-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EKUzy4p3oKQB0e013OQRfzJTH42p6yZulkOJUh+7CvX/Ne1hbZtV2V5GuvON8M5E DQ+mn7s6cIfiripfaMmIUg== 0001047469-03-042126.txt : 20031229 0001047469-03-042126.hdr.sgml : 20031225 20031229163247 ACCESSION NUMBER: 0001047469-03-042126 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20031229 EFFECTIVENESS DATE: 20031229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JP MORGAN MUTUAL FUND TRUST CENTRAL INDEX KEY: 0000919034 IRS NUMBER: 161408763 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-75250 FILM NUMBER: 031075785 BUSINESS ADDRESS: STREET 1: 522 FIFTH AVENUE STREET 2: 16TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 800-348-4782 MAIL ADDRESS: STREET 1: J.P. MORGAN FLEMING ASSET MANAGEMENT STREET 2: 522 FIFTH AVENUE, 16TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL FUND TRUST DATE OF NAME CHANGE: 19940215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JP MORGAN MUTUAL FUND TRUST CENTRAL INDEX KEY: 0000919034 IRS NUMBER: 161408763 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08358 FILM NUMBER: 031075786 BUSINESS ADDRESS: STREET 1: 522 FIFTH AVENUE STREET 2: 16TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 800-348-4782 MAIL ADDRESS: STREET 1: J.P. MORGAN FLEMING ASSET MANAGEMENT STREET 2: 522 FIFTH AVENUE, 16TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL FUND TRUST DATE OF NAME CHANGE: 19940215 485BPOS 1 a2118929z485bpos.txt 485BPOS As filed via EDGAR with the Securities and Exchange Commission on December 29, 2003 File No. 811-8358 Registration No. 33-75250 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Pre-Effective Amendment No. / / Post-Effective Amendment No. 28 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Post-Effective Amendment No. 28 /X/ ------------------------------ J.P. MORGAN MUTUAL FUND TRUST (Exact Name of Registrant as Specified in Charter) 522 Fifth Avenue, New York, New York 10036 -------------------------------------------------- (Address of Principal Executive Office) Registrant's Telephone Number, including Area Code: 1-800-348-4782 Copies to: Judy R. Bartlett John Baumgardner, Jr., Esq. J.P. Morgan Fund Distributors, Inc. Sullivan & Cromwell 522 Fifth Avenue 125 Broad Street New York, New York 10036 New York, New York 10004 --------------------------------------------- (Name and Address of Agent for Service) It is proposed that this filing will become effective: /x/ immediately upon filing pursuant to paragraph (b) / / on (date) pursuant paragraph (b) / / on (date) pursuant to paragraph (a)(1) / / 60 days after filing pursuant to paragraph (a)(1) / / on (date) pursuant to paragraph (a)(2) rule 485. / / 75 days after filing pursuant to paragraph (a)(2 If appropriate, check the following box: / / this post-effective amendment designates a new effective date for a previously filed post-effective amendment. ------------------ PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS MORGAN SHARES FOR ALL FUNDS AND CLASS B AND CLASS C SHARES FOR PRIME MONEY MARKET FUND PRIME MONEY MARKET FUND LIQUID ASSETS MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND FEDERAL MONEY MARKET FUND 100% U.S. TREASURY SECURITIES MONEY MARKET FUND TAX FREE MONEY MARKET FUND CALIFORNIA TAX FREE MONEY MARKET FUND NEW YORK TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 Liquid Assets Money Market Fund 8 U.S. Government Money Market Fund 11 Treasury Plus Money Market Fund 15 Federal Money Market Fund 19 100% U.S. Treasury Securities Money Market Fund 23 Tax Free Money Market Fund 27 California Tax Free Money Market Fund 32 New York Tax Free Money Market Fund 37 The Funds' Management and Administration 42 How Your Account Works 43 Buying Fund Shares 43 Selling Fund Shares 45 Exchanging Fund Shares 46 Distribution Arrangements 47 Other Information Concerning the Funds 47 Distributions and Taxes 48 Shareholder Services 50 What the Terms Mean 51 Financial Highlights 52 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.** The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. The performance figures in the bar chart do not reflect any deduction for the contingent deferred sales charges, which are assessed on Class B Shares. If the load were reflected, the performance figures would have been lower. Performance figures in the table for Class B and Class C Shares reflect the deduction of the applicable contingent deferred sales load. Class B shares convert to Morgan shares after eight years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS**,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.48% 1999 4.14% 2000 5.35% 2001 3.11% 2002 0.67%
BEST QUARTER 3rd quarter, 2000 1.39% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.12% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.09%. ** THE PERFORMANCE FOR THE PERIOD BEFORE CLASS B SHARES WERE LAUNCHED ON 4/20/94 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THESE PERIODS, THE ACTUAL RETURNS OF CLASS B SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE CLASS B SHARES HAVE HIGHER EXPENSES THAN PREMIER SHARES. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - ------------------------------------------------------------------ MORGAN SHARES * 1.32 4.10 4.09 - ------------------------------------------------------------------ CLASS B SHARES ** -4.33 3.19 3.78 - ------------------------------------------------------------------ CLASS C SHARES *** -0.34 3.47 3.75 - ------------------------------------------------------------------
* THE PERFORMANCE BEFORE THE MORGAN SHARES WERE LAUNCHED ON 10/1/98 IS BASED ON CLASS B SHARES OF THE FUND. ** SEE FOOTNOTE ON PREVIOUS PAGE. *** THE PERFORMANCE BEFORE CLASS C SHARES WERE LAUNCHED ON 5/14/98 IS BASED ON CLASS B SHARES OF THE FUND. INVESTOR EXPENSES FOR MORGAN, CLASS B AND CLASS C SHARES The expenses of the Morgan, Class B and Class C Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
MORGAN CLASS B CLASS C SHARES SHARES SHARES - --------------------------------------------------------------------------------- MAXIMUM SALES CHARGE (LOAD) WHEN YOU BUY SHARES, SHOWN AS % OF THE OFFERING PRICE^ NONE NONE NONE - --------------------------------------------------------------------------------- MAXIMUM DEFERRED SALES CHARGE (LOAD) SHOWN AS % OF LOWER OF ORIGINAL PURCHASE PRICE OR REDEMPTION PROCEEDS NONE 5.00% 1.00% - ---------------------------------------------------------------------------------
^ THE OFFERING PRICE IS THE NET ASSET VALUE OF THE SHARES PURCHASED PLUS ANY SALES CHARGE, IF ANY. 5 ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN, CLASS B AND CLASS C SHARES ASSETS)
MORGAN CLASS B CLASS C SHARES SHARES SHARES - -------------------------------------------------------------------------------------- MANAGEMENT FEES 0.10 0.10 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE 0.75 0.75 SHAREHOLDER SERVICE FEES 0.35 0.25 0.25 OTHER EXPENSES(1) 0.17 0.17 0.17 - -------------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.62 1.27 1.27 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.03) (0.03) (0.03) - -------------------------------------------------------------------------------------- NET EXPENSES(2) 0.59 1.24 1.24 - --------------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN, CLASS B AND CLASS C SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59%, 1.24% AND 1.24%, RESPECTIVELY, OF THEIR AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, CLASS B AND CLASS C SHARES NET EXPENSES WERE 1.21%. 6 EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan, Class B and Class C Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan, Class B and Class C Shares and your actual costs may be higher or lower. IF YOU SELL YOUR SHARES YOUR COSTS WOULD BE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- MORGAN SHARES ($) 60 196 343 771 - ---------------------------------------------------------------------------- CLASS B SHARES* ($) 626 700 894 1,352** - ---------------------------------------------------------------------------- CLASS C SHARES* ($) 226 400 694 1,531 - ----------------------------------------------------------------------------
IF YOU DON'T SELL YOUR SHARES YOUR COSTS WOULD BE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- CLASS B SHARES ($) 126 400 694 1,352** - ---------------------------------------------------------------------------- CLASS C SHARES ($) 126 400 694 1,531 - ----------------------------------------------------------------------------
* ASSUMES APPLICABLE DEFERRED SALES CHARGE IS DEDUCTED WHEN SHARES ARE SOLD. ** REFLECTS CONVERSION OF CLASS B SHARES TO MORGAN SHARES AFTER THEY HAVE BEEN OWNED FOR EIGHT YEARS. 7 JPMorgan LIQUID ASSETS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to maximize current income consistent with the preservation of capital and same-day liquidity. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted averaged maturity of the Fund will be 90 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 8 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 9 THE FUND'S PAST PERFORMANCE The Fund commenced operations on 4/1/02 and therefore has no reportable performance history. Once the Fund has performance for at least one calendar year, a bar chart and performance table will be included in the prospectus. To obtain current yield information call 1-800-348-4782. Although past performance of a fund is no guarantee of how it will perform in the future, historical performance may give you some indication of the risks of investing in the Fund. INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.32 - ------------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.87 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.28) - ------------------------------------------------------------------------------ NET EXPENSES(2) 0.59 - ------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES OF THE MORGAN SHARES WERE 0.54%. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 250 455 1,047 - ----------------------------------------------------------------------------
10 JPMorgan U.S. GOVERNMENT MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - debt securities issued or guaranteed by the U.S. Treasury, its agencies or instrumentalities of the U.S. government and - - repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 11 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 12 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.44% 1994 3.58% 1995 5.28% 1996 4.90% 1997 5.09% 1998 5.00% 1999 4.63% 2000 5.90% 2001 3.62% 2002 1.27%
BEST QUARTER 4th quarter, 2000 1.53% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.27% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.50%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------------ MORGAN SHARES 1.27 4.07 4.16 - ------------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 13 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ------------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.10) - ------------------------------------------------------------------------------ NET EXPENSES(2) 0.59 - ------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------------
14 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally 15 less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 16 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1995 5.43% 1996 4.90% 1997 4.99% 1998 4.89% 1999 4.44% 2000 5.75% 2001 3.42% 2002 1.23%
BEST QUARTER 4th quarter, 2000 1.51% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.25% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.48%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - --------------------------------------------------------------------------------------- MORGAN SHARES 1.23 3.94 4.36 - ---------------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE MORGAN SHARES WERE LAUNCHED ON 5/6/96 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF MORGAN SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE MORGAN SHARES HAVE HIGHER EXPENSES THAN PREMIER SHARES. THE FUND COMMENCED OPERATIONS ON 4/20/94. (1) THE FUND'S FISCAL YEAR END IS 8/31. 17 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.15 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.70 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.11) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 213 379 860 - ----------------------------------------------------------------------------
18 JPMorgan FEDERAL MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide current income while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - debt securities that certain U.S. government agencies or instrumentalities have either issued or guaranteed as to principal and interest. The interest on these securities is generally exempt from state and local income taxes. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED BY OR GUARANTEED THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 19 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 20 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURN(1),(2) 1995 5.31% 1996 4.81% 1997 4.98% 1998 4.87% 1999 4.52% 2000 5.68% 2001 3.56% 2002 1.14%
BEST QUARTER 4th quarter, 2000 1.47% - ------------------------------------------ WORST QUARTER 4th quarter, 2002 0.24% - ------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.39%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1),(2)
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - ------------------------------------------------------------------------------- MORGAN SHARES 1.14 3.94 4.35 - -------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 4/20/94. 21 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.24 - ------------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.79 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.09) - ------------------------------------------------------------------------------ NET EXPENSES(2) 0.70 - ------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.70% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 72 243 430 970 - ----------------------------------------------------------------------------
22 JPMorgan 100% U.S. TREASURY SECURITIES MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and providing maximum safety of principal. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes. These investments carry different interest rates, maturities and issue dates. The Fund does not buy securities issued or guaranteed by agencies of the U.S. government. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 23 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH-QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 24 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.60% 1994 3.50% 1995 5.17% 1996 4.73% 1997 4.91% 1998 4.84% 1999 4.26% 2000 5.49% 2001 3.47% 2002 1.18%
BEST QUARTER 4th quarter, 2000 1.46% - ------------------------------------------- WORST QUARTER 4th quarter, 2002 0.25% - -------------------------------------------
THE FUND'S YEAR-TO DATE TOTAL RETURN AS OF 9/30/03 WAS 0.44%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------------ MORGAN SHARES 1.18 3.84 4.01 - ------------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE MORGAN SHARES WERE LAUNCHED ON 5/3/96 IS BASED ON THE PERFORMANCE OF THE FUND'S PREDECESSOR, THE HANOVER 100% TREASURY SECURITIES MONEY MARKET FUND. (1) THE FUND'S FISCAL YEAR END IS 8/31. 25 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.10) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE M0RGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------------
26 JPMorgan TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 27 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the imposition of government controls, or regulations that do not match U.S. standards. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 28 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 29 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 1.82% 1994 2.15% 1995 3.13% 1996 2.91% 1997 3.16% 1998 2.99% 1999 2.77% 2000 3.65% 2001 2.38% 2002 0.99%
BEST QUARTER 4th quarter, 2000 0.96% - ----------------------------------------- WORST QUARTER 3rd quarter, 2002 0.23% - -----------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.41%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------------ MORGAN SHARES 0.99 2.55 2.59 - ------------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 30 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.10) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------------
31 JPMorgan CALIFORNIA TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is exempt from federal and California personal income taxes, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY As a fundamental policy, the Fund normally invests at least 80% of the value of its Assets in municipal obligations, the interest on which is excluded from gross income for federal income tax purposes, exempt from California personal income taxes and is not subject to the federal alternative minimum tax on individuals. "Assets" means net assets, plus the amount of borrowings for investment purposes. Municipal obligations in which the Fund can invest include those issued by the State of California, its political subdivisions, as well as Puerto Rico, other U.S. territories and their political subdivisions. The remaining 20% of Assets may be invested in securities paying interest which is subject to federal and California personal income taxes or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. For example, when suitable municipal obligations are unavailable, the Fund may buy municipal obligations from other states. These would generally be subject to California personal income taxes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 32 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. The Fund will be particularly susceptible to difficulties affecting California and its municipalities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax, the federal alternative minimum tax on individuals or California personal income taxes. Consult your tax professional for more information. The Fund may invest more than 25% of its total assets in securities which rely on similar projects for their income stream. As a result, the Fund could be more susceptible to developments which affect those projects. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 33 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 34 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.21% 1994 2.52% 1995 3.38% 1996 2.95% 1997 3.09% 1998 2.87% 1999 2.62% 2000 3.19% 2001 2.04% 2002 1.00%
BEST QUARTER 2nd quarter, 1995 0.88% - -------------------------------------------- WORST QUARTER 1st quarter, 2002 0.23% - --------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.43%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------------ MORGAN SHARES 1.00 2.34 2.58 - ------------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 35 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.18 - ------------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.73 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.18) - ------------------------------------------------------------------------------ NET EXPENSES(2) 0.55 - ------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.55% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual return of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 56 215 388 890 - ----------------------------------------------------------------------------
36 JPMorgan NEW YORK TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income and exempt from New York State and New York City personal income taxes, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY As a fundamental policy, the Fund normally invests at least 80% of the value of its Assets in municipal obligations, the interest on which is excluded from gross income for federal income tax purposes, exempt from New York State and New York City personal income taxes and is not subject to the federal alternative minimum tax on individuals. "Assets" means net assets, plus the amount of borrowings for investment purposes. Municipal obligations in which the Fund can invest include those issued by the State of New York, its political subdivisions, as well as Puerto Rico, other U.S. territories and their political subdivisions. The remaining 20% of Assets may be invested in securities paying interest which is subject to federal, New York State and New York City personal income taxes or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. For example, when suitable municipal obligations are unavailable, the Fund may buy municipal obligations from other states. These would generally be subject to New York State and New York City personal income taxes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 90 days or less, and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 37 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. The Fund will be particularly susceptible to difficulties affecting New York State and its municipalities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax, the federal alternative minimum tax on individuals or New York State and New York City personal income taxes. Consult your tax professional for more information. The Fund may invest more than 25% of its total assets in securities which rely on similar projects for their income stream. As a result, the Fund could be more susceptible to developments which affect those projects. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 38 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 39 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 1.67% 1994 2.07% 1995 3.03% 1996 2.81% 1997 3.09% 1998 2.90% 1999 2.72% 2000 3.53% 2001 2.22% 2002 1.03%
BEST QUARTER 4th quarter, 2000 0.94% - -------------------------------------------- WORST QUARTER 3rd quarter, 2002 0.24% - --------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.42%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ending December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------------ MORGAN SHARES 1.03 2.48 2.51 - ------------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 40 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.10) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------------
41 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - ---------------------------------------------------------- PRIME MONEY MARKET FUND 0.10 - ---------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 0.10 - ---------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 0.10 - ---------------------------------------------------------- FEDERAL MONEY MARKET FUND 0.10 - ---------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 0.10 - ---------------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 0.09 - ---------------------------------------------------------- TAX FREE MONEY MARKET FUND 0.10 - ---------------------------------------------------------- CALIFORNIA TAX FREE MONEY MARKET FUND 0.10 - ---------------------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND 0.10 - ----------------------------------------------------------
THE FUNDS' ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds. Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.35% of the average daily net assets of Morgan Shares of each Fund, and 0.25% of the average daily net assets of the Class B and Class C Shares of Prime Money Market Fund, held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.35% annual fee with respect to the Morgan Shares or the 0.25% annual fee with respect to the Class B and Class C Shares to such entities for performing shareholder and administrative services. The Board of Trustees has determined that the amount payable for "service fees" (as defined by the NASD) does not exceed 0.25% of the average annual net assets attributable to the Morgan Shares of each Fund. THE FUNDS' DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 42 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Morgan Shares of these Funds. Unlike the other money market funds in the prospectus, the Prime Money Market Fund also offers two additional classes of shares: Class B and Class C Shares. You may have to pay a deferred sales charge when you sell Class B or Class C Shares of the Prime Money Market Fund, depending on how long you have held them. In addition to these sales charges, certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. Different sales charges are associated with the Class B and Class C Shares of the Prime Money Market Fund: - - If you hold Class B Shares, you may be required to pay a deferred sales charge when you sell your shares, depending on the length of your investment in the particular shares. - - If you hold Class C Shares, you will be required to pay a deferred sales charge if you hold the shares for less than one year. For more information about Class B and Class C Shares see "Distribution Arrangements." The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy Morgan shares through financial service firms, such as broker-dealers and banks that have an agreement with the Funds, or directly from the JPMorgan Funds Service Center. Class B and Class C Shares are only available by exchanging Class B and Class C Shares of other JPMorgan Funds. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Funds are open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. - ------------------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 5:00 P.M. - ------------------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 5:00 P.M. - ------------------------------------------------------------------- FEDERAL MONEY MARKET FUND 2:00 P.M. - ------------------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 2:00 P.M. - ------------------------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 3:00 P.M. - ------------------------------------------------------------------- TAX FREE MONEY MARKET FUND NOON - ------------------------------------------------------------------- CALIFORNIA TAX FREE MONEY MARKET FUND NOON - ------------------------------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND NOON - -------------------------------------------------------------------
43 If you buy through an agent and not directly from the JPMorgan Funds Service Center, the agent could set earlier cut-off times. The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN FUNDS SERVICE CENTER 1-800-348-4782 MINIMUM INVESTMENTS
TYPE OF INITIAL ADDITIONAL ACCOUNT INVESTMENT INVESTMENTS - -------------------------------------------------------------------------------- REGULAR ACCOUNT $ 2,500 $ 100 - -------------------------------------------------------------------------------- SYSTEMATIC INVESTMENT PLAN(1) $ 1,000 $ 100 - -------------------------------------------------------------------------------- IRAs $ 1,000 $ 100 - -------------------------------------------------------------------------------- SEP-IRAs $ 1,000 $ 100 - -------------------------------------------------------------------------------- COVERDELL EDUCATION SAVINGS ACCOUNTS $ 500 $ 100 - --------------------------------------------------------------------------------
(1) FOR ALTERNATIVE MINIMUM INVESTMENTS FOR SYSTEMATIC INVESTMENT PLAN ACCOUNTS, PLEASE SEE SHAREHOLDER SERVICES. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Funds. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. You can buy shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to buy and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. 44 THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 The JPMorgan Funds Service Center will accept your order when federal funds, a wire, a check or ACH transaction is received together with a completed application or other instructions in proper form. The JPMorgan Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. THROUGH A SYSTEMATIC INVESTMENT PLAN You can make regular automatic purchases of at least $100. See Shareholder Services for details. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Funds Service Center accepts your order, less any applicable sales charges. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Funds Service Center accepts your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for Prime Money Market Fund, as federal securities laws permit. You will need to have signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Funds Service Center for more details. You can sell your shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to sell. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. 45 THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782. We will mail you a check or send the proceeds via electronic transfer or wire. If you have changed your address of record within the previous 30 days or if you sell shares of a Fund worth $25,000 or more by #HOW YOUR ACCOUNT WORKS telephone, we will send the proceeds by wire only to a bank account on our records. Or Send a signed letter with your instructions to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 THROUGH A SYSTEMATIC WITHDRAWAL PLAN You can automatically sell as little as $50 worth of shares. See Shareholder Services for details. REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Morgan Shares for Morgan Shares in certain other JPMorgan Funds without paying a sales charge. You may pay a sales charge if you exchange your Morgan Shares for other classes of shares. You can exchange Class B Shares and Class C Shares of the Prime Money Market Fund for shares of the same class of another JPMorgan Fund. If you exchange Class B Shares of the Prime Money Market Fund for Class B Shares of another JPMorgan Fund, or Class C Shares of the Prime Money Market Fund for Class C Shares of another JPMorgan Fund, you will not pay a deferred sales charge until you sell the shares of the other Fund. The amount of deferred sales charge will be based on when you bought the original shares, not when you made the exchange. When you purchase by check or through an ACH transaction, you can exchange your shares for shares of the same class of certain other JPMorgan Funds at net asset value, beginning 15 days or 7 business days, respectively, after you buy your shares. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. You will need to meet any minimum investment requirements. We reserve the right to limit the number of exchanges or to refuse an exchange. You can exchange your shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds' shares you want to exchange. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 to ask for details THROUGH A SYSTEMATIC EXCHANGE PLAN You can automatically exchange shares of one JPMorgan Fund for another of the same class. See Shareholder Services for details. 46 DISTRIBUTION ARRANGEMENTS CLASS B SHARES The deferred sales charge is deducted directly from your assets when you sell your shares. It is calculated as a percentage of the lower of the original purchase price or the current value of the shares. As the following table shows, the deferred sales charge decreases the longer you hold the shares and disappears altogether after six years. Class B Shares automatically convert into Morgan Shares at the beginning of the ninth year after you bought them.
YEAR DEFERRED SALES CHARGE 1 5% - ------------------------------- 2 4% - ------------------------------- 3 3% - ------------------------------- 4 3% - ------------------------------- 5 2% - ------------------------------- 6 1% - ------------------------------- 7 NONE - ------------------------------- 8 NONE - -------------------------------
We calculate the deferred sales charge from the month you buy your shares. We always sell the shares with the lowest deferred sales charge first. Shares acquired by reinvestment of distributions can be sold without a deferred sales charge. CLASS C SHARES The deferred sales charge is deducted directly from your assets when you sell your shares. It is equal to the lower of 1% of the original purchase price or 1% of the current value of the shares. The deferred sales charge on Class C Shares disappears altogether after one year. We calculate the deferred sales charge from the month you buy your shares. We always sell the shares with the lowest deferred sales charge first. Shares acquired by reinvestment of distributions can be sold without a deferred sales charge. Like Class B Shares, Class C Shares have higher combined distribution and service fees. Unlike Class B Shares, Class C Shares do not convert to Morgan Shares. That means you keep paying the higher combined service and distribution fees as long as you hold Class C Shares. Over the long term, this can add up to higher total fees than Class B Shares. WHICH CLASS OF SHARES IS BEST? Your investment representative will advise you about the best class of shares for you. With the exception of Prime Money Market Fund, all of the Funds have adopted Rule 12b-1 distribution plans under which they pay up to 0.10% of the average daily net assets attributed to Morgan Shares. The Prime Money Market Fund has adopted Rule 12b-1 distribution plans under which it pays annual distribution fees of up to 0.75% of the average daily net assets attributed to Class B and Class C Shares. These payments cover such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because Rule 12b-1 expenses are paid out of a Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below $500, as a result of selling shares. We may also close the account if you are in the Systematic Investment Plan and fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. 47 Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 Each Fund may issue multiple classes of shares. This prospectus relates only to Morgan Shares of the Funds and Class B and Class C Shares of the Prime Money Market Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. Shares of the JPMorgan U.S. Government Money Market Fund are intended to qualify as eligible investments for federally chartered credit unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National Credit Union Administration (NCUA) Rules and Regulations and NCUA Letter Number 155. This Fund intends to review changes in the applicable laws, rules and regulations governing eligible investments for federally chartered credit unions, and to take such action as may be necessary so that the investments of this Fund qualify as eligible investments under the Federal Credit Union Act and the regulations thereunder. DISTRIBUTIONS AND TAXES The Funds can earn income and can realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund, California Tax Free Money Market Fund and New York Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to 48 state and local taxes. However, for the New York Tax Free Money Market Fund, New York residents will not have to pay New York State or New York City personal income taxes on tax-exempt income from New York municipal obligations. Similarly, for the California Tax Free Money Market Fund, California residents will not have to pay California personal income taxes on tax-exempt income from California municipal obligations. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends of the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 49 SHAREHOLDER SERVICES SYSTEMATIC INVESTMENT PLAN If you make an initial investment of at least $1,000, you can regularly invest $100 or more on a monthly, quarterly or semi-annual basis. You may also choose to make a lower initial investment of $250, which requires additional monthly systematic investments of $200. The money is automatically deducted from your checking or savings account. For further information please refer to the How Your Account Works section of this prospectus. You can set up a plan when you open an account by completing the appropriate section of the application. Current shareholders can join by sending a signed letter and a deposit slip or void check from their bank account to the JPMorgan Funds Service Center. Call 1-800-348-4782 for complete instructions. SYSTEMATIC WITHDRAWAL PLAN You can automatically sell shares. You can make regular withdrawals of $50 or more. You can have automatic withdrawals made monthly, quarterly or semi-annually. Your account must contain at least $5,000 (or $20,000 for Class B accounts) to start the plan. Call 1-800-348-4782 for complete instructions. SYSTEMATIC EXCHANGE PLAN You can set up a systematic exchange program to automatically exchange shares on a regular basis. This is a free service. However, you cannot have simultaneous plans for the systematic investment or exchange and the systematic withdrawal or exchange for the same fund. Call 1-800-348-4782 for complete instructions. FREE EXCHANGE PRIVILEGE You can exchange shares between JPMorgan Funds in the same class without charge. This allows you to adjust your investments as your objectives change. 50 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 51 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 52 JPMORGAN PRIME MONEY MARKET FUND
CLASS B ------------------------------------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ----------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income --+ 0.01 0.04 0.05 0.04 Less dividends from net investment income --+ 0.01 0.04 0.05 0.04 ------- ------- ------- ------- ------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------- TOTAL RETURN (1) 0.25% 1.05% 4.43% 4.97% 4.07% - ----------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 10 $ 13 $ 18 $ 11 $ 36 - ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 1.21% 1.23% 1.24% 1.25% 1.25% - ----------------------------------------------------------------------------------------------------- Net investment income 0.27% 1.10% 4.17% 4.87% 4.00% - ----------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 1.27% 1.26% 1.26% 1.27% 1.47% - ----------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.21% 1.07% 4.15% 4.85% 3.78% - -----------------------------------------------------------------------------------------------------
+ Amount rounds to less than $.005. (1) Total Return figures do not include the effect of any deferred sales load. 53
CLASS C ------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income --+ 0.01 0.04 0.05 0.04 Less dividends from net investment income --+ 0.01 0.04 0.05 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 0.25% 1.05% 4.43% 4.95% 3.85% - -------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 1 $ 1 $ --* $ --* $ 1 - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 1.21% 1.23% 1.24% 1.26% 1.45% - -------------------------------------------------------------------------------------------------------------------------- Net investment income 0.25% 1.16% 4.17% 4.86% 3.75% - -------------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 1.27% 1.26% 1.26% 1.26% 1.45% - -------------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.19% 1.13% 4.15% 4.86% 3.75% - -------------------------------------------------------------------------------------------------------------------------- MORGAN^ ------------------------------------------------------------- YEAR YEAR YEAR YEAR 10/1/98** ENDED ENDED ENDED ENDED THROUGH 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.06 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.06 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 0.87% 1.71% 5.10% 5.65% 4.26% - -------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 4,627 $ 7,552 $ 10,367 $ 1,475 $ 515 - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.59% 0.58% 0.59% 0.59% 0.59% - -------------------------------------------------------------------------------------------------------------------------- Net investment income 0.90% 1.72% 4.82% 5.53% 4.61% - -------------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.62% 0.61% 0.61% 0.61% 0.72% - -------------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.87% 1.69% 4.80% 5.51% 4.48% - --------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. + Amount rounds to less than $.005. (1) Total Return figures do not include the effect of any front-end or deferred sales load. (b) Not annualized for periods less than one year. # Short periods have been annualized. * Amount rounds to less than one million. ^ Formerly Vista Shares. 54 JPMORGAN LIQUID ASSETS MONEY MARKET FUND
YEAR 4/1/02** ENDED THROUGH 8/31/03 8/31/02 - ----------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.01 Less dividends from net investment income 0.01 0.01 -------- -------- Net asset value, end of period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.95% 0.64% ===================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 18 $ 17 - ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.54% 0.45% - ----------------------------------------------------------------------------------------------------- Net investment income 0.95% 1.51% - ----------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.87% 0.83% - ----------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.62% 1.13% - -----------------------------------------------------------------------------------------------------
** Commencement of operations. (b) Not annualized for periods less than one year. # Short periods have been annualized. 55 JPMORGAN U.S. GOVERNMENT MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.84% 1.65% 4.93% 5.48% 4.55% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 3,077 $ 3,375 $ 4,150 $ 3,398 $ 3,538 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.84% 1.67% 4.80% 5.35% 4.46% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.69% 0.68% 0.69% 0.69% 0.69% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.74% 1.58% 4.70% 5.25% 4.36% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 56 JPMORGAN TREASURY PLUS MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.79% 1.59% 4.77% 5.29% 4.39% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 782 $ 1,103 $ 1,567 $ 1,367 $ 1,734 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.82% 1.57% 4.70% 5.14% 4.27% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.70% 0.70% 0.72% 0.71% 0.69% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.71% 1.46% 4.57% 5.02% 4.17% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 57 JPMORGAN FEDERAL MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.01 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.01 0.05 0.05 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.70% 1.51% 4.84% 5.29% 4.46% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 311 $ 452 $ 658 $ 576 $ 550 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.70% 0.70% 0.70% 0.70% 0.70% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.72% 1.53% 4.57% 5.17% 4.35% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.79% 0.72% 0.74% 0.75% 0.78% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.63% 1.51% 4.53% 5.12% 4.27% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 58 JPMORGAN 100% U.S. TREASURY SECURITIES MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.75% 1.55% 4.75% 5.02% 4.31% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 2,535 $ 3,526 $ 4,027 $ 3,535 $ 3,312 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.77% 1.53% 4.59% 4.92% 4.15% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.71% 0.71% 0.71% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.67% 1.43% 4.47% 4.80% 4.03% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 59 JPMORGAN TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.69% 1.21% 3.13% 3.37% 2.73% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 655 $ 903 $ 907 $ 895 $ 754 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.72% 1.14% 3.09% 3.33% 2.68% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.72% 0.75% 0.73% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.62% 1.04% 2.96% 3.17% 2.54% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 60 JPMORGAN CALIFORNIA TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.72% 1.13% 2.70% 3.00% 2.66% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 149 $ 163 $ 83 $ 78 $ 68 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 0.55% 0.55% 0.55% 0.55% 0.55% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.72% 1.05% 2.68% 3.03% 2.55% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.73% 0.76% 0.83% 0.90% 0.94% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.54% 0.84% 2.40% 2.68% 2.16% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 61 JPMORGAN NEW YORK TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 --------- --------- --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.72% 1.20% 2.98% 3.27% 2.66% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 1,662 $ 2,123 $ 2,439 $ 1,831 $ 1,505 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - --------------------------------------------------------------------------------------------------------------- Net investment income 0.72% 1.17% 2.88% 3.24% 2.61% - --------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.71% 0.70% 0.71% - --------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.62% 1.07% 2.76% 3.13% 2.49% - ---------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 62 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of portfolio holdings of the California Tax Free Money Market, New York Tax Free Money Market and Tax Free Money Market Funds is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358. (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003. PR-MMM-1203 [GRAPHIC] PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS MORGAN SHARES FOR ALL FUNDS AND CLASS B AND CLASS C SHARES FOR PRIME MONEY MARKET FUND PRIME MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND FEDERAL MONEY MARKET FUND 100% U.S. TREASURY SECURITIES MONEY MARKET FUND TAX FREE MONEY MARKET FUND CALIFORNIA TAX FREE MONEY MARKET FUND NEW YORK TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS
Prime Money Market Fund 1 U.S. Government Money Market Fund 8 Treasury Plus Money Market Fund 12 Federal Money Market Fund 16 100% U.S. Treasury Securities Money Market Fund 20 Tax Free Money Market Fund 24 California Tax Free Money Market Fund 29 New York Tax Free Money Market Fund 34 The Funds' Management and Administration 39 How Your Account Works 40 Buying Fund Shares 40 Selling Fund Shares 42 Exchanging Fund Shares 43 Distribution Arrangements 43 Other Information Concerning the Funds 44 Distributions and Taxes 45 Shareholder Services 47 What the Terms Mean 48 Financial Highlights 49 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third- party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 Who May Want to Invest The Fund is designed for investors who: - - want an investment that strives to preserve capital - - want regular income from a high quality portfolio - - want a highly liquid investment - - are looking for an interim investment - - are pursuing a short-term goal The Fund is not designed for investors who: - - are investing for long-term growth - - are investing for high income - - require the added security of FDIC insurance 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.** The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. The performance figures in the bar chart do not reflect any deduction for the contingent deferred sales charges, which are assessed on Class B Shares. If the load were reflected, the performance figures would have been lower. Performance figures in the table for Class B and Class C Shares reflect the deduction of the applicable contingent deferred sales load. Class B shares convert to Morgan shares after eight years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS**,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.48% 1999 4.14% 2000 5.35% 2001 3.11% 2002 0.67%
BEST QUARTER 3rd quarter, 2000 1.39% WORST QUARTER 4th quarter, 2002 0.12%
The Fund's year-to-date total return as of 9/30/03 was 0.09%. ** The performance for the period before Class B Shares were launched on 4/20/94 is based on the performance of Premier Shares of the Fund, which invest in the same portfolio of securities, but whose shares are not being offered in this prospectus. During these periods, the actual returns of Class B Shares would have been lower than shown because Class B Shares have higher expenses than Premier Shares. The Fund commenced operations on 11/15/93. (1) The Fund's fiscal year end is 8/31. 4 AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - ------------------------------------------------------------------- MORGAN SHARES * 1.32 4.10 4.09 - ------------------------------------------------------------------- CLASS B SHARES ** -4.33 3.19 3.78 - ------------------------------------------------------------------- CLASS C SHARES *** -0.34 3.47 3.75 - -------------------------------------------------------------------
* The performance before the Morgan Shares were launched on 10/1/98 is based on Class B Shares of the Fund. ** See footnote on previous page. *** The performance before Class C Shares were launched on 5/14/98 is based on Class B Shares of the Fund. INVESTOR EXPENSES FOR MORGAN, CLASS B AND CLASS C SHARES The expenses of the Morgan, Class B and Class C Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
MORGAN CLASS B CLASS C SHARES SHARES SHARES - ---------------------------------------------------------------------------- MAXIMUM SALES CHARGE (LOAD) WHEN YOU BUY SHARES, SHOWN AS % OF THE OFFERING PRICE^ NONE NONE NONE - ---------------------------------------------------------------------------- MAXIMUM DEFERRED SALES CHARGE (LOAD) SHOWN AS % OF LOWER OF ORIGINAL PURCHASE PRICE OR REDEMPTION PROCEEDS NONE 5.00% 1.00% - ----------------------------------------------------------------------------
^ The offering price is the net asset value of the shares purchased plus any sales charge, if any. 5 ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN, CLASS B AND CLASS C SHARES ASSETS)
MORGAN CLASS B CLASS C SHARES SHARES SHARES - ---------------------------------------------------------------------------------------- MANAGEMENT FEES 0.10 0.10 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE 0.75 0.75 SHAREHOLDER SERVICE FEES 0.35 0.25 0.25 OTHER EXPENSES(1) 0.17 0.17 0.17 - ---------------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.62 1.27 1.27 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.03) (0.03) (0.03) - ---------------------------------------------------------------------------------------- NET EXPENSES(2) 0.59 1.24 1.24 - ----------------------------------------------------------------------------------------
(1) "Other Expenses" are based on expenses incurred in the most recent fiscal year. (2) Reflects a written agreement pursuant to which JPMorgan Chase Bank agrees that it will reimburse the Fund to the extent total annual operating expenses of the Morgan, Class B and Class C Shares (excluding interest, taxes, extraordinary expenses and expenses related to the deferred compensation plan) exceed 0.59%, 1.24% and 1.24%, respectively, of their average daily net assets through 12/31/04. In addition, the Fund's service providers may voluntarily waive or reimburse certain of their fees, as they may determine, from time to time. For the period ended 8/31/03, Class B and Class C Shares net expenses were 1.21%. 6 EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan, Class B and Class C Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan, Class B and Class C Shares and your actual costs may be higher or lower. IF YOU SELL YOUR SHARES YOUR COSTS WOULD BE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------------- MORGAN SHARES ($) 60 196 343 771 - ------------------------------------------------------------------------------------ CLASS B SHARES* ($) 626 700 894 1,352** - ------------------------------------------------------------------------------------ CLASS C SHARES* ($) 226 400 694 1,531 - ------------------------------------------------------------------------------------
IF YOU DON'T SELL YOUR SHARES YOUR COSTS WOULD BE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------ CLASS B SHARES ($) 126 400 694 1,352** - ------------------------------------------------------------------------------------ CLASS C SHARES ($) 126 400 694 1,531 - ------------------------------------------------------------------------------------
* Assumes applicable deferred sales charge is deducted when shares are sold. ** Reflects conversion of Class B Shares to Morgan Shares after they have been owned for eight years. 7 JPMorgan U.S. GOVERNMENT MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - debt securities issued or guaranteed by the U.S. Treasury, its agencies or instrumentalities of the U.S. government and - - repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third- party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 8 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 9 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.44% 1994 3.58% 1995 5.28% 1996 4.90% 1997 5.09% 1998 5.00% 1999 4.63% 2000 5.90% 2001 3.62% 2002 1.27%
BEST QUARTER 4th quarter, 2000 1.53% WORST QUARTER 4th quarter, 2002 0.27%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.50%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 20021
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - --------------------------------------------------------------------- MORGAN SHARES 1.27 4.07 4.16 - ---------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 10 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ---------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.10) - ---------------------------------------------------------- NET EXPENSES(2) 0.59 - ----------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------ YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ------------------------------------------------------------------------------------------------------
11 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 12 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 13 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1995 5.43% 1996 4.90% 1997 4.99% 1998 4.89% 1999 4.44% 2000 5.75% 2001 3.42% 2002 1.23%
BEST QUARTER 4th quarter, 2000 1.51% WORST QUARTER 4th quarter, 2002 0.25%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.48%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,1
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - ----------------------------------------------------------------------- MORGAN SHARES 1.23 3.94 4.36 - -----------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE MORGAN SHARES WERE LAUNCHED ON 5/6/96 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF MORGAN SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE MORGAN SHARES HAVE HIGHER EXPENSES THAN PREMIER SHARES. THE FUND COMMENCED OPERATIONS ON 4/20/94. (1) THE FUND'S FISCAL YEAR END IS 8/31. 14 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES(%)(EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES (1) 0.15 - -------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.70 FEE WAIVERS AND EXPENSE REIMBURSEMENTS (2) (0.11) - -------------------------------------------------------------------- NET EXPENSES (2) 0.59 - --------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 213 379 860 - -------------------------------------------------------------------------------------------------------
15 JPMorgan FEDERAL MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide current income while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - debt securities that certain U.S. government agencies or instrumentalities have either issued or guaranteed as to principal and interest. The interest on these securities is generally exempt from state and local income taxes. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third- party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED BY OR GUARANTEED THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. 16 The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 17 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURN(1),(2) 1995 5.31% 1996 4.81% 1997 4.98% 1998 4.87% 1999 4.52% 2000 5.68% 2001 3.56% 2002 1.14%
BEST QUARTER 4th quarter, 2000 1.47% WORST QUARTER 4th quarter, 2002 0.24%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.39%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1),(2)
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - --------------------------------------------------------------------- MORGAN SHARES 1.14 3.94 4.35 - ---------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 4/20/94. 18 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS)
MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.24 - --------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.79 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.09) - --------------------------------------------------------------- NET EXPENSES(2) 0.70 - ---------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.70% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 72 243 430 970 - --------------------------------------------------------------------------------
19 JPMorgan 100% U.S. TREASURY SECURITIES MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and providing maximum safety of principal. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes. These investments carry different interest rates, maturities and issue dates. The Fund does not buy securities issued or guaranteed by agencies of the U.S. government. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. 20 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH- QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 21 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.60% 1994 3.50% 1995 5.17% 1996 4.73% 1997 4.91% 1998 4.84% 1999 4.26% 2000 5.49% 2001 3.47% 2002 1.18%
BEST QUARTER 4th quarter, 2000 1.46% WORST QUARTER 4th quarter, 2002 0.25%
THE FUND'S YEAR-TO DATE TOTAL RETURN AS OF 9/30/03 WAS 0.44%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- MORGAN SHARES 1.18 3.84 4.01 - --------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE MORGAN SHARES WERE LAUNCHED ON 5/3/96 IS BASED ON THE PERFORMANCE OF THE FUND'S PREDECESSOR, THE HANOVER 100% TREASURY SECURITIES MONEY MARKET FUND. (1)THE FUND'S FISCAL YEAR END IS 8/31. 22 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.10) - ------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE M0RGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------
23 JPMorgan TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 24 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the imposition of government controls, or regulations that do not match U.S. standards. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 25 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 26 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 1.82% 1994 2.15% 1995 3.13% 1996 2.91% 1997 3.16% 1998 2.99% 1999 2.77% 2000 3.65% 2001 2.38% 2002 0.99%
BEST QUARTER 4th quarter, 2000 0.96% WORST QUARTER 3rd quarter, 2002 0.23%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.41%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- MORGAN SHARES 0.99 2.55 2.59 - --------------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. 27 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.10) - ------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------
28 JPMorgan CALIFORNIA TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is exempt from federal and California personal income taxes, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY As a fundamental policy, the Fund normally invests at least 80% of the value of its Assets in municipal obligations, the interest on which is excluded from gross income for federal income tax purposes, exempt from California personal income taxes and is not subject to the federal alternative minimum tax on individuals. "Assets" means net assets, plus the amount of borrowings for investment purposes. Municipal obligations in which the Fund can invest include those issued by the State of California, its political subdivisions, as well as Puerto Rico, other U.S. territories and their political subdivisions. The remaining 20% of Assets may be invested in securities paying interest which is subject to federal and California personal income taxes or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. For example, when suitable municipal obligations are unavailable, the Fund may buy municipal obligations from other states. These would generally be subject to California personal income taxes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 29 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. The Fund will be particularly susceptible to difficulties affecting California and its municipalities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax, the federal alternative minimum tax on individuals or California personal income taxes. Consult your tax professional for more information. The Fund may invest more than 25% of its total assets in securities which rely on similar projects for their income stream. As a result, the Fund could be more susceptible to developments which affect those projects. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 30 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 31 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.21% 1994 2.52% 1995 3.38% 1996 2.95% 1997 3.09% 1998 2.87% 1999 2.62% 2000 3.19% 2001 2.04% 2002 1.00%
BEST QUARTER 2nd quarter, 1995 0.88% WORST QUARTER 1st quarter, 2002 0.23%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.43%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- MORGAN SHARES 1.00 2.34 2.58 - --------------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. 32 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.18 - ------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.73 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.18) - ------------------------------------------------------------------------- NET EXPENSES(2) 0.55 - -------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.55% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual return of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 56 215 388 890 - ----------------------------------------------------------------------
33 JPMorgan NEW YORK TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income and exempt from New York State and New York City personal income taxes, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY As a fundamental policy, the Fund normally invests at least 80% of the value of its Assets in municipal obligations, the interest on which is excluded from gross income for federal income tax purposes, exempt from New York State and New York City personal income taxes and is not subject to the federal alternative minimum tax on individuals. "Assets" means net assets, plus the amount of borrowings for investment purposes. Municipal obligations in which the Fund can invest include those issued by the State of New York, its political subdivisions, as well as Puerto Rico, other U.S. territories and their political subdivisions. The remaining 20% of Assets may be invested in securities paying interest which is subject to federal, New York State and New York City personal income taxes or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. For example, when suitable municipal obligations are unavailable, the Fund may buy municipal obligations from other states. These would generally be subject to New York State and New York City personal income taxes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 90 days or less, and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 34 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. The Fund will be particularly susceptible to difficulties affecting New York State and its municipalities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax, the federal alternative minimum tax on individuals or New York State and New York City personal income taxes. Consult your tax professional for more information. The Fund may invest more than 25% of its total assets in securities which rely on similar projects for their income stream. As a result, the Fund could be more susceptible to developments which affect those projects. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 35 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 36 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 1.67% 1994 2.07% 1995 3.03% 1996 2.81% 1997 3.09% 1998 2.90% 1999 2.72% 2000 3.53% 2001 2.22% 2002 1.03%
BEST QUARTER 4th quarter, 2000 0.94% WORST QUARTER 3rd quarter, 2002 0.24%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.42%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- MORGAN SHARES 1.03 2.48 2.51 - --------------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. 37 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.14 - ------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.69 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.10) - ------------------------------------------------------------------------- NET EXPENSES(2) 0.59 - -------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 211 374 849 - ----------------------------------------------------------------------
38 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - ---------------------------------------------------------------- PRIME MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- FEDERAL MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- TAX FREE MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- CALIFORNIA TAX FREE MONEY MARKET FUND 0.10 - ---------------------------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND 0.10 - ----------------------------------------------------------------
THE FUNDS' ADMINISTRATOR AND SHARE HOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds. Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.35% of the average daily net assets of Morgan Shares of each Fund, and 0.25% of the average daily net assets of the Class B and Class C Shares of Prime Money Market Fund, held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.35% annual fee with respect to the Morgan Shares or the 0.25% annual fee with respect to the Class B and Class C Shares to such entities for performing shareholder and administrative services. The Board of Trustees has determined that the amount payable for "service fees" (as defined by the NASD) does not exceed 0.25% of the average annual net assets attributable to the Morgan Shares of each Fund. THE FUNDS' DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 39 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Morgan Shares of these Funds. Unlike the other money market funds in the prospectus, the Prime Money Market Fund also offers two additional classes of shares: Class B and Class C Shares. You may have to pay a deferred sales charge when you sell Class B or Class C Shares of the Prime Money Market Fund, depending on how long you have held them. In addition to these sales charges, certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. Different sales charges are associated with the Class B and Class C Shares of the Prime Money Market Fund: - - If you hold Class B Shares, you may be required to pay a deferred sales charge when you sell your shares, depending on the length of your investment in the particular shares. - - If you hold Class C Shares, you will be required to pay a deferred sales charge if you hold the shares for less than one year. For more information about Class B and Class C Shares see "Distribution Arrangements." The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy Morgan Shares through financial service firms, such as broker-dealers and banks that have an agreement with the Funds, or directly from the JPMorgan Funds Service Center. Class B and Class C Shares are only available by exchanging Class B and Class C Shares of other JPMorgan Funds. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Funds are open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------- FEDERAL MONEY MARKET FUND 2:00 P.M. - -------------------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 2:00 P.M. - -------------------------------------------------------------------- TAX FREE MONEY MARKET FUND NOON - -------------------------------------------------------------------- CALIFORNIA TAX FREE MONEY MARKET FUND NOON - -------------------------------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND NOON - --------------------------------------------------------------------
40 If you buy through an agent and not directly from the JPMorgan Funds Service Center, the agent could set earlier cut-off times. The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN FUNDS SERVICE CENTER 1-800-348-4782 MINIMUM INVESTMENTS
TYPE OF INITIAL ADDITIONAL ACCOUNT INVESTMENT INVESTMENTS - -------------------------------------------------------------------------------- REGULAR ACCOUNT $ 2,500 $ 100 - -------------------------------------------------------------------------------- SYSTEMATIC INVESTMENT PLAN(1) $ 1,000 $ 100 - -------------------------------------------------------------------------------- IRAs $ 1,000 $ 100 - -------------------------------------------------------------------------------- SEP-IRAs $ 1,000 $ 100 - -------------------------------------------------------------------------------- COVERDELL EDUCATION SAVINGS ACCOUNTS $ 500 $ 100 - --------------------------------------------------------------------------------
(1)FOR ALTERNATIVE MINIMUM INVESTMENTS FOR SYSTEMATIC INVESTMENT PLAN ACCOUNTS, PLEASE SEE SHAREHOLDER SERVICES. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Funds. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. You can buy shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to buy and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. 41 THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMorgan Funds Service Center P.O. Box 219392 Kansas City, MO 64121-9392 The JPMorgan Funds Service Center will accept your order when federal funds, a wire, a check or ACH transaction is received together with a completed application or other instructions in proper form. The JPMorgan Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. THROUGH A SYSTEMATIC INVESTMENT PLAN You can make regular automatic purchases of at least $100. See Shareholder Services for details. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Funds Service Center accepts your order, less any applicable sales charges. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Funds Service Center accepts your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for Prime Money Market Fund, as federal securities laws permit. You will need to have signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Funds Service Center for more details. You can sell your shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to sell. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. 42 THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782. We will mail you a check or send the proceeds via electronic transfer or wire. If you have changed your address of record within the previous 30 days or if you sell shares of a Fund worth $25,000 or more by telephone, we will send the proceeds by wire only to a bank account on our records. Or Send a signed letter with your instructions to: JPMorgan Funds Service Center P.O. Box 219392 Kansas City, MO 64121-9392 THROUGH A SYSTEMATIC WITHDRAWAL PLAN You can automatically sell as little as $50 worth of shares. See Shareholder Services for details. REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Morgan Shares for Morgan Shares in certain other JPMorgan Funds without paying a sales charge. You may pay a sales charge if you exchange your Morgan Shares for other classes of shares. You can exchange Class B Shares and Class C Shares of the Prime Money Market Fund for shares of the same class of another JPMorgan Fund. If you exchange Class B Shares of the Prime Money Market Fund for Class B Shares of another JPMorgan Fund, or Class C Shares of the Prime Money Market Fund for Class C Shares of another JPMorgan Fund, you will not pay a deferred sales charge until you sell the shares of the other Fund. The amount of deferred sales charge will be based on when you bought the original shares, not when you made the exchange. When you purchase by check or through an ACH transaction, you can exchange your shares for shares of the same class of certain other JPMorgan Funds at net asset value, beginning 15 days or 7 business days, respectively, after you buy your shares. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. You will need to meet any minimum investment requirements. We reserve the right to limit the number of exchanges or to refuse an exchange. You can exchange your shares in one of three ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds' shares you want to exchange. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 to ask for details THROUGH A SYSTEMATIC EXCHANGE PLAN You can automatically exchange shares of one JPMorgan Fund for another of the same class. See Shareholder Services for details. DISTRIBUTION ARRANGEMENTS CLASS B SHARES The deferred sales charge is deducted directly from your assets when you sell 43 your shares. It is calculated as a percentage of the lower of the original purchase price or the current value of the shares. As the following table shows, the deferred sales charge decreases the longer you hold the shares and disappears altogether after six years. Class B Shares automatically convert into Morgan Shares at the beginning of the ninth year after you bought them.
YEAR DEFERRED SALES CHARGE 1 5% - -------------------------------- 2 4% - -------------------------------- 3 3% - -------------------------------- 4 3% - -------------------------------- 5 2% - -------------------------------- 6 1% - -------------------------------- 7 NONE - -------------------------------- 8 NONE - --------------------------------
We calculate the deferred sales charge from the month you buy your shares. We always sell the shares with the lowest deferred sales charge first. Shares acquired by reinvestment of distributions can be sold without a deferred sales charge. CLASS C SHARES The deferred sales charge is deducted directly from your assets when you sell your shares. It is equal to the lower of 1% of the original purchase price or 1% of the current value of the shares. The deferred sales charge on Class C Shares disappears altogether after one year. We calculate the deferred sales charge from the month you buy your shares. We always sell the shares with the lowest deferred sales charge first. Shares acquired by reinvestment of distributions can be sold without a deferred sales charge. Like Class B Shares, Class C Shares have higher combined distribution and service fees. Unlike Class B Shares, Class C Shares do not convert to Morgan Shares. That means you keep paying the higher combined service and distribution fees as long as you hold Class C Shares. Over the long term, this can add up to higher total fees than Class B Shares. WHICH CLASS OF SHARES IS BEST? Your investment representative will advise you about the best class of shares for you. With the exception of Prime Money Market Fund, all of the Funds have adopted Rule 12b-1 distribution plans under which they pay up to 0.10% of the average daily net assets attributed to Morgan Shares. The Prime Money Market Fund has adopted Rule 12b-1 distribution plans under which it pays annual distribution fees of up to 0.75% of the average daily net assets attributed to Class B and Class C Shares. These payments cover such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because Rule 12b-1 expenses are paid out of a Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below $500, as a result of selling shares. We may also close the account if you are in the Systematic Investment Plan and fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer 44 instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Funds Service Center P.O. Box 219392 Kansas City, MO 64121-9392 Each Fund may issue multiple classes of shares. This prospectus relates only to Morgan Shares of the Funds and Class B and Class C Shares of the Prime Money Market Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. Shares of the JPMorgan U.S. Government Money Market Fund are intended to qualify as eligible investments for federally chartered credit unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National Credit Union Administration (NCUA) Rules and Regulations and NCUA Letter Number 155. This Fund intends to review changes in the applicable laws, rules and regulations governing eligible investments for federally chartered credit unions, and to take such action as may be necessary so that the investments of this Fund qualify as eligible investments under the Federal Credit Union Act and the regulations thereunder. DISTRIBUTIONS AND TAXES The Funds can earn income and can realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund, California Tax Free Money Market Fund and New York Tax Free Money Market Fund are not subject to federal income taxes, but will generally be 45 subject to state and local taxes. However, for the New York Tax Free Money Market Fund, New York residents will not have to pay New York State or New York City personal income taxes on tax-exempt income from New York municipal obligations. Similarly, for the California Tax Free Money Market Fund, California residents will not have to pay California personal income taxes on tax-exempt income from California municipal obligations. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends of the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 46 SHAREHOLDER SERVICES SYSTEMATIC INVESTMENT PLAN If you make an initial investment of at least $1,000, you can regularly invest $100 or more on a monthly, quarterly or semi-annual basis. You may also choose to make a lower initial investment of $250, which requires additional monthly systematic investments of $200. The money is automatically deducted from your checking or savings account. For further information please refer to the How Your Account Works section of this prospectus. You can set up a plan when you open an account by completing the appropriate section of the application. Current shareholders can join by sending a signed letter and a deposit slip or void check from their bank account to the JPMorgan Funds Service Center. Call 1-800-348-4782 for complete instructions. SYSTEMATIC WITHDRAWAL PLAN You can automatically sell shares. You can make regular withdrawals of $50 or more. You can have automatic withdrawals made monthly, quarterly or semi-annually. Your account must contain at least $5,000 (or $20,000 for Class B accounts) to start the plan. Call 1-800-348-4782 for complete instructions. SYSTEMATIC EXCHANGE PLAN You can set up a systematic exchange program to automatically exchange shares on a regular basis. This is a free service. However, you cannot have simultaneous plans for the systematic investment or exchange and the systematic withdrawal or exchange for the same fund. Call 1-800-348-4782 for complete instructions. FREE EXCHANGE PRIVILEGE You can exchange shares between JPMorgan Funds in the same class without charge. This allows you to adjust your investments as your objectives change. 47 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 48 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 49 JPMORGAN PRIME MONEY MARKET FUND
CLASS B ------------------------------------------------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income --+ 0.01 0.04 0.05 0.04 Less dividends from net investment income --+ 0.01 0.04 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (1) 0.25% 1.05% 4.43% 4.97% 4.07% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 10 $ 13 $ 18 $ 11 $ 36 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 1.21% 1.23% 1.24% 1.25% 1.25% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.27% 1.10% 4.17% 4.87% 4.00% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 1.27% 1.26% 1.26% 1.27% 1.47% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.21% 1.07% 4.15% 4.85% 3.78% - ------------------------------------------------------------------------------------------------------------------------------
+ Amount rounds to less than $.005. (1) Total Return figures do not include the effect of any deferred sales load. 50 JPMORGAN PRIME MONEY MARKET FUND
CLASS C ------------------------------------------------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income --+ 0.01 0.04 0.05 0.04 Less dividends from net investment income --+ 0.01 0.04 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 0.25% 1.05% 4.43% 4.95% 3.85% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 1 $ 1 $ --* $ --* $ 1 - -------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net expenses 1.21% 1.23% 1.24% 1.26% 1.45% - -------------------------------------------------------------------------------------------------------------------- Net investment income 0.25% 1.16% 4.17% 4.86% 3.75% - -------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 1.27% 1.26% 1.26% 1.26% 1.45% - -------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.19% 1.13% 4.15% 4.86% 3.75% - -------------------------------------------------------------------------------------------------------------------- MORGAN^ ------------------------------------------------------------------ YEAR YEAR YEAR YEAR 10/1/98** ENDED ENDED ENDED ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.06 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.06 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 0.87% 1.71% 5.10% 5.65% 4.26% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 4,627 $ 7,552 $ 10,367 $ 1,475 $ 515 - -------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.59% 0.58% 0.59% 0.59% 0.59% - -------------------------------------------------------------------------------------------------------------------- Net investment income 0.90% 1.72% 4.82% 5.53% 4.61% - -------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.62% 0.61% 0.61% 0.61% 0.72% - -------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.87% 1.69% 4.80% 5.51% 4.48% - --------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. + Amount rounds to less than $.005. (1) Total Return figures do not include the effect of any front-end or deferred sales load. (b) Not annualized for periods less than one year. # Short periods have been annualized. * Amount rounds to less than one million. ^ Formerly Vista Shares. 51 JPMORGAN U.S. GOVERNMENT MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.84% 1.65% 4.93% 5.48% 4.55% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 3,077 $ 3,375 $ 4,150 $ 3,398 $ 3,538 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.84% 1.67% 4.80% 5.35% 4.46% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.69% 0.68% 0.69% 0.69% 0.69% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.74% 1.58% 4.70% 5.25% 4.36% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 52 JPMORGAN TREASURY PLUS MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.79% 1.59% 4.77% 5.29% 4.39% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 782 $ 1,103 $ 1,567 $ 1,367 $ 1,734 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.82% 1.57% 4.70% 5.14% 4.27% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.70% 0.70% 0.72% 0.71% 0.69% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.71% 1.46% 4.57% 5.02% 4.17% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 53 JPMORGAN FEDERAL MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.01 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.01 0.05 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.70% 1.51% 4.84% 5.29% 4.46% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 311 $ 452 $ 658 $ 576 $ 550 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.70% 0.70% 0.70% 0.70% 0.70% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.72% 1.53% 4.57% 5.17% 4.35% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.79% 0.72% 0.74% 0.75% 0.78% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.63% 1.51% 4.53% 5.12% 4.27% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 54 JPMORGAN 100% U.S. TREASURY SECURITIES MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.02 0.05 0.05 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.05 0.04 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.75% 1.55% 4.75% 5.02% 4.31% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 2,535 $ 3,526 $ 4,027 $ 3,535 $ 3,312 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.77% 1.53% 4.59% 4.92% 4.15% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.71% 0.71% 0.71% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.67% 1.43% 4.47% 4.80% 4.03% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 55 JPMORGAN TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.69% 1.21% 3.13% 3.37% 2.73% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 655 $ 903 $ 907 $ 895 $ 754 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.72% 1.14% 3.09% 3.33% 2.68% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.72% 0.75% 0.73% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.62% 1.04% 2.96% 3.17% 2.54% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 56 JPMORGAN CALIFORNIA TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 0.72% 1.13% 2.70% 3.00% 2.66% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 149 $ 163 $ 83 $ 78 $ 68 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Net expenses 0.55% 0.55% 0.55% 0.55% 0.55% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.72% 1.05% 2.68% 3.03% 2.55% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.73% 0.76% 0.83% 0.90% 0.94% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.54% 0.84% 2.40% 2.68% 2.16% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. 57 JPMORGAN NEW YORK TAX FREE MONEY MARKET FUND^
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.01 0.03 0.03 0.03 Less dividends from net investment income 0.01 0.01 0.03 0.03 0.03 ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (b) 0.72% 1.20% 2.98% 3.27% 2.66% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 1,662 $ 2,123 $ 2,439 $ 1,831 $ 1,505 - ------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS:# Net expenses 0.59% 0.59% 0.59% 0.59% 0.59% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income 0.72% 1.17% 2.88% 3.24% 2.61% - ------------------------------------------------------------------------------------------------------------------------------ Expenses without waivers, reimbursements and earnings credits 0.69% 0.69% 0.71% 0.70% 0.71% - ------------------------------------------------------------------------------------------------------------------------------ Net investment income without waivers, reimbursements and earnings credits 0.62% 1.07% 2.76% 3.13% 2.49% - ------------------------------------------------------------------------------------------------------------------------------
^ Formerly Vista Shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 58 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of portfolio holdings of the California Tax Free Money Market, New York Tax Free Money Market and Tax Free Money Market Funds is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358. (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003. PR-MMB-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS PREMIER SHARES PRIME MONEY MARKET FUND LIQUID ASSETS MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND FEDERAL MONEY MARKET FUND 100% U.S. TREASURY SECURITIES MONEY MARKET FUND TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING LOGO] ASSET MANAGEMENT CONTENTS Prime Money Market Fund 1 Liquid Assets Money Market Fund 5 U.S. Government Money Market Fund 9 Treasury Plus Money Market Fund 13 Federal Money Market Fund 17 100% U.S. Treasury Securities Money Market Fund 21 Tax Free Money Market Fund 25 The Funds' Management and Administration 30 How Your Account Works 31 Buying Fund Shares 31 Selling Fund Shares 32 Other Information Concerning the Funds 34 Distributions and Taxes 34 What the Terms Mean 36 Financial Highlights 37 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT GOAL. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 1 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 2 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1994 4.10% 1995 5.66% 1996 5.20% 1997 5.37% 1998 5.32% 1999 4.97% 2000 6.18% 2001 3.92% 2002 1.46%
BEST QUARTER 3rd quarter, 2000 1.59% WORST QUARTER 4th quarter, 2002 0.31%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.63%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002 (1),(2)
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - ---------------------------------------------------------------------------- PREMIER SHARES 1.46 4.36 4.65 - ----------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 11/15/93. 3 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.11 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.46 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.01) - ----------------------------------------------------------------------------- NET EXPENSES (2) 0.45 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 147 257 578 - ---------------------------------------------------------------------------
4 JPMorgan LIQUID ASSETS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to maximize current income consistent with the preservation of capital and same-day liquidity. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 5 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. Because of the sensitivity of the Fund's mortgage-related securities to changes in interest rates, the performance and duration of the Fund may be more volatile than if it did not hold these securities. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 6 THE FUND'S PAST PERFORMANCE The Fund commenced operations on 4/1/02 and therefore has no reportable performance history. Once the Fund has performance for at least one calendar year, a bar chart and performance table will be included in the prospectus. To obtain current yield information call 1-800-348-4782. Although past performance of a fund is no guarantee of how it will perform in the future, historical performance may give you some indication of the risks of investing in the Fund. INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES (1) 0.16 TOTAL ANNUAL OPERATING EXPENSES 0.51 FEE WAIVER AND EXPENSE REIMBURSEMENT (2) (0.06) NET EXPENSES (2) 0.45
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES OF THE PREMIER SHARES WERE 0.40%. 7 EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 158 279 635 - ---------------------------------------------------------------------------
8 JPMorgan U.S. GOVERNMENT MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - debt securities issued or guaranteed by the U.S. Treasury its agencies or instrumentalities of the U.S. government and - - repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 9 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 10 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.71% 1994 3.83% 1995 5.54% 1996 5.02% 1997 5.13% 1998 5.14% 1999 4.77% 2000 6.04% 2001 3.77% 2002 1.41%
BEST QUARTER 3rd quarter, 2000 1.56% 4th quarter, 2000 WORST QUARTER 4th quarter, 2002 0.30%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.61%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ------------------------------------------------------------------------------ PREMIER SHARES 1.41 4.22 4.33 - ------------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. 11 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.10 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.57 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.12) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.45 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 171 306 702 - ---------------------------------------------------------------------------
12 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 13 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 14 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1995 5.43% 1996 4.90% 1997 5.09% 1998 5.04% 1999 4.59% 2000 5.90% 2001 3.57% 2002 1.37%
BEST QUARTER 4th quarter, 2000 1.55% WORST QUARTER 4th quarter, 2002 0.28%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.58%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1),(2)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - --------------------------------------------------------------------------- PREMIER SHARES 1.37 4.08 4.46 - ---------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. (2)THE FUND COMMENCED OPERATIONS ON 4/20/94. 15 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.14 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.49 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.04) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.45 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 153 270 612 - ---------------------------------------------------------------------------
16 JPMorgan FEDERAL MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide current income while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - debt securities that certain U.S. government agencies or instrumentalities have either issued or guaranteed as to principal and interest. The interest on these securities is generally exempt from state and local income taxes. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. 17 The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 18 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1995 5.52% 1996 5.02% 1997 5.19% 1998 5.08% 1999 4.73% 2000 5.90% 2001 3.79% 2002 1.39%
BEST QUARTER 4th quarter, 2000 1.53% WORST QUARTER 4th quarter, 200 20.30%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.58%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time for the periods ended December 31, 2002(1),(2)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - --------------------------------------------------------------------------- PREMIER SHARES 1.39 4.16 4.56 - ---------------------------------------------------------------------------
(1)THE FUND'S FISCAL YEAR END IS 8/31. (2)THE FUND COMMENCED OPERATIONS ON 4/20/94. 19 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.47 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.02) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.45 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 149 261 590 - ---------------------------------------------------------------------------
20 JPMorgan 100% U.S. TREASURY SECURITIES MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and providing maximum safety of principal. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes. These investments carry different interest rates, maturities and issue dates. The Fund does not buy securities issued or guaranteed by agencies of the U.S. government. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. 21 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 22 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.60% 1994 3.50% 1995 5.17% 1996 4.75% 1997 4.95% 1998 4.93% 1999 4.36% 2000 5.60% 2001 3.59% 2002 1.31%
BEST QUARTER 4th quarter, 2000 1.49% WORST QUARTER 4th quarter, 2002 0.28%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.54%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- PREMIER SHARES 1.31 3.95 4.07 - --------------------------------------------------------------------------------
*THE PERFORMANCE FOR THE PERIOD BEFORE PREMIER SHARES WERE LAUNCHED ON 6/3/96 IS BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. RETURNS FOR THE PERIOD 1/1/93 THROUGH 5/3/96 REFLECT THE PERFORMANCE OF THE FUND'S PREDECESSOR, THE HANOVER 100% TREASURY SECURITIES MONEY MARKET FUND. (1)THE FUND'S FISCAL YEAR END IS 8/31. 23 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.47 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.01) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.46 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS AN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.46% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 47 150 262 590 - --------------------------------------------------------------------------------
24 JPMorgan TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal market circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments which that remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 25 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the impositions of government controls, or regulations that do not match U.S. standards. 26 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 27 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.13% 1994 2.46% 1995 3.42% 1996 3.04% 1997 3.23% 1998 3.05% 1999 2.83% 2000 3.71% 2001 2.48% 2002 1.13%
BEST QUARTER 4th quarter, 2000 0.98% WORST QUARTER 3rd quarter, 2002 4th quarter, 2002 0.27%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.51%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for the periods ended December 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- PREMIER SHARES 1.13 2.64 2.75 - --------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. 28 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.47 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.02) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.45 - -----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 149 261 590 - --------------------------------------------------------------------------------
29 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser to the Funds and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - -------------------------------------------------------------------------------- PRIME MONEY MARKET FUND 0.10 U.S. GOVERNMENT MONEY MARKET FUND 0.10 TREASURY PLUS MONEY MARKET FUND 0.10 FEDERAL MONEY MARKET FUND 0.10 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 0.10 LIQUID ASSETS MONEY MARKET FUND 0.09 TAX FREE MONEY MARKET FUND 0.10
THE FUNDS' ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Premier Shares of each Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUNDS' DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. The U.S. Government Money Market Fund has adopted a Rule 12b-1 distribution plan under which it pays annual distribution fees of up to 0.10% of the average daily net assets attributed to Premier Shares. This payment covers such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because 12b-1 expenses are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. 30 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Premier Shares of these Funds. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Funds, or directly from the JPMorgan Funds Service Center. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Funds are open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. U.S. GOVERNMENT MONEY MARKET FUND 5:00 P.M. TREASURY PLUS MONEY MARKET FUND 5:00 P.M. FEDERAL MONEY MARKET FUND 2:00 P.M. 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 2:00 P.M. LIQUID ASSETS MONEY MARKET FUND 3:00 P.M. TAX FREE MONEY MARKET FUND NOON
If you buy through an agent and not directly from the JPMorgan Funds Service Center, the agent could set earlier cut-off times. The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN FUNDS SERVICE CENTER 1-800-348-4782 MINIMUM INVESTMENTS Investors must buy a minimum of $100,000 worth of Premier Shares in a Fund to open an account. There are no minimum levels for subsequent purchases, but you must always have at least $100,000 in your account. The minimum investment may be less for certain investors. GENERAL Federal law requires a Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund 31 may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Funds in U.S. dollars. We do not accept credit cards, cash or checks from a third party. The redemption of shares purchased through the JPMorgan Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Funds. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. You can buy shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to buy and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMORGAN FUNDS SERVICE CENTER, P.O. BOX 219392 KANSAS CITY, MO 64121-9392 The JPMorgan Funds Service Center will accept your order when federal funds, a wire, a check or ACH transaction is received together with a completed application or other instructions in proper form. The JPMorgan Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. 32 Under normal circumstances, if the JPMorgan Funds Service Center accepts your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for the Prime Money Market Fund, as federal securities laws permit. You will need to have signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Funds Service Center for more details. You may sell your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds you want to sell. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782. We will mail you a check or send the proceeds via electronic transfer or wire. If you have changed your address of record within the previous 30 days or if you sell shares of a Fund worth $25,000 or more by telephone, we will send the proceeds by wire only to a bank account on our records. Or Send a signed letter with your instructions to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Premier Shares for shares of the same class in certain other JPMorgan Funds. You will need to meet any minimum investment requirement. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. Call 1-800-348-4782 for details. When you purchase by check or through an ACH transaction, you can exchange your shares beginning 15 days or 7 business days, respectively after you buy your shares. We reserve the right to limit the number of exchanges or to refuse an exchange. 33 You can exchange your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds' shares you want to exchange. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 to ask for details. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below $100,000 as a result of selling shares. We may also close the account if you fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 Each Fund may issue multiple classes of shares. This prospectus relates only to Premier Shares of the Funds. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. Shares of the JPMorgan U.S. Government Money Market Fund are intended to qualify as eligible investments for federally chartered credit unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National Credit Union Administration (NCUA) Rules and Regulations and NCUA Letter Number 155. This Fund intends to review changes in the applicable laws, rules and regulations governing eligible investments for federally chartered credit unions, and to take such action as may be necessary so that the investments of this Fund qualify as eligible investments under the Federal Credit Union Act and the regulations thereunder. DISTRIBUTIONS AND TAXES The Funds can earn income and can realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. 34 The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to state and local taxes. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from any of the Funds will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 35 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 36 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 37 JPMORGAN PRIME MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.01% 1.85% 5.25% 5.81% 4.90% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 5,412 $ 5,182 $ 2,153 $ 1,841 $ 1,094 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.44% 0.45% 0.45% 0.45% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.00% 1.80% 4.96% 5.67% 4.77% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.46% 0.47% 0.49% 0.49% 0.49% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.99% 1.77% 4.92% 5.63% 4.73% - -------------------------------------------------------------------------------------------------------------------
38 JPMORGAN LIQUID ASSETS MONEY MARKET FUND
YEAR 4/1/02** ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 Net Asset Value, End of Period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.09% 0.70% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 36 $ 26 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.40% 0.31% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.08% 1.65% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.51% 0.63% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.97% 1.33% - -------------------------------------------------------------------------------------------------------------------
** Commencement of operations. (b) Not annualized for periods less than one year. # Short periods have been annualized. 39 JPMORGAN U.S. GOVERNMENT MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.05 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.05 0.05 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.98% 1.79% 5.08% 5.62% 4.70% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,113 $ 1,047 $ 1,251 $ 1,134 $ 922 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.45% 0.45% 0.45% 0.45% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.96% 1.79% 4.95% 5.50% 4.60% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.57% 0.57% 0.59% 0.58% 0.58% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.84% 1.67% 4.81% 5.37% 4.47% - -------------------------------------------------------------------------------------------------------------------
40 JPMORGAN TREASURY PLUS MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.05 0.04 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.05 0.04 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.94% 1.73% 4.91% 5.44% 4.54% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,228 $ 818 $ 326 $ 228 $ 476 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.45% 0.45% 0.45% 0.45% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.91% 1.68% 4.84% 5.28% 4.42% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.49% 0.49% 0.52% 0.51% 0.50% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements And Earnings Credits 0.87% 1.64% 4.77% 5.22% 4.37% - -------------------------------------------------------------------------------------------------------------------
41 JPMORGAN FEDERAL MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.05 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.05 0.05 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.95% 1.77% 5.07% 5.50% 4.67% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,214 $ 1,404 $ 276 $ 279 $ 298 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.45% 0.49% 0.50% 0.50% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.96% 1.73% 4.78% 5.35% 4.56% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.47% 0.47% 0.49% 0.50% 0.50% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.94% 1.71% 4.78% 5.35% 4.56% - -------------------------------------------------------------------------------------------------------------------
42 JPMORGAN 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.05 0.04 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.05 0.04 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.88% 1.68% 4.84% 5.12% 4.40% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End Of Period (millions) $ 489 $ 353 $ 133 $ 116 $ 24 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.46% 0.46% 0.48% 0.49% 0.50% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.85% 1.52% 4.70% 5.02% 4.22% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.47% 0.48% 0.52% 0.53% 0.56% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.84% 1.50% 4.66% 4.98% 4.16% - -------------------------------------------------------------------------------------------------------------------
43 JPMORGAN TAX FREE MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 0.03 0.03 0.03 Less Dividends from Net Investment Income 0.01 0.01 0.03 0.03 0.03 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.83% 1.35% 3.21% 3.41% 2.78% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 3,429 $ 3,066 $ 116 $ 120 $ 130 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.45% 0.51% 0.55% 0.54% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.82% 1.25% 3.17% 3.40% 2.74% - ------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.47% 0.48% 0.53% 0.59% 0.56% - ------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.80% 1.22% 3.15% 3.26% 2.72% - -------------------------------------------------------------------------------------------------------------------
44 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of portfolio holdings of the Tax Free Money Market Fund is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358. (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003 PR-MMP-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS AGENCY SHARES PRIME MONEY MARKET FUND LIQUID ASSETS MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND FEDERAL MONEY MARKET FUND 100% U.S. TREASURY SECURITIES MONEY MARKET FUND TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 Liquid Assets Money Market Fund 6 U.S. Government Money Market Fund 9 Treasury Plus Money Market Fund 13 Federal Money Market Fund 17 100% U.S. Treasury Securities Money Market Fund 21 Tax Free Money Market Fund 25 The Funds' Management and Administration 30 How Your Account Works 31 Buying Fund Shares 31 Selling Fund Shares 33 Other Information Concerning the Funds 34 Distributions and Taxes 34 What the Terms Mean 36 Financial Highlights 37 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that investment must have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. 2 Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR-RETURNS*,(1) 1994 4.21% 1995 5.84% 1996 5.40% 1997 5.58% 1998 5.53% 1999 5.17% 2000 6.38% 2001 4.12% 2002 1.66%
BEST QUARTER 3rd quarter, 2000 1.64% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.36% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.78%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - ------------------------------------------------------------------------------------- AGENCY SHARES 1.66 4.56 4.84 - -------------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE AGENCY SHARES WERE LAUNCHED ON 4/26/94 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES(%)(EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.11 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.31 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.05) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.26 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST($) (WITH OR WITHOUT REDEMPTION) 27 95 169 388 - ---------------------------------------------------------------------------
5 JPMorgan LIQUID ASSETS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to maximize current income consistent with the preservation of capital and same-day liquidity. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted averaged maturity of the Fund will be 90 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 6 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 7 THE FUND'S PAST PERFORMANCE The Fund commenced operations on 4/1/02 and therefore has no reportable performance history. Once the Fund has performance for at least one calendar year, a bar chart and performance table will be included in the prospectus. To obtain current yield information call 1-800-348-4782. Although past performance of a fund is no guarantee of how it will perform in the future, historical performance may give you some indication of the risks of investing in the Fund. INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.13 - ------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.33 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.07) - ------------------------------------------------------------------------ NET EXPENSES(2) 0.26 - ------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES OF THE AGENCY SHARES WERE 0.21%. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. This example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 27 99 178 411 - ----------------------------------------------------------------------------
8 JPMorgan U.S. GOVERNMENT MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - debt securities issued or guaranteed by the U.S. Treasury, its agencies or instrumentalities of the U.S. government and - - repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 9 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 10 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.71% 1994 4.12% 1995 5.83% 1996 5.33% 1997 5.46% 1998 5.38% 1999 4.97% 2000 6.25% 2001 3.97% 2002 1.60%
BEST QUARTER 4th quarter, 2000 1.61% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.35% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.75%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - --------------------------------------------------------------------------------- AGENCY SHARES 1.60 4.42 4.55 - ---------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE AGENCY SHARES WERE LAUNCHED ON 12/10/93 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. (1) THE FUND'S FISCAL YEAR END IS 8/31. 11 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - ------------------------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.06) - ------------------------------------------------------------------------ NET EXPENSES(2) 0.26 - ------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES AND EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 27 97 174 400 - ---------------------------------------------------------------------------
12 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest 13 rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 14 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1995 5.62% 1996 5.14% 1997 5.35% 1998 5.29% 1999 4.79% 2000 6.11% 2001 3.77% 2002 1.58%
BEST QUARTER 4th quarter, 2000 1.60% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.33% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.74%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002(1),(2)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- AGENCY SHARES 1.58 4.30 4.67 - --------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 4/20/94. 15 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.14 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.34 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.09) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.25 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES AND EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.25% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04 . IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 26 100 182 422 - ---------------------------------------------------------------------------
16 JPMorgan FEDERAL MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide current income while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - debt securities that certain U.S. government agencies or instrumentalities have either issued or guaranteed as to principal and interest. The interest on these securities is generally exempt from state and local income taxes. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 17 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 18 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1995 5.71% 1996 5.24% 1997 5.43% 1998 5.32% 1999 4.98% 2000 6.14% 2001 4.01% 2002 1.58%
BEST QUARTER 4th quarter, 2000 1.58% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.35% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.72%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002(1),(2)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- AGENCY SHARES 1.58 4.40 4.79 - --------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 4/20/94. 19 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS)
MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.13 - -------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.33 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.07) - -------------------------------------------------------------------------------- NET EXPENSES(2) 0.26 - --------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 27 99 178 411 - -----------------------------------------------------------------------------------
20 JPMorgan 100% U.S. TREASURY SECURITIES MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and providing maximum safety of principal. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes. These investments carry different interest rates, maturities and issue dates. The Fund does not buy securities issued or guaranteed by agencies of the U.S. government. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 21 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF THE FDIC INSURANCE 22 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.60% 1994 3.50% 1995 5.17% 1996 4.94% 1997 5.24% 1998 5.23% 1999 4.62% 2000 5.85% 2001 3.82% 2002 1.52%
BEST QUARTER 4th quarter, 2000 1.54% - ---------------------------------------------- WORST QUARTER 4st quarter, 2002 0.34 - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.69%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- AGENCY SHARES 1.52 4.20 4.25 - --------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE AGENCY SHARES WERE LAUNCHED ON 6/3/96 IS BASED ON THE PERFORMANCE OF MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. RETURNS FOR THE PERIOD 1/1/93 THROUGH 5/3/96 REFLECT THE PERFORMANCE OF THE FUND'S PREDECESSOR, THE HANOVER 100% TREASURY SECURITIES MONEY MARKET FUND. (1) THE FUND'S FISCAL YEAR END IS 8/31. 23 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS)
MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - -------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.07) - -------------------------------------------------------------------------------- NET EXPENSES(2) 0.25 - --------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES AND EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.25% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 26 96 173 399 - -------------------------------------------------------------------------------
24 JPMorgan TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 25 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the imposition of government controls, or regulations that do not match U.S. standards. 26 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 27 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.15% 1994 2.67% 1995 3.68% 1996 3.31% 1997 3.50% 1998 3.33% 1999 3.11% 2000 3.99% 2001 2.71% 2002 1.32%
BEST QUARTER 4th quarter, 2000 1.04% - -------------------------------------------- WORST QUARTER 1st quarter, 2002 0.32 3rd quarter, 2002 4th quarter, 2002 - --------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.65%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------------- AGENCY SHARES 1.32 2.89 2.98 - --------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE AGENCY SHARES WERE LAUNCHED ON 11/4/93 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. (1) THE FUND'S FISCAL YEAR END IS 8/31. 28 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.13 - --------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.33 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.07) - --------------------------------------------------------------------------------- NET EXPENSES(2) 0.26 - ---------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 27 99 178 411 - --------------------------------------------------------------------------------
29 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser to the Funds and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - -------------------------------------------------------------------------------- PRIME MONEY MARKET FUND 0.10 - -------------------------------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 0.10 - -------------------------------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 0.10 - -------------------------------------------------------------------------------- FEDERAL MONEY MARKET FUND 0.10 - -------------------------------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 0.10 - -------------------------------------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 0.09 - -------------------------------------------------------------------------------- TAX FREE MONEY MARKET FUND 0.10 - --------------------------------------------------------------------------------
THE FUNDS' ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent receives an annual fee of 0.10% of the average daily net assets of Agency Shares of each Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.10% annual fee to such entities for performing shareholder and administrative services. THE FUNDS' DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 30 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Agency Shares of these Funds. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks or service organizations, that have an agreement with the Funds, or directly from the JPMorgan Institutional Funds Service Center. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Funds are open for business. Investment representatives and service organizations will be responsible for transmitting accepted orders to a Fund by the cut-off time. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 5:00 P.M. - -------------------------------------------------------------------------------- FEDERAL MONEY MARKET FUND 2:00 P.M. - -------------------------------------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 2:00 P.M. - -------------------------------------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 3.00 P.M. - -------------------------------------------------------------------------------- TAX FREE MONEY MARKET FUND NOON - --------------------------------------------------------------------------------
The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. To open an account, buy or sell shares or get Fund information, call: JPMorgan Institutional Funds Service Center 1-800-766-7722 MINIMUM INVESTMENTS The minimum amount for initial investments in each Fund by a service organization or individual is $10,000,000 and $25,000 for additional investments, although the minimum investment may be less for some investors. Shareholders of the Funds prior to 1/1/02 will be subject to a minimum of $1,000,000. GENERAL Federal law requires a Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential 31 street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Funds. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time day that you placed your order. You can buy shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds you want to buy and he or she will contact us. Your investment representative or service organization may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives or service organizations charge a single fee that covers all services. Your investment representative or service organization must accept your order by a Fund's cut-off time in order for us to process your order at that day's price. Your investment representative or service organization may impose different minimum investments and earlier cut-off times to buy and sell shares. Your service organization is paid by the Funds to assist you in establishing your account, executing transactions and monitoring your investment. Service organizations may provide the following services in connection with their customers' investments in the Funds: - - Acting directly or through an agent, as the sole shareholder of record - - Maintaining account records for customers - - Processing orders to purchase, redeem or exchange shares for customers - - Responding to inquiries from shareholders - - Assisting customers with investment procedures. THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 32 The JPMorgan Institutional Funds Service Center will accept your order when federal funds, a wire or a check is received together with a completed application or other instructions in proper form. The JPMorgan Institutional Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Institutional Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. SELLING FUND SHARES You can sell your shares through your service organization on any day that the JPMorgan Institutional Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center receives your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased by check for 15 days, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for the Prime Money Market Fund, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Institutional Funds Service Center for more details. You may sell your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds you want to sell. We must accept your order by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative or service organization may charge you for this service. THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722. We will send the proceeds by wire only to the bank account on our records. REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Agency Shares for shares of the same class in certain other JPMorgan Funds. You will need to meet any minimum investment requirement. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. Call 1-800-766-7722 for details. 33 When you purchase by check, you can exchange your shares beginning 15 days after you buy your shares. We reserve the right to limit the number of exchanges or to refuse an exchange. You can exchange your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds' shares you want to exchange. They will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative or service organization may charge you for this service. THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722 to ask for details. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below the minimum as a result of selling shares. We may also close the account if you fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your service organization. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 Each Fund may issue multiple classes of shares. This prospectus relates only to Agency Shares of the Funds. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. Shares of the JPMorgan U.S. Government Money Market Fund are intended to qualify as eligible investments for federally chartered credit unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National Credit Union Administration (NCUA) Rules and Regulations and NCUA Letter Number 155. This Fund intends to review changes in the applicable laws, rules and regulations governing eligible investments for federally chartered credit unions, and to take such action as may be necessary so that the investments of this Fund qualify as eligible investments under the Federal Credit Union Act and the regulations thereunder. DISTRIBUTIONS AND TAXES The Funds can earn income and can 34 realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to state and local taxes. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from any of the Funds will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 35 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 36 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 37 JPMORGAN PRIME MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - --------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.20% 2.05% 5.45% 6.01% 5.10% ================================================================================================================================= RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 12,648 $ 12,562 $ 16,676 $ 9,430 $ 8,161 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.26% 0.25% 0.26% 0.26% 0.26% - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.20% 2.08% 5.15% 5.86% 4.96% - --------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.31% 0.32% 0.33% 0.33% 0.33% - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.15% 2.01% 5.08% 5.79% 4.89% - ---------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 38 JPMORGAN LIQUID ASSETS MONEY MARKET FUND
YEAR 4/1/02** ENDED THROUGH 8/31/03 8/31/02 - -------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------- TOTAL RETURN(b) 1.29% 0.78% ======================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 284 $ 53 - -------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS:# Net Expenses 0.21% 0.13% - -------------------------------------------------------------------------------------------------------- Net Investment Income 1.16% 1.82% - -------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.33% 0.44% - -------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.04% 1.51% - --------------------------------------------------------------------------------------------------------
** Commencement of operations. (b) Not annualized for periods less than one year. # Short periods have been annualized. 39 JPMORGAN U.S. GOVERNMENT MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.17% 1.98% 5.28% 5.83% 4.92% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 3,766 $ 4,497 $ 3,769 $ 2,639 $ 2,913 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.26% 0.26% 0.26% 0.26% 0.25% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.17% 1.98% 5.09% 5.66% 4.80% - ---------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.32% 0.33% 0.33% 0.31% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.11% 1.92% 5.02% 5.59% 4.74% - ----------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 40 JPMORGAN TREASURY PLUS MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.14% 1.93% 5.12% 5.65% 4.75% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,247 $ 1,416 $ 944 $ 904 $ 980 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.25% 0.25% 0.25% 0.25% 0.24% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.14% 1.88% 5.04% 5.48% 4.61% - ---------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.34% 0.34% 0.36% 0.36% 0.31% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.05% 1.79% 4.93% 5.37% 4.54% - ----------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 41 JPMORGAN FEDERAL MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.14% 1.96% 5.30% 5.75% 4.92% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 334 $ 523 $ 1,169 $ 287 $ 248 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.26% 0.26% 0.26% 0.26% 0.26% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.20% 2.02% 5.01% 5.61% 4.79% - ---------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.33% 0.32% 0.34% 0.34% 0.34% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.13% 1.96% 4.93% 5.53% 4.71% - ----------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 42 JPMORGAN 100% U.S. TREASURY SECURITIES MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.05 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.05 0.05 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.09% 1.89% 5.11% 5.38% 4.67% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 818 $ 1,090 $ 1,170 $ 872 $ 895 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.25% 0.25% 0.25% 0.25% 0.24% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.11% 1.86% 4.93% 5.26% 4.51% - ---------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.32% 0.35% 0.34% 0.32% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.04% 1.79% 4.83% 5.17% 4.43% - ----------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 43 JPMORGAN TAX FREE MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.03 0.04 0.03 Less Dividends from Net Investment Income 0.01 0.02 0.03 0.04 0.03 -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.02% 1.54% 3.47% 3.71% 3.07% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 725 $ 1,091 $ 921 $ 640 $ 476 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.26% 0.26% 0.26% 0.26% 0.26% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.05% 1.45% 3.42% 3.67% 3.01% - ---------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.33% 0.33% 0.36% 0.39% 0.35% - ---------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.98% 1.38% 3.32% 3.54% 2.92% - ----------------------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 44 PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS 45 HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of portfolio holdings of the Tax Free Money Market Fund is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358. (C)J.P. Morgan Chase & Co. All Rights Reserved. December 2003 PR-MMA-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS INSTITUTIONAL CLASS SHARES PRIME MONEY MARKET FUND LIQUID ASSETS MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND FEDERAL MONEY MARKET FUND 100% U.S. TREASURY SECURITIES MONEY MARKET FUND TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 Liquid Assets Money Market Fund 5 U.S. Government Money Market Fund 9 Treasury Plus Money Market Fund 13 Federal Money Market Fund 17 100% U.S. Treasury Securities Money Market Fund 21 Tax Free Money Market Fund 25 The Funds' Management and Administration 30 How Your Account Works 31 Buying Fund Shares 31 Selling Fund Shares 33 Other Information Concerning the Funds 34 Distributions and Taxes 35 What the Terms Mean 36 Financial Highlights 37 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 1 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 2 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 4.21% 1995 5.84% 1996 5.40% 1997 5.58% 1998 5.53% 1999 5.17% 2000 6.38% 2001 4.12% 2002 1.72%
BEST QUARTER 3rd quarter, 2000 1.64% - ---------------------------------------------------- WORST QUARTER 4th quarter, 2002 0.38% - ----------------------------------------------------
The Fund's year-to-date total return as of 9/30/03 was 0.82%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
LIFE OF THE PAST 1 YEAR PAST 5 YEARS FUND - ----------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.72 4.58 4.84 - -----------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31 3 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.11 - --------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.31 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.11) - --------------------------------------------------- NET EXPENSES(2) 0.20 - ---------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------ YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 89 163 382 - ------------------------------------------------------------------------------
4 JPMorgan LIQUID ASSETS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to maximize current income consistent with the preservation of capital and same-day liquidity. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted averaged maturity of the Fund will be 90 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. 5 The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST AND OTHER SHORT-TERM DEBT SECURITIES, INCLUDING INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 6 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 7 THE FUND'S PAST PERFORMANCE The Fund commenced operations on 4/1/02 and therefore has no reportable performance history. Once the Fund has performance for at least one calendar year, a bar chart and performance table will be included in the prospectus. To obtain current yield information call 1-800-348-4782. Although past performance of a fund is no guarantee of how it will perform in the future, historical performance may give you some indication of the risks of investing in the Fund. INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.13 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.33 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.13) - ------------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES OF INSTITUTIONAL CLASS SHARES WERE 0.15%. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual return of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 93 172 405 - ---------------------------------------------------------------------------
8 JPMorgan U.S. GOVERNMENT MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - debt securities issued or guaranteed by the U.S. Treasury its agencies or instrumentalities of the U.S. government and - - repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser seeks, JPMIM, to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rate not met. 9 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 10 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.71% 1994 4.12% 1995 5.83% 1996 5.33% 1997 5.46% 1998 5.38% 1999 4.97% 2000 6.25% 2001 3.97% 2002 1.66%
BEST QUARTER 4th quarter, 2000 1.61% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.37% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.79%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ----------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.66 4.44 4.56 - -----------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. (1) THE FUND'S FISCAL YEAR END IS 8/31. 11 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.12) - ------------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 91 168 394 - ----------------------------------------------------------------------------
12 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 13 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 14 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*, (1) 1995 5.62% 1996 5.14% 1997 5.35% 1998 5.29% 1999 4.79% 2000 6.11% 2001 3.77% 2002 1.63%
BEST QUARTER 4th quarter, 2000 1.60% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.35% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.77%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for the periods ended December 31, 2002*, (1)
LIFE OF THE PAST 1 YEAR PAST 5 YEARS FUND - ------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.63 4.31 4.68 - -------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 4/20/94. (1) THE FUND'S FISCAL YEAR END IS 8/31. 15 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.14 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.34 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.14) - ------------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 95 177 417 - -------------------------------------------------------------------------------
16 JPMorgan FEDERAL MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide current income while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - debt securities that certain U.S. government agencies or instrumentalities have either issued or guaranteed as to principal and interest. The interest on these securities is generally exempt from state and local income taxes. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. 17 The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Fannie Mae and Freddie Mac, is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 18 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1995 5.71% 1996 5.24% 1997 5.43% 1998 5.32% 1999 4.98% 2000 6.14% 2001 4.01% 2002 1.64%
BEST QUARTER 3rd quarter, 2000 4th quarter, 2000 1.58% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.36% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.77%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
LIFE OF THE PAST 1 YEAR PAST 5 YEARS FUND - ------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.64 4.41 4.80 - -------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 4/20/94. (1) THE FUND'S FISCAL YEAR END IS 8/31. 19 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.12) - ------------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 91 168 394 - -------------------------------------------------------------------------------
20 JPMorgan 100% U.S. TREASURY SECURITIES MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and providing maximum safety of principal. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes. These investments carry different interest rates, maturities and issue dates. The Fund does not buy securities issued or guaranteed by agencies of the U.S. government. The dollar weighted average maturity of the Fund will be 90 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 21 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 22 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.60% 1994 3.50% 1995 5.17% 1996 4.94% 1997 5.24% 1998 5.23% 1999 4.62% 2000 5.85% 2001 3.82% 2002 1.57%
BEST QUARTER 4th quarter, 2000 1.54% - ----------------------------------------------- WORST QUARTER 4th quarter, 2002 0.35% - -----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.73%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ----------------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.57 4.21 4.25 - -----------------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. (1) THE FUND'S FISCAL YEAR END IS 8/31. 23 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.12) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 91 168 394 - --------------------------------------------------------------------------------
24 JPMorgan TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. 25 The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. ` Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the imposition of government controls, or regulations that do not match U.S. standards. 26 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 27 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1993 2.15% 1994 2.67% 1995 3.68% 1996 3.31% 1997 3.50% 1998 3.33% 1999 3.11% 2000 3.99% 2001 2.71% 2002 1.38%
BEST QUARTER 4th quarter, 2000 1.04% - ------------------------------------------------ WORST QUARTER 3rd quarter, 2002 0.33% - ------------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.70%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - --------------------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.38 2.91 2.99 - ---------------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. (1) THE FUND'S FISCAL YEAR END IS 8/31. 28 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.12 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.32 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.12) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 91 168 394 - --------------------------------------------------------------------------------
29 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser to the Funds and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - -------------------------------------------------- PRIME MONEY MARKET FUND 0.10 - -------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 0.10 - -------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 0.10 - -------------------------------------------------- FEDERAL MONEY MARKET FUND 0.10 - -------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 0.10 - -------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 0.09 - -------------------------------------------------- TAX FREE MONEY MARKET FUND 0.10 - --------------------------------------------------
THE FUNDS' ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.10% of the average daily net assets of Institutional Class Shares of each Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.10% annual fee to such entities for performing shareholder and administrative services. THE FUNDS' DISTRIBUTOR J.P.Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 30 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Institutional Class Shares of these Funds. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy Institutional Class Shares through financial service firms, such as broker-dealers and banks, or service organizations that have an agreement with the Funds, or directly from the JPMorgan Institutional Funds Service Center. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Funds are open for business. Investment representatives and service organizations will be responsible for transmitting accepted orders to a Fund by the cut-off time. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. - ---------------------------------------------------- U.S. GOVERNMENT MONEY MARKET FUND 5:00 P.M. - ---------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 5:00 P.M. - ---------------------------------------------------- FEDERAL MONEY MARKET FUND 2:00 P.M. - ---------------------------------------------------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND 2:00 P.M. - ---------------------------------------------------- LIQUID ASSETS MONEY MARKET FUND 3:00 P.M. - ---------------------------------------------------- TAX FREE MONEY MARKET FUND NOON - ----------------------------------------------------
If you buy through an agent and not directly from the JPMorgan Institutional Funds Service Center, the agent could set earlier cut-off times. The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS Investors or service organizations must buy a minimum of $20,000,000 worth of Institutional Class Shares in a Fund to open an account. The minimum for subsequent purchases is $25,000. The minimums may be less for certain investors. Shareholders of the Funds prior to 1/1/02 will be subject to a minimum of $10,000,000. 31 GENERAL Federal law requires a Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Funds. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. You can buy shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds you want to buy and they will contact us. Your investment representative or service organization may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives or service organizations charge a single fee that covers all services. We must accept an order from your investment representative or service organization by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative or service organization may impose different minimum investments and earlier cut-off times to buy and sell shares. Your service organization is paid by the Funds to assist you in establishing your account, executing transactions and monitoring your investment. Service organizations may provide the following services in connection with their customers' investments in the Funds: - - Acting directly or through an agent, as the sole shareholder of record - - Maintaining account records for customers - - Processing orders to purchase, redeem or exchange shares for customers - - Responding to inquiries from shareholders - - Assisting customers with investment procedures. 32 THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 The JPMorgan Institutional Funds Service Center will accept your order when federal funds, a wire or a check is received together with a completed application or other instructions in proper form. The JPMorgan Institutional Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Institutional Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Institutional Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check for 15 days following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for the Prime Money Market Fund, as federal securities laws permit. You will need to have your signature guaranteed if you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. You may sell your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds you want to sell. We must accept an order from your investment representative or service organization by the Fund's cut-off time in order for us to process your order at that day's price. They will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative or service organization may charge you for this service. THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722. We will send the proceeds by wire only to the bank account on our records. 33 REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Institutional Class Shares for shares of the same class in certain other JPMorgan Funds. You will need to meet any minimum investment requirement. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. Call 1-800-766-7722 for details. When you purchase by check, you can exchange your shares beginning 15 days after you buy your shares. We reserve the right to limit the number of exchanges or to refuse an exchange. You can exchange your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE OR SERVICE ORGANIZATION Tell your investment representative or service organization which Funds' shares you want to exchange. They will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative or service organization may charge you for this service. THROUGH THE JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER Call 1-800-766-7722 to ask for details. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 Each Fund may issue multiple classes of shares. This prospectus relates only to Institutional Class Shares of the Funds. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. Shares of the JPMorgan U.S. Government Money Market Fund are intended 34 to qualify as eligible investments for federally chartered credit unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National Credit Union Administration (NCUA) Rules and Regulations and NCUA Letter Number 155. This Fund intends to review changes in the applicable laws, rules and regulations governing eligible investments for federally chartered credit unions, and to take such action as may be necessary so that the investments of this Fund qualify as eligible investments under the Federal Credit Union Act and the regulations thereunder. DISTRIBUTIONS AND TAXES The Funds can earn income and can realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to state and local taxes. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from any of the Funds will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long a Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 35 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 36 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 37 JPMORGAN PRIME MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 1.27% 2.02% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 25,075 $ 21,881 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.19% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.24% 2.06% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.31% 0.32% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.13% 1.93% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (1) Total Return figures do not include the effect of any front-end or deferred sales load. (b) Not annualized for periods less than one year. # Short periods have been annualized. 38 JPMORGAN LIQUID ASSETS MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.35% 0.81% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 2,233 $ 1,119 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.15% 0.08% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.27% 1.87% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.33% 0.40% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.09% 1.55% - ---------------------------------------------------------------------------------------------------------------
** Commencement of operations. (b) Not annualized for periods less than one year. # Short periods have been annualized. 39 JPMORGAN U.S. GOVERNMENT MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.23% 1.96% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,526 $ 447 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.20% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.13% 1.89% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.32% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.01% 1.77% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 40 JPMORGAN TREASURY PLUS MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.19% 1.90% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 298 $ 432 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.20% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.18% 1.87% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.34% 0.34% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.04% 1.73% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 41 JPMORGAN FEDERAL MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.20% 1.93% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,712 $ 1,953 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.20% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.20% 1.97% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.32% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.08% 1.85% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 42 JPMORGAN 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.14% 1.85% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 1,126 $ 267 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.20% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.08% 1.67% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.33% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.96% 1.54% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 43 JPMORGAN TAX FREE MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - --------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ------------ ------------ Net Asset Value, End of Period $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.09% 1.54% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 6,332 $ 3,891 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.20% - --------------------------------------------------------------------------------------------------------------- Net Investment Income 1.05% 1.46% - --------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.32% 0.33% - --------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.93% 1.33% - ---------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 44 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-766-7722. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of portfolio holdings of the Tax Free Money Market Fund is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358 (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003 PR-MMI-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS RESERVE SHARES PRIME MONEY MARKET FUND TREASURY PLUS MONEY MARKET FUND NEW YORK TAX FREE MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JP MORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 Treasury Plus Money Market Fund 6 New York Tax Free Money Market Fund 10 The Funds' Management and Administration 15 How Your Account Works 16 Buying Fund Shares 16 Selling Fund Shares 17 Exchanging Fund Shares 17 Other Information Concerning the Funds 17 Distributions and Taxes 18 What the Terms Mean 20 Financial Highlights 21 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that must have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. 2 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.61% 1999 4.83% 2000 5.93% 2001 3.60% 2002 1.21%
BEST QUARTER 4th quarter, 2000 1.45% - --------------------------------------------- WORST QUARTER 4th quarter, 2002 0.25% - ---------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.44%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - ------------------------------------------------------------------- RESERVE SHARES 1.21 4.02 4.05 - -------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE RESERVE SHARES WERE LAUNCHED ON 7/31/00 IS BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF RESERVE SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE RESERVE SHARES HAVE HIGHER EXPENSES THAN THE MORGAN SHARES. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR RESERVE SHARES The expenses of the Reserve Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM RESERVE SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.25 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.11 ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.71 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.01) ---------------------------------------------------------------------------- NET EXPENSES(2) 0.70 ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE RESERVE SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.70% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Reserve Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Reserve Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 72 226 394 882 - ---------------------------------------------------------------------------
5 JPMorgan TREASURY PLUS MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY Under normal circumstances, the Fund invests its assets exclusively in: - - obligations of the U.S. Treasury, including Treasury bills, bonds and notes and - - repurchase agreements fully collateralized by U.S. Treasury securities. The debt securities described above carry different interest rates, maturities and issue dates. The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 6 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 7 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past eight calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1995 5.43% 1996 4.90% 1997 4.99% 1998 4.89% 1999 4.44% 2000 5.75% 2001 3.42% 2002 1.12%
BEST QUARTER 4th quarter, 2000 1.51% - --------------------------------------------------- WORST QUARTER 4th quarter, 2002 0.22% - ---------------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.40%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - ------------------------------------------------------------------- RESERVE SHARES 1.12 3.91 4.34 - -------------------------------------------------------------------
* THE PERFORMANCE IN THE TABLE FOR THE PERIOD BEFORE RESERVE SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF RESERVE SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE RESERVE SHARES HAVE HIGHER EXPENSES THAN MORGAN SHARES. THE FUND COMMENCED OPERATIONS ON 4/20/94. (1) THE FUND'S FISCAL YEAR END IS 8/31. 8 INVESTOR EXPENSES FOR RESERVE SHARES The expenses of the Reserve Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM RESERVE SHARES ASSETS)
MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.25 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.15 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.75 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.05) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.70 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE RESERVE SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.70% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Reserve Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Reserve Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 72 235 412 926 - ---------------------------------------------------------------------------
9 JPMorgan NEW YORK TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income and exempt from New York State and New York City personal income taxes, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY As a fundamental policy, the Fund normally invests at least 80% of the value of its Assets in municipal obligations, the interest on which is excluded from gross income for federal income tax purposes exempt from New York State and New York City personal income taxes and is not subject to the federal alternative minimum tax on individuals. "Assets" means net assets, plus the amount of borrowings for investment purposes. Municipal obligations in which the Fund can invest include those issued by the State of New York, its political subdivisions, as well as Puerto Rico, other U.S. territories and their political subdivisions. The remaining 20% of Assets may be invested in securities paying interest which is subject to federal New York State and New York City personal income taxes or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. For example, when suitable municipal obligations are unavailable, the Fund may buy municipal obligations from other states. These would generally be subject to New York State and New York City personal income taxes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 90 days or less, and the Fund will buy only those investments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that are rated in one of the two highest short-term rating categories from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, JPMIM, seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 10 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. The Fund will be particularly susceptible to difficulties affecting New York State and its municipalities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax, the federal alternative minimum tax on individuals or New York State and New York City personal income taxes. Consult your tax professional for more information. The Fund may invest more than 25% of its total assets in securities which rely on similar projects for their income stream. As a result, the Fund could be more susceptible to developments which affect those projects. Although the Fund seeks to be fully invested it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objectives. 11 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 12 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. YEAR-BY-YEAR RETURNS*,(1) [CHART] 1993 1.67% 1994 2.07% 1995 3.03% 1996 2.81% 1997 3.09% 1998 2.90% 1999 2.72% 2000 3.45% 2001 2.01% 2002 0.83%
BEST QUARTER 2nd quarter, 2000 0.91% - ------------------------------------------------------------- WORST QUARTER 3rd quarter, 2002 0.19% - -------------------------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.27%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR PERIODS ENDED DECEMBER 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - -------------------------------------------------------------------------- RESERVE SHARES 0.83 2.38 2.46 - --------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE RESERVE SHARES WERE LAUNCHED ON 7/31/00 IS BASED ON THE PERFORMANCE OF THE FUND'S MORGAN SHARES, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF RESERVE SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE RESERVE SHARES HAVE HIGHER EXPENSES THAN MORGAN SHARES. (1) THE FUND'S FISCAL YEAR END IS 8/31. 13 INVESTOR EXPENSES FOR RESERVE SHARES The expenses of the Reserve Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM RESERVE SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.30 SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.12 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.87 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.08) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.79 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE RESERVE SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.79% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE This example below is intended to help you compare the cost of investing in the Reserve Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Reserve Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 81 270 474 1,065 - ----------------------------------------------------------------------------
14 THE FUNDS' MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUNDS' INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers), as shown below, as a percentage of average daily net assets:
FUND % - -------------------------------------------------- PRIME MONEY MARKET FUND 0.10 - -------------------------------------------------- TREASURY PLUS MONEY MARKET FUND 0.10 - -------------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND 0.10 - --------------------------------------------------
THE FUNDS' ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Funds' other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Funds, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Funds' customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Reserve Shares of each Fund (except for the New York Tax Free Money Market Fund, which has an annual fee of 0.35% of the average daily net assets) held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee with respect to each Fund, except for the New York Tax Free Money Market Fund, which it will pay all or a portion of the 0.35% annual fee to such entities for performing shareholder and administrative services. The Board of Trustees has determined that the amount payable for "service fees" (as defined by the NASD) does not exceed 0.25% of the average annual net assets attributable to the Reserve Shares of the New York Tax Free Money Market Fund. THE FUNDS' DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. With the exception of the New York Tax Free Money Market Fund, all of the Funds have adopted Rule 12b-1 distribution plans under which they pay up to 0.25% of the average daily net assets attributed to Reserve Shares. The New York Tax Free Money Market Fund has adopted a Rule 12b-1 distribution plan under which it pays annual distribution fees of up to 0.30% of the average daily net assets attributed to Reserve Shares. These payments cover such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because 12b-1 expenses are paid out of a Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. 15 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Reserve Shares of these Funds. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Funds seek to maintain a stable NAV of $1.00. Each Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Funds are accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. THROUGH A SERVICE ORGANIZATION Prospective investors may only purchase shares of a Fund through a service organization. Your service organization is paid by the Funds to assist you in establishing your account, executing transactions and monitoring your investment. Service organizations may provide the following services in connection with their customers' investments in the Funds: - - Acting directly or through an agent, as the sole shareholder of record - - Maintaining account records for customers - - Processing orders to purchase, redeem or exchange shares for customers - - Responding to inquiries from shareholders - - Assisting customers with investment procedures. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by a Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. Service organizations will be responsible for transmitting accepted orders to the Funds by their cut-off time. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 PM - ----------------------------------------------- TREASURY PLUS MONEY MARKET FUND 5:00 PM - ----------------------------------------------- NEW YORK TAX FREE MONEY MARKET FUND NOON - -----------------------------------------------
The Funds may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Funds have the right to refuse any purchase order or to stop offering shares for sale at any time. MINIMUM INVESTMENTS The minimum amount for initial investments in each Fund by a service organization is $10,000,000 and $25,000 for additional investments, although the minimum investment may be less for some investors. 16 GENERAL Federal law requires a Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. Tell your service organization which Funds you want to buy and he or she will contact us. Your service organization may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Your service organization may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES Tell your service organization which Funds you want to sell. We must accept your order by the Fund's cut-off time in order for us to process your order at that day's price. Your service organization will send the necessary documents to the JPMorgan Funds Service Center. Your service organization may charge you for this service. Under normal circumstances, if the JPMorgan Funds Service Center receives your order before a Fund's cut-off time, the Fund will make available to you the proceeds the same business day. The Funds may stop accepting orders to sell and may postpone payments for more than seven days, or more than one day for the Prime Money Market Fund, as federal securities laws permit. REDEMPTIONS-IN-KIND Each Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Reserve Shares for shares of the same class in certain other JPMorgan Funds. You will need to meet any minimum investment requirement. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. Call 1-800-348-4782 for details. Tell your service organization which Funds' shares you want to exchange. They will send the necessary documents to the JPMorgan Funds Service Center. Your service organization may charge you for this service. OTHER INFORMATION CONCERNING THE FUNDS We may close your account if the balance falls below the minimum as a result of selling shares. We may also close the account if you fail to meet the 17 investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Funds liable for any loss or expenses arising from any sales request if the Funds take reasonable precautions. The applicable Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your service organization. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 Each Fund may issue multiple classes of shares. This prospectus relates only to Reserve Shares of the Funds. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Funds can earn income and can realize capital gain. The Funds deduct any expenses and then pay out these earnings to shareholders as distributions. The Funds declare dividends daily, so your shares can start earning dividends on the day you buy them. The Funds distribute the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Funds distribute any short-term capital gain at least annually. The Funds do not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the New York Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to state and local taxes. However, for the New York Tax Free Money Market Fund, New York residents will not have to pay New York State or New York City personal income taxes on tax-exempt income from New York municipal obligations. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from any of the 18 Funds will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Funds expect substantially all of their distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Funds will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom a Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Funds. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Funds will affect your own tax situation. 19 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 20 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand each Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with each Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 21 JPMORGAN PRIME MONEY MARKET FUND
YEAR YEAR YEAR 7/31/00** ENDED ENDED ENDED THROUGH 8/31/03 8/31/02 8/31/01 8/31/00 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.01 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.01 ------- ------- ------- ------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (1)(b) 0.76% 1.60% 4.88% 0.50% ========================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 355 $ 393 $ 10 $ --* - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS:# Net Expenses 0.70% 0.68% 0.79% 0.79% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.76% 1.41% 4.62% 5.33% - -------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.71% 0.72% 2.17% 1.45% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.75% 1.37% 3.24% 4.67% - --------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (1) Total Return figures do not include the effect of any front-end or deferred sales load. (b) Not annualized for periods less than one year. # Short periods have been annualized. * Amount rounds to less than one million. 22 JPMORGAN TREASURY PLUS MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - ------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 ------- --------- Net Asset Value, End of Period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.68% 1.40% ======================================================================================================= RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 234 $ 235 - ------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS:# Net Expenses 0.70% 0.70% - ------------------------------------------------------------------------------------------------------- Net Investment Income 0.68% 1.35% - ------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.75% 0.74% - ------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.63% 1.31% - -------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 23 JPMORGAN NEW YORK TAX FREE MONEY MARKET FUND
YEAR YEAR YEAR 7/31/00** ENDED ENDED ENDED THROUGH 8/31/03 8/31/02 8/31/01 8/31/00 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 0.03 --+ Less Dividends from Net Investment Income 0.01 0.01 0.03 --+ ------- ------- -------- --------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.52% 1.00% 2.77% 0.28% =============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 175 $ 180 $ --* $ --* - ------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS:# Net Expenses 0.79% 0.79% 0.90% 0.79% - ------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.50% 0.85% 2.57% 3.04% - ------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.87% 0.90% 1560.21%!! 1.49% - ------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.42% 0.74% (1556.74%)!! 2.34% - -------------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. + Less than .005. (b) Not annualized for periods less than one year. * Amount rounds to less than one million. # Short periods have been annualized. !! Due to the size of net assets and fixed expenses, ratios may appear disproportionate with other classes. 24 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on these Funds the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about each Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on each Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of portfolio holdings of the New York Tax Free Money Market Fund is available fifteen days after month end upon request. A list of prior day portfolio holdings of the other Money Market Funds is also available upon request. Please call 1-800-348-4782 to obtain further information. If you buy shares through an institution Please contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Funds, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Funds are also available on the SEC's website at http://www.sec.gov. The Funds' Investment Company Act File No. is 811-8358 (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003 PR-MMR-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS SELECT CLASS SHARES PRIME MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 10 Distributions and Taxes 10 What the Terms Mean 12 Financial Highlights 13 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund will generally be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that investment must have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 4.10% 1995 5.66% 1996 5.20% 1997 5.37% 1998 5.32% 1999 4.97% 2000 6.18% 2001 3.92% 2002 1.47%
BEST QUARTER 3rd quarter, 2000 1.59% - ------------------------------------------- WORST QUARTER 4th quarter, 2002 0.32% - -------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.64%. AVERAGE ANNUAL TOTALRETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - ------------------------------------------------------------------------------- SELECT CLASS SHARES 1.47 4.36 4.65 - -------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE SELECT CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF THE PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR SELECT CLASS SHARES The expenses of the Select Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM SELECT CLASS ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.47 FEE WAIVER AND EXPENSE REIMBURSEMENT(2) (0.03) - ------------------------------------------------------------------------------- NET EXPENSES(2) 0.44 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE SELECT CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.44% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Select Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Select Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 45 148 260 589 - -----------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Select Class Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Select Class Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything the class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time at 5:00 P.M. Eastern time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy Select Shares through financial service firms, such as broker-dealers and banks that have an agreement with the Funds, or directly from the JPMorgan Funds Service Center. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the Fund's cut-off time (in Eastern time) is 5:00 P.M. If you buy through an agent and not directly from the JPMorgan Funds Service Center, the agent could set an earlier cut-off time. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN FUNDS SERVICE CENTER 1-800-348-4782 MINIMUM INVESTMENTS Investors must buy a minimum of $1,000,000 worth of Select Class Shares in the Fund to open an account. The minimum investment may be less for certain investors. There are no minimum levels for subsequent purchases. Current shareholders of Select Class Shares who hold their shares as a result of the reorganization of certain JPMorgan Funds in September 2001 may purchase Select Class Shares of this and other Funds without regard to this minimum. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. 7 This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Funds in U.S. dollars. We do not accept credit cards, cash or checks from a third party. The redemption of shares purchased through the JPMorgan Funds Service Center by check is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 P.M. Eastern time on the day that you placed your order. You can buy shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 Or Complete the application form and mail it along with a check for the amount you want to invest to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 The JPMorgan Funds Service Center will accept your order when federal funds, a wire or a check is received together with a completed application or other instructions in proper form. The JPMorgan Funds Service Center accepts purchase orders on any business day that the Federal Reserve Bank of New York and the NYSE are open. Normally, if the JPMorgan Funds Service Center receives your order in proper form by the Fund's cut-off time, we will process your order at that day's price. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Funds Service Center receives 8 your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Funds Service Center by check for 15 days following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have signatures guaranteed if you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Funds Service Center for more details. You may sell shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell your Select Class Shares. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782. We will mail you a check or send the proceeds via electronic transfer or wire. If you have changed your address of record within the previous 30 days or if you sell shares of a Fund worth $25,000 or more by telephone, we will send the proceeds by wire only to a bank account on our records. Or Send a signed letter with your instructions to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. EXCHANGING FUND SHARES You can exchange your Select Shares for shares of the same class in certain other JPMorgan Funds. You will need to meet any minimum investment requirement. For tax purposes, an exchange is treated as a sale of Fund shares. Carefully read the prospectus of the Fund you want to buy before making an exchange. We reserve the right to limit the number of exchanges or to refuse an exchange. You can exchange your shares in one of two ways: THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative which Funds' shares you want to exchange. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. THROUGH THE JPMORGAN FUNDS SERVICE CENTER Call 1-800-348-4782 to ask for details 9 OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum investment noted above as a result of selling shares. We will give you 60 days' notice before closing your account. This restriction does not apply to shareholders who hold Select Class Shares as a result of the reorganization of certain JPMorgan Funds in September 2001. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN FUNDS SERVICE CENTER P.O.BOX 219392 KANSAS CITY, MO 64121-9392 The Fund may issue multiple classes of shares. This prospectus relates only to Select Class Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from any of the Funds will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long a Fund held a particular 10 asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 11 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 12 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 13 JPMORGAN PRIME MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 Less dividends from net investment income 0.01 0.02 Net asset value, end of period $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.02% 1.78% =============================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 776 $ 1,064 - ------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.44% 0.42% - ------------------------------------------------------------------------------------------------------------------------------- Net investment income 1.03% 1.83% - ------------------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.47% 0.46% - ------------------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 1.00% 1.79% - -------------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 14 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on this Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and its policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. The Fund's Investment Company Act File No. is 811-8358 (C)J.P. Morgan Chase &Co. All Rights Reserved. December 2003 PR-PMMS-1203 PROSPECTUS DECEMBER 29, 2003 JPMORGAN MONEY MARKET FUNDS CASH MANAGEMENT SHARES PRIME MONEY MARKET FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [JPMORGAN FLEMING ASSET MANAGEMENT LOGO] CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 The Fund's Distributor 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 8 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 2 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.61% 1999 4.83% 2000 6.03% 2001 3.78% 2002 0.94%
BEST QUARTER 3rd quarter, 2000 1.39% WORST QUARTER 4th quarter, 2002 0.19%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.26%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF FUND - ------------------------------------------------------------------------------------- CASH MANAGEMENT SHARES 0.94 4.00 4.04 - -------------------------------------------------------------------------------------
* THE PERFORMANCE IN THE TABLE FOR THE PERIOD BEFORE CASH MANAGEMENT SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF CASH MANAGEMENT SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE CASH MANAGEMENT SHARES HAVE HIGHER EXPENSES THAN THE MORGAN SHARES. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR CASH MANAGEMENT SHARES The expenses of the Cash Management Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM CASH MANAGEMENT SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.50 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 - ------------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES(2) 0.97 - -------------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE RESTATED FROM THE MOST RECENT FISCAL YEAR TO REFLECT CURRENT EXPENSE ARRANGEMENTS. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE CASH MANAGEMENT SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.97% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES FOR THE CASH MANAGEMENT SHARES WERE 0.95%. EXAMPLE The example below is intended to help you compare the cost of investing in the Cash Management Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - total annual operating expenses of 0.97%. This example is for comparison only; the actual returns of the Cash Management Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 99 309 536 1,190 - -----------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Cash Management Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. The Fund has adopted a Rule 12b-1 distribution plan under which it pays up to 0.50% of the average daily net assets attributed to Cash Management Shares. This payment covers such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because 12b-1 expenses are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Cash Management Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything the class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time at 5:00 P.M. Eastern time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. THROUGH A SERVICE ORGANIZATION Prospective investors may only purchase shares of the Fund through a service organization. Your service organization is paid by the Fund to assist you in establishing your account, executing transactions and monitoring your investment. Service organizations may provide the following services in connection with their customers' investments in the Fund: - - Acting directly or through an agent, as the sole shareholder of record - - Maintaining account records for customers - - Processing orders to purchase, redeem or exchange shares for customers - - Responding to inquiries from shareholders - - Assisting customers with investment procedures. Shares are available on any business day the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. Service organizations will be responsible for transmitting accepted orders to the Fund by the cut-off time. Normally, the Fund's cut-off time is 5:00 P.M. Eastern time. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. 7 MINIMUM INVESTMENT The minimum amount for initial investments in the Fund by a service organization is $10,000,000 and $25,000 for additional investments, although the minimum investments may be less for some investors. GENERAL Federal law requires a Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. Orders by wire may be cancelled if the JPMorgan Funds Service Center does not receive payment by 5:00 P.M. Eastern time on the day that you placed your order. Tell your service organization you want to buy and he or she will contact us. Your service organization may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Your service organization may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES Tell your service organization that you want to sell shares. We must accept your order by the Fund's cut-off time in order for us to process your order at that day's price. Your service organization will send the necessary documents to the JPMorgan Funds Service Center. Your service organization may charge you for this service. Under normal circumstances, if the JPMorgan Funds Service Center receives your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We may also close the account if you fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those 8 you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your service organization. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Funds Service Center P.O. Box 219392 Kansas City, MO 64121-9392 The Fund may issue multiple classes of shares. This prospectus relates only to Cash Management Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund holds a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. 9 The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 ------- ------- Net Asset Value, End of Period $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.50% 1.25% ========================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (millions) $ 544 $ 282 - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.95% 0.96% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.48% 1.17% - -------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.96% 0.99% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.47% 1.14% - --------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 13 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on this Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and its policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of prior day holdings of the Fund is available upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room, and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. The Fund's Investment Company Act File No. is 811-8358. (C) J.P. Morgan Chase & Co. All Rights Reserved. December 2003 PR-PMMCM-1203 JPMORGAN FUNDS PROSPECTUS TAX FREE MONEY MARKET FUND JPMORGAN PREMIER CLASS OF SHARES DISTRIBUTED THROUGH J.P. MORGAN FUND DISTRIBUTORS, INC. December 29, 2003 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS Tax Free Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Back cover
JPMORGAN TAX FREE MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income which is excluded from gross income, while still preserving capital and maintaining liquidity. THE FUND'S MAIN INVESTMENT STRATEGY Under normal market circumstances, the Fund will try to invest its assets exclusively in municipal obligations, the interest on which is excluded from regular federal income taxes. As a fundamental policy, the Fund will invest at least 80% of the value of its Assets in municipal obligations. "Assets" means net assets, plus the amount of borrowings for investment purposes. The remaining 20% of its Assets may be invested in securities subject to federal income tax or the federal alternative minimum tax for individuals. The Fund may exceed this limit for temporary defensive purposes. The Fund may also invest in municipal lease obligations. These provide participation in municipal lease agreements and installment purchase contracts. The dollar weighted average maturity of the Fund will be 60 days or less and the Fund will buy only those investments which that remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the Fund's adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of its non-fundamental investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The Fund attempts to keep its net asset value constant, but there is no guarantee that it will be able to do so. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently. This could decrease the Fund's income or hurt its ability to preserve capital and liquidity. Under some circumstances, municipal obligations might not pay interest unless the state or municipal legislature authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue. Since some municipal obligations may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking or financial sector suffers an economic downturn. The Fund may invest in securities whose interest is subject to federal income tax or the federal alternative minimum tax on individuals. Consult your tax professional for more information. The Fund may invest in municipal obligations backed by foreign institutions. This could carry more risk than securities backed by U.S. institutions because of political and economic instability, the impositions of government controls, or regulations that do not match U.S. standards. 2 Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE - - ARE INVESTING THROUGH A TAX-DEFERRED ACCOUNT, SUCH AS AN IRA 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past ten calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and ten years. To obtain current yield information call 1-800-348-4782. Past performance is not necessarily an indication how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1) 1993 2.13% 1994 2.46% 1995 3.42% 1996 3.04% 1997 3.23% 1998 3.05% 1999 2.83% 2000 3.71% 2001 2.48% 2002 1.13%
BEST QUARTER 4th quarter, 2000 0.98% WORST QUARTER 3rd quarter, 2002 4th quarter, 2002 0.27%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.51%. AVERAGE ANNUAL TOTAL RETURNS (%) SHOWS PERFORMANCE OVER TIME, FOR THE PERIODS ENDED DECEMBER 31, 2002(1)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS - ----------------------------------------------------------------- PREMIER SHARES 1.13 2.64 2.75
(1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.12 TOTAL ANNUAL OPERATING EXPENSES 0.47 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.02) NET EXPENSES(2) 0.45
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 149 261 590
5 THE FUND'S MANAGEMENT AND ADMINISTRATION Each Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser to the Funds and makes the day-to-day investment decisions for the Funds. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. For the fiscal year ended 8/31/03 the adviser was paid management fees (net of waivers) as a percentage of average daily net assets as follows:
FUND % - --------------------------------------- TAX FREE MONEY MARKET FUND 0.10
THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of each Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Premier Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Funds. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Premier Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of a Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund, or directly from the JPMorgan Funds Service Center. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is noon. If you buy through an agent and not directly from the JPMorgan Funds Service Center, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. MINIMUM INVESTMENTS Investors must buy a minimum of $100,000 worth of Premier Shares in the Fund to open an account. There are no minimum levels for subsequent purchases, but you must always have at least $100,000 in your account. The minimum investment may be less for certain investors. GENERAL Federal law requires the Fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The Fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the Fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to 7 attempt to verify the person's identity. The Fund may not be able to establish an account if the person does not provide the necessary information. In addition, the Fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the Fund is unable to verify the person's identity after an account is established, the Fund may be required to involuntarily redeem the person's shares and close the account. OPENING YOUR ACCOUNT AND BUYING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES You can sell your shares on any day that the JPMorgan Funds Service Center is accepting purchase orders. You will receive the next NAV calculated after the JPMorgan Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased by check for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than seven days, as federal securities laws permit. You will need to have signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. Contact the JPMorgan Funds Service Center for more details. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cutoff time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. 8 OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below $100,000 as a result of selling shares. We may also close the account if you fail to meet the investment minimum over a 12-month period. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund take reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 The Fund may issue multiple classes of shares. This prospectus relates only to Premier Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. Dividends of tax-exempt interest income paid by the Tax Free Money Market Fund are not subject to federal income taxes, but will generally be subject to state and local taxes. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. 9 If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of the tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights tables are intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the Fund's annual report, which is available upon request. 12 JPMORGAN TAX FREE MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 0.03 0.03 0.03 Less Dividends from Net Investment Income 0.01 0.01 0.03 0.03 0.03 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 0.83% 1.35% 3.21% 3.41% 2.78% ========================================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 3,429 $ 3,066 $ 116 $ 120 $ 130 - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.45% 0.51% 0.55% 0.54% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.82% 1.25% 3.17% 3.40% 2.74% - -------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.47% 0.48% 0.53% 0.59% 0.56% - -------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.80% 1.22% 3.15% 3.26% 2.72% - --------------------------------------------------------------------------------------------------------------------------
13 This page intentionally left blank. PRIVACY POLICY Respecting and protecting client privacy has been vital to our business since its inception. By explaining our Privacy Policy to you, we trust that you will better understand how the JPMorgan Funds keep our client information private and secure while using it to serve you better. PROTECTING THE CONFIDENTIALITY OF OUR CLIENT INFORMATION We take our responsibility to protect the privacy and confidentiality of our client information very seriously. We maintain physical, electronic and procedural safeguards that comply with United States federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies authorize access to client information only by individuals who need to know that information to provide products and services to you. WHO IS COVERED BY THE PRIVACY POLICY? The Privacy Policy applies to the shareholders of JPMorgan Funds and applies only to information related to JPMorgan Funds. If you decide at some point either to close your account(s) or to become an inactive client, we will continue to adhere to the privacy policies and practices described in this notice. INFORMATION WE COLLECT ABOUT YOU We receive information about you from various sources, including: certain nonpublic personal information about you from information you provide on applications or other forms (such as your address and social security number), and information about your account transactions with us (such as purchases, sales and account balances). We may also collect such information through account inquiries by mail, e-mail or telephone. SHARING INFORMATION FOR LEGAL AND ROUTINE BUSINESS REASONS AND FOR JOINT MARKETING We may disclose non public personal information we collect about you as permitted by law. For example, we may share information with regulatory authorities and law enforcement officials who have jurisdiction over us or if we are required to do so by United States or the applicable law; provide information to protect against fraud; share information with your consent and give account information to check and statement printers and other service providers who work for us. We also may share the information we collect about you, as described above, with firms that perform administrative or marketing services on our behalf or with financial institutions, such as banks, with whom we have joint marketing agreements to provide you with offers of their financial products and services. These companies may receive information about you, but they must safeguard it and not use it for any other purpose. J.P. MORGAN FUND DISTRIBUTORS, INC. J.P. Morgan Fund Distributors, Inc., as distributor of the JPMorgan Funds, does not collect or retain nonpublic personal financial information relating to any past, present or prospective shareholders of the Funds. From time to time, the Funds or companies that provide services to the Funds may provide to J.P. Morgan Fund Distributors, Inc. nonpublic personal financial information relating to shareholders or prospective shareholders as necessary to perform services for the Funds. In such circumstances, J.P. Morgan Fund Distributors, Inc. adheres to the regulatory limitations on the use or disclosure of that information and its own obligations to protect the security and confidentiality of the information. If you have any questions regarding this policy, please feel free to contact us at 1-800-348-4782. THIS INSIDE BACK COVER IS NOT PART OF YOUR PROSPECTUS HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and its policies. It is incorporated by reference into this prospectus. That means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-348-4782 or writing to: JPMORGAN FUNDS SERVICE CENTER P.O. BOX 219392 KANSAS CITY, MO 64121-9392 PORTFOLIO HOLDINGS A list of portfolio holdings of the Tax Free Money Market Fund is available fifteen days after month end upon request. Please call 1-800-348-4782 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102. 1-202-942-8090 E-MAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. The Fund's Investment Company Act File No. is 811-8358. (C) J. P. Morgan Chase & Co. All Rights Reserved. December 2002 PR-MTFMMP-1203 PROSPECTUS DECEMBER 29, 2003 [GRAPHIC] [SOUTHTRUSTFUNDS IT'S ABOUT TRUST.(SM) LOGO] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND MORGAN SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Inside back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.61% 1999 4.83% 2000 6.03% 2001 3.78% 2002 1.32%
BEST QUARTER 4th quarter, 2000 1.55% WORST QUARTER 4th quarter, 2002 0.28%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.53%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - ------------------------------------------------------------------------- MORGAN SHARES 1.32 4.10 4.09 - -------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE MORGAN SHARES WERE LAUNCHED ON 10/1/98 IS BASED ON THE PERFORMANCE OF CLASS B SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR MORGAN SHARES The expenses of the Morgan Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM MORGAN SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.35 OTHER EXPENSES(1) 0.17 - ------------------------------------------------------ TOTAL ANNUAL OPERATING EXPENSES 0.62 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.03) - ------------------------------------------------------ NET EXPENSES(2) 0.59 - ------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE MORGAN SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.59% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Morgan Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, - - net expenses through 12/31/04 and total annual operating expenses thereafter; and - - all shares sold at the end of each time period. This example is for comparison only; the actual returns of the Morgan Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 60 196 343 771 - -----------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.35% of the average daily net assets of the Morgan Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. The Board of Trustees has determined that the amount payable for "service fees" (as defined by the NASD) does not exceed 0.25% of the average annual net assets attributable to the Morgan Shares of the Fund. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Morgan Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS Investors must buy a minimum of $2,500 worth of Morgan Shares in the Fund to open an account. For additional investments investors must buy a minimum of $100, and must always have at least $2,500 in your account. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the 7 person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you place your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your representative may charge you for this service. 8 REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Morgan Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. 9 If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: Securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: Debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND^
YEAR YEAR YEAR YEAR 10/1/98** ENDED ENDED ENDED ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.02 0.05 0.06 0.04 Less dividends from net investment income 0.01 0.02 0.05 0.06 0.04 ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(b) 0.87% 1.71% 5.10% 5.65% 4.26% ================================================================================================================================ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 4,627 $ 7,552 $ 10,367 $ 1,475 $ 515 - -------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net expenses 0.59% 0.58% 0.59% 0.59% 0.59% - -------------------------------------------------------------------------------------------------------------------------------- Net investment income 0.90% 1.72% 4.82% 5.53% 4.61% - -------------------------------------------------------------------------------------------------------------------------------- Expenses without waivers, reimbursements and earnings credits 0.62% 0.61% 0.61% 0.61% 0.72% - -------------------------------------------------------------------------------------------------------------------------------- Net investment income without waivers, reimbursements and earnings credits 0.87% 1.69% 4.80% 5.51% 4.48% - --------------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. ^ Formerly Vista Shares. 13 This page intentionally left blank. HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and its policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STM-1203 PROSPECTUS DECEMBER 29, 2003 [GRAPHIC] [SOUTHTRUST FUNDS ITS ABOUT TRUST.(SM) LOGO] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND INSTITUTIONAL CLASS SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Inside back cover
JPMORGAN PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third- party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 2 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*, (1) 1994 4.21% 1995 5.84% 1996 5.40% 1997 5.58% 1998 5.53% 1999 5.17% 2000 6.38% 2001 4.12% 2002 1.72%
BEST QUARTER 3rd quarter, 2000 1.64% WORST QUARTER 4th quarter, 2002 0.38%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.82%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
LIFE OF THE PAST 1 YEAR PAST 5 YEARS FUND - ---------------------------------------------------------------------------- INSTITUTIONAL CLASS SHARES 1.72 4.58 4.84 - ----------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE INSTITUTIONAL CLASS SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF AGENCY SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR INSTITUTIONAL CLASS SHARES The expenses of the Institutional Class Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL CLASS SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.11 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.31 FEE WAIVER AND EXPENSE REIMBURSEMENTS(2) (0.11) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.20 - ----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE INSTITUTIONAL CLASS SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.20% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Institutional Class Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Institutional Class Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 20 89 163 382 - ---------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.10% of the average daily net assets of the Institutional Class Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.10% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Institutional Class Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything the class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS Investors must buy a minimum of $20,000,000 worth of Institutional Class Shares in the Fund to open an account. The minimum for subsequent purchases is $25,000, but the minimum investment may be less for certain investors. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to 7 verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5.00 p.m. Eastern time on the day that you placed your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares, you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. 8 THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Institutional Funds Service Center 500 Stanton Christiana Road Newark, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Institutional Class Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. 9 Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 - ----------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 Less Dividends from Net Investment Income 0.01 0.02 ---------- ---------- Net Asset Value, End of Period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 1.27% 2.02% =========================================================================================================== RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (millions) $ 25,075 $ 21,881 - ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.20% 0.19% - ----------------------------------------------------------------------------------------------------------- Net Investment Income 1.24% 2.06% - ----------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.31% 0.32% - ----------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.13% 1.93% - -----------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 13 HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STI-1203 PROSPECTUS DECEMBER 29, 2003 [GRAPHIC] [SOUTHTRUSTFUNDS IT'S ABOUT TRUST.(SM) LOGO] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND PREMIER CLASS SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Inside back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares. The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS(1),(2) 1994 4.10% 1995 5.66% 1996 5.20% 1997 5.37% 1998 5.32% 1999 4.97% 2000 6.18% 2001 3.92% 2002 1.46%
BEST QUARTER 3rd quarter, 2000 1.59% WORST QUARTER 4th quarter, 2002 0.31%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.63%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002(1),(2)
LIFE OF PAST 1 YEAR PAST 5 YEARS THE FUND - -------------------------------------------------------------------------------- PREMIER SHARES 1.46 4.36 4.65 - --------------------------------------------------------------------------------
(1) THE FUND'S FISCAL YEAR END IS 8/31. (2) THE FUND COMMENCED OPERATIONS ON 11/15/93. 4 INVESTOR EXPENSES FOR PREMIER SHARES The expenses of the Premier Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM PREMIER SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.11 - ------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.46 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.01) - ------------------------------------------------------------- NET EXPENSES(2) 0.45 - -------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE PREMIER SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.45% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Premier Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Premier Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 46 147 257 578 - --------------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of the Premier Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Premier Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M.
If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS Investors must buy a minimum of $100,000 worth of Premier Shares in the Fund to open an account. There are no minimum levels for subsequent purchases, but you must always have at least $100,000 in your account. The minimum investment may be less for certain investors. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit 7 account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you place your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. 8 THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Institutional Funds Service Center 500 Stanton Christiana Road Newark, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Premier Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. 9 The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.01% 1.85% 5.25% 5.81% 4.90% ================================================================================================================================ RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 5,412 $ 5,182 $ 2,153 $ 1,841 $ 1,094 - -------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Net Expenses 0.45% 0.44% 0.45% 0.45% 0.45% - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.00% 1.80% 4.96% 5.67% 4.77% - -------------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.46% 0.47% 0.49% 0.49% 0.49% - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.99% 1.77% 4.92% 5.63% 4.73% - --------------------------------------------------------------------------------------------------------------------------------
13 HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STP-1203 PROSPECTUS DECEMBER 29, 2003 [SOUTHTRUST FUNDS IT'S ABOUT TRUST.(SM) LOGO] [GRAPHIC] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND RESERVE SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 5 How Your Account Works 6 Buying Fund Shares 6 Selling Fund Shares 7 Other Information Concerning the Fund 8 Distributions and Taxes 8 What the Terms Mean 10 Financial Highlights 11 How To Reach Us Inside back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. 1 THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 2 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.61% 1999 4.83% 2000 5.93% 2001 3.60% 2002 1.21%
BEST QUARTER 4th quarter, 2000 1.45% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.25% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.44%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND - -------------------------------------------------------------------------------- RESERVE SHARES 1.21 4.02 4.05 - --------------------------------------------------------------------------------
* THE PERFORMANCE FOR THE PERIOD BEFORE RESERVE SHARES WERE LAUNCHED ON 7/31/00 IS BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF RESERVE SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE RESERVE SHARES HAVE HIGHER EXPENSES THAN MORGAN SHARES. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1) THE FUND'S FISCAL YEAR END IS 8/31. 3 INVESTOR EXPENSES FOR RESERVE SHARES The expenses of the Reserve Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM RESERVE SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.25 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSES(1) 0.11 - ----------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.71 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.01) - ----------------------------------------------------------------------------- NET EXPENSES(2) 0.70 - -----------------------------------------------------------------------------
(1) "OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2) REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE RESERVE SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.70% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Reserve Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Reserve Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 72 226 394 882 - --------------------------------------------------------------------------------
4 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of the Reserve Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. The Fund has adopted a Rule 12b-1 distribution plan under which it pays up to 0.25% of the average daily net assets attributed to Reserve Shares. This payment covers such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because 12b-1 expenses are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. 5 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Reserve Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything the class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV of each class of shares is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after your investment representative or the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M.
If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS The minimum amount for initial investments in the Reserve Shares is $10,000,000 and $25,000 for additional investments, although the minimum investment may be less for some investors. Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund 6 may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will 7 send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions #HOW YOUR ACCOUNT WORKS received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take all reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Institutional Funds Service Center 500 Stanton Christiana Road Newark, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Reserve Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund 8 will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 9 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 10 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 11 JPMORGAN PRIME MONEY MARKET FUND
YEAR YEAR YEAR 7/31/00** ENDED ENDED ENDED THROUGH PER SHARE OPERATING PERFORMANCE: 8/31/03 8/31/02 8/31/01 8/31/00 - ----------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.01 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.01 ------- ------- ------- --------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.76% 1.60% 4.88% 0.50% ================================================================================================================= RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Period (millions) $ 355 $ 393 $ 10 $ --* - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS:# Net Expenses 0.70% 0.68% 0.79% 0.79% - ----------------------------------------------------------------------------------------------------------------- Net Investment Income 0.76% 1.41% 4.62% 5.33% - ----------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.71% 0.72% 2.17% 1.45% - ----------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.75% 1.37% 3.24% 4.67% - -----------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. * Amount rounds to less than one million. 12 This page intentionally left blank. HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STR-1203 PROSPECTUS DECEMBER 29, 2003 [SOUTHTRUST FUNDS IT'S ABOUT TRUST.(SM) LOGO] [GRAPHIC] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND AGENCY CLASS SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Inside back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that investment must have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third-party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. 1 BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive periods or to meet redemptions, it may not achieve its investment objective. 2 WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - - WANT A HIGHLY LIQUID INVESTMENT - - ARE LOOKING FOR AN INTERIM INVESTMENT - - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - - ARE INVESTING FOR LONG-TERM GROWTH - - ARE INVESTING FOR HIGH INCOME - - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 4.21% 1995 5.84% 1996 5.40% 1997 5.58% 1998 5.53% 1999 5.17% 2000 6.38% 2001 4.12% 2002 1.66%
BEST QUARTER 3rd quarter, 2000 1.64% - ---------------------------------------------- WORST QUARTER 4th quarter, 2002 0.36% - ----------------------------------------------
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.78%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF THE FUND -------------------------------------------------------------------------------- AGENCY SHARES 1.66 4.56 4.84 --------------------------------------------------------------------------------
*THE PERFORMANCE FOR THE PERIOD BEFORE AGENCY SHARES WERE LAUNCHED ON 4/26/94 IS BASED ON THE PERFORMANCE OF PREMIER SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1)THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR AGENCY SHARES The expenses of the Agency Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a service organization. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM AGENCY SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES NONE SHAREHOLDER SERVICE FEES 0.10 OTHER EXPENSES(1) 0.11 - ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.31 FEE WAIVERS AND EXPENSE REIMBURSEMENTS(2) (0.05) - ---------------------------------------------------------------------------- NET EXPENSES(2) 0.26 - ----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE BASED ON EXPENSES INCURRED IN THE MOST RECENT FISCAL YEAR. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE AGENCY SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.26% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. EXAMPLE The example below is intended to help you compare the cost of investing in the Agency Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - net expenses through 12/31/04 and total annual operating expenses thereafter. This example is for comparison only; the actual returns of the Agency Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 27 95 169 388 - ---------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.10% of the average daily net assets of the Agency Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Agency Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything a class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M.
If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS The minimum amount for initial investments in the Agency Shares is $10,000,000 and $25,000 for additional investments, although the minimum investments may be less for some investors. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not provide 7 the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you placed your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. We may also need additional documents or a letter from a surviving joint owner before selling the shares. 8 THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMorgan Institutional Funds Service Center 500 Stanton Christiana Road Newark, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Agency Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and can realize capital gain. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at 9 the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. Qualified banks: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND@
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 - ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.02 0.05 0.06 0.05 Less Dividends from Net Investment Income 0.01 0.02 0.05 0.06 0.05 -------- --------- -------- -------- ------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 1.20% 2.05% 5.45% 6.01% 5.10% ====================================================================================================================== RATIOS/SUPPLEMENTAL DATA: - ---------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (millions) $ 12,648 $ 12,562 $ 16,676 $ 9,430 $ 8,161 - ---------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - ---------------------------------------------------------------------------------------------------------------------- Net Expenses 0.26% 0.25% 0.26% 0.26% 0.26% - ---------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.20% 2.08% 5.15% 5.86% 4.96% - ---------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.31% 0.32% 0.33% 0.33% 0.33% - ---------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 1.15% 2.01% 5.08% 5.79% 4.89% - ----------------------------------------------------------------------------------------------------------------------
@ Formerly Institutional Shares. 13 This page intentionally left blank. HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STA-1203 PROSPECTUS DECEMBER 29, 2003 [GRAPHIC] [SOUTHTRUSTFUNDS IT'S ABOUT TRUST.(SM) LOGO] MONEY MARKET FUNDS JPMORGAN PRIME MONEY MARKET FUND CASH MANAGEMENT SHARES AVAILABLE TO INVESTORS OF SOUTHTRUST FUNDS THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS Prime Money Market Fund 1 The Fund's Management and Administration 6 How Your Account Works 7 Buying Fund Shares 7 Selling Fund Shares 8 Other Information Concerning the Fund 9 Distributions and Taxes 9 What the Terms Mean 11 Financial Highlights 12 How To Reach Us Inside back cover
JPMorgan PRIME MONEY MARKET FUND THE FUND'S OBJECTIVE The Fund aims to provide the highest possible level of current income while still maintaining liquidity and preserving capital. THE FUND'S MAIN INVESTMENT STRATEGY The Fund invests in high quality, short-term money market instruments which are issued and payable in U.S. dollars. The Fund principally invests in: - - high quality commercial paper and other short-term debt securities, including floating and variable rate demand notes of U.S. and foreign corporations - - debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities - - securities issued or guaranteed by the U.S. government, its agencies or instrumentalities - - asset-backed securities - - repurchase agreements and reverse repurchase agreements - - taxable municipal obligations The dollar weighted average maturity of the Fund generally will be 60 days or less and the Fund will buy only those instruments that have remaining maturities of 397 days or less. All securities purchased by the Fund must meet the requirements of Rule 2a-7 under the Investment Company Act of 1940. The Fund may invest significantly in securities with floating or variable rates of interest. Their yields will vary as interest rates change. The Fund invests only in U.S. dollar denominated securities that have the highest possible short-term rating from at least two nationally recognized statistical rating organizations, or one such rating if only one organization rates that security. Alternatively, some securities may have additional third- party guarantees in order to meet the rating requirements mentioned above. If the security is not rated, it must be considered of comparable quality by the adviser. The Fund's adviser, J.P. Morgan Investment Management Inc. (JPMIM), seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers. 1 The Fund seeks to maintain a net asset value of $1.00 per share. The Fund's Board of Trustees may change any of these investment policies (including its investment objective) without shareholder approval. The Fund is diversified as defined in the Investment Company Act of 1940. BEFORE YOU INVEST INVESTORS CONSIDERING THE FUND SHOULD UNDERSTAND THAT: - THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS INVESTMENT OBJECTIVE. - THE FUND DOES NOT REPRESENT A COMPLETE INVESTMENT PROGRAM. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. THE FUND'S MAIN INVESTMENT RISKS All mutual funds carry a certain amount of risk. You may lose money on your investment in the Fund. Here are some specific risks of investing in the Fund. The Fund may not achieve its objective if the adviser's expectations regarding particular securities or interest rates are not met. The value of money market investments tends to fall when prevailing interest rates rise, although they are generally less sensitive to interest rate changes than longer-term securities. Repurchase agreements involve some risk to the Fund if the other party does not live up to its obligations under the agreement. Indebtedness of certain issuers identified with the U.S. government whose securities may be held by the Fund, including the well-known Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), is not entitled to the full faith and credit of the United States and is thus subject to the risk of default in the payment of interest and/or principal like the indebtedness of private issuers. The Fund's asset-backed investments involve risk of loss due to prepayments that occur earlier or later than expected, and like any bond, due to default. Some asset-backed securities may have additional risk because they may receive little or no collateral protection from the underlying assets. The Fund's ability to concentrate its investments in the banking industry could increase risks. The profitability of banks depends largely on the availability and cost of funds, which can change depending upon economic conditions. Banks are also exposed to losses if borrowers get into financial trouble and cannot repay their loans. Investments in foreign securities may be riskier than investments in U.S. securities. Foreign securities may be affected by political, social, and economic instability. There also may be less public information available. Although the Fund seeks to be fully invested, it may at times hold some of its assets in cash. This could hurt the Fund's performance. 2 Securities in the Fund's portfolio may not earn as high a current income as longer-term or lower-quality securities. If the Fund departs from its investment policies during temporary defensive period or to meet redemptions, it may not achieve its investment objective. WHO MAY WANT TO INVEST THE FUND IS DESIGNED FOR INVESTORS WHO: - WANT AN INVESTMENT THAT STRIVES TO PRESERVE CAPITAL - WANT REGULAR INCOME FROM A HIGH QUALITY PORTFOLIO - WANT A HIGHLY LIQUID INVESTMENT - ARE LOOKING FOR AN INTERIM INVESTMENT - ARE PURSUING A SHORT-TERM GOAL THE FUND IS NOT DESIGNED FOR INVESTORS WHO: - ARE INVESTING FOR LONG-TERM GROWTH - ARE INVESTING FOR HIGH INCOME - REQUIRE THE ADDED SECURITY OF FDIC INSURANCE 3 THE FUND'S PAST PERFORMANCE This section shows the Fund's performance record with respect to the Fund's shares.* The bar chart shows how the performance of the Fund's shares has varied from year to year over the past nine calendar years. This provides some indication of the risks of investing in the Fund. The table shows the average annual total returns for the past one year, five years and the life of the Fund. To obtain current yield information call 1-800-766-7722. Past performance is not necessarily an indication of how any class of the Fund will perform in the future. The calculations assume that all dividends and distributions are reinvested in the Fund. Some of the companies that provide services to the Fund have in the past agreed not to collect some expenses and to reimburse others. Without these agreements, the performance figures would have been lower than those shown. [CHART] YEAR-BY-YEAR RETURNS*,(1) 1994 3.39% 1995 4.59% 1996 4.13% 1997 4.49% 1998 4.61% 1999 4.83% 2000 6.03% 2001 3.78% 2002 0.94%
BEST QUARTER 3rd quarter, 2000 1.39% WORST QUARTER 4th quarter, 2002 0.19%
THE FUND'S YEAR-TO-DATE TOTAL RETURN AS OF 9/30/03 WAS 0.26%. AVERAGE ANNUAL TOTAL RETURNS (%) Shows performance over time, for periods ended December 31, 2002*,(1)
PAST 1 YEAR PAST 5 YEARS LIFE OF FUND - --------------------------------------------------------------------------- CASH MANAGEMENT SHARES 0.94 4.00 4.04 - ---------------------------------------------------------------------------
*THE PERFORMANCE IN THE TABLE FOR THE PERIOD BEFORE CASH MANAGEMENT SHARES WERE LAUNCHED ON 9/10/01 AND THE PERFORMANCE IN THE BAR CHART PRIOR TO 1/1/02 ARE BASED ON THE PERFORMANCE OF THE MORGAN SHARES OF THE FUND, WHICH INVEST IN THE SAME PORTFOLIO OF SECURITIES, BUT WHOSE SHARES ARE NOT BEING OFFERED IN THIS PROSPECTUS. DURING THIS PERIOD, THE ACTUAL RETURNS OF CASH MANAGEMENT SHARES WOULD HAVE BEEN LOWER THAN SHOWN BECAUSE CASH MANAGEMENT SHARES HAVE HIGHER EXPENSES THAN THE MORGAN SHARES. THE FUND COMMENCED OPERATIONS ON 11/15/93. (1)THE FUND'S FISCAL YEAR END IS 8/31. 4 INVESTOR EXPENSES FOR CASH MANAGEMENT SHARES The expenses of the Cash Management Shares before and after reimbursement are shown below. The table below does not reflect charges or credits which you might incur if you invest through a financial institution. ANNUAL OPERATING EXPENSES (%) (EXPENSES THAT ARE DEDUCTED FROM CASH MANAGEMENT SHARES ASSETS) MANAGEMENT FEES 0.10 DISTRIBUTION (RULE 12b-1) FEES 0.50 SHAREHOLDER SERVICE FEES 0.25 OTHER EXPENSE(1) 0.12 ---------------------------------------------------------------------------- TOTAL ANNUAL OPERATING EXPENSES 0.97 ----------------------------------------------------------------------------
(1)"OTHER EXPENSES" ARE RESTATED FROM THE MOST RECENT FISCAL YEAR TO REFLECT CURRENT EXPENSE ARRANGEMENTS. (2)REFLECTS A WRITTEN AGREEMENT PURSUANT TO WHICH JPMORGAN CHASE BANK AGREES THAT IT WILL REIMBURSE THE FUND TO THE EXTENT TOTAL ANNUAL OPERATING EXPENSES OF THE CASH MANAGEMENT SHARES (EXCLUDING INTEREST, TAXES, EXTRAORDINARY EXPENSES AND EXPENSES RELATED TO THE DEFERRED COMPENSATION PLAN) EXCEED 0.97% OF ITS AVERAGE DAILY NET ASSETS THROUGH 12/31/04. IN ADDITION, THE FUND'S SERVICE PROVIDERS MAY VOLUNTARILY WAIVE OR REIMBURSE CERTAIN OF THEIR FEES, AS THEY MAY DETERMINE, FROM TIME TO TIME. FOR THE PERIOD ENDED 8/31/03, NET EXPENSES FOR THE CASH MANAGEMENT SHARES WERE 0.95%. EXAMPLE The example below is intended to help you compare the cost of investing in the Cash Management Shares with the cost of investing in other mutual funds. The example assumes: - - $10,000 initial investment, - - 5% return each year, and - - total annual operating expenses of 0.97%. This example is for comparison only; the actual returns of the Cash Management Shares and your actual costs may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------- YOUR COST ($) (WITH OR WITHOUT REDEMPTION) 99 309 536 1,190 --------------------------------------------------------------------------
5 THE FUND'S MANAGEMENT AND ADMINISTRATION The Fund is a series of J.P. Morgan Mutual Fund Trust, a Massachusetts business trust. The trust is governed by trustees who are responsible for overseeing all business activities. THE FUND'S INVESTMENT ADVISER JPMIM is the investment adviser and makes the day-to-day investment decisions for the Fund. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPMorgan Chase), a bank holding company. During the most recent fiscal year ended 8/31/03, the adviser was paid management fees (net of waivers) of 0.10% as a percentage of average daily net assets. THE FUND'S ADMINISTRATOR AND SHAREHOLDER SERVICING AGENT JPMorgan Chase Bank (the Administrator) provides administrative services and oversees the Fund's other service providers. The Administrator receives a pro-rata portion of the following annual fee on behalf of the Fund for administrative services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Funds Complex plus 0.05% of average daily net assets over $100 billion. The Trust, on behalf of the Fund, has entered into a shareholder servicing agreement with JPMorgan Chase Bank under which JPMorgan Chase Bank has agreed to provide certain support services to the Fund's customers. For performing these services, JPMorgan Chase Bank, as shareholder servicing agent, receives an annual fee of 0.25% of the average daily net assets of Cash Management Shares of the Fund held by investors serviced by the shareholder servicing agent. JPMorgan Chase Bank may enter into services contracts with certain entities under which it will pay all or a portion of the 0.25% annual fee to such entities for performing shareholder and administrative services. THE FUND'S DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. is the distributor for the Fund. It is a subsidiary of The BISYS Group, Inc. and is not affiliated with JPMorgan Chase. The Fund has adopted a Rule 12b-1 distribution plan under which it pays up to 0.50% of the average daily net assets attributed to Cash Management Shares. This payment covers such things as compensation for services provided by broker-dealers and expenses connected to the sale of shares. Payments are not tied to the amount of actual expenses incurred. Because 12b-1 expenses are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than other types of sales charges. 6 HOW YOUR ACCOUNT WORKS BUYING FUND SHARES You do not pay any sales charge (sometimes called a load) when you buy Cash Management Shares of the Fund. Certain dealers and shareholder servicing agents may receive payments from JPMorgan Chase Bank or an affiliate. These payments are made at their own expense. The price you pay for your shares is the net asset value per share (NAV) of the class. NAV is the value of everything the class of the Fund owns, minus everything the class owes, divided by the number of shares held by investors. The Fund seeks to maintain a stable NAV of $1.00. The Fund uses the amortized cost method to value its portfolio of securities. This method provides more stability in valuations. However, it may also result in periods during which the stated value of a security is different than the price the Fund would receive if it sold the investment. The NAV is generally calculated as of the cut-off time each day the Fund is accepting orders. You will pay the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. You can buy shares through financial service firms, such as broker-dealers and banks that have an agreement with the Fund. Shares are available on any business day that the Federal Reserve Bank of New York and the New York Stock Exchange (NYSE) are open. If we accept your order by the Fund's cut-off time, we will process your order at that day's price and you will be entitled to all dividends declared on that day. If we accept your order after the cut-off time, we will generally process it at the next day's price. If you pay by check before the cut-off time, we will generally process your order the next day the Fund is open for business. Normally, the cut-off time (in Eastern time) is: PRIME MONEY MARKET FUND 5:00 P.M. If you buy through an agent, the agent could set earlier cut-off times. The Fund may close earlier a few days each year if the Public Securities Association recommends that the U.S. government securities market close trading early. The Fund has the right to refuse any purchase order or to stop offering shares for sale at any time. TO OPEN AN ACCOUNT, BUY OR SELL SHARES OR GET FUND INFORMATION, CALL: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 1-800-766-7722 MINIMUM INVESTMENTS The minimum amount for initial investments in the Cash Management Shares is $10,000,000 and $25,000 for additional investments, although the minimum investments may be less for some investors. GENERAL Federal law requires a fund to obtain, verify and record a person's name, date of birth (for a natural person), residential street address or principal place of business and Social Security Number, Employer Identification Number or other government issued identification when opening an account. The fund may require additional information in order to open a corporate account or under certain other circumstances. This information will be used by the fund, its transfer agent, shareholder servicing agent, or its financial intermediaries to attempt to verify the person's identity. The fund may not be able to establish an account if the person does not 7 provide the necessary information. In addition, the fund may suspend or limit account transactions while it is in the process of attempting to verify the person's identity. If the fund is unable to verify the person's identity after an account is established, the fund may be required to involuntarily redeem the person's shares and close the account. Make your check out to JPMorgan Institutional Funds in U.S. dollars. We do not accept credit cards, cash, or checks from a third party. The redemption of shares purchased through the JPMorgan Institutional Funds Service Center by check or an Automated Clearing House (ACH) transaction is subject to certain limitations. See Selling Fund Shares. Your purchase may be cancelled if your check does not clear and you will be responsible for any expenses and losses to the Fund. Orders by wire may be cancelled if the JPMorgan Institutional Funds Service Center does not receive payment by 5:00 p.m. Eastern time on the day that you place your order. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to buy shares of the Fund and he or she will contact us. Your investment representative may charge you a fee and may offer additional services, such as special purchase and redemption programs, "sweep" programs, cash advances and redemption checks. Some investment representatives charge a single fee that covers all services. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. Your investment representative may impose different minimum investments and earlier cut-off times to buy and sell shares. SELLING FUND SHARES When you sell your shares you will receive the next NAV calculated after the JPMorgan Institutional Funds Service Center accepts your order. We will need the names of the registered shareholders, your account number and other information before we can sell your shares. Under normal circumstances, if the JPMorgan Institutional Funds Service Center accepts your order before the Fund's cut-off time, the Fund will make available to you the proceeds the same business day. You will not be permitted to enter a redemption order for shares purchased directly through the JPMorgan Institutional Funds Service Center by check or through an ACH transaction for 15 days or 7 business days, respectively, following the acceptance of a purchase order unless you provide satisfactory proof that your purchase check has cleared. Thereafter, a redemption order can be processed as otherwise described. The Fund may stop accepting orders to sell and may postpone payments for more than one day, as federal securities laws permit. You will need to have your signatures guaranteed for all registered owners or their legal representative if: - - you want to sell shares with a net asset value of $100,000 or more, or - - you want your payment sent to an address other than the one we have in our records. 8 We may also need additional documents or a letter from a surviving joint owner before selling the shares. THROUGH YOUR INVESTMENT REPRESENTATIVE Tell your investment representative that you want to sell shares of the Fund. We must accept an order from your investment representative by the Fund's cut-off time in order for us to process your order at that day's price. He or she will send the necessary documents to the JPMorgan Institutional Funds Service Center. Your investment representative may charge you for this service. REDEMPTIONS-IN-KIND The Fund reserves the right to make redemptions of over $250,000 in securities rather than in cash. OTHER INFORMATION CONCERNING THE FUND We may close your account if the balance falls below the minimum as a result of selling shares. We will give you 60 days' notice before closing your account. Unless you indicate otherwise on your account application, we are authorized to act on redemption and transfer instructions received by telephone. If someone trades on your account by telephone, we will ask that person to confirm your account registration and address to make sure they match those you provided us. If they give us the correct information, we are generally authorized to follow that person's instructions. We will take reasonable precautions to confirm that the instructions are genuine. Investors agree that they will not hold the Fund liable for any loss or expenses arising from any sales request if the Fund takes reasonable precautions. The Fund will be liable for any loss to you from an unauthorized sale or fraud against you if we do not follow reasonable procedures. You may not always reach the JPMorgan Institutional Funds Service Center by telephone. This may be true at times of unusual market changes and shareholder activity. You can mail us your instructions or contact your investment representative or agent. We may modify or cancel the sale of shares by telephone without notice. You may write to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 The Fund may issue multiple classes of shares. This prospectus relates only to Cash Management Shares of the Fund. Each class may have different requirements for who may invest, and may have different sales charges and expense levels. A person who gets compensated for selling Fund shares may receive a different amount for each class. DISTRIBUTIONS AND TAXES The Fund can earn income and it can realize capital gains. The Fund deducts any expenses and then pays out these earnings to shareholders as distributions. The Fund declares dividends daily, so your shares can start earning dividends on the day you buy them. The Fund distributes the dividends monthly in the form of additional shares, unless you tell us that you want distributions in cash or as a deposit in a pre-assigned bank account. The taxation of dividends 9 will not be affected by the form in which you receive them. The Fund distributes any short-term capital gain at least annually. The Fund does not expect to realize long-term capital gain. Dividends of net investment income are usually taxable as ordinary income at the federal, state and local levels. The state or municipality where you live may not charge you state and local taxes on dividends of tax-exempt interest earned on certain bonds. Dividends of interest earned on bonds issued by the U.S. government and its agencies may also be exempt from some types of state and local taxes. It is unlikely that dividends from the Fund will qualify to any significant extent for the reduced 15% rate applicable to qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003. If you receive distributions of net capital gain, the tax rate will be based on how long the Fund held a particular asset, not on how long you have owned your shares. The Fund expects substantially all of its distributions of net capital gain to be attributable to short-term capital gain which is taxed at rates applicable to ordinary income. Early in each calendar year, the Fund will send you a notice showing the amount of distributions you received in the preceding year and the tax status of those distributions. Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding. The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities. The above is a general summary of tax implications of investing in the Fund. Because each investor's tax consequences are unique, please consult your tax advisor to see how investing in the Fund will affect your own tax situation. 10 WHAT THE TERMS MEAN ASSET-BACKED SECURITIES: Interests in a stream of payments from specific assets, such as auto or credit card receivables. COMMERCIAL PAPER: Short-term securities with maturities of 1 to 270 days which are issued by banks, corporations and others. DEMAND NOTES: A debt security with no set maturity date. The investor can generally demand payment of the principal at any time. DISTRIBUTION FEE: Covers the cost of the distribution system used to sell shares to the public. DOLLAR WEIGHTED AVERAGE MATURITY: The average maturity of the Fund is the average amount of time until the organizations that issued the debt securities in the Fund's portfolio must pay off the principal amount of the debt. "Dollar weighted" means the larger the dollar value of debt security in the Fund, the more weight it gets in calculating this average. FLOATING RATE SECURITIES: Securities whose interest rates adjust automatically whenever a particular interest rate changes. LIQUIDITY: Liquidity is the ability to easily convert investments into cash without losing a significant amount of money in the process. MANAGEMENT FEE: A fee paid to the investment adviser to manage the Fund and make decisions about buying and selling the Fund's investments. MUNICIPAL LEASE OBLIGATIONS: These provide participation in municipal lease agreements and installment purchase contracts, but are not part of the general obligations of the municipality. MUNICIPAL OBLIGATIONS: Debt securities issued by or on behalf of states, territories and possessions or by their agencies or other groups with authority to act for them. For securities to qualify as municipal obligations, the municipality's lawyers must give an opinion that the interest on them is not considered gross income for federal income tax purposes. OTHER EXPENSES: Miscellaneous items, including transfer agency, administration, custody and registration fees. QUALIFIED BANKS: (i) U.S. banks with more than $1 billion in total assets, and foreign branches of these banks; or (ii) foreign banks with the equivalent of more than $1 billion in total assets and which have branches or agencies in the U.S. or (iii) other U.S. or foreign commercial banks which the Fund's adviser judges to have comparable credit standing. REPURCHASE AGREEMENTS: A special type of a short-term investment. A dealer sells securities to a Fund and agrees to buy them back later for a set price. This set price includes interest. In effect, the dealer is borrowing the Fund's money for a short time, using the securities as collateral. REVERSE REPURCHASE AGREEMENTS: Contract whereby the Fund sells a security and agrees to repurchase it from the buyer on a particular date and at a specific price. Considered a form of borrowing. SHAREHOLDER SERVICE FEE: A fee to cover the cost of paying shareholder servicing agents to provide certain support services for your account. TAX EXEMPT MUNICIPAL SECURITIES: securities, generally issued as general obligation and revenue bonds, whose interest is exempt from federal taxation and state and/or local taxes in the state where the securities were issued. U.S. GOVERNMENT SECURITIES: debt instruments (Treasury bills, notes, and bonds) guaranteed by the U.S. government for the timely payment of principal and interest. VARIABLE RATE SECURITIES: Securities whose interest rates are periodically adjusted. 11 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the past one through five fiscal years or periods, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose reports, along with the Fund's financial statements, are included in the representative Fund's annual report, which is available upon request. 12 JPMORGAN PRIME MONEY MARKET FUND
YEAR 9/10/01** ENDED THROUGH 8/31/03 8/31/02 - ----------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net Asset Value, Beginning of Period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income 0.01 0.01 Less Dividends from Net Investment Income 0.01 0.01 Net Asset Value, End of Period $ 1.00 $ 1.00 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (b) 0.50% 1.25% ============================================================================================================================= RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (millions) $ 544 $ 282 - ----------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: # Net Expenses 0.95% 0.96% - ----------------------------------------------------------------------------------------------------------------------------- Net Investment Income 0.48% 1.17% - ----------------------------------------------------------------------------------------------------------------------------- Expenses Without Waivers, Reimbursements and Earnings Credits 0.96% 0.99% - ----------------------------------------------------------------------------------------------------------------------------- Net Investment Income Without Waivers, Reimbursements and Earnings Credits 0.47% 1.14% - -----------------------------------------------------------------------------------------------------------------------------
** Commencement of offering of class of shares. (b) Not annualized for periods less than one year. # Short periods have been annualized. 13 HOW TO REACH US MORE INFORMATION For investors who want more information on the Fund the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS Our annual and semi-annual reports contain more information about the Fund's investments and performance. The annual report also includes details about the market conditions and investment strategies that had a significant effect on the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund and their policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus. You can get a free copy of these documents and other information, or ask us any questions, by calling us at 1-800-766-7722 or writing to: JPMORGAN INSTITUTIONAL FUNDS SERVICE CENTER 500 STANTON CHRISTIANA ROAD NEWARK, DE 19713 PORTFOLIO HOLDINGS A list of prior day portfolio holdings of the Fund is also available upon request. Please call 1-800-766-7722 to obtain further information. If you buy your shares through an institution, you should contact that institution directly for more information. You can also find information online at www.jpmorganfunds.com. You can write or e-mail the SEC's Public Reference Room and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service. You can also visit the Public Reference Room and copy the documents while you are there. PUBLIC REFERENCE ROOM OF THE SEC WASHINGTON, DC 20549-0102 1-202-942-8090 EMAIL: publicinfo@sec.gov Reports, a copy of the SAI and other information about the Fund are also available on the SEC's website at http://www.sec.gov. Investment Adviser: J.P. Morgan Investment Management Inc. Distributor: J.P. Morgan Fund Distributors, Inc. Investment Company Act File No. 811-8358 PR-STCM-1203 J.P. MORGAN MONEY MARKET FUNDS STATEMENT OF ADDITIONAL INFORMATION DECEMBER 29, 2003 J.P. MORGAN MUTUAL FUND TRUST ("JPMMFT") JPMorgan Prime Money Market Fund ("Prime Money Market Fund") JPMorgan Liquid Assets Money Market Fund ("Liquid Assets Money Market Fund") JPMorgan U.S. Government Money Market Fund ("U.S. Government Money Market Fund") JPMorgan Treasury Plus Money Market Fund ("Treasury Plus Money Market Fund") JPMorgan Federal Money Market Fund ("Federal Money Market Fund") JPMorgan 100% U.S. Treasury Securities Money Market Fund ("100% U.S. Treasury Securities Money Market Fund") JPMorgan Tax Free Money Market Fund ("Tax Free Money Market Fund") JPMorgan California Tax Free Money Market Fund ("California Tax Free Money Market Fund") JPMorgan New York Tax Free Money Market Fund ("New York Tax Free Money Market Fund") This Statement of Additional Information is not a Prospectus but contains additional information which should be read in conjunction with the Prospectuses dated December 29, 2003, for Prime Money Market Fund, Liquid Assets Money Market Fund, U.S. Government Money Market Fund, Treasury Plus Money Market Fund, Federal Money Market Fund, 100% U.S. Treasury Securities Money Market Fund, Tax Free Money Market Fund, California Tax Free Money Market Fund and New York Tax Free Money Market Fund (each a "Fund," collectively the "Funds") as supplemented from time to time. Additionally, this Statement of Additional Information incorporates by reference the Financial Statements included in the Shareholder Reports related to the Funds, dated August 31, 2003. The Prospectuses and Financial Statements, including the Independent Accountants' Reports are available, without charge upon request by contacting J.P. Morgan Fund Distributors, Inc., the Funds' distributor (the "Distributor") at 522 Fifth Avenue, New York, NY 10036. For more information about the Funds or the Financial Statements, simply write or call for:
SELECT CLASS SHARES, MORGAN SHARES, CLASS B SHARES, CLASS C SHARES, PREMIER SHARES, AGENCY SHARES, CASH MANAGEMENT SHARES AND RESERVE SHARES: INSTITUTIONAL CLASS SHARES: JPMorgan Funds Service Center JPMorgan Institutional Funds Service Center P.O. Box 219392 500 Stanton Christiana Road Kansas City, MO 64121-9392 Newark, Delaware 19713 1-800-348-4782 1-800-766-7722
SAI-MMKT-1203 TABLE OF CONTENTS
PAGE ---- GENERAL 1 INVESTMENT STRATEGIES AND POLICIES 2 INVESTMENT RESTRICTIONS 11 TRUSTEES 13 OFFICERS 19 CODES OF ETHICS 21 PROXY VOTING PROCEDURES AND GUIDELINES 21 INVESTMENT ADVISER 22 ADMINISTRATOR AND SUB-ADMINISTRATOR 25 DISTRIBUTOR 26 DISTRIBUTION PLAN 27 CUSTODIAN 30 TRANSFER AGENT 31 SHAREHOLDER SERVICING 31 EXPENSES 33 FINANCIAL PROFESSIONALS 33 INDEPENDENT ACCOUNTANTS 34 PORTFOLIO TRANSACTIONS 34 PURCHASES, REDEMPTIONS AND EXCHANGES 34 NET ASSET VALUE 36 PERFORMANCE INFORMATION 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES 40 DISTRIBUTIONS AND TAX MATTERS 41 ADDITIONAL INFORMATION 45 APPENDIX A A-1 DESCRIPTION OF CERTAIN OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES B-1 APPENDIX B-DESCRIPTION OF SECURITY RATINGS C-1 APPENDIX C- ADDITIONAL INFORMATION CONCERNING CALIFORNIA MUNICIPAL SECURITIES D-1 APPENDIX D- INFORMATION CONCERNING THE STATE OF NEW YORK E-1
GENERAL Prime Money Market Fund, U.S. Government Money Market Fund, Treasury Plus Money Market Fund, Federal Money Market Fund, 100% U.S. Treasury Securities Money Market Fund, Tax Free Money Market Fund, California Tax Free Money Market Fund, New York Tax Free Money Market Fund and Liquid Assets Money Market Fund (each a "Fund" and collectively, the "Money Market Funds" or "Funds") are series of J.P. Morgan Mutual Fund Trust (the "Trust"), 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. On April 30, 2003, the name of the Trust was changed from Mutual Fund Trust to J.P. Morgan Mutual Fund Trust. Each Fund is a separate series of the Trust. The Funds are diversified as such term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"). To date, the Board of Trustees of the Trust has authorized the issuance of classes of shares, and such classes are also publicly available, as follows: Prime Money Market Fund--Class B, Class C, Morgan, Select, Premier, Agency, Institutional, Reserve and Cash Management; U.S. Government Money Market Fund--Morgan, Premier, Agency and Institutional; Treasury Plus Money Market Fund--Morgan, Premier, Agency, Institutional and Reserve; Federal Money Market Fund--Morgan, Premier, Agency and Institutional; 100% U.S. Treasury Securities Money Market Fund--Morgan, Premier, Agency and Institutional; Tax Free Money Market Fund--Morgan, Premier, Agency and Institutional; California Tax Free Money Market Fund--Morgan; New York Tax Free Money Market Fund--Morgan and Reserve; and Liquid Assets Money Market Fund--Morgan, Premier, Agency and Institutional. The shares of the Funds are collectively referred to in this Statement of Additional Information ("SAI") as the "Shares." The fiscal year-end of the Funds is August 31. 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 II Chase Vista Prime Money Market Fund JPMorgan Federal Money Market Fund II 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 JPMorgan 100% U.S. Treasury Securities Money Market Fund Chase Vista 100% U.S. Treasury Securities Money Market Fund JPMorgan U.S. Government Money Market Fund Chase Vista U.S. Government Money Market Fund JPMorgan California Tax Free Money Market Fund Chase Vista California Tax Free Money Market Fund JPMorgan New York Tax Free Money Market Fund Chase Vista New York Tax Free Money Market Fund
Effective September 10, 2001, the Board of Trustees of the Trust approved the re-naming of the following Funds:
NEW NAME FORMER NAME JPMorgan Prime Money Market Fund JPMorgan Prime Money Market Fund II JPMorgan Federal Money Market Fund JPMorgan Federal Money Market Fund II
Effective May 1, 2003, the Trust was renamed with the approval of the Board of Trustees to J.P. Morgan Mutual Fund Trust from Mutual Fund Trust. The Board of Trustees provides broad supervision over the affairs of the Trust including the Funds. J.P. Morgan Investment Management Inc. ("JPMIM" or the "Adviser") is the investment adviser for all the Funds. Prior to September 1, 2003, the investment adviser to the Funds was J.P. Morgan Fleming Asset Management (USA) Inc. ("JPMFAM (USA)") and prior to February 28, 2001, the investment adviser was The Chase Manhattan Bank ("Chase"). JPMorgan Chase Bank serves as the Trust's administrator (the "Administrator") and supervises the overall administration of the Trust, including the Funds. A majority of the Board of Trustees of the Trust are not affiliated with JPMIM or the Administrator. Investments in the Funds are not deposits or obligations of, or guaranteed or endorsed by, JPMorgan Chase Bank, an affiliate of the Adviser, or any other bank. Shares of the Funds are not federally insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. An investment 1 in a Fund is subject to risk that may cause the value of the investment to fluctuate, and when the investment is redeemed, the value may be higher or lower than the amount originally invested by the investor. INVESTMENT STRATEGIES AND POLICIES The Prospectuses set forth the various investment policies applicable to each Fund. 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 structure, yield and its maturity, in which the managers evaluate the risks of investing in long-term higher-yielding securities. Another step in the analysis is comparing yields on different types of securities to determine relative risk/reward profiles. MONEY MARKET INSTRUMENTS A description of the various types of money market instruments that may be purchased by the Funds appears below. Also see "Quality and Diversification Requirements." U.S. TREASURY SECURITIES. Each of the Funds may invest in direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the United States. ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Prime, Liquid Assets, U.S. Government and Federal Money Market may invest in obligations issued or guaranteed by U.S. government agencies or instrumentalities. These obligations may or may not be backed by the "full faith and credit" of the United States. Securities which are backed by the full faith and credit of the United States include obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank. In the case of securities not backed by the full faith and credit of the United States, each Fund must look principally to the federal agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Securities in which each Fund may invest that are not backed by the full faith and credit of the United States include, but are not limited to: (i) obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan Banks and the U.S. Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal National Mortgage Association, which are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and (iii) obligations of the Federal Farm Credit System and the Student Loan Marketing Association, each of whose obligations may be satisfied only by the individual credits of the issuing agency. The Federal Money Market Fund generally limits its investment 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. FOREIGN GOVERNMENT OBLIGATIONS. The Prime Money Market Fund and Liquid Assets Money Market Fund, subject to applicable investment policies, may also invest in short-term obligations of foreign sovereign governments or of their agencies, instrumentalities, authorities or political subdivisions. These securities must be denominated in U.S. dollars. See "Foreign Investments." BANK OBLIGATIONS. The Tax Free Money Market Fund, California Tax Free Money Market Fund, New York Tax Free Money Market Fund (collectively, the "Tax Free Funds"), Prime Money Market Fund and Liquid Assets Money Market Fund, unless otherwise noted in the Prospectuses or below, may invest in negotiable certificates of deposit, time deposits and bankers' acceptances of (i) banks, savings and loan associations and savings banks which have more than $1 billion in total assets and are organized under the laws of the United States or any state, (ii) foreign branches of these banks or of foreign banks of equivalent size and (iii) U.S. branches of foreign banks of equivalent size. See "Foreign Investments." The Prime Money Market Fund and Liquid Assets Money Market Fund will not invest in obligations for which the Adviser, or any of its affiliated persons, is the ultimate obligor or accepting bank. The Prime Money Market Fund and Liquid Assets Money Market Fund may also invest in obligations of international banking institutions designated or supported by national governments to promote economic reconstruction, development 2 or trade between nations (e.g., the European Investment Bank, the Inter-American Development Bank, or the World Bank). COMMERCIAL PAPER. The Prime Money Market Fund and Liquid Assets Money Market Fund may invest in commercial paper, including master demand obligations. Master demand obligations are obligations that provide for a periodic adjustment in the interest rate paid and permit daily changes in the amount borrowed. Master demand obligations are governed by agreements between the issuer and the Adviser acting as agent, for no additional fee. The monies loaned to the borrower come from accounts managed by the Adviser or its affiliates, pursuant to arrangements with such accounts. Interest and principal payments are credited to such accounts. The Adviser, has the right to increase or decrease the amount provided to the borrower under an obligation. The borrower has the right to pay without penalty all or any part of the principal amount then outstanding on an obligation together with interest to the date of payment. Since these obligations typically provide that the interest rate is tied to the Federal Reserve commercial paper composite rate, the rate on master demand obligations is subject to change. Repayment of a master demand obligation to participating accounts depends on the ability of the borrower to pay the accrued interest and principal of the obligation on demand which is continuously monitored by the Adviser. Since master demand obligations typically are not rated by credit rating agencies, the Prime Money Market Fund and Liquid Assets Money Market Fund may invest in such unrated obligations only if at the time of an investment the obligation is determined by the Adviser to have a credit quality which satisfies each Fund's quality restrictions. See "Quality and Diversification Requirements." Although there is no secondary market for master demand obligations, such obligations are considered by the Prime Money Market Fund and Liquid Assets Money Market Fund to be liquid because they are payable upon demand. The Prime Money Market Fund and Liquid Assets Money Market Fund do not have any specific percentage limitation on investments in master demand obligations. It is possible that the issuer of a master demand obligation could be a client of an affiliate of the Adviser to whom such affiliate, in its capacity as a commercial bank, has made a loan. ASSET-BACKED SECURITIES. The Prime Money Market Fund and Liquid Assets Money Market Fund may invest in asset-backed securities, which directly or indirectly represent a participation interest in, or are secured by and payable from, a stream of payments generated by particular assets, such as motor vehicle or credit card receivables or other asset-backed securities collateralized by such assets. Payments of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution unaffiliated with the entities issuing the securities. The asset-backed securities in which a Fund may invest are subject to the Fund's overall credit requirements. However, asset-backed securities, in general, are subject to certain risks. Most of these risks are related to limited interests in applicable collateral. For example, credit card debt receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts on credit card debt thereby reducing the balance due. Additionally, if the letter of credit is exhausted, holders of asset-backed securities may also experience delays in payments or losses if the full amounts due on underlying sales contracts are not realized. Because asset-backed securities are relatively new, the market experience in these securities is limited and the market's ability to sustain liquidity through all phases of the market cycle has not been tested. Collateralized securities are subject to certain additional risks, including a decline in the value of the collateral backing the security, failure of the collateral to generate the anticipated cash flow or in certain cases more rapid prepayment because of events affecting the collateral, such as accelerated prepayment of loans backing these securities or destruction of equipment subject to equipment trust certificates. In the event of any such prepayment, the Fund will be required to reinvest the proceeds of prepayments at interest rates prevailing at the time of reinvestment, which may be lower. STRUCTURED PRODUCTS. The Funds may invest in interests in entities organized and operated solely for the purpose of restructuring the investment characteristics of certain other investments. This type of restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments (such as commercial bank loans) and the issuance by that entity of one or more classes of securities ("structured products") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured products to create securities with different investment characteristics such as varying maturities, payment priorities and interest rate provisions, and the extent of the payments made with 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. 3 A Fund may invest in a class of structured products that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured products typically have higher yields and present greater risks than unsubordinated structured products. Although a Fund's 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 leveraged for purposes of a Fund's fundamental investment restriction 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 restrictions 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 may be no active trading market for structured products. REPURCHASE AGREEMENTS. Each of the Funds (other than the Federal Money Market Fund and 100% U.S. Treasury Securities Money Market Fund) may enter into repurchase agreements with brokers, dealers or banks that meet the Adviser's credit guidelines. In a repurchase agreement, a Fund buys a security from a seller that has agreed to repurchase the same security at a mutually agreed upon date and price. The resale price normally is in excess of the purchase price, reflecting an agreed upon interest rate. This interest rate is effective for the period of time a Fund is invested in the agreement and is not related to the coupon rate on the underlying security. A repurchase agreement may also be viewed as a collateralized loan of money by a Fund to the seller. Repurchase agreements maturing in more than seven days are treated as illiquid for purposes of the Funds' restrictions on purchases of illiquid securities. The Funds will always receive securities as collateral whose market value is, and during the entire term of the agreement remains, at least equal to 100% of the dollar amount invested by the Funds in each agreement plus accrued interest, and the Funds will make payment for such securities only upon physical delivery or upon evidence of book entry transfer to the account of the Custodian. The U.S. Government Money Market Fund, Treasury Plus Money Market Fund, Tax Free Money Market Fund, California Tax Free Money Market Fund and New York Tax Free Money Market Fund may engage only in repurchase agreement transactions that are collateralized fully as defined in Rule 5b-3 of the 1940 Act, which has the effect of enabling the Funds to look to the collateral, rather than the counterparty, for determining whether its assets are "diversified" for 1940 Act purposes. The Liquid Assets Money Market Fund and Prime Money Market Fund may also engage in repurchase agreement transactions that are collateralized by money market instruments or corporate debt securities that, at the time the transaction is entered into, are rated at least investment grade by the requisite nationally recognized statistical rating organizations. For these repurchase agreement transactions, the Funds would look to the counterparty, and not the collateral for determining such diversification. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon disposal of the collateral by a Fund may be delayed or limited. OTHER DEBT SECURITIES. The Prime Money Market Fund and Liquid Assets Money Market Fund may make investments in other debt securities with remaining effective maturities of not more than thirteen months, including, without limitation, corporate and foreign bonds, asset-backed securities and other obligations described in the Prospectuses or this SAI. FOREIGN INVESTMENTS The Prime Money Market Fund and Liquid Assets Money Market Fund may invest in certain foreign securities. All investments must be U.S. dollar-denominated. Investment in securities of foreign issuers and in obligations of foreign branches of domestic banks involves somewhat different investment risks from those affecting securities of U.S. domestic issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to domestic companies. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes which may decrease the net return on foreign investments as compared to dividends and interest paid to a Fund by domestic companies. Investors should realize that the value of a Fund's investments in foreign securities may be adversely affected by changes in political or social conditions, diplomatic relations, confiscatory taxation, expropriation, nationalization, 4 limitation on the removal of funds or assets, or imposition of (or change in) exchange control or tax regulations in those foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of portfolio securities and could favorably or unfavorably affect a Fund's operations. Furthermore, the economies of individual foreign nations may differ from the U.S. economy, whether favorably or unfavorably, in areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position; it may also be more difficult to obtain and enforce a judgment against a foreign issuer. Any foreign investments made by a Fund must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments. MUNICIPAL OBLIGATIONS The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds may invest in municipal obligations. The Prime Money Market Fund and Liquid Assets 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. 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 ("AMT"). Where a mutual fund receives such interest, a proportionate share of any exempt-interest dividend paid by the mutual fund may be treated as 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 Tax Free Funds. Investments by the Tax Free Funds will be made in unrated municipal obligations only if they are determined to be of comparable quality to permissible rated investments on the basis of the Adviser's 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 Tax Free Funds, (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 is 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 Adviser becomes 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 Adviser becoming aware of the new rating and the Fund's Board of Trustees is subsequently notified of the Adviser's actions. MUNICIPAL BONDS. The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds may invest in municipal bonds issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and by their political subdivisions and by duly constituted authorities and corporations. For example, states, territories, possessions and municipalities may issue municipal bonds to raise funds for various public purposes such as airports, housing, hospitals, mass transportation, schools, water and sewer works. They may also issue municipal bonds to refund outstanding obligations and to meet general operating expenses. Public authorities issue municipal bonds to obtain funding for privately operated facilities, such as housing and pollution control facilities, for industrial facilities or for water supply, gas, electricity or waste disposal facilities. The Prime Money Market Fund and Liquid Assets Money Market Fund may invest in municipal notes of various types, including notes issued in anticipation of receipt of taxes, the proceeds of the sale of bonds, other revenues or grant proceeds, as well as municipal commercial paper and municipal demand obligations such as variable rate demand notes and master demand obligations. These municipal bonds and notes will be taxable securities; income generated from these investments will be subject to federal, state and local taxes. Municipal bonds may be general obligation or revenue bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are 5 payable from revenues derived from particular facilities, from the proceeds of a special excise tax or from other specific revenue sources. They are not generally payable from the general taxing power of a municipality. The Tax Free Funds 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 Tax Free 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. MUNICIPAL NOTES. Municipal notes are short-term obligations with a maturity at the time of issuance ranging from six months to five years. The principal types of municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, grant anticipation notes and project notes. Notes sold in anticipation of collection of taxes, a bond sale, or receipt of other revenues are usually general obligations of the issuing municipality or agency. Municipal commercial paper typically consists of very short-term unsecured negotiable promissory notes that are sold to meet seasonal working capital or interim construction financing needs of a municipality or agency. While these obligations are intended to be paid from general revenues or refinanced with long-term debt, they frequently are backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or institutions. Municipal demand obligations are subdivided into two types: variable rate demand notes and master demand obligations. Variable rate demand notes are tax exempt municipal obligations or participation interests that provide for a periodic adjustment in the interest rate paid on the notes. They permit the holder to demand payment of the notes, or to demand purchase of the notes at a purchase price equal to the unpaid principal balance, plus accrued interest either directly by the issuer or by drawing on a bank letter of credit or guaranty issued with respect to such note. The issuer of the municipal obligation may have a corresponding right to prepay at its discretion the outstanding principal of the note plus accrued interest upon notice comparable to that required for the holder to demand payment. Municipal demand obligations are tax exempt municipal obligations that provide for a periodic adjustment in the interest rate paid and permit daily changes in the amount borrowed. The interest on such obligations is, in the opinion of counsel for the borrower, excluded from gross income for federal income tax purposes. 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. Each Fund will limit its 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. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds may purchase securities on a when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the purchase commitment. The purchase price and the interest rate payable, if any, on the securities are fixed on the purchase commitment date or at the time the settlement date is fixed. The value of such securities is subject to market fluctuation and for money market instruments and other fixed income securities no interest accrues to a Fund until settlement takes place. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its net asset value and, if applicable, calculate the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Fund will maintain with JPMorgan Chase Bank, the Custodian (see "Custodian") a segregated account with liquid assets, consisting of cash, U.S. government securities or other appropriate securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each Fund will meet its obligations from maturities or sales of the securities held in the segregated account and/or from cash flow. If a Fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be disadvantaged if the other party to the transaction defaults. 6 INVESTMENT COMPANY SECURITIES. Securities of other investment companies may be acquired by each of the Funds to the extent permitted under the 1940 Act or any order pursuant thereto. These limits currently require that, as determined immediately after a purchase is made, (i) not more than 5% of the value of a Fund's total assets will be invested in the securities of any one investment company, (ii) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group, and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by a Fund. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that a Fund bears directly in connection with its own operations. REVERSE REPURCHASE AGREEMENTS. Each of the Funds may enter into reverse repurchase agreements. In a reverse repurchase agreement, a Fund sells a security and agrees to repurchase the same security at a mutually agreed upon date and price reflecting the interest rate effective for the term of the agreement. For purposes of the 1940 Act a reverse repurchase agreement is also considered as the borrowing of money by the Fund and, therefore, a form of leverage. Leverage may cause any gains or losses for a Fund to be magnified. The Funds will invest the proceeds of borrowings under reverse repurchase agreements. In addition, except for liquidity purposes, a Fund will enter into a reverse repurchase agreement only when the expected return from the investment of the proceeds is greater than the expense of the transaction. A Fund will not invest the proceeds of a reverse repurchase agreement for a period which exceeds the duration of the reverse repurchase agreement. A Fund would be required to pay interest on amounts obtained through reverse repurchase agreements, which are considered borrowings under federal securities laws. The repurchase price is generally equal to the original sales prices plus interest. Reverse repurchase agreements are usually for seven days or less and cannot be repaid prior to their expiration dates. Each Fund will establish and maintain with the custodian a separate account with a segregated portfolio of securities in an amount at least equal to its purchase obligations under its reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the portfolio securities transferred may decline below the price at which the Fund is obliged to purchase the securities. All forms of borrowing (including reverse repurchase agreements and securities lending) are limited in the aggregate and may not exceed 33% of each Fund's total assets. FORWARD COMMITMENTS. The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds may purchase securities for delivery at a future date, which may increase their 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 Tax Free Funds, 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 ("SEC") 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. 7 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. 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 and entitles a Fund to same day settlement and to receive an exercise price equal to the amortized cost of the underlying security plus accrued interest, if any, at the time of exercise. 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 the fact 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 AND PARTICIPATION CERTIFICATES. Each Fund other than the Treasury Plus Money Market Fund and 100% U.S. Treasury Securities 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. The floating or variable rate demand instruments in which the 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 London Interbank Offered Rate ("LIBOR"), as provided in the respective instruments. The Funds will decide which floating or variable rate securities to purchase in accordance with procedures prescribed by the Board of Trustees of the Trust in order to minimize credit risks. 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 Fund's high quality criteria. If an instrument is ever deemed to fall below a 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, Liquid Assets Money Market Fund and 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 Prime Money Market Fund and Liquid Assets Money Market Fund, certificates of indebtedness or safekeeping. Participation Certificates are pro rata interests in securities held by others; certificates of indebtedness or safekeeping 8 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 the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the Participation Certificate) or insurance policy of an insurance company that the Board of Trustees of the Trust has determined meets the prescribed quality standards for a particular Fund. 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 a Fund may 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. The Adviser has 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 Tax Free Funds 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 inflation, 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 this does occur, 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. 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. TENDER OPTION FLOATING OR VARIABLE RATE CERTIFICATES. The 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 9 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. ZERO COUPON AND STRIPPED OBLIGATIONS. Each Fund may invest up to 20% of its total assets in stripped obligations. The principal and interest components of U.S. Treasury bonds with remaining maturities of longer than ten years are eligible to be traded independently under the Separate Trading of Registered Interest and Principal of Securities ("STRIPS") program. Under the STRIPS program, the principal and interest components are separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts separately. The interest component of STRIPS may be more volatile than that of U.S. Treasury bills with comparable maturities. The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds 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 rules of the Internal Revenue Code of 1986, as amended (the "Code"), 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. CUSTODIAL RECEIPTS. The Prime Money Market Fund and Liquid Assets 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. The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds 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 taxable money market instruments and repurchase agreements, the interest income from which may be taxable to shareholders as ordinary income for federal income tax purposes. ILLIQUID INVESTMENTS, PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds may invest in privately placed, restricted, Rule 144A or other unregistered securities. No Fund may acquire any illiquid holdings if, as a result thereof, more than 10% of a Fund's net assets would be in illiquid investments. Subject to this non-fundamental policy limitation, the Funds may acquire investments that are illiquid or have limited liquidity, such as the Prime Money Market Fund's investments in private placements or investments that are not registered under the Securities Act of 1933, as amended (the "1933 Act") and cannot be offered for public sale in the United States without first being registered under the 1933 Act. An illiquid investment is any investment that cannot be disposed of within seven days in the normal course of business at approximately the amount at which it is valued by the Funds. The price the Funds pay for illiquid securities or receive upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly the valuation of these securities will reflect any limitations on their liquidity. 10 The Prime Money Market Fund, Liquid Assets Money Market Fund and the Tax Free Funds may also purchase Rule 144A securities sold to institutional investors without registration under the 1933 Act. These securities may be determined to be liquid in accordance with guidelines established by the Adviser and approved by the Board of Trustees. The Board of Trustees will monitor the Adviser's implementation of these guidelines on a periodic basis. As to illiquid investments, a Fund is subject to a risk that should the Fund decide to sell them when a ready buyer is not available at a price the Fund deems representative of their value, the value of the Fund's net assets could be adversely affected. Where an illiquid security must be registered under the 1933 Act, before it may be sold, a Fund may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell. QUALITY AND DIVERSIFICATION REQUIREMENTS Each of the Funds intends to meet the diversification requirements of the 1940 Act. Current 1940 Act diversification requirements require that with respect to 75% of the assets of each Fund: (1) the Fund may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the U.S. government, its agencies and instrumentalities, and (2) the Fund may not own more than 10% of the outstanding voting securities of any one issuer. As for the other 25% of the Fund's assets not subject to the limitation described above, there is no limitation on investment of these assets under the 1940 Act, so that all of such assets may be invested in securities of any one issuer. Investments not subject to the limitations described above could involve an increased risk to a Fund should an issuer, or a state or its related entities, be unable to make interest or principal payments or should the market value of such securities decline. At the time any of the Funds invests in any taxable commercial paper, master demand obligation, bank obligation or repurchase agreement, the issuer must have outstanding debt rated A or higher by Moody's or S&P, the issuer's parent corporation, if any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by S&P, or if no such ratings are available, the investment must be of comparable quality in the Adviser's opinion. INVESTMENT RESTRICTIONS The investment restrictions below have been adopted by the Trust with respect to the Funds. Except where otherwise noted, these investment restrictions are "fundamental" policies which, under the 1940 Act, may not be changed without the vote of a majority of the outstanding voting securities of a Fund. A "majority of the outstanding voting securities" is defined in the 1940 Act as the lesser of (a) 67% or more of the voting securities present at a meeting if the holders of more than 50% of the outstanding voting securities are present or represented by proxy, or (b) more than 50% of the outstanding voting securities. The percentage limitations contained in the restrictions below apply at the time of the purchase of securities. FUNDAMENTAL INVESTMENT RESTRICTIONS Each Fund: (1) May not borrow money, except that each Fund may borrow money for temporary or emergency purposes, or by engaging in reverse repurchase transactions, in an amount not exceeding 33% of the value of its total assets at the time when the loan is made and may pledge, mortgage or hypothecate no more than 1/3 of its net assets to secure such borrowings. Any borrowings representing more than 5% of a Fund's total assets must be repaid before the Fund may make additional investments; (2) May make loans to other persons, in accordance with the Fund's investment objective and policies and to the extent permitted by applicable law; (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) the Money Market Funds may invest more than 25% of their total assets in obligations issued by banks, including U.S. banks; and 11 (ii) the Tax Free Funds may invest more than 25% of their 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 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) May not underwrite securities issued by other persons except insofar as a Fund may technically be deemed to be an underwriter under the 1933 Act 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 (2) above, loan participators are considered to be debt instruments. 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. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS In addition, each Fund is subject to the following non-fundamental investment restrictions which may be changed without shareholder approval: (1) Each 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). (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 Fund may not invest more than 10% of its net assets in illiquid securities. 12 (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. 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 non-fundamental. 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. 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 of investment, 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. TRUSTEES The names of the Trustees of the Funds, together with information regarding the year of their birth, positions with the Trust, principal occupations and other board memberships in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") or subject to the requirements of Section 15(d) of the Securities Exchange Act or any company registered as an investment company under the 1940 Act, are shown below. The contact address for each of the Trustees is 522 Fifth Avenue, New York, NY 10036.
NUMBER OF PORTFOLIOS IN PRINCIPAL FUND NAME (YEAR OF BIRTH); OCCUPATIONS COMPLEX(1) POSITIONS WITH THE FUNDS DURING PAST 5 OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE (SINCE) YEARS TRUSTEE FUND COMPLEX - --------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES WILLIAM J. ARMSTRONG (1941); Retired; 71 None Trustee since 1994. Vice-President & Treasurer of Ingersoll-Rand Company (manufacturer of industrial equipment) (1972-2000) ROLAND R. EPPLEY, JR. (1932); Retired 71 Director, Janel Hydro Inc. Trustee since 1994. (1993-present)
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NUMBER OF PORTFOLIOS IN PRINCIPAL FUND NAME (YEAR OF BIRTH); OCCUPATIONS COMPLEX(1) POSITIONS WITH THE FUNDS DURING PAST 5 OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE (SINCE) YEARS TRUSTEE FUND COMPLEX - --------------------------------------------------------------------------------------------------------------------- DR. MATTHEW GOLDSTEIN (1941); Chancellor of the 71 Trustee of the Albert Einstein School Trustee since 2003. City University of of Medicine 1999; President, Adelphi New York, since (1998-present); Trustee of Bronx September 1, 1999; University (New York) Lebanon President, Adelphi Hospital Center (1992-present); University (New Director of New Plan Excel Realty York) (1998-1999) Trust, Inc. (real estate investment company) (2000-present); Director of Lincoln Center Institute for the Arts in Education (1999-present); Director of Jewish Community Relations Counsel of New York, Inc. (2000-present); Director of United Way of New York City (2002-present) ANN MAYNARD GRAY (1945); Trustee Vice-President of 71 Director of Duke Energy Corporation since 2001. Capital Cities/ABC, (1997-present); Director of Elan Inc. (communications) Corporation, Plc (pharmaceuticals) (1986-1998); (2001-present); Director of The President of Phoenix Companies (wealth management) Diversified (2002-present) Publishing Group (1991-1997) MATTHEW HEALEY (1937); Trustee Retired; Chief 71 None since 2001. President of the Board Executive Officer of Trustees since 2001. of certain J.P. Morgan Fund trusts (1982-2001) ROBERT J. HIGGINS (1945); Trustee Director of 71 Director of Providian Financial Corp. since 2002. Administration of (banking) (2002-present) the State of Rhode Island (2003-present); President - Consumer Banking and Investment Services Fleet Boston Financial (1971-2002)
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NUMBER OF PORTFOLIOS IN PRINCIPAL FUND NAME (YEAR OF BIRTH); OCCUPATIONS COMPLEX(1) POSITIONS WITH THE FUNDS DURING PAST 5 OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE (SINCE) YEARS TRUSTEE FUND COMPLEX - --------------------------------------------------------------------------------------------------------------------- WILLIAM G. MORTON, JR. (1937); Formerly Chairman 71 Director of Radio Shack Corporation Trustee since 2003. Emeritus (March (electronics) (1987-present); 2001 - October Director of the Griswold Company 2002), and Chairman (securities brokerage) and Chief Executive (2002-present); Director of The Officer, Boston National Football Foundation and Stock Exchange College Hall of Fame (1994-present); (June 1985 - March Trustee of the Berklee College of 2001) Music (1998-present); Trustee of the Stratton Mountain School (2001-present) FERGUS REID, III (1932); Trustee Chairman of Lumelite 71 Trustee of 16 Morgan Stanley Funds since 1994 and Chairman of the Corporation (plastics (1995-present) Board of Trustees since 2001. manufacturing) (1985-present) JAMES J. SCHONBACHLER (1943); Retired; Managing 71 None Trustee since 2001. Director of Bankers Trust Company (financial services) (1968-1998); Group Head and Director of Bankers Trust, A.G., Zurich and BT Brokerage Corp. (financial services) (1995-2002) INTERESTED TRUSTEE LEONARD M. SPALDING, JR.* (1935); Retired; Chief 71 None Trustee since 1998. Executive Officer of Chase Mutual Funds (investment company) (1989-1998); Chief Investment Executive of Chase Manhattan Private Bank (investment management) (1990-1995)
15 (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 JPMorgan Fund Complex for which the Board of Trustees serves includes 11 investment companies. * Mr. Spalding is deemed to be an "interested person" due to his ownership of J.P. Morgan Chase & Co. stock. Each Trustee serves for an indefinite term, subject to the Fund's current retirement policy, which is age 73 for all Trustees, except Messrs. Reid and Eppley, for whom it is age 75. The Trustees decide upon general policies and are responsible for overseeing the Trust's business affairs. The Board of Trustees presently has Audit, Valuation, Investment, and Governance Committees. The members of the Audit Committee are Messrs. Armstrong (Chairman), Eppley and Schonbachler. The function of the Audit Committee is to recommend independent auditors and monitor accounting and financial matters. The Audit Committee met four times during the fiscal year ended August 31, 2003. The members of the Valuation Committee are Mr. Healey (Chairman) and Ms. Gray. The function of the Valuation Committee is to oversee the fair value of the Funds' portfolio securities as necessary. The Valuation Committee met once during the fiscal year ended August 31, 2003. The members of the Investment Committee are Messrs. Spalding (Chairman) and Goldstein. The function of the Investment Committee is to oversee the Adviser's investment program. The Investment Committee met once during the fiscal year end August 31, 2003. The members of the Governance Committee are Messrs. Reid (Chairman), Higgins and Morton. The function of the Governance Committee is to nominate trustees for the Board to consider and to address Trustee compensation issues. The Governance Committee will consider nominees recommended by shareholders, but has no procedures in place currently for doing so. The Governance Committee met once during the fiscal year end August 31, 2003. The following table shows the dollar range of each Trustee's beneficial ownership as of December 31, 2002 in the Funds and each Trustee's aggregate ownership in any Funds that the Trustee oversees in the Family of Investment Companies:
OWNERSHIP OF PRIME OWNERSHIP OF FEDERAL OWNERSHIP OF TREASURY NAME OF TRUSTEE MONEY MARKET FUND MONEY MARKET FUND PLUS MONEY MARKET FUND - ------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES William J. Armstrong None None None Roland R. Eppley, Jr. None None None Dr. Matthew Goldstein None None None Ann Maynard Gray $10,001--$50,000 None None Matthew Healey None Over $100,000 None Robert J. Higgins None None None William G. Morton, Jr. None None None Fergus Reid, III None None None James J. Schonbachler $10,001--$50,000 None None INTERESTED TRUSTEE Leonard M. Spalding, Jr. None None None
OWNERSHIP OF 100% U.S. OWNERSHIP OF U.S. OWNERSHIP OF TAX FREE TREASURY SECURITIES GOVERNMENT NAME OF TRUSTEE MONEY MARKET FUND MONEY MARKET FUND MONEY MARKET FUND - --------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES William J. Armstrong None Over $100,000 None Roland R. Eppley, Jr. None None None Dr. Matthew Goldstein None None None Ann Maynard Gray None None None
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OWNERSHIP OF 100% U.S. OWNERSHIP OF U.S. OWNERSHIP OF TAX FREE TREASURY SECURITIES GOVERNMENT NAME OF TRUSTEE MONEY MARKET FUND MONEY MARKET FUND MONEY MARKET FUND - --------------------------------------------------------------------------------------------- Matthew Healey Over $100,000 None None Robert J. Higgins None None None William G. Morton, Jr. None None None Fergus Reid, III None None None James J. Schonbachler None None None INTERESTED TRUSTEE Leonard M. Spalding, Jr. None None None
AGGREGATE OWNERSHIP OWNERSHIP OF OWNERSHIP OF OWNERSHIP OF OF ALL REGISTERED LIQUID ASSETS NEW YORK TAX CALIFORNIA INVESTMENT COMPANIES MONEY MARKET FREE MONEY TAX FREE OVERSEEN BY NAME OF TRUSTEE FUND MARKET FUND MONEY MARKET FUND TRUSTEE(1) - ---------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES William J. Armstrong None None None Over $100,000 Roland R. Eppley, Jr. None None None Over $100,000 Dr. Matthew Goldstein None None None None Ann Maynard Gray None None None $10,001--$50,000 Matthew Healey None None None Over $100,000 Robert J. Higgins None None None None William G. Morton, Jr. None None None None Fergus Reid, III None None None Over $100,000 James J. Schonbachler None None None $50,000--$100,000 INTERESTED TRUSTEE Leonard M. Spalding, Jr. None None None Over $100,000
(1) A Family of Investment Companies means any two or more registered investment companies that share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services. The Family of Investment Companies for which the Board of Trustees serves includes 11 investment companies. As of December 31, 2002, none of the independent Trustees or their immediate family members owned securities of the Adviser or the Distributor or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the Adviser or the Distributor. Each Trustee is currently paid an annual fee of $120,000 for serving as Trustee of the Funds and the JPMorgan Fund Complex. Each is reimbursed for expenses incurred in connection with service as a Trustee. For his services as Chairman of the Board of Trustees of the JPMorgan Fund Complex, Mr. Reid is paid an additional $130,000. For his services as President of the Board of Trustees of the JPMorgan Fund Complex, Mr. Healey is paid an additional $40,000. As of July 16, 2003 Messrs. Armstrong, Spalding and Healey are paid an additional $40,000 for their services as Committee Chairmen. The Board of Trustees may hold various other directorships unrelated to the JPMorgan Fund Complex. Aggregate Trustee compensation paid by the Funds and the JPMorgan Fund Complex for the calendar year ended December 31, 2002 is set forth below: 17 AGGREGATE TRUSTEE COMPENSATION PAID BY THE FUNDS
100% U.S. CALIFORNIA TREASURY TAX FREE NEW YORK SECURITIES MONEY FEDERAL TAX FREE MONEY MARKET MONEY MONEY PRIME MONEY NAME OF TRUSTEES MARKET FUND FUND MARKET FUND MARKET FUND MARKET FUND - -------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES William J. Armstrong, Trustee $ 5,999 $ 173 $ 5,538 $ 2,509 $ 60,340 Roland R. Eppley, Jr., Trustee 5,999 173 5,538 2,509 60,340 Dr. Matthew Goldstein, Trustee -- -- -- -- -- Ann Maynard Gray, Trustee 5,999 173 5,538 2,509 60,340 Matthew Healey, Trustee and President of 7,998 231 7,384 3,346 80,453 the Board of Trustees Robert J. Higgins, Trustee 3,540 105 2,938 1,535 33,833 William G. Morton, Jr., Trustee -- -- -- -- -- Fergus Reid, III, Trustee and Chairman of 12,497 361 11,537 5,228 125,708 the Board of Trustees James J. Schonbachler, Trustee 5,999 173 5,538 2,509 60,340 INTERESTED TRUSTEE Leonard M. Spalding, Jr., Trustee* 5,999 173 5,538 2,509 60,340
U.S. LIQUID TOTAL TREASURY GOVERNMENT ASSETS COMPENSATION TAX FREE PLUS MONEY MONEY MONEY PAID FROM MONEY MARKET MARKET MARKET "FUND NAME OF TRUSTEES MARKET FUND FUND FUND FUND COMPLEX"(1) - ------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES William J. Armstrong, Trustee $ 9,082 $ 4,591 $ 9,281 $ 680 $ 120,000 Roland R. Eppley, Jr., Trustee 9,082 4,591 9,281 680 120,000 Dr. Matthew Goldstein, Trustee -- -- -- -- -- Ann Maynard Gray, Trustee 9,082 4,591 9,281 680 120,000 Matthew Healey, Trustee and President of 12,109 6,121 12,375 907 160,000 the Board of Trustees Robert J. Higgins, Trustee 5,969 2,811 5,516 641 70,000 William G. Morton, Jr., Trustee -- -- -- -- -- Fergus Reid, III, Trustee and Chairman of 18,920 9,564 19,336 1,416 250,000 the Board of Trustees James J. Schonbachler, Trustee 9,082 4,591 9,281 680 120,000 INTERESTED TRUSTEE Leonard M. Spalding, Jr., Trustee* 9,082 4,591 9,281 680 120,000
* Mr. Spalding is deemed to be an "interested person" due to his ownership of J.P. Morgan Chase & Co. stock. (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 JPMorgan Fund Complex for which the Board of Trustees serves includes 11 investment companies. 18 The Board of Trustees of the former Chase Vista Funds instituted a Retirement Plan for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an employee of the former Chase Vista Funds' adviser, 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 was the date on which the Eligible Trustee attained age 65 and completed at least five years of continuous service with one or more of the investment companies advised by the adviser of certain former Chase Vista Funds and its affiliates (collectively, the "Covered Funds"). Each Eligible Trustee was 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 (2) 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 would exceed the highest annual compensation received by that Trustee from the Covered Funds. Such benefit was 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 in furtherance of this determination agreed to pay Eligible Trustees an amount equal, in the aggregate, to $10.95 million, of which $5.3 million had been previously accrued by the Covered Funds. The remaining $5.65 million was reimbursed by JPMorgan Chase Bank or its predecessors. Messrs. Armstrong, Eppley, Reid and Spalding received $1,027,673, $800,600, $2,249,437 and $463,798, respectively, in connection with the termination. Each nominee has elected to defer receipt of such amount pursuant to the Deferred Compensation Plan for Eligible Trustees. The Board of Trustees instituted a Deferred Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each Trustee (who is not an employee of the former Chase Vista Funds' adviser, administrator or distributor or any of their affiliates) may enter into agreements with the Funds whereby payment of the Board of Trustees' fees are deferred until the payment date 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. Messrs. Armstrong, Eppley, Reid and Spalding are the only Trustees who have elected to defer compensation under such plan. OFFICERS The Funds' executive officers (listed below), other than the officers who are employees of the Adviser or one of its affiliates, are provided and compensated by J.P. Morgan Fund Distributors, Inc., a subsidiary of The BISYS Group, Inc. The officers conduct and supervise the business operations of the Funds. The officers hold office until a successor has been elected and duly qualified. The Funds have no employees. The names of the officers of the Funds, together with their year of birth, information regarding their positions held with the Funds and principal occupations are shown below. The contact address for each of the officers unless otherwise noted is 522 Fifth Avenue, New York, NY 10036.
NAME (YEAR OF BIRTH), POSITIONS HELD WITH PRINCIPAL OCCUPATIONS THE FUNDS (SINCE) DURING PAST 5 YEARS - ------------------------------ ------------------------------------------------------------------------------------- George C.W. Gatch (1962), Managing Director, JPMIM; Head of J.P. Morgan Fleming's U.S. Mutual Funds and President (2001) Financial Intermediaries Business ("FFI"); he has held numerous positions throughout the firm in business management, marketing and sales. Patricia A. Maleski (1960), Vice President, JPMIM, head of FFI and US Institutional Funds Administration and Treasurer (2003) Board Liaison. Prior to joining JPMorgan in 2001, she was the Vice President of Finance for the Pierpont Group, Inc., a service provider to the board of trustees of the heritage JPMorgan Funds.
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NAME (YEAR OF BIRTH), POSITIONS HELD WITH PRINCIPAL OCCUPATIONS THE FUNDS (SINCE) DURING PAST 5 YEARS - ------------------------------ ------------------------------------------------------------------------------------- Sharon J. Weinberg (1959), Managing Director, JPMIM; Head of Business and Product Strategy for FFI; since Secretary (2001) joining J.P. Morgan Chase in 1996, she has held numerous positions throughout the asset management business in mutual funds marketing, legal and product development. Stephen M. Ungerman (1953), Vice President, JPMIM; Fund Administration - Pooled Vehicles; prior to joining J.P. Vice President and Assistant Morgan Chase in 2000, he held a number of positions in Prudential Financial's asset Treasurer (2001) management business, including Assistant General Counsel, Tax Director and Co-head of Fund Administration; Mr. Ungerman also served as Assistant Treasurer for all mutual funds managed by Prudential. Michael Maye (1965), Vice Vice President, JPMIM; Chief Financial Officer of FFI; prior to joining J.P. Morgan President and Assistant Chase in 2003, he was Vice President from 1999 to 2003 and Assistant Vice President Treasurer (2003) from 1996 to 1999 of Planning & Analysis at Alliance Capital Management L.P. where he was responsible for forecasting, special projects and financial analysis. Judy R. Bartlett Vice President and Assistant General Counsel, JPMIM, since September 2000; from 1965), Vice President and August 1998 through August 2000, she was an attorney at New York Life Insurance Assistant Secretary (2001) Company where she served as Assistant Secretary for the Mainstay Funds. Joseph J. Bertini (1965), Vice Vice President and Assistant General Counsel, JPMIM. President and Assistant Secretary (2001) Wayne H. Chan (1965), Vice Vice President and Assistant General Counsel, JPMIM, since September 2002; Mr. Chan President and Assistant was an associate at the law firm of Shearman & Sterling from May 2001 through Secretary (2003) September 2002; Swidler Berlin Shereff Friedman LLP from June 1999 through May 2001 and Whitman Breed Abbott & Morgan LLP from September 1997 through May 1999. Paul M. DeRusso (1954), Vice President, JPMIM; Manager of the Budgeting and Expense Group of Funds Assistant Treasurer (2001) Administration Group. Lai Ming Fung Associate, JPMIM; Budgeting Analyst for the Budgeting and Expense Group of Funds (1974), Assistant Treasurer Administration Group. (2001) Mary D. Squires Vice President, JPMIM; Ms. Squires has held numerous financial and operations (1955), Assistant Treasurer positions supporting the J.P. Morgan Chase organization complex. (2001) Nimish S. Bhatt (1963), Senior Vice President of Alternative Investment Products and Tax Services of BISYS Assistant Treasurer (2001)* Fund Services, Inc. since January 2002; held various positions within BISYS since 1996, including Senior Vice President of Fund Administration and Financial Services, Vice President and Director of International Operation, Vice President of Financial Administration and Vice President of Tax. Michael Ciotola (1968), Director of Financial Services of BISYS Fund Services, Inc. since January 2003; held Assistant Treasurer (2003)* various positions within BISYS since 1998.
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NAME (YEAR OF BIRTH), POSITIONS HELD WITH PRINCIPAL OCCUPATIONS THE FUNDS (SINCE) DURING PAST 5 YEARS - ------------------------------ ------------------------------------------------------------------------------------- Arthur A. Jensen (1966), Vice President of Financial Services of BISYS Fund Services, Inc., since June 2001; Assistant Treasurer (2001)* formerly Section Manager at Northern Trust Company and Accounting Supervisor at Allstate Insurance Company. Martin R. Dean (1963), Vice President of Regulatory Services of BISYS Fund Services, Inc. Assistant Treasurer (2001)* Alaina Metz (1967), Assistant Chief Administrative Officer of BISYS Fund Services, Inc.; formerly, Supervisor of Secretary (2001)* the Blue Sky Department of Alliance Capital Management L.P. Ryan M. Louvar (1972), Counsel of Legal Services, BISYS Fund Services, Inc. since 2000; formerly Attorney Assistant Secretary (2003)*** at Hill, Farrer & Burrill LLP from 1999 to 2000 and Knapp Petersen & Clarke, PC from 1997 to 1999. Lisa Hurley (1955), Assistant Executive Vice President and General Counsel of BISYS Fund Services, Inc. Secretary (2001)** Thomas J. Smith (1955), Vice Managing Director, Head of Compliance for J.P. Morgan Chase & Co.'s asset management President and Assistant business in the Americas. Secretary (2002)
* The contact address for the officer is 3435 Stelzer Road, Columbus, OH 43219. ** The contact address for the officer is 90 Park Avenue, New York, NY 10016. *** The contact address for the officer is 60 State Street, Boston, MA 02109. As of December 1, 2003, the Officers and Trustees as a group owned less than 1% of the shares of any class of each Fund. CODES OF ETHICS The Funds, the Adviser and the Distributor have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. Each of these codes permits personnel subject to such code to invest in securities, including securities that may be purchased or held by the Funds. Such purchases, however, are subject to procedures reasonably necessary to prevent access persons from engaging in any unlawful conduct set forth in Rule 17j-1. PROXY VOTING PROCEDURES AND GUIDELINES The Boards of Trustees of the Funds have delegated to JPMIM proxy voting authority with respect to the Funds' portfolio securities. Most of the securities in which the Funds invest, however, are rarely required, or permitted, to vote. To ensure that the proxies of portfolio companies are voted in the best interests of the Funds, the Funds' Boards have adopted JPMIM's detailed proxy voting procedures ("Procedures") that incorporate guidelines ("Guidelines") for voting proxies on specific types of issues. The Guidelines have been developed with the objective of encouraging corporate action that enhances shareholder value. Except as noted below, proxy voting decisions will be made in accordance with the Guidelines covering a multitude of both routine and non-routine matters that JPMIM and its affiliated advisers have encountered globally, based on many years of collective investment management experience. To oversee and monitor the proxy-voting process, JPMIM has established a proxy committee and appointed a proxy administrator in each global location where proxies are voted. The primary function of each proxy committee is to review periodically general proxy-voting matters, review and approve the Guidelines annually, and provide advice and recommendations on general proxy-voting matters as well as on specific voting issues implemented by JPMIM. 21 The procedures permit an Independent Voting Service, currently Institutional Shareholder Services, Inc. ("ISS"), to perform certain services otherwise carried out or coordinated by the proxy administrator. Although for many matters the Guidelines specify the votes to be cast, for many others, the Guidelines contemplate case-by-case determinations. In addition, there will undoubtedly be proxy matters that are not contemplated by the Guidelines. For both these categories of matters and to override the Guidelines, the Procedures require a certification and review process to be completed before the vote is cast. That process is designed to identify actual or potential material conflicts of interest (between a Fund on the one hand, and the Fund's investment adviser, principal underwriter or an affiliate of any of the foregoing, on the other hand) and ensure that the proxy vote is cast in the best interests of the Fund. When a potential material conflict of interest has been identified, the proxy administrator and a subgroup of proxy committee members (composed of a member from the Investment Department and one or more members from the Legal, Compliance or Risk Management Departments) will evaluate the potential conflict of interest and determine whether such conflict actually exists, and if so, will recommend how JPMIM will vote the proxy. In addressing any material conflict, JPMIM may take one or more of the following measures (or other appropriate action): removing or "walling off" from the proxy voting process certain JPMIM personnel with knowledge of the conflict, voting in accordance with any applicable Guideline if the application of the Guideline would objectively result in the casting of a proxy vote in a predetermined manner, or deferring the vote to the ISS, which will vote in accordance with its own recommendation. The following summarizes some of the more noteworthy types of proxy voting policies of the U.S.Guidelines: - - JPMIM considers votes on director nominees on a case-by-case basis. Votes generally will be withheld from directors who: (a) attend less than 75% of board and committee meetings without a valid excuse; (b) implement or renew a dead-hand poison pill; (c) are affiliated directors who serve on audit, compensation or nominating committees or are affiliated directors and the full board serves on such committees or the company does not have such committees; or (d) ignore a shareholder proposal that is approved for two consecutive years by a majority of either the shares outstanding or the votes cast. - - JPMIM votes proposals to classify Boards on a case-by-case basis, but will vote in favor of such proposal if the issuer's governing documents contain each of eight enumerated safeguards (for example, a majority of the board is composed of independent directors and the nominating committee is composed solely of such directors). - - JPMIM also considers management poison pill proposals on a case-by-case basis, looking for shareholder-friendly provisions before voting in favor. - - JPMIM votes against proposals for a super-majority vote to approve a merger. - - JPMIM considers proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan on a case-by-case basis, taking into account the extent of dilution and whether the transaction will result in a change in control. - - JPMIM votes proposals on a stock option plan, based primarily on a detailed, quantitative analysis that takes into account factors such as estimated dilution to shareholders' equity and dilution to voting power. JPMIM generally considers other management compensation proposals on a case-by-case basis. JPMIM also considers on a case-by-case basis proposals to change an issuer's state of incorporation, mergers and acquisitions and other corporate restructuring proposals and certain social and environmental issue proposals. INVESTMENT ADVISER Pursuant to an Investment Advisory Agreement (the "Advisory Agreement"), between the Trust on behalf of the Funds and JPMIM, JPMIM serves as investment adviser, as discussed in the "General" section. Subject to the supervision of the Funds' Board of Trustees, the Adviser makes the Funds' day-to-day investment decisions, arranges for the execution of Fund transactions and generally manages the Funds' investments. Effective October 1, 2003, JPMIM became a wholly owned subsidiary of J.P. Morgan Fleming Asset Management Holdings, Inc., which is a wholly owned subsidiary of J.P. Morgan Chase & Co. ("J.P. Morgan Chase"). JPMIM is a 22 registered investment adviser under the Investment Advisers Act of 1940, as amended. JPMIM acts as investment adviser to individuals, governments, corporations, employee benefit plans, labor unions and state and local governments, mutual funds and other institutional investors. JPMIM is located at 522 Fifth Avenue, New York, NY 10036. Certain of the assets of employee benefit accounts under the Adviser's management are invested in commingled pension trust funds for which JPMorgan Chase Bank serves as trustee. Under separate agreements, JPMorgan Chase Bank also provides certain financial, fund accounting and administrative services to the Trust and the Funds and shareholder services for the Trust. See the "Administrator and Sub-Administrator" and "Shareholder Servicing" sections. J.P. Morgan Chase, a bank holding company organized under the laws of the State of Delaware, was formed from the merger of J.P. Morgan & Co. Incorporated with and into The Chase Manhattan Corporation. J.P. Morgan Chase has a long history of offering a wide range of banking and investment services to customers throughout the United States and the world. The firm, through its predecessor companies, has been in business for over a century. The investment advisory services the Adviser provides to the Funds are not exclusive under the terms of the Advisory Agreement. The Adviser is free to and does render similar investment advisory services to others. The Adviser serves as investment adviser to personal investors and other investment companies and acts as fiduciary for trusts, estates and employee benefit plans. Certain of the assets of trusts and estates under management are invested in common trust funds for which the Adviser serves as trustee. The accounts which are managed or advised by the Adviser have varying investment objectives, and the Adviser invests assets of such accounts in investments substantially similar to, or the same as, those which are expected to constitute the principal investments of the Funds. Such accounts are supervised by employees of the Adviser who may also be acting in similar capacities for the Funds. See the "Fund Transactions" section. The Funds are managed by employees of the Adviser who, in acting for their customers, including the Funds, do not discuss their investment decisions with any personnel of J.P. Morgan Chase or any personnel of other divisions of the Adviser or with any of their affiliated persons, with the exception of certain other investment management affiliates of J.P. Morgan Chase which execute transactions on behalf of the Funds. Prior to September 1, 2003, JPMFAM (USA), which was a wholly owned subsidiary of JPMorgan Chase Bank, a subsidiary of J.P. Morgan Chase, was the investment adviser to the Funds. On September 1, 2003, JPMFAM (USA) merged into JPMIM. The investment advisory services and personnel providing investment advice have not changed as a result of the merger. Prior to February 28, 2001, The Chase Manhattan Bank ("Chase"), a predecessor of JPMorgan Chase Bank, was the investment adviser to the Funds. Chase Fleming Asset Management (USA) Inc. served as sub-adviser to the Funds. As compensation for the services rendered and related expenses such as salaries of advisory personnel borne by the Adviser under the Advisory Agreement, the Trust, on behalf of the Funds, has agreed to pay the Adviser a fee, which is computed daily and may be paid monthly, equal to the annual rate of each Fund's average daily net assets. The table below sets forth the investment advisory fees paid or accrued by the following Funds to JPMFAM (USA) or Chase, (waived amounts are in parentheses) with respect to the fiscal periods indicated:
8/31/01 8/31/02 8/31/03 ------- ------- ------- PRIME MONEY MARKET FUND Paid or Accrued $ 26,821,212 $ 59,806,000 $ 52,172,000 WAIVED - - - FEDERAL MONEY MARKET FUND Paid or Accrued 1,766,920 5,711,000 4,200,000 Waived - - -
23
8/31/01 8/31/02 8/31/03 ------- ------- ------- TREASURY PLUS MONEY MARKET FUND Paid or Accrued 2,583,023 4,225,000 3,856,000 Waived - - - 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Paid or Accrued 5,353,344 5,679,000 5,486,000 Waived - - - U.S. GOVERNMENT MONEY MARKET FUND Paid or Accrued 8,216,031 8,805,000 9,277,000 Waived - - - TAX FREE MONEY MARKET FUND Paid or Accrued 1,842,375 7,441,000 9,952,000 Waived - - - CALIFORNIA TAX FREE MONEY MARKET FUND Paid or Accrued 88,914 146,000 156,000 Waived - - - NEW YORK TAX FREE MONEY MARKET FUND Paid or Accrued 2,136,302 2,349,000 2,121,000 Waived - - - LIQUID ASSETS MONEY MARKET FUND Paid or Accrued N/A 278,000 2,256,000 Waived N/A (259,000) (171,000)
The Advisory Agreement provides that it will continue in effect for a period of two years after execution only if specially approved thereafter annually in the same manner as the Distribution Agreements. See the "Distributor" section. The Advisory Agreement will terminate automatically if assigned and is terminable at anytime without penalty by a vote of a majority of the Trustees, or by a vote of the holders of a majority of a Fund's outstanding voting securities, on 60 days' written notice to the Adviser and by the Adviser on 90 days' written notice to the Trust. See "Additional Information." BOARD REVIEW OF INVESTMENT ADVISORY ARRANGEMENTS The Funds' Board of Trustees, including the Board members who are not "interested persons" (as defined in the 1940 Act) of any party to the Advisory Agreement or its affiliates, has approved the Advisory Agreement for the Trust on behalf of each Fund. As part of its review of the investment advisory arrangements for the Funds, the Board of Trustees has requested that the Adviser prepare on a regular basis information regarding the performance of the Funds, their performance against the Funds' peers and benchmarks and analyses by the Adviser of the Funds' performance. The members of the Adviser's investment staff meet with the Board of Trustees to discuss this information and their intentions with regard to the management of the Funds. The Adviser also periodically provides comparative information regarding the Funds' expense ratios and those of the peer groups. In addition, in preparation for its annual approval meeting, the Board of Trustees requests and reviews, with the assistance of its legal counsel, materials from the Adviser regarding comparative fees, expenses, performance and profitability information pertaining to the relationship of the Adviser and the Funds. In approving the Advisory Agreement, the Board of Trustees of the Funds considered the nature, quality and scope of the operations and services provided by the Adviser to each Fund, including their knowledge of the Adviser's investment staff and executive personnel and the overall reputation and capabilities of the Adviser and its affiliates. The Board of Trustees also considered comparative fee information concerning other investment companies with similar investment objectives and policies. The Funds' Board of Trustees compared the terms of the Funds' advisory arrangements and similar arrangements by other investment companies, particularly with regard to levels of advisory fees relative to its peer group. The Board of Trustees also examined the benefits to the Adviser and its affiliates of their relationship with each Fund. Specifically, the Board of Trustees analyzed the benefits that accrued to the Adviser and its affiliates as a result of the fact that affiliates of the Adviser act as custodian, administrator and shareholder servicing agent for each Fund and receive fees from each Fund for acting in such capacities. 24 The Board of Trustees also analyzed the information provided by the Adviser regarding the profitability to the Adviser of its relationship with the Funds. Profitability information is not audited and represents the Adviser's determination of its and its affiliates' revenues from the contractual services provided to the Funds, less expenses of providing such services. Expenses include direct and indirect costs and are calculated using an allocation methodology developed by the Adviser. In addition, the Board of Trustees compared overall expense ratios (both pre- and post-expense reimbursement by the Adviser) for each Fund relative to its peer group. The Board of Trustees also considered the performance of the Funds and the intention of the Adviser with regard to management of the Funds, including the commitment of the Adviser to provide high quality services to the Funds, whether there were any conditions likely to affect the ability of the Adviser to provide such services, and its ability to retain and attract qualified personnel to manage each Fund. In reaching their decision to approve the investment advisory contracts, the Board of Trustees did not identify any single factor as being of paramount importance. Based on its evaluation of the information reviewed and after due consideration, the Board of Trustees of each Fund concluded that the current Advisory Agreement enabled the Fund to obtain high-quality services at costs that it deemed appropriate and reasonable and that approval of the agreement was in the best interest of each Fund and its shareholders. ADMINISTRATOR AND SUB-ADMINISTRATOR Pursuant to an Administration Agreement dated September 7, 2001 (the "Administration Agreement"), between the Trust on behalf of the Funds and JPMorgan Chase Bank, JPMorgan Chase Bank serves as administrator of the Funds. JPMorgan Chase Bank 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. JPMorgan Chase Bank in its capacity as administrator does not have any responsibility or authority for the investment management of the Funds, the determination of investment policy, or for any matter pertaining to the distribution of the Funds' shares. JPMorgan Chase Bank was formed on November 10, 2001 from the merger of The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. Under the Administration Agreement, JPMorgan Chase Bank is permitted to render administrative services to others. The Administration Agreement will continue in effect for two years and from year to year thereafter with respect to each Fund, only if such continuance is specifically approved at least annually by the Board of Trustees, including a majority of the Trustees who are not "interested persons" (as defined by the 1940 Act), or by vote of a majority of such Fund's outstanding voting securities. 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 JPMorgan Chase Bank 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 absent willful misfeasance, bad faith, gross negligence, or reckless disregard in the performance of duties under the agreement on the part of JPMorgan Chase Bank or its directors, officers or employees, the Trust shall indemnify JPMorgan Chase Bank against any claims that JPMorgan Chase Bank may incur based on any omissions in connection with services rendered to the Trust under the Administration Agreement. In consideration of the services provided by JPMorgan Chase Bank pursuant to the Administration Agreement, JPMorgan Chase Bank receives from each Fund a pro-rata portion of a fee computed daily and paid monthly at an annual rate equal to 0.10% of each Money Market Fund's average daily net assets of up to $100 billion on an annualized basis for the Fund's then-current fiscal year plus 0.05% of the average daily net assets over $100 billion. JPMorgan Chase Bank may voluntarily waive a portion of the fees payable to it with respect to each Fund. JPMorgan Chase Bank pays a portion of the fees it receives to BISYS Fund Services, L.P. for its services as each Fund's sub-administrator. 25 For the fiscal year ends indicated below, JPMorgan Chase Bank, or its predecessor, was paid or accrued administration fees, and waived the amounts in parentheses, for the following Funds:
8/31/01 8/31/02 8/31/03 ------- ------- ------- PRIME MONEY MARKET FUND Paid or Accrued $ 13,410,606 $ 59,033,000 $ 52,172,000 Waived - (9,237,000) (4,474,000) FEDERAL MONEY MARKET FUND Paid or Accrued 883,460 5,640,000 4,200,000 Waived - (1,039,000) (715,000) TREASURY PLUS MONEY MARKET FUND Paid or Accrued 1,291,511 4,182,000 3,856,000 Waived - (1,660,000) (1,406,000) TAX FREE MONEY MARKET FUND Paid or Accrued 921,188 7,368,000 9,952,000 Waived - (2,206,000) (2,279,000) 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Paid or Accrued 2,676,672 5,616,000 5,486,000 Waived - (1,103,000) (852,000) U.S. GOVERNMENT MONEY MARKET FUND Paid or Accrued 4,108,016 8,698,000 9,277,000 Waived - (4,152,000) (4,203,000) CALIFORNIA TAX FREE MONEY MARKET FUND Paid or Accrued 44,457 144,000 156,000 Waived - (67,000) (89,000) NEW YORK TAX FREE MONEY MARKET FUND Paid or Accrued 1,068,154 2,325,000 2,121,000 Waived - (823,000) (63,000) LIQUID ASSETS MONEY MARKET FUND Paid or Accrued - 278,000 2,256,000 Waived - (278,000) (1,846,000)
DISTRIBUTOR J.P. Morgan Fund Distributors, Inc. (the "Distributor") serves as the Trust's exclusive distributor and holds itself available to receive purchase orders for shares of each of the Funds. In that capacity, the Distributor has been granted the right, as agent of the Trust, to solicit and accept orders for the purchase of each of the Fund's shares in accordance with the terms of the Distribution Agreement between the Trust and the Distributor. Under the terms of the Distribution Agreement between the Distributor and the Trust, the Distributor receives no compensation in its capacity as the Distributor. The Distributor is a wholly owned indirect subsidiary of The BISYS Group, Inc. The Distribution Agreement shall continue in effect with respect to each Fund for a period of two years after execution and from year to year only if it is approved at least annually thereafter (i) by a vote of the holders of a majority of the Fund's outstanding shares or (ii) by a vote of a majority of the Trustees of the Trust and a vote of the Trustees who are not "interested persons" (as defined by the 1940 Act) of the parties to the Distribution Agreement, cast in person at a meeting called for the purpose of voting on such approval (see "Trustees"). The Distribution Agreement will terminate automatically if assigned by either party thereto and is terminable at any time without penalty by a vote of a majority of the Trustees of the Trust, including a vote of a majority of the Trustees who are not "interested persons" of the Trust, or by a vote of (i) 67% or more of the Fund's outstanding voting securities present at a meeting if the holders of more than 50% of the Fund's outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding voting securities, whichever is less. The principal offices of the Distributor are located at 522 Fifth Avenue, New York, NY 10036. 26 Under a prior Distribution and Sub-Administration Agreement, dated August 24, 1995, the Distributor also provided certain administration services. The table below sets forth for each Fund, the sub-administration fees paid or accrued to the Distributor (the amounts voluntarily waived in parentheses) under the previous arrangement for the fiscal year indicated:
FUND 8/31/01 ---------------------------------------------------------------------- PRIME MONEY MARKET FUND Paid or Accrued $ 13,410,606 Waived (2,682,121) FEDERAL MONEY MARKET FUND Paid or Accrued 883,460 Waived - TREASURY PLUS MONEY MARKET FUND Paid or Accrued 1,291,511 Waived (1,033,209) TAX FREE MONEY MARKET FUND Paid or Accrued 921,188 Waived - 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Paid or Accrued 2,676,672 Waived (1,812,442) U.S. GOVERNMENT MONEY MARKET FUND Paid or Accrued 4,108,016 Waived (3,985,921) CALIFORNIA TAX FREE MONEY MARKET FUND Paid or Accrued 44,457 Waived (3,651) NEW YORK TAX FREE MONEY MARKET FUND Paid or Accrued 1,068,154 Waived (1,068,154) LIQUID ASSETS MONEY MARKET FUND Paid or Accrued - Waived -
DISTRIBUTION PLAN The Trust has adopted a plan of distribution pursuant to Rule 12b-1 under the 1940 Act (a "Distribution Plan") on behalf of the Cash Management, Class B and Class C Shares of the Prime Money Market Fund, the Morgan Shares of the Money Market Funds (except the Prime Money Market Fund) and the Reserve Shares of the Prime Money Market Fund, Treasury Plus Money Market Fund and New York Tax Free Money Market Fund, which provides that each of such classes 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 such 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. Anticipated benefits to the Funds that may result from the adoption of the Distribution Plan are economic advantages achieved through economies of scale and enhanced viability if the Funds accumulate a critical mass. Some payments under the Distribution Plan may be used to compensate broker-dealers with trail or maintenance commissions in an amount not to exceed 0.75% annualized of the average daily net asset value of the Class B Shares, 0.75% annualized of the average daily net asset value of the Class C Shares or 0.10% annualized of the average daily net asset value of the Morgan Shares of Liquid Assets Money Market Fund maintained in a Fund by such broker-dealers' customers. With respect to Cash Management Shares of Prime Money Market Fund, broker-dealers will be compensated with trail or maintenance commissions of 0.50% annualized of the average daily net asset value. With 27 respect to Reserve Shares of Prime Money Market Fund, Treasury Plus Money Market Fund and New York Tax Free Money Market Fund, broker-dealers will be compensated with trail or maintenance commissions of 0.25% annualized of the average daily net asset value. For Class B, Class C and Morgan Shares, trail or maintenance commissions will be paid to broker-dealers beginning the 13th month following the purchase of such shares. For other classes of shares, such commissions will generally be paid beginning at the time of initial 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 Plan. The Distributor will use its own funds (which may be borrowed or otherwise financed) to pay such amounts. Because the Distributor will receive 0.75% on Class B and C Shares, 0.50% on Cash Management Shares, 0.10% on Morgan Shares and 0.25% on Reserve Shares of average daily net assets, the fee will take the Distributor several years to recoup the sales commissions paid to dealers and other sales expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the "compensation variety" (in contrast to "reimbursement" arrangements by which a distributor's payments are directly linked to its expenses). However, 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 Class Shares, Premier Shares and Agency Shares of the Money Market Funds have no Distribution Plan. Each class of shares is entitled to exclusive voting rights with respect to matters concerning its Distribution Plan. The 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 Distribution Plan requires that the Distributor 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. 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. The Distribution Plan may be terminated with respect to any class of a Fund at any time by a vote of a majority of the Qualified Trustees or 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 and rules thereunder). The Distribution Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of affected 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 the 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 years indicated below, the Distributor was paid or accrued the following 12b-1 Distribution Fees and voluntarily waived through September 9, 2001 and then contractually thereafter, the amounts in parentheses following such fees with respect to the Shares of each Fund:
8/31/02 8/31/03 -------------------------- -------------------------- PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED ------------ ----------- ------------ ----------- PRIME MONEY MARKET FUND B Shares $ 103,000 - $ 90,000 - C Shares 3,000 - 5,000 - Reserve Shares 683,000 - 1,011,000 - Cash Management Shares 1,028,000 - 1,806,000 - FEDERAL MONEY MARKET FUND Morgan Shares 627,000 - 381,000 $ (278,000) TREASURY PLUS MONEY MARKET FUND Morgan Shares 1,303,000 $ (330,000) 852,000 (646,000) Reserve Shares 595,000 - 590,000 - TAX FREE MONEY MARKET FUND Morgan Shares 883,000 (233,000) 702,000 (562,000)
28
8/31/02 8/31/03 -------------------------- -------------------------- PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED ------------ ----------- ------------ ----------- 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Morgan Shares 4,068,000 (3,132,000) 3,168,000 (2,687,000) CALIFORNIA TAX FREE MONEY MARKET FUND Morgan Shares 146,000 (56,000) 156,000 (156,000) NEW YORK TAX FREE MONEY MARKET FUND Morgan Shares 2,262,000 (1,477,000) 1,940,000 (1,878,000) Reserve Shares 261,000 (72,000) 544,000 (139,000) U.S. GOVERNMENT MONEY MARKET FUND Morgan Shares 3,747,000 (1,617,000) 3,187,000 (1,638,000) Premier Shares 1,117,000 (845,000) 1,012,000 (771,000) LIQUID ASSETS MONEY MARKET FUND Morgan Shares 6,000 (6,000) 18,000 (18,000)
Expenses paid by the Distributor related to the distribution of Fund shares under the Distribution Plan during the fiscal year ended August 31, 2003: PRIME MONEY MARKET FUND Advertising and sales literature $ 571,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 517,000 Compensation to dealers 904,000 Compensation to sales personnel 2,000 Class B Shares financing charges 82,000 Equipment, supplies and other indirect distribution-related expenses 234,000 FEDERAL MONEY MARKET FUND Advertising and sales literature 48,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 42,000 Compensation to dealers 72,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 19,000 TREASURY PLUS MONEY MARKET FUND Advertising and sales literature 50,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 44,000 Compensation to dealers 75,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 18,000 TAX FREE MONEY MARKET FUND Advertising and sales literature 104,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 96,000 Compensation to dealers 171,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 44,000 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Advertising and sales literature 71,000
29 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 62,000 Compensation to dealers 108,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 26,000 CALIFORNIA TAX FREE MONEY MARKET FUND Advertising and sales literature 2,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 2,000 Compensation to dealers 3,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 1,000 NEW YORK TAX FREE MONEY MARKET FUND Advertising and sales literature 30,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 25,000 Compensation to dealers 43,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 10,000 U.S. GOVERNMENT MONEY MARKET FUND Advertising and sales literature 119,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 106,000 Compensation to dealers 183,000 Compensation to sales personnel 1,000 Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 45,000 LIQUID ASSETS MONEY MARKET FUND Advertising and sales literature 19,000 Printing, production and mailing of prospectuses and shareholder reports to other than current shareholders 22,000 Compensation to dealers 35,000 Compensation to sales personnel - Class B Shares financing charges - Equipment, supplies and other indirect distribution-related expenses 11,000
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. CUSTODIAN Pursuant to the Global Custody Agreement with JPMorgan Chase Bank, 3 Chase MetroTech Center, Brooklyn, NY 11245, dated March 1, 2003, JPMorgan Chase Bank serves as the Funds' custodian and fund accounting agent and is responsible for holding portfolio securities and cash and maintaining the books of account and records of portfolio transactions. JPMorgan Chase Bank is an affiliate of the Adviser. For fund accounting services, the Funds pay to JPMorgan Chase Bank the higher of (a) each Fund's pro rata share of an annual complex-wide charge on the average daily net assets of all U.S. money market funds of 0.011% of the first $5 billion, 0.008% on the next $5 billion, 0.004% on the next $90 billion and 0.0025% for such assets over 30 $100 billion, or (b) the applicable per account minimum charge. The minimum total annual fund accounting charge per U.S. money market fund is $10,000. In addition, there is a $10,000 annual charge per share class and a $6,000 annual charge per manager for multi-managed accounts. JPMorgan Chase Bank is also reimbursed for its reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees. Prior to May 5, 2003, The Bank of New York served as the Funds' custodian and fund accounting agent and prior to September 7, 2001, The Chase Manhattan Bank was the Funds' custodian and fund accounting agent. For additional information, see the Prospectuses. TRANSFER AGENT DST Systems, Inc. ("DST" or "Transfer Agent"), 210 West 10th Street, Kansas City, Missouri 64105 serves as each Fund's transfer and dividend disbursing agent. As transfer agent and dividend disbursing agent, DST is responsible for maintaining account records detailing the ownership of Fund shares and for creating income, capital gains and other changes in share ownership to shareholder accounts. SHAREHOLDER SERVICING The Trust on behalf of each of the Funds has entered into a shareholder servicing agreement (the "Shareholder Servicing Agreement"), which enables the Funds to obtain the services of one or more Shareholder Servicing Agents including JPMorgan Chase Bank. Under the agreement, the Shareholder Servicing Agents are responsible for performing shareholder account, administrative and servicing functions, which include but are not limited to, answering inquiries regarding account status and history, the manner in which purchases and redemptions of Fund shares may be effected, and certain other matters pertaining to a Fund; assisting customers in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to coordinate the establishment and maintenance of shareholder accounts and records, transmitting or assisting in processing purchase and redemption orders and arranging for the wiring or other transfer of funds to and from customer accounts in connection with orders to purchase or redeem Fund shares; verifying purchase and redemption orders, transfers among and changes in accounts; informing the Distributor of the gross amount of purchase orders for Fund shares; providing other related services; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder-designated accounts; furnishing (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; transmitting, on behalf of the Funds, proxy statements, annual reports, updated Prospectuses and other communications to shareholders of the Funds; receiving and transmitting to the Funds proxies executed by shareholders with respect to meetings of shareholders of the Funds; and providing such other related services as the Funds or a shareholder may request. Shareholder Servicing Agents may be required to register pursuant to state securities law. Shareholder Servicing Agents may subcontract with parties for the provision of shareholder support services. Under the Shareholder Servicing Agreement, each Fund has agreed to pay JPMorgan Chase Bank for these services a fee at the following annual rates (expressed as a percentage of the average daily net asset value of Fund shares owned by or for shareholders). JPMorgan Chase Bank may voluntarily agree from time to time to waive a portion of the fees payable to it under the Shareholder Servicing Agreement with respect to each Fund on a month-to-month basis. Class B, Class C, Premier, Select, Cash Management and Reserve Shares 0.25% Morgan Shares 0.35%* Reserve Shares of New York Tax Free Money Market Fund 0.35%* Institutional Class and Agency Shares 0.10%
* The Board of Trustees has determined that the amount payable for "service fees" (as defined by the NASD) does not exceed 0.25% of the average annual net assets attributable to these shares. The 0.10% balance of the fees is for shareholder administrative services. 31 The table below sets forth the fees paid or accrued to JPMorgan Chase Bank (the amounts voluntarily waived are in parentheses) for the fiscal periods indicated:
8/31/01 8/31/02 8/31/03 - --------------------------------------------------------------------------------------------------------------------------------- PAID/ PAID/ PAID/ ACCRUED WAIVED ACCRUED WAIVED ACCRUED WAIVED - --------------------------------------------------------------------------------------------------------------------------------- PRIME MONEY MARKET FUND Morgan Shares $ 31,040,011 - $ 32,753,000 - $ 20,441,000 $ (1,387,000) Premier Shares 5,275,985 $ (486,419) 13,191,000 $ (40,000) 14,274,000 (115,000) Agency Shares 15,826,059 (8,839,377) 16,771,000 (6,708,000) 13,045,000 (5,261,000) B Shares 35,936 - 34,000 - 30,000 (5,000) C Shares 543 - 1,000 - 2,000 - Institutional Class Shares - - 26,797,000 (26,755,000) 25,882,000 (25,882,000) Reserve Shares 5,576 (5,576) 683,000 (26,000) 1,011,000 (13,000) Select Shares - - 2,778,000 (180,000) 2,292,000 (213,000) Cash Management Shares - - 514,000 (4,000) 903,000 - FEDERAL MONEY MARKET FUND Morgan Shares 2,229,626 (182,558) 2,195,000 (32,000) 1,335,000 - Premier Shares 728,127 - 4,332,000 (20,000) 3,616,000 (51,000) Agency Shares 838,492 (577,248) 887,000 (364,000) 396,000 (191,000) Institutional Class Shares 493 (493) 2,464,000 (2,464,000) 1,976,000 (1,976,000) TREASURY PLUS MONEY MARKET FUND Morgan Shares 4,851,482 (1,039,999) 4,561,000 (540,000) 2,982,000 - Premier Shares 722,274 (49,547) 2,211,000 (7,000) 2,526,000 - Agency Shares 907,975 (530,424) 1,288,000 (608,000) 1,183,000 (585,000) Institutional Class Shares - - 511,000 (511,000) 575,000 (575,000) Reserve Shares - - 595,000 (12,000) 590,000 (21,000) TAX FREE MONEY MARKET FUND Morgan Shares 3,223,644 (1,035,729) 3,090,000 (417,000) 2,457,000 - Premier Shares 269,358 (3,179) 6,899,000 - 8,550,000 (58,000) Agency Shares 813,591 (696,827) 967,000 (391,000) 860,000 (372,000) Institutional Class Shares - - 2,832,000 (2,820,000) 4,970,000 (4,970,000) 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Morgan Shares 13,742,359 - 14,236,000 - 11,087,000 - Premier Shares 328,527 - 772,000 - 1,310,000 - Agency Shares 1,295,545 (710,616) 1,125,000 (596,000) 959,000 (550,000) Institutional Class Shares - - 178,000 (178,000) 835,000 (835,000) CALIFORNIA TAX FREE MONEY MARKET FUND Morgan Shares 311,198 (188,037) 511,000 (187,000) 547,000 (39,000) NEW YORK TAX FREE MONEY MARKET FUND Morgan Shares 7,477,075 - 7,917,000 - 6,791,000 - Reserve Shares - - 305,000 - 634,000 (1,000) U.S. GOVERNMENT MONEY MARKET FUND Morgan Shares 13,786,362 (301,748) 13,115,000 - 11,152,000 - Premier Shares 2,874,269 (96,075) 2,791,000 - 2,531,000 - Agency Shares 3,127,363 (402,991) 3,484,000 (414,000) 3,794,000 (418,000) Institutional Class Shares - - 458,000 (344,000) 1,284,000 (929,000) LIQUID ASSETS MONEY MARKET FUND Morgan Shares - - 20,000 (3,000) 62,000 (25,000) Premier Shares - - 18,000 (6,000) 127,000 (12,000) Agency Shares - - 14,000 (12,000) 246,000 (91,000) Institutional Class Shares - - 251,000 (242,000) 1,941,000 (1,723,000)
32 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 it is 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 the shareholder servicing agent. For shareholders that bank with JPMorgan Chase Bank, JPMorgan Chase Bank may aggregate investments in the JPMorgan Funds with balances held in JPMorgan 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. JPMorgan Chase Bank 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. JPMorgan Chase Bank and/or the Distributor may from time to time, at their own expense out of compensation retained by them from the Funds or from 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 Funds attributable to shares of the Funds held by the customer of such Shareholder Servicing Agents. Such compensation does not represent an additional expense to the Funds or to its shareholders, since it will be paid by JPMorgan Chase Bank and/or the Distributor. EXPENSES In addition to the fees payable to the Adviser and JPMorgan Chase Bank under various agreements discussed under "Investment Adviser," "Administrator and Sub-Administrator" and "Shareholder Servicing" above, the Fund is responsible for usual and customary expenses associated with its operations. Such expenses include organization expenses, legal fees, accounting and audit expenses, insurance costs, the compensation and expenses of the Board of Trustees, registration fees under federal securities laws, interest, taxes and extraordinary expenses applicable to the Fund. For the Fund, such expenses also include transfer, registrar and dividend disbursing costs, the expenses of printing and mailing reports, notices and proxy statements to Fund shareholders and filing fees under state securities laws. JPMorgan Chase Bank has agreed that it will reimburse the Funds as described in the Prospectuses. FINANCIAL PROFESSIONALS The services provided by financial professionals may include establishing and maintaining shareholder accounts, processing purchase and redemption transactions, arranging for bank wires, performing shareholder subaccounting, answering client inquiries regarding the Funds, assisting clients in changing dividend options, account designations and addresses, providing periodic statements showing the client's account balance and integrating these statements with those of other transactions and balances in the client's other accounts serviced by the financial professional, transmitting proxy statements, periodic reports, updated prospectuses and other communications to shareholders and, with respect to meetings of shareholders, collecting, tabulating and forwarding executed proxies and obtaining such other information and performing such other services as JPMorgan Chase Bank or the financial professional's clients may reasonably request and agree upon with the financial professional. Financial professionals may establish their own terms and conditions for providing their services and may charge investors a transaction-based or other fee for their services. Such charges may vary among financial professionals, but in all cases will be retained by the financial professional and not be remitted to a Fund or JPMorgan Chase Bank. Each Fund has authorized one or more brokers to accept purchase and redemption orders on its behalf. Such brokers are authorized to designate other intermediaries to accept purchase and redemption orders on a Fund's behalf. 33 A Fund will be deemed to have received a purchase or redemption order when an authorized broker or, if applicable, a broker's authorized designee, accepts the order. These orders will be priced at the Fund's net asset value next calculated after they are so accepted. INDEPENDENT ACCOUNTANTS The independent accountants of the Trust are PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial statements of each of the Funds, assists in the preparation and/or review of each Fund's federal and state income tax returns and consults with the Funds as to matters of accounting and federal and state income taxation. PORTFOLIO TRANSACTIONS On behalf of the Funds, the Adviser places orders for all purchases and sales of portfolio securities, enters into repurchase agreements, and may enter into reverse repurchase agreements unless otherwise prohibited. See "Investment Strategies and Policies." Fixed income and debt securities and municipal bonds and notes are generally traded at a net price with dealers acting as principal for their own accounts without a stated commission. The price of the security usually includes profit to the dealers. In underwritten offerings, securities are purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain securities may be purchased directly from an issuer, in which case no commissions or discounts are paid. In connection with Portfolio transactions, the overriding objective is to obtain the best execution of purchase and sales orders. Subject to the overriding objective of obtaining the best execution of orders, the Adviser may allocate a portion of a Fund's brokerage transactions to affiliates of the Adviser. Under the 1940 Act, persons affiliated with a Fund and persons who are affiliated with such persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. The SEC has granted an exemptive order permitting each Fund to engage in principal transactions with J.P. Morgan Securities Inc., an affiliated broker, involving taxable money market instruments (including commercial paper, banker acceptances and medium term notes) and repurchase agreements. The order is subject to certain conditions. An affiliated person of a Fund may serve as its broker in listed or over-the-counter transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. JPMorgan Chase Bank 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. JPMorgan Chase Bank 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. JPMorgan Chase Bank 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. JPMIM has informed the Funds that in making its investment decisions, it does not obtain or use material inside information in the possession of any affiliate of JPMIM. Shareholders of the Funds should be aware that, subject to applicable legal or regulatory restrictions, JPMIM and its affiliates may exchange among themselves certain information about the shareholder and his account. PURCHASES, REDEMPTIONS AND EXCHANGES The Funds have established certain procedures and restrictions, subject to change from time to time, for purchase, redemption, and exchange orders, including procedures for accepting telephone instructions and effecting automatic investments and redemptions. JPMorgan Funds Service Center or JPMorgan Institutional Funds Service Center, as applicable, 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 34 has been received by JPMorgan Funds Service Center or JPMorgan Institutional Funds Service Center, as applicable. 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. An investor can buy shares of a Fund in one of three ways: (i) through an investment representative or service organization; (ii) through the Distributor by calling the JPMorgan Funds Service Center or JPMorgan Institutional Funds Service Center, as applicable; or (iii) through the Systematic Investment Plan, depending upon what type of class of shares. 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, and confirmation that the account registration and address given by such person match those on record, 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, her 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. The Funds may, at their own option, accept securities in payment for shares. The securities, delivered in such a transaction, are valued by the method described in "Net Asset Value" as of the day a Fund receives the securities. This is a taxable transaction to the shareholder. Securities may be accepted in payment for shares only if they are, in the judgment of the Adviser, appropriate investments for a Fund. In addition, securities accepted in payment for shares must: (i) meet the investment objectives and policies of the acquiring Fund; (ii) be acquired by the Fund for investment and not for resale; (iii) be liquid securities which are not restricted as to transfer either by law or liquidity of market; and (iv) if stock, have a value which is readily ascertainable as evidenced by a listing on a stock exchange, OTC market or by readily available market quotations from a dealer in such securities offered in payment for its shares. 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 under the 1940 Act committing to pay in cash all redemptions by a shareholder of record up to amounts specified by the rule (approximately $250,000). In accordance with section 22(e) of the 1940 Act, the Trust, on behalf of a Fund, reserves the right to postpone the date of payment upon redemption for more than one day for the Prime Money Market Fund and for more than seven days for the other Money Market Funds or suspend the right of redemption as follows: (i) during periods when the New York Stock Exchange is closed for other than weekends and holidays or when trading on such Exchange is restricted as determined by the SEC or by rule or regulation, (ii) during periods in which an emergency, as determined by the SEC, exists that causes disposal by the portfolio of, or evaluation of the net asset value of, its portfolio securities to be unreasonable or impracticable, or (iii) for such other periods as the SEC may by order permit for the protection of the Fund shareholders. Shareholders of other JPMorgan Funds may be entitled to exchange their shares for, or reinvest distributions from their funds in, shares of a Fund at net asset value. EXCHANGE PRIVILEGE. Shareholders may exchange their shares in a Fund for shares of the same class in any other JPMorgan Fund that offers such share class. You may pay a sales charge if you exchange your Morgan Shares for other classes of shares. If you exchange Class B Shares of Prime Money Market Fund for Class B Shares of another JPMorgan Fund or Class C Shares of Prime Money Market Fund for Class C Shares of another JPMorgan Fund, you will not pay a deferred sales charge until you sell the shares of the other fund. The amount of deferred sales charge will be based on when you bought the original shares, not when you made the exchange. The Funds reserve the right to limit the number of exchanges or to refuse an exchange. JPMorgan Chase may discontinue this exchange privilege at any time. Under the Exchange Privilege, shares may be exchanged for shares of the same class of another fund only if shares of the fund exchanged into are registered in the state where the exchange is to be made. Shares of a Fund may only be exchanged into another fund if the account registrations are identical. With respect to exchanges from any 35 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 Distributor pays broker-dealers a commission of 4.00% of the offering price on sales of Class B Shares and a commission of 1.00% of the offering price on sales of Class C Shares. The Distributor keeps the entire amount of any contingent deferred sales charge ("CDSC") the investor pays. The CDSC for Class B and Class C Shares will be waived for certain exchanges and for redemptions in connection with a Fund's systematic withdrawal plan, subject to the conditions described in the Prospectus. In addition, subject to confirmation of a shareholder's status, the CDSC 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 from an IRA, Keogh or custodial account under section 403(b) of the Internal Revenue Code or a mandatory distribution from a qualified plan; (iii) redemptions made from an IRA, Keogh or custodial account under section 403(b) of the Internal Revenue Code through an established Systematic Redemption Plan; (iv) a redemption resulting from an over-contribution to an IRA; (v) distributions from a qualified plan upon retirement; and (vi) an involuntary redemption of an account balance under $500. 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. The CDSC, however, will not be waived if a defined contribution plan redeems all of the shares that it owns on behalf of participants prior to the CDSC Period, as defined below. Class B Shares of the Prime Money Market Fund automatically convert to Morgan Shares (and thus are then subject to the lower expenses borne by Morgan 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 NAV per share of the Morgan Shares may be higher or lower than the NAV per share of the Class B Shares; as a result, depending on the relative NAVs per shares, a shareholder may receive fewer or more Morgan Shares than the number of Class B Shares converted. A Fund may require signature guarantees for changes that shareholders request be made in Fund records with respect to their accounts, including but not limited to, changes in bank accounts, for any written requests for additional account services made after a shareholder has submitted an initial account application to a 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. 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. NET ASSET VALUE The Funds compute their net asset value once daily on Monday through Friday at the time indicated in the Prospectuses. The net asset value will not be computed on the day the following legal holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Funds may also close for purchases and redemptions at such other times as 36 may be determined by the Board of Trustees to the extent permitted by applicable law. The days on which net asset value is determined are the Funds' business days. The net asset value of each class of a Fund is equal to the value of such class's pro rata portion of the Fund's investments less the class's pro rata portion of the Fund's liabilities. The following is a discussion of the procedures used by the Funds in valuing their assets. The Funds' portfolio securities are valued by the amortized cost method. The purpose of this method of calculation is to attempt to maintain a constant net asset value per share of each Fund of $1.00. No assurances can be given that this goal can be attained. The amortized cost method of valuation values a security at its cost at the time of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. If a difference of more than 1/2 of 1% occurs between valuation based on the amortized cost method and valuation based on market value, the Board of Trustees will take steps necessary to reduce such deviation, such as changing a Fund's dividend policy, shortening the average portfolio maturity, realizing gains or losses, or reducing the number of outstanding Fund shares. Any reduction of outstanding shares will be effected by having each shareholder contribute to a Fund's capital the necessary shares on a pro rata basis. Each shareholder will be deemed to have agreed to such contribution in these circumstances by his or her investment in the Funds. See "Distributions and Tax Matters." PERFORMANCE INFORMATION From time to time, the Funds may quote performance in terms of yield, actual distributions in reports, sales literature and advertisements published by the Funds. Shareholders may obtain current yield information by calling the number provided on the cover page of this SAI. See also the Prospectuses. YIELD QUOTATIONS 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 1933 Act 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 according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) 365/7] - 1 A portion of the 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 Tax Free Funds 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 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. If applicable, a Fund's tax equivalent effective yield is calculated by dividing that portion of the Fund's effective yield that is tax-exempt by 1, minus a stated income tax rate and adding the quotient to that portion, if any, of the Fund's effective yield that is not tax-exempt. 37
EFFECTIVE COMPOUND CURRENT ANNUALIZED ANNUALIZED YIELD AS OF YIELD AS OF 8/31/03 8/31/03 - ----------------------------------------------------------------------------------------------- PRIME MONEY MARKET FUND Agency Shares 0.86% 0.87% Class B Shares 0.08% 0.08% Class C Shares 0.08% 0.08% Cash Management Shares 0.17% 0.17% Institutional Class Shares 0.92% 0.93% Morgan Shares 0.53% 0.53% Premier Shares 0.67% 0.68% Reserve Shares 0.42% 0.42% Select Shares 0.68% 0.69% FEDERAL MONEY MARKET FUND Agency Shares 0.80% 0.80% Institutional Class Shares 0.86% 0.86% Morgan Shares 0.36% 0.36% Premier Shares 0.61% 0.61% TREASURY PLUS MONEY MARKET FUND Agency Shares 0.78% 0.78% Institutional Class Shares 0.83% 0.84% Morgan Shares 0.44% 0.44% Premier Shares 0.58% 0.58% Reserve Shares 0.33% 0.33% 100% U.S. TREASURY SECURITIES MONEY MARKET FUND Agency Shares 0.75% 0.76% Institutional Class Shares 0.80% 0.81% Morgan Shares 0.41% 0.41% Premier Shares 0.55% 0.55% U.S. GOVERNMENT MONEY MARKET FUND Agency Shares 0.84% 0.84% Institutional Class Shares 0.90% 0.90% Morgan Shares 0.51% 0.51% Premier Shares 0.65% 0.65% LIQUID ASSETS MONEY MARKET FUND Agency Shares 0.94% 0.94% Institutional Class Shares 1.00% 1.00% Morgan Shares 0.61% 0.61% Premier Shares 0.75% 0.75%
EFFECTIVE ANNUALIZED CURRENT COMPOUND TAX ANNUALIZED ANNUALIZED EQUIVALENT YIELD AS YIELD AS OF YIELD* AS OF OF 8/31/03 8/31/03 8/31/03 - ---------------------------------------------------------------------------------------------------- TAX FREE MONEY MARKET FUND Agency Shares 0.67% 0.67% 1.03% Institutional Class Shares 0.73% 0.73% 1.12% Morgan Shares 0.34% 0.34% 0.52% Premier Shares 0.48% 0.48% 0.74% CALIFORNIA TAX FREE MONEY MARKET FUND Morgan Shares 0.39% 0.39% 0.66%
38 NEW YORK TAX FREE MONEY MARKET FUND Morgan Shares 0.36% 0.36% 0.63% Reserve Shares 0.16% 0.16% 0.28%
*The tax equivalent yields assume a federal income tax rate of 35.00% for the Tax Free Money Market Fund, a combined New York State, New York City and federal income tax rate of 43.10% for the New York Tax Free Money Market Fund and a combined California State and federal income tax rate of 41.05% for the California Tax Free Money Market Fund. Unlike some bank deposits or other investments which pay a fixed yield for a stated period of time, the yields and the net asset values of the classes of shares of a Fund will vary based on market conditions, the current market value of the securities held by 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 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. Shareholders of the various classes of the Funds bear the fees and expenses described herein and in the Prospectuses. Advertising or communications to shareholders may contain the views of the Adviser 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 JPMIM, such as the offshore assets of other funds. MASSACHUSETTS TRUST 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, Board of 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. No personal liability will attach to the shareholders under any undertaking containing such provision when adequate notice of such provision is given, except possibly in a few jurisdictions. With respect to all types of claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where the provision referred to is omitted from the undertaking, (iii) claims for taxes, and (iv) certain statutory liabilities in other jurisdictions, a shareholder may be held personally liable to the extent that claims are not satisfied by a Fund. However, upon payment of such liability, the shareholder will be entitled to reimbursement from the general assets of the Fund. The Board of Trustees intends to conduct the operations of the Trust in such a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Funds. 39 The Declaration of Trust provides that the Trust will indemnify its Board of Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, unless, as to liability to the Trust or its shareholders, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or with respect to any matter unless it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interest of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination based upon a review of readily available facts, by vote of a majority of disinterested Trustees or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties. The Trust shall continue without limitation of time subject to the provisions in the Declaration of Trust concerning termination by action of the shareholders or by action of the Trustees upon notice to the shareholders. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Trust is an open-end management investment company organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts in 1994. The Trust currently consists of nine 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 among 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 JPMorgan Chase Bank, as 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, JPMorgan Chase Bank 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. As of September 10, 2001, the Select Shares were renamed "Morgan Shares" and a new class called Select Shares was introduced. The Institutional Class Shares were renamed "Agency Shares" and a new class of shares called Institutional Class Shares was also introduced on that date. 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 1-800-348-4782 or 1-800-766-7722 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. 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 Board of 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 series 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 40 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. 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. No certificates are issued for shares of the Funds. DISTRIBUTIONS AND TAX MATTERS The following is a summary of certain tax considerations generally affecting each Fund and its shareholders. This section is based on the Internal Revenue Code of 1986, as amended (the "Code"), published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. Please consult your own tax advisor concerning the consequences of investing in a Fund in your particular circumstances under the Code and the laws of any other taxing jurisdiction. Each Fund generally will be treated as a separate corporation for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Fund separately. Net long-term and short-term capital gains, net income and operating expenses therefore will be determined separately for each Fund. QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each Fund has elected to be taxed as a regulated investment company under Subchapter M of the Code and intends to meet all other requirements that are necessary for it to be relieved of federal taxes on income and gains it distributes to shareholders. 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 the sum of its net investment income for the year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. In addition to satisfying the Distribution Requirement, each Fund must derive at least 90% of its gross income from dividends, interest, certain payments with respect to loans of stock and securities, gains from the sale or disposition of stock, securities or foreign currencies 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. Each Fund must also 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, (1) 50% or more of the value of the Fund's assets must be represented by cash, United States government securities, securities of other regulated investment companies, and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund's assets and 10% of the outstanding voting securities of such issuer and (2) not more than 25% of the value of the Fund's assets may be invested in securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies), or of two or more issuers which the Fund controls and which are engaged in the same, similar or related trades or businesses. If for any 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. Such distributions will generally be taxable to the shareholders as qualified dividend income, as discussed below, and 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 to the extent that it distributes income in such a way that it is taxable to shareholders in a calendar year other than the calendar year in which the Fund earned the income. Specifically, the excise tax will be imposed if a Fund fails to distribute in each calendar year an amount equal to 98% of qualified dividend income and ordinary taxable income for the calendar year and 98% of capital gain net income for the one-year period ending on October 31 of such 41 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). 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 otherwise retained amounts if it is subject to income tax on those amounts for any taxable year ending in such calendar year. Each Fund intends to make sufficient distributions or deemed distributions of its qualified dividend income, ordinary income and capital gain net income prior to the end of each calendar year to avoid liability for this 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 INVESTMENTS. Each Fund may make investments or engage in transactions that affect the character, amount and timing of gains or losses realized by the Fund. Each Fund may make investments that produce income that is not matched by a corresponding cash receipt by the Fund. Any such income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code. Such investments may require a Fund to borrow money or dispose of other securities in order to comply with those requirements. Each Fund may also make investments that prevent or defer the recognition of losses or the deduction of expenses. These investments may likewise require a Fund to borrow money or dispose of other securities in order to comply with the distribution requirements of the Code. Additionally, a Fund may make investments that result in the recognition of ordinary income rather than capital gain, or that prevent the Fund from accruing a long-term holding period. These investments may prevent a Fund from making capital gain distributions as 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 makes any such investments in order to mitigate the effect of these rules. TAX EXEMPT DIVIDENDS. Each tax-exempt Fund intends to qualify to pay exempt-interest dividends to its respective shareholders by having, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consist of tax-exempt securities. An exempt-interest dividend is that part of dividend distributions made by a Fund that consists of interest received by the Fund on tax-exempt securities. Shareholders will not incur any federal income tax on the amount of exempt-interest dividends received by them from a Fund. Interest on indebtedness incurred or continued by a shareholder, whether a corporation or an individual, to purchase or carry shares of a Fund is not deductible to the extent it relates to exempt-interest dividends received by the shareholder. Any loss incurred on the sale or redemption of a Fund's shares held six months of less will be disallowed to the extent of exempt-interest dividends received with respect to such shares. Interest on certain tax-exempt bonds that are private activity bonds within the meaning of the Code is treated as a tax preference item for purposes of the alternative minimum tax, and any such interest received by a Fund and distributed to shareholders will be so treated for purposes of any alternative minimum tax liability of shareholders to the extent of the dividend's proportionate share of a Fund's income consisting of such interest. FUND DISTRIBUTIONS. Each Fund anticipates distributing substantially all of its net investment income for each taxable year. Dividends of net investment income paid to a non-corporate U.S. shareholder before January 1, 2009 that are designated as qualified dividend income will generally be taxable to such shareholder at a maximum rate of 15%. However, the amount of dividend income that may be so designated by a Fund will generally be limited to the aggregate of the eligible dividends received by the Fund. In addition, a Fund must meet certain holding period requirements with respect to the shares on which the Fund received the eligible dividends, and the non-corporate U.S. shareholder must meet certain holding period requirements with respect to the Fund shares. Dividends of net investment income that are not designated as qualified dividend income or exempt-interest dividends and dividends of net short-term capital gains will be taxable to shareholders at ordinary income rates. 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 dividends received by the Fund from certain domestic corporations for the taxable year. Shareholders will be advised annually as to the U.S. federal income tax consequences of distributions made (or deemed made) during the year, including the portion of dividends paid that qualify for the reduced tax rate. Ordinarily, shareholders are required to take taxable distributions by a Fund into account in the year in which the distributions are made. However, for federal income tax purposes, dividends that are declared by a Fund in October, November or December as of a record date in such month and actually paid in January of the following year will be 42 treated as if they were paid on December 31 of the year declared. Therefore, such dividends will generally be taxable to a shareholder in the year declared rather than the year paid. Each Fund may either retain or distribute to shareholders its net capital gain for each taxable year. Each Fund currently intends to distribute any such amounts. If net capital gain is distributed and designated as a "capital gain dividend", it will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares or whether such gain was recognized by the Fund prior to the date on which the shareholder acquired its shares. Capital gain of a non-corporate U.S. shareholder that is recognized before January 1, 2009 is generally taxed at a maximum rate of 15% where the property is held by a Fund for more than one year. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income. 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. In such a case, it is expected that such 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 its pro rata share of such gain, with the result that each shareholder will be required to report its pro rata share of such gain on its tax return as long-term capital gain, will receive a refundable tax credit for its pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for its shares by an amount equal to the deemed distribution less the tax credit. Distributions by a Fund that do not constitute qualified dividend income, ordinary income dividends, capital gain dividends or exempt-interest dividends will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in its shares; any excess will be treated as gain from the sale of its 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, prospective investors in a Fund should be aware that distributions from a Fund will, all other things being equal, have the effect of reducing the net asset value of the Fund's shares by the amount of the distribution. If the net asset value is reduced below a shareholder's cost, the distribution will nonetheless be taxable as described above, even if the distribution effectively represents a return of invested capital. Investors should consider the tax implications of buying shares just prior to a distribution, when the price of shares may reflect the amount of the forthcoming distribution. 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. A shareholder will recognize gain or loss on the sale or redemption of shares in 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 acquires other shares of the Fund within a period of 61 days beginning 30 days before such disposition, such as pursuant to reinvestment of a dividend in shares of the Fund. Additionally, if a shareholder disposes of shares of a Fund within 90 days following their acquisition, and the shareholder subsequently re-acquires Fund shares pursuant to a reinvestment right received upon the purchase of the original shares, any load charge (i.e., sales or additional charge) incurred upon the acquisition of the original shares will not be taken into account as part of the shareholder's basis for computing profit or loss upon the sale of the shares. 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 more than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on (or undistributed capital gains credited with respect to) such shares. Capital gain of a non-corporate U.S. shareholder that is recognized before January 1, 2009 is generally taxed at a maximum rate of 15% where the property is held by the shareholder for more than one year. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income. BACKUP WITHHOLDING. Each Fund will be required in certain cases to backup withhold and remit to the U.S. Treasury a portion of qualified dividend income, ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has provided either an incorrect tax identification number or no number at all, (2) who is subject to backup withholding by the IRS for failure to report the receipt of interest or dividend income properly or (3) who has failed to certify to the Fund that it is not subject to backup 43 withholding or that it is a corporation or other "exempt recipient". Backup withholding is not an additional tax and any amounts withheld may be refunded or credited against a shareholder's federal income tax liability, provided the appropriate information is furnished to the IRS. For federal income tax purposes, the following Money Markets Funds had capital loss carryforwards for the fiscal year ended August 31, 2003 (amounts in thousands):
CAPITAL LOSS EXPIRES IN FUND CARRYFORWARDS YEAR - ------------------------------- ---------------------- ---------------------- Treasury Plus Money Market Fund $ (219) August 31, 2008 (36) August 31, 2009 ---------------------- (255)
To the extent that this capital loss is used to offset future capital gains, it is probable that gains so offset will not be distributed to shareholders. FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ("foreign shareholder") depends on whether the income from a Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from a Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, dividends paid to such foreign shareholder from net investment income will be subject to U.S. withholding tax on the gross amount of the dividend. Such a foreign shareholder would generally be exempt from U.S. federal income tax, including withholding tax, on gains realized on the sale of shares of a Fund, capital gain dividends and amounts retained by a 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, undistributed capital gains credited to such shareholder and any gains realized upon the sale of shares of the Fund will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens or domestic corporations. In the case of foreign non-corporate shareholders, a Fund may be required to backup withhold U.S. federal income tax 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, the procedure for claiming the benefit of a lower treaty rate and the applicability of foreign taxes. Transfers by gift of shares of a Fund by an individual foreign shareholder will not be subject to U.S. federal gift tax, but the value of shares of a Fund held by such a shareholder at his death will generally be includible in his gross estate for U.S. federal estate tax purposes, subject to any applicable estate tax treaty. STATE AND LOCAL TAX MATTERS Depending on the residence of the shareholders for tax purposes, distributions may also be subject to state and local taxes. Rules of state and local taxation regarding qualified dividend income, ordinary income dividends and capital gain dividends from regulated investment companies may differ from the U.S. federal income tax rules 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. Most states provide that a regulated investment company may pass through (without restriction) to its shareholders state and local income tax exemptions available to direct owners of certain types of U.S. government securities (such as U.S. Treasury obligations). Thus, for residents of these states, distributions derived from a Fund's investment in certain types of U.S. government securities should be free from state and local income taxes to the extent that the interest income from such investments would have been exempt from state and local taxes if such securities had been held directly by the respective shareholders. Certain states, however, do not allow a regulated investment company to pass through to its shareholders the state and local income tax exemptions available to direct owners of 44 certain types of U.S. government securities unless the Fund 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. 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 a Fund will be notified as to the extent to which distributions from the Fund are attributable to interest on such securities. ADDITIONAL INFORMATION As used in this Statement of Additional Information and the Prospectuses, the term "majority of the outstanding voting securities" means the vote of (i) 67% or more of a Fund's shares or the Fund's outstanding voting securities present at a meeting, if the holders of more than 50% of the Fund's outstanding shares or the Fund's outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares or the Fund's outstanding voting securities, whichever is less. Telephone calls to the Funds, JPMorgan Chase Bank or a financial professional as shareholder servicing agent may be tape-recorded. With respect to the securities offered hereby, this Statement of Additional Information and the Prospectuses do not contain all the information included in the Trusts' Registration Statement filed with the SEC under the 1933 Act and the 1940 Act. Pursuant to the rules and regulations of the SEC, certain portions have been omitted. The Registration Statements, including the exhibits filed therewith, may be examined at the office of the SEC in Washington, D.C. Statements contained in this Statement of Additional Information and the Prospectuses concerning the contents of any contract or other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the applicable Registration Statements. Each such statement is qualified in all respects by such reference. No dealer, salesman or any other person has been authorized to give any information or to make any representations, other than those contained in the Prospectuses and this Statement of Additional Information, in connection with the offer contained therein and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the Trust, the Funds or the Distributor. The Prospectuses and this Statement of Additional Information do not constitute an offer by any Funds or by the Distributor to sell or solicit any offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful for the Funds or the Distributor to make such offer in such jurisdictions. PRINCIPAL HOLDERS As of November 28, 2003, the following persons owned of record, or were known by the Trust to own beneficially, 5% or more of the outstanding shares of any class of the Funds:
FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD PRIME MONEY MARKET FUND National Financial Serv Corp 9.61% (MORGAN SHARES) 200 Liberty St Fl 5 New York, NY 10281-5598 Vestar Capital Partners IV 8.30% Limited Partnership 245 Park Ave #41 New York, NY 10167-0002 JPMorgan Chase 6.09% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Dallas, TX 75254-2916 The Chase Manhattan Bank 5.43% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 PRIME MONEY MARKET FUND Wachovia Securities, LLC FBO 41.47% (CLASS C SHARES) Mrs. Rita F. Schneider 3434 Vantage Ln Glenview, IL 60025-1365 Pershing LLC 7.77% P.O. Box 2052 Jersey City, NJ 07303-2052 Investors Trust Co Cust 6.70% FBO Dianna Mandel IRA R/O 825 - E9 Street Apt 1J Brooklyn, NY 11230 Wachovia Securities, LLC FBO 6.29% Phillip L Thomas IRA Dtd 04/10/85 1318 Washington Ave New Orleans LA 70130-5750 Investors Trust Co Cust 5.48% IRA R/O Donald K Anderson 241 S6th St Monmouth, IL 61462-2325 NFSC FEBO #FBR-013560 5.40% JPMorgan Chase Bank Cust IRA of Alena Maria Pithart 3808 Grand Ave Oakland, CA 94610-1004 PRIME MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 41.54% (PREMIER SHARES) Fund Omnibus Account Attn Special Products 2 Ops/3 500 Stanton Christiana Road Newark, DE 19713-2107 Hare & Co 19.09% C/O The Bank of New York Attn Stif/Master Note 111 Sanders Creek Pkwy East Syracuse, NY 13057-1382 The Chase Manhattan Bank 15.12% FBO Various Trust
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 5.10% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 PRIME MONEY MARKET FUND JPMorgan Investor Services 38.30% (AGENCY SHARES) Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 The Chase Manhattan Bank 24.18% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 13.97% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 PRIME MONEY MARKET FUND The Chase Manhattan Bank 15.76% (INSTITUTIONAL SHARES) FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Hare & Co 11.47% C/O The Bank of New York Attn Stif/Master Note 111 Sanders Creek Pkwy East Syracuse, NY 13057-1382 PRIME MONEY MARKET FUND Chase Manhattan Bank 30.73% (RESERVE SHARES) FBO IMA Customers 1985 Marcus Ave Fl 2 New Hyde Park, NY 11042-1053 JPMorgan Chase Bank 18.54% FBO Itself and Clients Attn Michele C Dixon 10420 Highland Manor Dr 2nd Fl Tampa, FL 33610-9128 South Trust Bank NA 13.05% Attn Chad Manning/Cash Mgmt
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD 200 Wildwood Pkwy Homewood, AL 35209-7154 The Chase Manhattan Bank 12.45% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Chase Manhattan Bank 8.12% FBO IMA Customers 1985 Marcus Ave Fl 2 New Hyde Park, NY 11042-1053 PRIME MONEY MARKET FUND Bank of New York as Agent for 16.92% (CASH MANAGEMENT SHARES) Sidney Frank Importing Co Inc 20 Cedar St New Rochelle, NY 10801-5247 Bank of New York as Agent for 11.81% Liquidnet Inc Attn: Eric Legoff 498 7th Ave Fl 12 New York, NY 10018-6760 Bank of New York as Agent for 10.99% Liquidnet Holdings Inc Attn: Eric Legoff 498 7th Ave Fl 12 New York, NY 10018-6760 The Chase Manhattan Bank 9.63% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 LIQUID ASSETS MONEY MARKET FUND Wusthof-Trident of America, Inc. 8.88% (MORGAN SHARES) Attn: Enrica Staeger 333 South Highland Avenue P.O. Box 390 Briarcliff Manor, NY 10510-0264 Food City Markets 8.57% PO Box 669 Orangeburg, NY 10962-0669 LIQUID ASSETS MONEY MARKET FUND MBS Textbook Exchange Inc 42.48% (PREMIER SHARES) A/C 994157 Attn Andrew Gingrich PO Box 637 Columbia, MO 65205-0637 The Chase Manhattan Bank 10.88%
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Vatterott Family Trust 7.98% John Vatterott 510 2nd St S Naples, FL 34102-8623 Saint Barnabas Corporation 6.12% Attn Don Dering 2 Crescent Pl Oceanport, NJ 07757-1221 Adesso, Inc. 5.89% 21 Penn Plaza Suite 1001 New York, NY 10001-2727 LIQUID ASSETS MONEY MARKET FUND JPMorgan Investor Services 40.79% (AGENCY SHARES) Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 The Chase Manhattan Bank 13.02% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 10.95% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 Stroock & Stroock & Lavan LLP 7.05% 180 Maiden Lane New York, NY 10038-4925 JPMorgan Chase Bank 6.76% Christina L Mattin Attn: Fund Operations 3/OPS3 500 Stanton Christiana Road Newark, DE 19713-2105 Health Plus PHSP Inc. 5.15% 205 Montague Street 3rd Floor Brooklyn, NY 11201-3627 LIQUID ASSETS MONEY MARKET FUND JPMorgan Trust Co NA 11.78% (INSTITUTIONAL SHARES) Paul G Allen - Collateral Account
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Attn Fund Operations 3/OPS3 500 Stanton Christiana Road Newark, DE 19173-2107 Delphi Asset Mgt Corp 6.62% Attn Ryan Seghesio 6005 Plumas St Ste 202 Reno, NV 89509-6067 Kappa Capital Management 6.13% Attn Joe Anglim 1030 Delta Blvd #856 Atlanta, GA 30354-1989 JPMorgan Chase Bank as Agent for 5.94% Paul G Allen Attn Special Products 500 Stanton Christiana Rd 1/OPS 3 Newark, DE 19713 U.S. GOVERNMENT MONEY MARKET FUND JPMorgan Chase Bank 22.54% (MORGAN SHARES) FBO Itself and Clients Attn Michele C Dixon 10420 Highland Manor Dr 2nd Fl Tampa, FL 33610-9128 The Chase Manhattan Bank 19.66% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 AIP JPMorgan Omnibus Acct 9.06% Vista Account Sweep MMF FD 220 C/O Liquidity Mgmt Operations Attn Michele Dixon 10420 Highland Dr Fl 12 Tampa, FL 33610 JPMorgan Chase 5.58% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 U.S. GOVERNMENT MONEY MARKET FUND JPMorgan Investor Services 30.28% (PREMIER SHARES) Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 The Chase Manhattan Bank 23.01% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 11.07% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 JPMorgan Chase 10.55% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 National Financial Serv Corp 7.14% For the Excl Ben of our Cust Church Street Station P.O. Box 3752 New York, NY 10008-3752 U.S. GOVERNMENT MONEY MARKET FUND JPMorgan Investor Services 41.58% (AGENCY SHARES) Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 The Chase Manhattan Bank 20.76% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 10.99% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 General Electric Capital Corp 7.42% As Agent Coll Acct For Allegiance Telecom Worldwide 9201 N. Central Expwy Bldg B, Suite 500 Dallas, TX 75231-5916 JPMorgan Chase 5.99% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 U.S. GOVERNMENT MONEY MARKET FUND The Chase Manhattan Bank 15.58% (INSTITUTIONAL SHARES) FBO Various Trust Capital Mkts Fid Svcs
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 General Re Corporate Finance 8.08% Attn Cash Management 630 5th Ave Ste 450 New York, NY 10111-0499 JPMorgan Chase 6.67% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Enron Administrative Ser Corp 5.60% Attn Betty Tauzier 1400 Smith St Houston, TX 77002-7327 Enron North America Corp 5.57% Debtor in Possession 1400 Smith St Houston, TX 77002-7327 Enron Power Marketing Inc Dip 5.51% Attn Betty Tauzier 1400 Smith St Houston, TX 77002-7327 TREASURY PLUS MONEY MARKET FUND The Chase Manhattan Bank 37.43% (MORGAN SHARES) FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 TREASURY PLUS MONEY MARKET FUND Hare & Co 69.30% (PREMIER SHARES) C/O The Bank of New York Attn Stif/Master Note 111 Sanders Creek Pkwy East Syracuse, NY 13057-1382 The Chase Manhattan Bank 11.11% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 TREASURY PLUS MONEY MARKET FUND JPMorgan Investor Services 58.03% (AGENCY SHARES) Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD The Chase Manhattan Bank 23.46% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 TREASURY PLUS MONEY MARKET FUND Hare & Co 67.09% (INSTITUTIONAL SHARES) C/O The Bank of New York Attn Stif/Master Note 111 Sanders Creek Pkwy East Syracuse, NY 13057-1382 The Robertson Foundation 7.63% Attn: Betsy Hart 101 Park Ave Fl 48 New York, NY 10178-4799 TREASURY PLUS MONEY MARKET FUND Chase Manhattan Bank 47.04% (RESERVE SHARES) FBO IMA Customers 1985 Marcus Ave Fl 2 New Hyde Park, NY 11042-1053 BNY As Agent For 8.32% Lava Trading Inc 95 Morton St New York, NY 10014-3336 Bank of New York as Agent For 5.09% Peco Inc 29 Wells Ave Bldg 4 Yonkers, NY 10701-2753 JPMorgan Chase Bank 5.03% FBO Itself and Clients Attn Michele C Dixon 10420 Highland Manor Dr 2nd Fl Tampa, FL 33610-9128 FEDERAL MONEY MARKET FUND JPMorgan Chase 15.48% (MORGAN SHARES) Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Chase Bank 10.03% FBO Itself and Clients Attn Michele C Dixon 10420 Highland Manor Dr 2nd Fl Tampa, FL 33610-9128 FEDERAL MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 83.68% (PREMIER SHARES) Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Newark, DE 19713-2107 FEDERAL MONEY MARKET FUND The Chase Manhattan Bank 39.57% (AGENCY SHARES) FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Chase 20.11% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Kingsley & Co/JPM Asset Sweep 13.84% Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 JPMorgan Investor Services 8.47% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 FEDERAL MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 21.94% (INSTITUTIONAL SHARES) Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 JPMorgan Chase 16.31% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 100% U.S. TREASURY SECURITIES MONEY JPMorgan Chase 22.32% MARKET FUND Attn Richard Boyer (MORGAN SHARES) Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 The Chase Manhattan Bank 16.25% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 100% U.S. TREASURY SECURITIES MONEY The Chase Manhattan Bank 66.65% MARKET FUND FBO Various Trust
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD (PREMIER SHARES) Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Chase Bank 5.45% James Simons Attn Fund Operations 3/OPS3 500 Stanton Christiana Road Newark, DE 19713-2107 100% U.S. TREASURY SECURITIES MONEY HRM BRE Maui LLC 10.49% MARKET FUND C/O The Blackstone Group (AGENCY SHARES) 345 Park Ave New York, NY 10154-0004 Blkste CCC Cap Ptrs 10.04% C/O The Blackstone Group 345 Park Ave New York, NY 10154-0004 The Chase Manhattan Bank 9.08% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Blackstone DDS Commu 8.29% C/O The Blackstone Group 345 Park Ave New York, NY 10154-0004 Blackstone Group Hol 6.36% C/O The Blackstone Group 345 Park Ave New York, NY 10154-0004 Affinity Health Plan Inc 6.33% 1 Fordham Plz Bronx, NY 10458-5871 100% U.S. TREASURY SECURITIES MONEY The Chase Manhattan Bank 23.21% MARKET FUND FBO Various Trust (INSTITUTIONAL SHARES) Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Kingsley & Co/JPM Asset Sweep 21.49% Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD JPMorgan Chase 12.93% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Invest LLC 12.49% Attn Jim Reddy 1 Beacon St Ste 18 Boston, MA 02108-3102 Missionaries of Charity 10.87% 335 E145th St Bronx, NY 10451-5899 TAX FREE MONEY MARKET FUND JPMorgan Chase 26.99% (MORGAN SHARES) Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 The Chase Manhattan Bank 9.22% FBO Various Trust Capital Mkts Fid Svcs Attn Lily Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Obie & Co 8.80% JPMorgan Chase Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 Rose Electronics 8.08% Attn: David Rahvar or Peter Macourek P.O. Box 742571 Houston, TX 77274-2571 National Financial Serv Corp 6.48% For the Excl Ben of Our Cust Attn Mike McLaughlin P.O. Box 3752 New York, NY 10008-3752 TAX FREE MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 85.16% (PREMIER SHARES) Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 TAX FREE MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 26.26% (AGENCY SHARES) Fund Omnibus Account
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 JPMorgan Chase 14.20% Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 JPMorgan Investor Services 10.36% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 Obie & Co 9.84% JPMorgan Chase Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 TAX FREE MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 31.27% (INSTITUTIONAL SHARES) Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 Goldman Sachs Global Cash Services 6.72% Omnibus Acct FBO Goldman Sachs & Customers 4900 Sears Tower Chicago, IL 60606-6372 CALIFORNIA TAX FREE MONEY MARKET FUND Kingsley & Co/JPM Asset Sweep 54.98% (MORGAN SHARES) Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 Fiduciary Trust Revenue 7.53% Attn John Conte 600 5th Ave New York, NY 10020-2302 JPMorgan Investor Services 6.72% Cash Mgmt Investment Support Attn Cash Sweep Operations 14221 Dallas Parkway 2JIP 6th Fl Dallas, TX 75254-2916 NEW YORK TAX FREE MONEY MARKET FUND JPMorgan Chase 12.84%
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FUND AND CLASS OF SHARES NAME AND ADDRESS OF SHAREHOLDER PERCENTAGE HELD (MORGAN SHARES) Attn Richard Boyer Attn Lilly Nickerson 14201 Dallas Pkwy Fl 12 Dallas, TX 75254-2916 National Financial Serv Corp Cust 10.88% Church Street Station P.O. Box 3752 New York, NY 10008-3752 Kingsley & Co/JPM Asset Sweep 7.01% Fund Omnibus Account Attn Special Products 2 OPS/3 500 Stanton Christiana Road Newark, DE 19713-2107 Fiduciary Trust Revenue 5.63% Attn John Conte 600 5th Ave New York, NY 10020-2302 NEW YORK TAX FREE MONEY MARKET FUND Chase Manhattan Bank 99.40% (RESERVE SHARES) FBO IMA Customers 1985 Marcus Ave Fl 2 New Hyde Park, NY 11042-1053
FINANCIAL STATEMENTS The financial statements and the report thereon of PricewaterhouseCoopers LLP are incorporated herein by reference to the Funds' August 31, 2003 annual report filing made with the SEC on October 28, 2003 (Accession No. 0001047469-03-034559) pursuant to Section 32(b) of the 1940 Act and Rule 30b2-1 thereunder. 58 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. 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 SECURITY 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. STANDARD & POOR'S CORPORATE AND MUNICIPAL BONDS AAA-Debt rated AAA have the highest ratings assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in a small degree. A-Debt rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher rated categories. BB-Debt rated BB is regarded as having less near-term vulnerability to default than other speculative issues. However, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. B-An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC-An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC-An obligation rated CC is highly vulnerable to nonpayment. C-The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. Plus (+) or Minus (w): 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. - ---------- * 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 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/A-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-1--This rating indicates a fund has strong capacity to meet its financial commitments. Standard & Poor's rate it in the highest category. Within this category, certain obligors are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitments is extremely stong. A-2--This rating indicates a fund has satisfactory capacity to meet its financial commitments. However it is somewhat more susceptible to the adverse affects of changes in circumstances and economic conditions than obligors in the highest rating category. MOODY'S CORPORATE AND MUNICIPAL BONDS Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa-Bonds which are rated Aa are judged to be of high quality by all standards. Together with the AAA group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation B-2 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. Ba-Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa-Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca-Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Commercial Paper, Including Tax Exempt The Aa, A and Baa rating categories are refined by the inclusion of a modifier. These numeric suffixes (Aa1, Aa2,Aa3, etc.) are intended to provide further differentiation within each category. For instance, a Aa1 rating exhibits the best of the characteristics within the As category, while a Aa3 contains relatively less. COMMERCIAL PAPER, INCLUDING TAX EXEMPT PRIME-1-Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: - - Leading market positions in well established industries. High rates of return on funds employed. - - Conservative capitalization structures with moderate reliance on debt and ample asset protection. - - Broad margins in earnings coverage of fixed financial charges and high internal cash generation. - - Well established access to a range of financial markets and assured sources of alternate liquidity. PRIME-2-Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics B-3 cited above but to lesser degree. Earnings trends and coverage ratios, while sound, may be more subjects to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. PRIME-3-Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. SHORT-TERM TAX EXEMPT NOTES MIG-1-The short-term tax-exempt note rating MIG-1 is the highest rating assigned by Moody's for notes judged to be the best quality. Notes with this rating enjoy strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing, or both. MIG-2-MIG-2 rated notes are of high quality but with margins of protection not as large as MIG-1. 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 longterm 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 acceptable credit 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. FITCH 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 B-4 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. CORPORATE AND MUNICIPAL BONDS 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 issue, 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 by Fitch are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA--Bonds rated AA by Fitch are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issues is generally rated F-1+ by Fitch. A--Bonds rated A by Fitch are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB--Bonds rated BBB by Fitch are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse consequences on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Plus (+) and minus (-) signs are used by Fitch to indicate the relative position of a credit within a rating category. Plus and minus signs, however, are not used in the AAA category. SHORT-TERM TAX EXEMPT NOTES F-1+--Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1--Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2--Issues assigned this rating have a satisfactory degree of assurance for timely payment but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. B-5 F-3--Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, although near-term adverse changes could cause these securities to be rated below investment grade. LOC--The symbol LOC indicates that the rating is based on a letter of credit issued by a commercial bank. B-6 APPENDIX C- ADDITIONAL INFORMATION CONCERNING CALIFORNIA MUNICIPAL SECURITIES THE SECURITIES THAT THE FUND OFFERS ARE NOT BEING OFFERED BY THE STATE OF CALIFORNIA. THE STATE OF CALIFORNIA HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THE FUND'S REGISTRATION STATEMENT (INCLUDING THIS STATEMENT OF ADDITIONAL INFORMATION) IS TRUTHFUL OR COMPLETE This Appendix contains information about the State of California as set forth in "Appendix A" to the official statement issued by the State of California for its general obligation bond issue on October 29, 2003. The State of California C-1 TABLE OF CONTENTS
PAGE ---- INTRODUCTION TO APPENDIX A A-1 RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES A-3 STATE INDEBTEDNESS AND OTHER OBLIGATIONS A-5 General A-5 Capital Facilities Financing A-5 General Obligation Bonds A-5 Commercial Paper Program A-5 Lease-Purchase Obligations A-6 Non-Recourse Debt A-6 Pension Obligation Bonds A-6 Fiscal Recovery Bonds A-7 Enhanced Tobacco Settlement Revenue Bonds A-7 Cash Flow Borrowings A-8 CASH FLOW A-9 2002-03 Fiscal Year A-9 2003 Revenue Anticipation Warrants A-9 Fiscal Year 2003-04 Revenue Anticipation Notes A-10 STATE FINANCES A-11 The General Fund A-11 The Special Fund for Economic Uncertainties A-11 Inter-Fund Borrowings A-12 State Warrants A-14 Registered Warrants A-14 Reimbursement Warrants A-15 Refunding Warrants A-15 Sources of Tax Revenue A-15 Personal Income Tax A-15 Sales Tax A-16 Corporation Tax A-17 Insurance Tax A-18 Estate Tax; Other Taxes A-18 Special Fund Revenues A-18 Vehicle License Fee A-19 Taxes on Tobacco Products A-19 Recent Tax Receipts A-21 State Expenditures A-23 State Appropriations Limit A-23 Proposition 98 A-25 Local Governments A-26 Welfare Reform A-27 Pension Trusts A-28 Repayment of Energy Loans A-30 Tobacco Litigation Settlement A-30 Investment of Funds A-31 THE BUDGET PROCESS A-32 General A-32 Constraints on the Budget Process A-32 PRIOR FISCAL YEARS' BUDGETS A-33
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PAGE ---- 2000 Budget Act A-33 2001 Budget Act A-33 2002 Budget Act A-34 CURRENT STATE BUDGET A-35 Background A-35 2003 Budget Act A-36 Addressing the $38.2 Billion Shortfall A-37 Expenditure Cuts/Savings A-38 Fund Shifts A-39 Other Revenues A-39 Loans/Borrowings A-39 Fiscal Recovery Bonds A-39 Budget Controls and Flexibility A-40 Continuing "Structural Deficit" A-40 Election of New Governor A-41 Summary of State Revenues and Expenditures A-42 Revenue and Expenditure Assumptions A-44 Economic Assumptions A-45 FINANCIAL STATEMENTS A-46 OVERVIEW OF STATE GOVERNMENT A-47 Organization of State Government A-47 Employee Relations A-49 ECONOMY AND POPULATION A-49 Introduction A-49 Population and Labor Force A-50 Employment, Income, Construction and Export Growth A-51 LITIGATION A-54 Challenge to Discontinuation of Vehicle License Fee Offset A-54 Bond-Related Matters A-55 Challenge Seeking Payment to Teacher's Retirement Board A-55 Actions Seeking Flood-Related Damages A-55 Tax Refund Cases A-56 Environmental Cleanup Matter A-57 Energy-Related Matters A-58 Escheated Property Claims A-58 Action Seeking Damages for Alleged Violations of Privacy Rights A-59 Actions Seeking Program Modifications A-59 Medically Indigent Adult Mandate Claims A-60 STATE DEBT TABLES A-61 EXHIBIT 1 - STATE CONTROLLER'S STATEMENT OF GENERAL FUND CASH RECEIPTS AND DISBURSEMENTS, JULY 1, 2002 THROUGH JUNE 30, 2003 (UNAUDITED) EX-1 EXHIBIT 2 - STATE CONTROLLER'S STATEMENT OF GENERAL FUND CASH RECEIPTS AND DISBURSEMENTS, JULY 1, 2003 THROUGH SEPTEMBER 30, 2003 (UNAUDITED) EX-2
ii INTRODUCTION TO APPENDIX A IMPORTANCE OF APPENDIX A. APPENDIX A is the part of the Official Statement that provides investors with information concerning the State of California. Investors must read the entire Official Statement, including APPENDIX A, to obtain information essential to making an informed investment decision. ELECTION OF NEW GOVERNOR. Uncertified results from a special election held on October 7, 2003 indicate that the Governor of the State, Gray Davis, has been recalled and that he will be replaced as Governor by Arnold Schwarzenegger. The Secretary of State of the State has until November 15, 2003 to certify the results of the recall election. The new Governor would not take office until the election results are certified. The Governor-elect is in the process of assembling his staff and evaluating the State's financial condition. As a result of his evaluation, he may propose mid-year legislation or take executive actions which could affect the State's receipts, disbursements and proposed borrowings during the current fiscal year. CALIFORNIA'S FINANCIAL SITUATION. In May 2003, Governor Gray Davis stated that the State faced an estimated two-year budget shortfall of $38.2 billion. The recently enacted 2003 Budget Act (as defined herein) addressed the shortfall through, among other proposals, the issuance of approximately $10.7 billion of fiscal recovery bonds which are presently being challenged in court, and $1.9 billion of pension obligation bonds, which a trial court has declined to validate. See "LITIGATION--Bond-Related Matters." Although the 2003 Budget Act is balanced, the Legislative Analyst's Office projects that the State would face an estimated $7.9 billion deficit in fiscal year 2004-05, which will have to be addressed by future legislation or other budget solutions. The ability of the State to meet its current obligations (including its obligations pursuant to various cash flow borrowings becoming due in fiscal year 2003-04 as described herein under "CASH FLOW--2003 Revenue Anticipation Warrants and "--Fiscal Year 2003-04 Revenue Anticipation Notes") depends in large part on its ability to implement the borrowings contemplated by the 2003 Budget Act. The State can make no assurances that such borrowings will not be delayed or cancelled as a result of litigation or other reasons. See "RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES" and "CASH FLOW." The credit rating agencies have considered California's financial situation. In December 2002, Fitch downgraded the State's general obligation credit rating to "A." In July 2003, Standard & Poor's downgraded the State's general obligation credit rating to "BBB" and in August 2003, Moody's Investors Services downgraded such rating to "A3." In January 2001, these ratings were "AA," "AA" and "Aa2," respectively. See also "RATINGS" in the first part of this Official Statement. CALIFORNIA'S CREDIT HISTORY. California has always paid the principal of and interest on its general obligation bonds, general obligation commercial paper notes, lease-purchase obligations and short-term obligations, including revenue anticipation notes and revenue anticipation warrants, when due. OVERVIEW OF APPENDIX A. APPENDIX A begins with a description of recent developments regarding the State's economy and finances and then discusses the types of debt instruments that the State has issued and is authorized to issue in the future. See "RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES" and "STATE INDEBTEDNESS AND OTHER OBLIGATIONS." A discussion of the State's current and projected cash flow is contained under "CASH FLOW." A-1 APPENDIX A continues with a discussion of the sources and uses of State funds. See "STATE FINANCES." The budget process and constraints on this process, as well as the current budget and the economic assumptions underlying the revenue projections contained in the current budget, are discussed under "THE BUDGET PROCESS" and "CURRENT STATE BUDGET." Then, APPENDIX A incorporates by reference the Audited Annual Financial Statements of the State for the Year Ended June 30, 2002, together with certain information required by governmental accounting and financial reporting standards to be included in the Financial Statements, including a "Management's Discussion and Analysis" that describes and analyzes the financial position of the State and provides an overview of the State's activities for the fiscal year ended June 30, 2002. The State Controller's unaudited reports of cash receipts and disbursements for the period July 1, 2002 through September 30, 2003 are included as Exhibits 1 and 2 to this APPENDIX A. See "FINANCIAL STATEMENTS." Governance, management and employee information is set forth under "OVERVIEW OF STATE GOVERNMENT." Demographic and economic statistical information is included under "ECONOMY AND POPULATION." APPENDIX A concludes with a description of material litigation involving the State (see "LITIGATION") and debt tables (see "STATE DEBT TABLES"). A-2 RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES In recent years the State has experienced a decline in State revenues attributable in large part to declines in personal income tax receipts including particularly stock market related income tax revenues, such as capital gains realizations and stock option income. The State estimates that stock market related personal income tax revenue declined from $17.9 billion in fiscal year 2000-01 to $6.1 billion in fiscal year 2001-02, and to $5.0 billion in 2002-03, a total 72 percent decline. The State's economy continued to grow slowly through August of 2003. Slow growth is projected for the balance of 2003, and moderate growth is projected in 2004, generally tracking the national economy. In the budget for fiscal year 2002-03 (July 1, 2002 to June 30, 2003), Governor Davis and the Legislature addressed the continuing decline in tax revenues, primarily with a combination of expenditure reductions and one-time actions, such as bond and asset sales, expenditure deferrals and interfund transfers and loans. See "PRIOR FISCAL YEARS' BUDGETS--2002 Budget Act." The 2003-04 Governor's Budget, as proposed by Governor Davis on January 10, 2003, projected a shortfall or "gap" on a budgetary basis of $34.6 billion over the combined 2002-03 and 2003-04 fiscal years absent corrective action. The 2003-04 Governor's Budget (incorporating requests made in December 2002) called for budget actions totaling over $10.2 billion early in calendar year 2003 in order to achieve maximum savings. In March and April 2003, the Legislature passed revised budget adjustment legislation totaling about $10.4 billion in spending reductions, deferrals and fund transfers (including $5.1 billion for fiscal year 2002-03 and $5.3 billion for fiscal year 2003-04). The May Revision to the 2003-04 Governor's Budget, released on May 14, 2003 (the "May Revision"), projected that while some corrective action was taken in March and April 2003, the pre-corrective action budget gap had increased to about $38.2 billion, primarily due to the cancellation of the sale of tobacco securitization bonds (which bonds have now been issued), lost opportunities for savings with the passage of time, and increased caseload in certain health and correctional programs. The budget proposals contained in the May Revision were significantly changed from the original Governor's Budget, and Governor Davis proposed to address the budget challenge in three phases: (1) eliminate an estimated $10.675 billion budget deficit accumulated through June 30, 2003, by issuing fiscal recovery bonds to be repaid from a temporary one-half cent increase in the State sales tax, (2) balance the fiscal year 2003-04 budget with a combination of expenditure cuts (some already approved by the Legislature in March and April of 2003), fund transfers and loans, and transfer ("realignment") of certain health and social services programs from the State to counties, and (3) pursue legislative action during the balance of the 2003 legislative session to enact structural reforms that would eliminate an estimated $7.9 billion structural deficit for the 2004-05 fiscal year. See "CURRENT STATE BUDGET--Background." The annual Budget Act for fiscal year 2003-04 (the "2003 Budget Act"), adopted by the Legislature on July 29, 2003 and signed by Governor Davis on August 2, 2003, largely reflects the budget proposals contained in the May Revision. Realization of the 2003 Budget Act proposals is dependent upon numerous assumptions and contingencies more fully described herein, including, among others, the successful resolution of pending litigation relating to the issuance of pension obligation bonds and pending litigation relating to the issuance of fiscal recovery bonds (expected to generate approximately $10.7 billion of proceeds). A State trial court has declined to validate the pension obligation bonds and the State has appealed this decision. See "STATE INDEBTEDNESS--Pension Obligation Bonds," "--Fiscal Recovery Bonds" and "LITIGATION--Bond-Related Matters." As reflected in the May Revision, further legislative action will be required to address the remaining funding gap in fiscal year 2004-05. The Legislative Analyst's Office estimated the amount to be $7.9 billion. This "structural deficit" reflects in part the use of one-time revenue enhancements, cost A-3 reductions and fund transfers in fiscal years 2002-03 and 2003-04 that will be unavailable in fiscal year 2004-05 as well as customary expenditure growth due to, among other things, enrollment, caseload, and population growth. See "CURRENT STATE BUDGET--2003 Budget Act--Continuing Structural Deficit." As part of its cash management program, the State has regularly issued short-term obligations to meet cash flow needs. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings." In fiscal year 2002-03, the State retired $7.5 billion of revenue anticipation warrants issued near the end of the preceding fiscal year and issued $12.5 billion of revenue anticipation notes maturing in June 2003. Due to the budget shortfalls described above, the State Controller issued $10.965 billion of revenue anticipation warrants on June 18, 2003. This borrowing provided cash resources necessary to pay the State's obligations in June 2003 (including the maturing $12.5 billion of revenue anticipation notes) and in the first few months of fiscal year 2003-04. To provide further assurance for the repayment of the revenue anticipation warrants, which mature on June 16, 2004, the State entered into agreements with seven financial institutions which committed (subject to the conditions set forth in the agreements, including the State's inability to refund the revenue anticipation warrants) to purchase the revenue anticipation warrants upon their maturity. If the State is required to draw under the agreements, numerous adverse consequences affecting the State's financial condition might occur, as further described herein. See "CASH FLOW--2003 Revenue Anticipation Warrants." The State issued $3.0 billion of revenue anticipation notes on October 28, 2003. To provide further assurance for the payment of the revenue anticipation notes, which mature on June 23, 2004, the State entered into an agreement with certain financial institutions to provide letters of credit to pay principal and interest with respect to certain of such notes when due. If the State is required to draw under such letters of credit, or is otherwise unable to pay principal and interest on the notes at maturity, numerous adverse consequences affecting the State's financial condition might occur, as further described herein. See "CASH FLOW--Fiscal Year 2003-04 Revenue Anticipation Notes." Since the 2003 Budget Act, the Controller has released actual results of receipts and disbursements for the months of August and September. Cash and unused borrowable resources through the end of September, 2003 were $1.1 billion above the projections done in connection with the 2003 Budget Act. See "EXHIBIT 2 - STATE CONTROLLER'S STATEMENT OF GENERAL FUND CASH RECEIPTS AND DISBURSEMENTS, JULY 1, 2003 THROUGH SEPTEMBER 30, 2003 (UNAUDITED)" No assurance can be given by the State that available cash and unused borrowable resources will continue to be above projections. In fiscal year 2002-03 the State paid $8.161 billion in unemployment benefits from the Unemployment Insurance ("UI") Fund. In fiscal year 2003-04 the State expects to pay $8.203 billion in benefits from the UI Fund. The UI Fund (which is not part of the General Fund) is projected to have a $1.2 billion deficit by the end of calendar year 2004 notwithstanding the automatic unemployment insurance tax rate increase that takes effect January 1, 2004. The State may address this issue with one or more of the following options: (1) obtain a loan from the federal government, (2) rollback unemployment benefits and/or (3) increase unemployment insurance taxes which are the sole source of funds for the UI Fund. There is no reason to believe that one or all of these options will not be available to the State. The loan from the federal government would provide cash flow relief so that unemployment benefits can continue to be paid. The federal loan would eventually be repaid from increased UI tax revenue or the available resources resulting from decreased benefits. Interest payments on the loan would be paid by the EDD Contingent Fund and not the General Fund. The new Administration and the Legislature will have to determine how to resolve the cash flow imbalance in the UI Fund for the long-term. This issue is expected to be addressed in the upcoming session of the Legislature. A-4 STATE INDEBTEDNESS AND OTHER OBLIGATIONS GENERAL The State Treasurer is responsible for the sale of debt obligations of the State and its various authorities and agencies. The State has always paid the principal of and interest on its general obligation bonds, general obligation commercial paper notes, lease-purchase debt and short-term obligations, including revenue anticipation notes and revenue anticipation warrants, when due. CAPITAL FACILITIES FINANCING GENERAL OBLIGATION BONDS The State Constitution prohibits the creation of general obligation indebtedness of the State unless a bond measure is approved by a majority of the electorate voting at a general election or a direct primary. General obligation bond acts provide that debt service on general obligation bonds shall be appropriated annually from the General Fund and all debt service on general obligation bonds is paid from the General Fund. Under the State Constitution, debt service on general obligation bonds is the second charge to the General Fund after the application of moneys in the General Fund to the support of the public school system and public institutions of higher education. See "STATE FINANCES--State Expenditures." Certain general obligation bond programs receive revenues from sources other than the sale of bonds or the investment of bond proceeds. As of October 1, 2003, the State had outstanding $30,103,927,000 aggregate principal amount of long-term general obligation bonds, and unused voter authorizations for the future issuance of $24,021,001,000 of long-term general obligation bonds. This latter figure consists of $13,628,542,000 of general obligation bonds which are authorized by State finance committees to be issued initially as commercial paper notes, described below, and $10,392,459,000 of other authorized but unissued general obligation bonds. See the table "Authorized and Outstanding General Obligation Bonds" under "STATE DEBT TABLES." See introduction to "STATE DEBT TABLES" for information as to bonds issued or expected to be issued after October 1, 2003. General obligation bond law permits the State to issue as variable rate indebtedness up to 20 percent of the aggregate amount of long-term general obligation bonds outstanding. The State issued $1.4 billion of variable rate general obligation bonds, representing 4.7% of the State's total outstanding general obligation bonds as of October 1, 2003. The Legislature has approved approximately $22 billion of potential bond authorizations to be placed on the ballot in March of 2004, including the Kindergarten-University Public Education Facilities Bond Act of 2004 and the Safe, Reliable High-Speed Passenger Train Bond Act of the 21st Century. Additional bond proposals may also be added in 2004. COMMERCIAL PAPER PROGRAM Pursuant to legislation enacted in 1995, voter-approved general obligation indebtedness may be issued either as long-term bonds or, for some but not all bond issuances, as commercial paper notes. Commercial paper notes may be renewed or may be refunded by the issuance of long-term bonds. The State issues long-term general obligation bonds from time to time to retire its general obligation commercial paper notes. Commercial paper notes are deemed issued upon authorization by the respective finance committees, whether or not such notes are actually issued. The State's commercial paper credit A-5 facility expired in August 2003. The State is currently negotiating a new credit facility. See "STATE DEBT TABLES." LEASE-PURCHASE OBLIGATIONS In addition to general obligation bonds, the State builds and acquires capital facilities through the use of lease-purchase borrowing. Under these arrangements, the State Public Works Board, another State or local agency or a joint powers authority issues bonds to pay for the construction of facilities such as office buildings, university buildings or correctional institutions. These facilities are leased to a State agency or the University of California under a long-term lease that provides the source of payment of the debt service on the lease-purchase bonds. In some cases, there is not a separate bond issue, but a trustee directly creates certificates of participation in the State's lease obligation, which are then marketed to investors. Under applicable court decisions, such lease arrangements do not constitute the creation of "indebtedness" within the meaning of the State Constitutional provisions that require voter approval. For purposes of this section of the Official Statement and the tables under "STATE DEBT TABLES," "lease-purchase obligation" or "lease-purchase financing" means principally bonds or certificates of participation for capital facilities where the rental payments providing the security are a direct or indirect charge against the General Fund and also includes revenue bonds for a State energy efficiency program secured by payments made by various State agencies under energy service contracts. Certain of the lease-purchase financings are supported by special funds rather than the General Fund. See "STATE FINANCES--Sources of Tax Revenue--Special Fund Revenues." The tables under "STATE DEBT TABLES" do not include equipment leases or leases which were not sold, directly or indirectly, to the public capital markets. The State had $6,620,144,071 General Fund-supported lease-purchase obligations outstanding as of October 1, 2003. The State Public Works Board, which is authorized to sell lease revenue bonds, had $4,781,492,000 authorized and unissued as of October 1, 2003. In addition, as of that date, certain joint powers authorities were authorized to issue approximately $81,000,000 of revenue bonds to be secured by State leases. See introduction to "STATE DEBT TABLES" for information as to bonds issued or expected to be issued after October 1, 2003. NON-RECOURSE DEBT Certain State agencies and authorities issue revenue obligations for which the General Fund has no liability. Revenue bonds represent obligations payable from State revenue-producing enterprises and projects, which are not payable from the General Fund, and conduit obligations payable only from revenues paid by private users of facilities financed by the revenue bonds. The enterprises and projects include transportation projects, various public works projects, public and private educational facilities (including the California State University and University of California systems), housing, health facilities and pollution control facilities. There are 17 agencies and authorities authorized to issue revenue obligations (excluding lease-purchase obligations). State agencies and authorities had $42,558,532,631 aggregate principal amount of revenue bonds and notes which are non-recourse to the General Fund outstanding as of December 31, 2002, as further described in the table "State Agency Revenue Bonds and Conduit Financing" under "STATE DEBT TABLES." Detailed information regarding the State's long-term debt appears in the section "STATE DEBT TABLES." PENSION OBLIGATION BONDS Pursuant to the California Pension Obligation Financing Act, Government Code Section 16910 ET SEQ. (the "Pension Bond Act"), the State proposed to issue $1.9 billion of pension obligation bonds to make fiscal year 2003-04 contributions to the California Public Employees' Retirement System A-6 ("CalPERS"). The payment of debt service on the pension obligation bonds will be payable from the General Fund subject to the priorities specified in the Pension Bond Act. The State would make an interest-only payment on the pension obligation bonds in fiscal year 2003-04 and principal and interest payments in each fiscal year from 2004-05 through 2008-09. The proposed pension obligation bonds are the subject of a validation action brought by the Pension Obligation Bond Committee for and on behalf of the State. In that validation action, the Pension Obligation Bond Committee seeks to obtain the court's determination that the pension obligation bonds will not be in violation of the Constitutional debt limit because the proceeds of the pension obligation bonds will be used to pay the State's employer obligation to CalPERS, which is an "obligation imposed by law." On October 2, 2003, the trial court issued a judgment denying the State's request that the bonds be validated. The State has filed a petition for writ of mandate in the California Supreme Court and has requested the court's expedited consideration of the petition. Pension obligation bonds were not issued in time to make the October 1, 2003 quarterly pension contributions. The next quarterly contribution in the estimated amount of $553 million is due on January 2, 2004. The size of any future bond issue to fund the 2003-04 contributions to CalPERS will be reduced in the event this litigation causes further delay in the issuance of the pension obligation bonds. See "LITIGATION--Bond-Related Matters." FISCAL RECOVERY BONDS The State proposes to issue approximately $10.7 billion of fiscal recovery bonds in February and April, 2004. The California Fiscal Recovery Financing Act (Government Code Section 99000 et seq.), was adopted pursuant to Chapter 13, First Extraordinary Session, Statutes of 2003. The California Fiscal Recovery Financing Act authorizes the issuance of fiscal recovery bonds, proceeds of which would be deposited in the General Fund, to eliminate the estimated $10.675 billion accumulated budget deficit through June 30, 2003. This is the largest and most critical component of the 2003 Budget Act. The State plans to issue the fiscal recovery bonds in February and April of 2004. However, the issuance of the fiscal recovery bonds is the subject of current litigation, as described below. The fiscal recovery bonds will be issued by a Fiscal Recovery Finance Authority, and will be paid from future annual appropriations by the Legislature, if any, from the Fiscal Recovery Fund. The Fiscal Recovery Financing Act establishes the Fiscal Recovery Fund outside of the General Fund. The Legislature has enacted a temporary one-half cent State sales tax beginning July 1, 2004, the revenues of which will be deposited and held in the Fiscal Recovery Fund, available for the Legislature's future appropriations, if any, to pay debt service on the fiscal recovery bonds. See "STATE FINANCES--Sources of Tax Revenue--Sales Tax." Payment of debt service on the fiscal recovery bonds will be subject to future annual appropriation by the Legislature. A legal advocacy institution has filed a lawsuit challenging the proposed issuance of the fiscal recovery bonds alleging that the issuance of such fiscal recovery bonds violates the constitution's debt-limit provisions. See "LITIGATION--Bond-Related Matters." Prior to the filing of that lawsuit, the Attorney General concluded that fiscal recovery bonds issued pursuant to the terms of the Fiscal Recovery Bond Act would not be debt prohibited by the Constitutional debt limit. ENHANCED TOBACCO SETTLEMENT REVENUE BONDS In 1998 the State signed a settlement agreement with the four major cigarette manufacturers. Under the settlement agreement, the manufacturers agreed to make payments to the State in perpetuity. See "STATE FINANCES--Tobacco Settlement Litigation." Chapter 414, Statutes of 2002, as amended, allows the issuance of revenue bonds secured by the tobacco settlement revenues received by the State beginning in the 2003-04 fiscal year. An initial sale of 56.57% of the State's tobacco settlement revenues from July 1, 2003, onward, producing $2.5 billion in proceeds was completed in January 2003. A-7 A second sale of the remaining 43.43% of the State's tobacco settlement revenues, which produced $2.264 billion in proceeds, was completed in September 2003. Chapter 414, Statutes of 2002, as amended, requires the Governor to request an appropriation in the annual budget act to pay debt service and other related costs of the tobacco settlement revenue bonds secured by the second (and only the second) sale of tobacco settlement revenues when such tobacco settlement revenues are insufficient therefor. The 2003 Budget Act authorizes the Director of Finance to make allocations with legislative notification if tobacco settlement revenues are insufficient to cover the cost of the tobacco securitization program. The Legislature is not obligated to make any such requested appropriation in the future. Tobacco settlement revenue bonds are neither general nor legal obligations of the State or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of the State or of any political subdivision is or shall be pledged to the payment of any such bonds. CASH FLOW BORROWINGS As part of its cash management program, the State has regularly issued short-term obligations to meet cash flow needs. The State has issued revenue anticipation notes ("Notes" or "RANs") in 19 of the last 20 fiscal years to partially fund timing differences between revenues and expenditures, as the majority of General Fund revenues are received in the last part of the fiscal year. By law, RANs must mature prior to the end of the fiscal year of issuance. If additional external cash flow borrowings are required, the State has issued revenue anticipation warrants ("RAWs"), which can mature in a subsequent fiscal year. See "STATE FINANCES--State Warrants." RANs and RAWs are both payable from any "Unapplied Money" in the General Fund of the State on their maturity date, subject to the prior application of such money in the General Fund to pay Priority Payments. "Priority Payments" are payments as and when due to: (i) support the public school system and public institutions of higher learning (as provided in Section 8 of Article XVI of the Constitution of the State), (ii) pay principal of (whether at stated maturity or upon earlier redemption) and interest on general obligation bonds of the State, (iii) provide reimbursement from the General Fund to any special fund or account to the extent such reimbursement is legally required to be made to repay borrowings therefrom, and (iv) pay State employees' wages and benefits, State payments to pension and other State employee benefit trust funds, State Medi-Cal claims, and any amounts determined by a court of competent jurisdiction in a final and nonappealable judgment to be required by federal law or the State Constitution to be paid with State warrants that can be cashed immediately. Priority Payments also includes payments of principal and interest on registered warrants issued to make Priority Payments. See "State Finances" below. The following table shows the amount of RANs and RAWs issued in the past five fiscal years and in the current fiscal year. A-8 TABLE 1 STATE OF CALIFORNIA REVENUE ANTICIPATION NOTES AND WARRANTS ISSUED FISCAL YEARS 1998-99 TO 2003-04
PRINCIPAL AMOUNT FISCAL YEAR TYPE (BILLIONS) DATE OF ISSUE MATURITY DATE - ----------- ---------------------- ------------ ------------------ ------------------- 1998-99 Notes 1.70 October 1, 1998 June 30, 1999 1999-00 Notes Series A-B 1.00 October 1, 1999 June 30, 2000 2000-01 No Notes issued 2001-02 Notes Series A-C 5.70 October 4, 2001 June 28, 2002 RAWs Series A 1.50 June 24, 2002 October 25, 2002 RAWs Series B 3.00 June 24, 2002 November 27, 2002 RAWs Series C 3.00 June 24, 2002 January 30, 2003+ 2002-03 Notes Series A and C 6.00 October 16, 2002 June 20, 2003 Notes Series B and D 3.00 October 16, 2002 June 27, 2003 Notes Series E - G 3.50 November 6, 2002 June 20, 2003 RAWs Series A and B 10.965 June 18, 2003 June 16, 2004 2003-04 Notes 3.00 October 28, 2003 June 23, 2004
- ---------- + Called by the Controller and paid on November 27, 2002. Source: State of California, Office of the Treasurer. CASH FLOW 2002-03 FISCAL YEAR The State issued a total of $12.5 billion of 2002-03 RANs ("2002 RANs") in October 2002 and November 2002 to partially fund its cash flow needs in fiscal year 2002-03, including repayment of the 2002 RAWs issued in June 2002. The State Controller issued $10.965 billion of RAWs on June 18, 2003, to provide enough additional cash to pay the maturing 2002 RANs and to pay other State obligations in June 2003 and in the first months of the 2003-04 fiscal year. See "2003 Revenue Anticipation Warrants." 2003 REVENUE ANTICIPATION WARRANTS As noted above, the Controller issued, on June 18, 2003, $10.965 billion of 2003 Revenue Anticipation Warrants (the "2003 Warrants"). The 2003 Warrants will all mature on June 16, 2004. At the time of issuance, cash flows prepared by the Department of Finance, based upon the 2003 Budget Act, projected that there would be sufficient available moneys in the General Fund (including from internal borrowing) to repay the 2003 Warrants at maturity. This projection assumed, among other assumptions, the receipt by the State during the year of $2.0 billion tobacco securitization bond proceeds, $10.675 billion of fiscal recovery bond proceeds, and $1.355 billion of pension obligation bond proceeds. The State received $2.264 billion of tobacco securitization bond proceeds in September 2003. The fiscal recovery bonds and the pension obligation bonds are the subject of litigation as described herein. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds" and "LITIGATION--Bond-Related Matters." The payment of principal of and interest on the 2003 Warrants is subject to the prior application of moneys in the General Fund to pay Priority Payments. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings" for a definition of Priority Payments. A-9 If it appears to the Controller that there will be insufficient available money in the General Fund to pay the 2003 Warrants at maturity, the Controller has agreed to use his best efforts to offer for sale at competitive bid and issue refunding warrants to pay the 2003 Warrants in full. See "STATE FINANCES--State Warrants--Refunding Warrants." While no assurance can be given that the State would be able to sell refunding warrants, the State has always been able to borrow funds to meet its cash flow needs in the past and expects to take all steps necessary to continue to have access to the short-term and long-term credit markets. If the Controller were unable to issue refunding warrants in sufficient amounts, the State may decide to borrow under seven Forward Warrant Purchase Agreements into which the State has entered with seven financial institutions ("Participants"), on a several and not joint basis (the "Forward Purchase Agreements"), that will enable the State to borrow up to $11.2 billion to obtain additional cash resources to pay the principal of and interest on the 2003 Warrants on their maturity date. The Forward Purchase Agreements do not constitute a guaranty of the 2003 Warrants and contain certain conditions which must be met in order for the State to obtain advances of funds from the Participants. The conditions to be satisfied on June 16, 2004, include the condition that no event of default under the Forward Purchase Agreements shall have occurred. It is an event of default under the Forward Purchase Agreements if the State fails to pay when due, or otherwise defaults on, any general obligation bond or any short-term debt, or the validity of any general obligation bond or any short-term debt is contested by the State in a judicial or administrative proceeding. Events of default under the Forward Purchase Agreements also include a judgment that any 2003 Warrants issuable to the Participants is illegal or unenforceable or that any representation or warranty of the State in the Forward Purchase Agreements proved to have been untrue in any material respect when made on June 18, 2003. If the State draws upon the Forward Purchase Agreements, it will deliver to the Participants registered warrants due immediately and without a maturity date. Repayment by the State of the registered warrants issued to Participants is subordinate in rank of the use of available cash resources on any day to payment of Priority Payments (defined above) and to rental payments to support lease revenue bonds and principal of and interest on pension obligation bonds. However, the issuance of such registered warrants will severely restrict the State's cash management flexibility. See "STATE FINANCES--State Warrants--Registered Warrants" for a description of the nature of registered warrants and the method by which they are repaid, as it relates to other obligations of the State. The Forward Purchase Agreements contain a number of covenants on the part of the State relating to cash flow management and cash flow borrowing. One covenant requires the State to maximize internal borrowing from special funds prior to borrowing under the Forward Purchase Agreements. See "STATE FINANCES--Inter-Fund Borrowings." Other covenants prohibit the State from issuing any warrants or revenue anticipation notes having a maturity date prior to seven days after the maturity date of the 2003 Warrants. FISCAL YEAR 2003-04 REVENUE ANTICIPATION NOTES The State issued $3 billion of RANs on October 28, 2003 (the "2003-04 RANs"). The 2003-04 RANs will mature on June 23, 2004. As a condition to such issuance, the Department of Finance of the State estimated that there will be sufficient cash and unused borrowable resources available for use by the General Fund to pay principal of and interest on the 2003-04 RANs when due. Just as in the case of the 2003 Warrants, such estimate assumed, among other things, receipt by the State of $10.675 billion of fiscal recovery bond proceeds and $1.355 billion of pension obligation bond proceeds, both of which bond issuances are the subject of litigation. See "LITIGATION--Bond-Related Matters." A-10 If it appears that there will be insufficient available money in the General Fund to pay the principal of and interest on the 2003-04 RANs at maturity, the State has covenanted to use its best efforts to issue registered reimbursement warrants or other obligations, as was done in June 2003, to assure additional cash resources for the General Fund. While no assurance can be given that the State would be able to sell registered reimbursement warrants or other obligations, the State has always been able to borrow funds to meet its cash flow needs in the past and expects to take all steps necessary to continue to have access to the short-term and long-term credit markets. See "STATE FINANCES--State Warrants--Reimbursement Warrants." Repayment of principal of and interest on $1.835 billion of the 2003-04 RANs is required to be paid from draws under letters of credit (the "Letters of Credit") issued by various financial institutions ("Credit Banks"). The remaining $1.165 billion of 2003-04 RANs ("Unenhanced 2003-04 RANs") were issued directly to various financial institutions (the "Parity Note Purchasers"). If the State is unable to repay the draws upon the Letters of Credit or pay the Unenhanced 2003-04 RANs at maturity, it will deliver registered warrants, due immediately and without a maturity date, to the Credit Banks and the Parity Note Purchasers, as applicable. Repayment by the State of any registered warrants issued to Credit Banks and the Parity Note Purchasers is subordinate in rank of the use of available cash resources on any day to payment of Priority Payments (defined above), to rental payments to support lease revenue bonds and principal of and interest on pension obligation bonds and to registered warrants issued to Participants as described above under "2003 Revenue Anticipation Warrants." However, the issuance of such registered warrants will severely restrict the State's cash management flexibility. See "STATE FINANCES--State Warrants--Registered Warrants" for a description of the nature of registered warrants and the method by which they are repaid, as it relates to other obligations of the State. STATE FINANCES THE GENERAL FUND The moneys of the State are segregated into the General Fund and over 900 other funds, including special, bond and trust funds. The General Fund consists of revenues received by the State Treasury and not required by law to be credited to any other fund, as well as earnings from the investment of State moneys not allocable to another fund. The General Fund is the principal operating fund for the majority of governmental activities and is the depository of most of the major revenue sources of the State. For additional financial data relating to the General Fund, see the financial statements incorporated in or attached to this APPENDIX A. See "FINANCIAL STATEMENTS." The General Fund may be expended as a consequence of appropriation measures enacted by the Legislature and approved by the Governor (including the annual budget act), as well as appropriations pursuant to various constitutional authorizations and initiative statutes. THE SPECIAL FUND FOR ECONOMIC UNCERTAINTIES The Special Fund for Economic Uncertainties ("SFEU") is funded with General Fund revenues and was established to protect the State from unforeseen revenue reductions and/or unanticipated expenditure increases. Amounts in the SFEU may be transferred by the State Controller to the General Fund as necessary to meet cash needs of the General Fund and such transfers are characterized as "loans." The State Controller is required to return moneys so transferred without payment of interest as soon as there are sufficient moneys in the General Fund. At the end of each fiscal year, the Controller is required to transfer from the SFEU to the General Fund any amount necessary to eliminate any deficit in the General Fund. A-11 The legislation creating the SFEU (Government Code Section 16418) contains a continuous appropriation from the General Fund authorizing the State Controller to transfer to the SFEU, as of the end of each fiscal year, the lesser of (i) the unencumbered balance in the General Fund and (ii) the difference between the State's "appropriations subject to limitation" for the fiscal year then ended and its "appropriations limit" as defined in Section 8 of Article XIII B of the State Constitution and established in the Budget Act for that fiscal year, as jointly estimated by the State's Legislative Analyst's Office and the Department of Finance. For a further description of Article XIII B, see "State Appropriations Limit." In certain circumstances, moneys in the SFEU may be used in connection with disaster relief. For budgeting and accounting purposes, any appropriation made from the SFEU is deemed an appropriation from the General Fund. For year-end reporting purposes, the State Controller is required to add the balance in the SFEU to the balance in the General Fund so as to show the total moneys then available for General Fund purposes. See the caption "CURRENT STATE BUDGET" for information concerning the recent balances in the SFEU and projections of the balances for the current and upcoming fiscal years. As in any year, the Budget Act and related trailer bills are not the only pieces of legislation which appropriate funds. Other factors, including re-estimates of revenues and expenditures, existing statutory requirements, existing contractual requirements with respect to the 2003 Warrants and additional legislation introduced and passed by the Legislature may impact the fiscal year-end balance in the SFEU. INTER-FUND BORROWINGS Inter-fund borrowing is used to meet temporary imbalances of receipts and disbursements in the General Fund. In the event the General Fund is or will be exhausted, the State Controller is required to notify the Governor and the Pooled Money Investment Board (the "PMIB," comprised of the State Director of Finance, the State Treasurer and the State Controller). The Governor may then order the State Controller to direct the transfer of all or any part of the moneys not needed in special funds to the General Fund from such special funds, as determined by the PMIB. All money so transferred must be returned to the special fund from which it was transferred as soon as there is sufficient money in the General Fund to do so. Transfers cannot be made from a special fund which will interfere with the objective for which such special fund was created, or from certain specific funds. When moneys transferred to the General Fund in any fiscal year from any special fund pursuant to the inter-fund borrowing mechanism exceed ten percent of the total additions to such special fund as shown in the statement of operations of the preceding fiscal year as set forth in the Budgetary (Legal Basis) annual report of the State Controller, interest must be paid on such excess at a rate determined by the PMIB to be the current earning rate of the Pooled Money Investment Account. See also, "CASH FLOW--2003 Revenue Anticipation Warrants" for a description of certain covenants of the State relating to internal borrowings. As of September 30, 2003, $2.5 billion of outstanding loans from the SFEU and $0.3 billion of outstanding loans from other special funds were used to pay expenditures of the General Fund. See "STATE FINANCES--State Warrants," "Exhibit 1--State Controller's Statement of General Fund Cash Receipts and Disbursements, July 1, 2002 through June 30, 2003 (Unaudited)" and "Exhibit 2--State Controller's Statement of General Fund Cash Receipts and Disbursements, July 1, 2003 through September 30, 2003 (Unaudited)." In addition, as of this date, the State had $10.965 billion of RAWs maturing in mid-June 2004. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings." Any determination of whether a proposed borrowing from one of the special funds is permissible must be made with regard to the facts and circumstances existing at the time of the proposed borrowing. The Attorney General of the State has identified certain criteria relevant to such a determination. For A-12 instance, amounts in the special funds eligible for inter-fund borrowings are legally available to be transferred to the General Fund if a reasonable estimate of expected General Fund revenues, based upon legislation already enacted, indicates that such transfers can be paid from the General Fund promptly if needed by the special funds or within a short period of time if not needed. In determining whether this requirement has been met, the Attorney General has stated that consideration may be given to the fact that General Fund revenues are projected to exceed expenditures entitled to a higher priority than payment of internal transfers, i.e., expenditures for the support of the public school system and public institutions of higher education and the payment of debt service on general obligation bonds of the State. At the November 1998 election, voters approved Proposition 2. This proposition requires the General Fund to repay loans made from certain transportation special accounts (such as the State Highway Account) at least once per fiscal year, or up to 30 days after adoption of the annual budget act. Since the General Fund may reborrow from the transportation accounts any time after the annual repayment is made, the proposition does not have any adverse impact on the State's cash flow. In addition to temporary inter-fund borrowings described in this section, some of the budget solutions in the 2003-04 and other recent fiscal years have included other transfers and long-term loans from special funds to the General Fund, specified in legislation. In some cases, such loans and transfers have the effect of reducing internal borrowable resources. See "CURRENT STATE BUDGET--2003 Budget Act--Other Revenues" for a description of such transfers and "CURRENT STATE BUDGET--2003 Budget Act--Loans/Borrowings" for a description of such loans. The following chart shows internal borrowable resources available for temporary loans to the General Fund on June 30 of each of the fiscal years 1999-00 through 2002-03 and estimates, as of August 21, 2003, for 2003-04. The estimates for 2003-04 do not reflect the actual receipts and disbursements through September 2003. See "EXHIBIT 2--STATE CONTROLLER'S STATEMENT OF GENERAL FUND CASH RECEIPTS AND DISBURSEMENTS, JULY 1, 2003 THROUGH SEPTEMBER 30, 2003 (UNAUDITED)" TABLE 2 INTERNAL BORROWABLE RESOURCES (CASH BASIS) (MILLIONS)
JUNE 30 ------------------------------------------------------------------------ 2000 2001 2002(a) 2003(b) 2004(c) ------------ ------------ ------------ ------------ ------------ Available Internal Borrowable Resources $ 9,427.2 $ 12,342.4 $ 12,979.7 $ 10,401.5 $ 8,747.9 Outstanding Loans From Special Fund for Economic Uncertainties -0- -0- 2,524.5 -0- 1,902.6 From Special Funds and Accounts -0- -0- 423.5 -0- -0- Total Outstanding Internal Loans -0- -0- 2,948.0 -0- 1,902.6 Unused Internal Borrowable Resources $ 9,427.2 $ 12,342.4 $ 10,031.7 $ 10,401.5 $ 6,845.3
- ---------- (a) At June 30, 2002, the State also had outstanding $7.5 billion of external borrowings in the form of revenue anticipation warrants. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings." (b) At June 30, 2003, the State also had outstanding $10.965 billion of external borrowings in the form of revenue anticipation warrants. (c) Department of Finance estimates as of August 21, 2003. Source: State of California, Department of Finance. Information for the fiscal years ended June 30, 2000 through June 30, 2003, are actual figures. For the fiscal year ending June 30, 2004, these figures were estimated as of August 21, 2003, by the Department of Finance. A-13 STATE WARRANTS No money may be drawn from the State Treasury except upon a warrant duly issued by the State Controller. The State Controller is obligated to draw every warrant on the fund out of which it is payable for the payment of money directed by State law to be paid out of the State Treasury; however, a warrant may not be drawn unless authorized by law and unless unexhausted specific appropriations provided by law are available to meet it. State law provides two methods for the State Controller to respond if the General Fund has insufficient "Unapplied Money" available to pay a warrant when it is drawn, referred to generally as "registered warrants" and "reimbursement warrants." "Unapplied Money" consists of money in the General Fund for which outstanding warrants have not already been drawn and which would remain in the General Fund if all outstanding warrants previously drawn and then due were paid subject to the prior application of such money to obligations of the State with a higher priority. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings." Unapplied Money may include moneys transferred to the General Fund from the SFEU and internal borrowings from State special funds (to the extent permitted by law). REGISTERED WARRANTS If a warrant is drawn on the General Fund for an amount in excess of the amount of Unapplied Money in the General Fund, after deducting from such Unapplied Money the amount, as estimated by the State Controller, required by law to be set apart for obligations having priority over obligations to which such warrant is applicable, the warrant must be registered by the State Treasurer on the reverse side as not paid because of the shortage of funds in the General Fund. The State Controller then delivers such a "registered warrant" to persons or entities (e.g., suppliers and local governments) otherwise entitled to receive payments from the State. A registered warrant bears interest at a rate designated by the PMIB up to a maximum of five percent per annum or at a higher rate if issued for an unpaid revenue anticipation note or in connection with some form of credit enhancement such as the Forward Purchase Agreements. Registered warrants may or may not have a fixed maturity date. Registered warrants that have no fixed maturity date, and registered warrants that bear a maturity date but, for lack of Unapplied Moneys, were not paid at maturity, are paid, together with all interest due, when the Controller, with the approval of the PMIB, determines payment will be made. The State Controller then notifies the State Treasurer, who publishes a notice that the registered warrants in question are payable. As described under "CASH FLOW--2003 Revenue Anticipation Warrants" and "--Fiscal Year 2003-04 Revenue Anticipation Notes," if the State is required to obtain advances under the Forward Purchase Agreements to pay some or all of the 2003 Warrants (defined above) or draw on the Letters of Credit (defined above) to pay some or all of the 2003-04 RANs at maturity, or is otherwise unable to pay the 2003-04 RANs at maturity, the State will issue registered warrants without a maturity date to the Participants (defined above), Credit Banks (defined above) or Parity Note Purchasers (defined above), as applicable, bringing into effect the daily application of Unapplied Moneys in the General Fund described in the previous paragraph. The adverse results from issuing these registered warrants could include: (1) the State would be required by law to pay the registered warrants before issuing warrants that could be cashed immediately to persons or entities (e.g., suppliers and certain local governments) otherwise entitled to payments from the State General Fund, and the State's ability to manage its cash would therefore be limited; and (2) a default under the State's bank credit facilities backing the State's variable rate general obligation bonds and/or commercial paper notes (which would increase the State's borrowing costs and debt service payments). A-14 REIMBURSEMENT WARRANTS In lieu of issuing individual registered warrants to numerous creditors, State law provides an alternative procedure whereby the Governor, upon request of the Controller, may authorize utilizing the General Cash Revolving Fund in the State Treasury to borrow from other State special funds to meet payments authorized by law. The Controller may then issue "reimbursement warrants" in the financial market at competitive bid to reimburse the General Cash Revolving Fund, thereby increasing cash resources for the General Fund to cover required payments. The General Cash Revolving Fund exists solely to facilitate the issuance of reimbursement warrants. Reimbursement warrants may have a fixed maturity date. The principal of and interest on reimbursement warrants must be paid by the Treasurer on their respective maturity dates from any Unapplied Money in the General Fund and available for such payment. In the event that Unapplied Money is not available for payment on the respective maturity dates of reimbursement warrants, and refunding warrants (see "--Refunding Warrants") have not been sold at such times as necessary to pay such reimbursement warrants, such reimbursement warrants will be paid, together with all interest due thereon (including interest accrued at the original interest rate after the maturity date), at such times as the Controller, with the approval of the PMIB, may determine. The State issued reimbursement warrants on several occasions in order to meet its cash needs during the period 1992-1994, when State revenues were severely reduced because of an economic recession. Facing renewed economic pressures, the State issued reimbursement warrants in June 2002 and in June 2003 (the 2003 Warrants). See "RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES," "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings," and "CASH FLOW--2003 Revenue Anticipation Warrants." REFUNDING WARRANTS If there is not sufficient Unapplied Money in the General Fund to pay maturing reimbursement warrants, the Controller is authorized under State law, with the written approval of the Treasurer, to offer and sell a new issue of reimbursement warrants as refunding warrants to refund the prior, maturing reimbursement warrants. Proceeds of such refunding warrants must be used exclusively to repay the maturing warrants. In all other respects, refunding warrants have the same legal status and provisions as reimbursement warrants, as described above. SOURCES OF TAX REVENUE The following is a summary of the State's major revenue sources. Further information on State revenues is contained under "CURRENT STATE BUDGET" and "STATE FINANCES--Recent Tax Receipts." See Table 4 entitled "Comparative Yield of State Taxes--All Funds, 1998-99 Through 2003-04" for a comparison, by amount received, of the sources of the State's tax revenue. PERSONAL INCOME TAX The California personal income tax, which accounts for a significant portion of General Fund tax revenues, is closely modeled after the federal income tax law. It is imposed on net taxable income (gross income less exclusions and deductions), with rates ranging from 1.0 percent to 9.3 percent. The personal income tax is adjusted annually by the change in the consumer price index to prevent taxpayers from being pushed into higher tax brackets without a real increase in income. Personal, dependent and other credits are allowed against the gross tax liability. In addition, taxpayers may be subject to an alternative minimum tax (AMT), which is much like the federal AMT. The personal income tax structure is highly A-15 progressive. The State Franchise Tax Board estimated that the top 1 percent of taxpayers paid 39.5 percent of the total personal income tax in tax year 2001. Taxes on capital gains realizations and stock options, which are largely linked to stock market performance, had become a larger component of personal income taxes over the last half of the 1990s. The increasing influence that these stock market-related income sources had on personal income tax revenues linked to the highly progressive structure added a significant dimension of volatility to personal income tax receipts. Just as the State's remarkable revenue growth was driven by stock market related gains, the dramatic decline that occurred in 2001-02 largely reflects the stock market's decline. The 2003 Budget Act estimates that capital gains realizations and stock options accounted for roughly 25 percent of General Fund tax revenues in 2000-01, which dropped to 8.5 percent in 2001-02, and will account for about 7 percent in 2002-03 and in 2003-04. See "CURRENT STATE BUDGET--Economic Assumptions." SALES TAX The sales tax is imposed upon retailers for the privilege of selling tangible personal property in California. Most retail sales and leases are subject to the tax. However, exemptions have been provided for certain essentials such as food for home consumption, prescription drugs, gas delivered through mains and electricity. Other exemptions provide relief for a variety of sales ranging from custom computer software to aircraft. The breakdown of the base state and local sales tax rate of 7.25 percent in 2003 is as follows: - 5 percent is imposed as a State General Fund tax; - 0.5 percent is dedicated to local governments for health and welfare program realignment (Local Revenue Fund); - 0.5 percent is dedicated to local governments for public safety services (Local Public Safety Fund); - 1.25 percent is a local tax imposed under the Uniform Local Sales and Use Tax Law. Of that amount, 0.25 percent is dedicated to county transportation purposes, and 1 percent is for city and county general-purpose use. Effective July 1, 2004, the 1 percent local sales and use tax rate for city and county general-purpose use will decrease to 0.5 percent. Representatives of several local governments have stated their intention to bring a legal action to contest the termination of this one-half cent of sales tax authority. Also on July 1, 2004, a new 0.5 percent sales and use tax for the State will be imposed. Revenues from the new sales and use tax will be deposited in the newly created Fiscal Recovery Fund created by Chapter 13, Statutes of 2003 (the legislation that authorizes the issuance of fiscal recovery bonds) and will be available for the payment of the fiscal recovery bonds proposed to be issued in 2003-04. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Fiscal Recovery Bonds" and "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds." The proposed issuance of fiscal recovery bonds is the subject of current litigation. See "LITIGATION--Bond-Related Matters." Local entities will be allowed to keep property tax revenues that would normally have gone to schools, in the same amounts as their sales and use tax revenues were decreased. A-16 The new 0.5 percent State sales and use tax will end when the fiscal recovery bonds have been repaid, and the local 0.5 percent sales and use tax will be restored to 1 percent. The property tax shift will also end at that time. Effective July 1, 2004, the breakdown of the base state and local sales tax rate of 7.25 percent will be as follows: - 5 percent imposed as a State General Fund tax; - 0.5 percent dedicated to local governments for health and welfare program realignment (Local Revenue Fund); - 0.5 percent dedicated to local governments for public safety services (Local Public Safety Fund); - 0.75 percent local tax imposed under the Uniform Local Sales and Use Tax Law, with 0.25 percent dedicated to county transportation purposes and 0.50 percent for city and county general-purpose use; - 0.5 percent deposited in a special fund available to repay the State's fiscal recovery bonds (Fiscal Recovery Fund). Pursuant to prior law, 0.25 percent of a basic 5.00 percent State tax rate could be terminated upon certification by the Director of Finance by November 1 in any year that the balance in the budget reserve for two consecutive years exceeded 4 percent of General Fund revenues. The 0.25 percent rate would be reinstated if the Director of Finance subsequently determined that the reserve would not exceed 4 percent of General Fund revenues. Pursuant to this law, a 0.25 percent cut in the State sales tax occurred on January 1, 2001 but was reinstated on January 1, 2002. Legislation enacted as part of the 2001-02 annual budget revised this test to provide that 0.25 percent of the basic 5.00 percent State tax rate may be suspended in any calendar year beginning on and after January 1, 2002, upon certification by the Director of Finance by November 1 in any year in which both of the following occur: (1) the General Fund reserve (excluding the revenues derived from the 1/4 cent sales and use tax rate) is expected to exceed 3 percent of revenues in that fiscal year (excluding the revenues derived from the 1/4 cent sales and use tax rate) and (2) actual revenues for the period May 1 through September 30 equal or exceed the May Revision forecast. The 0.25 percent rate will be reinstated the following year if the Director of Finance subsequently determines conditions (1) or (2) above are not met for that fiscal year. The reserve was not sufficient to trigger an additional year of reduction for calendar year 2002 or 2003. The 2003 Budget Act forecast estimates that the reserve level will again be insufficient to trigger a reduction for calendar year 2004. See "CURRENT STATE BUDGET--Summary of State Revenues and Expenditures" for a projection of the 2003-04 General Fund reserve. CORPORATION TAX Corporation tax revenues are derived from the following taxes: 1. The franchise tax and the corporate income tax are levied at an 8.84 percent rate on profits. The former is imposed on corporations for the privilege of doing business in California, while the latter is imposed on corporations that derive income from California sources but are not sufficiently present to be classified as doing business in the State. A-17 2. Banks and other financial corporations are subject to the franchise tax plus an additional tax at the rate of 2 percent on their net income. This additional tax is in lieu of personal property taxes and business license taxes. 3. The alternative minimum tax (AMT) is similar to that in federal law. In general, the AMT is based on a higher level of net income computed by adding back certain tax preferences. This tax is imposed at a rate of 6.65 percent. 4. A minimum franchise tax of up to $800 is imposed on corporations subject to the franchise tax but not on those subject to the corporate income tax. New corporations are exempted from the minimum franchise tax for the first two years of incorporation. 5. Sub-Chapter S corporations are taxed at 1.5 percent of profits. Taxpayers with net operating losses (i.e., an excess of allowable deductions over gross income) are allowed to carry forward those losses for tax purposes and deduct a portion in subsequent years. Chapter 488, Statutes of 2002 (AB 2065), suspends the use of any carryover losses for the 2002 and 2003 tax years, but allows taxpayers to deduct those losses beginning in the 2004 tax year and extends the expiration date for those losses by two years. That Chapter also increases the percent of a taxpayer's net operating loss ("NOL") that can be carried forward from 65 percent to 100 percent beginning January 1, 2004, for NOLs generated after that date. About 85 percent of NOL is deducted from corporation taxes with the balance deducted from personal income tax. INSURANCE TAX The majority of insurance written in California is subject to a 2.35 percent gross premium tax. For insurers, this premium tax takes the place of all other state and local taxes except those on real property and motor vehicles. Exceptions to the 2.35 percent rate are certain pension and profit-sharing plans which are taxed at the lesser rate of 0.5 percent, surplus lines and nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent of underwriting profits. ESTATE TAX; OTHER TAXES The California estate tax is based on the State death tax credit allowed against the federal estate tax. The California estate tax is designed to pick up the maximum credit allowed against the federal estate tax return. The federal Economic Growth and Tax Reconciliation Act of 2001 phases out the federal estate tax by 2010. As part of this, the Act reduced the State pick-up tax by 25 percent in 2002, 50 percent in 2003, and 75 percent in 2004, and eliminates it beginning in 2005. The provisions of this federal act sunset after 2010. At that time, the federal estate tax will be reinstated along with the State's estate tax, unless future federal legislation is enacted to make the provisions permanent. See Table 4 entitled "Comparative Yield of State Taxes--All Funds, 1998-99 Through 2003-04." Other General Fund major taxes and licenses include: Inheritance and Gift Taxes; Cigarette Taxes; Alcoholic Beverage Taxes; Horse Racing License Fees and Trailer Coach License Fees. SPECIAL FUND REVENUES The California Constitution and statutes specify the uses of certain revenue. Such receipts are accounted for in various special funds. In general, special fund revenues comprise four categories of income: A-18 - Receipts from tax levies which are allocated to specified functions, such as motor vehicle taxes and fees and certain taxes on tobacco products. - Charges for special services to specific functions, including such items as business and professional license fees. - Rental royalties and other receipts designated for particular purposes (e.g., oil and gas royalties). - Motor vehicle related taxes and fees accounted for about 41 percent of all special fund revenues and transfers in 2001-02. Principal sources of this income are motor vehicle fuel taxes, registration and weight fees and vehicle license fees. During fiscal year 2001-02, $7.1 billion was derived from the ownership or operation of motor vehicles. This was 15 percent below the 2000-01 level. About $3.1 billion of this revenue was returned to local governments. The remainder was available for various State programs related to transportation and services to vehicle owners. VEHICLE LICENSE FEE Vehicle license fees, over and above the costs of collection and refunds authorized by law, are constitutionally defined local revenues. Chapter 322, Statutes of 1998 ("Chapter 322"), established a vehicle license fee ("VLF") offset program, scheduled to be implemented in successive stages if General Fund revenues met certain targets. Pursuant to Chapter 322, vehicle license fees were reduced (offset) by 25 percent beginning January 1, 1999. Later legislation increased the offset to 35 percent for 2000 and the first half of calendar year 2001, and to 67.5 percent July 1, 2001. Under Chapter 322, a continuous appropriation from the General Fund "backfills" the vehicle license fee revenue that local governments would otherwise lose due to the fee reductions. Chapter 322 also provided that if there were insufficient General Fund moneys to fully backfill the VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments are not disadvantaged. On June 20, 2003, it was determined that insufficient General Fund moneys were available to continue to fund any portion of the VLF offsets to local governments as of that date. Accordingly, the VLF paid by taxpayers returned on October 1, 2003, to the pre-1999 level of two percent of a vehicle's depreciated value and the State will not be obligated to make any offset payments from the General Fund in 2003-04. The suspension of the backfill of the VLF offset is estimated to reduce General Fund expenditures in 2003-04 by $4.2 billion. On July 1, 2003, the Howard Jarvis Taxpayers Association filed a lawsuit challenging the restoration of the VLF to 1998 levels. Until the case is decided, VLF will continue to be collected at the full two percent rate as authorized by statute. See "LITIGATION--Challenge to Discontinuation of Vehicle License Fee Offset." TAXES ON TOBACCO PRODUCTS On November 8, 1988, voters approved Proposition 99, which imposed, as of January 1, 1989, a 25 cents per pack excise tax on cigarettes, and a new, equivalent excise tax on other tobacco products. The initiative requires that funds from this tax be allocated to anti-tobacco education and research, to indigent health services, and to environmental and recreation programs. Proposition 10, approved in 1998, increased the excise tax imposed on distributors selling cigarettes in California to 87 cents per pack effective January 1, 1999. At the same time, this proposition A-19 imposed a new excise tax on cigars, chewing tobacco, pipe tobacco, and snuff at a rate equivalent to the tax increase on cigarettes. In addition, the higher excise tax on cigarettes automatically triggered an additional increase in the tax on other tobacco products effective July 1, 1999, with the proceeds going to the Cigarette and Tobacco Products Surtax Fund. There is litigation pending challenging the enactment of these taxes. See "LITIGATION--Tax Refund Cases." The State excise tax on cigarettes of 87 cents per pack and the equivalent rates on other tobacco product are earmarked as follows: 1. Fifty cents of the per-pack tax on cigarettes, and the equivalent rate levied on non-cigarette tobacco products, are deposited in the California Children and Families First Trust Fund and are allocated primarily for early childhood development programs. 2. Twenty-five cents of the per-pack tax on cigarettes and the equivalent rates levied on non-cigarette tobacco products are allocated to the Cigarette and Tobacco Products Surtax Fund. These funds are appropriated for anti-tobacco education and research, indigent health services, and environmental and recreation programs. 3. Ten cents of the per-pack tax is allocated to the State's General Fund. 4. The remaining two cents of the per-pack tax is deposited into the Breast Cancer Fund. The 2003 Budget Act proposes a tobacco products licensing requirement, which would also reduce overall tobacco tax evasion. The one time license application fee and per pack fee would generate one-time revenues of $22 million in 2003-04 that would be dedicated to a new Cigarette and Tobacco Products Compliance Fund. Reduced evasion associated with this licensure requirement is expected to generate $36 million ($4 million General Fund) in additional tobacco revenues during the implementation phase in 2003-04. A-20 RECENT TAX RECEIPTS The following table shows the trend of major General Fund and total taxes per capita and per $100 of personal income for the past five years and the current fiscal year. TABLE 3 RECENT TAX RECEIPTS
TREND OF STATE TAXES PER $100 TAXES PER CAPITA(a) OF PERSONAL INCOME ---------------------------- ------------------------ FISCAL YEAR GENERAL FUND TOTAL GENERAL FUND TOTAL - ----------- ------------- ------------ ------------ --------- 1998-99 $ 1,771.02 $ 2,121.72 $ 6.25 $ 7.48 1999-00 2,095.53 2,447.03 7.04 8.22 2000-01 2,223.15 2,589.79 6.88 8.02 2001-02 1,806.41 2,112.36 5.56 6.50 2002-03(b) 1,826.41 2,128.04 5.66 6.60 2003-04(b) 1,873.27 2,271.80 5.72 6.93
- ---------- (a) Data reflect population figures based on the 2000 Census. (b) Estimated. Source: State of California, Department of Finance. A-21 The following table gives the actual and estimated revenues by major source for the last five years and the current fiscal year. This table shows taxes which provide revenue both to the General Fund and State special funds. TABLE 4 COMPARATIVE YIELD OF STATE TAXES--ALL FUNDS 1998-99 THROUGH 2003-04 (MODIFIED ACCRUAL BASIS) (THOUSANDS OF DOLLARS)
YEAR INHERITANCE, ENDING SALES AND PERSONAL ESTATE AND JUNE 30 USE(a) INCOME CORPORATION TOBACCO(b) GIFT - ---------- ------------- ----------- ------------ ------------ ------------ 1999 22,890,693 30,894,865 5,724,237 976,512 890,490 2000 25,525,788 39,578,237 6,638,898 1,216,651 928,146 2001 26,616,073 44,618,532 6,899,322 1,150,869 934,709 2002 26,004,521 33,051,107 5,333,030 1,102,806 890,627 2003(e) 24,757,747(f) 32,442,000 6,700,011 1,068,200 694,800 2004(e) 26,063,712(f) 33,595,700 7,035,011 1,049,752 436,500 YEAR MOTOR MOTOR ENDING ALCOHOLIC HORSE VEHICLE VEHICLE JUNE 30 INSURANCE BEVERAGES RACING FUEL(c) FEES(d) - ---------- ------------- ----------- ------------ ------------ ------------ 1999 1,253,972 273,112 61,185 3,025,226 5,610,374 2000 1,299,777 282,166 44,130 3,069,694 5,263,245 2001 1,496,556 288,450 42,360 3,142,142 5,286,542 2002 1,595,846 292,627 42,247 3,295,903 3,836,795 2003(e) 1,880,150 290,000 44,455 3,307,244 3,923,911 2004(e) 2,068,150 288,000 44,985 3,313,301 7,441,870
- ---------- (a) Numbers include local tax revenue from the 0.5 percent rate increase enacted by Chapter 85, Statutes of 1991, for the State-local realignment program. The 0.5% rate is equivalent to about $2.3 to $2.5 billion per year. The figures also reflect a 0.25 percent reduction during calendar year 2001. (b) Proposition 10 (November 1998) increased the cigarette tax to $0.87 per pack and added the equivalent of $1.00 tax to other tobacco products. (c) Motor vehicle fuel tax (gasoline), use fuel tax (diesel and other fuels), and jet fuel. (d) Registration and weight fees, motor vehicle license fees and other fees. Vehicle license fee values reflect a 25 percent reduction for 1999 from the 1998 rate of two percent of a vehicle's depreciated value; a 35 percent reduction from such rate for 2000 and the first half of 2001; a 67.5 percent reduction from such rate for the second half of 2001 through September 2003, and no reduction from such rate after September 2003. See "STATE FINANCES--Sources of Tax Revenue--Vehicle License Fee." (e) Estimated. (f) The figures do not include voter approved local revenue, the 0.50 percent Local Public Safety Fund revenue, the 1.0 percent local city and county operations revenue (Bradley-Burns), or the 0.25 percent county transportation funds revenue. NOTE: This table shows taxes which provide revenue both to the General Fund and State special funds. Also, some revenue ources are dedicated to local governments. This accounts for differences between the information in this table and Table 11. - ---------- Source: Fiscal years 1998-99 through 2001-02: State of California, Office of the State Controller. Fiscal years 2002-03 and 2003-04: State of California, Department of Finance. A-22 STATE EXPENDITURES The following table summarizes the major categories of State expenditures, including both General Fund and special fund programs. TABLE 5 GOVERNMENTAL COST FUNDS (BUDGETARY BASIS) SCHEDULE OF EXPENDITURES BY FUNCTION AND CHARACTER FISCAL YEARS 1997-98 TO 2001-02 (THOUSANDS)
1997-98 1998-99 1999-00 2000-01 2001-02 ------------ ------------ ------------ ------------ ------------ Function Legislative, Judicial, Executive Legislative $ 209,690 $ 219,814 $ 232,323 $ 262,370 $ 265,312 Judicial 766,932 1,346,131 1,372,681 1,478,710 1,633,518 Executive 919,606 958,189 1,241,219 1,352,128 1,371,891 State and Consumer Services 771,444 829,745 856,096 950,192 1,100,942 Business, Transportation and Housing Business and Housing 136,558 136,893 156,499 601,053 240,237 Transportation 3,924,428 4,462,905 5,549,520 4,417,139 6,052,926 Technology, Trade and Commerce 62,235 130,796 488,489 140,833 81,832 Resources 1,323,860 1,695,323 1,858,844 3,349,003 2,284,269 Environmental Protection 605,584 600,060 689,678 869,539 993,144 Health and Human Services 18,059,611 19,616,132 21,806,291 24,204,531 26,563,743 Correctional Programs 3,901,296 4,181,474 4,412,542 4,952,927 5,242,369 Education Education-K through 12 21,574,341 22,783,975 26,356,838 28,720,596 28,078,228 Higher Education 7,022,658 7,838,117 8,553,343 9,655,954 9,945,193 General Government General Administration 764,615 859,703 982,923 1,294,587 2,475,564 Debt Service 1,979,211 1,988,176 2,072,960 2,270,649 2,432,942 Tax Relief 453,030 450,213 1,840,129 4,655,826 3,028,703 Shared Revenues 3,892,036 4,151,197 3,677,687 4,385,429 5,528,996 Brown vs. US Dept. of Health and Human Services 96,000 Other Statewide Expenditures 1,373,823 891,070 580,307 635,475 476,170 Expenditure Adjustment for Encumbrances (162,630) (461,310) (628,506) (1,943,208) (681,856) Credits for Overhead Services by General Fund (125,678) (144,041) (170,594) (197,343) (251,575) Statewide Indirect Cost Recoveries (48,963) (32,791) (37,423) (36,610) (47,862) Total $ 67,403,687 $ 72,501,771 $ 81,891,846 $ 92,019,780 $ 96,910,686 ------------ ------------ ------------ ------------ ------------ Character State Operations $ 20,199,031 $ 21,092,849 $ 22,864,874 $ 24,850,286 $ 27,994,343 Local Assistance 46,666,925 50,734,442 58,369,828 66,087,018 67,993,721 Capital Outlay 537,731 674,480 657,144 1,082,476 922,622 ------------ ------------ ------------ ------------ ------------ Total $ 67,403,687 $ 72,501,771 $ 81,891,846 $ 92,019,780 $ 96,910,686 ============ ============ ============ ============ ============
- ---------- Source: State of California, Office of the State Controller. STATE APPROPRIATIONS LIMIT The State is subject to an annual appropriations limit imposed by Article XIII B of the State Constitution (the "Appropriations Limit"). The Appropriations Limit does not restrict appropriations to pay debt service on voter-authorized bonds. Article XIII B prohibits the State from spending "appropriations subject to limitation" in excess of the Appropriations Limit. "Appropriations subject to limitation," with respect to the State, are A-23 authorizations to spend "proceeds of taxes," which consist of tax revenues, and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed "the cost reasonably borne by that entity in providing the regulation, product or service," but "proceeds of taxes" exclude most State subventions to local governments, tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees and certain other non-tax funds. There are various types of appropriations excluded from the Appropriations Limit. For example, debt service costs of bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified capital outlay projects, appropriations for tax refunds, appropriations of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and appropriation of certain special taxes imposed by initiative (e.g., cigarette and tobacco taxes) are all excluded. The Appropriations Limit may also be exceeded in cases of emergency. The Appropriations Limit in each year is based on the Appropriations Limit for the prior year, adjusted annually for changes in State per capita personal income and changes in population, and adjusted, when applicable, for any transfer of financial responsibility of providing services to or from another unit of government or any transfer of the financial source for the provisions of services from tax proceeds to non-tax proceeds. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college ("K-14") districts. The Appropriations Limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received over such two-year period above the combined Appropriations Limits for those two years, is divided equally between transfers to K-14 districts and refunds to taxpayers. The Legislature has enacted legislation to implement Article XIII B which defines certain terms used in Article XIII B and sets forth the methods for determining the Appropriations Limit. California Government Code Section 7912 requires an estimate of the Appropriations Limit to be included in the Governor's Budget, and thereafter to be subject to the budget process and established in the Budget Act. The following table shows the Appropriations Limit for 1999-00 through 2003-04. Because of the extraordinary surge of revenues in 1999-00, the State exceeded its Appropriations Limit by $975 million in that year. Since the excess revenues are calculated over a two-year period, there were no excess revenues for the combined 1999-00 and 2000-01 fiscal years. As of the release of the 2003 Budget Act, the Department of Finance projected the Appropriations Subject to Limit to be $16.902 billion and $13.207 billion under the Appropriations Limit in fiscal years 2002-03 and 2003-04, respectively. A-24 TABLE 6 STATE APPROPRIATIONS LIMIT (MILLIONS)
FISCAL YEARS --------------------------------------------------------- 1999-00 2000-01 2001-02 2002-03 2003-04 -------- -------- -------- -------- -------- State Appropriations Limit $ 50,673 $ 54,073 $ 59,318 $ 59,591 $ 61,702 Appropriations Subject to Limit (51,648) (51,648) (42,240) (42,689)* (48,495)* Amount (Over)/Under Limit $ (975) $ 2,425 $ 17,078 $ 16,902* $ 13,207*
- ---------- * Estimated/Projected. Source: State of California, Department of Finance. PROPOSITION 98 On November 8, 1988, voters of the State approved Proposition 98, a combined initiative constitutional amendment and statute called the "Classroom Instructional Improvement and Accountability Act." Proposition 98 changed State funding of public education below the university level and the operation of the State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum share of General Fund revenues. Proposition 98 (as modified by Proposition 111, enacted on June 5, 1990) guarantees K-14 schools the greater of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for changes in the cost of living (measured as in Article XIII B by reference to State per capita personal income) and enrollment ("Test 2"), or (c) a third test, which replaces Test 1 and Test 2 in any year the percentage growth in per capita General Fund revenues from the prior year plus one half of one percent is less than the percentage growth in State per capita personal income ("Test 3"). Under Test 3, schools receive the amount appropriated in the prior year adjusted for changes in enrollment and per capita General Fund revenues, plus an additional small adjustment factor. If Test 3 is used in any year, the difference between Test 3 and Test 2 becomes a "credit" (called the "maintenance factor") to schools and the basis of payments in future years when per capita General Fund revenue growth exceeds per capita personal income growth. Proposition 98 implementing legislation adopted prior to the end of the 1988-89 fiscal year determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent of the General Fund tax revenues, based on 1986-87 appropriations. However, that percent has been adjusted to approximately 35 percent to account for a subsequent redirection of local property taxes, since such redirection directly affects the share of General Fund revenues to schools. The Proposition 98 guarantee is funded from two sources: local property taxes and the General Fund. See "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds" for a discussion of the impact of the 2003 Budget Act on the level of local property taxes available for Proposition 98 funding. Any amount not funded by local property taxes is funded by the General Fund. Thus, local property tax collections represent an offset to General Fund costs. This is true regardless of whether the year in question is a Test 1, Test 2, or Test 3 year. Proposition 98 permits the Legislature, by two-thirds vote of both houses with the Governor's concurrence, to suspend the K-14 schools' minimum funding formula for a one-year period. The difference between the funding level provided pursuant to such suspension and the minimum guarantee otherwise applicable for such fiscal year must be repaid in future fiscal years. Proposition 98 also A-25 contains provisions for the transfer of certain State tax revenues in excess of the Article XIII B limit to K-14 schools. See "STATE FINANCES--State Appropriations Limit." The State's emphasis on improving education resources has resulted in estimated K-12 spending of $6,624 and $6,887 per-pupil in fiscal years 2002-03 and 2003-04, respectively. These amounts are 52 percent and 58 percent above the 1994-95 level of $4,351 per pupil. Total revenues (General Fund subject to the State Appropriations Limit ("SAL") and local property taxes) have increased significantly since 1994-95. The projected level of General Fund SAL revenue for 2002-03 was $65.036 billion. The revised 2002-03 Proposition 98 appropriations of $29.3 billion reflect a deferral of $1.820 billion to be reappropriated in 2003-04. The General Fund SAL revenue projection for 2003-04 exceeds the revised 2002-03 estimates by approximately $2.353 billion. The General Fund share of the guarantee Proposition 98 will increase approximately $415.3 million, from $29.4 billion in 2002-03 to $29.8 billion in 2003-04. The 2003 Budget Act proposes Proposition 98 funding at $215.2 million above the minimum, with enrollment growth for general apportionments and special education fully funded and total K-14 education funding of approximately $45.7 billion ($6,887 per K-12 pupil), an increase of 4.0 percent per pupil compared to the revised 2002-03 level. Total 2003-04 Proposition 98 appropriations of $30.0 billion reflect the permanent deferral of $1.087 billion. See "CURRENT STATE BUDGET" for further discussion of education funding. LOCAL GOVERNMENTS The primary units of local government in California are the counties, which range in population from 1,200 in Alpine County to approximately 10 million in Los Angeles County. Counties are responsible for the provision of many basic services, including indigent health care, welfare, jails, and public safety in unincorporated areas. There are also 478 incorporated cities and thousands of special districts formed for education, utilities, and other services. The fiscal condition of local governments has been constrained since Proposition 13, which added Article XIIIA to the State Constitution, ("Proposition 13") was approved by California voters in 1978. Proposition 13 reduced and limited the future growth of property taxes and limited the ability of local governments to impose "special taxes" (those devoted to a specific purpose) without two-thirds voter approval. Proposition 218, another initiative constitutional amendment enacted in 1996, further limited the ability of local governments to raise taxes, fees, and other exactions. Counties, in particular, have had fewer options to raise revenues than many other local government entities, while they have been required to maintain many services. In the aftermath of Proposition 13, the State provided aid to local governments from the General Fund to make up some of the loss of property tax moneys, including assuming principal responsibility for funding K-12 schools and community colleges. During the recession of the early 1990s, the Legislature eliminated most of the remaining components of post-Proposition 13 aid to local government entities other than K-12 schools and community colleges by requiring cities and counties to transfer some of their property tax revenues to school districts. However, the Legislature also provided additional funding sources, such as sales taxes, and reduced certain mandates for local services funded by cities and counties. See "STATE FINANCES--Sources of Tax Revenue--Sales Tax" and "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds" for a discussion of the impact of the 2003 Budget Act on local sales taxes. The 2002 Budget Act expanded such transfers to include community redevelopment agencies, which were not included in the original transfers. These agencies paid $75 million to schools in 2002-03. The 2003 Budget Act increases this payment to $135 million in 2003-04 only. The 2003 Budget Act and related legislation continue to provide significant assistance to local governments, including $238.2 million for various local public safety programs. This amount includes $100 million for A-26 the Citizens' Option for Public Safety ("COPS") program to support local front-line law enforcement, $100 million for county juvenile justice and crime prevention programs, and $38.2 million for reimbursement of jail booking fees. The 2003 Budget Act also provides $40.15 million for open space subvention reimbursements to cities and counties. A program to offset a portion of the vehicle license fees ("VLF") paid by vehicle owners was established in 1998. See "Sources of Tax Revenue--Vehicle License Fee." This offset provided tax relief of $3.985 billion in 2002-03. Since 1999, the General Fund has backfilled the offset so that the tax relief did not result in a revenue loss to local governments. The legislation that established the VLF offset program also provided that if there were insufficient General Fund moneys to fully backfill the VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments are not disadvantaged. On June 20, 2003, it was determined that insufficient General Fund moneys were available to continue to fund any portion of the VLF offsets to local governments as of that date. Accordingly, the VLF paid by taxpayers returned on October 1, 2003 to the pre-1999 level and the State will not be obligated to make any offset payments from the General Fund in 2003-04. This action will reduce General Fund expenditures by about $4.2 billion in fiscal year 2003-04 and result in a reduction of approximately $825 million in transfers to local governments to cover the period of time needed for the Department of Motor Vehicles to phase out the offset from vehicle registration bills. The 2003 Budget Act and related legislation require the State to repay the $825 million VLF "gap" loss to local governments no later than August 15, 2006. However, the Legislature failed to approve legislation that would also advance up to $40 million of the $825 million VLF "gap" loss for those local governments that are disproportionately affected by this reduction. The 2003 Budget Act also increases the portion of VLF revenues that are dedicated to State-local realignment programs in 2003-04 so that those programs are held harmless from the VLF "gap" loss. A case has been filed challenging the restoration of the VLF. See "LITIGATION--Challenge to Discontinuation of Vehicle License Fee Offset." Prior to legislation enacted in 1997, local governments provided the majority of funding for the State's trial court system. The legislation consolidated the trial court funding at the State level in order to streamline the operation of the courts, provide a dedicated revenue source, and relieve fiscal pressure on the counties. This resulted in decreasing the county contribution for court operations by $415 million and allowed cities to retain $68 million in fine and penalty revenue previously remitted to the State. The State's trial court system will receive approximately $1.9 billion in State resources and $475 million in resources from the counties in 2003-04. The entire statewide welfare system was changed in response to the change in federal welfare law enacted in 1996 (see "Welfare Reform"). Under the CalWORKs program, counties are given flexibility to develop their own plans, consistent with State law, to implement the program and to administer many of its elements, with costs for administrative and supportive services capped at the 1996-97 levels. As noted above, counties are also given financial incentives if, at the individual county level or statewide, the CalWORKs program produces savings associated with specified standards. Counties are still required to provide "general assistance" aid to certain persons who cannot obtain welfare from other programs. WELFARE REFORM The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193, the "Law") fundamentally reformed the nation's welfare system. The Law includes provisions to: (i) convert Aid to Families with Dependent Children ("AFDC"), an entitlement program, to Temporary Assistance for Needy Families ("TANF"), a block grant program with lifetime time limits on TANF recipients, work requirements and other changes; (ii) deny certain federal welfare and public benefits to legal noncitizens (subsequent federal law has amended this provision), allow states to elect to deny A-27 additional benefits (including TANF) to legal noncitizens, and generally deny almost all benefits to illegal immigrants; and (iii) make changes in the Food Stamp program, including to reduce maximum benefits and impose work requirements. The block grant formula under the Law is operative through March 31, 2004. Chapter 270, Statutes of 1997, embodies California's response to the federal welfare reforms. Effective January 1, 1998, California Work Opportunity and Responsibility to Kids ("CalWORKs") replaced the former AFDC and Greater Avenues to Independence programs. Consistent with the federal law, CalWORKs contains time limits on the receipt of welfare aid, both lifetime as well as current period. The centerpiece of CalWORKs is the linkage of eligibility to work participation requirements. Welfare caseloads have declined considerably with the implementation of the CalWORKs program. The 2003-04 CalWORKs caseload is projected to be 466,000, down from 480,000 cases in 2002-03. This represents a major decline in caseload from the rapid growth of the early 1990s, when caseload peaked at 921,000 cases in 1994-95. In 2003-04, California will continue to meet, but not exceed, the federally-required $2.7 billion combined State and county maintenance of effort ("MOE") requirement. In an effort to keep program expenditures within the TANF Block Grant and TANF MOE amounts, the 2003 Budget Act suspends the October 2003 statutory cost-of-living adjustment for cash grants. The 2003 Budget Act includes a one-time augmentation of $191.9 million for employment services to enable recipients to leave aid and become self sufficient. The 2003 Budget Act includes total CalWORKs-related expenditures of $6.9 billion for 2003-04, including child care transfer amounts for the Department of Education and the State's general TANF reserve. The 2003 Budget Act also includes a TANF reserve of $175.3 million, which is available for unanticipated needs in any program for which TANF Block Grant funds are appropriated, including CalWORKs benefits, employment services, county administration, and child care costs. This reserve may be needed for such pressures as litigation or the cost of increased participation rate requirements that have been proposed at the federal level with the reauthorization of the TANF program. Authorization for the TANF program currently ends March 31, 2004 (having been extended several times from its original September 30, 2002 expiration date). For the TANF program to continue, the U.S. Congress must pass, and the President must sign, legislation reauthorizing the program prior to that date. Although reauthorization could simply involve extending the funding period, it is more likely that Congress and the President will consider several key policy changes. It is unknown at this time how California's TANF funding will be affected by reauthorization. PENSION TRUSTS The pension contribution liability for the three principal retirement systems in which the State participates, the California Public Employees' Retirement System ("CalPERS"), the California State Teachers' Retirement System ("CalSTRS") and the University of California Retirement System ("UCRS"), is included in the financial statements of the State and described in Note 20 to the Audited Annual Financial Statements of the State of California for the year ended June 30, 2002 (the "Audited Financial Statements"), incorporated by reference in this APPENDIX A. See "FINANCIAL STATEMENTS." The three largest defined benefit retirement plans contained in the retirement systems and the State's share of the excess of the actuarial value of assets over the actuarial accrued liability or unfunded A-28 actuarial accrued liability of those plans at June 30, 2002 (June 30, 2001, for CalSTRS) was reported to be as follows: TABLE 7 STATE SHARE OF ACTUARIAL VALUE
EXCESS OF ACTUARIAL VALUE OF ASSETS OVER ACTUARIAL ACCRUED LIABILITIES NAME OF PLAN (UNFUNDED ACTUARIAL ACCRUED LIABILITY) - ------------------------------------------------ ---------------------------------------- Public Employees' Retirement Fund (CalPERS) $ (6.653) billion State Teachers' Retirement Fund Defined Benefit Program (CalSTRS) (2.227) billion University of California Retirement Plan 11.549 billion
The actuarial information for CalSTRS for the year ended June 30, 2002, is not yet available, as that information is updated on a two-year cycle. However, according to CalSTRS, its investment portfolio market value as of July 31, 2002, was $92,599,000,000, compared to $102,975,000,000 as of July 31, 2001. The CalPERS reports that its investment portfolio market value as of July 31, 2002, was $135,500,000,000, compared to $155,300,000,000 as of July 31, 2001. These declines in investment portfolio value will adversely affect the foregoing data when new actuarial calculations are made later in 2003. The State's contribution to the CalPERS and the UC Retirement System are actuarially determined each year, while the State's contribution to the CalSTRS is established by statute and is currently 2.017 percent of teacher payroll for the fiscal year ending in the immediately preceding calendar year. The following table shows the State's contributions to CalPERS for fiscal years 1997-98 through 2003-04: TABLE 8 STATE CONTRIBUTION TO CALPERS FISCAL YEARS 1997-98 TO 2003-04 1997-98 $ 1,223,000,000 1998-99 766,100,000 1999-00 463,600,000 2000-01 156,700,000 2001-02 677,200,000 2002-03 1,190,000,000 2003-04 2,213,000,000
Due to investment losses and increased retirement benefits, the State contribution to the CalPERS has increased from $156.7 million in 2000-01 to $2.213 billion in 2003-04. The State plans to issue pension obligation bonds to fund approximately $1.355 billion of the State's 2003-04 retirement obligation to CalPERS and the principal on such bonds would be repaid over five years starting in fiscal year 2004-05. The pension obligation bonds may not be issued or the amount of bonds may be reduced due to a trial court ruling declining to validate the pension obligation bonds. See "LITIGATION--Bond-Related Matters" and "CURRENT STATE BUDGET--2003 Budget Act." A-29 Details concerning the three largest plans and information concerning the other plans contained in the retirement systems are included in Note 20 to the Audited Financial Statements. See "FINANCIAL STATEMENTS." REPAYMENT OF ENERGY LOANS The Department of Water Resources of the State ("DWR") borrowed $6.1 billion from the General Fund of the State for DWR's power supply program between January and June 2001. DWR issued approximately $11.25 billion in revenue bonds in several series and in the fall of 2002 used the net proceeds of the revenue bonds to repay outstanding loans from banks and commercial lenders in the amount of approximately $3.5 billion and a loan from the General Fund in the amount of $6.1 billion plus accrued interest of approximately $500 million. Issuance of the DWR revenue bonds had been delayed since mid-2001 by a number of factors, including administrative and legal challenges. The loans from the General Fund and the banks and commercial lenders financed DWR's power supply program costs during 2001 exceeded DWR's revenues from the sale of electricity. Since that time, the power supply program has become self-supporting, and no additional loans from the General Fund are authorized. As of January 1, 2003, the DWR's authority to enter into new power purchase contracts terminated, and the IOUs resumed responsibility for obtaining electricity for their customers. The general purpose of the power supply program has been to provide to customers of the three major investor-owned electric utilities in the State (the "IOUs") the portion of their power not provided by the IOUs. The primary source of money to pay debt service on the DWR revenue bonds is revenues derived from customers of the IOUs resulting from charges set by the California Public Utilities Commission. The DWR revenue bonds are not a debt or liability of the State and do not directly or indirectly or contingently obligate the State to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. TOBACCO LITIGATION SETTLEMENT In 1998 the State (together with 45 other states and certain U.S. jurisdictions) signed a settlement agreement with the four major cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in the future for monetary damages arising from the use of or exposure to tobacco products. Cigarette manufacturers agreed to billions of dollars in payments and restrictions on marketing activities. Under the settlement agreement, the cigarette manufacturers agreed to make payments to the State in perpetuity, which payments amount to approximately $25 billion (subject to adjustments) over the first 25 years. Under a separate Memorandum of Understanding, approved by the court, half of the payments made by the cigarette manufacturers will be paid to the State and half to local governments (all counties and the cities of San Diego, Los Angeles, San Francisco and San Jose). The specific amount to be received by the State and local governments is subject to adjustment. Details in the settlement agreement allow reduction of the manufacturers' payments for decreases in cigarette shipment volumes by the settling manufacturers, payments owed to certain "Previously Settled States" and certain types of offsets for disputed payments, among other things. However, settlement payments are adjusted upward each year by at least 3% for inflation, compounded annually. During fiscal year 2001-02, the General Fund received $478 million in settlement payments. Of that amount, $76 million was deposited in the General Fund and $402 million was deposited into a special fund to pay certain health care costs. During fiscal year 2002-03, the General Fund received $474 million, all of which was deposited in the special fund. A-30 Chapter 414, Statutes of 2002, as amended, allows the issuance of revenue bonds to generate $5.0 billion for the General Fund secured by the tobacco settlement revenues received by the State beginning in the 2003-04 fiscal year. An initial sale of 56.57% of the State's tobacco settlement revenues from July 1, 2003, onward, producing $2.5 billion in proceeds was completed in January 2003. A second sale of the remaining 43.43% of the State's tobacco settlement revenues, which produced $2.264 billion in proceeds, was completed in September 2003. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Enhanced Tobacco Settlement Revenue Bonds." INVESTMENT OF FUNDS Moneys on deposit in the State's Centralized Treasury System are invested by the Treasurer in the Pooled Money Investment Account (the "PMIA"). As of September 30, 2003, the PMIA held approximately $32.5 billion of State moneys, and $21.2 billion invested for about 2,903 local governmental entities through the Local Agency Investment Fund ("LAIF"). The assets of the PMIA as of September 30, 2003, are shown in the following table: TABLE 9 ANALYSIS OF THE POOLED MONEY INVESTMENT ACCOUNT PORTFOLIO*
TYPE OF SECURITY AMOUNT (MILLIONS) PERCENT OF TOTAL - ------------------------------------- ----------------- ---------------- U.S. Treasury Bills and Notes $ 9,236 17.2% Commercial Paper (corporate) 10,185 19.0 Certificates of Deposits 6,545 12.2 Corporate Bonds 2,205 4.1 Federal Agency Securities 12,806 23.8 Bankers Acceptances - - Bank Notes 250 0.5 Loans Per Government Code 6,781 12.6 Time Deposits 5,694 10.6 Repurchases - - Reverse Repurchases - - ----------- --------- $ 53,702 100.0% =========== =========
- ---------- * Totals may differ due to rounding. Source: State of California, Office of the Treasurer. The State's treasury operations are managed in compliance with the California Government Code and according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters and maximum maturity of investments. The PMIA operates with the oversight of the PMIB. The LAIF portion of the PMIA operates with the oversight of the Local Agency Investment Advisory Board (consisting of the State Treasurer and four other appointed members). The Treasurer does not invest in leveraged products or inverse floating rate securities. The investment policy permits the use of reverse repurchase agreements subject to limits of no more than 10 percent of the PMIA. All reverse repurchase agreements are cash matched either to the maturity of the reinvestment or an adequately positive cash flow date which is approximate to the maturity of the reinvestment. A-31 The average life of the investment portfolio of the PMIA as of September 30, 2003, was 214 days. THE BUDGET PROCESS GENERAL The State's fiscal year begins on July 1 and ends on June 30 of the following year. The State operates on a budget basis, using a modified accrual system of accounting for its General Fund, with revenues credited in the period in which they are measurable and available and expenditures debited in the period in which the corresponding liabilities are incurred. The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the "Governor's Budget"). Under State law, the annual proposed Governor's Budget cannot provide for projected expenditures in excess of projected revenues for the ensuing fiscal year. Following the submission of the Governor's Budget, the Legislature takes up the proposal. Under the State Constitution, money may be drawn from the Treasury only through an appropriation made by law. The primary source of the annual expenditure appropriations is the annual Budget Act as approved by the Legislature and signed by the Governor. The Budget Act must be approved by a two-thirds majority vote of each House of the Legislature, although initiatives are pending to reduce this to a 55% vote. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each House of the Legislature. Appropriations also may be included in legislation other than the Budget Act. Except as noted in the previous paragraph and in the next sentence, bills containing General Fund appropriations must be approved by a two-thirds majority vote in each House of the Legislature and be signed by the Governor. Bills containing appropriations for K-12 schools or community colleges ("K-14 education") only require a simple majority vote. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution. Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt. CONSTRAINTS ON THE BUDGET PROCESS Over the years, a number of laws and constitutional amendments have been enacted, often from voter initiatives, which make it more difficult to raise State taxes, or restrict the use of State General Fund or special fund revenues, or otherwise limit the Legislature and Governor's discretion in enacting budgets. Prior examples of provisions that make it more difficult to raise taxes include Proposition 13, which, among other provisions, required that any change in State taxes enacted for the purpose of increasing revenues collected pursuant thereto, whether by increased rates or changes in computation, be enacted by a two-thirds vote in each house of the Legislature. Prior examples of provisions restricting the use of General Fund revenue are Proposition 98, which mandates a minimum percentage of General Fund revenues to be spent on local education, and Proposition 10, which raised taxes on tobacco products but mandated how the additional revenues would be expended. See "STATE FINANCES--Proposition 98" and "--Sources of Tax Revenue--Taxes on Tobacco Products." An initiative statute, called the "After School Education and Safety Program of 2002," was approved by the voters on November 5, 2002, and will require the State to expand funding for before and A-32 after school programs in the State's public elementary and middle schools. Beginning with fiscal year 2004-05 and in the first year that non-Proposition 98 appropriations exceed the base level by $1.5 billion, the initiative will require the State to appropriate up to $550 million annually, depending on the amount above the trigger level. (The initiative defines the base level as the fiscal year during the period July 1, 2000, through June 30, 2004, for which the State's non-guaranteed General Fund appropriations are the highest as compared to any other fiscal year during that period. Using final 2003 Budget Act data from August 2003, the 2003-04 fiscal year is the base year.) Based upon non-Proposition 98 General Fund appropriations in the 2003 Budget Act, the initiative is unlikely to require implementation of the funding increase in 2004-05. By comparison, the 2003 Budget Act includes about $121.6 million for these after school programs, $428.4 million below the amount which the initiative would require if the full funding increase were in effect. PRIOR FISCAL YEARS' BUDGETS Following a severe recession in the early 1990s, the State's financial condition improved markedly starting in 1995-96, due to a combination of better than expected revenues, slowdown in growth of social welfare programs, and continued spending restraint based on actions taken in earlier years. The economy grew strongly between 1994 and 2000, generally outpacing the nation, and as a result, for the five fiscal years from 1995-96 to 1999-00, the General Fund tax revenues exceeded the estimates made at the time the budgets were enacted. These additional funds were largely directed to school spending as mandated by Proposition 98, to make up shortfalls from reduced federal health and welfare aid in 1995-96 and 1996-97 and to fund new program initiatives, including education spending above Proposition 98 minimums, tax reductions, aid to local governments and infrastructure expenditures. The State ended the 1999-00 fiscal year with an $8.9 billion budget reserve. 2000 BUDGET ACT The 2000 Budget Act, signed by Governor Davis on June 30, 2000, assumed General Fund revenues and transfers of $73.9 billion, a 3.8 percent increase over 1999-00 estimates. The 2000 Budget Act appropriated $78.8 billion from the General Fund, a 17.3 percent increase over 1999-00, and reflected the use of $5.5 billion from the SFEU. About $7.0 billion of the increased spending in 2000-01 was for one-time expenditures and investments. Because of the State's strong cash position, the Davis Administration did not undertake a revenue anticipation note borrowing in 2000-01. The 2003-04 Governor's Budget reported that final fiscal year 2000-01 expenditures were $78.0 billion, about $2.0 billion below the 2001 Budget Act estimates, and revenues were $71.4 billion. The 2002-03 Governor's Budget reported that the June 30, 2001 SFEU balance, the budget reserve, was approximately $1.3 billion. This figure recognized the disbursement prior to June 30, 2001, of about $6.2 billion from the General Fund to make loans for the DWR power supply program. See "STATE FINANCES--Repayment of Energy Loans." At the time of enactment of the 2001 Budget Act, the Department of Finance had estimated the June 30, 2001 balance in the SFEU at $6.3 billion, but without recognition of the loans as an expenditure for budget purposes. 2001 BUDGET ACT The 2001 Budget Act (for fiscal year 2001-02) was signed by Governor Davis on July 26, 2001. The spending plan for 2001-02 included General Fund expenditures of $78.8 billion, a reduction of $1.3 billion from the prior year. It was expected that this could be accomplished without serious program cuts because such a large part of the 2000 Budget Act comprised one-time expenditures. The spending plan utilized more than half of the budget surplus as of June 30, 2001, but still left a projected balance in the SFEU at June 30, 2002, of $2.6 billion. The 2001 Budget Act assumed that, during the course of the A-33 fiscal year, the $6.2 billion advanced by the General Fund to the Department of Water Resources for power purchases would be repaid with interest. See "STATE FINANCES--Repayment of Energy Loans." The final estimate of fiscal year 2001-02 revenues and expenditures, included in the 2003-04 Governor's Budget in January 2003, showed an unprecedented drop in revenues compared to the prior year. The final estimate for the three largest tax sources was $59.7 billion, a drop of over $13 billion from 2000-01, the vast bulk of which was attributable to reduced personal income taxes from stock option and capital gains activity. This revenue shortfall and the delay of the DWR power revenue bonds past June 30, 2002, resulted in a substantial budgetary deficit and cash flow difficulties. The Department of Finance estimates that, on a budgetary basis, the General Fund had a $2.1 billion deficit at June 30, 2002. See "RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES," "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Cash Flow Borrowings" and "CURRENT STATE BUDGET--Summary of State Revenues and Expenditures." Within a few months after the start of the 2001-02 fiscal year, the Davis Administration recognized that economic growth and stock market levels were not meeting projections, and that revenues were falling below projections. Accordingly, Governor Davis imposed an immediate spending freeze for many State agencies in November 2001, and the Legislature approved spending reductions and deferrals totaling $2.3 billion for the 2001-02 fiscal year in January 2002. Despite these steps, as noted above, the State ended the fiscal year with $2.1 billion negative fund balance. The 2001 Budget Act as initially enacted included Proposition 98 per-pupil spending increases of 4.9 percent. Total General Fund spending of $32.4 billion for K-12 education fully funded enrollment and cost of living increases and also provided additional funding for a number of programs. Higher education funding was increased to allow for enrollment increases at both the University of California and the California State University system with no fee increases. Health and human services generally were fully funded for anticipated caseload growth. Funding for many of these programs was subsequently reduced as a result of the mid-year corrections noted above. The 2001 Budget Act altered the six-year transportation funding plan started in the 2000-01 fiscal year. The Legislature postponed for two years the transfer from the General Fund of $2.5 billion of sales taxes on gasoline to support transportation programs. To allow all current projects to remain on schedule through 2002-03, the Legislature authorized certain internal loans from other transportation accounts. The 2003 Budget Act also partially suspends the transfer of gasoline sales taxes out of the General Fund in 2003-04. Proposition 42, a constitutional amendment approved in March of 2002, made permanent, after 2007-08, the dedication of sales taxes on gasoline to transportation purposes. 2002 BUDGET ACT The 2002-03 Governor's Budget, released on January 10, 2002 (the "2002-03 Governor's Budget"), projected a decline in General Fund revenues due to the national economic recession combined with the stock market decline, which began in mid-2000. Personal income tax receipts, which include stock option and capital gains realizations, were particularly affected by the slowing economy and stock market decline. As a result, the Davis Administration projected a combined budget gap for 2001-02 and 2002-03 of approximately $12.5 billion. The May Revision to the 2002-03 Governor's Budget projected further deterioration in revenues and additional costs, increasing the two year budget gap to $23.6 billion. The 2002 Budget Act was signed by Governor Davis on September 5, 2002. The 2002 Budget Act addressed the $23.6 billion gap between expenditures and resources through a combination of A-34 program reductions, interfund borrowings, fund shifts, payment deferrals, accelerations and transfers, debt service restructuring savings and modest tax changes. Within a few months after the 2002 Budget Act was adopted, it became evident that revenue projections incorporated in the 2002 Budget Act were substantially overstated and that certain program cost savings included in the 2002 Budget Act would not be realized. In late November 2002, Governor Davis directed State agencies to take immediate action to reduce any non-critical or non-essential activities by not filling any vacant positions; to cancel, postpone or amend contracts, grants, purchase orders and similar commitments; to eliminate additional non-essential vacant positions; to delay construction or signing of new leases for space; to cancel or postpone non-essential trips; and to generate new proposals for current year program reductions. In December 2002, Governor Davis released proposals for immediate action to reduce the projected two-year budget gap by about $10.2 billion ($5.5 billion for 2002-03). Governor Davis requested action on these proposals early in 2003 in order to maximize savings in the 2002-03 fiscal year. The Legislature passed budget adjustment legislation in March and April 2003, totaling about $10.4 billion in spending reductions, deferrals and funding transfers ($5.1 billion for 2002-03 and $5.3 billion for 2003-04). The largest part of the reductions (including a $1.1 billion deferral into the 2003-04 fiscal year) were for K-12 education funding. The spending reductions reflected the enactment of legislation in May 2003 permitting the sale of about $1.9 billion of pension obligation bonds to fund the State's 2003-04 payments to the Public Employees' Retirement System. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds" and "CURRENT STATE BUDGET--2003 Budget Act." However, the issuance of the pension obligation bonds may be delayed or cancelled for the 2003-04 fiscal year due to a trial court ruling declining to validate the pension obligation bonds. See "LITIGATION--Bond-Related Matters." In January, 2003, the State General Fund received $2.5 billion from the first sale of the State's portion of future receipt of payments from tobacco companies from the settlement of litigation against the tobacco companies. The second sale, which raised $2.264 billion for the General Fund, was completed in September 2003. CURRENT STATE BUDGET THE DISCUSSION BELOW OF THE FISCAL YEAR 2003-04 BUDGET AND THE TABLE UNDER "SUMMARY OF STATE REVENUES AND EXPENDITURES" ARE BASED ON ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND FUTURE FISCAL YEARS AND MUST NOT BE CONSTRUED AS STATEMENTS OF FACT. THESE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS, WHICH MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED. SEE "RECENT DEVELOPMENTS REGARDING STATE ECONOMY AND FINANCES" AND "CURRENT STATE BUDGET--REVENUE AND EXPENDITURE ASSUMPTIONS." BACKGROUND. The 2003-04 Governor's Budget, released on January 10, 2003 (the "2003-04 Governor's Budget"), projected a significant downward revision in State revenues. The 2003-04 Governor's Budget projected revenues from the three largest tax sources to be about $61.7 billion in 2002-03, more than $6 billion lower than projected in the 2002 Budget Act. The 2003-04 Governor's Budget projected total revenues and transfers of $73.1 billion and $69.2 billion in 2002-03 and 2003-04 respectively. The 2003-04 Governor's Budget projected a $34.6 billion cumulative budget shortfall through June 30, 2004. A-35 The 2003-04 Governor's Budget proposed to close the $34.6 billion budget shortfall with expenditure reductions including the reduction of the vehicle license fee backfill to cities and counties, the "realignment" or shift of responsibility for certain health and welfare programs to cities and counties to be supported by increased sales tax, personal income tax and cigarette tax increases, fund shifts from the General Fund, revenues from the renegotiation of compacts with Indian tribes, and loans and borrowings (including a pension obligation bond issue to pay all or a portion of the 2003-04 retirement obligation for certain state retirement systems). On May 14, 2003, Governor Davis released the May Revision to the 2003-04 Governor's Budget (the "May Revision"). The May Revision reduced the revenue estimate for 2002-03 to $70.8 billion from the 2003-04 Governor's Budget estimate of $73.1 billion, primarily from the loss of $2 billion of revenues due to the delay of the second sale of tobacco securitization bonds. As a result principally of the loss of the tobacco securitization proceeds, together with the lost opportunities for savings because of legislative action in lower amounts than requested by Governor Davis, and higher than expected caseloads/populations for certain health and social services and correctional programs and required school payments, the May Revision estimated the budget gap for 2002-03 and 2003-04 increased from $34.6 billion to $38.2 billion. Governor Davis made a number of fundamental changes in the May Revision from his earlier budget proposals. In summary, in the May Revision, Governor Davis proposed to address the budget shortfalls in three phases: (1) eliminate an estimated $10.675 billion budget deficit accumulated through June 30, 2003 (after accounting for $5.1 billion of budget adjustments enacted in March and April 2003), by issuing fiscal recovery bonds to be repaid from a temporary one-half cent increase in the State sales tax, (2) balance the fiscal year 2003-04 budget with a combination of measures ($5.3 billion of which were approved by the Legislature in March and April) including expenditure cuts, fund shifts, transfers, loans, and the transfer ("realignment") of certain health and social services programs from the State to counties, and (3) pursue legislative action during the balance of the 2003 Legislative session to enact structural reforms that would eliminate an estimated $7.9 billion remaining funding gap for the 2004-05 fiscal year. 2003 BUDGET ACT After months of negotiation between Governor Davis and the Legislature, the 2003 Budget Act was adopted by the Legislature on July 29, 2003, along with a number of implementing measures, and signed by Governor Davis on August 2, 2003, after vetoing $47 million ($1 million General Fund and $46 million bond funds). The 2003 Budget Act largely reflected the proposals contained in the May Revision to the 2003-04 Budget, including the issuance of "fiscal recovery bonds" to address the estimated $10.675 billion budget deficit accumulated through June 30, 2003. See "LITIGATION--Bond-Related Matters." The 2003 Budget Act rejected the proposed "realignment" of certain health and social services programs (to be funded from $1.7 billion of personal and tobacco tax increases), and, instead, increased reliance upon fund shifts and transfers and additional (non-tax) revenues sources, as described below. Under the 2003 Budget Act, General Fund revenues are projected to increase 3.3 percent, from $70.9 billion in 2002-03 to $73.3 billion in 2003-04. The revenue projections incorporate a 4 percent increase in State tax revenues (as projected by the LAO's office), reflecting a correspondingly moderate growth in the State's economy and the State Department of Finance believes such forecast is reasonable. See "Economic Assumptions" below. Significant items of non-tax revenue are described below under "Addressing the $38.2 Billion Shortfall." A-36 General Fund expenditures are estimated to drop 9 percent from $78.1 billion in 2002-03 to $71.1 billion in 2003-04. Most of this decline can be explained by four factors: (1) the suspension of vehicle license fee backfill payments to local governments, which is estimated to result in $4.2 billion of savings in 2003-04. See "STATE FINANCES-Local Governments." In addition, the administrative action which suspended the vehicle license fee offsets has been challenged in court. See "STATE FINANCES--Sources of Tax Revenues--Vehicle License Fee," "Local Governments" and "LITIGATION--Challenge to Discontinuation of Vehicle License Fee Offset"; (2) approximately $1.8 billion of federal funds under the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 to cover State costs in 2003-04. (In comparison, approximately $321 million of such federal funds was received in 2002-03.) Approximately $694 million will be used to offset Medi-Cal costs in 2003-04, and the remainder will be used to cover other critical State program spending. These new federal funds are not expected to be available in 2004-05 and beyond; (3) the receipt of $1.9 billion of pension obligation bond proceeds to cover all of the State's quarterly contributions to CalPERS for 2003-04, which would reduce General Fund expenditures by $900 million and increase revenues by $1 billion. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds." Delays caused by litigation contesting the issuance of such bonds have reduced the anticipated size of the bond proceeds to be derived from such issuance to $1.355 billion. See "LITIGATION--Bond-Related Matters." The next quarterly estimated $553 million CalPERS contribution is due on January 2, 2004. It is possible that, even if the State prevails in the litigation, delays could further reduce the size of, or eliminate the issuance of any of the pension bonds in fiscal year 2003-04, requiring further mitigation measures by the State in order to maintain the estimated budget reserve; and (4) a one-time shift of Medi-Cal accounting from accrual to cash basis ($930 million). In the LAO's Budget Analysis, dated August 1, 2003, the LAO concluded that, absent the above-described factors, underlying spending for 2002-03 and 2003-04 would be roughly equal. Moreover, the LAO concluded that "the 2003-04 spending level is considerably less than what would be required to maintain "baseline spending" for the [2003-04 fiscal] year." The LAO defines "baseline spending" to include spending requirements imposed by existing law, policies and State mandates at the beginning of the fiscal year. The June 30, 2004 reserve is projected in the Budget to be just over $2 billion. This reflects the elimination of the $10.675 billion accumulated deficit through June 30, 2003, through the issuance of the fiscal recovery bonds. See "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds" below. However, the proposed issuance of the fiscal recovery bonds is the subject of current litigation. See "LITIGATION--Bond-Related Matters." The Legislative Analyst's Office has predicted that additional legislative action will be required in fiscal year 2004-05 to eliminate an estimated $7.9 billion remaining funding gap by the end of 2004-05. See "CURRENT STATE BUDGET--2003 Budget Act--Continuing 'Structural Deficit.'" ADDRESSING THE $38.2 BILLION SHORTFALL In May 2003, Governor Davis projected that, without further corrective action, the State would face an estimated $38.2 billion shortfall for fiscal years 2002-03 and 2003-04 combined. This estimate was based on the expenditure levels as required by the Constitution and State law, mandated by the federal government, or ordered by the courts, and accounted for scheduled cost of living adjustments, as well as increases due, among other things, to enrollment, caseload and population growth. Approximately A-37 $10.4 billion of this shortfall was addressed through legislative action taken in March and April 2003 ($5.1 billion for fiscal year 2002-03 and $5.3 billion for fiscal year 2003-04). The remainder of the shortfall is addressed through the issuance of fiscal recovery bonds which are expected to generate proceeds in the amount of approximately $10.7 billion in 2003-04 and other solutions contained in the 2003 Budget Act. Absent the corrective measures contained in the 2003 Budget Act and described below, the State was projected to expend $90.9 billion in 2003-04 rather than the budgeted $71.1 billion. Set forth below is a summary of the expenditure cuts and savings, fund shifts, new revenues, loans and borrowing, and the fiscal recovery bond financing incorporated into the 2003 Budget Act described above. These amounts include the effects of the legislative action taken in March and April 2003. 2003 BUDGET ACT ADDRESSING THE $38.2 BILLION BUDGET SHORTFALL (DOLLARS IN MILLIONS)
CATEGORY AMOUNT PERCENT OF SOLUTION - --------------------------------------------- ---------- --------------------- Cuts/Savings $ 17,589.6 44.6% Fund Shifts 4,357.0 11.1% Tobacco Securitization and Other Revenues 4,466.3 11.3% Pension Obligation Bonds and Interfund Loans 2,326.2 5.9% Fiscal Recovery Bonds 10,675.4 27.1% ---------- --------- Totals $ 39,414.5* 100.0% ========== ========
- ---------- Note: Numbers may not add due to rounding. *Reflects projected General Fund reserve balance of $2.2 billion at year end. EXPENDITURE CUTS/SAVINGS. Expenditure cuts/savings total $17.6 billion ($2.1 billion in 2002-03 and $15.5 billion in 2003-04), including the following major items: - VLF backfill suspension ($4.2 billion), as described above. - Employee compensation reductions and the abolishment of 16,000 permanent positions to be implemented through collective bargaining ($585 million from the General Fund and a total of $1.1 billion from all funds). - Change Medi-Cal accounting from accrual to cash basis ($930 million), as described above. - Partial suspension of transfer of gasoline sales tax revenue to Transportation Investment Fund to be repaid with interest by June 30, 2009 ($856 million). - Community Redevelopment Agency Transfer to the Educational Revenue Augmentation Fund ($135 million). - $3.1 billion in K-12 Education programs, including program cuts ($1.2 billion), elimination of COLAs ($800 million) and permanent Proposition 98 deferrals ($1.087 billion). A-38 - $1.186 billion in Higher Education Programs, including University of California ($484 million), California State University ($409 million) and California Community Colleges ($293 million), some of which will be offset by higher fees. - Deferral of a loan repayment from Caltrans ($500 million). - Defer funding of mandate deficiencies and new mandate costs ($870 million) and reduce non-Proposition 98 mandates ($769 million). - Eliminate equalization funding for revenue limits ($250 million). - Reductions in payments for retired teachers purchasing power maintenance, which the State is obligated to restore if purchasing power is not maintained at the 80 percent level through 2036 ($500 million). See, "LITIGATION - Challenge Seeking Payment to Teacher's Retirement Board." FUND SHIFTS Fund shifts from the General Fund to other fund sources total $4.3 billion ($1.0 billion in 2002-03 and $3.3 billion in 2003-04), including the receipt of approximately $2.2 billion of new federal funds under the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 (as described above), $355 million in new fees to offset General Fund costs, $492 million from shifts to Proposition 98 reversion account, $200 million for community colleges spending deferral, $220 million for healthy families costs funded out of tobacco settlement funds to offset additional costs, $143 million shift to federal funds, and $700 million in other fund shifts. OTHER REVENUES Other revenues total $4.5 billion ($0.3 billion in 2003-03 and $4.2 billion in 2003-04), including approximately $2 billion of proceeds from the tobacco settlement bonds; $680 million additional revenues resulting from renegotiation of compact agreements between Indian tribes and the State (still in progress); $756 million from the adoption of the higher revenues estimates as projected by the Legislative Analyst's Office; $289 million for fees; $112 million for additional unclaimed property revenues; $110 million for additional revenues from property sales and $598 million for other revenue increases and transfers. LOANS/BORROWINGS Loans/Borrowings total $2.3 billion in 2003-04. This includes $1.9 billion in proceeds from the proposed issuance of pension obligation bonds (see "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds" and "LITIGATION--Bond-Related Matters") and $400 million in loans from other various funds and accounts. FISCAL RECOVERY BONDS The California Fiscal Recovery Financing Act authorizes the issuance of fiscal recovery bonds to eliminate the estimated $10.675 billion accumulated deficit through June 30, 2003. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Fiscal Recovery Bonds." This is the largest and most critical component of the 2003 Budget Act. The State plans to issue the fiscal recovery bonds in February and April of 2004. However, the issuance of the fiscal recovery bonds is the subject of current litigation. See "LITIGATION--Bond-Related Matters." A-39 In the event that litigation materially delays or prevents the issuance of the fiscal recovery bonds, the size of the remaining shortfall would most certainly exceed the amount of discretionary spending within the 2003 Budget Act which could be cut to address the shortfall. The resulting shortfall would also cause a cash shortfall. The State would almost certainly be required to substantially reduce 2003-04 spending, raise taxes and/or incur other short term or long term borrowings, to the extent legally feasible and to the extent the State had continued access to the capital markets. The State expects to take all steps necessary to continue to have access to the short-term and long-term credit markets. The State might also be required to issue registered warrants if it requests an advance under the Forward Purchase Agreements, draws on the Letters of Credit or is otherwise unable to pay principal and interest on the 2003-04 RANs at maturity. Issuance of such registered warrants would further restrict the State's cash flow options. See "CASH FLOW--2003 Revenue Anticipation Warrants" and "--Fiscal Year 2003-04 Revenue Anticipation Notes." The Fiscal Recovery Bond Fund, the fund from which appropriations to pay the fiscal recovery bonds may be made by future Legislatures, will be financed by a temporary increase in the State's sales tax. Simultaneously with the temporary increase in the State's sales tax, the local sales tax authorization under State law will be reduced by one-half cent, and local governments' share of local property tax will be increased by a like amount. See "STATE FINANCES--Sources of Tax Revenue--Sales Tax." While this reduces the amount of property tax going to schools, Proposition 98 requires that the State make certain minimum payments to schools. See "STATE FINANCE--Proposition 98." Accordingly, the State will make payments to local governments and schools in amounts generally equal to the reduced amounts of sales taxes available to local governments and reduced property taxes available to school districts. These payments to local governments and school districts will commence in fiscal year 2004-05. The estimated amount of such payments for fiscal year 2004-05 is $2.5 billion. BUDGET CONTROLS AND FLEXIBILITY Chapter 228, Statutes of 2003 (AB 1756), authorizes the Director of Finance to reduce appropriations and to reallocate funds among appropriations available to each department in order to ensure the integrity of the 2003 Budget Act. Additionally, the 2003 Budget Act limits the Department of Finance's authority to approve requests for additional funding in the current year ("deficiency requests"). Deficiency requests to fund prior year expenditures, costs associated with legislation enacted without an appropriation, and start-up costs for programs not yet authorized may not be approved. CONTINUING "STRUCTURAL DEFICIT" Assuming that all of the savings in the 2003 Budget Act are achieved, on August 1, 2003, the Legislative Analyst's Office estimated that, absent further corrective actions, and assuming that the State adheres to the intent of Chapter 228, Statutes of 2003 (AB 1756) (described below), the State would end fiscal year 2004-05 with a $7.9 billion funding gap. The LAO funding gap estimate also assumes the effects of the Legislature's intent (expressed in AB 1756 and described below) limiting, among other expenditures, employee compensation and COLAs. The Department of Finance requested State agencies to submit proposals to reduce 2004-05 spending equivalent to 20-percent of the 2003-04 General Fund funding. The proposals are confidential and will be considered during the fall budget development process to help address the projected $7.9 billion funding shortfall in 2004-05. Any proposals selected by the Administration for implementation will be included in the 2004-05 Governor's proposed budget, to be released on January 10, 2004. A-40 Chapter 228, Statutes of 2003 (AB 1756), states the Legislature's intent that, in assisting the Governor in preparing the State Budget for fiscal year 2004-05, the Department of Finance not include any proposed funding for certain items, including salary increases, enrollment growth, and discretionary price adjustments at the University of California and California State University, discretionary price adjustments to State operations, State employee salary increases, local mandate reimbursements, General Fund capital outlay above $50 million, the All American Canal and Proposition 98 spending in excess of the minimum guarantee for fiscal years 2003-04 and 2004-05. ELECTION OF NEW GOVERNOR Uncertified results from a special election held on October 7, 2003 indicate that the Governor of the State, Gray Davis, has been recalled and that he will be replaced as Governor by Arnold Schwarzenegger. The Secretary of State of the State has until November 15, 2003 to certify the results of the recall election. The new Governor would not take office until the election results are certified. The Governor-elect is in the process of assembling his staff and evaluating the State's financial condition. As a result of his evaluation, he may propose mid-year legislation or take executive actions which could affect the State's receipts, disbursements and proposed borrowings during the current fiscal year. A-41 SUMMARY OF STATE REVENUES AND EXPENDITURES The table below presents the actual revenues, expenditures and changes in fund balance for the General Fund for fiscal years 1999-00, 2000-01 and 2001-02, estimated results for fiscal year 2002-03 and projected results (based upon the 2003 Budget Act) for fiscal year 2003-04. TABLE 10 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE-GENERAL FUND (BUDGETARY BASIS)(a) FISCAL YEARS 1999-00 THROUGH 2003-04 (MILLIONS)
ESTIMATED(b) ESTIMATED(b) 1999-00 2000-01 2001-02 2002-03(c) 2003-04(c) ---------- ---------- ---------- ------------ ------------ FUND BALANCE-BEGINNING OF PERIOD $ 3,907.7 $ 9,639.7 $ 9,017.5 $ (2,109.8) $ 1,401.9 Restatements Prior Year Revenue, Transfer Accrual Adjustments (204.6) (158.8) (729.8) 169.5 - Prior Year Expenditure, Accrual Adjustments 217.1 (229.9) 217.4 (43.5) - ---------- ---------- ---------- ------------ ------------ FUND BALANCE-BEGINNING OF PERIOD, AS RESTATED $ 3,920.2 $ 9,251.0 $ 8,505.1 $ (1,983.8) $ 1,401.9 Revenues $ 71,555.6 $ 77,609.9 $ 64,060.3 $ 68,071.3 $ 71,522.0 Other Financing Sources Deficit Financing Bond(d) 10,675.4 Transfers from Other Funds 423.3 6,561.8(e) 2,143.3 2,780.7 1,831.2 Other Additions 48.1 46.3 33.9 - - ---------- ---------- ---------- ------------ ------------ TOTAL REVENUES AND OTHER SOURCES $ 72,027.0 $ 84,218.0 $ 66,237.5 $ 81,527.4 $ 73,353.2 Expenditures State Operations $ 15,942.8 $ 17,641.7 $ 19,085.7 $ 18,394.9 $ 16,484.5 Local Assistance 49,974.7 58,441.4 57,142.0 59,598.9 54,574.6 Capital Outlay 186.2 2,044.3 323.5 147.9 77.8 Unclassified - - - - - Other Uses Transfer to Other Funds 203.8 6,324.1(e) 301.2 -(f) -(f) ---------- ---------- ---------- ------------ ------------ TOTAL EXPENDITURES AND OTHER USES $ 66,307.5 $ 84,451.5 $ 76,852.4 $ 78,141.7 $ 71,136.9 REVENUES AND OTHER SOURCES OVER OR (UNDER) EXPENDITURES AND OTHER USES $ 5,719.5 $ (233.5) $(10,614.9) $ 3,385.7 $ 2,216.3 Fund Balance Reserved for Encumbrances $ 701.3 $ 1,834.3 $ 1,491.5 $ 1,401.9 $ 1,401.9 Reserved for Unencumbered Balances of Continuing Appropriations(g) 1,115.2 1,436.7 827.3 - 174.9 Reserved for School Loans(h) 699.7 349.7 - - - Unreserved-Undesignated (i) 7,123.5 5,396.8 (4,428.6) - 2,041.4 ---------- ---------- ---------- ------------ ------------ FUND BALANCE-END OF PERIOD $ 9,639.7 $ 9,017.5 $ (2,109.8) $ 1,401.9 $ 3,618.2
- ---------- Footnotes on following page. Source: Fiscal years 1999-00 to 2001-02: State of California, Office of the State Controller. Fiscal years 2002-03 and 2003-04: State of California, Department of Finance. A-42 (a) These statements have been prepared on a budgetary basis in accordance with State law and some modifications would be necessary in order to comply with generally accepted accounting principles ("GAAP"). The Supplementary Information contained in the State's Audited Annual Financial Statements for the year ended June 30, 2003, incorporated by reference in this APPENDIX A, contains a description of the differences between the budgetary basis and the GAAP basis of accounting and a reconciliation of the June 30, 2002 fund balance between the two methods. (b) Estimates are shown net of reimbursements and abatements. (c) Estimated as of the 2003 Budget Act, August 2, 2003. (d) Reflects the Davis Administration's proposal to finance the cumulative deficit over several years through the issuance of approximately $10.7 billion of fiscal recovery bonds in 2003-04. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Fiscal Recovery Bonds" and "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds." For accounting purposes, this is shown in 2002-03 to reflect that the accumulated deficit has been eliminated as of the start of fiscal year 2003-04. (e) "Transfers to Other Funds" includes the $6.2 billion General Fund loan to the Department of Water Resources Electric Power Purchase Fund. See "STATE FINANCES--Repayment of Energy Loans" and "CURRENT STATE BUDGET" in this APPENDIX A. "Transfers from Other Funds" includes this loan as a receivable in 2000-01. The loan was subsequently repaid with interest as follows: $116 million in July 2001, $164 million in October 2002, and $6.456 billion in November 2002. The loan was reported in the State's Budgetary/Legal Basis Annual Report as an asset of the General Fund and a liability of the Department of Water Resources Electric Power Purchase Fund. (f) "Transfer to Other Funds" is included either in the expenditure totals detailed above or as "Transfer from Other Funds." (g) For purposes of determining whether the General Fund budget, in any given fiscal year, is in a surplus or deficit condition, Chapter 1238, Statutes of 1990, amended Government Code Section 13307. As part of the amendment, the unencumbered balances of continuing appropriations which exist when no commitment for an expenditure is made should be an item of disclosure, but the amount shall not be deducted from the fund balance. Accordingly, the General Fund condition included in the 2003-04 Governor's Budget includes the unencumbered balances of continuing appropriations as a footnote to the statement ($1.307 billion in 2001-02, $270.0 million in 2002-03 and $174.9 million in 2003-04). However, in accordance with Government Code Section 12460, the State's Budgetary/Legal Basis Annual Report reflects a specific reserve for the encumbered balance for continuing appropriations. (h) During 1995, a reserve was established in the General Fund balance for the $1.7 billion of previously recorded school loans which had been authorized by Chapter 703, Statutes of 1992 and Chapter 66, Statutes of 1993. These loans were repaid from future General Fund appropriations as part of the settlement of litigation. This accounting treatment is consistent with the State's audited financial statements prepared in accordance with GAAP. (i) Includes Special Fund for Economic Uncertainties (SFEU). The Department of Finance generally includes in its estimates of the SFEU and set aside reserves, if any, the items reported in the table under "Reserved for Unencumbered Balances of Continuing Appropriations," "Reserved for School Loans," and "Unreserved--Undesignated." The Department of Finance projects a $2.216 billion SFEU balance on June 30, 2004, based upon the 2003 Budget Act, signed on August 2, 2003. A-43 REVENUE AND EXPENDITURE ASSUMPTIONS The table below presents the Department of Finance's budget basis statements of major General Fund revenue sources and expenditures for the 2001-02 fiscal year and 2003 Budget Act estimates for the 2002-03 and 2003-04 fiscal years. TABLE 11 MAJOR GENERAL FUND REVENUE SOURCES AND EXPENDITURES
REVENUES (MILLIONS) FISCAL YEARS ---------------------------------------------------- 2001-02(a) 2002-03(b) 2002-03(c) 2003-04(c) SOURCE ACTUAL ENACTED REVISED ENACTED - -------------------------------- ---------- ---------- ---------- ---------- Personal Income Tax $ 33,047 $ 37,626 $ 32,442 $ 33,596 Sales and Use Tax 21,355 22,958 22,330 23,518 Corporation Tax 5,333 7,327 6,700 7,035 Insurance Tax 1,596 1,759 1,880 2,068 Deficit Financing Bond(d) 10,675 All Other 10,908(e) 9,488(f) 7,500(g) 7,136(h) ---------- ---------- ---------- ---------- Total Revenues and Transfers $ 72,239 $ 79,158 $ 81,527 $ 73,353 ========== ========== ========== ==========
EXPENDITURES (MILLIONS) FISCAL YEARS ---------------------------------------------------- 2001-02(a) 2002-03(b) 2002-03(c) 2003-04(c) ACTUAL ENACTED REVISED ENACTED ---------- ---------- ---------- ---------- FUNCTION K-12 Education $ 29,923 $ 30,769 $ 29,469 $ 29,318 Health and Human Services 21,820 21,633 23,150 23,358 Higher Education 9,645 9,759 9,543 8,679 Youth and Adult Correctional 5,641 5,285 5,833 5,644 Legislative, Judicial and Executive 2,612 2,464 2,486 2,406 Tax Relief 3,029 4,422 4,802 707(i) Resources 1,382 1,041 1,243 865 State and Consumer Services 690 471 480 444 Business, Transportation and Housing 639 228 211 512 All Other 1,371 650 925 -796(j) ---------- ---------- ---------- ---------- Total Expenditures $ 76,752 $ 76,722 $ 78,142 $ 71,137 ========== ========== ========== ==========
- ---------- Footnotes continue on following page. Source: State of California, Department of Finance. Figures in this table may differ from the figures in Table 4; see "Note" to Table 4. (a) Figures for 2001-02, prepared by the Department of Finance, are slightly different than the figures in Table 10, prepared by the State Controller's Office, because of certain differences in accounting methods used by the two offices. (b) 2002 Budget Act, September 5, 2002. (c) 2003 Budget Act, August 2, 2003. (d) Reflects the Davis Administration's proposal to finance the cumulative deficit over several years through the issuance of approximately $10.7 billion of fiscal recovery bonds in 2003-04. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Fiscal Recovery Bonds" and "CURRENT STATE BUDGET--2003 Budget Act--Fiscal Recovery Bonds." A-44 (e) Reflects the repayment of $6.2 billion in advances (plus interest of $525 million) made from the General Fund to the Department of Water Resources for the power supply program described under "STATE FINANCES--Repayment of Energy Loans." Repayment was made as follows: $116 million in July 2001, $164 million in October 2002, and $6.456 billion in November 2002. (f) Includes $4.5 billion for tobacco securitization bond proceeds and about $2.5 billion in inter-fund loans and transfers. (g) Includes $2.5 billion for tobacco securitization bond proceeds and about $2.8 billion in inter-fund loans and transfers. The Budget Act reflected $4.5 billion for tobacco securitization bond proceeds; however, the second sale ($2.0 billion) was not completed during fiscal year 2002-03. (h) Includes $2.0 billion for tobacco securitization bond proceeds. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Enhanced Tobacco Settlement Revenue Bonds." Also includes the anticipated receipt of $996 million from pension obligation bonds, which would be used to offset special fund contributions to pension funds. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds." (i) Reflects the suspension of vehicle license fee backfill payments to local government. See "STATE FINANCES--Sources of Tax Revenue--Vehicle License Fee." (j) Reflects reduced expenditures of $912 million due to the anticipated receipt of pension obligation bond proceeds to cover General Fund contributions to pension funds. See "STATE INDEBTEDNESS AND OTHER OBLIGATIONS--Pension Obligation Bonds." ECONOMIC ASSUMPTIONS The revenue and expenditure assumptions set forth have been based upon certain estimates of the performance of the California and national economies in calendar years 2003 and 2004. In the May Revision of the 2003-04 Governor's Budget, the Department of Finance projected that the California economy would grow slowly in 2003 and moderately in 2004. The California economy has tracked the national economy quite closely in the last calendar year. Both economies have been sluggish. From August 2002 to August 2003, nonfarm payroll employment fell by 0.3 percent in the State and 0.4 percent in the nation. Over that year, state unemployment varied narrowly, never exceeding 6.9 percent or falling below 6.6 percent. The gap between the State and national unemployment rates has narrowed in recent months. In addition, homebuilding was strong in both the State and the nation, as were housing markets. Economic output appears to be growing in both the nation and California. Inflation-adjusted Gross Domestic Product has grown for seven consecutive quarters. Statistics on Gross State Product are not as timely as those on (national) Gross Domestic Product, but the U.S. Commerce Department recently estimated that California personal income grew for the fifth consecutive month in the first quarter of 2003. In addition, personal state income tax withholdings were up 5.6 percent in the first nine months of 2003 from a year earlier. State sales tax revenues also increased over that period. Job losses have slowed down considerably in the San Jose and San Francisco metropolitan areas. Nonfarm payroll employment was down 4.6 percent in August 2003 from a year earlier in the San Jose metropolitan area and 1.8 percent in the San Francisco metropolitan area. A year ago, employment was down 8.4 percent and 5.5 percent, respectively, in the two metropolitan areas. By the same measure, however, job growth has slowed over the last year in the Riverside-San Bernardino and San Diego metropolitan areas. Construction and real estate remain strong. Permits for 130,225 new units were issued in the first eight months of 2003, up 20.3 percent from the year-ago level. A rush to beat large fee increases accounted for some of the increased permit issuance. Still, residential building for the year as a whole is likely to be the highest level since 1989. Private nonresidential building continues to slide, with the San Francisco Bay Area accounting for most of the slowdown. A-45 The median price of existing, single-family houses sold in California in August was a record $404,870, up 21.1 percent from a year ago. Sales were up 14.7 percent from a year earlier. According to the California Association of Realtors, the percentage of households in California able to afford a median-priced home stood at 26 percent in July. The corresponding measure of home affordability in the nation was 56 percent in July. Job growth may remain slow for the rest of 2003. Some industries still have too much capacity, dampening prospects for a strong recovery in the near-term. Moreover, if productivity continues to grow as quickly as in the last year, improvement in the labor markets will likely come first in the form of fewer layoffs and longer workweeks for employed workers. Actual employment gains will trail behind, and declines in the unemployment rate will come even later. The Department of Finance set out the following estimates for the State's economic performance in calendar years 2003 and 2004, which were used in predicting revenues and expenditures for the May Revision of the 2003-04 Governor's Budget. Also shown is the Department of Finance's previous forecast for the same calendar years, which were contained in the 2003-04 Governor's Budget. TABLE 12 ESTIMATES OF STATE'S ECONOMIC PERFORMANCE
FOR CALENDAR YEAR 2003 FOR CALENDAR YEAR 2004 -------------------------- -------------------------- GOVERNOR'S MAY GOVERNOR'S MAY BUDGET(a) REVISION(b) BUDGET(a) REVISION(b) ----------- ----------- ----------- ----------- Non-farm wage and salary employment (000) 14,623 14,608 14,928 14,922 Percent Change 0.7% 0.6% 2.1% 2.1% Personal income ($ billions) $ 1,176 $ 1,174 $ 1,238 $ 1,232 Percent Change 3.3% 3.1% 5.3% 4.9% Housing Permits (Units 000) 157 179 162 174 Consumer Price Index (percent change) 2.8% 2.9% 3.2% 2.4%
- ---------- (a) Fiscal Year 2003-04 Governor's Budget Summary: January 10, 2003. (b) Fiscal Year 2003-04 May Revision to the Governor's Budget: May 14, 2003. Source: State of California, Department of Finance. FINANCIAL STATEMENTS The Audited Annual Financial Statements of the State of California for the Year Ended June 30, 2002 (the "Financial Statements") are available. As of June 30, 2002, the State of California has implemented a new financial reporting model, as required by the Governmental Accounting Standards Board ("GASB") in conformity with accounting principles generally accepted in the United States of America. The GASB sets standards of accounting and financial reporting for state and local governments, which have significantly changed the presentation of the financial statements. The Financial Statements consists of an Independent Auditor's Report, a Management Discussion and Analysis, Basic Financial Statements of the State for the Year Ended June 30, 2002 ("Basic Financial Statements"), and Supplementary Information. Only the Basic Financial Statements have been audited, as described in the Independent Auditor's Report. A description of the new accounting and financial reporting standards is contained in Note 1 of the Basic Financial Statements. A-46 Potential investors may obtain or review a copy of the Financial Statements from the following sources: 1. By obtaining from any Nationally Recognized Municipal Securities Information Repository, or any other source, a copy of the State of California's Official Statement dated February 13, 2003, relating to the issuance of $900,000,000 General Obligation Bonds. The Financial Statements are printed in full in such Official Statement. No part of the February 13, 2003 Official Statement is incorporated into this document except the Financial Statements. 2. By accessing the internet website of the State Controller (www.sco.ca.gov) and selecting "California Government--State and Local," then "State Government," then finding the heading "Publications" and selecting "Comprehensive Annual Financial Report--Year Ended June 30, 2002," or by contacting the Office of the State Controller at (916) 445-2636. 3. By accessing the internet website of the State Treasurer (www.treasurer.ca.gov) and selecting "Financial Information" and then "Audited General Purpose Financial Statements," or by contacting the Office of the State Treasurer at (800) 900-3873. The State Controller's unaudited reports of cash receipts and disbursements for the period July 1, 2002 through September 30, 2003 is also included as Exhibits 1 and 2 to this APPENDIX A and is available on the State Controller's website. Periodic reports on revenues and/or expenditures during the fiscal year are issued by the Administration, the State Controller's Office and the Legislative Analyst's Office. The State Controller issues a monthly report on cash receipts and disbursements recorded on the Controller's records. The Department of Finance issues a monthly bulletin, available by accessing the internet website of the Department of Finance (www.dof.ca.gov), which reports the most recent revenue receipts as reported by State departments, comparing those receipts to budget projections. The Administration also formally updates its budget projections three times during each fiscal year, in January, May, and at the time of budget enactment. These bulletins and reports are available on the internet at websites maintained by the agencies and by contacting the agencies at their offices in Sacramento, California. Such bulletins and reports are not part of or incorporated into the Official Statement. Investors are cautioned that interim financial information is not necessarily indicative of results for a fiscal year. Information which may appear in the Official Statement from the Department of Finance concerning monthly receipts of "agency cash" may differ from the State Controller's reports of cash receipts for the same periods because of timing differences in the recording of in-transit items. OVERVIEW OF STATE GOVERNMENT ORGANIZATION OF STATE GOVERNMENT The State Constitution provides for three separate branches of government: the legislative, the judicial and the executive. The Constitution guarantees the electorate the right to make basic decisions, including amending the Constitution and local government charters. In addition, the State voters may directly influence State government through the initiative, referendum and recall processes. California's Legislature consists of a forty-member Senate and an eighty-member Assembly. Assembly members are elected for two-year terms, and Senators are elected for four-year terms. Assembly members are limited to three terms in office and Senators to two terms. The Legislature meets almost year round for a two-year session. The Legislature employs the Legislative Analyst, who provides reports on State finances, among other subjects. The Bureau of State Audits, headed by the State Auditor, A-47 an independent office since 1993, annually issues an auditor's report based on an examination of the General Purpose Financial Statements of the State Controller, in accordance with generally accepted accounting principles. The Governor is the chief executive officer of the State and is elected for a four-year term. The Governor presents the annual budget and traditionally presents an annual package of bills constituting a legislative program. In addition to the Governor, State law provides for seven other statewide elected officials in the executive branch. The current elected statewide officials, their party affiliation and the dates on which they were first elected are as follows:
OFFICE NAME PARTY AFFILIATION FIRST ELECTED - ------ ---- ----------------- ------------- Governor Gray Davis Democrat 1998 Lieutenant Governor Cruz Bustamante Democrat 1998 Controller Steve Westly Democrat 2002 Treasurer Philip Angelides Democrat 1998 Attorney General Bill Lockyer Democrat 1998 Secretary of State Kevin Shelley Democrat 2002 Superintendent of Public Instruction Jack O'Connell Democrat 2002 Insurance Commissioner John Garamendi Democrat 2002
The current term for each office expires in January 2007. Persons elected to statewide offices are limited to two terms in office (eight years) from the dates shown above. Mr. Garamendi previously served as elected Insurance Commissioner before term limits were enacted. See "INTRODUCTION TO APPENDIX A" for a description of the result of the October 7, 2003 recall election for Governor indicating that Gray Davis has been recalled as Governor and will be replaced by Arnold Schwarzenegger. The executive branch is principally administered through twelve major agencies and departments: Business, Transportation and Housing Agency, Child Development and Education Agency, Environmental Protection Agency, Department of Finance, Department of Food and Agriculture, Health and Human Services Agency, Labor and Workforce Development Agency (formerly Department of Industrial Relations), Resources Agency, State and Consumer Services Agency, Department of Veterans Affairs, Technology, Trade and Commerce Agency (to be eliminated starting January 2004), and Youth and Adult Correctional Agency. In addition, some State programs are administered by boards and commissions, such as The Regents of the University of California, Public Utilities Commission, Franchise Tax Board and California Transportation Commission, which have authority over certain functions of State government with the power to establish policy and promulgate regulations. The appointment of members of boards and commissions is usually shared by the Legislature and the Governor, and often includes ex officio members. California has a comprehensive system of public higher education comprised of three segments: the University of California, the California State University System and California Community Colleges. The University of California provides undergraduate, graduate and professional degrees to students. Approximately 47,000 degrees were awarded in the 2001-02 school year. About 186,600 full-time students were enrolled at the nine UC campuses and the Hastings College of Law in the 2001-02 school year. The California State University System, provides undergraduate and graduate degrees to students. Approximately 76,000 degrees were awarded in the 2001-02 school year. About 316,400 full-time students were enrolled at the 23 campuses in the 2001-02 school year. The third sector consists of 108 campuses operated by 72 community college districts which provide associate degrees and certificates. A-48 Approximately 114,000 associate degrees and certificates were awarded in the 2001-02 school year. About 1.8 million students were enrolled in California's community colleges in the fall of 2002. EMPLOYEE RELATIONS In 2003-04, the State work force is comprised of approximately 328,000 personnel years, of which approximately 118,000 personnel years represent employees of institutions of higher education. Of the remaining 210,000 personnel years, approximately 160,000 are subject to collective bargaining and approximately 50,000 are excluded from collective bargaining. These numbers will be reduced by Control Section 4.10, which requires a $1.1 billion ($585 million General Fund) reduction in 2003-04 employee compensation costs and the abolishment of 16,000 permanent positions. If collective bargaining produces concessions, the number of positions required for abolishment would be reduced. State law provides that State employees, defined as any civil service employee of the State and teachers under the jurisdiction of the Department of Education or the Superintendent of Public Instruction, and excluding certain other categories, have a right to form, join, and participate in the activities of employee organizations for the purpose of representation on all matters of employer-employee relations. The chosen employee organization has the right to represent its members, except that once an employee organization is recognized as the exclusive representative of a bargaining unit, only that organization may represent employees in that unit. The scope of representation is limited to wages, hours, and other terms and conditions of employment. Representatives of the Governor are required to meet and confer in good faith and endeavor to reach agreement with the employee organization, and, if agreement is reached, to prepare a memorandum of understanding and present it to the Legislature for ratification. The Governor and the recognized employee organization are authorized to agree mutually on the appointment of a mediator for the purpose of settling any disputes between the parties, or either party could request the Public Employment Relations Board to appoint a mediator. State employees are represented by 21 collective bargaining units. The State recently signed Memoranda of Understanding with 16 of these collective bargaining units to achieve current year savings in State personnel costs, a way of mitigating the State's difficult fiscal condition. Two of these contracts expire in June 2004, seven of these contracts expire in June 2005, five of these contracts expire in June 2006, and two of these contracts expire in June 2008. Another collective bargaining unit is under contract until July 2006. The remaining four collective bargaining units, comprising less than 5 percent of the State workforce, do not have a signed contract; the terms of the prior agreements remain in effect. The Department of Personnel Administration (DPA) is continuing to negotiate with these units. The State has not experienced a major work stoppage since 1972. The California State Employees' Association (CSEA) is the exclusive representative for nine of the 21 collective bargaining units, or approximately 50 percent of those employees subject to collective bargaining. Each of the remaining exclusive representatives represents only one bargaining unit. ECONOMY AND POPULATION INTRODUCTION California's economy, the largest among the 50 states and one of the largest in the world, has major components in high technology, trade, entertainment, agriculture, manufacturing, tourism, construction and services. California's economy slipped into a recession in early 2001, losing about 290,000 jobs between March 2001 and January 2002. The recession was concentrated in the State's hightech sector and, geographically, in the San Francisco Bay Area. Employment grew by about 79,000 jobs A-49 between January 2002 and May 2002 as the State began to recover. The recovery then stalled, however, and since then, the economy has been sluggish, with unemployment varying narrowly between 6.6 percent and 6.9 percent and employment falling by about 14,000 between May 2002 and June 2003. See "CURRENT STATE BUDGET--Economic Assumptions." POPULATION AND LABOR FORCE The State's July 1, 2002 population of over 35 million represented over 12 percent of the total United States population. California's population is concentrated in metropolitan areas. As of the April 1, 2000 census, 97 percent resided in the 25 Metropolitan Statistical Areas in the State. As of July 1, 2000, the 5-county Los Angeles area accounted for 48 percent of the State's population, with over 16.0 million residents, and the 10-county San Francisco Bay Area represented 21 percent, with a population of over 7.0 million. The following table shows California's population data for 1994 through 2002. TABLE 13 POPULATION 1994-2002(a)
CALIFORNIA % INCREASE OVER UNITED STATES % INCREASE OVER CALIFORNIA AS % YEAR POPULATION PRECEDING YEAR POPULATION PRECEDING YEAR OF UNITED STATES - ------ ------------ ---------------- -------------- ---------------- ---------------- 1994 31,523,080 0.7% 263,125,821 1.2% 12.0 1995 31,711,094 0.6 266,278,393 1.2 11.9 1996 31,962,050 0.8 269,394,284 1.2 11.9 1997 32,451,746 1.5 272,646,925 1.2 11.9 1998 32,861,779 1.3 275,854,104 1.2 11.9 1999 33,417,247 1.7 279,040,168 1.2 12.0 2000 34,036,376 1.9 282,224,348 1.1 12.1 2001 34,698,173 1.9 285,317,559 1.1 12.2 2002 35,301,480 1.7 288,368,698 1.1 12.2
- ---------- (a) Population as of July 1. Source: U. S. figures from U.S. Department of Commerce, Bureau of the Census; California figures from State of California, Department of Finance. The following table presents civilian labor force data for the resident population, age 16 and over, for the years 1993 to 2002. A-50 TABLE 14 LABOR FORCE 1993-2002 (THOUSANDS)
UNEMPLOYMENT RATE (%) YEAR LABOR FORCE EMPLOYMENT CALIFORNIA UNITED STATES - ---- ----------- ---------- ---------- ------------- 1993 15,360 13,918 9.4% 6.9% 1994 15,450 14,122 8.6 6.1 1995 15,412 14,203 7.8 5.6 1996 15,520 14,400 7.2 5.4 1997 15,960 14,954 6.3 4.9 1998 16,336 15,367 5.9 4.5 1999 16,596 15,732 5.2 4.2 2000 16,884 16,049 4.9 4.0 2001 17,183 16,260 5.4 4.8 2002 17,405 16,242 6.7 5.8
- ---------- Source: State of California, Employment Development Department. EMPLOYMENT, INCOME, CONSTRUCTION AND EXPORT GROWTH The following table shows California's non-agricultural employment distribution and growth for 1992 and 2002. TABLE 15 PAYROLL EMPLOYMENT BY MAJOR SECTOR 1992 AND 2002
EMPLOYMENT % DISTRIBUTION (THOUSANDS) OF EMPLOYMENT -------------------------------------- INDUSTRY SECTOR 1992 2002* 1992 2002* - ---------------------------------- -------- -------- -------- -------- Mining 35.4 23.5 0.3% 0.2% Construction 471.7 759.9 3.9 5.2 MANUFACTURING Nondurable goods 708.4 689.8 5.8 4.7 High Technology 584.4 467.1 4.8 3.2 Other Durable Goods 597.6 659.2 4.9 4.5 Transportation and Utilities 607.4 720.7 5.0 4.9 Wholesale and Retail Trade 2,834.8 3,362.4 23.3 22.9 Finance, Insurance And Real Estate 791.9 847.4 6.5 5.8 Services 3,426.3 4,678.2 28.2 31.9 Government Federal 345.9 256.9 2.9 1.7 State and Local 1,749.7 2,193.0 14.4 15.0 -------- -------- -------- -------- TOTAL NON-AGRICULTURAL 12,153.5 14,658.1 100% 100% ======== ======== ======== ========
- ---------- * Preliminary Source: State of California, Employment Development Department. A-51 The following tables show California's total and per capita income patterns for selected years. TABLE 16 TOTAL PERSONAL INCOME IN CALIFORNIA 1994-2002(a)
CALIFORNIA % YEAR MILLIONS % CHANGE (b) OF U.S. - ------- ----------- ------------ ------------ 1994(c) $ 735,104 2.9% 12.5% 1995 771,470 4.9 12.5 1996 812,404 5.3 12.4 1997 861,557 6.1 12.4 1998 931,564 8.1 12.6 1999 994,862 6.8 12.8 2000 1,099,375 10.5 13.1 2001 1,128,256 2.6 13.0 2002(d) 1,138,718 0.9 12.8
- ---------- (a) BEA's estimates as of September 23, 2002. (b) Change from prior year. (c) Reflects Northridge earthquake, which caused an estimated $15 billion drop in personal income. (d) Estimated by California Department of Finance. Note: Omits income for government employees overseas. Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA); State of California, Department of Finance. TABLE 17 PER CAPITA PERSONAL INCOME 1994-2002(a)
% % CALIFORNIA % YEAR CALIFORNIA CHANGE (b) UNITED STATES CHANGE (b) OF U.S. - ------- ----------- ------------ ------------- ---------- ------------ 1994(c) $ 23,348 2.3% $ 22,340 3.7% 104.5% 1995 24,339 4.2 23,255 4.1 104.7 1996 25,373 4.2 24,270 4.4 104.5 1997 26,521 4.5 25,412 4.7 104.4 1998 28,240 6.5 26,893 5.8 105.0 1999 29,712 5.2 27,880 3.7 106.6 2000 32,363 8.9 29,760 6.7 108.7 2001 32,655 0.9 30,413 2.2 107.4 2002 32,996 1.0 30,941 1.7 106.6
- ---------- (a) Latest estimates by BEA. (b) Change from prior year. (c) Reflects Northridge earthquake, which caused an estimated $15 billion drop in personal income. Note: Omits income for government employees overseas. Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA). A-52 The following tables show California's residential and non-residential construction. TABLE 18 RESIDENTIAL CONSTRUCTION AUTHORIZED BY PERMITS
UNITS ----------------------------- VALUATION(a) YEAR TOTAL SINGLE MULTIPLE (MILLIONS) - ---- ------- -------- ---------- ------------ 1995 85,293 68,689 16,604 $ 13,879 1996 94,283 74,923 19,360 15,289 1997 111,716 84,780 26,936 18,752 1998 125,707 94,298 31,409 21,976 1999 140,137 101,711 38,426 25,783 2000 148,540 105,595 42,945 28,142 2001 148,757 106,902 41,855 28,804 2002 167,761 123,865 43,896 33,305
- ---------- (a) Valuation includes additions and alterations. Source: Construction Industry Research Board TABLE 19 NONRESIDENTIAL CONSTRUCTION (THOUSANDS OF DOLLARS)
ADDITIONS AND YEAR COMMERCIAL INDUSTRIAL OTHER ALTERATIONS TOTAL - ---- ------------ ------------ ----------- ------------- ------------ 1995 $ 2,308,911 $ 732,874 $ 1,050,693 $ 4,062,273 $ 8,154,751 1996 2,751,925 1,140,574 1,152,443 4,539,219 9,584,161 1997 4,271,378 1,598,428 1,378,220 5,021,792 12,269,818 1998 5,419,251 2,466,530 1,782,337 5,307,901 14,976,019 1999 5,706,719 2,256,166 2,350,213 6,269,194 16,582,292 2000 6,962,031 2,206,169 2,204,754 7,252,004 18,624,958 2001 6,195,368 1,552,047 2,584,321 6,421,551 16,753,287 2002 5,195,348 1,227,754 2,712,681 5,393,329 14,529,112
- ---------- Source: Construction Industry Research Board A-53 The following table shows California's export growth for the period from 1995 through 2002. TABLE 20 EXPORTS THROUGH CALIFORNIA PORTS (IN MILLIONS)
YEAR EXPORTS (a) % CHANGE ---- ----------- -------- 1995 $ 116,825.5 22.2% 1996 124,120.0 6.2 1997 131,142.7 5.7 1998 116,282.4 -11.3 1999 122,092.8 5.0 2000 148,554.6 21.7 2001 127,255.3 -14.3 2002 111,340.1 -12.5
- ---------- (a) "Free along ship" Value Basis Source: U.S. Department of Commerce, Bureau of the Census LITIGATION The State is a party to numerous legal proceedings. The following are the most significant pending proceedings, as reported by the Office of the Attorney General. See "LITIGATION" in the main body of the Official Statement. CHALLENGE TO DISCONTINUATION OF VEHICLE LICENSE FEE OFFSET State law establishes an excise tax on motor vehicles and manufactured homes in the amount of two percent (2%) of the vehicle's or home's fair market value. In 1999, pursuant to Revenue and Taxation Code section 10754, the Legislature adopted successive offsets to the vehicle license fee paid by vehicle owners and mobile home owners. As a result of these offsets, the State transferred money each month from the General Fund to local governments in the amount of the cumulative offsets. In June 2003, the Davis Administration determined that there were insufficient moneys available to be transferred from the General Fund to fund vehicle license fee offset payments the State was making to local governments. This caused the State Department of Motor Vehicles and the State Department of Housing and Community Development to discontinue the offsets and, correspondingly, the amount of vehicle license fees paid by vehicle owners and mobile home owners increased. On July 1, 2003, several plaintiffs, including several Republican legislators and a non-profit public interest group, filed HOWARD JARVIS TAXPAYERS ASSOCIATION, ET AL. V. CALIFORNIA DEPARTMENT OF MOTOR VEHICLES (Sacramento County Superior Court, Case No. 03AS03665), in which plaintiffs seek declaratory relief based on several theories, each of which would find the discontinuation of the offset invalid. The court has ruled that the plaintiffs' complaint fails to state a cause of action, and has granted plaintiffs until November 17, 2003, to amend their complaint to adequately plead that they have exhausted their administrative remedies. Plaintiffs have not sought an immediate stay or injunction against the discontinuation of the vehicle license fee offset or on the collection of the statutorily established excise tax. In the event an appellate court judgment declares that the discontinuation of the vehicle license fee offset was invalid, it could result in costs to the State over time in amounts as high as the suspended vehicle license fee offset, which for fiscal year 2003-04 is approximately $4.2 billion. A-54 BOND-RELATED MATTERS The Legislature established the Pension Obligation Bond Committee for the purpose, among others, of issuing bonds to fund all or a portion of the State's fiscal year 2003-04 employer obligation to the Public Employee's Retirement System. In May of 2003, the Committee filed PENSION OBLIGATION BOND COMMITTEE V. ALL PERSONS INTERESTED IN THE MATTER OF THE VALIDITY OF THE STATE OF CALIFORNIA'S PENSION OBLIGATION, ETC. (Sacramento County Superior Court, Case No. 03AS02994), seeking validation of the bonds and certain contracts pertaining to the bonds pursuant to a validation process established by Code of Civil Procedure sections 860 ET SEQ. The Howard Jarvis Taxpayers Association filed an answer to the Committee's complaint and, a judgment was issued in the matter denying the Committee's request for validation of the bonds. The trial court judge declared that he was unwilling to apply the local government "obligation imposed by law" debt limit exception to the State constitutional debt limit. The Committee has filed a petition for writ of mandate in the California Supreme Court (Case No. S119882), and requested the court's expedited consideration of the petition. Granting expedited consideration is a discretionary act on behalf of the court. The Supreme Court has directed the Howard Jarvis Taxpayers Association to file its opposition to all issues raised by the petition by October 31, 2003. The Legislature has adopted a statute (Stats. 2003, 1st Ex. Sess. 2003, ch.13) authorizing the establishment of the Fiscal Recovery Finance Authority for the purpose, among others, of issuing bonds to fund the State's accumulated budget deficit. The amount of the accumulated budget deficit has been identified by the Department of Finance to be approximately $10.7 billion. On September 24, 2003, a complaint was filed in the Sacramento County Superior Court (FULLERTON ASSOCIATION OF CONCERNED TAXPAYERS V. CALIFORNIA FISCAL RECOVERY FINANCING AUTHORITY, ET AL., Case No. 93AS05319), seeking a declaration that any bonds issued pursuant to the statute without prior voter approval would violate the State constitutional debt limit and a determination that such bonds are invalid, and seeking an injunction against issuing bonds pursuant to the statute. This matter has not been served on any State officers. CHALLENGE SEEKING PAYMENT TO TEACHER'S RETIREMENT BOARD In May 2003, the Legislature enacted legislation which reduces a continuing appropriation to the State Teacher's Retirement System's ("CalSTRS") Supplemental Benefit Maintenance Account ("SBMA") for fiscal year 2003-04 by $500 million. The legislative changes also provide that in future fiscal years, the $500 million may be returned if actuarial determinations demonstrate that the money is needed in order for CalSTRS' to make purchasing power protection payments to retired members through 2036. On October 14, 2003, the CalSTRS board and certain CalSTRS members filed TEACHER'S RETIREMENT BOARD, AS MANAGER OF THE CALIFORNIA STATE TEACHERS, RETIREMENT SYSTEM, ET AL. V. STEVE PEACE, DIRECTOR OF CALIFORNIA DEPARTMENT OF FINANCE, AND STEVE WESTLY, CALIFORNIA STATE CONTROLLER, in the Sacramento County Superior Court (Case No. 03CS01503). This lawsuit seeks, primarily, a writ of mandate compelling the State Controller to transfer funds from the State's General Fund to the SBMA in an amount equal to the continuing appropriation as it existed prior to the enactment of the May legislation. It also seeks injunctive and declaratory relief to the same effect. ACTIONS SEEKING FLOOD-RELATED DAMAGES In January of 1997, California experienced major flooding with preliminary estimates of property damage of approximately $1.6 to $2.0 billion. In McMAHAN V. STATE, (Sacramento County Superior Court, Case No. 02-AS-06058), a substantial number of plaintiffs have joined suit against the State, local agencies, and private companies and contractors seeking compensation for the damages they suffered as a result of the flooding. A trial date has been scheduled for July 12, 2004. The State is vigorously defending the action. A-55 PATERNO V. STATE OF CALIFORNIA is a coordinated action involving 3,000 plaintiffs seeking recovery for damages caused by the Yuba River flood of February 1986. The trial court found liability in inverse condemnation and awarded damages of $500,000 to a sample of plaintiffs. The State's potential liability to the remaining plaintiffs ranges from $800 million to $1.5 billion. In 1992, the State and plaintiffs filed appeals of the decision in the sample plaintiffs' action, and upon remand, plaintiffs' inverse condemnation cause of action was re-tried. The trial court ruled that plaintiffs take nothing from defendants. The outcome of this trial controls with regard to the claims of all other plaintiffs. Plaintiffs filed an appeal with the Court of Appeal (Third Appellate District, Case No. CO40553), and oral argument is presently scheduled for November 19, 2003. TAX REFUND CASES The State has prevailed at the trial court, and following appeal, in two refund actions, CALIFORNIA ASSN. OF RETAIL TOBACCONISTS (CART), ET AL. V. BOARD OF EQUALIZATION, ET AL., AND CIGARETTES CHEAPER!, ET AL. V. BOARD OF EQUALIZATION, ET AL. (consolidated as Court of Appeal, Forth Appellate District, Division 1, Case No. D037599). On September 24, 2003, the California Supreme Court denied the plaintiffs' petitions for review (CALIFORNIA ASSN. OF RETAIL TOBACCONISTS V. STATE OF CALIFORNIA, Case No. S117618). The plaintiffs challenge the constitutionality of Proposition 10, which established the Children and Families Commission ("CFC") and local county commissions and increased the excise tax on tobacco products for the purpose of funding early childhood development programs through the CFC and local commissions. Plaintiffs contend Proposition 10 is unconstitutional under various provisions of the California Constitution, levies an impermissible double tax on certain tobacco products, and violates numerous other provisions of law. It is not yet known whether plaintiffs will seek review by the United States Supreme Court. Any petition must be filed within 90 days after the date review was denied by the California Supreme Court. There is exposure as to the entire $750 million per year collected under Proposition 10 together with interest, which could amount to several billion dollars by the time the case is finally resolved. Four pending cases allege that Revenue and Tax Code section 24402 ("Section 24402"), which establishes a corporate tax deduction for dividends received that are based on the amount of the dividend-paying corporation's income subject to California franchise taxes, violates the commerce clause of the United States Constitution. MONTGOMERY WARD LLC V. FRANCHISE TAX BOARD is pending in the San Diego Superior Court (Case No. 802767). In MICROSOFT CORPORATION V. FRANCHISE TAX BOARD (San Francisco County Superior Court, Case No. 400 444), the trial court issued a proposed statement of decision, ruling against the Franchise Tax Board in which the court failed to discuss Section 24402. A request for further exposition of the decision has been filed. In GENERAL MOTORS CORP. V. FRANCHISE TAX BOARD (Court of Appeal, Second Appellate District, Division 2, Case No. B165665) the trial court determined that Section 24402 violates the commerce clause and the Franchise Tax Board has appealed. In FARMER BROTHERS COMPANY V. FRANCHISE TAX BOARD, the trial court also determined that Section 24402 violates the commerce clause and, on appeal, the Second Appellate District, Division 1, affirmed the trial court's decision (Case No. B160061). On August 27, 2003, the California Supreme Court denied the Board's petition for review. A decision as to whether to seek a writ of certiorari from the United States Supreme Court must be made within 90 days of that denial. No decision has been made to date. A final decision adverse to the State in any of these cases could ultimately result in refunds of approximately $400 million to similarly situated taxpayers, with an ongoing annual loss of revenue of approximately $60 million. The State is vigorously litigating this issue. Five pending cases challenge the Franchise Tax Board's treatment of receipts from investment of cash in short-term financial instruments, and the resulting impact on the apportionment of corporate income allegedly earned outside of California to the corporation's California tax obligation. Three of these cases are also cases in which Revenue and Tax Code section 24402 has been challenged, as A-56 discussed in the previous paragraph. MONTGOMERY WARD LLC V. FRANCHISE TAX BOARD is pending in the San Diego Superior Court (Case No. 802767. TOYS "R" US, INC. V. FRANCHISE TAX BOARD is pending in Sacramento County Superior Court (Case No. 01-AS-04316). The TOYS "R" US trial court has issued a tentative decision in favor of the Franchise Tax Board, but a final judgment has not been issued. THE LIMITED STORES, INC. AND AFFILIATES V. FRANCHISE TAX BOARD is pending in the Court of Appeal, First District (Case No. A102915) and GENERAL MOTORS CORP. V. FRANCHISE TAX BOARD is pending in the Court of Appeal, Second Appellate District, Division 2 (Case No. B165665). The trial courts in both THE LIMITED STORES and GENERAL MOTORS ruled in favor of the Franchise Tax Board on this issue. In MICROSOFT CORPORATION V. FRANCHISE TAX BOARD (San Francisco County Superior Court, Case No. 400 444) the trial court issued a proposed statement of decision, ruling against the Franchise Tax Board. A request for further exposition of the decision has been filed. Other taxpayers have raised this same issue in administrative actions. A final decision in favor of any of these plaintiffs could result in tax refunds to similarly situated taxpayers in an amount exceeding $500 million, with a potential future annual revenue loss of $50 million. The State is vigorously litigating this issue. In EISENHOWER MEDICAL CENTER, ET AL. V. STATE BOARD OF EQUALIZATION (San Francisco Superior Court, Case No. 994985), 117 hospitals claim that certain intravenous sets and diagnostic substances are "medicines" within the meaning of the Revenue and Tax Code, and thus are exempt from sales and use taxes. The State Board of Equalization ("SBE") does not consider intravenous sets (other than those used primarily for feeding) and diagnostic substances to be medicines and, therefore, those items are subject to sales and use taxes. The trial court ruled in favor of the SBE, and an appeal is expected. Due to a retroactive regulatory change that the SBE adopted during the pendency of this case, specified types of enteral feeding supplies are now exempt from sales and use taxes. Therefore, even if the State prevails on appeal, refunds will be required in the amount of approximately $10 million. Should the plaintiffs ultimately prevail on all contested issues, estimated refunds to plaintiffs and others similarly situated hospitals would total approximately $400 million and estimated future revenue loss would be $70 million per year. In COUNTY OF ORANGE V. ORANGE COUNTY ASSESSMENT APPEALS BOARD #3; BEZAIRE, ET AL., REAL PARTIES IN INTEREST, (Orange County Superior Court, Case No. 00CC003385), the trial court determined that the Orange County assessor's office received property taxes from two taxpayers in excess of the amounts collectable under Article XIIIA of the California Constitution (sometimes referred to as "Proposition 13"). The plaintiffs' legal claim focuses on the constitutionality of the practice of the Orange County assessor's office to increase or "recapture" the assessed values of real properties that temporarily decline and then increase in value. The Orange County Superior Court ruled in favor of the plaintiffs in December 2001. That decision was appealed and oral argument is scheduled for December 16, 2003 in the Court of Appeal, Fourth Appellate District. The effects of a final determination by an appellate court that the contested assessment practices are contrary to Proposition 13 could result in an increase in the State general fund component of the financing guarantee to public schools established by Proposition 98 (see "STATE FINANCES--Proposition 98") in an amount in excess of several billion dollars. ENVIRONMENTAL CLEANUP MATTER In a federal Environmental Protection Agency ("U.S. EPA") administrative abatement action entitled IN THE MATTER OF: LEVIATHAN MINE, ALPINE COUNTY, CALIFORNIA, REGIONAL WATER QUALITY CONTROL BOARD, LAHONTAN REGION, STATE OF CALIFORNIA (U.S. EPA Region IX CERCLA Docket No. 00-16(a)), the State, as owner of the Leviathan Mine, is a party through the Lahontan Regional Water Quality Control Board ("Board"), which is the State entity potentially responsible for performing certain environmental remediation at the Leviathan Mine site. Also a party is ARCO, the successor in interest to the mining company that caused certain pollution of the mine site. The Leviathan Mine site is listed on the U.S. EPA A-57 "Superfund" List, and both remediation costs and costs for Natural Resource Damages may be imposed on the State. The Board has undertaken certain remedial action at the mine site, but the U.S. EPA's decision on the interim and final remedies are pending. ARCO has filed several state law claims against the State with the California Victim Compensation and Government Claims Board (an administrative agency with which certain claims must be filed as a prerequisite to litigation seeking damages against the State which was formerly named the Board of Control, the "Government Claims Board"), but litigation on these claims have been tolled by agreement of the parties until at least October, 2004. It is possible these matters could result in a potential loss to the State in excess of $400 million. ENERGY-RELATED MATTERS In PEOPLE V. ACN ENERGY, INC., ET AL. (Sacramento County Superior Court, Case No. 01AS05497), the court is considering whether and to what extent compensation is due to market participants which have claimed compensation as a result of the Governor's issuance of executive orders, under the California Emergency Service Act, "commandeering" power purchase arrangements held by Pacific Gas & Electric Company ("PG&E") and Southern California Edison ("SCE"), referred to as "block forward contracts." In this action the State seeks a declaration that the State is not liable for damages as a result of these orders, nor for compensation for inverse condemnation, and that any damages suffered by any of the defendants is offset by payments made by the Department of Water Resources for electricity received under the "commandeered" "block forward contracts." Complaints and cross-complaints for inverse condemnation, recovery under the Emergency Services Act and other causes of action brought by PG&E, Reliant Energy Services, Dynegy Power Marketing, Williams Energy Services, Sempra Energy Trading, the California Power Exchange, Mirant Americas Energy, Duke Energy Trading and Marketing, and numerous other market participants have been joined with the declaratory relief action in Judicial Council Coordination Proceeding No. 4203, in Sacramento County Superior Court. In an administrative proceeding action before the Government Claims Board (which was dismissed on procedural grounds), the California Power Exchange stated claims for "commandeering" the "block forward contracts" in the amount of approximately $1 billion. PACIFIC GAS AND ELECTRIC COMPANY V. THE STATE OF CALIFORNIA is now pending in the Court of Appeal, Third Appellate District (Case No. C043507). In the trial court, PG&E filed a complaint for breach of contract alleging that statutes enacted in 1996 as part of the restructuring of the electric power industry in California ("AB 1890") established a "regulatory contract" between the State and PG&E that authorized PG&E to sell the output of its retained generation facilities in interstate power markets at prices regulated by FERC and to sell the facilities themselves, and that by amending AB 1890 in 2001, the State deprived PG&E of the right to such sales and thereby breached that "regulatory contract." PG&E's complaint sought damages in an amount to be proven, but in an administrative proceeding before the Government Claims Board, in which PG&E's claims were denied, PG&E sought damages of at least $4.3 billion to compensate for the losses alleged in this action. The trial court sustained the demurrer of the State without leave to amend, dismissing the lawsuit. The pending action is PG&E's appeal of that dismissal. ESCHEATED PROPERTY CLAIMS In five pending cases, plaintiffs claim that the State Controller has a constitutional and statutory duty to give notice prior to the time the Controller sells property that has escheated to the State (in these cases, shares of stock): FONG V. CONNELL (Court of Appeal, Third District, Case No. C042007); HARRIS V. CONNELL (Court of Appeal, Second District, Case No. B160741); LUSBY-TAYLOR V. CONNELL (U.S. Court of Appeals for the Ninth Circuit, Case No. 02-16511); ORFIELD V. CONNELL (Los Angeles County Superior Court, Case No. BC288429); and SUEVER V. CONNELL (United States District Court, Northern District, Case No. C03-001556). The plaintiffs also claim that the Controller failed to comply with statutory notice A-58 requirements when it first received property that had escheated to the State. The plaintiffs seek damages, which the Fong plaintiffs have articulated as being in the amount of the difference between the amount they were paid for the stock upon its sale, and either the current value of the stock or the highest market value of the stock between the date the Controller sold the stock and the present. All of these cases, except Fong are styled as class actions, though in Lusby-Taylor and Harris, that issue was not determined prior to the trial court decisions that are being appealed. If one or more of these cases are successful as a class action and the class ultimately prevails on the merits, damages for the class could be in excess of $500 million. The State has prevailed at the trial court in Fong, Harris and Lusby-Taylor. Both Suever and Orfield are in the early stages of litigation in the trial court. The State is vigorously defending all of these actions. ACTION SEEKING DAMAGES FOR ALLEGED VIOLATIONS OF PRIVACY RIGHTS In GAIL MARIE HARRINGTON-WISELY, ET AL. V. STATE OF CALIFORNIA, ET AL., (Los Angeles County Superior Court, Case No. BC 227373), a proposed class action, plaintiffs seek damages for alleged violations of prison visitors' rights resulting from the Department of Corrections' use of a body imaging machine to search visitors entering state prisons for contraband. If this action is certified as a class action, and a court were to award damages pursuant to the California Civil Code for every use of the body imaging machine, damages could be as high as $3 billion. The State is vigorously defending this action. ACTIONS SEEKING PROGRAM MODIFICATIONS In the following cases, plaintiffs seek court orders or judgments that would require the State to modify existing programs and, except as specified, do not seek monetary damages. Nevertheless, a judgment against the State in any one of these cases could require changes in the challenged program that could result in increased programmatic costs to the State in a future fiscal year in excess of $400 million. Alternatively, in some circumstances, it may be possible that a judgment against the State could be addressed by legislative changes to the program that would cost less. In WILLIAMS, ET AL., V. STATE OF CALIFORNIA, ET AL., (San Francisco County Superior Court, Case No. 312236), a class action for declaratory relief and injunction brought by public school students against the State, the Board of Education, and Department of Education and the Superintendent of Public Instruction, the class alleges inadequacies in the public education system and seeks a variety of programmatic changes to the system including elimination of some types of multi-track, year-round school schedules. The State is vigorously defending this action. Trial is set for August 30, 2004. In NATURAL RESOURCES DEFENSE COUNCIL ET AL., V. CALIFORNIA DEPARTMENT OF TRANSPORTATION ET AL., (United States District Court, Central District, Case No. 93-6073-ER- (JRX)), plaintiffs obtained an injunction requiring the Department of Transportation (the "Department") to comply with National Pollution Discharge Elimination System ("NPDES") requirements under the federal Clean Water Act ("Act") in connection with storm water discharges from State highways and construction sites in an area that includes most of Los Angeles and Ventura Counties. There is an established dispute resolution procedure intended to resolve disputes without a return to federal court. Subsequent modifications of the injunction have provided for, among other things, studies of pilot projects to address control of the sources of storm water pollution and the performance of studies of pilot projects to retrofit highways with storm water pollution control facilities. There has been no agreement regarding what measures arising out of the pilot projects and studies will be implemented. Plaintiffs' position is that the Department should be required to retrofit its facilities to treat storm water, regardless of whether any construction is otherwise planned in any given area. For planning purposes, the Department is including an additional 3 percent in the cost of future statewide construction and maintenance projects to pay for compliance measures. This 3 percent increase amounts to $500 million through fiscal year 2006-07. While the A-59 impact of a judgment of the scope sought by plaintiffs is difficult to determine, it is possible that a judgment that would require the State to retrofit all its highway facilities throughout the State could cost billions of dollars. The following three cases seek reforms to State programs for the treatment of institutionalized disabled persons. Some rough estimates suggest the financial impact of a judgment against the State defendants in any of these cases could be as high as $1 billion per year in programmatic costs going forward. The State is vigorously defending these actions. In CHARLES DAVIS, ET AL. V. CALIFORNIA HEALTH AND HUMAN SERVICES AGENCY, ET AL., (United States District Court - Northern District, Case No. C00-2532 SBA), the plaintiffs brought a class action under a number of federal acts, including the ADA, seeking declaratory and injunctive relief. Plaintiffs allege that disabled persons institutionalized at San Francisco's Laguna Honda Hospital, a 1,200 bed skilled nursing facility, who require long term care should be assessed as to whether they can be treated at home or in community-based facilities, and then provided appropriate care. A settlement has been reached in this matter which, if approved by the court, will result in a State department revising its assessment tool for residents of nursing homes to focus on the propriety of community placement. The parties have agreed that plaintiffs' non-assessment claims will be dismissed without prejudice to plaintiffs' ability to re-file their action once the assessment process is in place. In the event the assessment tool changes are not sufficiently funded, plaintiffs may re-file those claims pertaining to assessment as well. In STEPHEN SANCHEZ, ET AL. V. GRANTLAND JOHNSON, ET AL., (United States District Court - Northern District, Case No. C-00-01593 CW), the plaintiffs have brought a class action seeking declaratory and injunctive relief, alleging, in part, that provider rates for community-based services for developmentally disabled individuals are discriminatory under the ADA, and violate the Social Security Act, Civil Rights Act and the Rehabilitation Act, because they result in unnecessary institutionalization of developmentally disabled persons. The court has issued interim rulings on plaintiffs' ADA and Rehabilitation Act claims, finding that the State has a "comprehensive, effectively working plan" for the de-institutionalization of persons with developmental disabilities." The undetermined allegations remain before the court, and these interim rulings are subject to appeal. In CAPITOL PEOPLE FIRST V. DEPARTMENT OF DEVELOPMENTAL SERVICES (Alameda County Superior Court, Case No. 2002-038715) a consortium of state and national law firms and public-interest groups brought suit against the Departments of Finance, California Department of Developmental Services and California Department of Health Services, alleging violations of the Lanterman Act, the ADA, and section 504 of the Rehabilitation Act by defendants needlessly isolate thousands of people with developmental disabilities in large facilities. The case seeks sweeping reforms, including requiring the State to offer a full range of community-based services. MEDICALLY INDIGENT ADULT MANDATE CLAIMS In 1997, the California Supreme Court ruled, in a challenge by the County of San Diego, that by excluding medically indigent adults ("MIAs") from Medi-Cal, the State had mandated a new program on the counties within the meaning of Article XIIIB, section 6 of the California Constitution. The Court sent the matter back to the Commission on State Mandates (the "Commission") to decide whether and by what amount the County of San Diego had been forced to incur costs for the care of MIAs in excess of funds provided by the State. The County of San Diego appealed from an adverse Commission decision. The appeal was based on facts specific to County of San Diego. On September 24, 2003, in an unpublished decision, the Court of Appeal (COUNTY OF SAN DIEGO V. COMMISSION ON STATE MANDATES ET AL. (Sept. 24, 2003) D039471) ruled in favor of the County of San Diego on certain of its claims and determined that A-60 the State owed the County of San Diego $3.4 million for medical services rendered to MIAs during the two-year period (1991-1992). This decision may be appealed. The Commission has taken the position that it would be bound to apply the holding of the San Diego case to any new claim for prospective relief brought by any county as a "test claim." Currently, there is a test claim pending before the Commission that was filed by the County of San Bernardino, relating to the same mandate (Medically Indigent Adults, 01-TC-26 County of San Bernardino, Claimant, Statutes 1982, Chapters 328 and 1594). The amount demanded in the claim for unreimbursed costs for fiscal year 2000-2001 is just over $9.2 million. The County of San Diego case, together with a test claim on the same subject filed by the County of San Bernardino, poses a potential for a negative impact on the General Fund in the amount of the unreimbursed costs for all similarly situated claimants, as determined by the Commission. Certain estimates of the annual cost of the services rendered by all counties to MIAs exceed $4 billion. How much of that will be determined to be "unreimbursed" to the counties by the State is unknown. Currently the counties receive approximately $1.3 billion in vehicle license fee revenue and $2.3 billion in sales tax revenue to fund various social services, public health and mental health programs which include the programs that provide services to MIAs. The determination of how much of the MIA mandate is "unreimbursed" is likely to be impacted by the fact that the vehicle license fee revenue now available to counties may be terminated as a result of the San Diego decision. In 1991 the Legislature increased the vehicle license fee and dedicated a portion of it to cover costs incurred by the counties for various social programs, including the cost of caring for MIAs. This legislation includes so-called "poison pill" provisions that, by their terms, eliminate the counties' vehicle license fee revenue source if a final appellate court decision holds that the legislation transferring responsibility for providing services to MIAs from the State to the counties established a reimbursable state mandate. Related 1991 legislation also authorized the sales tax increment from which the counties pay, among other costs, the cost of caring for MIAs, and established "poison pill" provisions relating to that sale tax increment. These "poison pill" provisions provide that, in the event a final appellate court decision holds that the legislation transferring responsibility for providing services to MIAs from the State to the counties established a reimbursable state mandate, the sales tax increment revenues are to be paid to the General Fund. This could increase the State's Proposition 98 funding guarantee (See "STATE FINANCES -- Proposition 98"), which, ultimately, could have the effect under certain "poison pill" provisions, of eliminating the sales tax increment. STATE DEBT TABLES The tables which follow provide information on outstanding State debt, authorized but unissued general obligation bonds and commercial paper notes, debt service requirements for State general obligation and lease-purchase bonds, and authorized and outstanding State revenue bonds. For purposes of these tables, "General Fund bonds," also known as "non-self liquidating bonds," are general obligation bonds expected to be paid from the General Fund without reimbursement from any other fund. Although the principal of general obligation commercial paper notes in the "non-self liquidating" category is legally payable from the General Fund, the State expects that principal of such commercial paper notes will be paid only from the issuance of new commercial paper notes or the issuance of long-term general obligation bonds to retire the commercial paper notes. Interest on "non-self liquidating" general obligation commercial paper notes is payable from the General Fund. "Enterprise Fund bonds," also known as "self liquidating bonds," are general obligation bonds for which program revenues are expected to be sufficient to reimburse in full the General Fund for debt A-61 service payments, but any failure to make such a reimbursement does not affect the obligation of the State to pay principal and interest on the bonds from the General Fund. As of October 1, 2003, the State did not have any General Obligation Commercial Paper Notes outstanding. The State expects to issue $1,800,000,000 of general obligation bonds on November 13, 2003. The State Public Works Board expects to issue $430,990,000 of lease revenue bonds on December 2, 2003. A-62 SCHEDULE OF DEBT SERVICE REQUIREMENTS FOR LEASE-PURCHASE DEBT AS OF OCTOBER 1, 2003
FISCAL YEAR CURRENT DEBT ENDING -------------------------------------------------------------- JUNE 30 INTEREST PRINCIPAL (a) TOTAL - ------- ------------------- ------------------- -------------------- 2004 $ 271,725,333.60 $ 239,466,935.00 $ 511,192,268.60(b) 2005 338,647,584.05 352,499,507.20 691,147,091.25 2006 318,759,840.18 372,167,554.60 690,927,394.78 2007 305,084,065.59 325,083,920.44 630,167,986.03 2008 285,872,258.35 333,426,787.98 619,299,046.33 2009 273,102,770.44 355,352,732.44 628,455,502.88 2010 249,521,652.75 343,906,633.76 593,428,286.51 2011 220,648,653.93 356,525,000.00 577,173,653.93 2012 201,992,986.81 339,905,000.00 541,897,986.81 2013 184,141,396.45 348,730,000.00 532,871,396.45 2014 165,903,553.81 351,695,000.00 517,598,553.81 2015 147,011,187.52 370,285,000.00 517,296,187.52 2016 127,321,451.24 351,465,000.00 478,786,451.24 2017 108,189,006.84 356,390,000.00 464,579,006.84 2018 89,324,937.16 370,915,000.00 460,239,937.16 2019 70,168,719.33 329,125,000.00 399,293,719.33 2020 52,930,040.95 299,100,000.00 352,030,040.95 2021 38,665,705.74 232,490,000.00 271,155,705.74 2022 26,543,126.24 202,365,000.00 228,908,126.24 2023 17,687,221.62 147,280,000.00 164,967,221.62 2024 11,178,852.00 56,075,000.00 67,253,852.00 2025 8,216,555.00 59,035,000.00 67,251,555.00 2026 5,574,756.25 45,215,000.00 50,789,756.25 2027 3,273,798.75 47,475,000.00 50,748,798.75 2028 922,862.50 34,170,000.00 35,092,862.50 ------------------- ------------------- -------------------- TOTAL $ 3,522,408,317.10 $ 6,620,144,071.42 $ 10,142,552,388.52 =================== =================== ====================
- ---------- (a) Includes scheduled mandatory sinking fund payments. (b) Total represents the remaining debt service requirements from November 1, 2003 through June 30, 2004. SOURCE: State of California, Office of the Treasurer. A-63 AUTHORIZED AND OUTSTANDING GENERAL OBLIGATION BONDS AS OF OCTOBER 1, 2003 (THOUSANDS)
VOTER AUTHORIZATION ------------------- BONDS DATE AMOUNT OUTSTANDING (a) ---- ------ --------------- GENERAL FUND BONDS (NON-SELF LIQUIDATING) California Clean Water, Clean Air, Safe Neighborhood Parks, and Coastal Protection Act of 2002 3/5/2002 $ 2,600,000 $ 41,830 California Library Construction and Renovation Bond Act of 1988 11/8/1988 75,000 46,570 California Library Construction and Renovation Bond Act of 2000 3/7/2000 350,000 4,530 California Park and Recreational Facilities Act of 1984 6/5/1984 370,000 121,705 California Parklands Act of 1980 11/4/1980 285,000 26,550 California Safe Drinking Water Bond Law of 1976 6/8/1976 175,000 37,030 California Safe Drinking Water Bond Law of 1984 11/6/1984 75,000 24,720 California Safe Drinking Water Bond Law of 1986 11/4/1986 100,000 57,790 California Safe Drinking Water Bond Law of 1988 11/8/1988 75,000 49,015 California Wildlife, Coastal, and Park Land Conservation Act of 1988 6/7/1988 776,000 396,050 Class Size Reduction Public Education Facilities Bond Act of 1998 (Hi Ed) 11/3/1998 2,500,000 1,790,920 Class Size Reduction Public Education Facilities Bond Act of 1998 (K-12) 11/3/1998 6,700,000 5,941,750 Clean Air and Transportation Improvement Bond Act of 1990 6/5/1990 1,990,000 1,305,715 Clean Water and Water Conservation Bond Law of 1978 6/6/1978 375,000 34,470 Clean Water and Water Reclamation Bond Law of 1988 11/8/1988 65,000 46,000 Clean Water Bond Law of 1970 11/3/1970 250,000 4,000 Clean Water Bond Law of 1974 6/4/1974 250,000 8,165 Clean Water Bond Law of 1984 11/6/1984 325,000 77,000 Community Parklands Act of 1986 6/3/1986 100,000 39,685 County Correctional Facility Capital Expenditure and Youth Facility Bond Act of 1988 11/8/1988 500,000 296,545 County Correctional Facility Capital Expenditure Bond Act of 1986 6/3/1986 495,000 205,350 County Jail Capital Expenditure Bond Act of 1981 11/2/1982 280,000 54,225 County Jail Capital Expenditure Bond Act of 1984 6/5/1984 250,000 47,250 Earthquake Safety and Public Buildings Rehabilitation Bond Act of 1990 6/5/1990 300,000 205,740 Fish and Wildlife Habitat Enhancement Act of 1984 6/5/1984 85,000 24,240 Hazardous Substance Cleanup Bond Act of 1984 11/6/1984 100,000 7,000 Higher Education Facilities Bond Act of 1986 11/4/1986 400,000 126,000 Higher Education Facilities Bond Act of 1988 11/8/1988 600,000 293,575 Higher Education Facilities Bond Act of June 1990 6/5/1990 450,000 251,490 Higher Education Facilities Bond Act of June 1992 6/2/1992 900,000 646,345 Housing and Emergency Shelter Trust Fund Act of 2002 11/5/2002 2,100,000 0 Housing and Homeless Bond Act of 1990 6/5/1990 150,000 6,410 Kindergarten - University Public Education Facilities Bond Act of 2002 (K-12) 11/5/2002 11,400,000 3,945,990 Kindergarten - University Public Education Facilities Bond Act of 2002 (Hi-Ed) 11/5/2002 1,650,000 15,320 Lake Tahoe Acquisitions Bond Act 8/2/1982 85,000 25,740 CP PROGRAM AUTHORIZED (b) UNISSUED (c) -------------- ------------ GENERAL FUND BONDS (NON-SELF LIQUIDATING) California Clean Water, Clean Air, Safe Neighborhood Parks, and Coastal Protection Act of 2002 $ 220,810 $ 2,337,360 California Library Construction and Renovation Bond Act of 1988 0 2,595 California Library Construction and Renovation Bond Act of 2000 48,250 297,200 California Park and Recreational Facilities Act of 1984 n.a. 1,100 California Parklands Act of 1980 n.a. 0 California Safe Drinking Water Bond Law of 1976 n.a. 2,500 California Safe Drinking Water Bond Law of 1984 n.a. 0 California Safe Drinking Water Bond Law of 1986 n.a. 0 California Safe Drinking Water Bond Law of 1988 5,100 2,000 California Wildlife, Coastal, and Park Land Conservation Act of 1988 n.a. 7,330 Class Size Reduction Public Education Facilities Bond Act of 1998 (Hi Ed) 675,755 0 Class Size Reduction Public Education Facilities Bond Act of 1998 (K-12) 505,445 0 Clean Air and Transportation Improvement Bond Act of 1990 242,490 40,925 Clean Water and Water Conservation Bond Law of 1978 n.a. 0 Clean Water and Water Reclamation Bond Law of 1988 0 0 Clean Water Bond Law of 1970 n.a. 0 Clean Water Bond Law of 1974 n.a. 0 Clean Water Bond Law of 1984 n.a. 0 Community Parklands Act of 1986 n.a. 0 County Correctional Facility Capital Expenditure and Youth Facility Bond Act of 1988 0 0 County Correctional Facility Capital Expenditure Bond Act of 1986 n.a. 0 County Jail Capital Expenditure Bond Act of 1981 n.a. 0 County Jail Capital Expenditure Bond Act of 1984 n.a. 0 Earthquake Safety and Public Buildings Rehabilitation Bond Act of 1990 59,450 0 Fish and Wildlife Habitat Enhancement Act of 1984 n.a. 3,000 Hazardous Substance Cleanup Bond Act of 1984 n.a. 0 Higher Education Facilities Bond Act of 1986 n.a. 0 Higher Education Facilities Bond Act of 1988 3,440 7,000 Higher Education Facilities Bond Act of June 1990 2,130 0 Higher Education Facilities Bond Act of June 1992 8,010 270 Housing and Emergency Shelter Trust Fund Act of 2002 980,000 1,120,000 Housing and Homeless Bond Act of 1990 n.a. 0 Kindergarten - University Public Education Facilities Bond Act of 2002 (K-12) 7,454,010 0 Kindergarten - University Public Education Facilities Bond Act of 2002 (Hi-Ed) 266,680 1,368,000 Lake Tahoe Acquisitions Bond Act n.a. 0
A-64
VOTER AUTHORIZATION ------------------- BONDS DATE AMOUNT OUTSTANDING (a) ---- ------ --------------- New Prison Construction Bond Act of 1981 6/8/1982 $ 495,000 $ 44,250 New Prison Construction Bond Act of 1984 6/5/1984 300,000 37,500 New Prison Construction Bond Act of 1986 11/4/1986 500,000 168,820 New Prison Construction Bond Act of 1988 11/8/1988 817,000 401,130 New Prison Construction Bond Act of 1990 6/5/1990 450,000 234,450 Passenger Rail and Clean Air Bond Act of 1990 6/5/1990 1,000,000 583,680 Public Education Facilities Bond Act of 1996 (K-12) 3/26/1996 2,025,000 1,704,115 Public Education Facilities Bond Act of 1996 (Hi-Ed) 3/26/1996 975,000 868,740 1988 School Facilities Bond Act 11/8/1988 800,000 417,525 1990 School Facilities Bond Act 6/5/1990 800,000 439,915 1992 School Facilities Bond Act 11/3/1992 900,000 576,392 Safe, Clean Reliable Water Supply Act of 1996 11/5/1996 995,000 462,425 Safe Drinking Water Bond Act of 2000 3/7/2000 1,970,000 329,600 Safe Neighborhood Parks Bond Act of 2000 3/7/2000 2,100,000 711,005 School Building and Earthquake Bond Act of 1974 11/5/1974 40,000 30,655 School Facilities Bond Act of 1988 6/7/1988 800,000 370,480 School Facilities Bond Act of 1990 11/6/1990 800,000 475,570 School Facilities Bond Act of 1992 6/2/1992 1,900,000 1,175,450 Seismic Retrofit Bond Act of 1996 3/26/1996 2,000,000 1,604,580 Senior Center Bond Act of 1984 11/6/1984 50,000 7,250 State Beach, Park, Recreational and Historical Facilities Bonds 6/4/1974 250,000 495 State School Building Lease-Purchase Bond Law of 1982 11/2/1982 500,000 22,685 State School Building Lease-Purchase Bond Law of 1984 11/6/1984 450,000 102,500 State School Building Lease-Purchase Bond Law of 1986 11/4/1986 800,000 266,800 State, Urban, and Coastal Park Bond Act of 1976 11/2/1976 280,000 13,505 Veterans' Homes Bond Act of 2000 3/7/2000 50,000 0 Voting Modernization Bond Act of 2002 3/5/2002 200,000 0 Water Conservation and Water Quality Bond Law of 1986 6/3/1986 150,000 68,780 Water Conservation Bond Law of 1988 11/8/1988 60,000 37,280 Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002 11/5/2002 3,440,000 72,670 ------------ --------------- TOTAL GENERAL FUND BONDS $ 63,078,000 $ 27,432,962 ------------ --------------- ENTERPRISE FUND BONDS (SELF LIQUIDATING) California Water Resources Development Bond Act of 1959 11/8/1960 $ 1,750,000 $ 806,940 Veterans Bonds (d) 4,510,000 1,864,025 ------------ --------------- TOTAL ENTERPRISE FUND BONDS $ 6,260,000 $ 2,670,965 ------------ --------------- TOTAL GENERAL OBLIGATION BONDS $ 69,338,000 $ 30,103,927 ============ =============== CP PROGRAM AUTHORIZED (b) UNISSUED (c) -------------- ------------ New Prison Construction Bond Act of 1981 $ n.a. $ 0 New Prison Construction Bond Act of 1984 n.a. 0 New Prison Construction Bond Act of 1986 n.a. 1,500 New Prison Construction Bond Act of 1988 0 12,260 New Prison Construction Bond Act of 1990 6,125 0 Passenger Rail and Clean Air Bond Act of 1990 10,565 0 Public Education Facilities Bond Act of 1996 (K-12) 46,790 0 Public Education Facilities Bond Act of 1996 (Hi-Ed) 29,630 8,700 1988 School Facilities Bond Act 2,665 0 1990 School Facilities Bond Act 2,990 0 1992 School Facilities Bond Act 6,614 0 Safe, Clean Reliable Water Supply Act of 1996 281,165 226,000 Safe Drinking Water Bond Act of 2000 756,147 873,800 Safe Neighborhood Parks Bond Act of 2000 259,100 1,117,000 School Building and Earthquake Bond Act of 1974 n.a. 0 School Facilities Bond Act of 1988 n.a. 0 School Facilities Bond Act of 1990 2,550 0 School Facilities Bond Act of 1992 17,290 0 Seismic Retrofit Bond Act of 1996 269,645 0 Senior Center Bond Act of 1984 n.a. 0 State Beach, Park, Recreational and Historical Facilities Bonds n.a. 0 State School Building Lease-Purchase Bond Law of 1982 n.a. 0 State School Building Lease-Purchase Bond Law of 1984 n.a. 0 State School Building Lease-Purchase Bond Law of 1986 n.a. 0 State, Urban, and Coastal Park Bond Act of 1976 n.a. 0 Veterans' Homes Bond Act of 2000 45,000 5,000 Voting Modernization Bond Act of 2002 155,000 45,000 Water Conservation and Water Quality Bond Law of 1986 n.a. 27,600 Water Conservation Bond Law of 1988 6,266 5,234 Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002 1,259,430 2,107,900 -------------- ------------ TOTAL GENERAL FUND BONDS $ 13,628,542 $ 9,619,274 -------------- ------------ ENTERPRISE FUND BONDS (SELF LIQUIDATING) California Water Resources Development Bond Act of 1959 $ n.a. $ 167,600 Veterans Bonds 0 605,585 -------------- ------------ TOTAL ENTERPRISE FUND BONDS $ 0 $ 773,185 -------------- ------------ TOTAL GENERAL OBLIGATION BONDS $ 13,628,542 $ 10,392,459 ============== ============
- ---------- (a) Includes the initial value of capital appreciation bonds rather than the accreted value. (b) Represents the total amount of commercial paper authorized by Finance Committees that could be issued for new money projects. Of this amount, no more than $2 billion of commercial paper can be issued at any time. Currently, there is $0.00 of commercial paper issued and outstanding. The bond acts marked as "n.a." are not legally permitted to utilize commercial paper, or all bonds were issued before the commercial paper program began. (c) Treats full commercial paper authorization as issued; see footnote (b). (d) Various dates. SOURCE: State of California, Office of the Treasurer. A-65 SCHEDULE OF DEBT SERVICE REQUIREMENTS FOR GENERAL FUND GENERAL OBLIGATION BONDS (a) (NON-SELF LIQUIDATING) AS OF OCTOBER 1, 2003
FISCAL YEAR CURRENT DEBT ENDING ------------------------------------------------------------------ JUNE 30 INTEREST PRINCIPAL (b) TOTAL - ------- -------------------- -------------------- -------------------- 2004 $ 836,259,033.53 $ 286,555,000.00 $ 1,122,814,033.53(c) 2005 1,357,591,057.59 1,244,789,388.71 2,602,380,446.30 2006 1,283,636,860.00 1,173,910,000.00 2,457,546,860.00 2007 1,214,666,425.93 1,204,445,000.00 2,419,111,425.93 2008 1,149,031,802.93 1,331,543,078.31 2,480,574,881.24 2009 1,075,729,153.75 1,344,375,000.00 2,420,104,153.75 2010 1,000,681,073.06 1,395,720,000.00 2,396,401,073.06 2011 925,998,656.09 1,358,369,045.16 2,284,367,701.25 2012 848,660,462.55 1,000,470,000.00 1,849,130,462.55 2013 796,713,063.75 862,130,000.00 1,658,843,063.75 2014 754,204,683.39 739,730,000.00 1,493,934,683.39 2015 717,751,867.19 750,140,000.00 1,467,891,867.19 2016 678,328,795.21 685,515,000.00 1,363,843,795.21 2017 641,361,433.35 718,375,000.00 1,359,736,433.35 2018 604,119,507.23 742,660,000.00 1,346,779,507.23 2019 565,254,157.25 789,615,000.00 1,354,869,157.25 2020 524,243,981.00 817,080,000.00 1,341,323,981.00 2021 482,907,432.25 766,515,000.00 1,249,422,432.25 2022 443,367,368.50 902,960,000.00 1,346,327,368.50 2023 395,806,562.70 913,720,000.00 1,309,526,562.70 2024 350,253,835.34 785,265,000.00 1,135,518,835.34 2025 310,641,239.08 845,680,000.00 1,156,321,239.08 2026 267,484,176.34 817,740,000.00 1,085,224,176.34 2027 226,226,882.59 819,105,000.00 1,045,331,882.59 2028 184,450,249.09 858,235,000.00 1,042,685,249.09 2029 141,378,340.00 769,830,000.00 911,208,340.00 2030 102,320,895.75 820,835,000.00 923,155,895.75 2031 61,155,454.50 529,160,000.00 590,315,454.50 2032 36,236,695.00 452,070,000.00 488,306,695.00 2033 14,202,037.50 306,425,000.00 320,627,037.50 -------------------- -------------------- -------------------- TOTAL $ 17,990,663,182.44 $ 26,032,961,512.18 $ 44,023,624,694.62 ==================== ==================== ====================
- ---------- (a) Does not include debt service payments on $1,400,000,000 State of California General Obligation Variable Rate Bonds due 2033. (b) Includes scheduled mandatory sinking fund payments. (c) Total represents the remaining debt service requirements from November 1, 2003 through June 30, 2004. SOURCE: State of California, Office of the Treasurer. A-66 STATE PUBLIC WORKS BOARD AND OTHER LEASE-PURCHASE FINANCING OUTSTANDING ISSUES OCTOBER 1, 2003
NAME OF ISSUE OUTSTANDING - ------------- ---------------- GENERAL FUND SUPPORTED ISSUES: STATE PUBLIC WORKS BOARD California Community Colleges $ 536,530,000 Department of the Youth Authority 17,320,000 Department of Corrections * 2,284,626,689 Energy Efficiency Program (Various State Agencies) (a) 74,770,000 The Regents of The University of California *(b) 1,151,602,382 Trustees of The California State University 584,005,000 Various State Office Buildings 1,093,130,000 ---------------- TOTAL STATE PUBLIC WORKS BOARD ISSUES $ 5,741,984,071 TOTAL OTHER STATE BUILDING LEASE PURCHASE ISSUES (c) $ 878,160,000 ---------------- TOTAL GENERAL FUND SUPPORTED ISSUES $ 6,620,144,071 SPECIAL FUND SUPPORTED ISSUES: East Bay State Building Authority Certificates of Participation (State of California Department of Transportation) * $ 67,047,955 San Bernardino Joint Powers Financing Authority (State of California Department of Transportation) 55,380,000 San Francisco State Building Authority (State of California Department of General Services Lease) (d) 38,685,000 ---------------- TOTAL SPECIAL FUND SUPPORTED ISSUES $ 161,112,955 TOTAL $ 6,781,257,026 ================
* Includes the initial value of capital appreciation bonds rather than the accreted value. (a) This program is self-liquidating based on energy cost savings. (b) The Regents' obligations to the State Public Works Board are payable from lawfully available funds of The Regents which are held in The Regents' treasury funds and are separate from the State General Fund. A portion of The Regents' annual budget is derived from General Fund appropriations. (c) Includes $180,450,000 Sacramento City Financing Authority Lease Revenue Bonds State of California - Cal EPA Building, 1998 Series A, which are supported by lease rentals from the California Environmental Protection Agency; these rental payments are subject to annual appropriation by the State Legislature. (d) The sole tenant is the California Public Utilities Commission. SOURCE: State of California, Office of the Treasurer. A-67 SCHEDULE OF DEBT SERVICE REQUIREMENTS FOR ENTERPRISE FUND GENERAL OBLIGATION BONDS (SELF LIQUIDATING) AS OF OCTOBER 1, 2003
FISCAL YEAR CURRENT DEBT ENDING ------------------------------------------------------------------ JUNE 30 INTEREST PRINCIPAL (a) TOTAL - ------- -------------------- -------------------- -------------------- 2004 $ 119,440,515.65 $ 66,065,000.00 $ 185,505,515.65(b) 2005 145,344,837.25 131,840,000.00 277,184,837.25 2006 135,947,998.50 144,455,000.00 280,402,998.50 2007 125,907,629.76 156,545,000.00 282,452,629.76 2008 115,116,952.29 152,905,000.00 268,021,952.29 2009 104,513,601.25 153,725,000.00 258,238,601.25 2010 93,545,886.55 168,695,000.00 262,240,886.55 2011 83,950,470.77 126,905,000.00 210,855,470.77 2012 76,437,886.00 169,860,000.00 246,297,886.00 2013 68,092,160.62 171,035,000.00 239,127,160.62 2014 60,721,567.25 136,035,000.00 196,756,567.25 2015 54,714,273.15 118,935,000.00 173,649,273.15 2016 48,788,367.00 122,130,000.00 170,918,367.00 2017 42,549,819.39 130,125,000.00 172,674,819.39 2018 36,508,729.09 105,235,000.00 141,743,729.09 2019 31,151,899.21 101,050,000.00 132,201,899.21 2020 26,763,528.05 66,260,000.00 93,023,528.05 2021 23,192,791.29 60,385,000.00 83,577,791.29 2022 19,895,027.39 56,870,000.00 76,765,027.39 2023 17,273,135.76 38,275,000.00 55,548,135.76 2024 15,128,625.52 40,535,000.00 55,663,625.52 2025 12,831,771.91 43,880,000.00 56,711,771.91 2026 10,584,088.75 38,415,000.00 48,999,088.75 2027 8,956,152.50 20,745,000.00 29,701,152.50 2028 7,987,927.50 14,315,000.00 22,302,927.50 2029 6,890,681.25 25,420,000.00 32,310,681.25 2030 5,404,392.50 28,100,000.00 33,504,392.50 2031 3,892,867.50 25,920,000.00 29,812,867.50 2032 2,395,225.00 27,375,000.00 29,770,225.00 2033 812,977.50 28,930,000.00 29,742,977.50 -------------------- -------------------- -------------------- TOTAL $ 1,504,741,786.15 $ 2,670,965,000.00 $ 4,175,706,786.15 ==================== ==================== ====================
- ---------- (a) Includes scheduled mandatory sinking fund payments. (b) Total represents the remaining debt service requirements from November 1, 2003 through June 30, 2004. SOURCE: State of California, Office of the Treasurer. A-68 OUTSTANDING STATE DEBT FISCAL YEARS 1997-98 THROUGH 2001-02 (DOLLARS IN THOUSANDS EXCEPT FOR PER CAPITA INFORMATION)
1997-98 1998-99 1999-00 2000-01 2001-02 -------------- -------------- -------------- --------------- --------------- OUTSTANDING DEBT (a) General Obligation Bonds General Fund (Non-Self Liquidating) $ 14,932,766 $ 16,202,211 $ 17,869,616 $ 20,472,893 $ 22,115,362 Enterprise Fund (Self Liquidating) 3,906,950 3,674,020 3,474,900 3,396,215 3,211,310 -------------- -------------- -------------- --------------- --------------- Total $ 18,839,716 $ 19,876,231 $ 21,344,516 $ 23,869,108 $ 25,326,672 Lease-Purchase Debt 6,639,620 6,671,534 6,627,944 6,413,260 6,341,935 -------------- -------------- -------------- --------------- --------------- Total Outstanding General Obligation Bonds and Lease-Purchase Debt $ 25,479,336 $ 26,547,765 $ 27,972,460 $ 30,282,368 $ 31,668,607 BOND SALES DURING FISCAL YEAR Non-Self Liquidating General Obligation Bonds $ 1,667,820 $ 2,294,650 $ 2,750,000 $ 4,419,665 $ 3,905,025 Self Liquidating General Obligation Bonds $ 447,535 $ 80,000 $ 126,500 $ 358,625 $ 111,325 Lease-Purchase Debt $ 1,245,190 $ 456,410 $ 293,235 $ 214,585 $ 229,105 DEBT SERVICE (b) Non-Self Liquidating General Obligation Bonds $ 1,878,026 $ 1,934,628 $ 2,045,566 $ 2,279,636 $ 2,367,570 Lease-Purchase Debt $ 577,987 $ 652,131 $ 654,485 $ 670,228 $ 647,568 GENERAL FUND RECEIPTS (b) $ 55,261,557 $ 58,510,860 $ 72,226,473 $ 78,330,406 $ 66,604,508 Non-Self Liquidating General Obligation Bonds Debt Service as a Percentage of General Fund Receipts 3.40% 3.31% 2.83% 2.91% 3.55% Lease-Purchase Debt Service as a Percentage of General Fund Receipts 1.05% 1.11% 0.91% 0.86% 0.97% POPULATION (c) 32,451,746 32,861,779 33,417,248 34,039,611 34,729,535 Non-Self Liquidating General Obligation Bonds Outstanding Per Capita $ 460.15 $ 493.04 $ 534.74 $ 601.44 $ 636.79 Lease-Purchase Debt Outstanding Per Capita $ 204.60 $ 203.02 $ 198.34 $ 188.41 $ 182.61 PERSONAL INCOME (d) $ 861,557,000 $ 931,627,000 $ 997,293,000 $ 1,094,770,000 $ 1,116,602,000 Non-Self Liquidating General Obligation Bonds Outstanding as Percentage of Personal Income 1.73% 1.74% 1.79% 1.87% 1.98% Lease-Purchase Debt Outstanding as Percentage of Personal Income 0.77% 0.72% 0.66% 0.59% 0.57%
- ---------- (a) As of last day of fiscal year. Includes the initial value of capital appreciation bonds rather than the accreted value. (b) Calculated on a cash basis; debt service costs of bonds issued in any fiscal year largely appear in subsequent fiscal year. (c) As of July 1, the beginning of the fiscal year. (d) Annual Totals: US BEA, revised 1997-2000; DOF Estimated 2001. California Department of Finance. SOURCES: Population: State of California, Department of Finance Personal Income: State of California, Department of Finance; United States, Department of Commerce, Bureau of Economic Analysis (BEA) Outstanding Debt, Bonds Sales During Fiscal Year and Debt Service: State of California, Office of the Treasurer. General Fund Receipts: State of California, Office of the State Controller. A-69 STATE AGENCY REVENUE BONDS AND CONDUIT FINANCING AS OF DECEMBER 31, 2002
ISSUING AGENCY OUTSTANDING(a) - -------------- ----------------- STATE PROGRAMS FINANCING: California State University $ 625,118,000 California Transportation Commission -- Department of Water Resources - Central Valley Project 2,398,180,000 Department of Water Resources - Power Supply Program 11,263,500,000 The Regents of the University of California (b) 3,962,335,000 Trade and Commerce Agency -- HOUSING FINANCING: California Housing Finance Agency 8,158,493,913 Veterans Revenue Debenture 534,040,000 CONDUIT FINANCING: California Alternative Energy and Advanced Transportation Financing Authority 58,610,000 California Educational Facilities Authority 2,632,319,951 California Health Facilities Financing Authority 6,396,805,195 California Infrastructure and Economic Development Bank (c) 1,831,618,173 California Passenger Rail Financing Commission -- California Pollution Control Financing Authority 4,602,162,399 California School Finance Authority 90,000 California Student Loan Authority 95,260,000 California Urban Waterfront Area Restoration Financing Authority -- ----------------- TOTAL $ 42,558,532,631 =================
(a) Totals for California State University, Department of Water Resources-Central Valley Project, and Veterans Revenue Debenture were provided by the State of California, Office of the Treasurer. All other totals were provided by the listed issuing agency. (b) Includes $319,635,000 in Certificates of Participation. (c) Does not include $6 billion of "rate reduction bonds" issued by special purpose trusts for the benefit of four investor-owned electric utility companies representing interests in certain electric rate surcharges. A-70 APPENDIX D- INFORMATION CONCERNING THE STATE OF NEW YORK THE SECURITIES THAT THE FUND OFFERS ARE NOT BEING OFFERED BY THE STATE OF NEW YORK. THE STATE OF NEW YORK HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THE FUND'S REGISTRATION STATEMENT (INCLUDING THIS STATEMENT OF ADDITIONAL INFORMATION) IS TRUTHFUL OR COMPLETE This Appendix contains the Annual Information Statement of the State of New York (AIS), as updated or supplemented to the date specified therein. The AIS sets forth information about the financial condition of the State of New York. The State intends to update and supplement that Annual Information Statement further as described therein. The AIS set forth in this Appendix is dated May 30, 2003 and contains information only through that date. It has been updated on October 30, 2003 for specified information only through that date. This Appendix sets forth the section of the AIS entitled "Current Fiscal Year." The remaining sections of the AIS set out under the headings "Prior Fiscal Year," "Economic and Demographics," "Debt and other Financing Activities," "State Organization," "Authorities and Localities," "Litigation," and "Exhibits" are not included herein. The entire AIS, including such remaining sections, was filed with each Nationally Recognized Municipal Securities Information Repository (NRMSIR). An official copy of the AIS may be obtained by contacting a NRMSIR, or the Division of the Budget, State Capitol, Albany, NY 12224, Tel. (518) 473-8705. An informational copy of the AIS is available on the Internet at http://www.state.ny.us/dob. D-1 UPDATE TO ANNUAL INFORMATION STATEMENT (AIS) STATE OF NEW YORK OCTOBER 30, 2003 This quarterly update (the "Update") to the AIS of the State of New York is dated October 30, 2003 and contains information only through that date. It is the second quarterly update to the AIS of the State of New York dated May 30, 2003. The first update to the AIS was issued on August 7, 2003. The information in this Update is organized into three parts. PART I contains information on the State's Financial Plan projections. In Part I, readers will find: 1. The Mid-Year Update to the 2003-04 Financial Plan (the "Mid-Year Update") issued by the Division of the Budget (DOB) on October 28, 2003. Part I also reprints information on the GAAP-basis Financial Plan projections for 2003-04 and the State's five-year Capital Program and Financing Plan that first appeared in the in First Quarterly Update to the AIS issued on August 7, 2003. The full Capital Program and Financing Plan for the 2003-04 through 2007-08 fiscal years is incorporated by reference, and is available from DOB at the address below. 2. A discussion of special considerations affecting the State Financial Plan. PART II contains updated disclosure on the State Retirement System, the Metropolitan Transportation Authority (MTA) and the City of New York. As a convenience to readers, Part II also reprints information related to the State's audited basic Financial Statements for the 2002-03 fiscal year that first appeared in the August 7, 2003 Update to the AIS. PART III updates information related to certain litigation against the State. This Update has been supplied by the State to provide information about the financial condition of the State in connection with financings of certain issuers (including public authorities of the State) that may depend in whole or in part on State appropriations as sources of payment of their respective bonds, notes or other obligations, and for which the State has contractually obligated itself to provide such information pursuant to an applicable continuing disclosure agreement (a "CDA"). An Official Copy of this Update has been filed with each Nationally Recognized Municipal Securities Information Repository (NRMSIR) and may be obtained by contacting a NRMSIR or the Division of the Budget, State Capitol, Albany, NY 12224, Tel: (518) 473-8705. An Informational Copy of this Update is available on the DOB website (www.budget.state.ny.us). The availability of this Update in electronic form at DOB's website is being provided solely as a matter of convenience to readers and does not imply that there have been no changes in the financial condition of the State at any time subsequent to its release date. Maintenance of this Update on such website is not intended as a republication of the information therein on any date subsequent to its release date. Neither this Update nor any portion thereof may be included or incorporated by reference in a Preliminary Official Statement, Official Statement, or other offering document without express written consent by DOB and agreement by DOB to execute a CDA relating to the series of bonds or notes described in such Preliminary Official Statement, Official Statement, or other offering document. Any use or incorporation by reference of this Update or any portion thereof in a Preliminary Official Statement, Official Statement, or other offering document without such consent and agreement is unauthorized and the State expressly disclaims any responsibility with respect to the inclusion, intended use, and updating of this Update if so misused. PART I MID-YEAR UPDATE TO THE 2003-04 FINANCIAL PLAN DOB PREPARED THE MID-YEAR UPDATE SET FORTH BELOW. IT CONTAINS ESTIMATES AND PROJECTIONS OF FUTURE RESULTS THAT SHOULD NOT BE CONSTRUED AS STATEMENTS OF FACT. THESE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS THAT MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND NATION AND POTENTIAL LITIGATION CONCERNING ACTIONS BY THE STATE LEGISLATURE IN ENACTING THE 2003-04 BUDGET. THERE CAN BE NO ASSURANCE THAT ACTUAL RESULTS WILL NOT DIFFER MATERIALLY AND ADVERSELY FROM THE ESTIMATES AND PROJECTIONS CONTAINED HEREIN. INTRODUCTION This is the Mid-Year Update to the State's 2003-04 Financial Plan, submitted pursuant to section 23 of the State Finance Law. The Mid-Year Update includes revised Financial Plan projections, an updated economic forecast, operating results for the first six months of fiscal year 2003-04, and General Fund cash flow projections through the third quarter of fiscal year 2003-04. For a description of the structure of the State Financial Plan and general State operating procedures, please see the 2003-04 New York State Executive Budget Appendix II published on January 29, 2003 and the Annual Information Statement of the State of New York dated May 30, 2003, which are available at www.budget.state.ny.us. The actual cash-basis results and financial plan projections reported in this Mid-Year Update reflect the deferral of $1.9 billion in spending from 2002-03 to 2003-04 that was necessary due to delayed Legislative authorization for issuance of tobacco bonds. Therefore, the projections contained herein are reported on a basis consistent with the actual results reported by the State Comptroller, and with unadjusted Financial Plans previously reported in the Enacted Budget Report and First Quarterly Financial Plan Update. In addition, the State Funds and All Governmental Funds actual results and estimates contained in this Update reflect the reclassification of the Expendable and Non-Expendable Trust Funds from the Fiduciary fund type to the Special Revenue fund type. This fund reclassification conforms to the new accounting standards as set forth in the Governmental Accounting Standards Board (GASB) 2 issued Statement 34, which substantially changed the way in which governments are required to report operations in their financial statements. OVERVIEW At mid-year, the State's 2003-04 Financial Plan remains solidly balanced based on the availability of one-time Federal aid that was authorized after this year's budget was enacted. While these receipts help to ensure balance in the current year, the State continues to face a significant financial gap in 2004-05. Revenue actions enacted by the Legislature over the Governor's objection continue to perform as the Executive had anticipated, with no appreciable receipt collections from several newly authorized sources. Moreover, while the potential for improved performance from the financial services sector shows some promise, the level of revenue from tax law changes has not materialized to the extent anticipated by the Legislature at the time of their enactment. At the same time, governmental spending on economically sensitive entitlement programs is running higher than expected as the State's economic recovery remains anemic. Taken together, these factors represent a fiscal challenge for the 2004-05 fiscal year and beyond. As of this Mid-Year Report, the imbalance between anticipated receipts and disbursements for the 2004-05 fiscal year remains at approximately $5 billion to $6 billion. As previously reported, a number of steps have been taken to address the State's fiscal situation. Aggressive austerity measures that require all State agencies to carefully scrutinize discretionary expenditures are in place, and a strict hiring freeze has been maintained. The Governor is also working with legislative leaders on statutory measures that could be enacted this fall to provide further savings this year and begin to address next year's gap. As indicated, the Division of the Budget (DOB) projects the State will end the 2003-04 fiscal year in balance after year-end reserve transactions. These transactions, totaling $730 million, are comprised of $710 million in the permanent rainy day fund (the Tax Stabilization Reserve Fund) and $20 million in the Contingency Reserve Fund. An additional $75 million in resources, resulting primarily from minor timing revisions to the July Financial Plan projections, have been treated as available for use in 2004-05. As detailed later in this report, the Mid-Year Update reflects modest net increases in both receipts and spending of $30 million from the July Update. The $30 million net increase in the revenue projections include modest upward revisions to tax receipts estimates. Nonetheless, tax receipt projections for the current fiscal year remain slightly below those contained in the Enacted Budget Report. The $30 million net increase in spending reflects higher spending in welfare and Medicaid due to increasing caseloads, expenditure growth and utilization and growth in the Tuition Assistance Program (TAP) due to higher enrollment. These costs are partially offset by the timing of Federal aid that lowers health care costs and savings resulting from recently enacted "clean-up" legislation. In addition, the report updates the status of certain risks to the Financial Plan 3 projections, including possible reductions in anticipated Federal aid for the school supportive health services program. Current revenue and spending estimates for the General Fund, State Funds and All Governmental Funds are summarized in the following table. Detailed information is provided later in this report. 2003-04 REVENUE AND SPENDING ESTIMATES (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM JULY CHANGE FROM UPDATE UPDATE UPDATE ENACTED BUDGET REVENUE: General Fund 42,337 42,367 30 627 State Funds 62,539 62,647 108 592 All Governmental Funds 97,029 98,322 1,293 2,601 SPENDING: General Fund 42,422 42,452 30 (285) State Funds 62,700 62,864 164 (123) All Governmental Funds 96,918 97,979 1,061 1,605
SUMMARY OF MID-YEAR REVISIONS General Fund revenue projections have been revised upward by $30 million from the July Financial Plan Update issued July 30, 2003 (the "July Update") to reflect a modest upward revision in the tax receipts estimate offset by additional costs for the School Tax Relief (STAR) program and a deposit to the Personal Income Tax (PIT) Refund Reserve Account. The spending increase of $30 million is due to higher estimated costs in welfare ($31 million), Medicaid ($100 million), and TAP ($31 million), partially offset by Federal aid which reduces the State share of Medicaid costs ($51 million), other available health care resources ($46 million), implementation of cost containment in recently enacted "clean-up" legislation ($20 million), and projected additional lottery receipts used to finance school aid costs ($15 million). State Funds disbursements increased by $164 million from the July Update reflecting General Fund changes described above ($30 million) and increased spending for STAR ($35 million). The reclassification of Expendable Trust and Non-Expendable Trust Funds from the Fiduciary Fund type to the Special Revenue fund type increases both receipts and disbursements ($60 million and $84 million, respectively) from amounts published in the July Update. The balance of the increase in the State Funds receipts of $108 million from the July Update primarily reflects the General Fund changes discussed above ($30 million). The increase in All Governmental Funds receipts of $1.29 billion over the July Update primarily reflects the receipt of Federal Emergency Management Agency (FEMA) reimbursement aid for costs incurred by the State and New York City associated with the World Trade Center attacks of September 11th ($1.17 billion), as well as the State Funds changes described above ($108 million). 4 All Governmental Funds disbursements increased by $1.06 billion over the July Update due primarily to FEMA aid that flowed through the State to New York City for costs associated with the World Trade Center attacks ($885 million), and State Funds changes described above ($164 million). RECAP OF FINANCIAL PLAN REVISIONS SINCE THE ENACTED BUDGET Since the Enacted Budget Financial Plan, projected General Fund receipts have been increased by $627 million. This increase is attributable to the receipt of $645 million in one-time Federal revenue sharing payments and the expected flow of $170 million in additional sales tax receipts to the General Fund due to the delay in providing payments to New York City associated with the Local Government Assistance Corporation (LGAC)/Municipal Assistance Corporation (MAC) transaction. These increases are partially offset by a net reduction in the estimate for General Fund tax and miscellaneous receipts for 2003-04 of $53 million, additional costs for the STAR program of $35 million, an increased deposit into the PIT Refund Reserve Account of $75 million and a decrease in other transfers of $25 million. General Fund spending has decreased by $285 million from the Enacted Budget Financial Plan. This decrease is primarily attributable to lower costs resulting from a 15-month increase in the Federal matching rate on Medicaid costs ($422 million), the delayed timing of spending for new legislative "member items" ($100 million), additional resources available to Medicaid ($46 million), lower debt service costs ($42 million) and savings from the cap on mentally disabled payments to counties ($20 million). These reductions in spending are partially offset by: growth above budgeted levels for Medicaid ($200 million), welfare ($71 million) and TAP ($31 million); the delayed implementation of employee health insurance cost containment changes ($26 million); and a modest increase in State operations spending ($17 million). The combined benefit of the increased General Fund receipts and lower spending was used to balance the 2003-04 Enacted Budget and help lower the 2004-05 budget gap. The 2004-05 budget gap of roughly $5 billion to $6 billion already reflects these revisions. State Funds receipts increased $592 million over the Enacted Budget Financial Plan primarily reflecting the General Fund increase described above ($627 million). The State Funds disbursements decline of $123 million reflects the decline in General Fund spending detailed above ($285 million) offset by increased spending in STAR ($35 million) and the reclassification of Expendable Trust and Non-Expendable Trust Funds from the Fiduciary fund type to the Special Revenue fund type ($84 million). The increase in All Governmental Funds receipts of $2.60 billion over the Enacted Budget Financial Plan primarily reflects the receipt of Federal Emergency Management Agency (FEMA) reimbursement aid for costs incurred by the State and New York City associated with the World Trade Center attacks of September 11th ($1.17 billion), the State funds changes described above ($592 million), higher projected Federal aid in support of the Medicaid program reflecting the temporary increase in the Federal matching rate ($1.01 billion) and program cost increases ($300 million). All Governmental Funds disbursements increased $1.60 billion over the Enacted Budget 5 primarily due to increases in World Trade Center costs ($885 million) and the Medicaid increases detailed above ($1.31 billion), offset by decreases in all other program areas. The majority of the changes since the Enacted Budget Financial Plan were reflected in the July Update, and thus only the incremental changes from the July Update are discussed in further detail later in this report. RECENT EVENTS The Legislature recently passed "clean-up" bills that provide technical corrections and clarification to the budget bills and Article VII language bills enacted in the 2003 regular legislative session. These bills include necessary corrections and clarifications to achieve several savings and revenue initiatives included in the 2003-04 Financial Plan, as well as $20 million in new cost containment savings (described in more detail below). In addition, the bills include a provision that grants loan forgiveness to local governments of roughly $172 million in advance payments associated with the cost of providing mental health services. This action was already reflected in the Financial Plan. STATUS OF LEGISLATIVE ACTIONS DOB continues to value certain revenue measures adopted by the Legislature at significantly lower amounts. The temporary personal income tax increase is valued at $280 million below legislative estimates, and year-to-date results appear consistent with the lower estimate. In addition, more speculative revenue actions taken by the Legislature are expected to have virtually no positive revenue impact in the current fiscal year, again, consistent with results to date. These actions include Video Lottery Terminals (VLTs) permitted to operate at certain racetracks, the collection of excise and sales taxes from non-exempt purchasers on Native American lands, and the denial of business deductions for the use of certain intangible assets. DOB ANALYSIS OF 2003-04 LEGISLATIVE REVENUE ACTIONS (MILLIONS OF DOLLARS)
LEGISLATIVE VALUE DOB VALUE Temporary PIT Increases 1,680 1,400 Indian Reservation Taxes 164 0 VLTs 150 0 Bonus Depreciation Recapture 146 58 Intangible Holding Companies 115 0 Other Revenue Actions 140 15
It should also be noted that the Legislature assumed savings in certain program areas that have not been attainable and which are still not reflected in this Update. These occur primarily in Medicaid and in shelter allowances for welfare recipients. 6 PROJECTED GENERAL FUND OUTYEAR BUDGET GAPS While the current fiscal year is balanced, the magnitude of future budget gaps requires timely and aggressive measures to restore structural balance. The Governor is continuing implementation of a fiscal management plan that includes measures intended to reduce costs and generate recurring savings in the outyears. General Fund outyear budget gaps are estimated to be roughly $5 billion to $6 billion in 2004-05 and $8 billion in 2005-06, consistent with the range of gaps initially reported by DOB in the May 1 Analysis of Legislative Budget Changes and in the Enacted Budget Report released later in May. The statewide austerity measures limiting discretionary spending, travel, and low priority capital spending will remain in force and all State agencies will continue to operate under a hiring freeze, consistent with existing guidelines. In addition, agencies continue to conduct comprehensive reviews of all existing and new State contracts, fleet management practices, and equipment purchases, as well as management assessments of current agency operations. These reviews will identify opportunities where agencies, through increased administrative flexibility, statutory changes or other means, can achieve greater productivity, improve services, and reduce costs. Savings from these measures, which are not yet reflected in the Financial Plan, should provide a hedge against risk for the remainder of the fiscal year and help reduce the outyear budget gaps. GENERAL FUND FINANCIAL PLAN NATIONAL ECONOMY Revised data for the second quarter of this year, in conjunction with preliminary data for the third quarter, indicate a stronger national economy for 2003 than projected in the July Update. Indeed, U.S. real gross domestic product is expected to grow almost 6 percent during the third quarter, aided by the issuance of tax cut rebate checks and a long-awaited improvement in business spending. Consequently, the DOB forecast for real growth in U.S. GDP for 2003 has been revised up to 2.8 percent. National economic growth is expected to accelerate to 3.8 percent in 2004. The improved outlook for the overall national economy has not yet translated into significant labor market growth. High productivity growth, rising benefit costs, and the trend toward off-shore outsourcing in certain economic sectors has delayed the resumption of hiring by businesses. DOB has reduced its estimate of nonagricultural employment growth for 2003 slightly from the 0.2 percent decline reported in July to a decline of 0.3 percent. Moreover, expected growth for 2004 has been reduced from 0.9 percent to 0.6 percent. The weaker job market, along with slightly lower than expected consumer price inflation, will result in slower wage and personal income growth than reported in the July Update. Wage growth has been revised down from 2.8 percent to 2.1 percent for 2003, partly due to a downward revision to the first quarter of 2003. Overall personal income growth has been revised down as well from 3.5 percent to 3.2 percent. Income growth is expected to accelerate in 2004, but remains well below the historical average. 7 MAJOR ECONOMIC INDICATORS
2002 2003 2004 Gross Domestic Product (real) 2.4 2.8 3.8 Personal Income 2.7 3.2 4.7 Non Farm Employment (0.3) 0.6 1.7 Consumer Price Index 1.6 2.3 1.9
Note: Numbers above are percent change/calendar year. DOB estimates are based on National Income and Product Account data through September 2003. DOB's forecast is not without risk. With significant labor market slack and the capacity utilization rate at its lowest level since the early 1980s recession, the business sector has been more reluctant to significantly increase investment spending than is typical at this stage of a recovery. If this trend continues, it could result in even slower job growth than expected. In turn, continued weakness in the labor market could depress consumption spending, further reducing the incentive for businesses to spend. In contrast, if the Federal tax reduction, combined with historically low interest rates, has a greater impact on households than expected, or a weaker dollar produces higher export growth than the current forecast, national economic growth could be stronger than expected. STATE ECONOMY DOB's New York State Index of Coincident Economic Indicators shows that the State economy began to emerge from recession in early 2003. The collapse of dot-com equity prices, and the implosion of the high-tech sector that followed, sent the stock market tumbling and precipitated heavy job losses in the State's manufacturing, trade, and finance industries during the first eight months of 2001. The destruction of the World Trade Center wrought catastrophe for the downstate economy, with the finance and travel and tourism industries being the hardest hit. The December 2001 collapse of Enron, the corporate governance scandals that followed, and finally, the run-up to the war in Iraq, further delayed the recovery in equity prices, leading to further financial sector layoffs, as well as reductions in bonuses. As a result of this barrage of negative events, the State recession extended beyond that of the nation. Notwithstanding the upward revision to the national economic forecast, DOB's outlook for the New York economy is little changed from that presented in the July Update. With the State's labor market beginning to recover, DOB has revised its 2003 forecast for total State employment growth marginally upward from a decline of 0.4 percent to a decline of 0.1 percent, on an annual average basis. Private sector job growth has similarly been revised up from a decline of 0.2 percent to a decline of 0.1 percent. Expected employment growth for 2004 has also been revised upward from 0.6 percent to 0.8 percent. Nevertheless, the estimate for the State's unemployment rate, which is often a lagging economic indicator, remains at 6.2 percent for both 2003 and 2004. 8 The recovery of the State's financial sector continues. With the S&P 500 up over 13 percent since the end of 2002, recent months have seen an increase in merger and acquisition activity, as well as strong revenues from bond trading activity, although the latter are expected to weaken with the rise in long-term interest rates. The improved outlook for the financial markets is expected to translate into higher bonus growth for the coming bonus season than was projected in July. DOB's 2003 forecast for State wages and salaries is relatively unchanged from July, but has been revised up for 2004 from 4.1 percent to 4.6 percent. Growth in total State personal income, of which wages and salaries are the largest component, has been revised up to 2.7 percent for 2003, due in large part to revised data for proprietors' income, and to 4.4 percent for 2004. MAJOR ECONOMIC INDICATORS
2002 2003 2004 Personal Income (0.2) 2.7 4.4 Nonagricultural Employment (1.8) (0.1) 0.8 Unemployment Rate 6.1 6.2 6.2
Note: Numbers above are percent change/calendar year. Personal income and nonagricultural employment growth for 2002 and all forecasts for 2003 and 2004 are projected by DOB. The volatility of the financial markets remains a significant source of risk to the New York forecast. If the recent rise in equity prices and financial services activity fails to be sustained, industry profitability and associated compensation could be lower than anticipated. In addition, weaker than expected growth for both the national and international economies would, in turn, weaken the State's recovery. This would result in even slower employment and income growth than projected. In contrast, stronger financial services sector growth or stronger national and international growth could result in a healthier economic recovery for the State than projected. GENERAL FUND RECEIPTS 2003-04 GENERAL FUND RECEIPTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE Total Tax Receipts 28,406 28,402 (4) 425 All Other Receipts 13,931 13,965 34 4,546 TOTAL RECEIPTS 42,337 42,367 30 4,971
Total General Fund receipts are estimated at $42.37 billion, an increase of $30 million from the July Update, as explained below. The increase of $4.97 billion over the prior year is largely attributable to three factors: the expected receipt of $3.80 billion in tobacco securitization proceeds, $645 million from the Federal revenue sharing grants, and higher receipts resulting from tax and fee increases enacted with the 2003-04 Budget. The tax receipt revisions from the July Update, including transfers, are relatively minor and reflect a modestly more optimistic view of economic trends and financial sector performance balanced against some shortfalls in year-to-date results. Estimates for the impact of legislatively enacted changes remain essentially unchanged. It remains 9 the case that a significant number of the revenue actions taken by the Legislature will generate little or no revenue in fiscal year 2003-04. PERSONAL INCOME TAX Personal income tax receipts for the 2003-04 fiscal year are estimated at $16.28 billion, a decrease of $8 million from the July Update estimate. This decrease is comprised of an additional deposit to the PIT Refund Reserve Account ($75 million) partially offset by higher PIT collections ($67 million). The estimate reflects an increase of $150 million in the non-withholding payments estimate due in part to a change in collection patterns related to tax actions taken with the Enacted Budget. Despite a year-to-date shortfall in withholding results, the estimate is unchanged reflecting better-than-anticipated securities industry profitability and an expected increase in end-of-year bonus payments. Increases are partially offset by a lower assessments estimate ($25 million), increased costs for the STAR program ($35 million) and greater deposits to the Revenue Bond Tax Fund (RBTF) ($23 million). Important risks affecting the personal income tax estimate include the strength of growth in the overall economy, financial sector compensation trends, and collection patterns related to the temporary tax increase enacted earlier this year. CONSUMPTION AND USE TAXES The estimate for user taxes and fees is $7.96 billion, which is $11 million below the July Update. The estimates for sales tax, motor vehicle fees, the alcohol beverage tax, and alcohol beverage control license fees are unchanged from the July Update. The estimate for the cigarette and tobacco tax is $11 million below the July Update estimate, reflecting weaker-than-anticipated cigarette consumption. Overall, consumption and use tax receipts are within $5 million of the estimated cash flow contained in the July Update. BUSINESS TAXES The business tax estimates total $3.44 billion and remain unchanged from the July Update. Business taxes for the first half of the fiscal year were $1.54 billion, which is $43 million below July estimates. This is primarily due to unexpected large refunds in the bank tax and lower-than-expected utility tax payments. Collections are expected to strengthen in the later part of the year as corporate profitability continues to improve. OTHER TAXES Other taxes, comprised of the estate tax, gift tax, real property gains tax, pari-mutuel taxes and other taxes are now expected to total $726 million, a $15 million increase from the July Update. Through the first half of the fiscal year, receipts totaled $398 million, which is $32 million above the cash flow projection in the July Update. The change from the July Update is due to the unexpectedly strong results in the estate tax. The change is based upon the strong year-to-date results, and an upward revision to estimates of household net worth. MISCELLANEOUS RECEIPTS The estimate for miscellaneous receipts is $5.55 billion and remains unchanged from the July Update. Year-to-date collections of miscellaneous receipts are $3.13 billion, which is $2.27 billion 10 higher than last year. The higher receipts are attributable to $2.20 billion in tobacco bond proceeds received in June, offset by lower collections from abandoned property. There is some downside risk in the miscellaneous receipts estimate, stemming from lower-than-expected year-to-date collections from abandoned property, though the majority of revenue from this source is received during the second half of the fiscal year. FEDERAL GRANTS Federal Grants are estimated to total $645 million and remain unchanged from the July Update. TRANSFERS FROM OTHER FUNDS The estimate for transfers from other funds is $7.77 billion, which is $34 million above the July Update. Personal income tax and the real estate transfer tax in excess of debt service requirements are expected to increase by $23 million and $11 million respectively. These changes reflect modest increases in the estimates of the personal income and real estate transfer taxes. GENERAL FUND DISBURSEMENTS 2003-04 GENERAL FUND DISBURSEMENTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE Grants to Local Governments 29,584 29,629 45 4,742 All Other 12,838 12,823 (15) 97 TOTAL DISBURSEMENTS 42,422 42,452 30 4,839
General Fund spending is estimated at $42.45 billion, an increase of $30 million from the July Update as a result of additional net spending of $45 million for Grants to Local Governments partially offset by the anticipated elimination of a $15 million transfer to the State Lottery Fund. Grants to Local Governments disbursements are projected at $29.63 billion, an increase of $45 million from the July Update. This higher local spending consists of increases in welfare ($31 million), TAP ($31 million), and Medicaid ($3 million), partially offset by reduced spending in mental hygiene programs ($20 million). Revised welfare caseload and expenditure estimates result in a net $31 million spending increase above the July Update. Federal Temporary Assistance to Needy Families (TANF) originally programmed to offset school aid costs for the Pre-K program and Higher Education Services Corporation (HESC) spending for the TAP program are now needed to fund welfare costs. As a result, school aid and HESC spending increases by $50 million and $70 million respectively, partially offset by a welfare realignment of $89 million after the TANF reprogramming, including $23 million in TANF bonus funds. 11 In addition to the loss of $70 million of TANF funds to offset TAP spending from the General Fund, HESC local assistance spending is $31 million above the July Update estimate as a result of larger than projected growth in the number of TAP recipients and average award levels. Medicaid spending increased by a net $3 million over the July Update estimate as a result of $100 million in higher costs relating to caseload and utilization ($96 million) and revised cost containment savings ($4 million). This growth is partially offset by an increased State benefit resulting from the 15-month increase in the Federal matching rate used to lower Medicaid costs ($51 million). The gross State benefit of $319 million (for a total State share benefit in 2003-04 of $690 million) is reduced by $268 million to reflect the portion of these savings used to finance programs under the Health Care Reform Act. In addition, there are other available resources to Medicaid to reduce current year costs ($46 million). Local assistance spending estimates for the Office of Mental Retardation and Developmental Disabilities were reduced by $20 million from the July Update estimate due to the implementation of a cap on mentally disabled payments to counties pursuant to the recently enacted "clean-up" bills. Transfers from the General Fund to other funds are reduced by $15 million for the anticipated elimination of a transfer to the Lottery Fund assumed in the July Update. This transfer is no longer required due to an increase in estimated lottery receipts that sufficiently funds a portion of school aid costs as assumed in the Enacted Budget Financial Plan. All other General Fund spending estimates, including State Operations ($7.14 billion), General State Charges ($3.26 billion), Debt Service ($1.54 billion) and Capital Projects ($255 million), remain unchanged from the July Update. ANNUAL CHANGE IN GENERAL FUND DISBURSEMENTS General Fund spending is now projected to total $42.45 billion, an increase of $4.84 billion or 13.0 percent from the prior year. The deferral of $1.90 billion in disbursements from 2002-03 to 2003-04 that was made necessary due to the delay in securing authorization to issue tobacco bonds represents $3.80 billion of the annual growth in General Fund spending. The deferral of $1.9 billion in payments included school aid ($1.31 billion), CUNY Senior Colleges advance ($419 million), Medicaid to New York City relating to the mentally disabled ($82 million), education ($54 million), welfare ($47 million) and several other payments ($186 million). The remaining $1.04 billion in projected annual spending growth in the General Fund is primarily attributable to increased spending for Grants to Local Governments of $1.09 billion. This category is the largest area of General Fund spending and represents over 68 percent of total disbursements. All other General Fund spending is estimated to decrease by $51 million and consists of lower spending for State Operations ($610 million), offset by increases in General State Charges ($493 million) and Transfers To Other Funds ($66 million). Higher local assistance spending of $1.09 billion or 4.1 percent results from higher welfare spending associated with the loss of non-recurring Federal TANF reserve funds used to offset 2002- 12 03 welfare spending and an increased caseload ($582 million), additional spending for legislative member items ($250 million), growth in Medicaid program costs ($130 million), and various other increases in spending across several local assistance programs. State Operations disbursements, which accounts for the second largest area of General Fund spending, are estimated to decline $610 million or 7.9 percent from 2002-03 due to decreased spending for personal service ($677 million) partially offset by modest growth in non-personal service spending ($67 million). Decreases in personal service costs are attributable to the continuation of the strict statewide hiring freeze, an aggressive use of a State employees retirement incentive, and the use of alternative funding sources to finance spending. These alternative funding sources for personal service costs are comprised of additional SUNY revenues including a tuition increase ($289 million), increased Federal revenues used to finance a portion of mental hygiene spending ($227 million), and the shift of transportation-related spending for the Department of Motor Vehicles to the Dedicated Highway Fund ($90 million). This lower spending is partially offset by increased non-personal service spending resulting primarily from inflationary increases across all agencies. General State Charges annual growth of $493 million or 18.0 percent is mostly due to higher costs associated with pensions ($250 million) and health insurance ($204 million). Increases in pension costs are driven by a required minimum contribution rate of 4.5 percent of 2003-04 annual payroll expenditures (versus 1.0 percent in 2002-03), as well as higher costs produced by retirement incentives. The growth in health insurance spending reflects rising costs of employee and retiree health care, including the escalating costs of prescription drugs. Transfers to other funds are projected to grow $66 million or 2.8 percent over the prior year, primarily the result of timing of State subsidy payments to the SUNY hospitals ($107 million), increased General Fund support of capital projects spending for transportation and the environment ($90 million), and underlying growth in debt service costs ($46 million). These increases are partially offset by a decrease in the transfer to the Community Service Provider Assistance Program Fund ($100 million) and in the State's share of Medicaid payments to SUNY hospitals ($48 million). Additional information relating to the annual spending changes is included in the 2003-04 Enacted Budget Report published on May 28, 2003. RESERVES/GENERAL FUND CLOSING BALANCE The Mid-Year Update projects a closing balance of $730 million in the General Fund, and is unchanged from the July Update. The closing fund balance is comprised of $710 million in the permanent rainy day fund (Tax Stabilization Reserve Fund) and $20 million in the litigation reserve (Contingency Reserve Fund). 13 CERTAIN RISKS(1) The Mid-Year Financial Plan does not assume costs that could materialize as a result of adverse rulings in pending litigation, increased school aid funding related to recent court rulings, future collective bargaining agreements with State employee unions, Federal disallowances or other Federal actions that could produce adverse effects on the State's projections of receipts and disbursements. These risks are explained in further detail below. The State is a defendant in several ongoing legal proceedings that could result in costs to the State Financial Plan. The most significant litigation includes ongoing claims by several Indian Nations alleging wrongful possession of lands by the State and several counties, and the recent State Court of Appeals ruling that the State's financing system for New York City public schools was unconstitutional requiring the State to submit its remedy to the Court by July 30, 2004. In addition, in JIGGETTS VS. DOWLING, the State has implemented a court-ordered increase in the shelter allowance schedule for public assistance families effective November 1, 2003. The court has also directed the parties to return on March 30, 2004 for further proceedings. The State and several State employee unions are negotiating new collective bargaining agreements. The recently expired four-year agreement included a $500 non-recurring lump sum payment and salary increases of 1.5 percent in 1999-00, 3.0 percent in 2000-01 and 3.5 percent in 2001-02 and 2002-03. Each one percent salary increase costs roughly $80 million in the General Fund. The Federal government is currently auditing Medicaid claims submitted since 1993 under the school supportive health services program. At this point, these audits have not been finalized, and, as a result, the liability of the State and/or school districts for any disallowances that may result from these audits cannot be determined. Federal regulations include an appeals process that could postpone repayment of any disallowances. In addition, as of September 2003, nearly $300 million in Federal Medicaid payments related to school supportive health services have been deferred by the Federal Centers for Medicare and Medicaid Services. Since the State has continued to reimburse school districts for these costs, these Federal deferrals, if not resolved, could result in a Medicaid cash shortfall in the General Fund. New York State continues to await Federal approval of the Medicaid State Plan Amendment necessary to make planned payments totaling roughly $1.1 billion (half funded by the Federal government) to public hospitals throughout the State, including the New York City Health and Hospitals Corporation, State University of New York hospitals, and other State and county operated facilities. - ---------- (1) For a discussion of other risks, please see "Special Considerations" and "Litigation" in this Update. 14 GOVERNMENTAL FUNDS FINANCIAL PLANS The State Funds and All Governmental Funds sections below provide a brief description of the annual change in receipts and disbursements. For a more detailed discussion of these changes, refer to the Enacted Budget Financial Plan. GASB issued Statement 34 (GASB 34), which substantially changed the way in which governments are required to report their operations in their financial statements. In accordance with GASB 34, the Expendable and Non-Expendable Trust Funds have been reclassified from the Fiduciary fund type to the Special Revenue fund type. These fund reclassifications conform to the new accounting standards and are counted in the State Funds and All Governmental Funds actual results and estimates contained in this Update. STATE FUNDS State Funds represent the portion of the State's budget supported exclusively by State revenues: taxes, fees, fines, and other revenues imposed and collected by the State. Federal grants are not typically included as part of State Funds; however, one-time Federal grants received in the General Fund have been included for 2003-04. 2003-04 STATE FUND RECEIPTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE Taxes 42,534 42,577 43 1,901 Miscellaneous Receipts 19,360 19,424 64 5,421 Federal Grants 645 646 1 646 TOTAL RECEIPTS 62,539 62,647 108 7,968
The increase in State Funds receipts of $108 million over the July Update is primarily attributable to General Fund changes including projected increases in tax collections ($43 million). The remaining State Funds receipts change reflects the reclassification of Expendable and Non-Expendable Trust Funds to the Special Revenue Funds pursuant to GASB 34 as discussed above ($60 million). State Funds receipts are projected to total $62.65 billion in 2003-04, an increase of $7.97 billion or 14.6 percent from 2002-03. Tax receipts in State Funds are projected to total $42.58 billion, an increase of $1.90 billion from 2002-03 primarily reflecting a new personal income tax surcharge ($1.4 billion) and a one-quarter percent increase in sales tax ($450 million) as well as other modest tax reestimates. Miscellaneous receipts in State Funds are projected to total $19.42 billion, an increase of $5.42 billion over 2002-03. The growth in miscellaneous receipts primarily reflects receipts from the issuance of tobacco bonds ($3.8 billion), receipt of bond proceeds in support of capital spending ($1.29 billion) and growth in SUNY revenues attributable to a tuition increase ($280 million). Federal grants are projected to total $646 million and reflect one-time Federal revenue sharing payments. 15 2003-04 STATE FUNDS DISBURSEMENTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE 62,700 62,864 164 7,111
State Funds disbursements increased by $164 million from the July Update. Spending growth is due mostly to General Fund changes, including welfare caseload increases ($31 million) and higher than expected enrollment in the current academic year for TAP ($31 million). The remaining change reflects increased spending in STAR for higher than anticipated school tax increases ($35 million) and fund reclassifications made pursuant to GASB 34 as discussed above ($84 million). State Funds disbursements are projected at $62.86 billion in 2003-04, an increase of $7.11 billion or 12.8 percent from 2002-03. The deferral of payments made necessary due to the delay in securing authorization to issue tobacco bonds accounts for $3.8 billion of the $7.11 billion increase. Spending growth in welfare and HESC ($582 million and $210 million, respectively) results primarily from the loss of non-recurring Federal TANF reserve funds that had previously helped offset 2002-03 General Fund spending. Other State Funds spending growth includes increases in: General State Charges ($543 million) primarily due to higher pension and health insurance costs; Medicaid ($249 million) reflecting growth in program costs; and debt service ($349 million), reflecting planned growth in costs and additional bonding enacted by the Legislature. The remaining annual growth includes: legislative member items ($250 million), public health ($195 million), SUNY ($183 million), STAR ($171 million), transportation ($136 million), environmental conservation ($117 million) and children and family services ($105 million). ALL GOVERNMENTAL FUNDS All Governmental Funds includes activity in the four governmental fund types: the General Fund, Special Revenue Funds, Capital Projects Funds, and Debt Service funds. All Governmental Funds spending combines State Funds with Federal grants across these fund types. 2003-04 ALL GOVERNMENTAL FUND RECEIPTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE Taxes 42,534 42,577 43 1,901 Miscellaneous Receipts 19,582 19,555 (27) 5,413 Federal Grants 34,913 36,190 1,277 2,934 TOTAL RECEIPTS 97,029 98,322 1,293 10,248
16 The increase in All Governmental Funds receipts of $1.29 billion over the July Update primarily reflects the receipt of Federal Emergency Management Agency (FEMA) reimbursement aid for World Trade Center costs ($1.17 billion), and the State Funds changes described above ($108 million). All Governmental Funds receipts are projected to be $98.32 billion in 2003-04, an increase of $10.25 billion or 11.6 percent from 2002-03. The growth in receipts is comprised of the State Funds increase of $7.97 billion discussed above, and additional growth of $2.29 billion in Federal grants. The annual increase in Federal grants primarily reflects the receipt of FEMA aid as described above ($1.13 billion) and higher projected Federal aid in support of the Medicaid program reflecting the temporary increase in the Federal matching rate ($1.01 billion) and program cost increases ($300 million). 2003-04 ALL GOVERNMENTAL FUNDS DISBURSEMENTS (MILLIONS OF DOLLARS)
JULY OCTOBER CHANGE FROM ANNUAL UPDATE UPDATE JULY UPDATE CHANGE 96,918 97,979 1,061 8,923
All Governmental Funds disbursements increased by $1.06 billion over the July Update due to FEMA aid that flowed through the State to New York City for costs incurred associated with the World Trade Center attacks ($885 million), and the State funds changes described above ($164 million). All Governmental Funds spending is projected to total $97.98 billion in 2003-04, an annual increase of $8.92 billion or 10 percent from 2002-03. All Governmental Funds Medicaid spending growth of $2.51 billion primarily reflects underlying spending growth ($1.40 billion), the temporary increase in the Federal matching rate ($1.01 billion), and increased aid for disproportionate share payments to public hospitals ($394 million), as well as the State Funds changes described above ($249 million). Also included in the annual increase is higher spending for public health ($475 million), largely related to the Child Health Plus program ($319 million), and welfare ($225 million), which reflects the State Funds increase described above ($582 million) partially offset by decreased Federal spending primarily due to the loss of one-time TANF aid that was used to support 2002-03 spending. All Governmental Funds spending growth largely attributable to State Funds spending includes growth for fringe benefits ($525 million), debt service ($349 million), legislative member items ($250 million), SUNY ($160 million), and STAR ($171 million). 17 MID-YEAR CASH-BASIS RESULTS GENERAL FUND CUMULATIVE GENERAL FUND CASH FLOW RESULTS APRIL 1, 2003 THROUGH SEPTEMBER 30, 2003 (MILLIONS OF DOLLARS)
FAVORABLE (UNFAVORABLE) JULY PLAN ACTUALS VARIANCE Total Receipts 21,764 21,649 (115) Total Disbursements 20,316 19,905 411 Cash Balance 2,263 2,559 296
The General Fund ended the second quarter with a balance of $2.56 billion, $296 million higher than the estimate in the July Update to the Financial Plan. The variance primarily reflects timing delays in projected spending of $411 million partially offset by lower receipts of $115 million. Total General Fund receipts, including transfers from other funds, were $21.65 billion in the first six-months. On a net basis, receipts were $115 million lower than the July Update cash flow projections. This variance is primarily attributable to the delay in a transfer from the Dedicated Highway Fund ($118 million), lower sales and business taxes ($46 million) and lower gross personal income tax receipts ($21 million), which are partially offset by higher miscellaneous receipts ($29 million) and other taxes ($32 million). General Fund disbursements, including transfers to other funds, totaled $19.91 billion through the second quarter, and were $411 million lower than the estimate of disbursements in the July Update. This lower spending consists of slower than anticipated 2002-03 school year aid payments primarily for categorical aid programs to school districts ($178 million), timing delays in capital projects in the economic development, environment, education and general government areas ($113 million), and a delay in the receipt of Federal Medicaid disproportionate share monies which are then transferred to SUNY hospitals ($92 million). Almost all of these timing variances are expected to be paid by the end of December and should have no impact on year-end projections, with the exception of the pending Federal approval of the Medicaid State Plan Amendment to make additional intergovernmental transfers and disproportionate share (IGT/DSH) payments to public hospitals as discussed earlier in this document which could result in higher costs. STATE FUNDS Total State Funds receipts were $30.15 billion in the first six months of 2003-04 comprised of $20.48 billion in taxes and $9.67 billion in other receipts. State Funds tax receipts are projected to total $42.58 billion at year-end and all other receipts are projected to total $20.07 billion. State Funds receipts through September represent 48 percent of total year-end projections which is consistent with financial plan assumptions that closely mirror State Funds disbursements. 18 State Funds disbursements totaled $28.42 billion through the second quarter against projected year-end total disbursements of $62.86 billion. Disbursements through September from State Funds amount to 45 percent of total projected disbursements consistent with underlying cash flow assumptions which plan for the disbursement of substantially all of the STAR local tax relief payments, significant school aid payments and Medicaid payments supported by HCRA monies in the second half of the fiscal year. ALL GOVERNMENTAL FUNDS All Governmental Funds receipts totaled $48.81 billion in the first six months of 2003-04 comprised of $20.48 billion in taxes, $9.44 billion in miscellaneous receipts and $18.89 billion in Federal grants. All Governmental Funds receipts are projected to total $98.32 billion at year-end: $42.58 billion in taxes, $19.56 billion in miscellaneous receipts, and $36.19 billion in Federal grants. Total All Governmental Funds disbursements were $46.23 billion through September against projected year-end total disbursements of $97.98 billion. All Governmental Funds receipts and disbursements through September are consistent with cash flow assumptions made in development of the Financial Plan projections and represent 49 percent and 47 percent of total year-end estimates, respectively. GENERAL FUND CASH FLOW PROJECTIONS Actual month-end cash balances through September ranged from a low of $1.33 billion in August to a high of $2.79 billion in April. Total receipts through September included $2.20 billion in tobacco proceeds and $323 million in Federal revenue sharing received in June, which allowed for the repayment of all pending March 2003 payment delays totaling $1.9 billion. The General Fund closing balance on September 30, 2003 was $2.56 billion. General Fund intra-month daily balances can be supplemented with positive balances in other governmental funds as permitted by legislation included in the 2003-04 Enacted Budget that allows the State Comptroller to temporarily access balances in other funds to support the General Fund within a month. This process was utilized in September, as planned, to ensure intra-month payments continued in a timely manner. While the receipt of tobacco securitization proceeds and additional Federal aid has alleviated the tight monthly cash flow position experienced in the first six months of the 2003-04 State Fiscal Year, DOB continues to review cash balances on a daily basis and expects that cash flow in the early part of 2004-05 will have to be carefully monitored. The 2003-04 General Fund cash flow is projected to end the third quarter with a balance of $2.54 billion, an increase of $1.07 billion over the prior fiscal year. 19 DEBT REFORM ACT The Debt Reform Act of 2000 imposed phased-in caps that limit new debt outstanding to four percent of personal income and new debt service costs to five percent of total governmental funds receipts. To immediately constrain State debt levels, the Act applies to all new State-supported debt issued on and after April 1, 2000 (excluding certain refunding bonds). Section 23 of the State Finance Law requires the calculation of the caps imposed by the Act to be submitted with the Financial Plan Update most proximate to October 31 of each year. For the 2002-03 fiscal year, the debt outstanding and debt service caps are 1.65 percent each. As shown in the tables below, actual levels of debt outstanding and debt service costs continue to remain well below the limits imposed by the Act. DEBT OUTSTANDING CAP ($ IN MILLIONS) New Debt Outstanding $ 8,295 Personal Income (CY 2002) $ 684,070 Debt Outstanding (% of PI) 1.21% Cap Imposed by Debt Reform Act 1.65%
DEBT SERVICE CAP ($ IN MILLIONS) New Debt Service $ 470 Governmental Funds Receipts $ 90,174 Debt Service (% of Govn't Fund Receipts) 0.52% Cap Imposed by Debt Reform Act 1.65%
20 CASH FINANCIAL PLAN GENERAL FUND 2003-2004 (MILLIONS OF DOLLARS)
JULY CHANGE OCTOBER --------------- --------------- --------------- OPENING FUND BALANCE 815 0 815 =============== =============== =============== RECEIPTS: Taxes: Personal income tax 16,284 (8) 16,276 User taxes and fees 7,975 (11) 7,964 Business taxes 3,436 0 3,436 Other taxes 711 15 726 Miscellaneous receipts 5,547 0 5,547 Federal grants 645 0 645 Transfers from other funds: PIT in excess of Revenue Bond debt service 5,150 23 5,173 Sales tax in excess of LGAC debt service 1,960 0 1,960 Real estate taxes in excess of CW/CA debt service 199 11 210 All other 430 0 430 --------------- --------------- --------------- TOTAL RECEIPTS 42,337 30 42,367 =============== =============== =============== DISBURSEMENTS: Grants to local governments 29,584 45 29,629 State operations 7,142 0 7,142 General State charges 3,258 0 3,258 Transfers to other funds: Debt service 1,541 0 1,541 Capital projects 255 0 255 State university 145 0 145 Other purposes 497 (15) 482 --------------- --------------- --------------- TOTAL DISBURSEMENTS 42,422 30 42,452 =============== =============== =============== CHANGE IN FUND BALANCE (85) 0 (85) =============== =============== =============== CLOSING FUND BALANCE 730 0 730 =============== =============== =============== Tax Stabilization Reserve Fund 710 0 710 Contingency Reserve Fund 20 0 20
21 CASH FINANCIAL PLAN GENERAL FUND 2003-2004 (MILLIONS OF DOLLARS)
ENACTED CHANGE OCTOBER --------------- --------------- --------------- OPENING FUND BALANCE 815 0 815 =============== =============== =============== RECEIPTS: Taxes: Personal income tax 16,285 (9) 16,276 User taxes and fees 8,007 (43) 7,964 Business taxes 3,498 (62) 3,436 Other taxes 771 (45) 726 Miscellaneous receipts 5,569 (22) 5,547 Federal grants 0 645 645 Transfers from other funds: PIT in excess of Revenue Bond debt service 5,125 48 5,173 Sales tax in excess of LGAC debt service 1,853 107 1,960 Real estate taxes in excess of CW/CA debt service 202 8 210 All other 430 0 430 --------------- --------------- --------------- TOTAL RECEIPTS 41,740 627 42,367 =============== =============== =============== DISBURSEMENTS: Grants to local governments 29,835 (206) 29,629 State operations 7,205 (63) 7,142 General State charges 3,232 26 3,258 Transfers to other funds: Debt service 1,583 (42) 1,541 Capital projects 255 0 255 State university 145 0 145 Other purposes 482 0 482 --------------- --------------- --------------- TOTAL DISBURSEMENTS 42,737 (285) 42,452 =============== =============== =============== FISCAL MANAGEMENT PLAN/FEDERAL AID 912 (912) 0 =============== =============== =============== CHANGE IN FUND BALANCE (85) 0 (85) =============== =============== =============== CLOSING FUND BALANCE 730 0 730 =============== =============== =============== Tax Stabilization Reserve Fund 710 0 710 Contingency Reserve Fund 20 0 20
22 CASH FINANCIAL PLAN GENERAL FUND 2002-2003 AND 2003-2004 (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ANNUAL ACTUAL OCTOBER CHANGE --------------- --------------- --------------- OPENING FUND BALANCE 1,032 815 (217) =============== =============== =============== RECEIPTS: Taxes: Personal income tax 16,791 16,276 (515) User taxes and fees 7,063 7,964 901 Business taxes 3,380 3,436 56 Other taxes 743 726 (17) Miscellaneous receipts 2,091 5,547 3,456 Federal grants 0 645 645 Transfers from other funds: PIT in excess of Revenue Bond debt service 4,215 5,173 958 Sales tax in excess of LGAC debt service 1,919 1,960 41 Real estate taxes in excess of CW/CA debt service 263 210 (53) All other 931 430 (501) --------------- --------------- --------------- TOTAL RECEIPTS 37,396 42,367 4,971 =============== =============== =============== DISBURSEMENTS: Grants to local governments 24,887 29,629 4,742 State operations 7,678 7,142 (536) General State charges 2,699 3,258 559 Transfers to other funds: Debt service 1,496 1,541 45 Capital projects 166 255 89 State university 26 145 119 Other purposes 661 482 (179) --------------- --------------- --------------- TOTAL DISBURSEMENTS 37,613 42,452 4,839 =============== =============== =============== CHANGE IN FUND BALANCE (217) (85) 132 =============== =============== =============== CLOSING FUND BALANCE 815 730 (85) =============== =============== =============== Tax Stabilization Reserve Fund 710 710 0 Contingency Reserve Fund 20 20 0 Community Projects Fund 85 0 (85)
NOTE: ACTUALS REFLECT THE AMOUNTS PUBLISHED IN THE COMPTROLLER'S CASH BASIS REPORT RELEASED ON JULY 29, 2003. 23 CURRENT STATE RECEIPTS GENERAL FUND 2002-2003 AND 2003-2004 (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ANNUAL ACTUAL OCTOBER CHANGE --------------- --------------- --------------- PERSONAL INCOME TAX 16,791 16,276 (515) --------------- --------------- --------------- USER TAXES AND FEES: 7,063 7,964 901 --------------- --------------- --------------- Sales and use tax 6,328 7,250 922 Cigarette and tobacco taxes 446 415 (31) Motor vehicle fees 67 75 8 Alcoholic beverages taxes 180 182 2 Alcoholic beverage control license fees 42 42 0 BUSINESS TAXES: 3,380 3,436 56 --------------- --------------- --------------- Corporation franchise tax 1,407 1,388 (19) Corporation and utilities tax 860 755 (105) Insurance taxes 704 868 164 Bank tax 409 425 16 OTHER TAXES: 743 726 (17) --------------- --------------- --------------- Estate tax 701 692 (9) Gift tax 7 0 (7) Real property gains tax 5 2 (3) Pari-mutuel taxes 29 32 3 Other taxes 1 0 (1) TOTAL TAXES 27,977 28,402 425 --------------- --------------- --------------- MISCELLANEOUS RECEIPTS 2,091 5,547 3,456 --------------- --------------- --------------- FEDERAL GRANTS 0 645 645 --------------- --------------- --------------- TOTAL RECEIPTS 30,068 34,594 4,526 =============== =============== ===============
24 GENERAL FUND PERSONAL INCOME TAX COMPONENTS 2002-2003 AND 2003-2004 (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ANNUAL ACTUAL OCTOBER CHANGE --------------- --------------- --------------- Withholdings 19,959 22,085 2,126 Estimated Payments 4,855 5,035 180 Final Payments 1,334 1,240 (94) Delinquencies 796 595 (201) --------------- --------------- --------------- GROSS COLLECTIONS 26,944 28,955 2,011 State/City Offset (288) (300) (12) Refund Reserve 1,050 84 (966) Refunds (4,008)(1) (4,230)(2) (222) --------------- --------------- --------------- REPORTED TAX COLLECTIONS 23,698 24,509 811 STAR (2,664) (2,835) (171) RBTF (4,243) (5,398) (1,155) --------------- --------------- --------------- GENERAL FUND 16,791 16,276 (515) =============== =============== ===============
Net personal income tax collections are affected by transactions in the tax refund reserve account. The tax refund reserve account is used to hold moneys designated to pay tax refunds. The Comptroller deposits receipts into this account at the discretion of the Commissioner of Taxation and Finance. The deposit of moneys into the account during a fiscal year has the effect of reducing receipts for the fiscal year, and the withdrawal of moneys from the account has the effect of increasing receipts in the fiscal year of withdrawal. The tax refund reserve account also includes amounts made available as a result of the LGAC financing program. Beginning in 1998-99, a portion of personal income tax collections is deposited directly in the School Tax Reduction (STAR) fund and used to make payments to reimburse local governments for their revenue decreases due to the STAR program. NOTE 1: REFLECTS THE PAYMENT OF THE BALANCE OF REFUNDS ON 2001 LIABILITY AND PAYMENT OF $960 MILLION OF CALENDAR YEAR 2002 REFUNDS IN THE LAST QUARTER OF THE STATE'S 2002-03 FISCAL YEAR AND A BALANCE IN THE TAX REFUND RESERVE ACCOUNT OF $627 MILLION. NOTE 2: REFLECTS THE PAYMENT OF THE BALANCE OF REFUNDS ON 2002 LIABILITY AND THE PROJECTED PAYMENT OF $960 MILLION OF CALENDAR YEAR 2003 REFUNDS IN THE LAST QUARTER OF THE STATE'S 2003-04 FISCAL YEAR AND A PROJECTED BALANCE IN THE TAX REFUND RESERVE ACCOUNT OF $543 MILLION. 25 CASH FINANCIAL PLAN STATE FUNDS 2003-2004 (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 947 (560) 158 1,360 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,402 4,462 1,750 7,963 42,577 Miscellaneous receipts 5,547 9,943 3,232 702 19,424 Federal grants 645 1 0 0 646 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 34,594 14,406 4,982 8,665 62,647 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 29,629 10,237 1,095 0 40,961 State operations 7,142 4,630 0 8 11,780 General State charges 3,258 410 0 0 3,668 Debt service 0 0 0 3,387 3,387 Capital projects 0 6 3,062 0 3,068 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 40,029 15,283 4,157 3,395 62,864 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,773 820 280 4,882 13,755 Transfers to other funds (2,423) (229) (947) (10,149) (13,748) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,350 591 (419) (5,267) 255 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) (286) 406 3 38 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 661 (154) 161 1,398 ============= ============= ============= ============= =============
THE SPECIAL REVENUE FUNDS OPENING FUND BALANCE HAS BEEN INCREASED BY $54 MILLION TO REFLECT THE RECLASSIFICATION OF THE EXPENDABLE AND NON-EXPENDABLE TRUST FUNDS FROM THE FIDUCIARY FUND TYPE TO THE SPECIAL REVENUE FUND TYPE PURSUANT TO GASB 34. 26 CASH FINANCIAL PLAN ALL GOVERNMENTAL FUNDS 2003-2004 (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 1,039 (791) 158 1,221 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,402 4,462 1,750 7,963 42,577 Miscellaneous receipts 5,547 10,074 3,232 702 19,555 Federal grants 645 33,907 1,638 0 36,190 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 34,594 48,443 6,620 8,665 98,322 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 29,629 40,388 1,312 0 71,329 State operations 7,142 7,922 0 8 15,072 General State charges 3,258 576 0 0 3,834 Debt service 0 0 0 3,387 3,387 Capital projects 0 6 4,351 0 4,357 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 40,029 48,892 5,663 3,395 97,979 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,773 3,302 280 4,882 16,237 Transfers to other funds (2,423) (2,671) (1,079) (10,149) (16,322) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,350 631 (551) (5,267) 163 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) 182 406 3 506 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 1,221 (385) 161 1,727 ============= ============= ============= ============= =============
THE SPECIAL REVENUE FUNDS OPENING FUND BALANCE HAS BEEN INCREASED BY $54 MILLION TO REFLECT THE RECLASSIFICATION OF THE EXPENDABLE AND NON-EXPENDABLE TRUST FUNDS FROM THE FIDUCIARY FUND TYPE TO THE SPECIAL REVENUE FUND TYPE PURSUANT TO GASB 34. 27 CURRENT STATE RECEIPTS ALL GOVERNMENTAL FUNDS 2002-2003 AND 2003-2004 (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ANNUAL ACTUAL OCTOBER CHANGE ------------- ------------- ------------- PERSONAL INCOME TAX 23,698 24,509 811 ------------- ------------- ------------- USER TAXES AND FEES 10,804 11,906 1,102 ------------- ------------- ------------- Sales and use taxes 8,796 9,914 1,118 Cigarette and tobacco taxes 446 415 (31) Motor fuel tax 544 515 (29) Motor vehicle fees 612 651 39 Highway use tax 147 149 2 Alcoholic beverage taxes 180 182 2 Alcoholic beverage control license fees 42 42 0 Auto rental tax 37 38 1 BUSINESS TAXES 4,983 5,021 38 ------------- ------------- ------------- Corporation franchise tax 1,612 1,577 (35) Corporation and utilities taxes 1,091 964 (127) Insurance taxes 776 972 196 Bank tax 481 497 16 Petroleum business taxes 1,023 1,011 (12) OTHER TAXES 1,191 1,141 (50) ------------- ------------- ------------- Estate tax 701 691 (10) Gift tax 7 0 (7) Real property gains tax 5 2 (3) Real estate transfer tax 448 415 (33) Pari-mutuel taxes 29 32 3 Other taxes 1 1 0 TOTAL TAXES 40,676 42,577 1,901 ------------- ------------- ------------- MISCELLANEOUS RECEIPTS 14,148 19,555 5,407 ------------- ------------- ------------- FEDERAL GRANTS 33,250 36,190 2,940 ------------- ------------- ------------- TOTAL RECEIPTS 88,074 98,322 10,248 ============= ============= =============
28 CASH FINANCIAL PLAN SPECIAL REVENUE FUNDS 2003-2004 (MILLIONS OF DOLLARS)
STATE FEDERAL TOTAL ------------- ------------- ------------- OPENING FUND BALANCE 947 92 1,039 ============= ============= ============= RECEIPTS: Taxes 4,462 0 4,462 Miscellaneous receipts 9,943 131 10,074 Federal grants 1 33,906 33,907 ------------- ------------- ------------- TOTAL RECEIPTS 14,406 34,037 48,443 ============= ============= ============= DISBURSEMENTS: Grants to local governments 10,237 30,151 40,388 State operations 4,630 3,292 7,922 General State charges 410 166 576 Debt service 0 0 0 Capital projects 6 0 6 ------------- ------------- ------------- TOTAL DISBURSEMENTS 15,283 33,609 48,892 ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 820 2,482 3,302 Transfers to other funds (229) (2,442) (2,671) Bond and note proceeds 0 0 0 ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 591 40 631 ============= ============= ============= CHANGE IN FUND BALANCE (286) 468 182 ============= ============= ============= CLOSING FUND BALANCE 661 560 1,221 ============= ============= =============
THE STATE SPECIAL REVENUE FUNDS OPENING FUND BALANCE HAS BEEN INCREASED BY $54 MILLION TO REFLECT THE RECLASSIFICATION OF THE EXPENDABLE AND NON-EXPENDABLE TRUST FUNDS FROM THE FIDUCIARY FUND TYPE TO THE SPECIAL REVENUE FUND TYPE PURSUANT TO GASB 34. 29 CASH FINANCIAL PLAN CAPITAL PROJECTS FUNDS 2003-2004 (MILLIONS OF DOLLARS)
STATE FEDERAL TOTAL ------------- ------------- ------------- OPENING FUND BALANCE (560) (231) (791) ============= ============= ============= RECEIPTS: Taxes 1,750 0 1,750 Miscellaneous receipts 3,232 0 3,232 Federal grants 0 1,638 1,638 ------------- ------------- ------------- TOTAL RECEIPTS 4,982 1,638 6,620 ============= ============= ============= DISBURSEMENTS: Grants to local governments 1,095 217 1,312 State operations 0 0 0 General State charges 0 0 0 Debt service 0 0 0 Capital projects 3,062 1,289 4,351 ------------- ------------- ------------- TOTAL DISBURSEMENTS 4,157 1,506 5,663 ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 280 0 280 Transfers to other funds (947) (132) (1,079) Bond and note proceeds 248 0 248 ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) (419) (132) (551) ============= ============= ============= CHANGE IN FUND BALANCE 406 0 406 ============= ============= ============= CLOSING FUND BALANCE (154) (231) (385) ============= ============= =============
30 CASHFLOW GENERAL FUND 2003-2004 (MILLIONS OF DOLLARS)
APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER --------- --------- --------- --------- --------- --------- --------- --------- --------- OPENING FUND BALANCE 815 2,786 2,151 1,989 1,466 1,331 2,559 3,245 2,825 ========= ========= ========= ========= ========= ========= ========= ========= ========= RECEIPTS: Taxes Personal income tax 2,811 244 1,545 1,214 1,126 1,791 1,345 1,034 233 Sales tax 450 461 692 547 557 813 567 574 815 User taxes and fees 103 74 40 73 52 65 49 50 55 Business taxes 56 (133) 728 58 42 787 41 1 809 Other taxes 49 93 33 60 67 96 48 52 55 Tobacco bond proceeds 0 0 2,202 0 0 0 0 0 1,598 Federal Grants 0 0 323 0 0 0 323 0 0 Miscellaneous receipts 70 55 116 94 81 187 137 290 102 Transfers from other funds 898 297 770 585 561 816 628 460 359 --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RECEIPTS 4,437 1,091 6,449 2,631 2,486 4,555 3,138 2,461 4,026 ========= ========= ========= ========= ========= ========= ========= ========= ========= Disbursements: Grants to local governments 1,462 604 5,426 1,834 1,723 1,703 1,557 1,871 2,973 State operations 743 799 648 845 606 634 504 656 728 General State charges 32 268 246 359 246 636 275 171 217 Transfers to other funds 229 55 291 116 46 354 116 183 397 --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL DISBURSEMENTS 2,466 1,726 6,611 3,154 2,621 3,327 2,452 2,881 4,315 ========= ========= ========= ========= ========= ========= ========= ========= ========= CHANGE IN FUND BALANCE 1,971 (635) (162) (523) (135) 1,228 686 (420) (289) ========= ========= ========= ========= ========= ========= ========= ========= ========= CLOSING FUND BALANCE 2,786 2,151 1,989 1,466 1,331 2,559 3,245 2,825 2,536 ========= ========= ========= ========= ========= ========= ========= ========= =========
NOTE: REFLECTS ACTUALS THROUGH SEPTEMBER PUBLISHED IN THE COMPTROLLER'S MONTHLY REPORT ON STATE FUNDS CASH BASIS OF ACCOUNTING FOR SEPTEMBER 2003 AND DOB PROJECTIONS FOR OCTOBER THROUGH DECEMBER. 31 GAAP-BASIS FINANCIAL PLANS (Reprinted from August 7, 2003 Update to the AIS) DOB also prepares the General Fund and All Governmental Funds Financial Plans in accordance with Generally Accepted Accounting Principles (GAAP). The GAAP results for 2002-03 and the projections for 2003-04 are based on the accounting principles applied by the State Comptroller in the financial statements issued for the 2002-03 State Fiscal Year, and reflect the impact of GASB 34. GASB 34 has significantly changed the presentation of GAAP financial information for State and local governments. The changes are intended to portray the State's net overall financial condition, including activities that affect State assets and liabilities during the fiscal year. Based on the new GASB 34 presentation, the State has a net positive asset condition of $44.9 billion, a decrease of $5.5 billion from the prior year. In the General Fund, the State ended the 2002-03 fiscal year with an operating deficit of $4.22 billion. The operating result is primarily attributable to the use of $1.3 billion in cash reserves to balance the 2002-03 budget, a $1.0 billion decline in revenues as a result of the weak economy and lingering effects of the World Trade Center disaster, and the deferral of $1.9 billion in cash basis spending from 2002-03 until 2003-04. As a result of the operating deficit, the 2001-02 accumulated surplus (as restated) of $901 million has declined to a $3.32 billion accumulated deficit. The General Fund is anticipated to end the 2003-04 fiscal year with an operating surplus of $968 million on a GAAP-basis which is primarily attributable to the receipt of the tobacco bond proceeds originally anticipated in 2002-03 but received in 2003-04, partially offset by the use of cash reserves and other non-recurring actions in 2003-04. As a result, the accumulated deficit is projected to improve to $2.25 billion by the end of the 2003-04 fiscal year. CAPITAL PROGRAM AND FINANCING PLAN UPDATE (Reprinted from August 7, 2003 Update to the AIS) Section 22-c of the State Finance Law requires the Governor to update the five-year Capital Program and Financing Plan (the Plan) submitted with the Executive Budget by the later of July 30 or 90 days after the enactment of the State Budget. The updated 2003-04 through 2007-08 Capital Program and Financing Plan was released with the First Quarterly Update and can be obtained by contacting the Division of the Budget, State Capitol, Albany, NY 12224, (518) 473-8705, or by visiting its website at www.budget.state.ny.us. Total capital spending is projected to be $26.2 billion across the five years of the Plan, an average of $5.2 billion annually. Transportation continues to be largest area of spending, which is projected at $15.3 billion over the five-year Plan. Spending for the environment ($4 billion), education ($2.2 billion), mental hygiene ($1.5 billion), public protection ($1.3 billion), and economic 32 development, housing and other programs ($1.9 billion) constitutes the remainder of the five-year Plan. For 2003-04 through 2007-08, the Plan projects issuances of: $872 million in general obligation bonds; $5.3 billion in Dedicated Highway and Bridge Trust Fund Bonds issued by the Thruway Authority to finance capital projects for transportation; $955 million in Mental Health Facilities Improvement Revenue Bonds issued by DASNY to finance capital projects at mental health facilities; $276 million in SUNY Dormitory Facilities Revenue Bonds to finance capital projects related to student dormitories; and $7.9 billion in State Personal Income Tax Revenue Bonds to finance various capital programs including school construction, university facilities, SUNY community colleges, State court facilities, local highway improvements, prisons, housing, economic development and environmental programs, homeland security, and State facilities. The projections of State borrowings for the 2003-04 fiscal year are subject to change as market conditions, interest rates and other factors vary throughout the fiscal year. The Debt Reform Act of 2000 has improved the State's borrowing practices by imposing phased-in caps on new debt outstanding and new debt service costs, limiting the use of debt to capital works and purposes only, and establishing a maximum term of 30 years on such debt. The Debt Reform Act applies to all new State-supported debt issued on and after April 1, 2000. The most recent annual debt reform calculations show that the State was in compliance with both debt caps, with debt issued after March 31, 2000 and then outstanding at 0.67 percent of personal income and debt service on such debt at 0.36 percent of total governmental receipts as compared to the caps of 1.25 percent each. The State has also enacted statutory limits on the amount of variable rate obligations and interest rate exchange agreements that authorized issuers of State-supported debt may enter into. The statute limits the use of debt instruments which result in a variable rate exposure (e.g., variable rate obligations and interest rate exchange agreements) to no more than 15 percent of total outstanding State-supported debt, and limits the use of interest rate exchange agreements to a total notional amount of no more than 15 percent of total outstanding State-supported debt. All interest rate exchange agreements are subject to various statutory restrictions such as minimum counterparty ratings, monthly reporting requirements, and the adoption of interest rate exchange agreement guidelines. All the authorized issuers have adopted uniform guidelines as required by statute. As of March 31, 2003, there was approximately $1.9 billion in debt instruments resulting in a variable rate exposure. In addition, three authorized issuers entered into a total notional amount of $2.2 billion in interest rate exchange agreements, with a mark-to-market value of about $42 million. Both amounts are less than the authorized totals of 15 percent of total outstanding State-supported debt (about $5.8 billion each). SPECIAL CONSIDERATIONS The Financial Plan is necessarily based upon on forecasts of national and State economic activity. Economic forecasts have frequently failed to predict accurately the timing and magnitude of changes in the national and State economies. DOB believes that its current receipts and spending estimates related to the performance of the State and national economies are reasonable. However, 33 there can be no assurance that actual results will not differ materially and adversely from the current forecast. Labor contracts between the State and most State employee unions expired on March 31, 2003 and collective bargaining negotiations are ongoing. The Financial Plan contains no reserves to finance potential new costs related to any new labor agreements. DOB projects that every one percent increase in salaries for all State employees would result in a General Fund Financial Plan cost of approximately $80 million. DOB continues to forecast that the State's cash flow position will experience pressure in the first quarter of the 2004-05 fiscal year. A number of administrative options are available to DOB to manage General Fund cash flow needs during any fiscal year. The State is prohibited from issuing seasonal notes in the public credit markets to finance cash flow needs, unless the State satisfies certain restrictive conditions imposed under the LGAC statute and related bond covenants. For a discussion of the LGAC restrictions, see the section entitled "Debt and Other Financing Activities -- Local Government Assistance Corporation" in the AIS. On August 6, 2003, the LGAC board of directors, which is comprised of the LGAC chairperson, the State Comptroller, and the Director of DOB, unanimously approved a resolution objecting to the annual payments of $170 million to the City of New York and the refinancing of MAC bonds. The resolution directed LGAC to not participate in the New York City transaction, authorized the co-executive directors of LGAC to engage the services of litigation counsel, and declared that LGAC has no intention to pay such $170 million payments unless legal issues with the transaction (including but not limited to potential LGAC bond covenant violations) are resolved either by litigation or action by the Legislature. For an update on the status of this litigation, see the section entitled "Litigation" in this Update. The Federal government is currently auditing Medicaid claims submitted since 1993 under the school supportive health services program. At this point, these audits have not been finalized, and, as a result, the liability of the State and/or school districts for any disallowances that may result from these audits cannot be determined. Federal regulations include an appeals process that could postpone repayment of any disallowances. In addition, as of September 2003, nearly $300 million in Federal Medicaid payments related to school supportive health services have been deferred by the Federal Centers for Medicare and Medicaid Services. Since the State has continued to reimburse school districts for these costs, these Federal deferrals, if not resolved, could result in a Medicaid cash shortfall, potentially creating a need for additional State support in the short-term. New York State continues to await Federal approval of the Medicaid State Plan Amendment necessary to make planned payments totaling roughly $1.1 billion (half funded by the Federal government) to public hospitals throughout the State, including New York City Health and Hospitals Corporation, State University of New York hospitals, and other State and county operated facilities. 34 The current State Financial Plan assumes no significant Federal disallowances or other Federal actions that could adversely affect State finances. As a result, there can be no assurance that the State's budget projections for 2003-04 will not differ materially and adversely from the projections set forth at this time. 35 PART II PART II OF THIS UPDATE CONTAINS REPRINTED INFORMATION ON GAAP-BASIS RESULTS FOR FISCAL YEAR 2002-03 THAT APPEARED IN THE AUGUST 7, 2003 UPDATE TO THE AIS. IT ALSO CONTAINS UPDATED DISCLOSURE ON THE STATE RETIREMENT SYSTEM, THE METROPOLITAN TRANSPORTATION AUTHORITY, AND THE CITY OF NEW YORK. GAAP-BASIS RESULTS FOR PRIOR FISCAL YEARS (Reprinted from August 7, 2003 Update to the AIS) On July 29, 2003, the State Comptroller issued the Basic Financial Statements and Other Supplementary Information (the 2002-03 Basic Financial Statements) for the 2002-03 fiscal year. The 2002-03 Basic Financial Statements were prepared in accordance with GASB 34 and other applicable GASB statements. The 2002-03 Basic Financial Statements can be obtained by visiting the Office of the State Comptroller's website, www.osc.state.ny.us, or by contacting the Office of the State Comptroller, 110 State Street, Albany, NY 12236. For a brief summary of the 2002-03 GAAP-basis results, see the section entitled "GAAP-basis Financial Plans" in Part I of this Update. STATE ORGANIZATION STATE RETIREMENT SYSTEMS GENERAL The New York State and Local Retirement Systems (the "Systems") provide coverage for public employees of the State and its localities (except employees of New York City and teachers, who are covered by separate plans). The Systems comprise the New York State and Local Employees Retirement System and the New York State and Local Police and Fire Retirement System. The Comptroller is the administrative head of the Systems. State employees made up about 34 percent of the membership during the 2002-03 fiscal year. There were 2,818 other public employers participating in the Systems, including all cities and counties (except New York City), most towns, villages and school districts (with respect to non-teaching employees) and a large number of local authorities of the State. As of March 31, 2003, 650,543 persons were members and 313,597 pensioners or beneficiaries were receiving benefits. The State Constitution considers membership in any State pension or retirement system to be a contractual relationship, the benefits of which shall not be diminished or impaired. Members cannot be required to begin making contributions or make increased contributions beyond what was required when membership began. 36 CONTRIBUTIONS Funding is provided in large part by employer and employee contributions. Employers contribute on the basis of the plan or plans they provide for members. Members joining since mid-1976, other than police and fire members, are required to contribute 3 percent of their salaries for their first 10 years of membership. Legislation enacted in May, 2003 realigns the Retirement Systems billing cycle to match governments' budget cycles and the legislation also institutes a minimum annual payment. The employer contribution for a given fiscal year will be based on the value of the pension fund and its liabilities on the prior April 1. In addition, employers will be required to make a minimum contribution of at least 4.5 percent of payroll every year. The legislation also eliminates the State's ability to delay payments when the amounts owed are greater than the amount budgeted, effective in fiscal year 2004-2005. Also, a portion of the 2004-2005 bill may be amortized over a five-year period at 8 percent interest with the first payment due in 2004-05. Due to the enactment of this legislation, the State bill due in the fiscal year ending March 31, 2004, payable September 1, 2003, was $481.5 million, of which $396.3 million was paid. The difference with 8 percent interest will be due on or before March 1, 2006. Employer contributions due from the State for the fiscal year ending March 31, 2005, payable September 1, 2004, are estimated at $1.15 billion or $797 million if the maximum amount is amortized. ASSETS AND LIABILITIES Assets are held exclusively for the benefit of members, pensioners and beneficiaries. Investments for the Systems are made by the Comptroller as trustee of the Common Retirement Fund, a pooled investment vehicle. OSC reports the net assets available for benefits as of March 31, 2003 were $97.4 billion (including $2.3 billion in receivables), a decline of $15.3 billion or 13.6 percent from the 2001-02 level of $112.7 billion, reflecting, in large part, equity market performance. OSC reports that the present value of anticipated benefits for current members, retirees, and beneficiaries as of March 31, 2003 was $130.5 billion (including $46.1 billion for current retirees and beneficiaries), an increase of $3.5 billion or 2.8 percent from the 2001-02 level of $127 billion. The funding method used by the Systems anticipates that the net assets, plus future actuarially determined contributions, will be sufficient to pay for the anticipated benefits of current members, retirees and beneficiaries. Actuarially determined contributions are calculated using actuarial assets and the present value of anticipated benefits. Actuarial assets differ from net assets in that they are calculated using a five-year smoothing method for valuing equity investments and using amortized cost instead of market value for bonds and mortgages. Actuarial assets decreased from $125.2 billion in 2002 to $106.7 billion on March 31, 2003. The table below shows the actuarially determined contributions that have been made over the last six years. See also "Contributions" above. 37 NET ASSETS AVAILABLE FOR BENEFITS OF THE NEW YORK STATE AND LOCAL RETIREMENT SYSTEMS(1) (MILLIONS OF DOLLARS)
INCREASE/ FISCAL YEAR ENDED (DECREASE) MARCH 31 TOTAL ASSETS(2) FROM PRIOR YEAR ----------------- ----------------- ----------------- 1998 106,319 26.7 1999 112,723 6.0 2000 128,889 14.3 2001 114,044 (11.5) 2002 112,725 (1.2) 2003 97,373 (13.6)
- ---------- (1) Includes relatively small amounts held under Group Life Insurance Plan. Includes some employer contribution receivables. Fiscal year ending March 31, 2003 includes approximately $2.3 billion of receivables. (2) Includes certain accrued employer contributions to be paid with respect to service rendered during fiscal years other than the year shown. CONTRIBUTIONS AND BENEFITS NEW YORK STATE AND LOCAL RETIREMENT SYSTEMS (MILLIONS OF DOLLARS)
ENDED ALL PARTICIPATING LOCAL BENEFITS MARCH 31 EMPLOYERS(1) EMPLOYERS(1) STATE(1) EMPLOYEES PAID(2) - -------------- --------------------- -------------- --------- ---------- ----------- 1998 463 358 105 369 3,395 1999 292 156 136 400 3,570 2000 165 11 154 423 3,787 2001 215 112 103 319 4,267 2002 264 199 65 210 4,576 2003 652 378 274 219 5,030
- ------------- Sources: State and Local Retirement Systems. (1) Includes employer premiums to Group Life Insurance Plan. (2) Includes payments from Group Life Insurance Plan. 38 AUTHORITIES AND LOCALITIES METROPOLITAN TRANSPORTATION AUTHORITY THE FOLLOWING INFORMATION WAS PREPARED FROM INFORMATION FURNISHED BY THE METROPOLITAN TRANSPORTATION AUTHORITY (MTA) AND IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THIS SECTION IS INTENDED TO PROVIDE READERS WITH A BRIEF SUMMARY OF STATE OVERSIGHT AND FINANCIAL ASSISTANCE TO THE MTA. THE OFFICIAL FINANCIAL DISCLOSURE OF THE MTA AND ITS SUBSIDIARIES IS AVAILABLE BY CONTACTING THE METROPOLITAN TRANSPORTATION AUTHORITY, FINANCE DEPARTMENT, 347 MADISON AVENUE, 6TH FLOOR, NEW YORK, NEW YORK 10017 OR BY VISITING THE MTA WEBSITE AT www.mta.info/mta/investor.htm. THE STATE ASSUMES NO LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL INFORMATION REPORTED BY THE MTA OR FOR ANY ERRORS OR OMISSIONS THAT MAY BE CONTAINED AT THE MTA WEBSITE. The MTA oversees the operation of subway and bus lines in New York City by its affiliates, the New York City Transit Authority and the Manhattan and Bronx Surface Transit Operating Authority (collectively, the TA). The MTA operates certain commuter rail and bus services in the New York metropolitan area through the MTA's subsidiaries, the Long Island Rail Road Company, the Metro North Commuter Railroad Company, and the Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel Authority (TBTA), the MTA operates certain intrastate toll bridges and tunnels. Because fare revenues are not sufficient to finance the mass transit portion of these operations, the MTA has depended on, and will continue to depend on, operating support from the State, local governments and TBTA, including loans, grants and subsidies. If current revenue projections are not realized and/or operating expenses exceed current projections, the MTA may be required to seek additional State assistance, raise fares or take other actions. The MTA Board has approved a financial plan for the years 2003 and 2004 for itself and its affiliates and subsidiaries (the 2003-04 Financial Plan) that will enable all such entities to maintain their respective operations on a self-sustaining basis through 2004. The 2003-04 Financial Plan tracks the final two years of the 2000-2004 Capital Programs of the transit and commuter systems (the 2000-2004 Capital Programs) that were approved by the Capital Program Review Board. As part of the 2003-04 Financial Plan, fares on the transit and commuter systems and tolls on TBTA's bridges and tunnels were increased in May 2003. Legal challenges to the fare and toll increases were unsuccessful. On October 28, 2003 the MTA released a revised 2003 budget and a four-year Financial Plan for itself and its affiliates and subsidiaries for 2004 - 2007. This Plan expects balanced budgets for 2003 and 2004. The Plan anticipates budget gaps of $840 million in 2005, $1.34 billion in 2006 and $1.45 billion in 2007. The MTA will solicit wide-ranging comment from the public and elected officials and submit a revised final 2004 budget and 2005 - 2007 Financial Plan to its Board in late December 2003. 39 On May 4, 2000, the Capital Program Review Board approved the MTA's $17.1 billion 2000-2004 Capital Programs. Other amendments were subsequently approved raising the total of the programs to $17.9 billion. The 2000-2004 Capital Programs are the fifth approved capital plan since the Legislature authorized procedures for the adoption, approval and amendment of MTA capital programs and is designed to upgrade the performance of the MTA's transportation systems by investing in new rolling stock, maintaining replacement schedules for existing assets, bringing the MTA system into a state of good repair, and making major investments in system expansion projects such as the Second Avenue Subway project and the East Side Access project. The 2000-2004 Capital Programs approved by the Capital Program Review Board assume the issuance of an estimated $10.6 billion in new money MTA bonds. The remainder of the plan is projected to be financed with assistance from the Federal government, the State, The City of New York, and from various other revenues generated from actions taken by the MTA. Since 1980, the State has enacted several taxes including a surcharge on the profits of banks, insurance corporations and general business corporations doing business in the 12-county Metropolitan Transportation Region served by the MTA and a special one-quarter of one percent regional sales and use tax that provide revenues for mass transit purposes, including assistance to the MTA. Since 1987, State law also has required that the proceeds of a one-quarter of one percent mortgage recording tax paid on certain mortgages in the Metropolitan Transportation Region be deposited in a special MTA fund for operating or capital expenses. In 1993, the State dedicated a portion of certain additional petroleum business tax receipts to fund operating or capital assistance to the MTA. The 2000-01 Enacted Budget initiated a five-year State transportation plan that included nearly $2.2 billion in dedicated revenue support for the MTA's 2000-2004 Capital Programs. This capital commitment includes approximately $800 million of newly dedicated State petroleum business tax revenues, motor vehicle fees, and motor fuel taxes not previously dedicated to the MTA. State legislation accompanying the 2000-01 Enacted Budget increased the aggregate bond cap for the MTA, TBTA and TA to $16.5 billion in order to finance a portion of the 2000-2004 Capital Programs. There can be no assurance that all the necessary governmental actions for the current or future capital programs will be taken or that funding sources currently identified will not be decreased or eliminated. As appropriate, the MTA and the Capital Program Review Board may amend the 2000-2004 Capital Programs from time to time to reflect the level of funding available to pay for the capital projects anticipated to be undertaken during the time period covered by the approved programs. If the 2000-2004 Capital Programs are delayed or reduced, ridership and fare revenue may decline, which could impair the MTA's ability to meet its operating expenses without additional State assistance. THE CITY OF NEW YORK THE FOLLOWING INFORMATION WAS PREPARED FROM INFORMATION FURNISHED BY THE CITY OF NEW YORK AND IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THIS SECTION IS INTENDED TO PROVIDE READERS WITH A BRIEF SUMMARY OF THE FINANCIAL CONDITION OF THE CITY OF NEW YORK, WHICH IS THE LARGEST MUNICIPAL RECIPIENT OF STATE ASSISTANCE TO LOCAL GOVERNMENTS. THE FISCAL DEMANDS ON THE STATE MAY BE AFFECTED 40 BY THE FISCAL CONDITION OF THE CITY, WHICH RELIES IN PART ON STATE AID TO BALANCE ITS BUDGET AND MEET ITS CASH REQUIREMENTS. IT IS ALSO POSSIBLE THAT THE STATE'S FINANCES MAY BE AFFECTED BY THE ABILITY OF THE CITY, AND CERTAIN ENTITIES ISSUING DEBT FOR THE BENEFIT OF THE CITY, TO MARKET SECURITIES SUCCESSFULLY IN THE PUBLIC CREDIT MARKETS. THE OFFICIAL FINANCIAL DISCLOSURE OF THE CITY OF NEW YORK AND FINANCING ENTITIES ISSUING DEBT ON ITS BEHALF IS AVAILABLE BY CONTACTING RAYMOND J. ORLANDO, DIRECTOR OF INVESTOR RELATIONS, OR CONTACTING THE NEW YORK CITY OFFICE OF MANAGEMENT AND BUDGET, 75 PARK PLACE, 6TH FLOOR, NEW YORK, NY 10007, (212) 788-5875. THE STATE ASSUMES NO LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL INFORMATION REPORTED BY THE CITY OF NEW YORK. On June 30, 2003, the City submitted to the State Financial Control Board (the "Control Board") the Financial Plan for the 2003 through 2007 fiscal years, which relates to the City and certain entities which receive funds from the City, and which reflects changes as a result of the City's expense and capital budgets for the 2004 fiscal year which were adopted on June 27, 2003. The Financial Plan is a modification to the financial plans submitted to the Control Board on November 18, 2002, January 31, 2003 and April 23, 2003. The Financial Plan projects revenues and expenditures for the 2003 and 2004 fiscal years balanced in accordance with GAAP, and projects gaps of $2.0 billion, $3.2 billion, and $3.3 billion for fiscal years 2005, 2006, and 2007, respectively. The current Financial Plan reflects changes since the June Financial Plan which decreased projected revenues, by $821 million, $2.3 billion, $2.2 billion and $2.0 billion in fiscal years 2003 through 2006, respectively, and increased projected net expenditures by $1.3 billion, $1.3 billion and $1.6 billion in fiscal years 2004 through 2006, respectively. Changes in projected revenues include a decline in projected tax revenues of $621 million, $1.6 billion, $1.8 billion and $1.9 billion in fiscal years 2003 through 2006, respectively, reflecting primarily decreases in projected personal income, business and sales tax revenues, as well as the elimination of previously assumed non-tax revenues. The decline in projected tax revenue growth reflects the September 11th attack and a continued weak economy, which has resulted in lower wage earnings, lower corporate earnings, local job losses exceeding 117,000 in 2002 and 20,000 in the first half of 2003, a disruption in tourism and related spending and the decline in financial services sector profits and employee income. Changes in projected expenditures since the June Financial Plan include: (i) increased pension costs totaling $213 million, $369 million and $541 million for fiscal years 2004 through 2006, respectively, resulting primarily from additional pension benefits and investments losses in fiscal year 2002, partially offset by projected investment gains in fiscal year 2003; and (ii) the elimination of $223 million, $296 million, $291 million and $412 million of previously assumed labor productivity initiatives in fiscal years 2003 through 2006, respectively. In addition, the City will receive $232 million over the next five years generated by the Battery Park City Authority's (BPCA) recent bond refunding. Of this amount, the City will receive $68 million in fiscal year 2004, which is in addition to the $150 million reflected in the City's Financial Plan from the sale of City-owned land to BPCA. Changes in projected expenditures also include increased agency spending, increased costs for settling claims against the City, increased health and welfare spending primarily for Medicaid, increased debt service costs, an increase in the labor reserve and funding for capital expenditures. The Financial Plan also includes proposed discretionary transfers and prepayments in fiscal year 2003 of $1.3 billion, reflecting discretionary transfers and prepayments in fiscal year 2003 of $679 41 million in debt service, subsidies and lease debt service due in fiscal year 2004 and a miscellaneous budget grant of $624 million to the Transitional Finance Authority in fiscal year 2003, which increases tax revenue in fiscal year 2004 by $624 million. The gap-closing program included in the Financial Plan reflects: (i) the enacted 18.49 percent property tax increase, effective January 1, 2003, which is projected to continue to generate $837 million, $1.7 billion, $1.8 billion and $1.9 billion in fiscal years 2003 through 2006, respectively, and (ii) a gap-closing program to reduce agency expenditures (including debt service savings reflecting a 24 percent reduction in capital commitments) and increase agency revenues by $950 million in fiscal year 2003 and by between $2.1 billion and $2.2 billion annually in subsequent fiscal years. The gap-closing program included in the Financial Plan also reflects: (i) an enacted increase in the personal income tax rates (which decline after the first year) for City residents with taxable income above specified amounts for three years, commencing January 1, 2003, which is projected to generate $644 million, $545 million and $315 million in fiscal years 2004 through 2006, respectively; (ii) an enacted increase in the City portion of the sales tax by one-eighth percent for two years, commencing in June 2003, which is proposed to generate $115 million and $111 million in fiscal years 2004 and 2005, respectively; (iii) the repeal, beginning June 1, 2003, of the sales tax exemption on the purchase of clothing and footwear under $110 for one year with two one-week periods of exemption which is expected to generate $192 million in fiscal year 2004; (iv) legislation enacted by the State Legislature pursuant to which LGAC is to make available to the City $170 million annually which the City intends to assign to a newly-created financing entity for the purpose of refinancing outstanding indebtedness of the Municipal Assistance Corporation for the City of New York (MAC) which would make available to the City approximately $500 million annually in fiscal years 2004 through 2008 by reducing the amount of City revenues retained for MAC debt service; (v) $200 million, $583 million and $96 million in fiscal years 2004 through 2006, respectively, of back rent and renegotiated future lease payments for the City's airports, which is subject to the settlement of the City's claim for back rent and the renegotiation of the City's airport leases; and (vi) additional Federal assistance and additional State assistance which requires the approval of the State government. Additional Federal gap-closing actions in the Financial Plan include $420 million in fiscal year 2003 (in addition to the $230 million previously provided) to reimburse the City for costs related to the September 11th attack and increased Federal funding for Medicaid which is expected to generate approximately $290 million for the City over the fifteen months ending June 30, 2004. The additional State actions proposed in the Financial Plan include a proposed regional transportation initiative which would produce savings for the City totaling $75 million in fiscal year 2004 and approximately $150 million annually in each of fiscal years 2005 and 2006 by transferring responsibility for the local private bus system to the Metropolitan Transportation Authority. Subsequent to the passage of the State budget by the State Legislature, the Governor vetoed significant portions of the budget and other legislation providing City assistance, including legislation relating to the increase in the in the City personal income tax and the sales tax, the proposed $170 million annual payment by LGAC that the City intends to use to pay for MAC debt and the restoration of State education aid. In his veto message, the Governor raised questions as 42 to the constitutionality of the mandated annual $170 million payment. On May 15 and May 19, 2003, the State Legislature overrode the Governor's vetoes. On August 6, 2003 the LGAC directors adopted a resolution stating that LGAC would not make the $170 million annual payment to the City, expressing legal and policy concerns with the legislation. On August 13, 2003, LGAC, its Chairperson, the State Division of the Budget and its Director sued the City and the Sales Tax Asset Receivable Corporation (STAR Corp.) seeking to prevent the issuance of bonds by STAR Corp., the local development corporation expected to finance the cost of debt service on MAC debt otherwise payable from City sales tax revenues. STAR Corp. debt is expected to be paid from the annual payment of $170 million from LGAC which the City would assign to STAR Corp. The State Supreme Court granted the City's and STAR Corp.'s motion for summary judgment. Plaintiffs appealed that decision to the State Appellate Division which had previously issued a preliminary injunction preventing STAR Corp. from issuing its bonds pending appeal. The appeal is expected to be heard in November. The outcome of this litigation cannot be predicted with certainty. If the $500 million in annual savings in MAC debt service for fiscal years 2004 through 2008 from the STAR Corp. financing is not available to the City, the City would be forced to reduce expenditures or increase revenues to maintain balanced operating results for fiscal year 2004 and would be faced with larger than forecast budget gaps in the subsequent years of the Financial Plan. The Financial Plan does not make any provision for wage increases, other than the pay increases for the 2000-2002 round of bargaining and pay increases to be funded by productivity initiatives. It is estimated that each one percent wage increase for all City employees for subsequent contract periods would cost approximately $212 million annually (including benefits). The City Comptroller and others have issued reports identifying various risks. In addition, the economic and financial condition of the City may be affected by various financial, social, economic, geo-political and other factors which could have a material effect on the City. On October 3, 2003, the City's Office of Management and Budget directed City agencies to detail how they would sustain a three percent reduction in City-funded expenditures, with the goal of achieving budgetary savings of $300 million in fiscal year 2004. On October 15, 2003, the Mayor and the Governor announced that the City and the Port Authority of New York and New Jersey (the "Port Authority") had reached an agreement to extend the current lease on John F. Kennedy International and LaGuardia airports through 2050. The agreement secures a minimum upfront payment to the City of approximately $700 million and a minimum annual rent payment of $93.5 million. The upfront payment, which consists of an approximately $500 million lump sum payment and the annual rent payments for 2002 and 2003, is expected to be received late in fiscal year 2004 or in fiscal year 2005. This agreement is subject to the approval of the Port Authority Board and other closing conditions. 43 MONITORING AGENCIES On July 30, 2003, the City Comptroller released a report on the Financial Plan that identified risks for the fiscal years 2004 through 2007, respectively, which, when added to the gaps in the Financial Plan, result in gaps of $484 million, $3.0 billion, $3.9 billion and $3.9 billion in fiscal years 2004 through 2007, respectively. On July 24, 2003, the Office of the State Deputy Comptroller issued a report on the Financial Plan that identified net risks of $367 million, $806 million, $401 million and $423 million for fiscal years 2004 through 2007, respectively. On July 24, 2003, the staff of the Control Board issued a report reviewing the Financial Plan that identified net risks of $154 million, $775 million, $291 million and $313 million for fiscal years 2004 through 2007, respectively, which, when combined with the gaps projected in the Financial Plan, result in estimated gaps of $154 million, $2.8 billion, $3.5 billion and $3.6 billion for fiscal years 2004 through 2007, respectively. The staffs of the FCB, OSDC, the City Comptroller and the Independent Budget Office, issue periodic reports on the City's financial plans. Copies of the most recent reports are available by contacting: FCB, 123 William Street, 23rd Floor, New York, NY 10038, Attention: Executive Director; Independent Budget Officer, OSDC, 59 Maiden Lane, 29th Floor, New York, NY 10038, Attention: Deputy Comptroller; City Comptroller, Municipal Building, 6th Floor, One Centre Street, New York, NY 10007-2341, Attention: Deputy Comptroller for Budget; and IBO, 110 William Street, 14th Floor, New York, NY 10038, Attention: Director. 44 PART III LITIGATION LOCAL GOVERNMENT ASSISTANCE CORPORATION In LOCAL GOVERNMENT ASSISTANCE CORPORATION ET AL. V. SALES TAX ASSET RECEIVABLE CORPORATION AND THE CITY OF NEW YORK (Supreme Court, Albany County), the petitioners challenge, INTER ALIA, the constitutionality of Public Authorities Law section 3238-a, which requires LGAC to annually transfer $170 million to The City of New York. Section 3238-a was enacted in 2003 as part of legislation (Part A4 of Chapter 62 and Part V of Chapter 63 of the Laws of 2003) authorizing the refinancing of debt incurred by the Municipal Assistance Corporation (the MAC Refinancing Act). By decision and order dated September 17, 2003, the court held that the MAC Refinancing Act was constitutional. Petitioners have appealed from the decision and order to the Appellate Division, Third Department. By decision and order entered August 27, 2003, the Appellate Division, Third Department granted a preliminary injunction restraining defendants, INTER ALIA, from issuing any bonds pursuant to the MAC Refinancing Act pending appeal. SCHOOL AID In CAMPAIGN FOR FISCAL EQUITY, INC. ET AL. V. STATE, ET AL. (Supreme Court, New York County), plaintiffs challenge the State's method of providing funding for New York City public schools. Plaintiffs seek a declaratory judgment that the State's public school financing system violates article 11, section 1 of the State Constitution and Title VI of the Federal Civil Rights Act of 1964 and injunctive relief that would require the State to satisfy State Constitutional standards. This action was commenced in 1993. In 1995, the Court of Appeals affirmed the dismissal of claims under the equal protection clauses of the Federal and State constitutions and Title VI of the Federal Civil Rights Act of 1964. It reversed dismissal of the claims under article 11, section 1 of the State Constitution and implementing regulations of Title VI, and remanded these claims for trial. By decision dated January 9, 2001, following trial, the trial court held that the State's education funding mechanism does not provide New York City students with a "sound basic education" as required by the State Constitution, and that it has a disparate impact on plaintiffs in violation of regulations enacted by the U.S. Department of Education pursuant to Title VI of the Civil Rights Act of 1964. The court ordered that defendants put in place reforms of school financing and governance designed to redress those constitutional and regulatory violations, but did not specify the manner in which defendants were to implement these reforms. The State appealed, and the trial court's decision was stayed pending resolution of the appeal. By decision and order entered June 25, 2002, the Appellate Division, First Department, reversed the January 9, 2001 decision and dismissed the claim in its entirety. On July 22, 2002, the plaintiffs filed a notice of appeal to the decision and order to the Court of Appeals. By decision dated June 26, 2003, the Court of Appeals reversed that portion of the June 25, 2002 decision and order of the Appellate Division, First Department relating to the claims arising 45 under the State Constitution. The Court held that the weight of the credible evidence supported the trial court's conclusion that New York City schoolchildren were not receiving the constitutionally mandated opportunity for a sound basic education and further held that the plaintiffs had established a causal link between the present education funding system and the failure to provide said sound basic education. The Court remitted the case to the trial court for further proceedings in accordance with its decision. MEDICAID Several cases challenge provisions of Chapter 81 of the Laws of 1995 which alter the nursing home Medicaid reimbursement methodology on and after April 1, 1995. Included are NEW YORK STATE HEALTH FACILITIES ASSOCIATION, ET AL., V. DEBUONO, ET AL., ST. LUKE'S NURSING CENTER, ET AL. V. DEBUONO, ET AL., NEW YORK ASSOCIATION OF HOMES AND SERVICES FOR THE AGING V. DEBUONO, ET AL. (THREE CASES), HEALTHCARE ASSOCIATION OF NEW YORK STATE V. DEBUONO AND BAYBERRY NURSING HOME ET AL. V. PATAKI, ET AL. Plaintiffs allege that the changes in methodology have been adopted in violation of procedural and substantive requirements of State and Federal law. In a decision dated June 3, 2003, involving seven consolidated cases (MATTER OF ST. JAMES NURSING HOME V. DEBUONO), the Supreme Court, Albany County, partially granted petitioners claims that the State violated the procedural requirements of the Boren Amendment and directed the State to recalculate the Medicaid rates associated with State Plan Amendment 95-23. The court dismissed petitioners' claims as to the Medicaid rates associated with State Plan Amendments 95-24 and 96-24. The State has appealed from this decision. In related cases, NEW YORK ASSOCIATION OF HOMES AND SERVICES FOR THE AGING, INC. V. NOVELLO, ET AL., VALLEY HEALTH SERVICES V. STATE AND CHARLES T. SITRIN HEALTH CARE CENTER, INC., ET AL. V. SONY, ET AL., plaintiffs seek judgments declaring as unconstitutional, under provisions of the Constitutions of the United States and the State, amendments to Public Health Law Section 2907-d, enacted as part of Chapter 1 of the Laws of 2002, also known as the Health Care Workforce Recruitment & Retention Act of 2002, or "HCRA 2002," which impose a 6 percent assessment on nursing home gross receipts from patient care services and operating income. In a decision dated April 24, 2003, the Court granted summary judgment to defendants dismissing the SITRIN case. Plaintiffs have appealed from this decision. EMPIRE CONVERSION In CONSUMERS UNION OF U.S., INC. V. STATE, plaintiffs challenge the constitutionality of those portions of Chapter 1 of the Laws of 2002 which relate to the authorization of the conversion of Empire Health Choice, d/b/a Empire Blue Cross and Blue Shield from a not-for-profit corporation to a for-profit corporation. Chapter 1 requires, in part, that upon such conversion, assets representing 95 percent of the fair market value of the not-for-profit corporation be transferred to a fund designated as the "public asset fund" to be used for the purpose set forth in Section 7317 of the Insurance Law. The State and private defendants have separately moved to dismiss the complaint. On November 6, 2002, the Supreme Court, New York County, granted a temporary restraining order, 46 directing that the proceeds from the initial public offering of the for-profit corporation be deposited with the State Comptroller in an interest-bearing account, pending the hearing of a motion for a preliminary injunction, which WAS returnable simultaneously with the motions to dismiss, on November 26, 2002. By decision dated February 28, 2003, the Supreme Court, New York County, granted the defendants' motions to dismiss. In its decision, the court also granted plaintiffs leave to amend their complaint to assert a new cause of action and deferred decision on plaintiffs' motion for a preliminary injunction. The plaintiffs and defendants have appealed from the February 28, 2003 decision. Plaintiffs served an amended complaint on April 1, 2003. On April 15, 2003, the defendants moved to dismiss the amended complaint. By decision dated October 1, 2003, the court denied defendants' motions to dismiss, except for the motions to dismiss brought by the individually named members of the board of directors of Empire Healthchoice, Inc. The court also declined to vacate the temporary restraining order directing that the proceeds from the initial public offering of the for-profit corporation be deposited with the State Comptroller in an interest-bearing account. Defendants intend to appeal this decision. REAL PROPERTY CLAIMS In the CANADIAN ST. REGIS BAND OF MOHAWK INDIANS case, plaintiffs seek ejectment and monetary damages with respect to their claim that approximately 15,000 acres in Franklin and St. Lawrence Counties were illegally transferred from their predecessors-in-interest. By decision dated July 28, 2003, the District Court granted, in most respects, a motion by plaintiffs to strike defenses and dismiss counterclaims contained in defendants' answers. By decision dated October 20, 2003, the District Court denied the States motion for reconsideration of that portion of the July 28, 2003 decision which struck a counterclaim against the United States for contribution. In the CAYUGA INDIAN NATION OF NEW YORK case, plaintiffs seek monetary damages for their claim that approximately 64,000 acres in Seneca and Cayuga Counties were illegally purchased by the State in 1795. Prior to trial, the court held that plaintiffs were not entitled to seek the remedy of ejectment. In October 1999, the District Court granted the Federal government's motion to have the State held liable for any damages owed to the plaintiffs. In February 2000, at the conclusion of the damages phase of the trial of this case, a jury verdict of $35 million in damages plus $1.9 million representing the fair rental value of the tract at issue was rendered against the defendants. By decision and judgment dated October 2, 2001, the District Court also granted plaintiffs $211 million in prejudgment interest. The State has appealed from the judgment to the United States Court of Appeals for the Second Circuit. On October 1, 2003, the State served the United States Department of the Interior and the United States Department of Justice with a statement of claim asserting that the United States is jointly and severally liable with the State for the $248 million judgment and post-judgment interest. A statement of claim is a precursor to filing a proceeding in the United States Court of Claims. 47 ANNUAL INFORMATION STATEMENT STATE OF NEW YORK DATED: MAY 30, 2003 TABLE OF CONTENTS ANNUAL INFORMATION STATEMENT 1 Introduction 2 CURRENT FISCAL YEAR 4 ENACTED BUDGET FINANCIAL PLAN 4 Overview 4 Explanation of the Financial Plan 8 The State's Fund Structure 8 2003-04 General Fund Financial Plan 9 Governmental Funds Financial Plans 20 First Quarter Cash Flow 24 GAAP-Basis Financial Plans 25 Outyear General Fund Financial Plan Projections 25 SPECIAL CONSIDERATIONS 42
1 ANNUAL INFORMATION STATEMENT MAY 30, 2003 ANNUAL INFORMATION STATEMENT OF THE STATE OF NEW YORK INTRODUCTION This Annual Information Statement ("AIS") is dated May 30, 2003 and contains information only through that date. This AIS constitutes the official disclosure information regarding the financial condition of the State of New York (the "State"). This AIS, including the Exhibits attached hereto, should be read in its entirety, together with any update or supplement issued during the fiscal year. In this AIS, readers will find: 1. A section entitled the "Current Fiscal Year" that contains (a) the Enacted Budget Financial Plan prepared by the Division of the Budget ("DOB"), including the State's official Financial Plan projections and (b) a discussion of potential risks that may affect the State's Financial Plan during the current fiscal year under the heading "Special Considerations." 2. Information on other subjects relevant to the State's fiscal condition, including: (a) operating results for the three prior fiscal years, (b) the State's revised economic forecast and a profile of the State economy, (c) debt and other financing activities, (d) governmental organization, and (e) activities of public authorities and localities. 3. The status of significant litigation that has the potential to adversely affect the State's finances. DOB is responsible for organizing and presenting the information that appears in this AIS on behalf of the State. In preparing the AIS, DOB relies on information drawn from several sources, including the Office of the State Comptroller ("OSC"), public authorities, and other sources believed to be reliable, but its presentation herein has not been subject to an independent audit process by DOB. Information relating to matters described in the section entitled "Litigation" is furnished by the Office of the State Attorney General. During the fiscal year, the Governor, the State Comptroller, State legislators, and others may issue statements or reports that contain predictions, projections or other information relating to the State's financial condition, including potential operating results for the current fiscal year and projected baseline gaps for future fiscal years, that may vary materially from the information provided in this AIS. Investors and other market participants should, however, refer to this AIS, as revised, updated, or supplemented, for official information regarding the financial condition of the State. The State plans to issue updates to this AIS on a quarterly basis (generally in July, November and January of each fiscal year) and may issue supplements or other disclosure notices as events warrant. The State intends to announce publicly whenever an update or a supplement is issued. The State may choose to incorporate by reference all or a portion of this AIS in Official Statements or related disclosure documents for State or State-supported debt issuance. Readers may obtain informational copies of the AIS, updates, and supplements by contacting Mr. Louis Raffaele, Chief Budget Examiner, New York State Division of the Budget, State Capitol, Albany, NY 12224, (518) 473-8705. This AIS has also been filed with the Nationally Recognized Municipal Securities Information Repositories. The Basic Financial 2 Statements for the 2002-03 fiscal year are expected to be available in July 2003 and may be obtained from the Office of the State Comptroller, 110 State Street, Albany, NY 12236. Informational copies of this AIS are available electronically on the DOB website at www.budget.state.ny.us. Typographical or other errors may have occurred in converting the original source documents to their digital format, and DOB assumes no liability or responsibility for errors or omissions contained at the Internet site. 3 CURRENT FISCAL YEAR The State's current fiscal year began on April 1, 2003 and ends on March 31, 2004. On March 31, 2003, the State Legislature enacted appropriations for all State-supported, contingent contractual, and certain other debt service obligations for the entire 2003-04 fiscal year. On May 2, 2003, the Legislature completed action on the remaining appropriations and accompanying legislation constituting the budget for the 2003-04 fiscal year. The Governor vetoed substantial portions of the budget revisions enacted by the Legislature, but the Legislature overrode the vetoes on May 15, 2003. Accordingly, DOB issued the Enacted Budget Financial Plan on May 28, 2003 that reflected final action on the 2003-04 State Budget by the Legislature. THE ENACTED BUDGET FINANCIAL PLAN SET FORTH BELOW WAS PREPARED BY THE DOB AND REFLECTS ACTIONS BY THE STATE LEGISLATURE THROUGH THE DATE OF THIS AIS. THE ENACTED BUDGET FINANCIAL PLAN CONTAINS ESTIMATES AND PROJECTIONS OF FUTURE RESULTS THAT SHOULD NOT BE CONSTRUED AS STATEMENTS OF FACT. THESE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS THAT MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND NATION AND POTENTIAL LITIGATION CONCERNING ACTIONS BY THE STATE LEGISLATURE IN ENACTING THE 2003-04 BUDGET. THERE CAN BE NO ASSURANCE THAT ACTUAL RESULTS WILL NOT DIFFER MATERIALLY AND ADVERSELY FROM THE ESTIMATES AND PROJECTIONS CONTAINED IN THE ENACTED BUDGET FINANCIAL PLAN. ENACTED BUDGET FINANCIAL PLAN OVERVIEW The 2003-04 Executive Budget reflected recommendations to close a combined 2002-03 and 2003-04 budget gap of over $11.5 billion. These recommendations included savings from spending restraint of $6.3 billion, tobacco securitization proceeds of $3.8 billion, and revenue/fee increases of $1.4 billion. Assuming these budget recommendations were enacted in their entirety, the Executive Budget projected potential outyear budget gaps of $2.8 billion in 2004-05 and $4.1 billion in 2005-06. The Legislature completed action on the budget for the 2003-04 fiscal year on May 15, overriding the Governor's vetoes of $3.2 billion in tax increases and spending additions. DOB (DOB) analysis of the Enacted Budget, which is detailed in this report and in a preliminary report released on May 1, 2003*, indicates that changes since the Executive Budget will increase General Fund spending by $2.3 billion above the levels recommended by the Governor. As compared to the Executive Budget, revenues are projected to increase by $1.4 billion, reflecting enacted tax and revenue increases offset by lower revenue results for 2002-03 and the April income tax settlement. This leaves the General Fund Financial Plan with a potential imbalance of roughly $900 million in 2003-04, and increases the outyear gaps by $3.7 billion in 2004-05 and $4.2 billion in 2005-06, before potential benefits provided by recently enacted Federal aid changes and savings from a Fiscal Management Plan being developed. Also excluded are revenues from certain measures enacted by the Legislature that DOB considers to be highly speculative at this time. The combination of Federal aid and management actions will keep the 2003-04 budget in balance and are discussed in more detail later in this report. - ---------- * Note: Reported in the May 2, 2003 Supplement to the 2002-03 AIS. 4 SUMMARY OF GENERAL FUND REVENUE CHANGES Legislative changes are projected to increase revenues by $1.9 billion in 2003-04, $1.4 billion in 2004-05, and $605 million in 2005-06. The outyear values of the revenue proposals decrease primarily because of "sunset" provisions enacted for the tax increases. In addition to these changes, revenues are projected to decrease from the Executive Budget forecast by $462 million in 2003-04 primarily due to the impact of 2002-03 actuals on the current year, and the April 2003 income tax settlement. The net 2003-04 revenue change since the Executive Budget is therefore $1.4 billion. Not counted within these revenue totals are certain other revenue measures adopted by the Legislature that DOB considers to be speculative. Examples include receipts from video lottery terminals (VLTs) at racetracks, collection of cigarette and motor fuel taxes on Indian reservations, and use tax collections. Net revenue changes since the Executive Budget include the following: NET REVENUE CHANGES FROM 30-DAY ESTIMATES INCREASES (DECREASES) (MILLIONS OF DOLLARS)
2003-04 2004-05 2005-06 Personal Income Tax Surcharge 1,400 1,200 1,000 Increase Sales Tax by 1/4 Cent 450 572 100 Restrict Sales Tax on Clothing 86 (315) (435) Recapture Bonus Depreciation 58 100 90 Redirect State Sales Tax to NYC (170) (170) (170) Revenue Losses (462) (609) (609) All Other 39 20 20 NET REVENUE INCREASES 1,401 798 (4)
These revenue changes and speculative revenue sources are described in more detail later in this report. SUMMARY OF GENERAL FUND SPENDING CHANGES General Fund spending is projected to increase from the Executive Budget by a net $2.3 billion in 2003-04, $4.5 billion in 2004-05 and $4.2 billion in 2005-06. This spending increase reflects net legislative restorations and adds to the Governor's 2003-04 Executive Budget, including the denial of the Governor's pension reform proposals included in the Executive Budget ($434 million in 2004-05 and $197 million in 2005-06, after deferring required 2003-04 payments with interest to 2005-06). It also reflects increased outyear costs resulting from the May 15, 2003 school aid database update ($184 million in 2004-05 and $60 million in 2005-06). In addition, the net spending changes include costs DOB projects but which the Legislature believes may not occur. Examples include a $200 million lump sum appropriation for member items which DOB values at $200 million in costs and which the Legislature valued at $100 million; various Medicaid savings DOB believes are not fully attainable; and higher costs associated with shelter allowances for welfare recipients. 5 NET GENERAL FUND SPENDING CHANGES FROM 30-DAY ESTIMATES INCREASES (DECREASES) (MILLIONS OF DOLLARS)
2003-04 2004-05 2005-06 Medicaid (including HCRA) 840 1,681 1,494 School Aid (including 5/15 Database update) 599 1,354 1,409 Member Items 200 0 0 Higher Education 193 323 303 Handicapped/All Other Education 132 110 111 Welfare 114 157 157 Public Health 40 100 136 General State Charges (including pension deferral) 34 555 338 State Operations 2 94 102 All Other 171 132 101 NET SPENDING INCREASES 2,325 4,506 4,151
These spending changes are described in more detail later in this report. SPENDING PROJECTIONS As a result of the deferred tobacco securitization proceeds and payment delays, 2002-03 actual receipts and disbursements were understated by $1.9 billion and 2003-04 estimates will be overstated by a like amount. To provide a meaningful year-to-year comparison of receipts and disbursements, the 2002-03 actuals and 2003-04 Enacted Budget estimates have been adjusted for this transaction in most of the tabular data in this report. Specifically, Miscellaneous Receipts and various spending categories (mainly Grants to Local Governments) were increased by $1.9 billion in 2002-03 and decreased by a like amount in 2003-04. (See Financial Plan tables at the end of this report for the detailed adjustments.) 2002-03 GENERAL FUND PAYMENT DEFERRALS (MILLIONS OF DOLLARS) School Aid 1,312 CUNY Senior Colleges 219 Medicaid Payment to Counties 82 Education 54 Welfare 47 All Other 186 TOTAL PAYMENT DEFERRALS 1,900
The following table summarizes current spending levels for the General Fund, State Funds and All Governmental Funds under the 2003-04 Enacted Budget, after adjusting for the 2002-03 payment deferrals. 6 2003-04 SPENDING PROJECTIONS (MILLIONS OF DOLLARS)
2002-03 2003-04 $ CHANGE % CHANGE ADJUSTED ACTUALS ADJUSTED ENACTED FROM 2002-03 FROM 2002-03 GENERAL FUND 39,513 40,837 1,324 3.4 STATE FUNDS 57,712 61,087 3,375 5.8 ALL GOVERNMENTAL FUNDS 90,956 94,474 3,518 3.9
NOTE: ADJUSTED ACTUALS ACCOUNT FOR THE IMPACT OF $1.9 BILLION IN SPENDING DEFERRALS DESCRIBED EARLIER THAT WOULD REDUCE 2002-03 ACTUAL SPENDING AND INCREASE 2003-04 ESTIMATES FROM THE AMOUNTS SHOWN ABOVE. Annual spending is projected to increase by $1.3 billion (3.4 percent) in the General Fund, by $3.4 billion (5.8 percent) in State Funds, and by $3.5 billion (3.9 percent) in All Governmental Funds. These changes are explained in more detail below, and do not reflect any increased Federal aid or possible spending reductions associated with the Fiscal Management Plan. FISCAL MANAGEMENT PLAN/FEDERAL ASSISTANCE The recently enacted Federal economic stimulus legislation provides $20 billion nationwide in fiscal relief to states, to be distributed as $10 billion in revenue sharing grants and $10 billion from a 15-month increase in the Federal share of Medicaid. DOB expects New York to receive $2.1 billion as a result of this legislation over the next two State fiscal years. The State's revenue sharing grant is estimated to be $645 million. The impact of the 2.95 percent increase in the Federal share of Medicaid costs is estimated to yield $1.4 billion for the State and its local governments. The State's share of this total is roughly $900 million. In order to manage cash flow, assure budget balance in the current fiscal year, and begin to address significant 2004-05 and 2005-06 budget gaps, the Governor has directed DOB to develop a Fiscal Management Plan to reduce State operations costs, curtail non-essential spending, and identify other cost containment actions to bring the General Fund into balance. This plan will be developed in cooperation with State agency managers and is expected to be detailed by the time the State's First Quarterly Financial Plan Update is released in July. Elements of the plan are expected to include: - Continuing statewide austerity measures that limit discretionary spending, ban non-essential travel, and restrict or terminate lower-priority capital spending and other contractual liabilities. - Mandating agency management plans to eliminate, consolidate, and streamline governmental services. - Making significant further reductions in the State workforce. - Maximizing Federal aid. - Developing cost containment proposals that can be presented for legislative action later this year. As noted in the messages accompanying the Governor's vetoes, certain appropriations and spending authorizations may be legally flawed. The State will review all such authorizations and continue to assess the degree to which any legal deficiencies may reduce overall spending levels. DOB will also monitor and work to achieve additional revenues, as specified in the Senate Finance Committee Staff Report on the Budget, from certain measures enacted by the Legislature that DOB believes are speculative in nature and thus not reflected in the Financial Plan. These include Video Lottery Terminals (VLTs) at racetracks (legislative value of $150 million), collection of cigarette and motor fuel taxes on Indian Reservations (legislative value of $186 million), and collection of use tax 7 (legislative value of $25 million), as well as other measures that the Legislature believes will reduce the outyear gaps (casino revenue and streamlined sales tax are examples). EXPLANATION OF THE FINANCIAL PLAN The State's Enacted Budget Financial Plan forecasts receipts and disbursements for the fiscal year. The economic forecast of DOB and the State's tax and fee structure serve as the basis for projecting receipts. After consulting with public and private sector experts, DOB prepares a detailed economic forecast for both the nation and New York, showing Gross Domestic Product (GDP), employment levels, inflation, wages, consumer spending, and other relevant economic indicators. It then projects the yield of the State's revenue structure against the backdrop of these forecasts. Projected disbursements are based on agency staffing levels, program caseloads, levels of service needs, formulas contained in State and Federal law, inflation and other factors. The factors that affect spending estimates vary by program. For example, welfare spending is based primarily on anticipated caseloads that are estimated by analyzing historical trends, projected economic conditions and changes in Federal law. In criminal justice, spending estimates are based on recent trends and data from the criminal justice system, as well as on estimates of the State's prison population. All projections account for the timing of payments, since not all the amounts appropriated in the Budget are disbursed in the same fiscal year. THE STATE'S FUND STRUCTURE The State accounts for all of its spending and receipts by the fund in which the activity takes place (such as the General Fund or the Capital Projects Fund), and the broad category or purpose of that activity (such as State Operations or Capital Projects). The Financial Plan tables sort all State projections and results by fund and category. The General Fund receives the majority of State taxes. State Funds include the General Fund and funds specified for dedicated purposes, with the exception of Federal Funds. The All Governmental Funds Financial Plan, which includes State Funds and Federal Funds, is comprised of four major fund types, and includes: - The General Fund, which receives most of the State's tax revenue and accounts for spending on programs that are not supported directly by dedicated fees and revenues; - Special Revenue Funds, which receive Federal grants, certain dedicated taxes, fees and other revenues that are used for a specified purpose; - Capital Projects Funds, which account for costs incurred in the construction and reconstruction of roads, bridges, prisons, and other infrastructure projects; and - Debt Service Funds, which pay principal, interest and related expenses on long-term bonds issued by the State and its public authorities. Within each of these fund types, revenues and spending are classified by major categories of the Financial Plan (e.g., Taxes, Miscellaneous Receipts, Grants to Local Governments, State Operations). Activity in these Financial Plan categories is described in greater detail later in this Report. Summary charts display the annual change for each category of the Financial Plan, and a narrative explanation of major changes follows each chart. The tables at the end of the Report summarize projected General Fund, State Funds and All Governmental Funds receipts and disbursements for the 2003-04 fiscal year. 8 2003-04 GENERAL FUND FINANCIAL PLAN WHERE IT COMES/WHERE IT GOES GENERAL FUND 2003-04 ADJUSTED ENACTED [CHART] RECEIPTS Personal Income Tax 40% User taxes and fees 20% Business taxes 9% Other taxes 2% Miscellaneous Receipts and Transfers 24% Tobacco Proceeds 5%
[CHART] DISBURSEMENTS Local Assistance 68% State Operations 18% General State Charges 8% Debt Service 4% Capital/Other 2%
The General Fund is the principal operating fund of the State and is used to account for all financial transactions except those required to be accounted for in another fund. It is the State's largest fund and receives almost all State taxes and other resources not dedicated to particular purposes. In the State's 2003-04 fiscal year, the General Fund is expected to account for approximately 41 percent of All Governmental Funds disbursements. General Fund moneys are also transferred to and from other funds, primarily to support certain capital projects and debt service payments in other fund types. The graphs above depict the components of projected receipts and disbursements in the General Fund (in percent). Many complex political, social and economic forces influence the State's economy and finances, which may in turn affect the State Financial Plan and increase the likelihood that current projections will differ materially from the projections set forth in this Enacted Budget Report. These forces may affect the State unpredictably from fiscal year to fiscal year and are influenced by governments, institutions, and organizations that are not subject to the State's control. The 2003-04 Enacted Plan is also necessarily based upon forecasts of national and State economic activity. Economic forecasts have frequently failed to predict accurately the timing and magnitude of changes in the national and State economies. NATIONAL ECONOMY U.S. economic growth slowed to 1.6 percent during the first quarter of 2003, partly due to severe weather conditions and the uncertainty surrounding the war in Iraq. Now that the war is over, the nation's economic recovery is expected to gain momentum. The national economy grew at a slower pace than anticipated in the Executive Budget during early 2003. However, higher growth toward the end of the year is expected to bring real U.S. GDP growth up to 2.3 percent for 2003, only slightly below the Executive Budget projection of 2.4 percent. Buttressed by low inflation and high productivity growth, the national economy is expected to grow 3.4 percent during 2004. Although a boost in Federal spending contributed positively to GDP growth, the impact of the war on the labor market was clearly negative, with 220,000 reservists having been called up for duty as of April 2003. The Budget Division now expects no net growth in employment for 2003, compared to the 9 0.6 percent growth projected in the Executive Budget. Income growth for 2003, especially in wages, is also expected to be modestly below the Executive Budget projection. This is mainly due to the downward revision made to the data for the third quarter of 2003 by the U.S. Bureau of Economic Analysis. Higher output growth toward the end of this year is expected to be fueled by a rebound in private investment activity. If business sector financial conditions do not improve, hiring may be delayed, leading to an even weaker labor market than now anticipated. On the positive side of the ledger, given the current and lagged effects of expansionary monetary and fiscal policy, the economy could grow faster than expected. A lower dollar could lead to higher exports and, therefore, higher output growth. MAJOR ECONOMIC INDICATORS
2002 2003 2004 Gross Domestic Product (real) 2.4 2.3 3.4 Personal Income 2.8 3.8 5.2 Corporate Profits (0.7) 12.7 15.2 Unemployment Rate 5.8 5.8 5.5 Consumer Price Index 1.6 2.5 2.3
Note: Numbers above are percent change/calendar year, except for unemployment rate. The New York State Division of the Budget estimates are based on National Income and Product Account data through April 2003, except for nonagricultural employment and the unemployment rate which are based on U.S. Department of Labor data through early May 2003. STATE ECONOMY The September 11th terrorist attack had a more severe impact on the New York economy than on that of any other state. Therefore, not surprisingly, the State's economy is only now emerging from the most recent recession. DOB now estimates that State employment fell 1.8 percent in 2002, and wage income is estimated to have declined 3.8 percent. The unemployment rate for 2002 was 6.1 percent and is expected to remain virtually unchanged for 2003. Employment growth was weaker than expected during the last quarter of 2002. The weaker job base, combined with the sluggishness of the national economic recovery, has led DOB to anticipate marginally lower employment growth for the 2003-04 State fiscal year than projected in the Executive Budget. Growth in wages and salaries is expected to be marginally lower as well. In addition to the risks associated with the national economic forecast, there are specific risks to the State economy. Chief among them is a more prolonged downturn in the financial sector than is currently projected, producing sharper declines in both employment and compensation. Moreover, significant numbers of business relocations out of the State could imply slower job and income growth as well. In contrast, a stronger national economy than expected could result in stronger equity market growth and, in turn, a stronger demand for financial market services, fueling a rebound in income growth in that sector. 10 MAJOR ECONOMIC INDICATORS
2002 2003 2004 Personal Income 0.0 3.0 4.1 Nonagricultural (1.8) 0.3 1.0 Employment Unemployment Rate 6.1 6.0 5.5
Note: Numbers above are percent change/calendar year. Personal income and nonagricultural employment growth for 2002 and all forecasts for 2003 and 2004 are projected by DOB. GENERAL FUND REVENUE ACTIONS Revenue actions included with the 2003-04 Enacted Budget include: a personal income tax increase ($1.4 billion); a limited liability company filing fee increase ($26 million); income tax withholding for certain partnerships ($15 million); reduced interest for late refunds ($5 million); increasing the State sales tax rate from 4 percent to 4.25 percent ($450 million); temporarily replacing the permanent sales tax exemption on items of clothing and shoes priced under $110 with a sales tax free week in August 2003 and another in January 2004 for the same items and thresholds ($449 million); including the New York City cigarette excise tax in the sales tax base ($7 million); changing the tax structure for insurance companies ($158 million); decoupling from the Federal bonus depreciation provisions ($58 million); decoupling from Federal expensing provisions for SUVs; and reducing the time period for collecting abandoned property related to the demutualization of insurance companies ($75 million). In total, the Budget includes over $2.4 billion in revenue actions including those contained in the Executive Budget. As part of the Enacted Budget, the Legislature also enacted tobacco securitization legislation that creates a bankruptcy-remote corporation to securitize all or a portion of the State's future share of tobacco settlement payments. The corporation will issue debt backed by payments from the tobacco industry under the master settlement agreement (MSA) and a contingent-contractual obligation on behalf of the State to pay debt service if MSA payments prove insufficient. The structure is designed to reduce overall borrowing costs to a level comparable to a typical State bond sale. The Financial Plan assumes net proceeds of $3.8 billion ($1.9 billion on an adjusted basis) from this transaction in 2003-04 and $400 million in 2004-05; these amounts are reflected as miscellaneous receipts in the Financial Plan. It is possible that, in order to reduce costs of issuance, take advantage of current low interest rates and improve its cash flow balances, the State may securitize amounts sufficient to receive the entire $4.2 billion in 2003-04, reserving the $400 million for 2004-05 budget balance. GENERAL FUND RECEIPTS GENERAL FUND RECEIPTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Total Tax Receipts 27,977 28,561 584 1,148 All Other Receipts 11,319 11,279 (40) 255 TOTAL RECEIPTS 39,296 39,840 544 1,403
Total General Fund receipts in support of the 2003-04 Financial Plan are projected to be $39.84 billion, an increase of $544 million from the $39.30 billion recorded in 2002-03. This total includes $28.56 billion in tax receipts, $3.67 billion in miscellaneous receipts, and $7.61 billion in transfers from other funds. The increase largely reflects the impact of revenue actions adopted with the Budget. There are additional legislative actions enacted with the 2003-04 Budget that may have a positive impact on revenues but are too speculative at this point to value with any confidence, including the addition of a use 11 tax line on the personal income tax return, non-resident sales of real property, six-day liquor sales, and VLTs. General Fund receipts net of refund reserve account transactions are estimated at $39.69 billion for 2003-04. Adjusting for the impact of revenue actions, General Fund tax receipts have been reduced by $463 million from estimates released with the 30-day amendments to the Executive Budget. This revision reflects several factors including: the impact of lower-than-anticipated 2002-03 receipts on the 2003-04 revenue base; a modest net loss in personal income tax receipts due to a lower-than-expected net settlement of 2002 income tax liability in April and May; and continued weakness in corporate tax collections. PERSONAL INCOME TAX (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 16,791 16,285 (506) 833
General Fund personal income tax receipts are projected to decrease by $506 million from 2002-03. This is due to economic improvement in 2003-04 and enactment of a temporary tax increase, more than offset by a lower settlement for 2002 tax returns, a reduction in revenue reserves flowing through the refund reserve accounts, and a higher deposit into the Revenue Bond Tax Fund. Overall, net of law changes, personal income tax payments associated with the 2002 tax year are down modestly from what was anticipated in the Executive Budget. The estimate for withholding tax collections increased by $1.03 billion from the Executive Budget estimate, reflecting the enacted temporary tax increase offset somewhat by lower wage growth than forecast with the Executive Budget. Estimated tax installment payments have been increased by $300 million, again reflecting the enacted temporary tax increase. Additionally, reflecting April and May results on the settlement of 2002 tax liabilities, the estimate for payments with final returns has been increased by $100 million and the estimate for refunds has been increased by $175 million. The estimate for delinquent collections of the personal income tax has been reduced by $50 million, reflecting the State tax amnesty program bringing greater-than-expected receipts forward into 2002-03. General Fund personal income tax receipts, including refund reserve account transactions, are expected to be $833 million higher than the 30-day amendments to the Executive Budget adjusted for a higher net contribution from the refund reserve account. This increase is due to the temporary tax increase, offset somewhat by the lower-than-anticipated income tax settlement for 2002 tax liability, lower withholding resulting from a weaker-than-expected economy for 2003-04, lower expected assessment collections, and a higher STAR fund deposit due to the Legislature's rejection of the STAR spending limitation proposed in the Executive Budget. 12 USER TAXES AND FEES (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 7,063 8,007 944 499
Receipts for user taxes and fees for 2003-04 are projected to total $8.01 billion, an increase of $944 million from reported 2002-03 collections. Included in this category are: receipts from the State sales tax, cigarette and tobacco products taxes; alcoholic beverage taxes and fees; and motor vehicle license and registration fees. The projected growth in sales tax cash receipts of 15.1 percent is largely attributable to the enactment of a temporary increase in the overall tax rate (to 4.25 percent) and a change in the clothing and footwear exemption. The Enacted Budget eliminated the exemption on items of clothing and footwear for one year, effective June 1, 2003, and replaced it with two temporary one-week exemptions with the same $110 thresholds -- one in August 2003 and another in January 2004. Growth in the sales tax base, after adjusting for tax law changes and other factors, is projected at 4.3 percent. The decline in General Fund cigarette tax receipts is the result of a continuation of the long-term consumption decline in cigarettes. User taxes and fees are expected to rise by $499 million from the 30-day amendments to the Executive Budget. This adjustment mainly reflects tax increases contained in the Enacted Budget. BUSINESS TAXES (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 3,380 3,498 118 (184)
Receipts for business taxes for 2003-04 are projected to total $3.50 billion, an increase of $118 million from 2002-03 collections. Business taxes include the corporate franchise tax, corporation and utilities taxes, the insurance franchise tax, and the bank franchise tax. Business tax receipts for 2003-04 have been revised down by $184 million from the 30-day amendments to the Executive Budget to reflect lower 2002-03 actuals during closeout and anticipated enhanced refund activity. These negatives in 2002-03 have been offset by the effect of decoupling from the Federal bonus depreciation. Corporate franchise tax receipts have been revised down by $141 million from the 30-day amendments to the Executive Budget. The difference is attributable to a closeout adjustment and enhanced refund activity. These reductions are offset by an increase in revenues of $58 million based on decoupling from Federal bonus depreciation provisions. Corporation and utilities taxes, and insurance franchise tax receipts remain unchanged from the 30-day Executive Budget estimate. Bank tax receipts are estimated to be $43 million lower than the 30-day Executive Budget estimate. This result is primarily attributable to continued weak earnings growth, and the decline in the 2002-03 base. 13 OTHER TAXES (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 743 771 28 0
Other tax receipts are now projected to total $771 million or $28 million above last year's amount. Sources in this category include the estate and gift tax, the real property gains tax and pari-mutuel taxes. Previously enacted legislation to repeal both the real property gains tax and the gift tax and to reduce the estate and pari-mutuel taxes have significantly reduced the yield from this category of receipts. Other taxes estimated in this category are unchanged from the 30-day estimate. MISCELLANEOUS RECEIPTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 3,991 3,669 (322) 90
Miscellaneous receipts, adjusted for the tobacco securitization, are expected to reach $3.67 billion, a decrease of $322 million from 2002-03 and an increase of $90 million from the 30-day estimate. The annual decrease in receipts is the result of several non-recurring actions taken in the 2002-03 Enacted Budget, including transferring available balances from various State authorities. The increase in receipts from the 30-day estimates is attributed to a delay in the collection of a settlement recovery from various Wall Street firms originally expected in 2002-03, as well as the net impact of several legislative actions, which on balance increase receipts by an estimated $50 million. TRANSFERS FROM OTHER FUNDS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE PIT in Excess of Revenue Bond Debt Service 4,215 5,125 910 260 Sales Tax in Excess of LGAC Debt Service 1,919 1,853 (66) (146) Real Estate Taxes in Excess of CW/CA Debt Service 263 202 (61) 0 All Other Transfers 931 430 (501) 51 TOTAL TRANSFERS FROM 7,328 7,610 282 165
Transfers from other funds are expected to total $7.61 billion, or $282 million more than total receipts from this category during 2002-03 and $165 million higher than the 30-day estimates. The $910 million year-to-year increase in transfers of personal income tax (PIT) in excess of revenue bond debt service requirements is primarily attributable to higher dedicated PIT receipts ($1.1 billion), including legislative tax increases, offset by increased debt service requirements ($222 million). The $260 million net increase from the 30-day estimate reflects the legislative tax increases, offset by increased debt service costs. 14 The annual decrease of $66 million in transfers from the sales tax in excess of LGAC debt service reflects increased debt service requirements ($67 million) and an annual payment to New York City intended to cover debt service costs related to restructuring NYC MAC debt for City fiscal relief ($170 million), offset by increased sales tax receipts ($171 million). The 2003-04 estimate is $146 million lower than the 30-day estimate primarily due to the legislation requiring a payment of State sales tax to New York City. Provisions enacted with the 2003-04 Budget relating to the Local Government Assistance Corporation (LGAC) and the Municipal Assistance Corporation of the City of New York (MAC) appear to intend that the State assume responsibility for debt service payments on the remaining $2.5 billion in outstanding MAC bonds. Thirty annual payments of $170 million from sales tax receipts dedicated to LGAC are authorized to be pledged to a New York City-created not-for-profit corporation allowing the maturity of the debt to be extended through 2034, well beyond the original 2008 maturity of the outstanding MAC debt. The structure of this bonding may be flawed and counsel are continuing to evaluate the constitutional and legal issues raised by the legislation, the implications on the State's Debt Reform Act of 2000, and the impact on LGAC and other bondholders. The annual decline of $61 million in transfers from the real estate transfer tax is due to a projected decrease in tax receipts ($43 million) and an increase in Clean Water/Clean Air debt service requirements ($18 million). The 2003-04 enacted estimate is unchanged from the 30-day estimate. The $501 million expected annual decrease in all other transfers is primarily due to the loss of onetime 2002-03 transfers from the Environmental Protection Fund ($269 million) and Federal reimbursement of World Trade Center related costs ($231 million). All other transfers increased by $51 million from the 30-day estimates due to an increase in expected receipts for the Waste Tire Management Recycling Act ($20 million) and one-time transfers from various non-General funds ($31 million). GENERAL FUND DISBURSEMENTS GENERAL FUND DISBURSEMENTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Welfare 496 1,127 631 114 General State Charges 2,732 3,199 467 34 Member Items 105 455 350 200 Medicaid (including HCRA) 5,951 6,269 318 840 Public Health 525 566 41 40 School Aid (including 5/15 database 12,278 12,312 34 599 update) Handicapped/All Other Education 1,341 1,323 (18) 132 Higher Education 1,528 1,488 (40) 193 State Operations 7,715 7,168 (547) 2 All Other 6,842 6,930 88 171 TOTAL GENERAL FUND DISBURSEMENTS 39,513 40,837 1,324 2,325
Total General Fund disbursements, including transfers to support capital projects, debt service and other purposes, are estimated at $40.84 billion for 2003-04, an increase of $1.32 billion or 3.4 percent from 2002-03. The annual growth in spending is primarily attributable to the use of non-recurring offsets in the previous fiscal year for welfare assistance programs ($631 million), higher costs for General State 15 Charges mostly due to pensions and health insurance ($467 million), additional spending for member items ($350 million), and growth in Medicaid ($318 million), offset by lower State Operations spending ($547 million). The annual change in spending is explained by financial plan category in more detail below. Total projected spending in the 2003-04 Enacted Budget is $2.33 billion higher than the level recommended in the Governor's Executive Budget. Spending changes primarily reflect net legislative restorations and adds in Medicaid ($840 million), school aid ($599 million), funding for member items ($200 million), higher education programs ($193 million), handicapped/all other education programs ($132 million), and welfare programs ($114 million). In addition, the net spending changes include certain costs resulting from the Legislature's action or inaction on several spending items. Examples include a $200 million lump sum appropriation for member items which the Legislature valued at $100 million; various Medicaid savings DOB believes are not fully attainable including additional Federal reimbursement for prescription drug costs and home care costs; and inaction on cost containment provisions which DOB believes results in higher welfare costs. GRANTS TO LOCAL GOVERNMENTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 26,713 28,009 1,296 2,229
Grants to Local Governments (also known as local assistance) include financial aid to local governments and non-profit organizations, as well as entitlement payments to individuals. The largest shares of spending in local assistance are for aid to public schools (44 percent) and for the State's share of Medicaid payments to medical providers (22 percent). Spending for mental hygiene programs (6 percent), higher education programs (5 percent), welfare assistance (4 percent), and children and families services (4 percent) represent the next largest areas of local aid. Spending in local assistance is estimated at $28.01 billion in 2003-04, an increase of $1.30 billion (4.9 percent) over the 2002-03 fiscal year. This net spending growth is primarily attributable to welfare assistance programs ($631 million), Medicaid ($318 million), additional spending in the Community Projects Fund ($350 million), higher spending for the Higher Education Service Corporation ($123 million) and various other local assistance programs. These increases are partially offset by an annual decline in spending for the City University of New York ($176 million) and a scheduled decline in payments for the Yonkers settlement agreement ($110 million). General Fund spending for school aid on a State fiscal year basis is projected at $12.31 billion in 2003-04, an increase of $34 million over 2002-03. This net increase reflects the "tail" cost of the 2002-03 school year increase offset in part by the reduced spending in the 2003-04 enacted school year aid package. On a school year basis, school aid is projected at $14.43 billion for 2003-04, a decrease of $185 million from the prior school year. This decrease is primarily due to a reduction in operating aid ($285 million), which is partially offset by increases in transportation aid, excess cost aid and BOCES. Medicaid spending is estimated at $6.27 billion in 2003-04, an increase of $318 million (5.3 percent) from the prior year. The net increase is primarily attributable to expected underlying spending growth of approximately 8 percent ($478 million), the sunset of the Tobacco Transfer Fund used to reimburse medical care providers for services rendered to Medicaid patients ($91 million), the Federally mandated phase out of the nursing home intergovernmental transfers ($90 million), and the reduction of the nursing home gross receipts assessment used to offset Medicaid costs ($78 million). The growth in Medicaid 16 spending is partially offset by increased Federal aid from an increase in disproportionate share payments to public hospitals ($324 million), additional financing through the Health Care Reform Act ($117 million), and various cost containment proposals, as well as the phase out of Disaster Relief Medicaid related to the September 11th attack on the World Trade Center. In addition, the Enacted Budget "rolls" the last Medicaid cycle payable on March 31, 2004 to the first day of the 2004-05 fiscal year ($170 million), decreasing 2003-04 and increasing 2004-05 costs. The Medicaid estimate does not include possible savings related to the temporary increase in the Federal share of Medicaid costs. Spending on welfare is projected at $1.13 billion, an increase of $631 million (127.2 percent) from 2002-03. This increase is due primarily to the use of Federal TANF reserve funds to offset welfare spending in 2002-03 ($465 million) and the increased cost of the welfare caseload ($166 million). The projected welfare caseload of 622,067 recipients represents an increase from 2002-03 of approximately 10,248 recipients. Higher Education Services Corporation (HESC) spending is projected at $442 million, an increase of $123 million (38.6 percent) from 2002-03. This increase reflects underlying program growth ($163 million) and a reduction in available Federal TANF funds ($64 million), offset by a deferral of Tuition Assistance Program costs into the 2004-05 fiscal year ($104 million). City University of New York (CUNY) spending is projected at $681 million, a decrease of $176 million (20.5 percent) from 2002-03. The decrease is primarily due to the impact of a tuition increase at the senior colleges used to offset General Fund spending ($91 million) and a reduction in costs due to a one-time retroactive collective bargaining payment made in 2002-03 ($70 million). Spending for all other local assistance programs will total $7.18 billion in 2003-04, a net increase of $366 million (5.4 percent) from the 2002-03 fiscal year. This increase is largely attributable to additional spending for member items ($350 million), increased spending for children and family services ($90 million), public health programs ($41 million), mental hygiene programs ($27 million), and various other local assistance programs. These increases are offset by spending declines across other agencies and programs including an annual decrease in the funding for the Yonkers settlement agreement ($110 million). The 2003-04 enacted estimate for local assistance spending increased by $2.23 billion from the 30-day estimate primarily as a result of net legislative adds and restorations of Executive Budget proposals. The largest adds and restorations occurred in Medicaid ($840 million), school aid ($599 million), additional funding for the Community Projects Fund ($200 million), higher education programs ($193 million), handicapped/all other education programs ($132 million), and welfare programs ($114 million). These net legislative adds reflect resources identified by the Legislature to delay the last Medicaid cycle in the 2003-04 fiscal year to the following fiscal year ($170 million) and defer Tuition Assistance Program payments to colleges out of 2003-04 into 2004-05 ($104 million). STATE OPERATIONS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 7,715 7,168 (547) 2
State Operations accounts for the cost of operating the Executive, Legislative, and Judicial branches of government. Spending in this category is projected at $7.17 billion, a decrease of $547 million or 7.1 percent from 2002-03. The annual decline in State Operations spending is comprised of lower spending in both personal service ($493 million) and non-personal service ($54 million). 17 The State Operations estimates reflect $1.03 billion in savings initiatives. Included in these savings are $363 million from continuation of the strict Statewide hiring freeze, aggressive use of a retirement incentive for State employees, and various actions to restrain non-personal service spending in all agencies. A total of $662 million in savings is projected to be available in 2003-04 from a variety of revenue maximization efforts to finance State Operations spending. Among these savings are additional SUNY revenues from an anticipated tuition increase and other revenue measures used to support General Fund costs ($325 million), additional Federal revenues to offset spending on mental hygiene programs ($174 million), and various shifts of General Fund costs to other funds ($133 million) -- most notably funding $93 million in Department of Motor Vehicles transportation-related spending in the Dedicated Highway Fund. The savings initiatives and revenue maximization efforts are partially offset by base spending growth of $478 million, including normal salary step increases and required non-personal service cost increases and the loss of one-time offsets used in 2002-03. Virtually all Executive agencies are held flat or reduced from 2002-03 levels. The 2003-04 State Operations estimate is $2 million higher than the estimate prepared at the time of the 30-day Amendments to the Executive Budget in February 2003. This additional spending represents minor legislative changes to the Executive Budget estimates. The State's All Funds workforce is projected to be 186,000 at the end of 2003-04, a decrease of approximately 10,000 from November 2001 when the Governor announced a series of cost savings actions following the World Trade Center attacks. This reduction resulted from attrition and the use of early retirement incentives. Additional declines are possible as a result of the Fiscal Management Plan to be implemented during the fiscal year. GENERAL STATE CHARGES (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE 2,732 3,199 467 34
General State Charges (GSCs) account for the costs of providing fringe benefits to State employees and retirees of the Executive, Legislative and Judicial branches, as well as certain fixed costs of the State. Fringe benefit payments, many of which are mandated by statute or collective bargaining agreements, include employer contributions for pensions, social security, health insurance, workers' compensation and unemployment insurance. Fixed costs include State payments-in-lieu-of-taxes to local governments for certain State-owned lands, and the costs of litigation against the State and its public officers. Total spending for GSCs is estimated at $3.20 billion, an increase of $467 million or 17.0 percent from the prior year. The projected annual growth is primarily attributable to higher pension and health insurance costs. Pension investment losses resulting in significantly higher contributions to the New York State and Local Retirement System for the 2003-04 fiscal year. The employer pension contribution rate is the Executive Budget was projected to increase to 4 percent of payroll in 2003-04, increasing pension costs by $250 million (171 percent). Pension reform legislation approved with the Enacted Budget requires a minimum pension contribution equal to 4.5 percent of payroll annually. This change along with higher than expected retirement incentive costs would increase the 2003-04 fiscal year contribution by an additional $94 million to $344 million. However, the Legislature did not provide sufficient appropriation 18 authority to allow the entire pension bill to be paid to the retirement system in 2003-04. As a result, it is anticipated that the State will pay this unbudgeted amount in 2005-06 at 8 percent annual interest, for a total cost of approximately $110 million. Health insurance premiums are expected to increase by approximately $178 million (11 percent) in 2003-04 to cover the rising costs of employee and retiree health care. The enacted budget reflects $43 million in health benefit changes, which is expected to reduce the underlying growth in employee health insurance costs from $221 million (13.7 percent). These changes, some of which are subject to negotiations with State employee unions, would: place restrictions on pharmacy benefits, require a higher co-payments for prescription drugs, modernize the hospital benefit plan, and increase employee copayments, deductibles and coinsurance levels for doctor visits. The $34 million increase from the 30-day estimate is largely the result of the Legislature's denial of a proposal to change to the current 9 percent statutory interest rate on Court of Claims judgments to market-based rates, and partial restoration of Executive Budget proposals to change employee health insurance benefits. TRANSFERS TO OTHER FUNDS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Transfers in Support of Debt Service 1,496 1,583 87 0 Transfers in Support of Capital Projects 170 251 81 45 Transfers in Support of State University 26 145 119 0 All Other Transfers 661 482 (179) 15 TOTAL TRANSFERS TO OTHER FUNDS 2,353 2,461 108 60
Transfers to other funds are expected to total $2.46 billion, or $108 million higher than total receipts from this category during 2002-03 and $60 million higher than the 30-day estimates. The annual net increase in debt service transfers of $87 million reflects planned growth in underlying debt service costs, offset by debt reduction efforts. As compared to the 30-day estimate, transfers in support of debt service remain unchanged. Transfers for capital projects provide General Fund support for projects that are not financed by bond proceeds, dedicated taxes, Federal grants or other revenues. The $81 million projected increase in 2003-04 reflects year-to-year increases in pay-as-you-go spending for legislative adds for transportation and the environment ($49 million) and changes in the timing of the receipt of bond proceeds to reimburse capital spending. Compared to the 30-day estimate for 2003-04, the $45 million increase in capital projects transfers reflects the legislative adds for transportation and the environment. The State's cost of transfers to the State University are estimated to increase by $119 million over 2002-03 due to the timing of State subsidy payments to the SUNY hospitals ($107 million) and the use of Dormitory Authority funds in 2002-03 to help subsidize the SUNY hospitals ($12 million). This transfer remained unchanged from the 30-day estimate. All other transfers are estimated to total $482 million in 2003-04, a decline of $179 million from 2002-03. This decline is primarily due to decreases in the Community Service Provider Assistance Program ($100 million), the State's share of Medicaid payments to SUNY hospitals ($48 million), and payments to the State Lottery Fund ($17 million). All other transfers increased $15 million from the 30-day estimates. 19 NON-RECURRING ACTIONS A total of $5.1 billion in gross nonrecurring actions, with a net impact of $3.2 billion on the Financial Plan, are incorporated in the 2003-04 Enacted Budget. These include resources from the securitization of tobacco settlement payments ($3.8 billion), the use of Federal TANF moneys to offset General Fund welfare, HESC, and school aid program spending ($458 million), spending delays for a Medicaid cycle and TAP payments ($274 million), the one-time shift of various pay-as-you-go capital projects to bonding ($122 million), debt management actions to reduce debt service costs ($161 million), recoveries of school aid and welfare overpayments ($88 million), abandoned property collections ($75 million), and various routine fund sweeps ($138 million). The 2003-04 spending projections include $1.9 billion of one-time payment delays from 2002-03 pending receipt of tobacco securitization proceeds. These one-time payment deferrals are "matched-up" with $1.9 billion of the $3.8 billion tobacco proceeds, for a net one-time impact of $3.2 billion ($5.1 billion of total actions offset by $1.9 billion linked to one-time costs). GENERAL FUND CLOSING BALANCE The Enacted Budget Financial Plan projects a closing General Fund balance of $730 million at the end of the 2003-04 fiscal year, unchanged from the 30-day projection. The closing balance represents monies on deposit in the Tax Stabilization Reserve Fund ($710 million) and the Contingency Reserve Fund ($20 million). The balance assumes achievement of $912 million of savings from the Fiscal Management Plan including additional Federal aid described earlier. GOVERNMENTAL FUNDS FINANCIAL PLANS STATE FUNDS State Funds represent the portion of the State's budget supported exclusively by State revenues: taxes, fees, fines, and other revenues imposed and collected by the State. Federal grants are not included as part of State Funds. STATE FUNDS RECEIPTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Taxes 40,676 42,672 1,996 1,541 Miscellaneous Receipts 15,903 17,483 1,580 297 TOTAL STATE FUNDS RECEIPTS 56,579 60,155 3,576 1,838
Total State Funds receipts are projected to total $60.16 billion in 2003-04, an increase of $3.58 billion or 6.3 percent from 2002-03. State Funds tax receipts are projected to total $42.67 billion, an increase of $2.0 billion from 2002-03 primarily reflecting a new personal income tax surcharge ($1.4 billion) and a one-quarter percent increase in sales tax ($450 million), offset by revenue losses associated with the closeout of 2002-03 and the April PIT settlement ($462 million). These changes are discussed in more detail in the General Fund section above. Miscellaneous receipts in the State Funds are projected to total $17.48 billion, an increase of $1.58 billion over 2002-03. The growth in miscellaneous receipts primarily reflects the timing of the receipt of bond proceeds to reimburse capital spending from the Dedicated Highway and Bridge Trust Fund ($961 million), economic development spending that is not counted by the State Comptroller as spending even 20 though the bond proceeds are counted as State-supported debt ($325 million), and growth in SUNY revenues primarily attributable to an anticipated tuition increase ($280 million). These increases are offset by a decline in General Fund miscellaneous receipts primarily due to the loss of non-recurring actions ($322 million). The increase in State Funds receipts of $1.84 billion over the 30-day estimates is comprised of a projected tax increase of $1.54 billion and miscellaneous receipts increase of $297 million. The projected tax growth is consistent with the enacted tax increases described above. The growth in miscellaneous receipts is primarily attributable to the timing of the receipt of bond proceeds to reimburse capital spending ($482 million), offset by a decline in State Funds receipts in support of Medicaid due to the legislative restoration of the proposed home care and hospital assessments ($281 million). Total State Funds disbursements are projected at $61.09 billion in 2003-04, an increase of $3.38 billion or 5.8 percent from 2002-03. Of this amount, $1.32 billion is due to a net increase in General Fund spending as described in detail above, and $2.05 billion is due to growth in other State funds. STATE FUNDS DISBURSEMENTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Welfare 496 1,127 631 114 General State Charges 3,088 3,608 520 43 Medicaid 8,413 8,852 439 559 Community Projects Fund 105 455 350 200 Debt Service 3,038 3,387 349 27 Public Health 2,023 2,218 195 88 SUNY 4,043 4,225 182 58 STAR 2,664 2,800 136 93 School Aid 14,121 14,225 104 608 Transportation 3,521 3,600 79 42 Handicapped/All Other Education 1,522 1,443 (79) 152 Mental Hygiene 2,645 2,572 (73) 42 Public Protection 2,902 2,899 (3) 18 All Other 9,131 9,676 545 172 TOTAL STATE FUNDS DISBURSEMENTS 57,712 61,087 3,375 2,216
State Funds Medicaid spending growth of $439 million (5.2 percent) reflects increased General Fund spending of $318 million (discussed in the General Fund section above) and an increase of $121 million in Special Revenue Funds. Additional HCRA financing for the Family Health Plus program, workforce recruitment and retention initiatives, and additional funding for Medicaid pharmacy costs represent $389 million of the net growth in the Special Revenue Funds. This increase is partially offset by lower spending attributable to the use of available pool balances in the Indigent Care Fund ($125 million) in 2002-03, the sunset of the Tobacco Transfer Fund used to reimburse medical care providers for services rendered to Medicaid patients ($91 million), and the legislative reduction of the nursing home gross receipts assessment from 6 percent to 5 percent ($45 million). 21 Spending from Debt Service Funds is estimated to increase by $349 million or 11.5 percent from 2002-03. The net increase in debt service spending reflects planned growth in costs, and additional bonding enacted by the Legislature for the CHIPs capital program and equipment for E-911 cellular emergency systems. Net debt service costs increased modestly ($27 million) from the 30-day estimates. Public Health spending supported by State Funds is projected to increase $195 million (9.6 percent) from the prior year, of which the General Fund supports $41 million. The increase in other State-supported spending is primarily attributable to additional spending for the Elderly Pharmaceutical Insurance Coverage Program (EPIC) providing senior citizens with prescription drug insurance ($105 million) and the Child Health Plus program providing health insurance to children up to age 19 ($68 million). Projected annual spending growth of $182 million for SUNY is primarily attributable to enrollment growth at the State-operated campuses, hospital program expansion, and anticipated increases in disbursements for capital programs. The annual growth in the STAR program of $136 million is mainly due to inflation and increased taxpayer participation. Annual State Funds spending growth due mostly to General Fund changes include: Welfare ($631 million), primarily reflecting the use of non-recurring Federal TANF reserve funds to offset 2002-03 welfare spending; General State Charges ($520 million), primarily due to higher pension and health insurance costs; and increased spending from the Community Projects Funds ($350 million). Major areas experiencing modest annual increases or decreases on a State Funds basis include: school aid (up $104 million), transportation (up $79 million), handicapped/all other education (down $79 million), mental hygiene (down $73 million) and public protection (down $3 million). State Funds disbursements increased $2.22 billion over the 30-day estimates primarily due to net legislative changes including school aid ($608 million), Medicaid ($559 million), the Community Projects Fund ($200 million), handicapped/all other education ($152 million), and welfare ($114 million). ALL GOVERNMENTAL FUNDS All Governmental Funds includes activity in the four governmental funds types: the General Fund, Special Revenue Funds, Capital Projects Funds, and Debt Service funds. All Governmental Funds spending combines State funds (discussed earlier) with Federal grants across these fund types. It excludes Fiduciary, Internal Services, and Enterprise Funds. ALL GOVERNMENTAL FUNDS RECEIPTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Taxes 40,676 42,672 1,996 1,541 Miscellaneous Receipts 16,056 17,705 1,649 301 Federal Grants 33,242 33,444 202 1,426 TOTAL ALL GOVERNMENTAL FUNDS RECEIPTS 89,974 93,821 3,847 3,268
All Governmental Funds receipts are projected to be $93.82 billion in 2003-04, an increase of $3.85 billion or 4.3 percent from 2002-03. Tax receipts are projected to increase by $2.0 billion to total $42.67 billion primarily reflecting the impact of the enacted tax increases previously discussed. 22 Miscellaneous receipts are projected to increase by $1.65 billion to total $17.71 billion over 2002-03. The growth in All Governmental Funds miscellaneous receipts primarily reflects the timing of the receipt of bond proceeds to reimburse capital spending, economic development spending, and SUNY tuition increases, offset by a decline in General Fund miscellaneous receipts as discussed above. Federal Grants are projected to total $33.44 billion, an increase of $202 million from 2002-03. Federal grants represent reimbursement from the Federal government for programs financed by the State in the first instance. Federal receipts are generally assumed to be received in the State fiscal year in which spending is incurred; therefore, the revisions to Federal receipts correspond to the adjustments to the federally-reimbursed spending revisions described below. The All Governmental Funds receipts increase of $3.27 billion over the 30-day estimates is comprised of enacted tax increases described above and Federal grants of $1.43 billion primarily due to increases in Medicaid spending. All Governmental Funds spending is estimated at $94.47 billion in 2003-04, an annual increase of $3.52 billion or 3.9 percent. The spending growth is comprised of the State Funds increases of $3.38 billion and growth in Federal Funds of $143 million. The growth in Federal spending is primarily due to increases for Medicaid ($1.02 billion), offset by declines in welfare ($426 million), World Trade Center costs ($302 million) and education ($180 million). ALL GOVERNMENTAL FUNDS DISBURSEMENTS (MILLIONS OF DOLLARS)
2002-03 2003-04 ANNUAL CHANGE FROM ADJUSTED ACTUALS ADJUSTED ENACTED $ CHANGE 30-DAY ESTIMATE Medicaid 25,315 26,778 1,463 2,003 Public Health 3,230 3,778 548 137 General State Charges 3,272 3,774 502 43 Community Projects Fund 105 455 350 200 Debt Service 3,038 3,387 349 27 Welfare 2,803 3,008 205 124 Mental Hygiene 4,983 5,174 191 45 SUNY 4,208 4,368 160 58 STAR 2,664 2,800 136 93 School Aid 14,121 14,225 104 608 Handicapped/All Other Education 3,922 3,663 (259) 187 Transportation 4,907 4,834 (73) 13 Public Protection 3,096 3,027 (69) 18 All Other 15,292 15,203 (89) 109 TOTAL ALL FUNDS DISBURSEMENTS 90,956 94,474 3,518 3,665
All Governmental Funds Medicaid spending growth of $1.46 billion reflects previously discussed State Funds spending growth of $439 million, and an increase of $1.02 billion (6.1 percent) in Medicaid spending supported by Federal Funds, which are estimated to total $26.78 billion in 2003-04. The net increase is primarily attributable to expected underlying spending growth of approximately 8 percent ($1.10 billion) and increased aid governed from an increase in disproportionate share payments to public hospitals ($394 million). This increase is partially offset by the mandated phase out of the nursing home intergovernmental transfers ($119 million), the phase out of Disaster Relief Medicaid related to the 23 September 11th attack on the World Trade Center ($83 million), nonrecurring additional indigent care payments ($72 million), and various other cost containment proposals. The Medicaid estimate does not include possible savings related to the temporary increase in the Federal share of Medicaid costs. Public health spending supported by All Governmental Funds is expected to increase by $548 million from 2002-03 of which $195 million is attributable to increased State Funds support and the remaining $353 million consisting of additional Federal aid. The growth in Federal aid is largely attributable to increased spending for the Child Health Plus program ($324 million). Spending from All Governmental Funds in support of welfare initiatives increased $205 million from 2002-03 actuals and reflects the State Funds increase described above ($631 million) offset by decreased welfare spending from federal funds ($426 million). The decreased spending is primarily due to the loss of one-time credits that were used to support 2002-03 spending. All Governmental Funds spending growth largely attributable to State Funds spending includes growth for General State Charges ($502 million), Community Projects Fund ($350 million), debt service ($349 million), SUNY ($160 million), STAR ($136 million), and school aid ($104 million). Major areas experiencing modest annual increases or decreases on an All Governmental Funds basis include: mental hygiene (up $191 million), handicapped/all other education (down $259 million), transportation (down $73 million), and public protection (down $69 million). All Governmental Funds disbursements increased $3.67 billion over the 30-day estimates due to State Funds spending increases of $2.22 billion described above and growth in Federal Medicaid spending ($1.45 billion) attributable to legislative restorations of various cost containment and revenue maximizations, as well as revised estimates for underlying Federal Medicaid spending. FIRST QUARTER CASH FLOW Unlike previous years, the 2003-04 General Fund first quarter cash flow estimates assume continued implementation of emergency cash management actions implemented after delays in enacting tobacco securitization legislation led to potential cash imbalances. The General Fund cash flow position is expected to be extremely tight during the first quarter of the 2003-04 fiscal year and thus requires continued management actions to maintain positive balances until $2.1 billion of tobacco proceeds are received in late June. DOB continues to monitor cash balances on a daily basis and has administratively managed the flow of funds and disbursements while continuing essential governmental operations through a statewide austerity plan. Under the current cash management plan, daily cash balances are expected to fluctuate significantly. The General Fund balances assume continued deferrals of discretionary payments through June, including school aid payments scheduled in May and early June until the State receives the tobacco securitization proceeds. Thereafter, cash balances are expected to be healthy until March of the fiscal year. The General Fund is projected to end May with a balance of $2.15 billion. This balance, along with June receipts, will be used to make the school aid payment deferred from March on June 2 ($1.2 billion) as well as weekly Medicaid, payroll, and other critical payments. As a result, cash balances are expected to decline to very low levels by mid-June. The State expects to make the remaining May and June school aid payments ($2.5 billion) in late June upon the receipt of tobacco securitization proceeds. Absent these proceeds, General Fund resources would be insufficient to pay school aid and end the month with a positive cash balance. 24 The 2003-04 Enacted Budget amends State Finance Law to permit the State Comptroller to make balances in other funds and accounts temporarily available to the General Fund for intra-month cash flow needs as long as such balances can be repaid by the end of the month. This provision is set to expire on March 31, 2004. GAAP-BASIS FINANCIAL PLANS The February Financial Plan included General Fund Financial Plans prepared in accordance with Generally Accepted Accounting Principles (GAAP) for State fiscal years 2002-03 through 2005-06. The accounting principles that DOB applied in preparing the GAAP projections are consistent with those applied by the State Comptroller for the 2001-02 GAAP-basis Financial Statements. Accordingly, the projections do not reflect the impact of any pending proposals of the Governmental Accounting Standards Board, including GASB 34. The changes mandated by GASB 34 are expected to significantly change the presentation of GAAP-basis financial results for state and local governments in 2002-03. The General Fund GAAP Financial Plan issued as part of the February Financial Plan projected that the State would end the 2002-03 fiscal year with an operating imbalance of $2.74 billion. The operating result reflected the use of reserves in response to the World Trade Center disaster. As a result of the operating deficit, the accumulated surplus was projected to decline from $492 million at the end of 2001-02 to a $2.24 billion accumulated deficit at the end of 2002-03. Certain legislative actions, including deferring a Medicaid Cycle ($170 million), and delaying TAP payments ($104 million) are expected to negatively impact the GAAP Financial Plan. Additionally, the deferral of $1.9 billion in spending from 2002-03 until 2003-04 is expected to increase the 2002-03 accumulated GAAP-basis deficit, since the deferred payments are expected to be accrued to the 2002-03 fiscal year. However, the tobacco settlement revenues originally anticipated in 2002-03 but now expected in 2003-04 are likely to be accrued to the 2003-04 fiscal year resulting in no net change to the accumulated GAAP deficit by the end of 2003-04. DOB expects to update the GAAP Financial Plan estimates for 2003-04 in the First Quarterly Financial Plan Update to be issued in July 2003. OUTYEAR GENERAL FUND FINANCIAL PLAN PROJECTIONS General Fund budget gaps for the 2004-05 and 2005-06 fiscal years have increased significantly from the 30-day projections. It is currently estimated that spending and revenue actions in the Enacted Budget in concert with events since presentation of the Executive Budget will increase gaps to over $6 billion in 2004-05 and $8 billion in 2005-06, before reflecting savings from the Fiscal Management Plan or extra Federal aid. The Fiscal Management Plan savings will be implemented in 2003-04, and these actions coupled with new Federal assistance are expected to produce recurring savings in the outyears, reducing the gaps by approximately $900 million in each year. Future budget gaps are subject to substantial revision as additional information becomes available about the national and State economies, financial sector activity, entitlement spending and social service caseloads, and State reimbursement obligations that are driven by local government activity. Key factors include: end-of-year business tax collections; calendar year economic results; year-end financial sector bonus income data; the school aid database update in November; and quarterly Medicaid cycle trend analysis. These factors have historically been subject to a high degree of fluctuation across the forecast period, and could produce results above or below the current projections. 25 The outyear gap estimates do not assume any collective bargaining salary increases. If the projected budget gap for 2004-05 is closed fully with recurring actions, the 2005-06 budget gap would be reduced to under $2 billion. Revenues are projected to increase from the Executive Budget as a result of legislative changes by $1.4 billion in 2004-05 and $605 million in 2005-06. The revenue proposals decrease primarily because of "sunset" provisions enacted for the tax increases. New revenue actions include a personal income tax surcharge ($1.2 billion in 2004-05 and $1.0 billion in 2005-06), one-quarter percent increase in sales tax ($572 million in 2004-05 and $100 million in 2005-06), and a decoupling from Federal bonus depreciation provisions ($100 million in 2004-05 and $90 million in 2005-06). These revenue actions are offset by the loss of receipts due to the sales tax free week proposed in the Executive Budget ($315 million in 2004-05 and $435 million in 2005-06), and the intended transfer of State sales tax receipts to New York City ($170 million annually). In addition, revenues are expected to decrease by $609 million in 2004-05 and 2005-06 primarily reflecting the impact of 2002-03 actuals and the April 2003 PIT settlement. As compared to the Executive Budget, spending is projected to increase by $4.5 billion in 2004-05 and $4.2 billion in 2005-06. This spending increase reflects revisions based on actual results and net legislative adds to the Governor's Executive Budget, including Medicaid programs ($1.7 billion in 2004-05 and $1.5 billion in 2005-06), school aid, including revised estimates resulting from the May 15 database update ($1.4 billion in 2004-05 and 2005-06), higher education ($323 million in 2004-05 and $303 million in 2005-06), and higher general state charges primarily driven by restorations of health insurance savings initiatives and the planned payment of the full required pension bill in 2004-05 and 2005-06 ($555 million in 2004-05 and $338 million in 2005-06). 2004-05 spending grows $2.2 billion above the $2.3 billion increase in 2003-04 from the Executive Budget (for a total 2004-05 increase of $4.5 billion). This incremental growth is driven by the annualization of Medicaid restorations ($403 million), HCRA ($268 million), and the deferral of a 2003-04 Medicaid cycle into 2004-05 ($170 million), the "tail" of school aid adds and restorations including the loss of proposed BOCES and Building Aid reforms ($571 million), the May 15 school aid database revisions ($184 million), and increased fringe benefits costs including the denial of the Governor's proposed pension reforms and the restoration of proposed health insurance cost containment ($521 million). Fiscal Management Plan savings include continuing the statewide austerity measures implemented during 2003-04, mandating agencies to eliminate, consolidate, and streamline governmental services, reducing the State workforce further, maximizing Federal aid, and planning legislative actions that may include statutory modifications to programs. A more detailed discussion of these revenue and spending changes, as well as the Fiscal Management Plan, is described in the Overview and General Fund sections above. 26 CASH FINANCIAL PLAN GENERAL FUND 2002-2003 AND 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ADJUSTED ADJUSTED ANNUAL ACTUAL ENACTED CHANGE --------------- --------------- --------------- OPENING FUND BALANCE 1,032 815 (217) =============== =============== =============== RECEIPTS: Taxes: Personal income tax 16,791 16,285 (506) User taxes and fees 7,063 8,007 944 Business taxes 3,380 3,498 118 Other taxes 743 771 28 Miscellaneous receipts 3,991 3,669 (322) Transfers from other funds: PIT in excess of Revenue Bond debt service 4,215 5,125 910 Sales tax in excess of LGAC debt service 1,919 1,853 (66) Real estate taxes in excess of CW/CA debt service 263 202 (61) All other 931 430 (501) --------------- --------------- --------------- TOTAL RECEIPTS 39,296 39,840 544 =============== =============== =============== DISBURSEMENTS: Grants to local governments 26,713 28,009 1,296 State operations 7,715 7,168 (547) General State charges 2,732 3,199 467 Transfers to other funds: Debt service 1,496 1,583 87 Capital projects 170 251 81 State University 26 145 119 Other purposes 661 482 (179) --------------- --------------- --------------- TOTAL DISBURSEMENTS 39,513 40,837 1,324 =============== =============== =============== FISCAL MANAGEMENT PLAN/FEDERAL AID 0 912 912 =============== =============== =============== CHANGE IN FUND BALANCE (217) (85) 132 =============== =============== =============== CLOSING FUND BALANCE 815 730 (85) =============== =============== =============== Tax Stabilization Reserve Fund 710 710 0 Contingency Reserve Fund 20 20 0 Community Projects Fund 85 0 (85)
27 CASH FINANCIAL PLAN GENERAL FUND 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
ADJUSTED 30-DAY CHANGE ENACTED --------------- --------------- --------------- OPENING FUND BALANCE 805 10 815 =============== =============== =============== RECEIPTS: Taxes: Personal income tax 15,452 833 16,285 User taxes and fees 7,508 499 8,007 Business taxes 3,682 (184) 3,498 Other taxes 771 0 771 Miscellaneous receipts 3,579 90 3,669 Transfers from other funds: PIT in excess of Revenue Bond debt service 4,865 260 5,125 Sales tax in excess of LGAC debt service 1,999 (146) 1,853 Real estate taxes in excess of CW/CA debt service 202 0 202 All other 379 51 430 --------------- --------------- --------------- TOTAL RECEIPTS 38,437 1,403 39,840 =============== =============== =============== DISBURSEMENTS: Grants to local governments 25,780 2,229 28,009 State operations 7,166 2 7,168 General State charges 3,165 34 3,199 Transfers to other funds: Debt service 1,583 0 1,583 Capital projects 206 45 251 State university 145 0 145 Other purposes 467 15 482 --------------- --------------- --------------- TOTAL DISBURSEMENTS 38,512 2,325 40,837 =============== =============== =============== FISCAL MANAGEMENT PLAN/FEDERAL AID 0 912 912 =============== =============== =============== CHANGE IN FUND BALANCE (75) (10) (85) =============== =============== =============== CLOSING FUND BALANCE 730 0 730 =============== =============== =============== Tax Stabilization Reserve Fund 710 0 710 Contingency Reserve Fund 20 0 20
NOTE: THE 30-DAY OPENING FUND BALANCE WAS REDUCED BY $198 MILLION AND THE PERSONAL INCOME TAX RECEIPTS WERE INCREASED BY $198 MILLION TO REFLECT THE TAX REFUND RESERVE TRANSACTION. 28 CASH FINANCIAL PLAN GENERAL FUND 2002-2003 AND 2003-2004 (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ACTUAL ENACTED CHANGE --------------- --------------- --------------- OPENING FUND BALANCE 1,032 815 (217) =============== =============== =============== RECEIPTS: Taxes: Personal income tax 16,791 16,285 (506) User taxes and fees 7,063 8,007 944 Business taxes 3,380 3,498 118 Other taxes 743 771 28 Miscellaneous receipts 2,091 5,569 3,478 Transfers from other funds: PIT in excess of Revenue Bond debt service 4,215 5,125 910 Sales tax in excess of LGAC debt service 1,919 1,853 (66) Real estate taxes in excess of CW/CA debt service 263 202 (61) All other 931 430 (501) --------------- --------------- --------------- TOTAL RECEIPTS 37,396 41,740 4,344 =============== =============== =============== DISBURSEMENTS: Grants to local governments 24,887 29,835 4,948 State operations 7,678 7,205 (473) General State charges 2,699 3,232 533 Transfers to other funds: Debt service 1,496 1,583 87 Capital projects 166 255 89 State University 26 145 119 Other purposes 661 482 (179) --------------- --------------- --------------- TOTAL DISBURSEMENTS 37,613 42,737 5,124 =============== =============== =============== FISCAL MANAGEMENT PLAN/FEDERAL AID 0 912 912 =============== =============== =============== CHANGE IN FUND BALANCE (217) (85) 132 =============== =============== =============== CLOSING FUND BALANCE 815 730 (85) =============== =============== =============== Tax Stabilization reserve Fund 710 710 0 Contingency Reserve Fund 20 20 0 Community Projects Fund 85 0 (85)
NOTE: ACTUALS REFLECT THE AMOUNTS PUBLISHED IN THE COMPTROLLER'S CASH BASIS REPORT RELEASED ON APRIL 15, 2003. 29 CASH FINANCIAL PLAN GENERAL FUND 2002-2003 (MILLIONS OF DOLLARS)
ADJUSTED ACTUAL ADJUSTMENTS ACTUAL --------------- --------------- -------------- OPENING FUND BALANCE 1,032 0 1,032 =============== =============== ============== RECEIPTS: Taxes: Personal income tax 16,791 0 16,791 User taxes and fees 7,063 0 7,063 Business taxes 3,380 0 3,380 Other taxes 743 0 743 Miscellaneous receipts 2,091 1,900 3,991 Transfers from other funds: PIT in excess of Revenue Bond debt service 4,215 0 4,215 Sales tax in excess of LGAC debt service 1,919 0 1,919 Real estate taxes in excess of CW/CA debt service 263 0 263 All other 931 0 931 --------------- --------------- -------------- TOTAL RECEIPTS 37,396 1,900 39,296 =============== =============== ============== DISBURSEMENTS: Grants to local governments 24,887 1,826 26,713 State operations 7,678 37 7,715 General State charges 2,699 33 2,732 Transfers to other funds: Debt service 1,496 0 1,496 Capital projects 166 4 170 State University 26 0 26 Other purposes 661 0 661 --------------- --------------- -------------- TOTAL DISBURSEMENTS 37,613 1,900 39,513 =============== =============== ============== CHANGE IN FUND BALANCE (217) 0 (217) =============== =============== ============== CLOSING FUND BALANCE 815 0 815 =============== =============== ============== Tax Stabilization Reserve Fund 710 0 710 Contingency Reserve Fund 20 0 20 Community Projects Fund 85 0 85
NOTE: ACTUALS REFLECT THE AMOUNTS PUBLISHED IN THE COMPTROLLER'S CASH BASIS REPORT RELEASED ON APRIL 15, 2003. 30 CASH FINANCIAL PLAN GENERAL FUND 2003-2004 (MILLIONS OF DOLLARS)
ADJUSTED ENACTED ADJUSTMENTS ENACTED ------------ ------------ ------------ OPENING FUND BALANCE 815 0 815 ============ ============ ============ RECEIPTS: Taxes: Personal income tax 16,285 0 16,285 User taxes and fees 8,007 0 8,007 Business taxes 3,498 0 3,498 Other taxes 771 0 771 Miscellaneous receipts 5,569 (1,900) 3,669 Transfers from other funds: PIT in excess of Revenue Bond debt service 5,125 0 5,125 Sales tax in excess of LGAC debt service 1,853 0 1,853 Real estate taxes in excess of CW/CA debt service 202 0 202 All other 430 0 430 ------------ ------------ ------------ TOTAL RECEIPTS 41,740 (1,900) 39,840 ============ ============ ============ DISBURSEMENTS: Grants to local governments 29,835 (1,826) 28,009 State operations 7,205 (37) 7,168 General State charges 3,232 (33) 3,199 Transfers to other funds: Debt service 1,583 0 1,583 Capital projects 255 (4) 251 State University 145 0 145 Other purposes 482 0 482 ------------ ------------ ------------ TOTAL DISBURSEMENTS 42,737 (1,900) 40,837 ============ ============ ============ FISCAL MANAGEMENT PLAN/FEDERAL AID 912 0 912 ============ ============ ============ CHANGE IN FUND BALANCE (85) 0 (85) ============ ============ ============ CLOSING FUND BALANCE 730 0 730 ============ ============ ============ Tax Stabilization Reserve Fund 710 0 710 Contingency Reserve Fund 20 0 20
NOTE: THE 30-DAY OPENING FUND BALANCE WAS REDUCED BY $198 MILLION AND THE PERSONAL INCOME TAX RECEIPTS WERE INCREASED BY $198 MILLION TO REFLECT THE PIT REFUND RESERVE TRANSACTION. 31 CURRENT STATE RECEIPTS GENERAL FUND 2002-2003 AND 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ADJUSTED ADJUSTED ANNUAL ACTUAL ENACTED CHANGE --------------- --------------- --------------- PERSONAL INCOME TAX 16,791 16,285 (506) --------------- --------------- --------------- USER TAXES AND FEES 7,063 8,007 944 --------------- --------------- --------------- Sales and use tax 6,328 7,285 957 Cigarette and tobacco taxes 446 425 (21) Motor vehicle fees 67 75 8 Alcoholic beverages taxes 180 180 0 Alcoholic beverage control license fees 42 42 0 BUSINESS TAXES 3,380 3,498 118 --------------- --------------- --------------- Corporation franchise tax 1,407 1,450 43 Corporation and utilities tax 860 805 (55) Insurance taxes 704 818 114 Bank tax 409 425 16 OTHER TAXES 743 771 28 --------------- --------------- --------------- Estate tax 701 737 36 Gift tax 7 0 (7) Real property gains tax 5 2 (3) Pari-mutuel taxes 29 31 2 Other taxes 1 1 0 TOTAL TAXES 27,977 28,561 584 --------------- --------------- --------------- MISCELLANEOUS RECEIPTS 3,991 3,669 (322) --------------- --------------- --------------- TOTAL 31,968 32,230 262 =============== =============== ===============
NOTE: ADJUSTED MISCELLANEOUS RECEIPTS INCLUDE $1.9 BILLION IN TOBACCO SECURITIZATION PROCEEDS IN 2002-03 THAT WILL BE RECEIVED IN 2003-04. 32 CURRENT STATE RECEIPTS ALL GOVERNMENTAL FUNDS 2002-2003 AND 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ADJUSTED ADJUSTED ACTUAL ENACTED CHANGE --------------- --------------- --------------- PERSONAL INCOME TAX 23,698 24,460 762 --------------- --------------- --------------- USER TAXES AND FEES 10,804 11,984 1,180 --------------- --------------- --------------- Sales and use taxes 8,796 9,956 1,160 Cigarette and tobacco taxes 446 425 (21) Motor fuel tax 544 537 (7) Motor vehicle fees 612 651 39 Highway use tax 147 149 2 Alcoholic beverage taxes 180 180 0 Alcoholic beverage control license fees 42 42 0 Auto rental tax 37 44 7 BUSINESS TAXES 4,983 5,052 69 --------------- --------------- --------------- Corporation franchise tax 1,612 1,655 43 Corporation and utilities taxes 1,091 993 (98) Insurance taxes 776 903 127 Bank tax 481 500 19 Petroleum business taxes 1,023 1,001 (22) OTHER TAXES 1,191 1,176 (15) --------------- --------------- --------------- Estate tax 701 737 36 Gift tax 7 0 (7) Real property gains tax 5 2 (3) Real estate transfer tax 448 404 (44) Pari-mutuel taxes 29 32 3 Other taxes 1 1 0 TOTAL TAXES 40,676 42,672 1,996 --------------- --------------- --------------- MISCELLANEOUS RECEIPTS 16,056 17,705 1,649 --------------- --------------- --------------- FEDERAL GRANTS 33,242 33,444 202 --------------- --------------- --------------- TOTAL 89,974 93,821 3,847 =============== =============== ===============
NOTE: ADJUSTED MISCELLANEOUS RECEIPTS INCLUDE $1.9 BILLION IN TOBACCO SECURITIZATION PROCEEDS IN 2002-03 THAT WILL BE RECEIVED IN 2003-04. 33 GENERAL FUND TAX REFUND RESERVE ACCOUNT 2002-2003 AND 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
2002-2003 2003-2004 ADJUSTED ADJUSTED ANNUAL ACTUAL ENACTED CHANGE --------------- --------------- --------------- Withholdings 19,959 22,135 2,176 Estimated Payments 4,855 4,780 (75) Final Payments 1,334 1,241 (93) Delinquencies 796 670 (126) --------------- --------------- --------------- GROSS COLLECTIONS 26,944 28,826 1,882 State/City Offset (288) (300) (12) Refund Reserve 1,050 159 (891) Refunds (4,008)(1) (4,225)(2) (217) --------------- --------------- --------------- REPORTED TAX COLLECTIONS 23,698 24,460 762 STAR (2,664) (2,800) (136) RBTF (4,243) (5,375) (1,132) --------------- --------------- --------------- GENERAL FUND 16,791 16,285 (506) =============== =============== ===============
Net personal income tax collections are affected by transactions in the tax refund reserve account. The tax refund reserve account is used to hold moneys designated to pay tax refunds. The Comptroller deposits receipts into this account at the discretion of the Commissioner of Taxation and Finance. The deposit of moneys into the account during a fiscal year has the effect of reducing receipts for the fiscal year, and the withdrawal of moneys from the account has the effect of increasing receipts in the fiscal year of withdrawal. The tax refund reserve account also includes amounts made available as a result of the LGAC financing program. Beginning in 1998-99, a portion of personal income tax collections is deposited directly in the School Tax Reduction (STAR) Fund and used to make payments to reimburse local governments for their revenue decreases due to the STAR program. NOTE 1: REFLECTS THE PAYMENT OF THE BALANCE OF REFUNDS ON 2001 LIABILITY AND PAYMENT OF $960 MILLION OF CALENDAR YEAR 2002 REFUNDS IN THE LAST QUARTER OF THE STATE'S 2002-03 FISCAL YEAR AND A BALANCE IN THE TAX REFUND RESERVE ACCOUNT OF $627 MILLION. NOTE 2: REFLECTS THE PAYMENT OF THE BALANCE OF REFUNDS ON 2002 LIABILITY AND THE PROJECTED PAYMENT OF $960 MILLION OF CALENDAR YEAR 2003 REFUNDS IN THE LAST QUARTER OF THE STATE'S 2003-04 FISCAL YEAR AND A PROJECTED BALANCE IN THE TAX REFUND RESERVE ACCOUNT OF $468 MILLION. 34 CASH FINANCIAL PLAN STATE FUNDS 2003-2004 (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 894 (560) 158 1,307 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,561 4,401 1,765 7,945 42,672 Miscellaneous receipts 5,569 9,880 3,232 702 19,383 Federal grants 0 0 0 0 0 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 34,130 14,281 4,997 8,647 62,055 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 29,835 10,191 1,095 0 41,121 State operations 7,205 4,561 0 8 11,774 General State charges 3,232 410 0 0 3,642 Debt service 0 0 0 3,387 3,387 Capital projects 0 2 3,061 0 3,063 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 40,272 15,164 4,156 3,395 62,987 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,610 801 401 4,844 13,656 Transfers to other funds (2,465) (231) (1,068) (10,093) (13,857) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,145 570 (419) (5,249) 47 ============= ============= ============= ============= ============= FISCAL MANAGEMENT PLAN/FEDERAL AID 912 0 0 0 912 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) (313) 422 3 27 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 581 (138) 161 1,334 ============= ============= ============= ============= =============
35 CASH FINANCIAL PLAN STATE FUNDS 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 894 (560) 158 1,307 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,561 4,401 1,765 7,945 42,672 Miscellaneous receipts 3,669 9,880 3,232 702 17,483 Federal grants 0 0 0 0 0 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 32,230 14,281 4,997 8,647 60,155 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 28,009 10,191 1,095 0 39,295 State operations 7,168 4,561 0 8 11,737 General State charges 3,199 410 0 0 3,609 Debt service 0 0 0 3,387 3,387 Capital projects 0 2 3,057 0 3,059 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 38,376 15,164 4,152 3,395 61,087 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,610 801 397 4,844 13,652 Transfers to other funds (2,461) (231) (1,068) (10,093) (13,853) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,149 570 (423) (5,249) 47 ============= ============= ============= ============= ============= FISCAL MANAGEMENT PLAN/FEDERAL AID 912 0 0 0 912 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) (313) 422 3 27 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 581 (138) 161 1,334 ============= ============= ============= ============= =============
36 CASH FINANCIAL PLAN ALL GOVERNMENTAL FUNDS 2003-2004 (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 986 (791) 158 1,168 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,561 4,401 1,765 7,945 42,672 Miscellaneous receipts 5,569 10,102 3,232 702 19,605 Federal grants 0 31,806 1,638 0 33,444 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 34,130 46,309 6,635 8,647 95,721 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 29,835 38,677 1,312 0 69,824 State operations 7,205 7,790 0 8 15,003 General State charges 3,232 576 0 0 3,808 Debt service 0 0 0 3,387 3,387 Capital projects 0 2 4,350 0 4,352 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 40,272 47,045 5,662 3,395 96,374 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,610 3,221 401 4,844 16,076 Transfers to other funds (2,465) (2,594) (1,200) (10,093) (16,352) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,145 627 (551) (5,249) (28) ============= ============= ============= ============= ============= FISCAL MANAGEMENT PLAN/FEDERAL AID 912 0 0 0 912 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) (109) 422 3 231 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 877 (369) 161 1,399 ============= ============= ============= ============= =============
37 CASH FINANCIAL PLAN ALL GOVERNMENTAL FUNDS 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
SPECIAL CAPITAL DEBT GENERAL REVENUE PROJECTS SERVICE (MEMO) FUND FUNDS FUNDS FUNDS TOTAL ------------- ------------- ------------- ------------- ------------- OPENING FUND BALANCE 815 986 (791) 158 1,168 ============= ============= ============= ============= ============= RECEIPTS: Taxes 28,561 4,401 1,765 7,945 42,672 Miscellaneous receipts 3,669 10,102 3,232 702 17,705 Federal grants 0 31,806 1,638 0 33,444 ------------- ------------- ------------- ------------- ------------- TOTAL RECEIPTS 32,230 46,309 6,635 8,647 93,821 ============= ============= ============= ============= ============= DISBURSEMENTS: Grants to local governments 28,009 38,677 1,312 0 67,998 State operations 7,168 7,790 0 8 14,966 General State charges 3,199 576 0 0 3,775 Debt service 0 0 0 3,387 3,387 Capital projects 0 2 4,346 0 4,348 ------------- ------------- ------------- ------------- ------------- TOTAL DISBURSEMENTS 38,376 47,045 5,658 3,395 94,474 ============= ============= ============= ============= ============= OTHER FINANCING SOURCES (USES): Transfers from other funds 7,610 3,221 397 4,844 16,072 Transfers to other funds (2,461) (2,594) (1,200) (10,093) (16,348) Bond and note proceeds 0 0 248 0 248 ------------- ------------- ------------- ------------- ------------- NET OTHER FINANCING SOURCES (USES) 5,149 627 (555) (5,249) (28) ============= ============= ============= ============= ============= FISCAL MANAGEMENT PLAN/FEDERAL AID 912 0 0 0 912 ============= ============= ============= ============= ============= CHANGE IN FUND BALANCE (85) (109) 422 3 231 ============= ============= ============= ============= ============= CLOSING FUND BALANCE 730 877 (369) 161 1,399 ============= ============= ============= ============= =============
38 CASH FINANCIAL PLAN SPECIAL REVENUE FUNDS 2003-2004 (MILLIONS OF DOLLARS)
STATE FEDERAL TOTAL ------- --------- ------- OPENING FUND BALANCE 894 92 986 ======= ========= ======= RECEIPTS: Taxes 4,401 0 4,401 Miscellaneous receipts 9,880 222 10,102 Federal grants 0 31,806 31,806 ------- --------- ------- TOTAL RECEIPTS 14,281 32,028 46,309 ======= ========= ======= DISBURSEMENTS: Grants to local governments 10,191 28,486 38,677 State operations 4,561 3,229 7,790 General State charges 410 166 576 Debt service 0 0 0 Capital projects 2 0 2 ------- --------- ------- TOTAL DISBURSEMENTS 15,164 31,881 47,045 ======= ========= ======= OTHER FINANCING SOURCES (USES): Transfers from other funds 801 2,420 3,221 Transfers to other funds (231) (2,363) (2,594) Bond and note proceeds 0 0 0 ------- --------- ------- NET OTHER FINANCING SOURCES (USES) 570 57 627 ======= ========= ======= CHANGE IN FUND BALANCE (313) 204 (109) ======= ========= ======= CLOSING FUND BALANCE 581 296 877 ======= ========= =======
39 CASH FINANCIAL PLAN CAPITAL PROJECTS FUNDS 2003-2004 ADJUSTED FOR 2002-2003 DELAYS (MILLIONS OF DOLLARS)
STATE FEDERAL TOTAL ------- --------- ------- OPENING FUND BALANCE (560) (231) (791) ======= ========= ======= RECEIPTS: Taxes 1,765 0 1,765 Miscellaneous receipts 3,232 0 3,232 Federal grants 0 1,638 1,638 ------- --------- ------- TOTAL RECEIPTS 4,997 1,638 6,635 ======= ========= ======= DISBURSEMENTS: Grants to local governments 1,095 217 1,312 State operations 0 0 0 General State charges 0 0 0 Debt service 0 0 0 Capital projects 3,057 1,289 4,346 ------- --------- ------- TOTAL DISBURSEMENTS 4,152 1,506 5,658 ======= ========= ======= OTHER FINANCING SOURCES (USES): Transfers from other funds 397 0 397 Transfers to other funds (1,068) (132) (1,200) Bond and note proceeds 248 0 248 ------- --------- ------- NET OTHER FINANCING SOURCES (USES) (423) (132) (555) ======= ========= ======= CHANGE IN FUND BALANCE 422 0 422 ======= ========= ======= CLOSING FUND BALANCE (138) (231) (369) ======= ========= =======
40 CASH FLOW GENERAL FUND 2003-2004 (MILLIONS OF DOLLARS)
APRIL MAY JUNE ------- --------- ------- OPENING FUND BALANCE 815 2,786 2,145 ======= ========= ======= RECEIPTS: Taxes: Personal income tax 2,811 304 1,582 Sales tax 450 462 737 User taxes and fees 103 56 59 Business taxes 56 (128) 722 Other taxes 49 67 73 Miscellaneous receipts 70 103 2,239 Transfers from other funds 898 330 782 ------- --------- ------- TOTAL RECEIPTS 4,437 1,194 6,194 ======= ========= ======= DISBURSEMENTS: Grants to local governments 1,462 694 5,284 State operations 743 814 611 General State charges 32 241 236 Transfers to other funds 229 86 350 ------- --------- ------- TOTAL DISBURSEMENTS 2,466 1,835 6,481 ======= ========= ======= CHANGE IN FUND BALANCE 1,971 (641) (287) ======= ========= ======= CLOSING FUND BALANCE 2,786 2,145 1,858 ======= ========= =======
41 SPECIAL CONSIDERATIONS Many complex political, social, and economic forces influence the State's economy and finances, which may in turn affect the State's Financial Plan. These forces may affect the State unpredictably from fiscal year to fiscal year and are influenced by governments, institutions, and events that are not subject to the State's control. The Financial Plan is also necessarily based upon forecasts of national and State economic activity. Economic forecasts have frequently failed to predict accurately the timing and magnitude of changes in the national and State economies. DOB believes that its current estimates related to the performance of the State and national economies are reasonable. However, there can be no assurance that actual results will not differ materially and adversely from the current forecast. For a discussion of the DOB economic forecast, see the sections entitled "Economic and Demographics," "Current Fiscal Year - National Economy" and "Current Fiscal Year - State Economy" in this AIS. Based on current projections, the 2003-04 Financial Plan depends in part on the implementation of a fiscal management plan to maintain budget balance in the current fiscal year. The plan currently under development by DOB is expected to contain a range of actions that can be implemented administratively, as well as proposals that may require legislative approval. The fiscal management plan will also integrate savings from the Federal aid package enacted by Congress on May 23, 2003. DOB estimates the Federal package will provide the State and localities a total of $2.1 billion in fiscal relief over the next two State fiscal years, consisting of a temporary 2.95 percent increase in the Federal matching rate for State Medicaid expenditures (valued at $1.5 billion) and unrestricted aid payments (valued at $645 million). The Federal aid is expected to enhance the State's flexibility in preparing the fiscal management plan and maintaining a balanced budget in the 2003-04 fiscal year. DOB expects to incorporate the fiscal management plan into the Financial Plan projections by the release of the First Quarterly Update to the Financial Plan. The Executive is reviewing legal questions surrounding certain actions taken by the Legislature in enacting the 2003-04 budget. The State Constitution provides that the Legislature may not alter an appropriation bill submitted by the Governor except to strike out or reduce items, or to add appropriations that are stated separately and distinctly from the original appropriations. A number of court cases have interpreted and clarified the Legislature's powers to act on the appropriations contained in the Executive Budget (see the section entitled "Litigation" for a discussion of two ongoing cases). In light of the provisions of the State Constitution and existing case law, the Executive believes that the Legislature, in enacting changes to the Governor's Executive Budget for 2003-04, may have acted in a manner that violates State constitutional and statutory requirements. Labor contracts between the State and most State employee unions expired on March 31, 2003 and collective bargaining negotiations are underway on a new round of contracts. The Financial Plan contains no reserves to finance potential new costs related to any new labor agreements. DOB projects that every one percent increase in salaries for all State employees would result in a General Fund Financial Plan cost of approximately $80 million. DOB expects the State's cash flow position to experience pressure in the first quarter of the 2004-05 fiscal year. A number of administrative options are available to DOB to manage General Fund cash flow needs during any fiscal year. The State is prohibited from issuing seasonal notes in the public credit markets to finance cash flow needs, unless the State satisfies certain restrictive conditions imposed under the Local Government Assistance Corporation ("LGAC") statute and related bond covenants. For a discussion of the LGAC restrictions, see the section entitled "Debt and Other Financing Activities - Local Government Assistance Corporation" in this AIS. 42 An ongoing risk to the Financial Plan arises from the potential impact of certain litigation and Federal disallowances now pending against the State, which could produce adverse effects on the State's projections of receipts and disbursements. For example, the Federal government has issued a draft disallowance for certain claims, and deferred the payment of other claims, submitted by school districts related to school supportive health services. It is unclear at this time what impact, if any, such disallowances may have on the State Financial Plan in the current year or in the future. The Financial Plan assumes no significant Federal disallowances or other Federal actions that could adversely affect State finances. For more information on certain litigation pending against the State, see the section entitled "Litigation" in this AIS. In the past, the State has taken management actions to address potential financial plan shortfalls, and DOB believes it could take similar actions should adverse variances occur in its projections for the current fiscal year. To help guard against such risks, the State is maintaining a total of $730 million in General Fund reserves, after implementation of the fiscal management plan. 43 J.P. Morgan Mutual Fund Trust Part C. Other Information Item 23. Exhibits EXHIBIT EXHIBIT NUMBER DESCRIPTION - ------- ------------ (a)(1) ARTICLES OF INCORPORATION. Declaration of Trust dated as of February 1, 1994. Incorporated herein by reference to the Registrant's Registration Statement as filed on February 14, 1994. (a)(2) Amendment No. 1 to Declaration of Trust dated December 6, 2001. Filed herewith. (a)(3) Amendment No. 2 to Declaration of Trust dated February 5, 2003. Filed herewith. (b)(1) BY-LAWS. By-Laws of Registrant dated January 19, 1996. Incorporated herein by reference to the Registrant's Registration Statement as filed on February 14, 1994. (b)(2) Certification of Amendment to By-Laws of Registrant dated January 19, 1996. Filed herewith. (b)(3) Amendment to By-Laws dated September 5, 2001. Incorporated herein by reference to Post-Effective Amendment No. 27 to the Registrant's Registration Statement as filed on December 20, 2002 (Accession No. 0001047469-02-007862). (c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS. Not applicable. (d)(1) INVESTMENT ADVISORY CONTRACTS. Investment Advisory Agreement dated May 6, 1996 by and between Registrant and The Chase Manhattan Bank, N.A. and its Successor. Incorporated herein by reference to Post-Effective Amendment No. 4 to the Registrant's Registration Statement as filed on December 28, 1995 (Accession No. 0000922423-95-000282). (e)(1) UNDERWRITING CONTRACTS. Distribution Agreement dated June 29, 2001 between Registrant and J.P. Morgan Fund Distributors, Inc. Filed herewith. (e)(2) Form of Amendment to Distribution Agreement dated July 25, 2002 between Registrant and J.P. Morgan Fund Distributors, Inc. Filed herewith. (f) BONUS OR PROFIT SHARING CONTRACTS. Not applicable. (g)(1) CUSTODIAN AGREEMENT. Global Custody Agreement dated March 1, 2003 between JPMorgan Chase Bank and Registrant. Filed herewith. (g)(2) Fee Schedule for Global Custody Agreement dated July 2002. Filed herewith. (h)(1) OTHER MATERIAL CONTRACTS. Administration Agreement dated September 7, 2001 between Registrant and Morgan Guaranty Trust Company of New York. Filed herewith. (h)(2) Shareholder Servicing Agreement between Registrant and The Chase Manhattan Bank, N.A. Incorporated herein by reference to Post-Effective Amendment No. 4 to the Registrant's Registration Statement as filed on December 28, 1995 (Accession No. 0000922423-95-000282). (h)(3) Transfer Agency Agreement dated September 1, 2001 between Registrant and DST Systems, Inc. Filed herewith. (i) LEGAL OPINION. Opinion and consent of Sullivan & Cromwell as to Legality of Securities Being Registered. Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement as filed on April 18, 1994. (j) OTHER OPINIONS. Consent of Independent Accountant. Filed herewith. (k) OMITTED FINANCIAL STATEMENTS. Financial statements omitted from Item 22. (l) INITIAL CAPITAL AGREEMENTS. Inapplicable. (m) RULE 12B-1 PLAN. Form of Distribution Plan. Filed herewith. (n) RULE 18F-3 PLAN. Rule 18f-3 Multi-Class Plan effective May 6, 1996, as revised June 21, 2001. Incorporated herein by reference to Post-Effective Amendment No. 27 to the Registrant's Registration Statement as filed on December 20, 2002 (Accession No. 0001047469-02-007862). C-1 (o) Reserved. (p)(1) CODES OF ETHICS. Code of Ethics of The J.P. Morgan Family of Funds. Filed herewith. (p)(2) Code of Ethics of J.P. Morgan Fund Distributors Inc. Filed herewith. (p)(3) Code of Ethics of Adviser. Filed herewith. (99)(a) POWERS OF ATTORNEY. Powers of Attorney for: William J. Armstrong, Roland R. Eppley, Jr., Dr. Matthew Goldstein, Ann Maynard Gray, Matthew Healey, Robert J. Higgins, William G. Morton, Jr., Fergus Reid, III, James J. Schonbachler and Leonard M. Spalding. Filed herewith. ITEM 25. Indemnification Reference is hereby made to Article V of the Registrant's Declaration of Trust. The Trustees and officers of the Registrant and the personnel of the Registrant's investment adviser, administrator and distributor are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940. Under the terms of the Registrant's Declaration of Trust, the Registrant may indemnify any person who was or is a Trustee, officer or employee of the Registrant to the maximum extent permitted by law; provided, however, that any such indemnification (unless ordered by a court) shall be made by the Registrant only as authorized in the specific case upon a determination that indemnification of such persons is proper in the circumstances. Such determination shall be made (i) by the Trustees, by a majority vote of a quorum which consists of Trustees who are neither in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the proceeding, or (ii) if the required quorum is not obtainable or, if a quorum of such Trustees so directs, by independent legal counsel in a written opinion. No indemnification will be provided by the Registrant to any Trustee or officer of the Registrant for any liability to the Registrant or shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of duty. Insofar as the conditional advancing of indemnification monies for actions based upon the Investment Company Act of 1940 may be concerned, such payments will be made only on the following conditions: (i) the advances must be limited to amounts used, or to be used, for the preparation or presentation of a defense to the action, including costs connected with the preparation of a settlement; (ii) advances may be made only upon receipt of a written promise by, or on behalf of, the recipient to repay that amount of the advance which exceeds that amount to which it is ultimately determined that he is entitled to receive from the Registrant by reason of indemnification; and (iii) (a) such promise must be secured by a surety bond, other suitable insurance or an equivalent form of security which assures that any repayments may be obtained by the Registrant without delay or litigation, which bond, insurance or other form of security must be provided by the recipient of the advance, or (b) a C-2 majority of a quorum of the Registrant's disinterested, non-party Trustees, or an independent legal counsel in a written opinion, shall determine, based upon a review of readily available facts, that the recipient of the advance ultimately will be found entitled to indemnification. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 26. Business and Other Connections of Investment Adviser The business of J.P. Morgan Investment Management Inc. (JPMIM), the Adviser, is summarized in the Prospectuses constituting Part A of this Registration Statement, which are incorporated herein by reference. The business or other connections of each director and officer of JPMIM is currently listed in the investment advisor registration on Form ADV for JPMIM (File No. 801-21011). ITEM 27. Principal Underwriters (a) J.P. Morgan Fund Distributors, Inc., a wholly-owned subsidiary of The BISYS Group, Inc. is the underwriter for the Registrant. J.P. Morgan Fund Distributors, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National Association of Securities Dealers. J.P. Morgan Fund Distributors, Inc. is located at 522 Fifth Avenue, New York, New York 10036. J.P. Morgan Fund Distributors, Inc. is a wholly-owned subsidiary of The BISYS Group, Inc. J.P. Morgan Fund Distributors, Inc. acts as principal underwriter for the following investment companies: J.P. Morgan Fleming Mutual Fund Group, Inc. J.P. Morgan Funds J.P. Morgan Institutional Funds J.P. Morgan Series Trust J.P. Morgan Series Trust II J.P. Morgan Mutual Fund Group J.P. Morgan Mutual Fund Investment Trust J.P. Morgan Mutual Fund Select Group J.P. Morgan Mutual Fund Select Trust J.P. Morgan Mutual Fund Trust Mutual Fund Variable Annuity Trust Growth and Income Portfolio JPMorgan Value Opportunities Fund, Inc. J.P. Morgan Fleming Series Trust J.P. Morgan Mutual Fund Series (b) The following are the Directors and officers of J.P. Morgan Fund Distributors, Inc. The principal business address of each of these persons, is listed below. NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT - ---------------- -------------------- -------------------- Lynn J. Mangum Chairman None 90 Park Ave. New York, NY 10016 Charles Linn Booth Vice President/ None 3435 Stelzer Road Compliance Officer Columbus, OH 43219 Margaret Warner Chambers Vice President None 90 Park Ave. New York, NY 10016 Dennis Sheehan Director None 90 Park Ave. New York, NY 10016 Kevin J. Dell Secretary None 90 Park Ave. New York, NY 10016 Edward S. Forman Assistant Secretary None 90 Park Ave. New York, NY 10016 Robert A. Bucher Financial Operations Officer None 90 Park Ave. New York, NY 10016 Patrick William McKeon Vice President/ None 90 Park Ave. Chief Compliance Officer New York, NY 10016 William J. Tomko President None 3435 Stelzer Road Columbus, OH 43219 (c) Not applicable C-3 ITEM 28. Location of Accounts and Records The accounts and records of the Registrant are located, in whole or in part, at the office of the Registrant and the following locations: NAME ADDRESS J.P. Morgan Fund Distributors, Inc. 522 Fifth Avenue New York, NY 10036 DST Systems, Inc 210 W. 10th Street, Kansas City, MO 64105 JPMorgan Chase Bank 3 Metrotech Center Brooklyn, NY 11245 J.P. Morgan Investment Management Inc. 522 Fifth Avenue New York, NY 10036 C-4 ITEM 29. Management Services Not applicable ITEM 30. Undertakings Registrant undertakes that its trustees shall promptly call a meeting of shareholders of the Trust for the purpose of voting upon the question of removal of any such trustee or trustees when requested in writing so to do by the record holders of not less than 10 per centum of the outstanding shares of the Trust. In addition, the Registrant shall, in certain circumstances, give such shareholders assistance in communicating with other shareholders of a fund as required by Section 16(c) of the Investment Company Act of 1940. C-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of New York and State of New York on the 29th day of December, 2003. J.P. MORGAN MUTUAL FUND TRUST By: /s/ George C.W. Gatch --------------------------- George C.W. Gatch President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on December 29, 2003. /s/ Fergus Reid, III* Chairman and Trustee - ------------------------ Fergus Reid, III /s/ William J. Armstrong* Trustee - ------------------------ William J. Armstrong /s/ Roland R. Eppley, Jr.* Trustee - ------------------------ Roland R. Eppley, Jr. /s/ Dr. Matthew Goldstein* Trustee - -------------------------- Dr. Matthew Goldstein /s/ Ann Maynard Gray* Trustee - ------------------------ Ann Maynard Gray /s/ Matthew Healey* President of the Board of Trustees and Trustee - ------------------------ Matthew Healey /s/ Robert J. Higgins* Trustee - ------------------------ Robert J. Higgins /s/ William G. Morton, Jr.* Trustee - -------------------------- William G. Morton, Jr. /s/ James J. Schonbachler* Trustee - ------------------------ James J. Schonbachler /s/ Leonard M. Spalding, Jr.* Trustee - ---------------------------- Leonard M. Spalding, Jr. *By: /s/ Patricia A. Maleski Treasurer and Attorney-in-Fact ------------------------ Patricia A. Maleski
C-6 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- (a)(2) Amendment No. 1 to Declaration of Trust dated December 6, 2001. (a)(3) Amendment No. 2 to Declaration of Trust dated February 5, 2003. (b)(2) Certification of Amendment to By-Laws of Registrant dated January 19, 1996. (e)(1) Distribution Agreement dated June 29, 2001 between Registrant and J.P. Morgan Fund Distributors, Inc. (e)(2) Form of Amendment to Distribution Agreement dated July 25, 2002 between Registrant and J.P. Morgan Fund Distributors, Inc. (g)(1) Global Custody Agreement dated March 1, 2003 between JPMorgan Chase Bank and Registrant. (g)(2) Fee Schedule for Global Custody Agreement dated July 2002. (h)(1) Administration Agreement dated September 7, 2001 between Registrant and Morgan Guaranty Trust Company of New York. (h)(3) Transfer Agency Agreement dated September 1, 2001 between Registrant and DST Systems, Inc. (j) Consent of Independent Accountant. (m) Form of Distribution Plan. (p)(1) Code of Ethics of The J.P. Morgan Family of Funds. (p)(2) Code of Ethics of J.P. Morgan Fund Distributors Inc. (p)(3) Code of Ethics of Adviser. (99)(a) Powers of Attorney for: William J. Armstrong, Roland R. Eppley, Jr., Dr. Matthew Goldstein, Ann Maynard Gray, Matthew Healey, Robert J. Higgins, William G. Morton, Jr., Fergus Reid, III, James J. Schonbachler and Leonard M. Spalding. C-7 EX-99.(A)(2) 3 a2118929zex-99_a2.txt EX-99.(A)(2) Exhibit 99.(a)(2) MUTUAL FUND TRUST AMENDMENT NO. 1 TO DECLARATION OF TRUST Amendment and First Amended and Restated Establishment and Designation of Series of Shares of Beneficial Interest (par value $0.001 per share) DATED DECEMBER 6, 2001 Pursuant to Section 6.9 of the Declaration of Trust, dated February 1, 1994 (the "Declaration of Trust"), of the Mutual Fund Trust (the "Trust"), the Trustees of the Trust hereby amend and Restate the Establishment and Designation of series of Shares appended to the Declaration of Trust to change the names of the following funds: Vista Federal Money Market Fund to JPMorgan Federal Money Market Fund Vista Prime Money Market Fund to JPMorgan Prime Money Market Fund Vista Treasury Plus Money Market Fund to JPMorgan Treasury Plus Money Market Fund
1. The series shall be respectively designated as follows: JPMorgan California Tax Free Money Market Fund JPMorgan Federal Money Market Fund JPMorgan Tax Free Money Market Fund JPMorgan New York Tax Free Money Market Fund JPMorgan 100% U.S. Treasury Securities Money Market Fund JPMorgan Liquid Assets Money Market Fund JPMorgan Prime Money Market Fund JPMorgan Treasury Plus Money Market Fund JPMorgan U.S. Government Money Market Fund 2. Each series shall be authorized to invest in cash, securities, instruments, and other property as from time to time described in the Trust's then currently effective registration statement under the Securities Act of 1933 to the extent pertaining to the offering of Shares of such series. Each share of each of each series shall be redeemable, shall be entitled to one vote or fraction thereof in respect of a fractional share on matters on which shares of that series shall be entitled to vote, shall represent a PRO RATA beneficial interest in the assets allocated or belonging to such series, and shall be entitled to receive its PRO RATA share of the net assets of such series upon liquidation of the series, all as provided in Section 6.9 of the Declaration of Trust. 3. Shareholders of each series shall vote separately as a class on any matter to the extent required by, and any matter shall be deemed to have been effectively acted upon with respect to such series as provided in, Rule 18f-2 or Rule 18f-3, as from time to time in effect, under the Investment Company Act of 1940, as amended, or any successor rule, and by the Declaration of Trust. 4. The assets and liabilities of the Trust shall be allocated among these series as set forth in Section 6.9 of the Declaration of Trust. 5. Subject to the provisions of Section 6.9 and Article IX of the Declaration of Trust, the Trustees (including any successor Trustees) shall have the right at any time and from time to time to reallocate assets and expenses or to change the designation of any series now or hereafter created, or to otherwise change the special and relative rights of any such series. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the date first written above. This instrument may be executed by the Trustees on separate counterparts but shall be effective only when signed by a majority of the Trustees. - ------------------------------- William J. Armstrong - ------------------------------- Roland R. Eppley, Jr. - ------------------------------- Ann Maynard Gray - ------------------------------- Matthew Healy - ------------------------------- Fergus Reid, III - ------------------------------- James J. Schonbachler - ------------------------------- Leonard M. Spalding - ------------------------------- H. Richard Vartabedian EX-99.(A)(3) 4 a2118929zex-99_a3.txt EX-99.(A)(3) Exhibit 99.(a)(3) MUTUAL FUND TRUST AMENDMENT NO. 2 TO DECLARATION OF TRUST Amendment DATED FEBRUARY 5, 2003 Pursuant to Section 9.3 of the Declaration of Trust, dated February 1, 1994 as amended and restated (the "Declaration of Trust"), of the Mutual Fund Trust (the "Trust"), the Trustees of the Trust hereby change the name of the Trust from Mutual Fund Trust to "J.P. Morgan Mutual Fund Trust" effective May 1, 2003. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the date first written above. This instrument may be executed by the Trustees on separate counterparts but shall be effective only when signed by a majority of the Trustees. /s/ William J. Armstrong - ------------------------ William J. Armstrong /s/ Roland R. Eppley, Jr. - ------------------------- Roland R. Eppley, Jr. /s/ Ann Maynard Gray - -------------------- Ann Maynard Gray /s/ Matthew Healey - ------------------ Matthew Healey /s/ Robert J. Higgins - --------------------- Robert J. Higgins /s/ Fergus Reid, III - -------------------- Fergus Reid, III /s/ James J. Schonbachler - ------------------------- James J. Schonbachler /s/ Leonard M. Spalding, Jr. - ---------------------------- Leonard M. Spalding, Jr. EX-99.(B)(2) 5 a2118929zex-99_b2.txt EX-99.(B)(2) Exhibit 99.(b)(2) MUTUAL FUND TRUST CERTIFICATION OF AMENDMENT TO BY-LAWS The undersigned, constituting a majority of the Trustees of Mutual Fund Trust (the "Trust"), a business trust organized under the laws of the Commonwealth of Massachusetts pursuant to a Declaration of Trust dated February 1, 1994, do hereby certify that in accordance with the provisions of Article XI of the By-Laws, a majority of the Trustees of the Trust, by vote duly adopted by a majority of the Trustees, amended the By-Laws as follows: Section 3 of Article III is amended to read in its entirety: "SECTION3. RECORD DATE. For the purpose of determining the Shareholders who are entitled to notice of and to vote at any meeting, or to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding 30 days, as the Trustees may determine; or without closing the transfer books the Trustees may fix a date not more than 90 days prior to the date of any meeting of Shareholders or distribution or other action as a record date for the determination of the persons to be treated as Shareholders of record for such purpose." IN WITNESS OF WHEREOF, the undersigned have executed this certificate as of the 19th day of January, 1996. /s/ Fergus Reid, III /s/ William J. Armstrong - -------------------- ------------------------- Fergus Reid, III William J. Armstrong /s/ John R.H. Blum /s/ Joseph J. Harkins - ------------------- --------------------- John R. H. Blum Joseph J. Harkins /s/ H. Richard Vartabedian - ------------------------ -------------------------- Richard E. Ten Haken H. Richard Vartabedian /s/ Stuart W. Cragin, Jr. /s/ Irving L. Thode - ------------------------- ------------------- Stuart W. Cragin, Jr. Irving L. Thode EX-99.(E)(1) 6 a2118929zex-99_e1.txt EX-99.(E)(1) Exhibit 99.(e)(1) DISTRIBUTION AGREEMENT AGREEMENT made as of the 29th day of June, 2001, between the funds listed on Schedule A (each, the "Company"), having its principal place of business at 522 Fifth Avenue, New York, NY 10036, and J.P. Morgan Fund Distributors, Inc. ("Distributor"), having its principal place of business at 3435 Stelzer Road, Columbus, OH 43219. WHEREAS, the Company is an open-end management investment company, organized as a Massachusetts business trust or a Delaware business trust and registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, Distributor is acting as the distributor of the shares of beneficial interest ("Shares") of each of the investment portfolios of the Company set forth in Schedule A (such portfolios being referred to individually as a "Fund" and collectively as the "Funds"). NOW, THEREFORE, in consideration of the mutual promises and covenants herein set forth, the parties agree as follows: 1. SERVICES AS DISTRIBUTOR. 1.1 Distributor will act as agent for the distribution of the Shares covered by the registration statement and prospectus of the Company then in effect under the Securities Act of 1933, as amended (the "Securities Act"). As used in this Agreement, the term "registration statement" shall mean Parts A (the prospectus), B (the Statement of Additional Information) and C of each registration statement that is filed on Form N-1A, or any successor thereto, with the Commission, together with any amendments thereto. The term "prospectus" shall mean each form of prospectus and Statement of Additional Information used by the Funds for delivery to shareholders and prospective shareholders after the effective dates of the above referenced registration statements, together with any amendments and supplements thereto. 1.2 Distributor agrees to use best efforts to solicit orders for the sale of the Shares and will undertake such advertising and promotion as it believes reasonable in connection with such solicitation; provided, however, that all sales and marketing materials shall have been approved by the Company. The Company understands that Distributor's affiliates are now and may in the future be the distributor of the shares of several investment companies or series (together, "Investment Companies") including Investment Companies having investment objectives similar to those of the Company. The Company further understands that investors and potential investors in the Company may invest in shares of such other Investment Companies. The Company agrees that Distributor's and/or its affiliates' duties to such Investment Companies shall not be deemed in conflict with their duties to the Company under this paragraph 1.2. Except as provided in Section 2 herein, Distributor shall, at its own expense, finance appropriate activities which it deems reasonable, which are primarily intended to result in the sale of the Shares, including, but not limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing and mailing of prospectuses to other than current Shareholders, and the printing and mailing of sales literature. 1.3 In its capacity as distributor of the Shares, all activities of Distributor and its partners, agents, and employees shall comply with all applicable laws, rules and regulations, including, without limitation, the 1940 Act, all rules and regulations promulgated by the Commission thereunder and all rules and regulations adopted by any securities association registered under the Securities Exchange Act of 1934. 1.4 Distributor will provide one or more persons, during normal business hours, to respond to telephone questions with respect to the Company. 1.5 Distributor will transmit any orders received by it for purchase or redemption of the Shares to the transfer agent and custodian for the Funds. 1.6 The Company's officers may decline to accept any orders for, or make any sales of, the Shares until such time as those officers deem it advisable to accept such orders and to make such sales. 1.7 Distributor will act only on its own behalf as principal if it chooses to enter into selling agreements with selected dealers or others. 1.8 The Company agrees at its own expense to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the qualification of the Shares for sale in such states as Distributor may designate. 1.9 The Company shall furnish from time to time, for use in connection with the sale of the Shares, such information with respect to the Funds and the Shares as Distributor may reasonably request; and the Company warrants that the statements contained in any such information shall fairly show or represent what they purport to show or represent. The Company shall also furnish Distributor upon request with: (a) unaudited semi-annual statements of the Funds' books and accounts prepared by the Company, (b) a monthly itemized list of the securities in the Funds, (c) monthly balance sheets as soon as practicable after the end of each month, and (d) from time to time such additional information regarding the financial condition of the Funds as Distributor may reasonably request. 1.10 The Company represents to Distributor that, with respect to the Shares, all registration statements and prospectuses filed by the Company with the Commission under the Securities Act have been carefully prepared in conformity with requirements of said Act and rules and regulations of the Commission thereunder. The registration statement and prospectus contain all statements required to be stated therein in conformity with said Act and the rules and regulations of said Commission and all statements of fact contained in any such registration statement and prospectus are true and correct in all material respects. Furthermore, neither any registration statement nor any prospectus includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein 2 not misleading to a purchaser of the Shares. The Company may, but shall not be obligated to, propose from time to time such amendment or amendments to any registration statement and such supplement or supplements to any prospectus as, in the light of future developments, may, in the opinion of the Company's counsel, be necessary or advisable. If the Company shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Company of a written request from Distributor to do so, Distributor may, at its option, terminate this Agreement. The Company shall not file any amendment to any registration statement or supplement to any prospectus without giving Distributor reasonable notice thereof in advance; provided, however, that nothing contained in this Agreement shall in any way limit the Company's right to file at any time such amendments to any registration statement and/or supplements to any prospectus, of whatever character, as the Company may deem advisable, such right being in all respects absolute and unconditional. 1.11 The Company may request Distributor to use an electronic processing system over the internet in which electronically transmitted orders are forwarded electronically for processing by a third party known to the Company under circumstances in which Distributor will not review the orders. Under such circumstances, the Company acknowledges and agrees that it will independently determine that the third party is a satisfactory service provider and that Distributor's review will not be necessary. The Company authorizes Distributor and dealers to use any prospectus in the form furnished from time to time in connection with the sale of the Shares. The Distributor shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the Distributor's part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. In the absence of willful misfeasance, bad faith or gross negligence or reckless disregard of obligations or duties hereunder on the part of Distributor or any of its officers, directors or employees, the Company agrees to indemnify, defend and hold Distributor, its several partners and employees, and any person who controls Distributor within the meaning of Section 15 of the Securities Act free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which Distributor, its partners and employees, or any such controlling person, may incur (a) arising out of or based upon the electronic processing of orders over the internet; (b) based on any act or omission in the course of, or connected with, rendering services hereunder; (c) based on any representations made herein by the Company; (d) based on any act or omission of any prior Distributor (in its capacity as Distributor or Sub-Administrator), Administrator or Adviser to the Company, including the registration or failure to register any shares of the Company in accordance with state or federal laws or resulting from or relating to any books or records delivered to the Distributor in connection with its responsibilities under this Agreement and occurring prior to the date of this Agreement; or (e) under the Securities Act or under common law or otherwise, arising out of or based upon (i) any untrue statement, or alleged untrue statement, of a material fact contained in any registration statement or any prospectus, (ii) any omission, or alleged omission, to state a material fact required to be stated in any registration statement or any prospectus or necessary to make the statements in either thereof not misleading or (iii) any Company advertisement or sales literature that is not in compliance with applicable 3 laws, rules or regulations (including, but not limited to the Conduct Rules of the National Association of Securities Dealers, Inc.); provided, however, that the Company's agreement to indemnify Distributor, its partners or employees, and any such controlling person shall not be deemed to cover any claims, demands, liabilities or expenses arising out of any statements or representations as are contained in any prospectus, advertisement or sales literature and in such financial and other statements as are furnished in writing to the Company by Distributor and used in the answers to the registration statement or in the corresponding statements made in the prospectus, advertisement or sales literature, or arising out of or based upon any omission or alleged omission to state a material fact in connection with the giving of such information required to be stated in such answers or necessary to make the answers not misleading; and further provided that the Company's agreement to indemnify Distributor and the Company's representations and warranties hereinbefore set forth in paragraph 1.10 shall not be deemed to cover any liability to the Company or its Shareholders to which Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of Distributor's reckless disregard of its obligations and duties under this Agreement. The Company's agreement to indemnify Distributor, its partners and employees and any such controlling person, as aforesaid, is expressly conditioned upon the Company being notified of any action brought against Distributor, its partners or employees, or any such controlling person, such notification to be given by letter or by telegram addressed to the Company at its principal office in New York, NY and sent to the Company by the person against whom such action is brought, within 10 days after the summons or other first legal process shall have been served. The failure to so notify the Company of any such action shall not relieve the Company from any liability which the Company may have to the person against whom such action is brought by reason of any such untrue, or allegedly untrue, statement or omission, or alleged omission, otherwise than on account of the Company's indemnity agreement contained in this paragraph 1.11. The Company will be entitled to assume the defense of any suit brought to enforce any such claim, demand or liability, but, in such case, such defense shall be conducted by counsel of good standing chosen by the Company and approved by Distributor, which approval shall not be unreasonably withheld. In the event the Company elects to assume the defense of any such suit and retain counsel of good standing approved by Distributor, the defendant or defendants in such suit shall bear the fees and expenses of any additional counsel retained by any of them; but in case the Company does not elect to assume the defense of any such suit, or in case Distributor reasonably does not approve of counsel chosen by the Company, the Company will reimburse Distributor, its partners and employees, or the controlling person or persons named as defendant or defendants in such suit, for the fees and expenses of any counsel retained by Distributor or them. The Company's indemnification agreement contained in this paragraph 1.11 and the Company's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of Distributor, its partners and employees, or any controlling person, and shall survive the delivery of any Shares. This Agreement of indemnity will inure exclusively to Distributor's benefit, to the benefit of its several partners and employees, and their respective estates, and to the benefit of the controlling persons and their successors. The Company agrees promptly to notify Distributor 4 of the commencement of any litigation or proceedings against the Company or any of its officers or Directors in connection with the issue and sale of any Shares. 1.12 Distributor agrees to indemnify, defend and hold the Company, its several officers and Trustees/Directors (hereinafter referred to as "Directors") and any person who controls the Company within the meaning of Section 15 of the Securities Act free and harmless from and against any and all claims, demands, liabilities and expenses (including the costs of investigating or defending such claims, demands, or liabilities and any reasonable counsel fees incurred in connection therewith) which the Company, its officers or Directors or any such controlling person, may incur under the Securities Act or under common law or otherwise, but only to the extent that such liability or expense incurred by the Company, its officers or Directors or such controlling person resulting from such claims or demands, shall arise out of or be based upon any untrue, or alleged untrue, statement of a material fact contained in information furnished in writing by Distributor to the Company and used in the answers to any of the items of the registration statement or in the corresponding statements made in the prospectus, or shall arise out of or be based upon any omission, or alleged omission, to state a material fact in connection with such information furnished in writing by Distributor to the Company required to be stated in such answers or necessary to make such information not misleading. Distributor's agreement to indemnify the Company, its officers and Directors, and any such controlling person, as aforesaid, is expressly conditioned upon Distributor being notified of any action brought against the Company, its officers or Directors, or any such controlling person, such notification to be given by letter or telegram addressed to Distributor at its principal office in Columbus, Ohio, and sent to Distributor by the person against whom such action is brought, within 10 days after the summons or other first legal process shall have been served. Distributor shall have the right of first control of the defense of such action, with counsel of its own choosing, satisfactory to the Company, if such action is based solely upon such alleged misstatement or omission on Distributor's part, and in any other event the Company, its officers or Directors or such controlling person shall each have the right to participate in the defense or preparation of the defense of any such action. The failure to so notify Distributor of any such action shall not relieve Distributor from any liability which Distributor may have to the Company, its officers or Directors, or to such controlling person by reason of any such untrue or alleged untrue statement, or omission or alleged omission, otherwise than on account of Distributor's indemnity agreement contained in this paragraph 1.12. 1.13 No Shares shall be offered by either Distributor or the Company under any of the provisions of this Agreement and no orders for the purchase or sale of Shares hereunder shall be accepted by the Company if and so long as the effectiveness of the registration statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the Securities Act or if and so long as a current prospectus as required by Section 10(b)(2) of said Act is not on file with the Commission; provided, however, that nothing contained in this paragraph 1.13 shall in any way restrict or have an application to or bearing upon the Company's obligation to repurchase Shares from any Shareholder in accordance with the provisions of the Company's prospectus, Declaration of Trust, or Bylaws. 5 1.14 The Company agrees to advise Distributor as soon as reasonably practical by a notice in writing delivered to Distributor or its counsel: (a) of any request by the Commission for amendments to the registration statement or prospectus then in effect or for additional information; (b) in the event of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or prospectus then in effect or the initiation by service of process on the Company of any proceeding for that purpose; (c) of the happening of any event that makes untrue any statement of a material fact made in the registration statement or prospectus then in effect or which requires the making of a change in such registration statement or prospectus in order to make the statements therein not misleading; and (d) of all action of the Commission with respect to any amendment to any registration statement or prospectus which may from time to time be filed with the Commission. For purposes of this section, informal requests by or acts of the Staff of the Commission shall not be deemed actions of or requests by the Commission. 1.15 Distributor agrees on behalf of itself and its partners and employees to treat confidentially and as proprietary information of the Company all records and other information relative to the Company and its prior, present or potential Shareholders, and not to use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except, after prior notification to and approval in writing by the Company, which approval shall not be unreasonably withheld and may not be withheld where Distributor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Company. 1.16 This Agreement shall be governed by the laws of the State of New York. 1.17 In the event Distributor purchases the initial shares of the Company for purposes of satisfying the minimum net worth requirements set forth in Section 14 (a) of the 1940 Act, and a notice of termination is subsequently given or this Agreement is otherwise terminated pursuant to Section 6 herein for any reason prior to the time that organizational expenses incurred by the Company have been fully amortized, then the Company shall cause the successor distributor of the shares (the "Successor Distributor") to pay to Distributor, within ten (10) days prior to the termination of this Agreement, an amount of cash that is sufficient to purchase the initial shares that are held by Distributor 6 1.18 The Company and Distributor each represents and warrants that (a) it has adopted a policy for the safeguarding of non-public personal information pertaining to their respective customers and consumers ("Privacy Policy") and (b) its Privacy Policy will, at all times during the term of this Agreement, be in substantial compliance with all applicable statutes, rules and regulations. The Company and Distributor further represent and warrant that (1) each has delivered a copy of its Privacy Policy to the other party and (2) in the event that its Privacy Policy is amended or restated, it will promptly deliver to the other party a copy of the amended and restated Privacy Policy. The Distributor represents and warrants that, in connection with its provision of services hereunder, it will, at all times during the term of this Agreement, be in substantial compliance with the Company's Privacy Policy, as and to the extent the same may be applicable to it in respect of the Company's shareholders and other consumers. 2. RESERVED. 3. SALE AND PAYMENT. Shares of a Fund may be subject to a sales load and may be subject to the imposition of a distribution fee pursuant to the Distribution Plan for the Funds. To the extent that Shares of a Fund are sold at an offering price which includes a sales load or at net asset value subject to a contingent deferred sales load with respect to certain redemptions (either within a single class of Shares or pursuant to two or more classes of Shares), such Shares shall hereinafter be referred to collectively as "Load Shares" (in the case of Shares that are sold with a front-end sales load or Shares that are sold subject to a contingent deferred sales load), "Front-End Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall hereinafter be referred to collectively as "Load Funds" or "Front-End Load Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund that contains CDSL Shares shall hereinafter be referred to collectively as "Load Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund." Under this Agreement, the following provisions shall apply with respect to the sale of, and payment for, Load Shares. 3.1 Distributor shall have the right to purchase Load Shares at their net asset value and to sell such Load Shares to the public against orders therefor at the applicable public offering price, as defined in Section 4 hereof. Distributor shall also have the right to sell Load Shares to dealers against orders therefor at the public offering price less a concession determined by Distributor, which concession shall not exceed the amount of the sales charge or underwriting discount, if any, referred to in Section 4 below. 3.2 Prior to the time of delivery of any Load Shares by a Load Fund to, or on the order of, Distributor, Distributor shall pay or cause to be paid to the Load Fund or to its order an amount in Boston or New York clearing house funds equal to the applicable net asset value of such Shares. Distributor may retain so much of any sales charge or underwriting discount as is not allowed by Distributor as a concession to dealers. 4. PUBLIC OFFERING PRICE. 7 The public offering price of a Load Share shall be the net asset value of such Load Share, plus any applicable sales charge, all as set forth in the current prospectus of the Load Fund. The net asset value of Shares shall be determined in accordance with the provisions of the Declaration or Trust and Bylaws of the Company and the then-current prospectus of the Load Fund. 5. ISSUANCE OF SHARES. The Company reserves the right to issue, transfer or sell Load Shares at net asset value (a) in connection with the merger or consolidation of the Company or the Load Fund(s) with any other investment company or the acquisition by the Company or the Load Fund(s) of all or substantially all of the assets or of the outstanding Shares of any other investment company; (b) in connection with a pro rata distribution directly to the holders of Shares in the nature of a stock dividend or split; (c) upon the exercise of subscription rights granted to the holders of Shares on a pro rata basis; (d) in connection with the issuance of Load Shares pursuant to any exchange and reinvestment privileges described in any then-current prospectus of the Load Fund; and (e) otherwise in accordance with any then-current prospectus of the Load Fund. 6. TERM, DURATION AND TERMINATION. This Agreement shall become effective with respect to each Fund listed on Schedule A hereof as of the date first written above (or, if a particular Fund is not in existence on such date, on the date an amendment to Schedule A to this Agreement relating to that Fund is executed) and, unless sooner terminated as provided herein, shall continue until August 31, 2002. Thereafter, if not terminated, this Agreement shall continue with respect to a particular Fund automatically for successive one-year terms, provided that such continuance is specifically approved at least annually by (a) by the vote of a majority of those members of the Company's Directors who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting for the purpose of voting on such approval and (b) by the vote of the Company's Directors or the vote of a majority of the outstanding voting securities of such Fund. The termination of this Agreement with respect to one Fund or Company shall not result in the termination of this Agreement with respect to any other Fund or Company listed on Schedule A. This Agreement is terminable without penalty, on not less than sixty days' prior written notice, by the Company's Directors, by vote of a majority of the outstanding voting securities of the Company or by the Distributor. This Agreement will also terminate automatically in the event of its assignment. (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" shall have the same meanings as ascribed to such terms in the 1940 Act.) 7. CERTAIN MATTERS RELATING TO A MASSACHUSETTS BUSINESS TRUST. If the Company is a Massachusetts business trust, a copy of the Declaration of Trust is on file with the Secretary of the State of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Directors of the Company as Directors and not individually, and that the obligations of this instrument are not binding upon any of the Directors or shareholders individually, but are binding only upon the assets and property of the Company, 8 and all persons dealing with any class of shares of the Company must look solely to the Company property belonging to such class for the enforcement of any claims against the Company. 8. NOTICES. Any notice under this Agreement shall be in writing, addressed and delivered, or mailed, postage paid, to the other party at such address as such other party may designate for the receipt of such notices. Until further notice to the other party, it is agreed that the address of the Company for notice shall be 1211 Sixth Avenue, New York, NY 10036, attn: David Wezdenko, with a copy to Joseph J. Bertini, Esq., and the address of the Distributor shall be 3435 Stelzer Road, Columbus, OH 43219. 9 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first written above. J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN SERIES TRUST II MUTUAL FUND GROUP MUTUAL FUND TRUST MUTUAL FUND SELECT GROUP MUTUAL FUND SELECT TRUST MUTUAL FUND VARIABLE ANNUITY TRUST MUTUAL FUND INVESTMENT TRUST J.P. MORGAN MUTUAL FUND SERIES J.P. MORGAN FLEMING SERIES TRUST By: -------------------------------- Title: -------------------------------- Date: -------------------------------- J.P. MORGAN FUND DISTRIBUTORS, INC. By: -------------------------------- Title: -------------------------------- Date: -------------------------------- 10 As Amended September 7, 2001 SCHEDULE A TO THE DISTRIBUTION AGREEMENT J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN SERIES TRUST II MUTUAL FUND GROUP MUTUAL FUND TRUST MUTUAL FUND SELECT GROUP MUTUAL FUND SELECT TRUST MUTUAL FUND VARIABLE ANNUITY TRUST MUTUAL FUND INVESTMENT TRUST J.P. MORGAN MUTUAL FUND SERIES* J.P. MORGAN FLEMING SERIES TRUST** * effective February 28, 2003 ** effective EX-99.(E)(2) 7 a2118929zex-99_e2.txt EX-99.(E)(2) Exhibit 99.(e)(2) [Form of] AMENDMENT TO DISTRIBUTION AGREEMENT AMENDMENT made as of this 25th day of July 2002, between each of the Trusts or Corporation listed on Exhibit A (the "Trust") and J.P. Morgan Fund Distributors, Inc. ("JPMFD" or the "Distributor"), a Delaware corporation having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219, to the Distribution Agreement dated September 1, 2001, under which JPMFD serves as distributor of the Trust (as amended and in effect on the date hereof, the "Agreement"). WHEREAS, under the Agreement, JPMFD is designated as the Trust's distributor and performs the distribution services for the Trust that are enumerated in the Agreement; WHEREAS, each Series of the Trusts listed on Exhibit A (the "Funds") are required to and have established anti-money laundering programs pursuant to Title III of the USA PATRIOT Act for which the Funds' anti-money laundering compliance officer maintains responsibility for implementation and compliance. WHEREAS, the Trust is permitted by applicable law to, and wishes to, delegate certain aspects of its anti-money laundering program to JPMFD in order to implement more effective anti-money laundering procedures; NOW, THEREFORE, in consideration of the covenants herein contained, the Trust and JPMFD hereby agree as follows: 1. Each of the Distributor and the Trust acknowledges that it is a financial institution subject to the USA Patriot Act of 2001 and the Bank Secrecy Act (collectively, the "AML Acts"), which require among other things, that financial institutions adopt compliance programs to guard against money laundering. Each represents and warrants to the other that it is in compliance with and will continue to comply with the AML Acts and applicable regulations in all relevant respects. Each of the Distributor and the Trust agrees that it will take such further steps, and cooperate with the other, to facilitate such compliance, including but not limited to the provision of copies of its written procedures, policies and controls related thereto ("AML Operations"). Distributor undertakes that it will grant to the Trust, the Trust's compliance officer and the applicable regulatory agencies, reasonable access to copies of Distributor's AML Operations, books and records pertaining to the Trust only. It is expressly understood and agreed that the Trust and the Trust's compliance officer shall have no access to any of Distributor's AML Operations, books or records pertaining to other clients of Distributor not having a relationship with the Trust. 2. JPMFD hereby agrees to comply with all applicable laws and regulations relating to anti-money laundering and terrorist financing and with the provisions of the Funds' and JPMFD's anti-money laundering program designed to guard against money laundering activities. In connection with this undertaking, JPMFD will perform on behalf of the Funds an appropriate review of each third-party distributing shares of the Funds. The Funds agree that JPMFD will be provided with prior notice of any changes to the Fund's AML program that materially affects the services to be provided by JPMFD and that JPMFD will not be bound to such changes with respect to their obligations in the Fund's AML program without JPMFD's prior approval, except that such changes will become effective without prior approval if such changes are required of JPMFD, in its role as Funds' distributor by applicable laws and regulations. 3. JPMFD hereby represents that where it is directly responsible for introducing clients' funds into the Funds it will ensure that such clients are not introduced to the Funds until they have been properly identified and their details verified in accordance with the latest money laundering regulations and guidelines and that they will take all reasonable steps in accordance with such regulations and guidelines to ensure that such funds do not come from any illicit activity. 4. In the event JPMFD delegates any of its responsibilities to a third party or relies on the performance of a third party to perform any aspect of its anti-money laundering program or any of the responsibilities that are set forth in paragraph 3 herein or elsewhere in this amendment to the Agreement, JPMFD agrees that it will be responsible for the selection of each such third party that is retained by JPMFD (each a "Third Party") and that it will obtain the written agreement of such third parties, which provides that such Third Parties will: (i) comply with applicable laws and regulations relating to anti-money laundering and terrorist financing; (ii) permit inspections and allow access to their records by U.S. authorities; and (iii) provide evidence and retain records relating to its review. 5. JPMFD also agrees that it will maintain sufficient oversight and conduct proper due diligence investigations, as required by applicable law, of any such Third Party, on its own behalf and on behalf of the Funds, in order to reasonably assure that its performance is consistent with its representations under this amendment to the Agreement. 6. JPMFD confirms that it promptly will supply the Funds with a copy of (i) its anti-money laundering policy and procedures, (ii) the most recent audit report and any further audit reports regarding such policy and procedures as it relates to the Funds, and (iii) such other certifications and representations regarding such policy and procedures as the Trust may from time to time reasonably request. The Funds confirm that they will supply JPMFD with a copy of the Fund's anti-money laundering program and will provide JPMFD with any changes thereto, as set forth in section 2 above. 7. JPMFD also confirms that, on reasonable request, it will promptly supply the Trust with evidence of the work that it has carried out to fulfill its responsibilities described in the preceding paragraphs. 2 EXHIBIT A TRUSTS/CORPORATION J.P. MORGAN FUNDS - MA Trust J.P. MORGAN INSTITUTIONAL FUNDS - MA Trust J.P. MORGAN SERIES TRUST - MA Trust J.P. MORGAN SERIES TRUST II - DE Trust FLEMING MUTUAL FUND GROUP - MD Corporation MUTUAL FUND GROUP - MA Trust MUTUAL FUND TRUST - MA Trust MUTUAL FUND SELECT GROUP - MA Trust MUTUAL FUND SELECT TRUST - MA Trust MUTUAL FUND INVESTMENT TRUST - MA Trust MUTUAL FUND VARIABLE ANNUITY TRUST - MA Trust J.P. MORGAN FLEMING SERIES TRUST - MA Trust J.P. MORGAN MUTUAL FUND SERIES - MA Trust 3 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN SERIES TRUST II MUTUAL FUND GROUP MUTUAL FUND TRUST MUTUAL FUND SELECT GROUP MUTUAL FUND SELECT TRUST MUTUAL FUND INVESTMENT TRUST MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN FLEMING SERIES TRUST J.P. MORGAN MUTUAL FUND SERIES FLEMING MUTUAL FUND GROUP By: ------------------------------------- Name: ----------------------------------- ATTEST: Title: ------------------------- ---------------------------------- J.P. MORGAN FUND DITRIBUTORS, INC. By: ------------------------------------- Name: ----------------------------------- ATTEST: Title: ------------------------- ---------------------------------- 4 EX-99.(G)(1) 8 a2118929zex-99_g1.txt EX-99.(G)(1) Exhibit 99.(g)(1) [CHASE LOGO] GLOBAL CUSTODY AGREEMENT This AGREEMENT is effective March 1, 2003, and is between JPMORGAN CHASE BANK ("Bank") and the entities listed on Annex A hereto (each a "Customer" or "Fund"). 1. CUSTOMER ACCOUNTS. Bank, acting as "Securities Intermediary" (as defined in Section 15(g) hereof) shall establish and maintain the following accounts ("Accounts"): (a) a Custody Account (as defined in Section 15(b) hereof) in the name of Customer for Financial Assets, which shall, except as modified by Section 15(d) hereof, mean stocks, shares, bonds, debentures, notes, mortgages or other obligations for the payment of money, bullion, coin and any certificates, receipts, warrants or other instruments representing rights to receive, purchase or subscribe for the same or evidencing or representing any other rights or interests therein and other similar property whether certificated or uncertificated as may be received by Bank or its Subcustodian (as defined in Section 3 hereof) for the account of Customer, including as an "Entitlement Holder" as defined in Section 15(c) hereof); and (b) an account in the name of Customer ("Deposit Account") for any and all cash in any currency received by Bank or its Subcustodian for the account of Customer, which cash shall not be subject to withdrawal by draft or check. Customer warrants its authority to: 1) deposit the cash and Financial Assets (collectively "Assets") received in the Accounts and 2) give Instructions (as defined in Section 11 hereof) concerning the Accounts. Bank may deliver Financial Assets of the same class in place of those deposited in the Custody Account. Upon written agreement between Bank and Customer, additional Accounts may be established and separately accounted for as additional Accounts hereunder. 2. MAINTENANCE OF FINANCIAL ASSETS AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS. Unless Instructions specifically require another location acceptable to Bank: (a) Financial Assets shall be held in the country or other jurisdiction in which the principal trading market for such Financial Assets is located, where such Financial Assets are to be presented for payment or where such Financial Assets are acquired; and (b) Cash shall be credited to an account in a country or other jurisdiction in which such cash may be legally deposited or is the legal currency for the payment of public or private debts. Cash may be held pursuant to Instructions in either interest or non-interest bearing accounts as may be available for the particular currency. To the extent Instructions are issued and Bank can comply with such Instructions, Bank is authorized to maintain cash balances on deposit for Customer with itself or one of its "Affiliates" at such reasonable rates of interest as may from time to time be paid on such accounts, or in non-interest bearing accounts as Customer may direct, if acceptable to Bank. For purposes hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or under common control with, Bank. If Customer wishes to have any of its Assets held in the custody of an institution other than the established Subcustodians as defined in Section 3 (or their securities depositories), such arrangement must be authorized by a written agreement, signed by Bank and Customer. 3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Bank may act hereunder through the subcustodians listed in Schedule A hereof with which Bank has entered into subcustodial agreements ("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in accounts which Bank has established with one or more of its branches or Subcustodians. Bank and Subcustodians are authorized to hold any of the Financial Assets in their account with any securities depository in which they participate. Bank reserves the right to add new, replace or remove Subcustodians. Customer shall be given reasonable notice by Bank of any amendment to Schedule A, but in no case will such amendment be effective prior to Customer's actual receipt of such notice . Upon request by Customer, Bank shall identify the name, address and principal place of business of any Subcustodian of Customer's Assets and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian. 4. USE OF SUBCUSTODIAN. (a) Bank shall identify the Assets on its books as belonging to Customer. (b) A Subcustodian shall hold such Assets together with assets belonging to other customers of Bank in accounts identified on such Subcustodian's books as custody accounts for the exclusive benefit of customers of Bank. (c) Any Financial Assets in the Accounts held by a Subcustodian shall be subject only to the instructions of Bank or its agent. Any Financial Assets held in a securities depository for the account of a Subcustodian shall be subject only to the instructions of such Subcustodian. (d) Any agreement Bank enters into with a Subcustodian for holding Bank's customers' assets shall provide (i) for indemnification or insurance arrangements (or any combination) that will adequately protect the Customer against the risk of loss of Assets held in accordance with the Agreement; (ii) that such assets shall not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors except a claim of payment for their safe custody or administration or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar laws; (iii) that the beneficial ownership of such assets shall be freely transferable without the payment of money or value other than for safe custody or administration; (iv) that adequate records will be maintained identifying such Assets as belonging to the Customer or as being held by Bank for the benefit of its customers; (v) that the Customer's independent public accountants will be given access to those records or confirmation of the contents of those records; and (vi) that the Customer will receive periodic reports with respect to the safekeeping of Customer's Assets, including notification of any transfer to or from Customer's account or a third party account containing assets held for the benefit of the Customer. Where Securities are deposited by a Subcustodian with a securities depository, Bank shall cause the Subcustodian to identify on its books as belonging to Bank, as agent, the Securities shown on the Subcustodian's account on the books of such securities depository. The foregoing shall not apply to the extent of any special agreement or arrangement made by Customer with any particular Subcustodian. 2 5. DEPOSIT ACCOUNT TRANSACTIONS. (a) Bank or its Subcustodians shall make payments from the Deposit Account upon receipt of Instructions which include all information required by Bank. (b) In the event that any payment to be made under this Section 5 exceeds the funds available in the Deposit Account, Bank, in its discretion, may advance Customer such excess amount which shall be deemed a loan payable on demand, bearing interest at the rate customarily charged by Bank on similar loans. (c) If Bank credits the Deposit Account on a payable date, or at any time prior to actual collection and reconciliation to the Deposit Account, with interest, dividends, redemptions or any other amount due, Customer shall promptly return any such amount upon oral or written notification: (i) that such amount has not been received in the ordinary course of business or (ii) that such amount was incorrectly credited. If Customer does not promptly return any amount upon such notification, Bank shall be entitled, upon oral or written notification to Customer, to reverse such credit by debiting the Deposit Account for the amount previously credited. Bank or its Subcustodian shall have no duty or obligation to institute legal proceedings, file a claim or a proof of claim in any insolvency proceeding or take any other action with respect to the collection of such amount, but may act for Customer upon Instructions after consultation with Customer. 6. CUSTODY ACCOUNT TRANSACTIONS; ACCOUNTING SERVICES. (a) Financial Assets shall be transferred, exchanged or delivered by Bank or its Subcustodian upon receipt by Bank of Instructions which include all information required by Bank. Settlement and payment for Financial Assets received for, and delivery of Financial Assets out of, the Custody Account may be made in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivery of Financial Assets to a purchaser, dealer or their agents against a receipt with the expectation of receiving later payment and free delivery. Delivery of Financial Assets out of the Custody Account may also be made in any manner specifically required by Instructions acceptable to Bank. (b) In accordance with applicable law, Bank will effect book entries on a "contractual settlement date accounting" basis as described below with respect to the settlement of trades in those markets where Bank generally offers contractual settlement date accounting and will notify Customer of those markets from time to time. Otherwise, such transactions shall be credited or debited to the Accounts on the date cash or Financial Assets are actually received by the Bank and reconciled to the Account. (i) On the settlement date for a sale, Bank will credit the Deposit Account with the proceeds of the sale and transfer the relevant Financial Assets to an account at Bank pending settlement of the trade where not already delivered. (ii) On the settlement date for the purchase (or earlier, if market practice requires delivery of the purchase price before settlement date), Bank will debit the Deposit Account for the settlement amount and credit a separate account at Bank. Bank will then post the Custody Account as awaiting receipt of expected Financial Assets. Customer will not be entitled to the Financial Assets that are awaiting receipt until Bank or a Subcustodian actually receives them. (iii) Bank reserves the right to restrict in good faith the availability of contractual settlement date accounting for credit or operational reasons. 3 (iv) Bank may (in its absolute discretion) upon oral or written notification to Customer reverse any debit or credit made pursuant to this Section 6 prior to a transaction's actual settlement, and Customer will be responsible for any costs or liabilities resulting from such reversal. Customer acknowledges that the procedures described in these sub-sections are of an administrative nature, and Bank does not undertake to make loans and/or Financial Assets available to Customer other than as provided for in Section 5 or otherwise in this Agreement. (c) Bank shall perform fund accounting services as specified on attached Schedule D. 7. ACTIONS OF BANK. Bank shall follow Instructions received regarding Assets held in the Accounts. However, until it receives Instructions to the contrary, Bank shall: (a) Present for payment any Financial Assets which are called, redeemed or retired or otherwise become payable and all coupons and other income items which call for payment upon presentation, to the extent that Bank or Subcustodian is aware of such opportunities. Bank is deemed to be aware for purposes of this Agreement upon publication of notice of such opportunities in a publication identified on Exhibit 1, as such Exhibit may be amended from time to time by mutual agreement. (b) Execute in the name of Customer such ownership and other certificates as may be required to obtain payments in respect of Financial Assets. (c) Exchange interim receipts or temporary Financial Assets for definitive Financial Assets. (d) Appoint brokers and agents for any transaction involving the Financial Assets, including, without limitation, Affiliates of Bank or any Subcustodian. (e) Advise Customer and its investment adviser daily of the amount of any funds advanced to Customer by Bank under Section 5(b) hereof ("overdrafts") and the circumstances giving rise to each such overdraft. (f) Issue statements to Customer, at times mutually agreed upon, identifying the Assets in the Accounts. Bank shall send Customer an advice or notification of any transfers of Assets to or from the Accounts. Such statements, advices or notifications shall indicate the identity of the entity having custody of the Assets. Unless Customer sends Bank a written exception or objection to any Bank statement within sixty (60) days of receipt, Customer shall be deemed to have approved such statement. In such event, or where Customer has otherwise approved any such statement, Bank shall, to the extent permitted by law, be released, relieved and discharged with respect to all matters set forth in such statement or reasonably implied therefrom as though it had been settled by the decree of a court of competent jurisdiction in an action where Customer and all persons having or claiming an interest in Customer or Customer's Accounts were parties. All collections of funds or other property paid or distributed in respect of Financial Assets in the Custody Account shall be made at the risk of Customer. Bank shall have no liability for any loss occasioned by delay in the actual receipt of notice by Bank or by its Subcustodians of any payment, redemption or other transaction regarding Financial Assets in the Custody Account in respect of which Bank has agreed to take any action hereunder. 4 Except as specifically stated otherwise in this Agreement, in any and every case where payment for purchases of domestic securities for the account of Customer is made by Bank in advance of receipt of the securities purchased in the absence of specific written instructions from Customer to pay in advance, Bank shall be absolutely liable to Customer for any and all Losses (as defined hereinafter) resulting therefrom. Notwithstanding the foregoing, settlement and payment for securities received for the account of Customer and delivery of securities maintained for the account of Customer may be effected in accordance with the best customary established securities trading or securities processing practices and procedures in the market in which the transaction occurs, including delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. 8. CORPORATE ACTIONS; PROXIES; TAX RECLAIMS. (a) CORPORATE ACTIONS. Whenever Bank receives information concerning the Financial Assets which requires discretionary action by the beneficial owner of the Financial Assets (other than a proxy), such as subscription rights, bonus issues, stock repurchase plans and rights offerings, or legal notices or other material intended to be transmitted to securities holders ("Corporate Actions"), Bank shall give Customer notice of such Corporate Actions to the extent that Bank's central corporate actions department has actual knowledge of a Corporate Action in time to notify its customers. When a rights entitlement or a fractional interest resulting from a rights issue, stock dividend, stock split or similar Corporate Action is received which bears an expiration date, Bank shall endeavor to obtain Instructions from Customer or its Authorized Person (as defined in Section 10 hereof), but if Instructions are not received in time for Bank to take timely action, or actual notice of such Corporate Action was received too late to seek Instructions, Bank is authorized to sell such rights entitlement or fractional interest and to credit the Deposit Account with the proceeds or take any other action it deems, in good faith, to be appropriate in which case it shall be held harmless for any such action. (b) PROXY VOTING. Bank shall provide proxy voting services for securities held outside the United States, if elected by Customer, in accordance with the terms of the proxy voting services rider hereto. Proxy voting services may be provided by Bank or, in whole or in part, by one or more third parties appointed by Bank (which may be Affiliates of Bank). The Bank shall, with respect to domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of Customer or one of its series, or a nominee of such, all proxies it receives, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Customer such proxies, all proxy soliciting materials and all notices relating to such securities as it has received. (c) TAX RECLAIMS. (i) Subject to the provisions hereof, Bank shall apply for a reduction of withholding tax and any refund of any tax paid or tax credits which apply in each applicable market in respect of income payments on Financial Assets for Customer's benefit which Bank believes may be available to Customer. (ii) The provision of tax reclaim services by Bank is conditional upon Bank's receiving from Customer or, to the extent the Financial Assets are beneficially owned by others, from each beneficial owner, A) a declaration of the beneficial owner's identity and place of residence and (B) certain other documentation (PRO FORMA copies of which are available from Bank). Customer acknowledges that, if Bank does not receive such declarations, documentation and information, Bank shall be unable to provide tax reclaim services. 5 (iii) Bank shall not be liable to Customer or any third party for any taxes, fines or penalties payable by Bank or Customer, and shall be indemnified accordingly, whether these result from the inaccurate completion of documents by Customer or any third party, or as a result of the provision to Bank or any third party of inaccurate or misleading information or the withholding of material information by Customer or any other third party, or as a result of any delay of any revenue authority or any other matter beyond Bank's control. (iv) Bank shall perform tax reclaim services only with respect to taxation levied by the revenue authorities of the countries notified to Customer from time to time and Bank may, by notification in writing, at Bank's absolute discretion, supplement or amend the markets in which tax reclaim services are offered. Other than as expressly provided in this sub-clause, Bank shall have no responsibility with regard to Customer's tax position or status in any jurisdiction. (v) Customer confirms that Bank is authorized to disclose any information requested by any revenue authority or any governmental body in relation to Customer or the securities and/or cash held for Customer. (vi) Tax reclaim services may be provided by Bank or, in whole or in part, by one or more third parties appointed by Bank (which may be Bank's affiliates); provided that Bank shall be liable for the performance of any such third party to the same extent as Bank would have been if Bank had performed such services. (d) TAX OBLIGATIONS. (i) Customer confirms that Bank is authorized to deduct from any cash received or credited to the Deposit Account any taxes or levies required by any revenue or governmental authority for whatever reason in respect of the Custody Account. (ii) If Bank does not receive appropriate declarations, documentation and information then additional United Kingdom taxation shall be deducted from all income received in respect of the Financial Assets issued outside the United Kingdom and any applicable United States withholding tax shall be deducted from income received from the Financial Assets. Customer shall provide to Bank such documentation and information as Bank may require in connection with taxation, and warrants that, when given, this information shall be true and correct in every respect, not misleading in any way, and contain all material information. Customer undertakes to notify Bank immediately if any such information requires updating or amendment. (iii) Customer shall be responsible for the payment of all taxes relating to the Financial Assets in the Custody Account, and Customer agrees to pay, indemnify and hold Bank harmless from and against any and all liabilities, penalties, interest or additions to tax with respect to or resulting from any delay in, or failure by, Bank (1) to pay, withhold or report any U.S. federal, state or local taxes or foreign taxes imposed on, or (2) to report interest, dividend or other income paid or credited to the Deposit Account, whether such failure or delay by Bank to pay, withhold or report tax or income is the result of (x) Customer's failure to comply with the terms of this paragraph, or (y) Bank's own acts or omissions; provided however, Customer shall not be liable to Bank for any penalty or additions to tax due as a result of Bank's failure to pay, withhold or report tax or to report interest, dividend or other income paid or credited to the Deposit Account solely as a result of Bank's negligent acts or omissions. 6 9. NOMINEES. Financial Assets which are ordinarily held in registered form may be registered in a nominee name of Bank, Subcustodian or securities depository, as the case may be. Bank may without notice to Customer cause any such Financial Assets to cease to be registered in the name of any such nominee and to be registered in the name of Customer. In the event that any Financial Assets registered in a nominee name are called for partial redemption by the issuer, Bank may allot the called portion to the respective beneficial holders of such class of security in any manner Bank deems to be fair and equitable. Customer shall hold Bank, Subcustodians, and their respective nominees harmless from any liability arising directly or indirectly from their status as a mere record holder of Financial Assets in the Custody Account. 10. AUTHORIZED PERSONS. As used herein, the term "Authorized Person" means employees or agents including investment managers as have been designated by written notice from Customer or its designated agent to act on behalf of Customer hereunder. Such persons shall continue to be Authorized Persons until such time as Bank receives Instructions from Customer or its designated agent that any such employee or agent is no longer an Authorized Person. 11. INSTRUCTIONS. The term "Instructions" means instructions of any Authorized Person received by Bank, via telephone, telex, facsimile transmission, bank wire or other teleprocess or electronic instruction or trade information system acceptable to Bank which Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions which Bank may specify. Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or superseded. The term "Instructions" includes, without limitation, instructions to sell, assign, transfer, deliver, purchase or receive for the Custody Account, any and all stocks, bonds and other Financial Assets or to transfer funds in the Deposit Account. Any Instructions delivered to Bank by telephone shall promptly thereafter be confirmed in writing by an Authorized Person (which confirmation may bear the facsimile signature of such Person), but Customer shall hold Bank harmless for the failure of an Authorized Person to send such confirmation in writing, the failure of such confirmation to conform to the telephone instructions received or Bank's failure to produce such confirmation at any subsequent time. Bank may electronically record any Instructions given by telephone, and any other telephone discussions with respect to the Custody Account. Customer shall be responsible for safeguarding any testkeys, identification codes or other security devices which Bank shall make available to Customer or its Authorized Persons. 12. STANDARD OF CARE; LIABILITIES. (a) Bank shall be responsible for the performance of only such duties as are set forth herein or expressly contained in Instructions which are consistent with the provisions hereof as follows: (i) Bank shall exercise reasonable care, prudence and diligence in carrying out all its duties and obligations under this Agreement, and shall be liable to each Fund for any and all claims, liabilities losses, damages fines, penalties and expenses ("Losses") suffered or incurred by such Fund resulting from the failure of Bank to exercise such reasonable care, prudence and diligence or resulting from Bank's negligence or willful misconduct. In addition, Bank shall be liable to each applicable Fund for all Losses representing reasonable costs and expenses incurred by such Fund in connection with any claim by such Fund against Bank arising from the obligations of Bank hereunder, including, without 7 limitation, all reasonable attorneys' fees and expenses incurred by such Fund in connection with any investigations, lawsuits or proceedings relating to such claim; provided that such Fund has recovered from Bank for such claim. Bank shall be liable for the actions or omissions of any domestic Subcustodian or any Foreign Subcustodian to the same extent as if such act or omission was performed by the Bank itself. In the event of any Losses suffered or incurred by a Fund caused by or resulting from the actions or omissions of any Domestic Subcustodian or Foreign Subcustodian for which the Bank would otherwise be liable, the Bank shall promptly reimburse such Fund in the amount of any such Losses. Bank shall have no liability whatsoever for any consequential, special, indirect or speculative loss or damages (including, but not limited to, lost profits) suffered by Customer in connection with the transactions and services contemplated hereby and the relationship established hereby even if Bank has been advised as to the possibility of the same and regardless of the form of the action. (ii) Bank shall not be responsible for the insolvency of any Subcustodian which is not a branch or Affiliate of Bank. Bank shall not be responsible for any act, omission, default or the solvency of any broker or agent which it or a Subcustodian appoints unless such appointment was made negligently or in bad faith. (iii) Each Fund severally and not jointly shall indemnify Bank against, and hold harmless Bank from, any Losses suffered, incurred or sustained by Bank or to which Bank becomes subject, resulting from, arising out of or relating to: (A) Instructions or other directions upon which Bank is authorized to rely pursuant to the terms of this Agreement; and (B) Bank's performance under this Agreement, provided Bank has acted with reasonable care and prudence, and has not been negligent or engaged in willful misconduct. (C) In performing its obligations hereunder, Bank may rely on the genuineness of any document which it believes in good faith to have been validly executed. Customer shall have no liability whatsoever for any consequential, special, indirect or speculative loss or damages (including, but not limited to, lost profits) suffered by Bank in connection with the transactions and services contemplated hereby and the relationship established hereby even if Customer has been advised as to the possibility of the same and regardless of the form of action. (iv) Customer shall pay for and hold Bank harmless from any liability or loss resulting from the imposition or assessment of any taxes or other governmental charges, and any related expenses, with respect to income from or Assets in the Accounts. (v) Bank shall be entitled to rely, and may act, upon the advice of counsel reasonably acceptable to the Customer on all matters and shall be without liability for any action reasonably taken or omitted pursuant to such advice. (vi) Bank need not maintain any insurance for the benefit of Customer. (vii) Without limiting the foregoing, Bank shall not be liable for any loss which results from: 1) the general risk of investing, or 2) investing or holding Assets in a particular country including, but not limited to, losses resulting from malfunction, interruption of or error in the transmission of information caused by any machines or system or interruption of communication facilities, abnormal operating conditions, nationalization, expropriation or other governmental actions; regulation of the banking or securities industry; currency restrictions, devaluations or fluctuations; and market conditions which prevent the orderly execution of securities transactions or affect the value of Assets. (viii) Neither party shall be liable to the other for any loss due to forces beyond their control including, but not limited to strikes or work stoppages, acts of war (whether declared or undeclared) or terrorism, insurrection, revolution, nuclear fusion, fission or radiation, or acts of God. 8 (b) Consistent with and without limiting the first paragraph of this Section 12, it is specifically acknowledged that Bank shall have no duty or responsibility to: (i) question Instructions or make any suggestions to Customer or an Authorized Person regarding such Instructions; (ii) supervise or make recommendations with respect to investments or the retention of Financial Assets; (iii) advise Customer or an Authorized Person regarding any default in the payment of principal or income of any security other than as provided in Section 5(c) hereof; (iv) evaluate or report to Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which Financial Assets are delivered or payments are made pursuant hereto; and (v) review or reconcile trade confirmations received from brokers. Customer or its Authorized Persons issuing Instructions shall bear any responsibility to review such confirmations against Instructions issued to and statements issued by Bank. (c) Customer authorizes Bank to act hereunder notwithstanding that Bank or any of its divisions or Affiliates may have a material interest in a transaction, or circumstances are such that Bank may have a potential conflict of duty or interest including the fact that Bank or any of its Affiliates may provide brokerage services to other customers, act as financial advisor to the issuer of Financial Assets, act as a lender to the issuer of Financial Assets, act in the same transaction as agent for more than one customer, have a material interest in the issue of Financial Assets, or earn profits from any of the activities listed herein. The provisions of this Section 12 shall survive any termination of this Agreement. 13. FEES AND EXPENSES. Customer shall pay Bank for its services hereunder the fees set forth in Schedule B hereto or such other amounts as may be agreed upon in writing, together with Bank's reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees. Bank shall have a lien on and is authorized to charge any Accounts of Customer for any amount owing to Bank under any provision hereof. 14. MISCELLANEOUS. (a) CERTIFICATION OF RESIDENCY, ETC. Customer certifies that it is a resident of the United States and shall notify Bank of any changes in residency. Bank may rely upon this certification or the certification of such other facts as may be required to administer Bank's obligations hereunder. Customer shall indemnify Bank against all losses, liability, claims or demands arising directly or indirectly from any such certifications. (b) ACCESS TO RECORDS. Bank shall allow Customer's independent public accountant reasonable access to the records of Bank relating to Financial Assets as is required in connection with their examination of books and records pertaining to Customer's affairs. Subject to restrictions under applicable law, Bank shall also obtain an undertaking to permit Customer's independent public accountants reasonable access to the records of any Subcustodian which has physical possession of any Financial Assets as may be required in connection with the examination of Customer's books and records. 9 (c) GOVERNING LAW; SUCCESSORS AND ASSIGNS; IMMUNITY; CAPTIONS. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either party, but shall bind the successors in interest of Customer and Bank. To the extent that in any jurisdiction Customer may now or hereafter be entitled to claim, for itself or its assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, Customer irrevocably shall not claim, and it hereby waives, such immunity. The captions given to the sections and subsections of this Agreement are for convenience of reference only and are not to be used to interpret this Agreement. (d) ENTIRE AGREEMENT; APPLICABLE RIDERS. Customer represents that the Assets deposited in the Accounts are (Check one): /X/ Investment Company assets subject to certain U.S. Securities and Exchange Commission rules and regulations; / / Other (specify) This Agreement consists exclusively of this document together with Schedules A and B, Exhibits I - _______ and the following Rider(s) [Check applicable rider(s)]: /X/ INVESTMENT COMPANY /X/ PROXY VOTING /X/ SPECIAL TERMS AND CONDITIONS There are no other provisions hereof and this Agreement supersedes any other agreements, whether written or oral, between the parties. Any amendment hereto must be in writing, executed by both parties. (e) SEVERABILITY. In the event that one or more provisions hereof are held invalid, illegal or unenforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions shall not in any way be affected or impaired. (f) WAIVER. Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right hereunder operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision hereof, or waiver of any breach or default, is effective unless in writing and signed by the party against whom the waiver is to be enforced. (g) REPRESENTATIONS AND WARRANTIES. (i) Customer hereby represents and warrants to Bank that: (A) it has full authority and power to deposit and control the Financial Assets and cash deposited in the Accounts; (B) it has all necessary authority to use Bank as its custodian; (C) this Agreement constitutes its legal, valid and binding obligation, enforceable in accordance with its terms; (D) it shall have full authority and power to borrow moneys and enter into foreign exchange transactions; and (E) it has not relied on any oral or written representation made by Bank or any person on its behalf, and acknowledges that this Agreement sets out to the fullest extent the duties of Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the full power and authority to perform its obligations hereunder, (B) this Agreement constitutes its legal, valid and binding obligation, enforceable in accordance with its terms; and (C) that it has taken all necessary action to authorize the execution and delivery hereof. 10 (h) NOTICES. All notices hereunder shall be effective when actually received. Any notices or other communications which may be required hereunder are to be sent to the parties at the following addresses or such other addresses as may subsequently be given to the other party in writing: (a) Bank: The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention: Global Investor Services, Investment Management Group; and (b) Customer: J.P. Morgan Institutional Funds, c/o Chase Global Asset Management and Mutual Funds, 1 Chase Square, 7th Floor, Rochester, New York 14643, Attention: Colleen T. McCoy. (i) TERMINATION. This Agreement may be terminated by Customer or Bank by giving sixty (60) days' written notice to the other, provided that such notice to Bank shall specify the names of the persons to whom Bank shall deliver the Assets in the Accounts. If notice of termination is given by Bank, Customer shall, within sixty (60) days following receipt of the notice, deliver to Bank Instructions specifying the names of the persons to whom Bank shall deliver the Assets. In either case Bank shall deliver the Assets to the persons so specified, after deducting any amounts which Bank determines in good faith to be owed to it under Section 13. If within sixty (60) days following receipt of a notice of termination by Bank, Bank does not receive Instructions from Customer specifying the names of the persons to whom Bank shall deliver the Assets, Bank, at its election, may deliver the Assets to a bank or trust company doing business in the State of New York to be held and disposed of pursuant to the provisions hereof, or to Authorized Persons, or may continue to hold the Assets until Instructions are provided to Bank. (j) MONEY LAUNDERING. Customer warrants and undertakes to Bank for itself and its agents that all Customer's customers are properly identified in accordance with U.S. Money Laundering Regulations as in effect from time to time. (k) IMPUTATION OF CERTAIN INFORMATION. Bank shall not be held responsible for and shall not be required to have regard to information held by any person by imputation or information of which Bank is not aware by virtue of a "Chinese Wall" arrangement. If Bank becomes aware of confidential information which in good faith it feels inhibits it from effecting a transaction hereunder Bank may refrain from effecting it. 15. DEFINITIONS. As used herein, the following terms shall have the meaning hereinafter stated: a) "Certificated Security" shall mean a security that is represented by a certificate. b) "Custody Account" shall mean each Securities custody account on Bank's records to which Financial Assets are or may be credited pursuant hereto. c) "Entitlement Holder" shall mean the person on the records of a Securities Intermediary as the person having a Securities Entitlement against the Securities Intermediary. d) "Financial Asset" shall mean, as the context requires, either the asset itself or the means by which a person's claim to it is evidenced, including a Certificated Security or Uncertificated Security, a security certificate, or a Securities Entitlement. Financial Assets shall not include cash. e) "Securities" shall mean stocks, bonds, rights, warrants and other negotiable and non-negotiable paper whether issued as Certificated Securities or Uncertificated Securities and commonly traded or dealt in on securities exchanges or financial markets, and other obligations of an issuer, or shares, participations and interests in an issuer recognized in an area in which it is issued or dealt in as a medium for investment and any other property as shall be acceptable to Bank for the Custody Account. 11 f) "Securities Entitlement" shall mean the rights and property interest of an Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of the Uniform Commercial Code. g) "Securities Intermediary" shall mean Bank, a Subcustodian, a securities depository, and any other financial institution which in the ordinary course of business maintains custody accounts for others and acts in that capacity. h) "Uncertificated Security" shall mean a security that is not represented by a certificate. i) "Uniform Commercial Code" shall mean Article 8 of the Uniform Commercial Code of the State of New York, as the same may be amended from time to time. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first-above 12 written. JPMorgan Chase Bank By: /s/ Ann M. Osti -------------------------- Title: Vice President Date: March 1, 2003 Customer By: /s/ David Wezdenko ------------------ Title: Date: 13 STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) On this ___ day of March, 2003, before me personally came ____________________, to me known, who being by me duly sworn, did depose and say that he resides in ______________________________________, that he is President of the entity described in and which executed the foregoing instrument; that he knows the seal of said entity, that the seal affixed to said instrument is such seal, that it was so affixed by order of said entity, and that he/she signed his/her name thereto by like order. ----------------- Sworn to before me this day of March, 2003. - ------------------------- Notary STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) On this day of March, 2003, before me personally came , to me known, who being by me duly sworn, did depose and say that he/she resides in at ; that he/she is a Vice President of JPMORGAN CHASE , the corporation described in and which executed the foregoing instrument; that he/she knows the seal of said corporation, that the seal affixed to said instrument is such corporate seal, that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. Sworn to before me this day of March, 2003. Notary Investment Company Rider to Global Custody Agreement Between JPMorgan Chase and [Customer] effective March , 2003 The following modifications are made to the Agreement: A. Add a new Section 16 to the Agreement as follows: "16. COMPLIANCE WITH SEC RULE 17F-5. (a) Customer's board of directors (or equivalent body) (hereinafter 'Board') hereby delegates to Bank, and Bank hereby accepts the delegation to it, of the obligation to perform as Customer's 'Foreign Custody Manager' (as that term is defined in Securities and Exchange Commission ("SEC") rule 17f-5(a)(2) as promulgated under the Investment Company Act of 1940, as amended ("1940 Act")), for the purposes of (i) selecting Eligible Foreign Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may be amended from time to time, or that have otherwise been made exempt pursuant to an SEC exemptive order) to hold Financial Assets and Cash and (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)). Anything in this Agreement to the contrary notwithstanding, the Bank shall in no event be deemed to have selected any Eligible Securities Depository (as defined in SEC rule 17f-7), the use of which is mandatory by law or regulation.. (Eligible Securities Depositories used by Bank as of the date hereof are set forth in Appendix 1-A hereto, and as the same may be amended on notice to Customer from time to time.) (b) In connection with the foregoing, Bank shall: (i) provide written reports notifying Customer's Board of the placement of Financial Assets and Cash with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Customer's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Customer's foreign custody arrangements (and until further notice from Customer such reports shall be provided not less than quarterly with respect to the placement of Financial Assets and Cash with particular Eligible Foreign Custodians and with reasonable promptness upon the occurrence of any material change in the arrangements with such Eligible Foreign Custodians); (ii) exercise such reasonable care, prudence and diligence in performing as Customer's Foreign Custody Manager as a person having responsibility for the safekeeping of Financial Assets and Cash would exercise; (iii) in selecting an Eligible Foreign Custodian, first have determined that Financial Assets and Cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such Financial Assets and Cash, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv); (iv) determine that the written contract with the Eligible Foreign Custodian requires that the Eligible Foreign Custodian will provide reasonable care for Financial Assets and Cash based on the standards applicable to custodians in the relevant market. (v) have established a system to monitor the continued appropriateness of maintaining Financial Assets and Cash with particular Eligible Foreign Custodians and of the governing contractual arrangements; it being understood, however, that in the event that Bank shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford Financial Assets and Cash reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, Bank shall promptly so advise Customer and shall then act in accordance with the Instructions of Customer with respect to the disposition of the affected Financial Assets and Cash. Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain Financial Assets and Cash on behalf of Customer with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Bank. (c) Bank represents to Customer that it is a U.S. Bank as defined in Rule 17f-5(a)(7). Customer represents to Bank that: (1) the Financial Assets and Cash being placed and maintained in Bank's custody are subject to the 1940 Act, as the same may be amended from time to time; (2) its Board: (i) has determined that it is reasonable to rely on Bank to perform as Customer's Foreign Custody Manager (ii) or its investment adviser shall have determined that Customer may maintain Financial Assets and Cash in each country in which Customer's Financial Assets and Cash shall be held hereunder and determined to accept the risks arising therefrom (including, but not limited to, a country's financial infrastructure), prevailing custody and settlement practices, laws applicable to the safekeeping and recovery of Financial Assets and Cash held in custody, and the likelihood of nationalization, currency controls and the like) (collectively ("Country Risk")). Nothing contained herein shall require Bank to make any selection or to engage in any monitoring on behalf of Customer that would entail consideration of Country Risk. (d) Bank shall provide to Customer an analysis of the risks associated with maintaining assets with Eligible Securities Depositories. Bank shall monitor the custody risks associated with maintaining assets with the Eligible Securities Depositories on a continuing basis, and promptly notify the Customer of any material change in these risks. Customer hereby acknowledges that: (i) such information is solely designed to inform Customer of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) Bank has gathered the information from sources it considers reliable, but that Bank shall have no responsibility for inaccuracies or incomplete information unless the Bank knows such information is inaccurate or incomplete. B. Add the following after the first sentence of Section 3 of the Agreement: "At the request of Customer, Bank may, but need not, add to Schedule A an Eligible Foreign Custodian where Bank has not acted as Foreign Custody Manager with respect to the selection thereof. Bank shall notify Customer in the event that it elects to add any such entity." C. Add the following language to the end of Section 3 of the Agreement: "The term Subcustodian as used herein shall mean the following: (a) a 'U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule 17f-5(a)(7); (b) an 'Eligible Foreign Custodian,' which shall mean (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, (ii) a majority-owned direct or indirect subsidiary of a U.S. bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States; and (iii) any other entity (other than an Eligible Securities 2 Depository) that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC. For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term Subcustodian shall not include any Eligible Foreign Custodian as to which Bank has not acted as Foreign Custody Manager or any Eligible Securities Depository." 3 Appendix 1-A ELIGIBLE SECURITIES DEPOSITORIES Appendix 1-B INFORMATION REGARDING COUNTRY RISK 1. To aid Customer in its determinations regarding Country Risk, Bank shall furnish annually and upon the initial placing of Financial Assets and Cash into a country the following information (check items applicable): A Opinions of local counsel concerning: / / i. Whether applicable foreign law would restrict the access afforded Customer's independent public accountants to books and records kept by an eligible foreign custodian located in that country. / / ii. Whether applicable foreign law would restrict the Customer's ability to recover its Financial Assets and Cash in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. / / iii. Whether applicable foreign law would restrict the Customer's ability to recover Financial Assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: / / i. The foreseeability of expropriation, nationalization, freezes, or confiscation of Customer's Financial Assets and Cash. / / ii. Whether difficulties in converting Customer's cash and cash equivalents to U.S. dollars are reasonably foreseeable.] C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) depositories (including depository evaluation), if any. 2. To aid Customer in monitoring Country Risk, Bank shall furnish board the following additional information: Market flashes, including with respect to changes in the information in market reports. GLOBAL PROXY SERVICE RIDER To Global Custody Agreement Between JPMORGAN CHASE BANK AND [CUSTOMER] Dated March , 2003 1. Global Proxy Services ("Proxy Services") shall be provided for the countries listed in the procedures and guidelines ("Procedures") furnished to Customer, as the same may be amended by Bank from time to time on prior notice to Customer. The Procedures are incorporated by reference herein and form a part of this Rider. 2. Proxy Services shall consist of those elements as set forth in the Procedures, and shall include (a) notifications ("Notifications") by Bank to Customer of the dates of pending shareholder meetings, resolutions to be voted upon and the return dates as may be received by Bank or provided to Bank by its Subcustodians or third parties, and (b) voting by Bank of proxies based on Customer Instructions. Original proxy materials or copies thereof shall not be provided. Notifications shall generally be in English and, where necessary, shall be summarized and translated from such non-English materials as have been made available to Bank or its Subcustodian. In this respect Bank's only obligation is to provide information from sources it believes to be reliable and/or to provide materials summarized and/or translated in good faith. Bank reserves the right to provide Notifications, or parts thereof, in the language received. Upon reasonable advance request by Customer, backup information relative to Notifications, such as annual reports, explanatory material concerning resolutions, management recommendations or other material relevant to the exercise of proxy voting rights shall be provided as available, but without translation. 3. While Bank shall attempt to provide accurate and complete Notifications, whether or not translated, Bank shall not be liable for any losses or other consequences that may result from reliance by Customer upon Notifications where Bank prepared the same in good faith. 4. Notwithstanding the fact that Bank may act in a fiduciary capacity with respect to Customer under other agreements or otherwise under the Agreement, in performing Proxy Services Bank shall be acting solely as the agent of Customer, and shall not exercise any discretion with regard to such Proxy Services. 5. Proxy voting may be precluded or restricted in a variety of circumstances, including, without limitation, where the relevant Financial Assets are: (i) on loan; (ii) at registrar for registration or reregistration; (iii) the subject of a conversion or other corporate action; (iv) not held in a name subject to the control of Bank or its Subcustodian or are otherwise held in a manner which precludes voting; (v) not capable of being voted on account of local market regulations or practices or restrictions by the issuer; or (vi) held in a margin or collateral account. 6. Customer acknowledges that in certain countries Bank may be unable to vote individual proxies but shall only be able to vote proxies on a net basis (E.G., a net yes or no vote given the voting instructions received from all customers). 7. Customer shall not make any use of the information provided hereunder, except in connection with the funds or plans covered hereby, and shall in no event sell, license, give or otherwise make the information provided hereunder available, to any third party, and shall not directly or indirectly compete with Bank or diminish the market for Proxy Services by provision of such information, in whole or in part, for compensation or otherwise, to any third party. 8. The names of Authorized Persons for Proxy Services shall be furnished to Bank in accordance with Section 10 of the Agreement. Proxy Services fees shall be as set forth in Section 13 of the Agreement or as separately agreed. 2 SPECIAL TERMS AND CONDITIONS RIDER GLOBAL CUSTODY AGREEMENT WITH [CUSTOMER] DATE March , 2003 DOMESTIC ONLY SPECIAL TERMS AND CONDITIONS RIDER DOMESTIC CORPORATE ACTIONS AND PROXIES With respect to domestic U.S. and Canadian Financial Assets (the latter if held in DTC), the following provisions shall apply rather than the provisions of Section 8 of the Agreement and the Global Proxy Service rider: Bank shall send to Customer or the Authorized Person for a Custody Account, such proxies (signed in blank, if issued in the name of Bank's nominee or the nominee of a central depository) and communications with respect to Financial Assets in the Custody Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by Bank for forwarding to its customers. In addition, Bank shall follow coupon payments, redemptions, exchanges or similar matters with respect to Financial Assets in the Custody Account and advise Customer or the Authorized Person for such Account of rights issued, tender offers or any other discretionary rights with respect to such Financial Assets, in each case, of which Bank has received notice from the issuer of the Financial Assets, or as to which notice is published in publications routinely utilized by Bank for this purpose. FEES The fees referenced in Section 13 hereof cover only domestic and euro-dollar holdings. There shall be no Schedule A hereto, as there are no foreign assets in the Accounts. DOMESTIC AND GLOBAL SPECIAL TERMS AND CONDITIONS RIDER DOMESTIC CORPORATE ACTIONS AND PROXIES With respect to domestic U.S. and Canadian Financial Assets (the latter if held in DTC), the following provisions shall apply rather than the pertinent provisions of Section 8 of the Agreement and the Global Proxy Service rider: Bank shall send to Customer or the Authorized Person for a Custody Account, such proxies (signed in blank, if issued in the name of Bank's nominee or the nominee of a central depository) and communications with respect to Financial Assets in the Custody Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by Bank for forwarding to its customers. In addition, Bank shall follow coupon payments, redemptions, exchanges or similar matters with respect to Financial Assets in the Custody Account and advise Customer or the Authorized Person for such Account of rights issued, tender offers or any other discretionary rights with respect to such Financial Assets, in each case, of which Bank has received notice from the issuer of the Financial Assets, or as to which notice is published in publications routinely utilized by Bank for this purpose. JPMorgan Chase Bank Global Investor Services ADDENDUM TO FEE SCHEDULE FOR [CUSTOMER] Effective March , 2003 FUND ACCOUNTING FEE {To be Completed] Signed, for and on behalf of Signed, for and on behalf of JPMorgan Chase Bank [Customer] - ----------------------------- ---------------------------- Date: Date: ------------------------ -----------------------
DOMESTIC CUSTODY FEES DOMESTIC TRANSACTION FEES
FUND ACCOUNTING FEES BASE FUND ACCOUNTING: MULTICLASS ACCOUNTING FEE: PRICE QUOTES FEE: New markets added, or additional services required that are not included in this schedule will be negotiated separately and added to this schedule as the need arises. Agreed to on the day of March, 2003 [Customer] JPMorgan Chase Bank - ------------------------- -------------------- By: President Name: Title: Annex A J.P. MORGAN MUTUAL FUND SERIES JPMorgan Intrepid Growth Fund JPMorgan Intrepid Value Fund JPMorgan Intrepid All Cap Fund JPMorgan Intrepid Investor Fund J.P. MORGAN FLEMING SERIES TRUST JPMorgan Multi-Manager Small Cap Growth Fund JPMorgan Multi-Manager Small Cap Value Fund J.P. MORGAN FUNDS JPMorgan Fleming Emerging Markets Debt Fund JPMorgan U.S. Small Company Opportunities Fund J.P. MORGAN INSTITUTIONAL FUNDS JPMorgan Short Term Bond Fund JPMorgan Bond Fund JPMorgan U.S. Equity Fund JPMorgan U.S. Small Company Fund JPMorgan Fleming International Value Fund JPMorgan Fleming Emerging Markets Equity Fund JPMorgan Diversified Fund JPMorgan Disciplined Equity Fund JPMorgan Fleming International Opportunities Fund JPMorgan Global Strategic Income Fund JPMorgan Tax Aware Short-Intermediate Income Fund J.P. MORGAN SERIES TRUST JPMorgan Enhanced Income Fund JPMorgan Global 50 Fund JPMorgan Global Healthcare Fund JPMorgan Tax Aware U.S. Equity Fund JPMorgan Tax Aware Disciplined Equity Fund JPMorgan California Bond Fund JPMorgan Market Neutral Fund JPMorgan Tax Aware Enhanced Income Fund JPMorgan Tax Aware Small Company Opportunities Fund JPMorgan Disciplined Equity Value Fund JPMORGAN SERIES TRUST II J.P. Morgan Bond Portfolio J.P. Morgan U.S. Large Cap Core Equity Portfolio J.P. Morgan Small Company Portfolio J.P. Morgan International Equity Portfolio J.P. Morgan Mid Cap Value Portfolio J.P. MORGAN MUTUAL FUND GROUP JPMorgan Capital Growth Fund JPMorgan Fleming European Fund JPMorgan Fleming International Growth Fund JPMorgan Fleming Japan Fund JPMorgan Dynamic Small Cap Fund J.P. MORGAN MUTUAL FUND GROUP CONT. JPMorgan Growth & Income Fund JPMorgan Short Term Bond Fund II JPMorgan Strategic Income Fund JPMorgan U.S. Treasury Income Fund JPMorgan Small Cap Equity Fund JPMorgan Fleming Tax Aware International Opportunities Fund JPMorgan Fleming Asia Equity Fund JPMorgan Fleming International Small Cap Equity Fund JPMorgan Select Growth & Income Fund J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. JPMorgan Mid Cap Value Fund JPMorgan Small Cap Growth Fund J.P. MORGAN MUTUAL FUND TRUST JPMorgan California Tax Free Money Market Fund JPMorgan Federal Money Market Fund JPMorgan Tax Free Money Market Fund JPMorgan New York Tax Free Money Market Fund JPMorgan 100% U.S. Treasury Securities Money Market Fund JPMorgan Liquid Assets Money Market Fund JPMorgan Prime Money Market Fund JPMorgan Treasury Plus Money Market Fund JPMorgan U.S. Government Money Market Fund J.P. MORGAN MUTUAL FUND SELECT GROUP JPMorgan Bond Fund II JPMorgan Tax Aware Large Cap Value Fund JPMorgan Tax Aware Large Cap Growth Fund JPMorgan Mid Cap Equity Fund JPMorgan Trust Small Cap Equity Fund JPMorgan Fleming International Equity Fund J.P. MORGAN MUTUAL FUND SELECT TRUST JPMorgan Intermediate Tax Free Income Fund JPMorgan New York Intermediate Tax Free Income Fund JPMorgan New Jersey Tax Free Income Fund JPMorgan Tax Free Income Fund MUTUAL FUND VARIABLE ANNUITY TRUST Asset Allocation Variable Annuity Portfolio Capital Growth Variable Annuity Portfolio Growth & Income Variable Annuity Portfolio International Equity Variable Annuity Portfolio Money Market Variable Annuity Portfolio U.S. Government Income Variable Annuity Portfolio J.P. MORGAN MUTUAL FUND INVESTMENT TRUST JPMorgan Equity Growth Fund JPMorgan Equity Income Fund JPMorgan Mid Cap Growth Fund Schedule D FUND ACCOUNTING Bank agrees to perform the following duties in accordance with the requirements of Customer's Registration Statement, the 1940 Act, applicable Internal Revenue Service ("IRS") regulations, and procedures as may be agreed upon from time to time, including without limitation, those set forth in the service level agreement pertaining to the Fund to which the Bank is a party. In all instances, Bank agrees to perform such services in accordance with industry standards and best practices, which may include those enumerated in the Audits of Investment Companies Audit and Accounting Guide, as in effect from time to time. Where appropriate, Bank agrees to keep all records on a class-by-class basis for each of Customer's series (a "Fund"). Bank agrees to: a. keep and maintain the books and records of each Fund pursuant to Rule 3la-1 under the 1940 Act, which are applicable to fund accounting and the services to be performed pursuant to this Schedule D, including the following: (i) journals containing an itemized daily record in detail of all purchases and sales of securities, all receipts and disbursements of cash and all other debits and credits, as required by subsection (b)(1) of said Rule; (ii) general and auxiliary ledgers reflecting all asset, liability, reserve, capital, income and expense accounts, including interest accrued and interest received, as required by subsection (b)(2)(i) of said Rule; (iii) separate ledger accounts required by subsections (b)(2)(ii) and (iii) of said Rule; and (iv) a monthly trial balance of all ledger accounts (except shareholder accounts) as required by subsection (b)(8) of said Rule. b. perform the following accounting services daily for each Fund: (i) calculate the net asset value per share; (ii) obtain security prices from independent pricing services, or if such quotes are unavailable, obtain such prices from each Fund's investment adviser or its designee (the "Investment Adviser"), as approved by Customer's Board; (iii) provide exception, stale and halted price reporting to the Investment Adviser; (iv) verify and reconcile with Bank's custody records all daily trade activity; (v) compute, as appropriate, each Fund's net income and capital gains, dividend payables, dividend factors, 7-day yields, 7-day effective yields, 30-day yields, weighted average portfolio maturity and such other agreed-upon rates and yields; (vi) review daily the net asset value calculation and dividend factor (if any) for each Fund, check and confirm the net asset values and dividend factors for reasonableness and deviations against agreed-upon benchmarks and tolerance levels: (vii) distribute net asset values and yields to NASDAQ, Customer's transfer agent (the "Transfer Agent"), Customer's administrator (the "Administrator") and such other third parties as are agreed upon; (viii) report to Customer, at least weekly, about the daily market pricing of securities in any money market Funds, with the comparison to the amortized cost basis; (ix) determine unrealized appreciation and depreciation on securities held in variable net asset value Funds; (x) record all Corporate Actions affecting securities held by each Fund, including dividends, stock splits and recapitalizations; (xi) amortize premiums and accrete discounts on securities purchased at a price other than face value, if requested by Customer; (xii) record and reconcile with the Transfer Agent all capital stock activity; (xiii) update Customer accounting system to reflect rate changes on variable interest rate instruments; (xiv) post Fund transactions to appropriate categories; (xv) accrue expenses of each Fund according to instructions received from the Administrator; (xvi) calculate book capital account balances; (xvii) maintain books and records; (xviii) determine the outstanding receivables and payables for all (1) security trades, (2) Fund share transactions and (3) income and expense accounts; (xix) provide accounting reports in connection with Customer's regular annual audit and other audits and examinations by regulatory agencies; and (xx) provide such periodic reports as Customer shall reasonably request. In connection with the provision of these services, Bank agrees: (a) to maintain, in a format acceptable to Customer, documents in accordance with the applicable provisions of Rule 31a-2 of the 1940 Act and with requirements of other applicable domestic regulators, such as the IRS, or Applicable Foreign Regulators (as hereinafter defined). Bank agrees to make such documents available upon reasonable request for inspection by officers, employees and auditors of Customer during Bank's normal business hours. For purposes of this subclause (a), Applicable Foreign Regulator shall mean a foreign regulator designated as such by the Fund by Proper Instructions and a foreign regulator actually known to the Bank to have authority over the Fund or its operations. Promptly after the identification of an Applicable Foreign Regulator, appropriate representatives of the Bank and the Fund shall meet and determine the requirements to which the Applicable Foreign Regulator would subject the Fund. If the Bank and the Fund determine, in the exercise of their reasonable judgment, that complying with such requirements would impose a substantial additional burden on the Bank, the Fund and the Bank agree to negotiate in good faith, taking into account all relevant circumstances, an appropriate change in the fees payable hereunder; (b) that all records maintained and preserved by Bank pursuant to this Agreement which Customer is required to maintain and preserve shall be and remain the property of Customer and shall be surrendered to Customer promptly upon request in the form in which such records have been maintained and preserved. Upon reasonable request of Customer, Bank shall provide, in the form reasonably requested by Customer, any records included in any such delivery, and Customer shall reimburse Bank for its expenses of providing such records in such form; (c) to make reasonable efforts to determine (i) the taxable nature of any distribution or amount received by or deemed received by, or payable to, the Fund; (ii) the taxable nature or effect on the Fund or its shareholders of any Corporate Actions, class actions, tax reclaims or similar events; and (iii) taxable amount of any distribution or dividend paid, payable, or deemed paid by the Portfolio to its shareholders; subject to the following (w) with respect to determinations contemplated by this clause (c) that a prudent fund accountant would reasonably consider to be, and that the Bank considers to be, non-routine in nature, the Bank may seek in writing the approval or authorization of the Fund or a designee of the Fund and shall not be required to act in respect of any such determination (as to which a written request for approval or authorization shall have been made) without such approval or authorization; (x) the Bank need not make any such accrual, unless and until such accrual has been approved and authorized by the Fund or its designee; (y) the Fund shall, or shall cause its designee, to provide such approval and authorization, or approval and authorization of different determinations(s), promptly; and (z) provided the Bank has made the reasonable efforts described in this clause (c) and thereafter has acted in accordance with the approvals and authorizations of the Fund or its designee, the Bank shall have no liability for any such accrual if it otherwise, in performing its services hereunder, is not in breach of this Agreement. The Bank shall accrue for these actions appropriately; and (d) to provide such records and assistance, including office space within Bank's premises, to Customer's independent accountants in connection with the services such accountants provide to Customer, as such accountants shall reasonably request. The parties further agree as follows with respect to the provision of services pursuant to this Schedule D: (a) Bank may rely on Customer's then currently effective Prospectus, and Customer shall promptly advise Bank of any amendments thereto and provide copies of such amendments to Bank. (b) Both Bank and Customer or its designee shall use reasonable efforts to identify any changes in domestic and foreign laws and regulations applicable to Bank's providing of services under this Schedule D, and each shall promptly advise the other of any changes it identifies and upon any such identification Bank and Customer shall agree on any reasonable alteration to the services to be provided to Bank under this Schedule D. (c) Customer or its designee shall (i) furnish promptly to Bank (and Bank may rely upon) the amounts of, or written formulas or methodologies to be used by Bank to calculate the amounts of, Customer liabilities and (ii) specify the timing for accruals of such liabilities. Bank shall request such additional information as it deems reasonably necessary for it to perform its services under this Schedule D. (d) Bank shall not be required to include as Customer liabilities and expenses, nor use in its calculations hereunder, including, without limitation, as a reduction of net asset value, any accrual for any U.S. federal or state income taxes, unless and until Customer or its designee shall have specified to Bank the precise amount of the same to be included in liabilities and expenses or used to reduce net asset value. Bank agrees to include as a Customer liability proper accruals for foreign taxes, unless, after being advised of the amount and the basis for the accrual, Customer by Instructions directs Bank not to do so. (e) Customer or its designee shall furnish to Bank, and Bank may rely upon, the following types of information (and explanations thereof): (i) Customer's tax basis in debt obligations acquired by Customer before Bank's becoming Bank hereunder, the dates of such acquisitions, and the amount of premium previously amortized and the discount previously included in income, (ii) the amounts credited to any capital accounts, (iii) the amount of any reserves, and (iv) similar information which is required by Bank for performing the services and is neither possessed by Bank as Bank nor available from a third party. (f) The Bank shall not be responsible for, and shall not incur any loss or liability with respect to: any errors or omissions in information supplied by the Fund or its designee that the Bank has reviewed and has concluded to be within reasonable tolerance limits, as agreed between the parties; any improper use by the Fund, its designees, agents, distributor or investment adviser of any valuations or computations supplied by the Bank under this Agreement; any valuations of securities supplied by the Fund or an independent pricing service approved by the Fund's Board, provided that, with respect to such valuations, the Bank has otherwise complied with this Schedule C, has reviewed the valuations and has concluded they are within reasonable tolerance limits agreed to by the parties; any tax determination authorized and approved by the Fund or its designee that the Bank has reviewed and has concluded is within reasonable tolerance limits as agreed to by the parties; or any changes in U.S. law or regulations applicable to the Bank's performance not identified by the Bank's use of reasonable efforts which are not identified to the Bank by the Fund. EX-99.(G)(2) 9 a2118929zex-99_g2.txt EX-99.(G)(2) Exhibit 99.(g)(2) [JPMORGAN LOGO] JP Morgan Chase Bank FEE SCHEDULE FOR THE "FUNDS" EFFECTIVE JULY, 2002 FUND ACCOUNTING FEES: MONEY MARKETS: Tier One 5,000,000,000 1.1 bps Tier Two 10,000,000,000 0.8 bps Tier Three 100,000,000,000 0.4 bps Tier Four Over 100BN 0.25 bps FIXED INCOME: Tier One 10,000,000,000 1 bps Tier Two 20,000,000,000 0.75 bps Tier Three 30,000,000,000 0.5 bps Tier Four Over 30BN 0.25 bps DOMESTIC EQUITY: Tier One 10,000,000,000 1.2 bps Tier Two 20,000,000,000 0.5 bps Tier Three 30,000,000,000 0.4 bps Tier Four Over 30BN 0.25 bps INTERNATIONAL FUNDS: Tier One 10,000,000,000 3 bps Tier Two Over 10BN 2.5 bps EMERGING MARKETS: Tier One 10,000,000,000 4 bps Tier Two Over 10BN 3 bps
COMMINGLED FUND FEES - US: Included in existing categories COMMINGLED FUND FEES - INTERNATIONAL: Included in existing categories OTHER FEES: Minimums: US Equity $ 20,000 US Fixed Income $ 25,000 Money Markets $ 10,000 International / Emerging Markets $ 55,000 Share Class $ 10,000 Multi-Manager (per manager) $ 6,000
SAFEKEEPING FEES:
BPS TRADES Argentina 25.00 100.00 Australia 5.00 50.00 Austria 8.00 50.00 Bahrain 60.00 150.00 Bangladesh 60.00 150.00 Belgium 5.00 50.00 Bermuda 20.00 75.00 Botswana 60.00 150.00 Brazil 15.00 58.00 Bulgaria 35.00 75.00 Canada (RBC) 3.00 25.00 Chile 35.00 75.00 China 25.00 75.00 Colombia 40.00 100.00 Costa Rica 60.00 150.00 Croatia 40.00 115.00 Cyprus 60.00 150.00 Czech Republic 40.00 90.00 Denmark 4.00 50.00 ECU 1.50 24.00 Ecuador 50.00 100.00 Egypt 40.00 75.00 Estonia 35.00 75.00 Euroclear/Cedel 1.50 24.00 Euro CDs 2.00 25.00 Finland 5.25 50.00 France 4.75 47.00 Germany 2.50 27.00 Ghana 60.00 150.00 Greece 40.00 75.00 Hong Kong 4.00 50.00 Hungary 40.00 100.00 India (Deutsche) 40.00 45.00 India (HSBC) 40.00 50.00 Indonesia 10.00 75.00 Ireland 7.00 45.00 Israel 50.00 100.00 Italy 5.25 50.00 Ivory Coast 3.00 100.00 Jamaica 11.00 70.00
BPS TRADES Japan 2.75 25.00 Jersey 60.00 150.00 Jordan 50.00 100.00 Kenya 60.00 150.00 Korea 20.00 48.00 Latvia 20.00 115.00 Lebanon 50.00 140.00 Lithuania 35.00 140.00 Luxembourg 3.00 55.00 Malaysia 8.00 75.00 Mauritius 60.00 150.00 Mexico 6.00 42.00 Morocco 50.00 150.00 Namibia 60.00 150.00 Nepal 60.00 150.00 Netherlands 5.00 50.00 New Zealand 2.00 47.00 Nigeria 60.00 150.00 Norway 6.00 50.00 Oman 35.00 130.00 Pakistan 30.00 150.00 Peru 50.00 100.00 Philippines 15.00 83.00 Poland 40.00 150.00 Portugal 25.00 83.00 Romania 40.00 115.00 Russia 25.00 100.00 Singapore 4.00 50.00 Slovakia 40.00 100.00 Slovenia 35.00 100.00 South Africa 5.00 50.00 Spain 7.75 50.00 Sri Lanka 20.00 100.00 Swaziland 60.00 150.00 Sweden 5.00 50.00 Switzerland 6.00 75.00 Taiwan 13.00 100.00 Thailand 15.00 63.00 Tunisia 60.00 150.00 Turkey 20.00 75.00 United Kingdom 1.00 25.00 United States 0.10 7.50 Uruguay 60.00 150.00
BPS TRADES Venezuela 35.00 100.00 Vietnam 60.00 150.00 Zambia 60.00 150.00 Zimbabwe 50.00 115.00
This fee schedule will be in effect for a period of 2 years. New markets added, or additional services required that are not included in this schedule will be negotiated separately and added to this schedule as the need arises. Signed on behalf of: J.P. Morgan Funds J.P. Morgan Institutional Funds J.P. Morgan Series Trust J.P. Morgan Series Trust II Mutual Fund Group Fleming Mutual Fund Group Mutual Fund Select Group Mutual Fund Select Trust Mutual Fund Variable Annuity Trust Mutual Fund Investment Trust JPMorgan Chase Bank /s/ David Wezdenko /s/ Ann M. Osti - -------------------------- -------------------------- David Wezdenko Ann M. Osti Vice President Vice President Date: 2/14/03 Date: 3/7/03 -------------------- -------------------- EX-99.(H)(1) 10 a2118929zex-99_h1.txt EX-99.(H)(1) Exhibit 99.(h)(1) ADMINISTRATION AGREEMENT THIS AGREEMENT dated as of September 7, 2001, by and between each of the Trusts listed on Exhibit A (the "Trust"), and Morgan Guaranty Trust Company of New York or The Chase Manhattan Bank or their Successor (the "Administrator"). W I T N E S S E T H : In consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: FIRST: The Trust on behalf of each of its series and any new series to be created hereby authorizes the Administrator to provide administrative services to the Trust in accordance with the terms and conditions of this Agreement. The Administrator's services shall be subject to the direction and control of the Board of Trustees of the Trust and shall be performed under the direction of the appropriate Trust officers. SECOND: The Administrator shall provide certain administration services including: (A) arranging for the preparation and filing of the Trust's tax returns and preparing financial statements and other financial reports for review by the Trust's independent auditors; (B) preparing for the signature of the appropriate Trust officer (or assisting counsel in preparation of) all required Trust proxy statements and updates to the Trust's Registration Statement under the Investment Company Act of 1940 (the "Act"); (C) arranging for the printing and mailing (at the Trust's expense) of proxy statements and other reports or other material provided to the Trust's shareholders; (D) coordinating the Trust's annual audits; (E) developing the budget and establishing the rate of expense accrual for each series of the Trust; (F) overseeing the preparation by the Trust's transfer agent of tax information for shareholders; (G) coordinating all relationships between the Trust and its contractors, including coordinating the negotiation of agreements, the review of performance of agreements, and the exchange of information, provided that coordination with the distributor shall be limited to the exchange of information necessary for the administration of the Trust and the reporting of the information to the Board of Trustees and the Trust officers; (H) overseeing the Trust's custodian, transfer agent and other service providers, including expense disbursement; overseeing any service provider conversions; verifying the calculation of performance data for the Trust and its reporting to the appropriate tracking services; arranging for the publication of current price information in newspapers and publications; monitoring the pricing of portfolio securities and compliance with amortized cost procedures, if applicable; computing the amount and monitoring the frequency of distributing each series' dividends and capital gains distributions and confirming that they have been properly distributed to the shareholders of record; and monitoring calculation of net asset value of shares by the custodian; (I) taking responsibility for compliance with all applicable federal securities and other regulatory requirements (other than state securities registration and filing requirements) and reviewing from time to time transactions with brokers and dealers; taking responsibility for monitoring the Trust's compliance with their investment objectives, policies and restrictions as disclosed in their prospectuses and statements of additional information; (J) responding to all inquires or other communications from shareholders of the Trust and other parties or, if the inquiry is more properly responded to by the Trust's transfer agent or distributor, referring the individual making the inquiry to the appropriate person; (K) taking responsibility for monitoring each series' status as a regulated investment company under the Internal Revenue Code of 1986, as amended; (L) arranging for preparation of agendas and supporting documents for and minutes of meetings of Trustees, committees of Trustees and shareholders; (M) preparing annual and semi-annual financial statements for management review; assisting management with coordination of annual financial statement audits; reviewing N-30D filings prepared by print vendor; instructing printer to file; preparing and filing financial data for Form N-SAR filings; preparing and filing financial data for Form 24f-2 filings; compiling financial data (including expenses, management fees and performance data) for Form N-1A and SAI updates for management review; preparing portfolio statistics on monthly and quarterly basis for client reporting/marketing; (N) reviewing fund accounting vendors' monthly cash and assets reconciliations and report cards; monitoring expense activity, including accuracy of basis point accrual changes and journal entries; preparing same day analysis (in order to send out blast faxes) of money market and fixed income fund yields and investigating unusual discrepancies between classes/feeders with fund accounting; performing daily reasonableness test of NAV; monitoring delivery of services by fund accountants; (O) preparing expense authorizations for management review and submitting for payment and maintaining expense log-database; providing management with monthly informational analysis of expenses, including budgeted future expenses and estimated over-under-accruals; expense cap analysis - waivers and reimbursements; (P) compiling and summarizing weekly Rule 2a-7 money market funds' analysis for board book presentation; assisting management with the administration of the Directors' deferred compensation plans, if any; performing periodic line of credit reporting to comply with the loan agreement; preparing and mail annual 1099-MISC forms to Directors and vendors; compiling information for annual shareholder tax letters for management review; assisting management with preparation of shareholder proxy materials as necessary; (Q) preparing, reviewing and distributing daily statistics for use by management; completing weekly, monthly and quarterly surveys provided by reporting agencies; assisting management with the calculation and communication of periodic distribution information; calculating and distributing fund performance information; performing daily calculation of 1, 3, 5 and 10 year returns for all funds; maintaining benchmark data and calculating benchmark performance; calculating and distributing unsubsidized SEC yields; enduring consistency of performance information with Lipper and Morningstar; FundStation administration for daily distribution of NAVs, rates, total returns, yields and performance; calculation of after-tax and tax equivalent returns; (R) making all necessary Blue Sky Filings; (S) maintaining books and records relating to such services; and (T) providing such other related services as the Fund may reasonably request. THIRD: Any activities to be performed by the Administrator under this Agreement may be delegated or sub-contracted to a third party without the approval of the Trust. The Administrator retains ultimate responsibility at all times under this contract for the performance of such activities, notwithstanding the existence of a third-party subcontract. FOURTH: Notwithstanding anything in this Agreement to the contrary: (A) The Administrator will keep confidential and will not use or disclose to any other party (including, but not limited to, affiliates of the Administrator) any Customer Information (as defined below), expect as authorized in writing by the Trust or as appropriate in connection with performing this Agreement and subject to any conditions set forth elsewhere in the Agreement. (B) The Administrator will maintain appropriate physical, electronic and procedural safeguards to store, dispose of (if applicable) and secure Customer Information to protect it from unauthorized access, use, disclosure, alteration, loss and destruction. The safeguards used by the Administrator to protect Customer Information will be no less than those used by the Administrator to protect its own confidential information. In addition, the Administrator will comply with any other security safeguards required by this Agreement. (C) The Administrator will control access to Customer Information and, except as required by law or as otherwise may be specifically permitted by this Agreement, permit access only to individuals who need access in connection with performing this Agreement and will cause such individuals to maintain the confidentiality of Customer Information. (D) Except as necessary to conform to any record retention requirements imposed by this Agreement, the Company will, upon termination of this Agreement or the Trust's earlier request, return to the Trust all Customer Information or destroy it, as specified by the Trust. The Administrator will provide to the Trust a destruction certificate if so required. (E) As between the Trust and the Administrator, Customer Information and all applicable intellectual property rights embodied in the Customer Information shall remain the property of the Trust. (F) The Administrator acknowledges that it has received and reviewed a copy of the Trust's privacy policy applicable to Customer Information and it agrees that it will not act in a manner that is inconsistent with such policy. (G) The term "Customer Information" as used in this Article means information, in any form, provided to the Administrator by on or behalf of the Trust that uniquely identifies a current, former or prospective Trust customer. Customer Information includes, but is not limited to, copies of such information or materials derived from such information. FIFTH: Any activities performed by the Administrator under this Agreement shall at all times conform to, and be in accordance with, any requirements imposed by: (1) the provisions of the Act and of any rules or regulations in force thereunder; (2) any other applicable provision of law; (3) the provisions of the Agreement and the Declaration of Trust and By-laws of the Trust as amended from time to time; (4) any policies and determinations of the Board of the Trustees of the Trust; and (5) the fundamental policies of each Trust, as reflected in the then current Registration Statement of the Trust. As used in this Agreement, the term "Registration Statement" shall mean the Registration Statement most recently filed by the Trust with the Securities and Exchange Commission and effective under the Securities Act of 1933, as amended, as such Registration Statement is amended at such time, and the term "Prospectus" and "Statement of Additional Information" shall mean for the purposes of this Agreement the form of the then current prospectus and statement of additional information for each series of the Trust. SIXTH: Nothing in this Agreement shall prevent the Administrator or any other officer thereof from acting as administrator for any other person, firm or corporation and shall not in any way limit or restrict the Administrator or any of its trustees, officers, employees or affiliates from buying, selling or trading any securities for its own or their own accounts or for the accounts of others for whom it or they may be acting, provided, however, that the Administrator expressly represents that it will undertake no activities which, in its judgement, will adversely affect the performance of its obligations to the Trust under the Agreement. SEVENTH: The Administrator shall, at its own expense, provide office space and facilities, equipment and personnel for the performance of its functions hereunder. The Administrator shall create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of the Trust under this Act, with particular attention to Section 31 thereof and Rules 31a-2 thereunder. All such records shall be the property of the Trust and shall at all times during the regular business hours of the Administrator be open for inspection by duly authorized officers, employees or agents of the Securities and Exchange Commission. In compliance with the requirements of Rule 31a-3 under the Act, the Administrator hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trust's request. EIGHTH: Each Trust shall pay the Administrator, as full compensation for all services rendered hereunder, an annual fee on behalf of each Fund payable monthly and computed based on the average daily net asset value of such Fund at the annual rate listed on Schedule A, as may be amended from time to time. NINTH: (A) This Agreement shall go into effect at the close of business on the date hereof and, unless terminated as hereinafter, but only so long as such continuance is specifically approved at least annually by the Trust's Board of Trustees, including the vote of a majority of the Trustees who are not parties to this Agreement or "interested persons" (as defined in the Act) of any such party cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a "majority" (as so defined) of the outstanding voting securities of the applicable Trust and by such vote of the Trustees. (B) This Agreement may be terminated by the Administrator at any time without penalty upon giving the Board of Trustees of the Trust sixty (60) days' written notice (which notice may be waived by the Trust) and may be terminated by the Board of Trustees of the Trust at any time without penalty upon giving the Administrator sixty (60) days' written notice (which notice may be waived by the Administrator), provided that such termination by the Board of Trust of the Trust shall be directed or approved by the vote of a majority of all of its Trustees in office at the time, including a majority of the Trustees who are not interested persons (as defined in the Act) of the Trust, or by vote of the holders of a majority (as defined by the Act) of the voting securities of each Trust at the time outstanding and entitled to vote. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Act. TENTH: In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Administrator or any of its officers, directors or employees, the Trust shall indemnify the Administrator against any and all claims, demands and liabilities and expenses (including reasonable attorney's fees) which the Administrator may incur based on any omission in the course of, or connected with, rendering services to such Trust hereunder. ELEVENTH: A copy of the Agreement and the Declaration of Trust of the Trust is on file with the Secretary of the Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as Trustees and not individually, and that the obligations of this instrument are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Trust. TWELVETH: Any notice under this Agreement shall be in writing, addressed and delivered, or mailed, postage paid, to the other party at such address as such other party may designate for the receipt of such notices. Until further notice to the other party, it is agreed that the address of the Trust shall be 522 Fifth Avenue, New York, New York 10036, and the address of the Administrator shall be 522 Fifth Avenue, New York, New York 10036. IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be executed by their duly authorized officers as of the day and year first above written. J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST MUTUAL FUND GROUP MUTUAL FUND TRUST MUTUAL FUND SELECT GROUP MUTUAL FUND SELECT TRUST MUTUAL FUND INVESTMENT TRUST MUTUAL FUND VARIABLE ANNUITY TRUST GROWTH AND INCOME PORTFOLIO By: /s/ Sharon Weinberg ------------------------- Sharon Weinberg Title: Secretary Date: ------------------------- JPMORGAN CHASE BANK By: /s/ George Gatch ----------------------- George Gatch Title: Date: ------------------------- EXHIBIT A LIST OF TRUSTS J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST MUTUAL FUND GROUP MUTUAL FUND TRUST MUTUAL FUND SELECT GROUP MUTUAL FUND SELECT TRUST MUTUAL FUND INVESTMENT TRUST MUTUAL FUND VARIABLE ANNUITY TRUST GROWTH AND INCOME PORTFOLIO MUTUAL FUND TRUST Schedule of ADMINISTRATION FEES
FUND FEE % * - ---- ------- JPMorgan California Tax Free Money Market Fund 0.10 JPMorgan Federal Money Market Fund 0.10 JPMorgan Liquid Assets Money Market Fund 0.10 JPMorgan New York Tax Free Money Market Fund 0.10 JPMorgan Prime Money Market Fund 0.10 JPMorgan Tax Free Money Market Fund 0.10 JPMorgan Treasury Plus Money Market Fund 0.10 JPMorgan U.S. Government Money Market Fund 0.10 JPMorgan 100% U.S. Treasury Securities Money Market Fund 0.10
* The administrator receives a pro-rate portion of the following annual fee on behalf of each Fund for administration services: 0.10% of the first $100 billion of average daily net assets of all money market funds in the JPMorgan Fund Complex plus 0.05% of average daily net assets over $100 billion. EX-99.(H)(3) 11 a2118929zex-99_h3.txt EX-99.(H)(3) Exhibit 99.(h)(3) TRANSFER AGENCY AGREEMENT Made as of the 1st day of September, 2001 by and between EACH OF THE J.P. MORGAN SERIES TRUST, J.P. Morgan Tax Aware Small Company Opportunities Fund - A Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - B Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - C Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - A Shares J.P. Morgan Tax Aware US Equity Fund - B Shares J.P. Morgan Tax Aware US Equity Fund - C Shares J.P. Morgan Tax Aware US Equity Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - Institutional Shares J.P. Morgan Global Healthcare Fund - A Shares J.P. Morgan Global Healthcare Fund - B Shares J.P. Morgan Global Healthcare Fund - C Shares J.P. Morgan Global Healthcare Fund - Select Shares J.P. Morgan Global 50 Fund - A Shares J.P. Morgan Global 50 Fund - B Shares J.P. Morgan Global 50 Fund - C Shares J.P. Morgan Global 50 Fund - Select Shares J.P. Morgan Tax Aware Disciplined Equity Fund - Institutional Shares J.P. Morgan Tax Aware Enhanced Income Fund - A Shares J.P. Morgan Tax Aware Enhanced Income Fund - Select Shares J.P. Morgan Tax Aware Enhanced Income Fund - Institutional Shares J.P. Morgan SmartIndex Fund - Institutional Shares J.P. Morgan Large Cap Growth Fund - Institutional Shares J.P. Morgan Market Neutral Fund - A Shares J.P. Morgan Market Neutral Fund - B Shares J.P. Morgan Market Neutral Fund - Institutional Shares J.P. Morgan California Bond Fund - A Shares J.P. Morgan California Bond Fund - Select Shares J.P. Morgan California Bond Fund - Institutional Shares J.P. Morgan Disciplined Equity Value Fund - Institutional Shares J.P. Morgan Enhanced Income Fund - Ultra Shares J.P. Morgan Enhanced Income Fund - Institutional Shares J.P. Morgan US High Yield Bond Fund - A Shares J.P. Morgan US High Yield Bond Fund - B Shares J.P. MORGAN FUNDS, J.P. Morgan Fleming Emerging Markets Debt Fund - Select Shares J.P. Morgan US Small Company Opportunities Fund - Select Shares J.P. MORGAN INSTITUTIONAL FUNDS, J.P. Morgan Bond Fund - A Shares J.P. Morgan Bond Fund - B Shares J.P. Morgan Bond Fund - Select Shares J.P. Morgan Bond Fund - Institutional Shares J.P. Morgan Bond Fund - Ultra Shares J.P. Morgan Fleming International Opportunities Fund - A Shares J.P. Morgan Fleming International Opportunities Fund - B Shares J.P. Morgan Fleming International Opportunities Fund - Institutional Shares J.P. Morgan Fleming International Opportunities Fund - Select Shares J.P. Morgan US Equity Fund - A Shares J.P. Morgan US Equity Fund - B Shares J.P. Morgan US Equity Fund - C Shares J.P. Morgan US Equity Fund - Institutional Shares J.P. Morgan US Equity Fund - Select Shares J.P. Morgan Global Strategic Income Fund - A Shares J.P. Morgan Global Strategic Income Fund - B Shares J.P. Morgan Global Strategic Income Fund - Institutional Shares J.P. Morgan Global Strategic Income Fund - Select Shares J.P. Morgan Short Term Bond Fund - A Shares J.P. Morgan Short Term Bond Fund - Institutional Shares J.P. Morgan Short Term Bond Fund - Select Shares J.P. Morgan US Small Company Fund - Institutional Shares J.P. Morgan US Small Company Fund - Select Shares J.P. Morgan Fleming International Value Fund - A Shares J.P. Morgan Fleming International Value Fund - B Shares J.P. Morgan Fleming International Value Fund - Institutional Shares J.P. Morgan Fleming International Value Fund - Select Shares J.P. Morgan Fleming Emerging Markets Equity Fund - A Shares J.P. Morgan Fleming Emerging Markets Equity Fund - B Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Institutional Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Select Shares J.P. Morgan Diversified Fund - Institutional Shares J.P. Morgan Diversified Fund - Select Shares J.P. Morgan Disciplined Equity Fund - A Shares J.P. Morgan Disciplined Equity Fund - B Shares J.P. Morgan Disciplined Equity Fund - Institutional Shares J.P. Morgan Disciplined Equity Fund - Select Shares J.P. MORGAN SERIES TRUST II, J.P. Morgan International Opportunities Portfolio J.P. Morgan Small Company Portfolio J.P. Morgan US Disciplined Equity Portfolio J.P. Morgan Bond Portfolio J.P. Morgan Mid Cap Value Portfolio MUTUAL VARIABLE ANNUITY TRUST, Vista Capital Advantage Variable Annuity Capital Growth Portfolio Vista Capital Advantage Variable Annuity Growth & Income Portfolio Vista Capital Advantage Variable Annuity International Equity Portfolio Vista Capital Advantage Variable Annuity Asset Allocation Portfolio Vista Capital Advantage Variable Annuity Money Market Portfolio Vista Capital Advantage Variable Annuity US Government Income Portfolio MUTUAL FUND TRUST, J.P. Morgan Prime Money Market - Morgan Shares J.P. Morgan Prime Money Market - B Shares J.P. Morgan Prime Money Market - C Shares J.P. Morgan Prime Money Market - Premier Shares J.P. Morgan Prime Money Market - Agency Shares J.P. Morgan Prime Money Market - Institutional Shares J.P. Morgan Prime Money Market - Reserve Shares J.P. Morgan Prime Money Market - Cash Mgmt Shares J.P. Morgan Prime Money Market - Select Shares J.P. Morgan Federal Money Market - Morgan Shares J.P. Morgan Federal Money Market - Premier Shares J.P. Morgan Federal Money Market - Agency Shares J.P. Morgan Federal Money Market - Institutional Shares J.P. Morgan Treasury Plus Money Market - Morgan Shares J.P. Morgan Treasury Plus Money Market - Premier Shares J.P. Morgan Treasury Plus Money Market - Agency Shares J.P. Morgan Treasury Plus Money Market - Institutional Shares J.P. Morgan Treasury Plus Money Market - Reserve Shares J.P. Morgan Tax Free Money Market - Morgan Shares J.P. Morgan Tax Free Money Market - Premier Shares J.P. Morgan Tax Free Money Market - Agency Shares J.P. Morgan Tax Free Money Market - Institutional Shares J.P. Morgan US Government Money Market - Morgan Shares J.P. Morgan US Government Money Market - Premier Shares J.P. Morgan US Government Money Market - Agency Shares J.P. Morgan US Government Money Market - Institutional Shares J.P. Morgan 100% US Treasury Securities Money Market - Morgan Shares J.P. Morgan 100% US Treasury Securities Money Market - Premier Shares J.P. Morgan 100% US Treasury Securities Money Market - Agency Shares J.P. Morgan 100% US Treasury Securities Money Market - Institutional Shares J.P. Morgan California Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Reserve Shares J.P. Morgan Liquid Assets - Morgan Shares J.P. Morgan Liquid Assets - Premier Shares J.P. Morgan Liquid Assets - Agency Shares J.P. Morgan Liquid Assets - Institutional Shares J.P. Morgan Liquid Assets - Capital Shares MUTUAL FUND SELECT GROUP, J.P. Morgan Bond Fund II - A Shares J.P. Morgan Bond Fund II - B Shares J.P. Morgan Bond Fund II - Select Shares J.P. Morgan Intermediate Bond Fund - A Shares J.P. Morgan Intermediate Bond Fund - Select Shares J.P. Morgan Select Large Cap Growth Fund J.P. Morgan Select Mid Cap Equity Fund J.P. Morgan Select Small Cap Equity Fund J.P. Morgan Select Balanced Fund J.P. Morgan Select Equity Income Fund J.P. Morgan Select International Equity Fund - A Shares J.P. Morgan Select International Equity Fund - B Shares J.P. Morgan Select International Equity Fund - Institutional Shares J.P. Morgan Select International Equity Fund - Select Shares J.P. Morgan Select Large Cap Equity Fund MUTUAL FUND GROUP, J.P. Morgan Fleming European Fund - A Shares J.P. Morgan Fleming European Fund - B Shares J.P. Morgan Fleming European Fund - C Shares J.P. Morgan Fleming European Fund - Select Shares J.P. Morgan Fleming European Fund - Institutional Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - A Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - B Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - C Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - Institutional Shares J.P. Morgan Short Term Bond Fund II - A Shares J.P. Morgan Short Term Bond Fund II - Select Shares J.P. Morgan Short Term Bond Fund II - M Shares J.P. Morgan US Treasury Income Fund - A Shares J.P. Morgan US Treasury Income Fund - B Shares J.P. Morgan US Treasury Income Fund - Select Shares J.P. Morgan Strategic Income Fund - A Shares J.P. Morgan Strategic Income Fund - B Shares J.P. Morgan Strategic Income Fund - C Shares J.P. Morgan Strategic Income Fund - Select Shares J.P. Morgan Strategic Income Fund - M Shares J.P. Morgan Capital Growth Fund - A Shares J.P. Morgan Capital Growth Fund - B Shares J.P. Morgan Capital Growth Fund - C Shares J.P. Morgan Capital Growth Fund - Select Shares J.P. Morgan H&Q Technology Fund - A Shares J.P. Morgan H&Q Technology Fund - B Shares J.P. Morgan H&Q Technology Fund - C Shares J.P. Morgan Focus Fund - A Shares J.P. Morgan Focus Fund - B Shares J.P. Morgan Focus Fund - C Shares J.P. Morgan Focus Fund - Select Shares J.P. Morgan Growth & Income Fund - A Shares J.P. Morgan Growth & Income Fund - B Shares J.P. Morgan Growth & Income Fund - C Shares J.P. Morgan Growth & Income Fund - Select Shares J.P. Morgan Select Growth & Income Fund J.P. Morgan Fleming International Growth Fund - A Shares J.P. Morgan Fleming International Growth Fund - B Shares J.P. Morgan Fleming International Growth Fund - C Shares J.P. Morgan Fleming Japan Fund - A Shares J.P. Morgan Fleming Japan Fund - B Shares J.P. Morgan Small Cap Equity Fund - A Shares J.P. Morgan Small Cap Equity Fund - B Shares J.P. Morgan Small Cap Equity Fund - Select Shares J.P. Morgan Dynamic Small Cap Fund - A Shares J.P. Morgan Dynamic Small Cap Fund - B Shares J.P. Morgan Dynamic Small Cap Fund - C Shares J.P. Morgan Dynamic Small Cap Fund - Select Shares MUTUAL FUND SELECT TRUST, J.P. Morgan New York Intermediate Tax Free Income Fund - A Shares J.P. Morgan New York Intermediate Tax Free Income Fund - B Shares J.P. Morgan New York Intermediate Tax Free Income Fund - Select Shares J.P. Morgan New York Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan Intermediate Tax Free Income Fund - Select Shares J.P. Morgan Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan New Jersey Tax Free Income Fund - Select Shares J.P. Morgan Tax Free Income Fund - A Shares J.P. Morgan Tax Free Income Fund - B Shares J.P. Morgan Tax Free Income Fund - Select Shares MUTUAL FUND INVESTMENT TRUST, J.P. Morgan Balanced Fund - A Shares J.P. Morgan Balanced Fund - B Shares J.P. Morgan Balanced Fund - C Shares J.P. Morgan Balanced Fund - Select Shares J.P. Morgan Core Equity Fund - A Shares J.P. Morgan Core Equity Fund - B Shares J.P. Morgan Core Equity Fund - C Shares J.P. Morgan Core Equity Fund - Select Shares J.P. Morgan Equity Growth Fund - A Shares J.P. Morgan Equity Growth Fund - B Shares J.P. Morgan Equity Growth Fund - C Shares J.P. Morgan Equity Growth Fund - Select Shares J.P. Morgan Equity Growth Fund II J.P. Morgan Equity Income Fund - A Shares J.P. Morgan Equity Income Fund - B Shares J.P. Morgan Equity Income Fund - C Shares J.P. Morgan Equity Income Fund - Select Shares J.P. Morgan Mid Cap Growth Fund - A Shares J.P. Morgan Mid Cap Growth Fund - B Shares FLEMING MUTUAL FUND GROUP, AND J.P. Morgan Small Cap Growth Fund - A Shares J.P. Morgan Small Cap Growth Fund - B Shares J.P. Morgan Small Cap Growth Fund - C Shares J.P. Morgan Small Cap Growth Fund - Institutional Shares J.P. Morgan Small Cap Growth Fund - Select Shares J.P. Morgan Mid Cap Value Fund - A Shares J.P. Morgan Mid Cap Value Fund - B Shares J.P. Morgan Mid Cap Value Fund - C Shares J.P. Morgan Mid Cap Value Fund - Institutional Shares J.P. Morgan Mid Cap Value Fund - Select Shares EACH ACCOUNT IN THE FOLLOWING AMERCIAN CENTURY FUNDS REGISTERED IN THE NAME OF J.P. MORGAN CHASE BANK NA (OR AN AFFILIATE), SPECIAL ACCT. BENEFIT OF CLIENTS ATTN: KEN FAITH: American Century Ultra Fund American Century Select Fund American Century International Growth Fund American Century International Discovery Fund American Century Value Fund American Century California Tax Free Money Market Fund American Century Florida Municipal Money Market Fund American Century California Intermediate Tax Free Fund American Century GNMA Fund American Century California High Yield Municipal Fund American Century Florida Intermediate Term Municipal Fund American Century California Municipal Money Market Fund American Century Heritage Fund American Century Equity Income Fund American Century California Long Term Tax Free Fund American Century High Yield Bond Fund American Century Real Estate Fund American Century Growth Fund American Century Small Cap Value Fund (collectively, the "American Century Funds") And DST SYSTEMS, INC. TABLE OF CONTENTS Documents to be Filed with Appointment 2 Certain Representations and Warranties of DST 3 Certain Representations and Warranties of the Trust 3 Scope of Appointment 4 Limit of Authority 7 Compensation and Expenses 8 Operation of DST System 11 Indemnification 13 Certain Covenants of DST and the Trust 18 Recapitalization or Readjustment 20 Stock Certificates 20 Death, Resignation or Removal of Signing Officer 20 Future Amendments of Declaration of Trust and Bylaws 21 Instructions, Opinion of Counsel and Signatures or JPM 21 Force Majeure and Disaster Recovery Plans 21 Certification of Documents 23 Records 23 Disposition of Books, Records and Canceled Certificates 23
i Provisions Relating to DST as Transfer Agent 23 Provisions Relating to Dividend Disbursing Agency 26 Assumption of Duties By the Trust or Agents Designated By the Trust 27 Termination of Agreement 28 Confidentiality 30 Changes and Modifications 31 Assignment and Subcontractors 32 Limitations on Liability 33 Miscellaneous 33 Exhibit A - Fee Schedule 43 Exhibit B - Authorized Personnel 50 Exhibit C - Transfer Agency Services and Systems Features 57 Exhibit D - Confidentiality Agreement for Auditors 59 Appendix I 63
ii TRANSFER AGENCY AGREEMENT THIS AGREEMENT made as of the 1st day of September, 2001, by and between each of the J.P. MORGAN SERIES TRUST, J.P. MORGAN FUNDS, J.P. MORGAN INSTITUTIONAL FUNDS, MUTUAL VARIABLE ANNUITY TRUST, MUTUAL FUND TRUST, MUTUAL FUND SELECT GROUP, MUTUAL FUND GROUP, MUTUAL FUND SELECT TRUST, and MUTUAL FUND INVESTMENT TRUST, each a business trust existing under the laws of the Commonwealth of Massachusetts, the FLEMING MUTUAL FUND GROUP, a Maryland corporation, J.P. MORGAN CHASE & CO., formerly Morgan Guaranty Trust of NY, a New York State chartered trust company and member of the Federal Reserve System, and the J.P. MORGAN SERIES TRUST II, a Delaware business trust,, each with a principal place of business at 522 5th Ave., New York, NY 10036 and each of which is acting on its own behalf and on behalf of each of the portfolios listed under its name in Appendix I (jointly and severally, such portfolios shall be referred to hereinafter as the "Fund" or "Funds), and DST SYSTEMS, INC., a corporation existing under the laws of the State of Delaware, having its principal place of business at 1055 Broadway, Kansas City, Missouri 64105 ("DST"): WITNESSETH: WHEREAS, each Trust (as used hereinafter, the term "Trust" shall refer jointly and severally to the J.P. Morgan Series Trust, J.P. Morgan Funds, J.P. Morgan Institutional Funds, J.P. Morgan Series Trust II, Mutual Variable Annuity Trust, Mutual Fund Trust, Mutual Fund Select Group, Mutual Fund Group, those accounts in the name of J.P. Morgan Chase & Co., J.P. Morgan Chase Bank NA or Morgan Guaranty Trust Company of New York, each further registered Special Acct. Benefit of Clients Attn: Ken Faith, in the previously enumerated American Century Funds(1), Mutual Fund Investment Trust and Fleming Mutual Fund Group, and to each Fund listed in Appendix I) is a Massachusetts or Delaware business trust or Maryland corporation registered with the Securities and Exchange Commission as an investment company pursuant to the Investment Company Act of 1940, as amended, which currently consists of the Funds listed under its name on Appendix I; and WHEREAS, the Trust desires to appoint DST as Transfer Agent and Dividend Disbursing Agent for all shares of each Fund of each Trust (the "Shares"), and DST desires to accept such appointment; - ---------- (1) Sub-accounting Services only. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. DOCUMENTS TO BE FILED WITH APPOINTMENT. In connection with the appointment of DST as Transfer Agent and Dividend Disbursing Agent for the Trust, there will be filed with DST the following documents: A. A certified copy of the votes of the Board of Trustees of the Trust appointing DST as Transfer Agent and Dividend Disbursing Agent, approving the form of this Agreement, and designating certain persons to sign Certificates, if any, and give written instructions and requests on behalf of the Trust; B. A certified copy of the Declaration of Trust of the Trust and all amendments thereto; C. A certified copy of the Bylaws of the Trust; D. Copies of Registration Statements and amendments thereto, filed with the Securities and Exchange Commission; E. Specimens of all forms of outstanding Certificates; F. Specimens of the signatures of the officers of the Trust authorized to sign Certificates and individuals authorized to sign written instructions and requests; G. An opinion of counsel for the Trust or Corporation, as appropriate, with respect to: (1) The Trust's organization and existence under the laws of its state of organization, (2) The status of all Shares, whether unissued or evidenced by Certificates of the Trust, covered by the appointment under the Securities Act of 1933, as amended, (the "'33 Act") and any other applicable federal or state statute, and (3) That all issued Shares are, and all unissued Shares will be when issued, validly issued, fully paid and non-assessable. 2 2. CERTAIN REPRESENTATIONS AND WARRANTIES OF DST. DST represents and warrants to the Trust that: A. It is a corporation duly organized and existing and in good standing under the laws of Delaware. B. It is duly qualified to carry on its business in the State of Missouri. C. It is empowered under applicable laws and by its Articles of Incorporation and Bylaws to enter into and perform the services contemplated in this Agreement. D. It is registered as a transfer agent to the extent required under the Securities Exchange Act of 1934, as amended, (the "34 Act") and it will remain so registered for the duration of this Agreement. It will promptly notify the Trust in the event of any material change in its status as a registered transfer agent. Should DST fail to be registered with the appropriate federal agency as a transfer agent at any time during this Agreement, the Trust may, on written notice to DST, immediately terminate this Agreement. E. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. F. It has and will continue to have and maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 3. CERTAIN REPRESENTATIONS AND WARRANTIES OF THE TRUST. The Trust represents and warrants to DST that: A. It is a business trust duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts or the State of Delaware, or, with respect to the Fleming Mutual Fund Group, Inc., a Maryland corporation, or with respect to J.P. Morgan Chase & Co., a New York State chartered trust company. B. It is, and with respect to J.P. Morgan Chase & Co., each Portfolio on Appendix I under its name, an open-end, non-diversified management investment company registered under the Investment Company Act of 1940, as amended. C. A registration statement under the '33 Act has been filed and will be effective with respect to all Shares offered for sale. 3 D. All requisite steps have been and will continue to be taken to register the Shares for sale in all applicable states and such registration will be effective at all times Shares are offered for sale in such state. E. The Trust is empowered under applicable laws and by its Declaration of Trust and Bylaws to enter into and perform this Agreement. 4. SCOPE OF APPOINTMENT. A. Subject to the conditions and termination of provisions set forth in this Agreement, the Trust hereby appoints DST as Transfer Agent and Dividend Disbursing Agent for the Shares and for the Shares of future portfolios of the Trust (Appendix I shall be automatically deemed to be revised to include such future portfolio(s)). B. DST hereby accepts such appointment and agrees that it will act as the Trust's Transfer Agent and Dividend Disbursing Agent. DST agrees that it will also act as agent in connection with the Trust's periodic withdrawal payment accounts and other open accounts or similar plans for shareholders, if any. C. The Trust agrees to use its best efforts to deliver to DST in Kansas City, Missouri, as soon as they are available, all of its shareholder account records for any new Fund of the Trust. D. DST, utilizing TA2000(TM), DST's computerized data processing system for securityholder accounting (the "TA2000(TM) System"), will perform the following services as transfer and dividend disbursing agent for the Trust, and as agent of the Trust for shareholder accounts thereof, in a timely manner: issuing (including countersigning), transferring and canceling share certificates; maintaining all shareholder accounts; providing transaction journals; once annually preparing shareholder meeting lists for use in connection with the annual meeting and certifying the shareholder votes of the Trust; mailing shareholder reports and prospectuses; withholding, as required by federal law, taxes on shareholder accounts, disbursing income dividends and capital gains distributions to shareholders, preparing, filing and mailing U.S. Treasury Department Forms 1099, 1042, and 1042S and performing and paying backup withholding as required for all shareholders; preparing and mailing confirmation forms to shareholders and dealers, as instructed, for all purchases and liquidations of shares of the Trust and other 4 transactions in shareholders' accounts requiring confirmation under applicable law; recording reinvestment of dividends and distributions in Shares; providing or making available on-line daily and monthly reports as both are regularly provided by the TA2000(TM) System and as requested by the Trust or its management company; maintaining those records necessary to carry out DST's duties hereunder, including all information reasonably required by the Trust to account for all transactions in the Shares, calculating the appropriate sales charge with respect to each purchase of the Shares as set forth in the prospectus for the Trust, determining the portion of each sales charge payable to the dealer participating in a sale in accordance with schedules delivered to DST by the Trust's principal underwriter or distributor (hereinafter "principal underwriter") from time to time, disbursing dealer commissions collected to such dealers, determining the portion of each sales charge payable to such principal underwriter and disbursing such commissions to the principal underwriter; receiving correspondence pertaining to any former, existing or new shareholder account, processing such correspondence for proper recordkeeping, and responding promptly to shareholder correspondence; mailing to dealers confirmations of wire order trades; mailing copies of shareholder statements to shareholders and dealers in accordance with the Trust's instructions; processing, generally on the date of receipt, purchases or redemptions or instructions to settle any mail or wire order purchases or redemptions received in proper order as set forth in the prospectus, rejecting promptly any requests not received in proper order (as defined by the Trust, the Trust's agents or prospectus, or the Procedures, as hereinafter defined), and causing exchanges of shares to be executed in accordance with the Trust's instructions and prospectus, the Procedures and the general exchange privilege applicable; operating the order desk on behalf of the Trust for the purpose of taking trade orders from broker-dealers and institutions, confirming orders on "T+1" (Trade Date Plus One), monitoring the settlement of such orders and advising the Trust once such orders become delinquent based upon the Trust's guidelines; monitoring "as of's" and advising broker-dealers of the necessity to reimburse the Trust when the as of loss from a transaction exceeds the thresholds 5 established by the Trust; and monitoring, administering and updating (but not verifying the accuracy of) the MENTAP/Market Advisor database. E. At the request of Trust, DST shall use reasonable efforts to provide the services set forth in Section 4.D. other than through DST's usual methods and procedures to utilize the TA2000 System, that is by performing services requiring more manual intervention by DST, either in the entry of data or in the modification or amendment of reports generated by the TA2000 System, or where information is provided to DST after the commencement of the nightly processing cycle of the TA2000 System, thereby decreasing the effective time for performance by DST (the "Exception Services"). F. DST shall use reasonable efforts to provide, reasonably promptly under the circumstances, the same services with respect to any new, additional functions or features or any changes or improvements to existing functions or features as provided for in the Trust's instructions, prospectus or application as amended from time to time, for the Trust; provided (i) DST is advised in advance by the Trust of any changes therein and (ii) the TA2000(TM) System and the mode of operations utilized by DST, as then constituted, supports such additional functions and features. If any addition to, improvement of or change in the features and functions currently provided by the TA2000(TM) System or the operations as requested by the Trust requires an enhancement or modification to the TA2000(TM) System or to operations as presently conducted by DST, DST shall not be liable therefore until such modification or enhancement is installed on the TA2000(TM) System or new mode of operation is instituted. If any new, additional function or feature or change or improvement to existing functions or features or new service or mode of operation measurably increases DST's cost of performing the services required hereunder at the current level of service, DST shall advise the Trust of the amount of such increase and if the Trust elects to utilize such function, feature or service, DST shall be entitled to increase its fees by the amount of the increase in costs. In no event shall DST be responsible for or liable to provide any additional function, feature, improvement or change in method of operation requested by the Trust until it has consented thereto in writing. 6 G. The Trust shall have the right to add all new Funds of the Trust to the TA2000(TM) System, provided that the Trust provides DST with at least thirty (30) days' prior written notice and provided, further, that the requirements of the new series are generally consistent with services then being provided by DST under this Agreement. Rates or charges for additional Funds shall be as set forth in Exhibit A, as hereinafter defined, for the remainder of the contract term except as such Fund uses functions, features or characteristics for which DST has imposed an additional charge as part of its standard pricing schedule. In the latter event, rates and charges shall be in accordance with DST's then-standard pricing schedule. Notwithstanding the foregoing, nothing herein is intended to, nor does it, prohibit the Trust from offering Funds under a "private label" arrangement whereby such Funds consist of omnibus accounts whose shareowner detail, reflecting ownership of the shares of the omnibus account, are maintained on another shareholder accounting and recordkeeping system other than on the TA2000 System. 5. LIMIT OF AUTHORITY. Unless otherwise expressly limited by the resolution of appointment or by subsequent action by the Trust, the appointment of DST as Transfer Agent will be construed to cover the full amount of authorized stock of the class or classes for which DST is appointed as the same will, from time to time, be constituted, and any subsequent increases in such authorized amount. In case of such increase the Trust will file with DST: A. If the appointment of DST was theretofore expressly limited, a certified copy of a resolution of the Board of Trustees of the Trust increasing the authority of DST; B. A certified copy of the amendment to the Declaration of Trust of the Trust authorizing the increase of stock; C. A certified copy of the order or consent of each governmental or regulatory authority required by law to consent to the issuance of the increased stock, or an opinion of counsel that the order or consent of no other governmental or regulatory authority is required; D. Opinion of counsel for the Trust stating: 7 (1) The status of the additional shares of stock of the Trust under the `33 Act and any other applicable federal or state statute; and (2) That the additional shares are, or when issued will be, validly issued, fully paid and non-assessable. 6. COMPENSATION AND EXPENSES. A. In consideration for its services hereunder as Transfer Agent and Dividend Disbursing Agent, the Trust will pay to DST, from time to time, a reasonable compensation for all services rendered as Agent and, also, all DST's reasonable billable expenses, charges, counsel fees, and other disbursements ("Compensation and Expenses") incurred in connection with the agency. "Expenses" are more fully described in Section 6.B. of this Agreement. Such Compensation and Expenses are set forth in a separate schedule previously agreed to by the Trust and DST, a copy of which is attached hereto as Exhibit A. If the Trust has not paid such Compensation and Expenses to DST within a reasonable time, DST may charge against any monies held under this Agreement, the amount of any Compensation and Expenses for which it shall be entitled to reimbursement under this Agreement. B. The Trust also agrees promptly to reimburse DST for all reasonable billable expenses or disbursements incurred by DST in connection with the performance of services under this Agreement including, but not limited to: expenses for postage; express delivery services; freight charges; envelopes, checks, drafts, forms (continuous or otherwise); specially requested reports and statements; telephone calls; telegraphs; stationery supplies; counsel fees incurred in connection with the review of the legal sufficiency of documentation provided by a shareholder or otherwise as to the advisability of complying with the request or instruction of a shareholder or person purporting to act on behalf of a shareholder; outside printing and mailing firms (including DST Output, Inc. and its affiliates ["DST Output"]); magnetic tapes, reels or cartridges (if sent to the Trust or to a third party at the Trust's request) and magnetic tape handling charges; off-site record storage and media for storage of records (e.g., microfilm, microfiche, optical platters, computer tapes); computer equipment installed at the Trust's request at the Trust's or a third party's premises; telecommunications equipment and telephone/telecommunication 8 lines between the Trust and its agents, on one hand, and DST on the other; proxy soliciting, processing and/or tabulating costs; second-site backup computer facility; transmission of statement data for remote printing or processing other than by DST Output (at a charge of .035/record); and National Securities Clearing Corporation ("NSCC") transaction fees to the extent any of the foregoing are paid or incurred by DST. The Trust agrees to pay postage expenses at least one day in advance if so requested. In addition, any other expenses incurred by DST at the request or with the consent of the Trust will be promptly reimbursed by the Trust. C. Amounts due hereunder shall be due and paid on or before the thirtieth (30th) calendar day after receipt of the statement therefor by the Trust (the "Due Date"). The Trust is aware that its failure to pay all amounts in a timely fashion so that they will be received by DST on or before the Due Date will give rise to costs to DST not contemplated by this Agreement, including but not limited to carrying, processing and accounting charges. Accordingly, subject to Section 6.D. hereof, in the event that any amounts due hereunder are not received by DST by the Due Date, the Trust shall pay a late charge equal to the lesser of the maximum amount permitted by applicable law or the product of one and one-half (1 1/2) percentage points per month times the amount overdue, times the number of days from the Due Date up to and including the day on which payment is received by DST. The parties hereby agree that such late charge represents a fair and reasonable computation of the costs incurred by reason of late payment or payment of amounts not properly due. Acceptance of such late charge shall in no event constitute a waiver of the Trust's or DST's default or prevent the non-defaulting party from exercising any other rights and remedies available to it. D. In the event that any charges are disputed, the Trust shall, on or before the Due Date, pay all undisputed amounts due hereunder and notify DST in writing of any disputed charges for billable expenses which it is disputing in good faith. Payment for such disputed charges shall be due on or before the close of the fifth (5th) business day after the day on which DST provides to the Trust documentation which an objective observer would agree reasonably supports the disputed charges (the 9 "Revised Due Date"). Late charges shall not begin to accrue as to charges disputed in good faith until the first business day after the Revised Due Date. E. The fees and charges set forth on Exhibit A shall increase or may be increased as follows: (1) On the first day of each anniversary of this Agreement, subject to Note E of Exhibit A; (2) DST may increase the fees and charges set forth on Exhibit A upon at least ninety (90) days prior written notice, if changes in existing laws, rules or regulations: (i) require substantial system modifications or (ii) materially increase DST's cost of performance hereunder; (3) DST may charge for additional features of TA2000 used by the Trust which features are not consistent with the Trust's current processing requirements; and (4) In the event DST, at the Trust's request or direction, performs Exception Services, DST shall be entitled to increase the fees and charges for such Exception Services from those set forth on Exhibit A to the extent such Exception Services increase DST's cost of performance. If DST notifies the Trust of an increase in fees or charges pursuant to subparagraph (2) of this Section 6.E., the parties shall confer, diligently and in good faith and agree upon a new fee to cover the amount necessary, but not more than such amount, to reimburse DST for the Trust's aliquot portion of the cost of developing the new software to comply with regulatory charges and for the increased cost of operation. If DST notifies the Trust of an increase in fees or charges under subparagraphs (3) or (4) of this Section 6.E., the parties shall confer, diligently and in good faith, and agree upon a new fee to cover such new Trust feature. 7. OPERATION OF DST SYSTEM. In connection with the performance of its services under this Agreement, DST is responsible for such items as: A. That entries in DST's records, and in the Trust's records on the TA2000(TM) System created by DST and DST's affiliates, accurately reflect the orders, instructions, and 10 other information received by DST and such affiliates from the Trust, the Trust's distributor, manager or principal underwriter, J.P. Morgan Fund Distributors, Inc, Chase Fleming Asset Management, (USA) Inc. or any successor of any of the foregoing (all hereinafter referred to as "JPM") and its affiliates, entities from whom JPM or the Trust have directed DST to accept orders, instructions or other information, the Trust's investment adviser, banks or other entities which DST has been advised by the Trust or JPM are affiliated with or a correspondent of JPM, or the Trust's administrator (each of the foregoing being an "Authorized Person"), broker-dealers or shareholders (existing or new). DST has currently been instructed, by way of example and not limitation, to accept telephone instructions from any person reasonably believed by DST to be a representative of an Authorized Person, to accept third party checks initiated by or received from or through a broker/dealer or a JPM-customer relationship, to accept transactions and documentation by fax in accordance with the guidelines established by an Authorized Person, to allow corporations, partnerships, trusts and other accounts not registered in the name of a single individual and individually owned accounts to have telephone or "VOICE" transaction processing privileges (the "Privileges"), to establish Privileges on all accounts unless the establishing shareholder explicitly directs that telephone exchanges and redemptions not be permitted and to accept and to effectuate transmissions and trades entered on a remote basis by JPM and banks affiliated with JPM (without verification of the contents of such transmissions and trades); B. That shareholder lists, shareholder account verifications, confirmations and other shareholder account information to be produced from its records or data be available and accurately reflect the data in the Trust's records on the TA2000(TM) System; C. The accurate and timely issuance of dividend and distribution checks in accordance with instructions received from the Trust and the data in the Trust's records on the TA2000(TM) System; D. That redemption transactions and payments be effected timely, to be processed under normal circumstances on the day of receipt, and accurately in accordance with redemption instructions received by DST from Authorized Persons, broker-dealers or shareholders and the data in the Trust's records on the TA2000(TM) System; 11 E. The deposit daily in the Trust's appropriate special bank account of all checks and payments received by DST from NSCC, broker-dealers or shareholders for investment in shares; F. Notwithstanding anything herein to the contrary, with respect to "as of" adjustments, DST will not assume one hundred percent (100%) responsibility for losses resulting from "as of's" due to clerical errors or misinterpretations of shareholder instructions, but DST will discuss with the Fund DST's accepting liability for an "as of" on a case-by-case basis and may accept financial responsibility for a particular situation resulting in a financial loss to the Fund where such loss is "material", as hereinafter defined, and, under the particular facts at issue, DST in its discretion believes DST's conduct was culpable and DST's conduct is the sole cause of the loss. A loss is "material" for purposes of this Section 7.F. when it results in a pricing error on a given day which is (i) greater than a negligible amount per shareholder, (ii) equals or exceeds one ($.01) full cent per share times the number of shares outstanding or (iii) equals or exceeds the product of one-half of one percent (1/2%) times Fund's Net Asset Value per share times the number of shares outstanding (or, in case of (ii) or (iii), such other amounts as may be adopted by applicable accounting or regulatory authorities from time to time). When DST concludes that it should contribute to the settlement of a loss, DST's responsibility will commence with that portion of the loss over $0.01 per share calculated on the basis of the total value of all shares owned by the affected portfolio (i.e., on the basis of the value of the shares of the total portfolio, including all classes of that portfolio, not just those of the affected class); G. The requiring of proper forms of instructions, signatures and signature guarantees and any necessary documents supporting the opening of shareholder accounts, transfers, redemptions and other shareholder account transactions, all in conformance with DST's present procedures as set forth in its Legal Manual, Third Party Check Procedures, Checkwriting Draft Procedures, and Signature Guarantee Procedures (collectively the "Procedures") with such changes or deviations therefrom as may be from time to time required or approved by the Trust, its investment adviser or principal underwriter, or its or DST's counsel and the rejection 12 of orders or instructions not in good order in accordance with the applicable prospectus or the Procedures; and H. The maintenance of a current, duplicate set of the Trust's essential records at a secure separate location, in a form available and usable forthwith in the event of any breakdown or disaster disrupting its main operation. 8. INDEMNIFICATION. A. DST shall at all times act in good faith and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement. DST shall provide its services hereunder in accordance with the '34 Act, and other Federal laws, rules and regulations of governmental authorities having jurisdiction over DST. In the absence of bad faith, willful misconduct, knowing violations of applicable law pertaining to the manner in which transfer agency services are to be performed by DST (excluding any violations arising directly or indirectly out of the actions or omissions to act of third parties unaffiliated with DST), reckless disregard of the performance of its duties, or negligence on its part, DST shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Agreement. For those activities or actions delineated in the Procedures, DST shall be presumed to have used reasonable care, due diligence and acted in good faith if it has acted in accordance with the Procedures, copies of which have been provided to the Trust and reviewed and approved by the Trust's counsel, as amended from time to time with approval of counsel, or for any deviation therefrom approved by the Trust or DST counsel. B. DST shall not be responsible for, and the Trust shall indemnify and hold DST harmless from and against, any and all losses, damages, reasonable costs, reasonable charges, reasonable counsel fees, payments, reasonable expenses and liability (the "Adverse Consequences") which may be asserted against DST or for which DST may be held to be liable, arising out of or attributable to: (1) All actions of DST required to be taken by DST pursuant to this Agreement, provided that DST has acted in good faith and with due diligence and reasonable care; 13 (2) The Trust's refusal or failure to comply with the terms of this Agreement, the Trust's negligence or willful misconduct, or the breach of any representation or warranty of the Trust hereunder; (3) The good faith reliance on, or the carrying out of, any written or oral instructions or requests of persons designated by the Trust in writing (see Exhibit B) from time to time as authorized to give instructions on its behalf or representatives of an Authorized Person or DST's good faith reliance on, or use of, information, data, records and documents received from, or which have been prepared and/or maintained by the Trust, its investment advisor, its sponsor or its principal underwriter; (4) Defaults by dealers or shareowners with respect to payment for share orders previously entered; (5) The offer or sale of Shares in violation of any requirement under federal securities laws or regulations or the securities laws or regulations of any state or in violation of any stop order or other determination or ruling by any federal agency or state with respect to the offer or sale of such shares in such state (unless such violation results from DST's failure to comply with written instructions of the Trust or of any officer of the Trust that no offers or sales be input into the Trust's securityholder records in or to residents of such state); (6) Any error or mistake of the Trust, any Authorized Person, and any agent designated by the Trust in the use of the TA2000(TM) System, the data center, computer and related equipment used to access the TA2000(TM) System (the "DST Facilities"), and control procedures relating thereto in the verification of output and in the remote input of data; (7) Errors, inaccuracies, and omissions in, or errors, inaccuracies or omissions of DST arising out of or resulting from such errors, inaccuracies and omissions in, the Trust's records, shareholder and other records, delivered to DST hereunder by the Trust or its prior agent(s); 14 (8) Actions or omissions to act by the Trust or agents designated by the Trust with respect to duties assumed thereby as provided for in Section 21 hereof; and (9) DST's performance of Exception Services except where DST acted or omitted to act in bad faith, with reckless disregard of its obligations or with gross negligence. C. Except where DST is entitled to indemnification under Section 8.B. hereof and with respect to "as of's" set forth in Section 7.F., DST shall indemnify and hold the Trust harmless from and against any and all Adverse Consequences arising out of DST's failure to comply with the terms of this Agreement or arising out of or attributable to DST's negligence, willful misconduct or reckless disregard of its obligations under this Agreement or DST's breach of any of its representations or warranties under this Agreement. In the event that any claim is asserted against DST under this Agreement for any reason other than DST's bad faith, willful misconduct or gross negligence, DST's liability with respect to, arising from or arising in connection with this Agreement, or from all services provided or omitted to be provided under this Agreement, whether in contract, or in tort, or otherwise, is limited to, and shall not exceed, the amounts paid hereunder by the Trust to DST as fees and charges, but not including reimbursable expenses, during the previous twelve (12) months (the "Liability Limitation Amount"). D. EXCEPT FOR VIOLATIONS OF SECTION 23, IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR CONSEQUENTIAL DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THE POSSIBILITY THEREOF. E. Promptly after receipt by an indemnified person of notice of the commencement of any action, such indemnified person will, if a claim in respect thereto is to be made against an indemnifying party hereunder, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party will 15 not relieve an indemnifying party from any liability that it may have to any indemnified person for contribution or otherwise under the indemnity agreement contained herein except to the extent it is prejudiced as a proximate result of such failure to timely notify. In case any such action is brought against any indemnified person and such indemnified person seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, assume the defense thereof (in its own name or in the name and on behalf of any indemnified party or both with counsel reasonably satisfactory to such indemnified person); provided, however, if the defendants in any such action include both the indemnified person and an indemnifying party and the indemnified person shall have reasonably concluded that there may be a conflict between the positions of the indemnified person and an indemnifying party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified persons which are inconsistent with those available to an indemnifying party, the indemnified person or indemnified persons shall have the right to select one separate counsel (in addition to local counsel) to assume such legal defense and to otherwise participate in the defense of such action on behalf of such indemnified person or indemnified persons at such indemnified party's sole expense. Upon receipt of notice from an indemnifying party to such indemnified person of its election so to assume the defense of such action and approval by the indemnified person of counsel, which approval shall not be unreasonably withheld (and any disapproval shall be accompanied by a written statement of the reasons therefor), the indemnifying party will not be liable to such indemnified person hereunder for any legal or other expenses subsequently incurred by such indemnified person in connection with the defense thereof. An indemnifying party will not settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified persons are actual or potential parties to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified person from all liability arising out of 16 such claim, action, suit or proceeding. An indemnified party will not, without the prior written consent of the indemnifying party, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder. If it does so, it waives its right to indemnification therefor. F. In any case an indemnifying person may be asked to indemnify or save an indemnified person harmless, the indemnified person shall use reasonable care to (i) fully and promptly advise the indemnifying person of all pertinent facts concerning the situation in question, and (ii) timely advise the indemnifying person of any matter as to which the indemnified person is aware that a claim which may give rise to Adverse Consequences has been asserted or is being threatened and appears reasonably likely to be asserted. 9. CERTAIN COVENANTS OF DST AND THE TRUST. A. All requisite steps will be taken by the Trust from time to time when and as necessary to register the Shares for sale in all states in which the Shares shall at the time be offered for sale and require registration. If at any time the Trust receives notice of any stop order or other proceeding in any such state affecting such registration or the sale of the Shares, or of any stop order or other proceeding under the federal securities laws affecting the sale of the Shares, the Trust will give prompt notice thereof to DST. B. DST hereby agrees to perform such transfer agency functions as are set forth in Section 4.D. above and Exhibit C, to establish and to maintain facilities and procedures reasonably acceptable to the Trust for safekeeping of Certificates, check forms, and facsimile signature imprinting devices, if any, and for the preparation or use, and the keeping account of, such Certificates, forms and devices, and to carry such insurance as DST considers adequate and reasonably available. C. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and Rules thereunder, DST agrees that all records maintained by DST relating to the services to be performed by DST under this Agreement are the property of the Trust and will be preserved and will be surrendered promptly to the Trust on request. 17 D. DST agrees to furnish the Trust annual reports of (i) DST's financial condition, consisting of a balance sheet, earnings statement and any other financial information reasonably requested by the Trust, and (ii) a report in accordance with Statements on Auditing Standards No. 70 (the "SAS 70 Report"). The annual financial statements will be certified by DST's certified public accountants. E. DST represents and agrees that it will use its best efforts within reasonable limits to keep current on the trends of the investment company industry relating to shareholder services and will use its best efforts to continue to modernize and improve. Notwithstanding the foregoing, (i) DST shall not be liable for failing to make any modification or improvement as to the necessity of which the Fund has not advised DST in writing and (ii) for any delay in the implementation of such modification or improvement where DST reasonably requires more time than was permitted by circumstances or such regulations. F. DST will permit the Trust and its authorized representatives to make periodic inspections of its operations as such would involve the Trust at reasonable times during business hours subject to such authorized representatives' execution of DST's "Confidentiality and Limited Use Agreement, a blank copy of which is attached hereto as Exhibit D. G. DST agrees to use its best efforts to provide in Kansas City at the Trust's expense two (2) man weeks of training for the Trust's personnel in connection with use and operation of the TA2000(TM) System. All travel and reimbursable expenses incurred by the Trust's personnel in connection with and during training at DST's Facility shall be borne by the Trust. At the Trust's option and expense, DST also agrees to use its best efforts to provide an additional two (2) man weeks of training at the Trust's facility for the Trust's personnel in connection with the conversion to the TA2000(TM) System. Reasonable travel, per diem and reimbursable expenses incurred by DST personnel in connection with and during training at the Trust's facility or in connection with the conversion shall be borne by the Trust. H. DST shall reasonably cooperate with the Trust's independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to assure that all readily necessary information is made available to such 18 accountants for the expression of their opinion as such may be required from time to time. Special reports or information may be charged for. A report is "Special" if it is not regularly produced by TA2000(TM) or requires special programming. 10. RECAPITALIZATION OR READJUSTMENT. In case of any recapitalization, readjustment or other change in the capital structure of the Trust requiring a change in the form of Certificates, DST will issue or register Certificates in the new form in exchange for, or in transfer of, the outstanding Certificates in the old form, upon receiving: A. Written instructions from an officer of the Trust; B. Certified copy of the amendment to the Declaration of Trust or other document effecting the change; C. Certified copy of the order or consent of each governmental or regulatory authority, required by law to the issuance of the stock in the new form, and an opinion of counsel that the order or consent of no other government or regulatory authority is required; D. Specimens of the new Certificates in the form approved by the Board of Trustees of the Trust, with a certificate of the Secretary of the Trust as to such approval; E. Opinion of counsel for the Trust stating: (1) The status of the shares of stock of the Trust in the new form under the '33 Act, as amended and any other applicable federal or state statute; and (2) That the issued shares in the new form are, and all unissued shares will be when registered, validly issued, fully paid and nonassessable. 11. STOCK CERTIFICATES ("CERTIFICATES"). The Trust will furnish DST with a sufficient supply of blank Certificates and from time to time will renew such supply upon the request of DST. Such Certificates will be signed manually or by facsimile signatures of the officers of the Trust authorized by law and by bylaws to sign Certificates, and if required, will bear the corporate seal or facsimile thereof. 12. DEATH, RESIGNATION OR REMOVAL OF SIGNING OFFICER. The Trust will file promptly with DST written notice of any change in the officers authorized to sign Certificates, written instructions or requests, together with a revised Exhibit B. In case any officer of the Trust who will have signed manually or whose 19 facsimile signature will have been affixed to blank Certificates will die, resign, or be removed prior to the issuance of such certificates, DST may issue or register such Certificates as the Certificates of the Trust notwithstanding such death, resignation, or removal, until specifically directed to the contrary by the Trust in writing. In the absence of such direction, the Trust will file promptly with DST such approval, adoption, or ratification as may be required by law. 13. FUTURE AMENDMENTS OF DECLARATION OF TRUST AND BYLAWS. The Trust will promptly file with DST copies of all material amendments to its Declaration of Trust or Bylaws made after the date of this Agreement. 14. INSTRUCTIONS, OPINION OF COUNSEL AND SIGNATURES OF JPM. Any time DST shall be in doubt as to any proposed or requested action or omission to be taken or omitted by it, DST may apply to any person authorized by the Trust to give instructions to DST. DST may with the approval of a Trust officer consult with legal counsel for the Trust or may consult with DST's own legal counsel at DST's own expense, with respect to any matter involving a question of law involved in any action to be taken or omitted by DST in connection with the agency. DST will not be liable for any action taken or omitted by it in good faith in reliance upon such instructions or upon the opinion of such counsel. Notwithstanding the foregoing, the Trust shall reimburse DST for outside counsel fees incurred in connection with the review of the legal sufficiency of documentation provided by a shareholder or otherwise as to the advisability of complying with the request of a shareholder or person purporting to act on behalf of a shareholder. DST will be protected in acting upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons and will not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust. It will also be protected in recognizing Certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Trust, and the proper countersignature of any former Transfer Agent or Registrar, or of a co-Transfer Agent or co-Registrar. 15. FORCE MAJEURE AND DISASTER RECOVERY PLANS. A. DST shall not be responsible or liable for its failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by 20 circumstances beyond its reasonable control, including, without limitation: any interruption, loss or malfunction or any utility, transportation, computer (hardware or software) or communication service; inability to obtain labor, material, equipment or transportation, or a delay in mails; governmental or exchange action, statute, ordinance, rulings, regulations or direction; war, strike, riot, emergency, civil disturbance, terrorism, vandalism, explosions, labor disputes, freezes, floods, fires, tornadoes, acts of God or public enemy, revolutions, or insurrection; or any other cause, contingency, circumstance or delay not subject to DST's reasonable control which prevents or hinders DST's performance hereunder. B. DST currently maintains an agreement with a third party whereby DST is to be permitted to use on a "shared use" basis a "hot site" (the "Recovery Facility") maintained by such party in event of a disaster rendering the DST Facilities inoperable. DST has developed and is continually revising a business contingency plan (the "Business Contingency Plan") detailing which, how, when, and by whom data maintained by DST at the DST Facilities will be installed and operated at the Recovery Facility. Provided the Trust is paying its pro rata portion of the charge therefor, DST would, in event of a disaster rendering the DST Facilities inoperable, use reasonable efforts to convert the TA2000(TM) System containing the designated Trust data to the computers at the Recovery Facility in accordance with the then current Business Contingency Plan. C. DST also currently maintains, separate from the area in which the operations which provides the services to the Trust hereunder are located, a Crisis Management Center consisting of phones, computers and the other equipment necessary to operate a full service transfer agency business in the event one of its operations areas is rendered inoperable. The transfer of operations to other operating areas or to the Crisis Management Center is also covered in DST's Business Contingency Plan. 21 16. CERTIFICATION OF DOCUMENTS. The required copy of the Declaration of Trust of the Trust and copies of all amendments thereto will be certified by the Secretary of State (or other appropriate official) of the State of Incorporation, and if such Declaration of Trust and amendments are required by law to be also filed with a county, city or other officer of official body, a certificate of such filing will appear on the certified copy submitted to DST. A copy of the order or consent of each governmental or regulatory authority required by law to the issuance of the stock will be certified by the Secretary or Clerk of such governmental or regulatory authority, under proper seal of such authority. The copy of the Bylaws and copies of all amendments thereto, and copies of resolutions of the Board of Trustees of the Trust, will be certified by the Secretary or an Assistant Secretary of the Trust under the Trust's seal. 17. RECORDS. DST will maintain customary records in connection with its agency, and particularly will maintain those records required to be maintained pursuant to subparagraph (2) (iv) of paragraph (b) of Rule 31a-1 under the Investment Company Act of 1940, if any. 18. DISPOSITION OF BOOKS, RECORDS AND CANCELED CERTIFICATES. DST may send periodically to the Trust, or to where designated by the Secretary or an Assistant Secretary of the Trust, all books, documents, and all records no longer deemed needed for current purposes and Certificates which have been canceled in transfer or in exchange, upon the understanding that such books, documents, records, and Certificates will be maintained by the Trust under and in accordance with the requirements of Section 17Ad-7 adopted under the Securities Exchange Act of 1934. Such materials will not be destroyed by the Trust without the consent of DST (which consent will not be unreasonably withheld), but will be safely stored for possible future reference. 19. PROVISIONS RELATING TO DST AS TRANSFER AGENT. A. DST will make original issues of Certificates upon written request of an officer of the Trust and upon being furnished with a certified copy of a resolution of the Board of Trustees authorizing such original issue, an opinion of counsel as outlined in subparagraphs 1.G. and 5.D. of this Agreement, any documents required by Sections 5. or 10. of this Agreement, and necessary funds for the payment of any original issue tax. 22 B. Before making any original issue of Certificates of the Trust will furnish DST with sufficient funds to pay all required taxes on the original issue of the stock, if any. The Trust will furnish DST such evidence as may be required by DST to show the actual value of the stock. If no taxes are payable DST will be furnished with a certified statement from an officer of the Trust to that effect. C. Shares of stock represented by Certificates will be transferred and new Certificates issued in transfer, or Shares of stock accepted for redemption and funds remitted therefor, or book entry transfer be effected, upon surrender of the old Certificates in form or receipt by DST of instructions deemed by DST properly endorsed for transfer or redemption accompanied by such documents as DST may deem necessary to evidence the authority of the person making the transfer or redemption. DST reserves the right to refuse to transfer or redeem Shares until it is satisfied that the endorsement or signature on the Certificate or any other document is valid and genuine, and for that purpose it may require a guaranty of signature in accordance with the Signature Guarantee Procedures. DST will incur no liability and shall be indemnified and held harmless by the Fund for any action taken by it in accordance with an instruction bearing what purports to be a signature guarantee or medallion of an Eligible Guarantor Institution or otherwise in accordance with DST's Signature Guarantee Procedures adopted pursuant to 17 C.F.R. Section 240.17Ad-15 under the Securities and Exchange Act of 1934. DST also reserves the right to refuse to transfer or redeem shares until DST is satisfied that the requested transfer or redemption is legally authorized, and it will incur no liability for the refusal in good faith to make transfers or redemptions which, in its reasonable judgment, are improper or unauthorized. Authority to perform a redemption shall be suspended when the Trust suspends the shareholders' right of redemption provided that the Trust delivers written notice of such suspension to DST. DST may, in effecting transfers or redemptions, rely upon Simplification Acts, UNIFORM COMMERCIAL CODE or other statutes which protect it and the Trust in not requiring complete fiduciary documentation. In cases in which DST is not directed or otherwise required to maintain the consolidated records of shareholder's accounts, DST will not be liable for any loss which may arise by reason of not having such records. 23 D. When mail is used for delivery of Certificates, DST will forward Certificates in "nonnegotiable" form by first class or registered mail and Certificates in "negotiable" form by registered mail, all such mail deliveries to be covered while in transit to the addressee by insurance arranged for by DST. E. DST will issue and mail subscription warrants, Certificates representing stock dividends, exchanges or split ups, or act as Conversion Agent upon receiving written instructions from any officer of the Trust and such other documents as DST deems necessary. F. DST will issue, transfer, and split up Certificates and will issue Certificates of stock representing full Shares upon surrender of scrip certificates aggregating one full share or more when presented to DST for that purpose upon receiving written instructions from an officer of the Trust and such other documents as DST may deem necessary. G. DST may issue new Certificates in place of Certificates represented to have been lost, destroyed, stolen or otherwise wrongfully taken upon receiving instructions from the Trust and indemnity satisfactory to DST and the Trust, and may issue new Certificates in exchange for, and upon surrender of, mutilated Certificates. Such instructions from the Trust will be in such form as will be approved by the Board of Trustees of the Trust and will be in accordance with the provisions of law and the bylaws of the Trust governing such matter. H. DST will supply a shareholder's list to the Trust for its annual meeting upon receiving a request from an officer of the Trust. It will also, at the expense of the Trust, supply lists at such other times as may be requested by an officer of the Trust. I. Upon receipt of written instructions of an officer of the Trust, DST will, at the expense of the Trust, address and mail notices to shareholders. J. In case of any request or demand for the inspection of the securityholder files or stock books of the Trust or any other books or records in the possession of the Trust in DST's possession, DST will not permit such inspection, except (i) after prior notification to and approval in writing by the Trust or Advisor as appropriate, which approval shall not be unreasonably withheld and may not be withheld or delayed where DST may be exposed to civil or criminal contempt proceedings for failure to 24 comply when requested to divulge such information by duly constituted authorities, or (ii) when so requested by the Trust or an Authorized Person. Nothing in the foregoing is intended to, nor does it, prohibit or deny to DST the right to disclose information requested by subpoena, Court Order, administrative order or request issued by a federal, state or local authority purporting to be issued under statutory authority or a self-regulatory organization registered under the '34 Act. DST shall use reasonable efforts to advise the Trust concerning subpoenas received for records of the Trust and, upon being so advised, the Trust shall be responsible for handling and responding thereto. 20. PROVISIONS RELATING TO DIVIDEND DISBURSING AGENCY. A. DST will, at the expense of the Trust, provide a special form of check containing the imprint of any device or other matter desired by the Trust. Said checks must, however, be of a form and size convenient for use by DST. B. If the Trust desires to include additional printed matter, financial statements, etc., with the dividend checks, the same will be furnished DST within a reasonable time prior to the date of mailing of the dividend checks, at the expense of the Trust. C. If the Trust desires its distributions mailed in any special form of envelopes, sufficient supply of the same will be furnished to DST but the size and form of said envelopes will be subject to the approval of DST. If stamped envelopes are used, they must be furnished by the Trust; or if postage stamps are to be affixed to the envelopes, the stamps or the cash necessary for such stamps must be furnished by the Trust. D. DST shall establish and maintain, and is hereby authorized to establish and to maintain, under the usual terms and conditions prevalent in the industry and on behalf of the Trust as agent of the Trust, in DST's own name or under the J.P. Morgan name (or that of the Trusts as a group or of an Affiliate thereof), one or more deposit accounts, into which DST shall deposit the funds DST receives for payment of dividends, distributions, redemptions or other disbursements provided for hereunder and to draw checks against such accounts. E. DST is authorized and directed to stop payment of checks theretofore issued hereunder, but not presented for payment, when the payees thereof allege either that 25 they have not received the checks or that such checks have been mislaid, lost, stolen, destroyed or through no fault of theirs, are otherwise beyond their control, and cannot be produced by them for presentation and collection, and, to issue and deliver duplicate checks in replacement thereof. 21. ASSUMPTION OF DUTIES BY THE TRUST OR AGENTS DESIGNATED BY THE TRUST. A. The Trust or its designated agents other than DST may assume certain duties and responsibilities with respect to the operations of the Trust, including (with DST's agreement) providing all, or a portion, of those services which DST is obligated to provide under Section 4.D. of this Agreement. B. To the extent the Trust or its agent or affiliate assumes DST's duties and responsibilities (which assumption should be embodied in writing), DST shall be relieved from all responsibility and liability therefor (including any Adverse Consequences directly or indirectly arising out of or resulting from the actions or omissions of the Trust or its designees, as well as from any "as of" liability or withholding reversals in connection therewith) and DST is hereby indemnified and held harmless against any liability therefrom in the same manner and degree as provided for in Section 8 hereof. C. Initially, with respect to accounts serviced by JPM or banks affiliated with or a correspondent of JPM, the Trust or its designees shall be responsible for the following: (i) answering and responding to telephone inquiries from shareholders and brokers; (ii) accepting shareholder and broker instructions (either or both oral and written) and (A) transmitting to DST orders (transactions and maintenance) based on such instructions for input into TA2000 by DST or (B) themselves inputting such orders into TA2000 on a remote basis; (iii) preparing and mailing confirmations; (iv) classifying the status of shareholders and shareholder accounts under applicable tax law and in accordance with the capabilities provided on TA2000, and performing all compliance functions with respect thereto, including without limitation obtaining certified TIN's, Form W-8's and other documentation, and properly coding accounts (social codes, tax status, foreign accounts and so forth) as provided for on TA2000; (v) on a remote basis establishing shareholder accounts on the TA2000(TM) System, establishing the appropriate privileges 26 thereupon and assigning social codes and Taxpayer Identification Number codes thereof; (vi) disbursing monies of the Trust; (vii) sending redemption and dividend wires in accordance with instructions received; and (viii) following up and collecting upon unsettled trade orders and unpaid broker-dealer, institutional or shareholder "as of's". Additionally, the Trust or its designees are also responsible for verifying the accuracy of, and notifying DST as to errors in, the MENTAP/Market Advisor and Confluence FundStation databases. 22. TERMINATION OF AGREEMENT. A. This Agreement shall be in effect from the 1st day of September, 2001, through the 31st day of August, 2006 (the "Initial Term" of this Transfer Agency Agreement"). This Agreement shall thereafter automatically extend for additional, successive five (5) year terms upon the expiration of any term hereof, unless terminated as of the end of any term by either party on not less than six (6) month's prior written notice to the other party. Each additional five (5) year period shall be an additional term of this Agreement. However, notwithstanding anything in this Agreement to the contrary, the effective date of any termination shall not occur during the period from December 15 through March 30 of any year to avoid adversely impacting year end. B. Each party, in addition to any other rights and remedies, shall have the right to terminate this Agreement forthwith upon the occurrence at any time of any of the following events with respect to the other party: (1) The bankruptcy of the other party or its assigns or the appointment of a receiver for the other party or its assigns; (2) failure by the other party or its assigns to perform its duties (including any material interruption or cessation of its operations) in accordance with the Agreement, which failure materially adversely affects the business operations of the first party and which failure continues for thirty (30) days after receipt of written notice from the first party, unless such failure is excused under Section 15 of this Agreement; or (3) merger, consolidation or sale of substantially all of the assets of the other party or its assigns; or 27 (4) acquisition of a controlling interest in the other party or its assigns by any third party except as may presently exist within the previous sixty (60) days. C. DST may, on written notice to such Trust, immediately terminate this Agreement as to any Trust which itself or its Shares fail to be registered as provided in Section 3 of this Agreement at any time during this Agreement. D. In the event of termination, the Trust will promptly pay DST all amounts due to DST hereunder, including any termination fee set forth in Exhibit A to this Agreement. E. In the event of termination, DST will use its best efforts to transfer the records of the Trust to the designated successor transfer agent, to provide reasonable assistance to the Trust and its designated successor transfer agent, and to provide other information relating to its services provided hereunder (subject to the recompense of DST for such assistance at its standard rates and fees for personnel then in effect at that time); provided, however, as used herein "reasonable assistance" and "other information" shall not include assisting any new service or system provider to modify, alter, enhance, or improve its system or to improve, enhance, or alter its current system, or to provide any new functionality or to require DST to disclose any DST Confidential Information, as hereinafter defined, or any information which is otherwise confidential to DST. 23. CONFIDENTIALITY. A. DST agrees on behalf of itself, its affiliates, its officers and employees, except as provided in Section 19.J. hereof, or as otherwise required by law, DST will keep confidential all records of and information in its possession relating to the Trust or its shareholders or shareholder accounts and will not disclose the same to any person except at the instruction (standing or specific), request or with the consent of the Trust. Notwithstanding the foregoing, DST shall be permitted in the ordinary course of business to provide such information to third parties providing services to DST which DST utilizes in connection with the services DST provides to the Trust under this Agreement or in accordance with Section 19.J. of this Agreement. B. The Trust on behalf of itself, its affiliates, its officers and employees and all entities which it directs DST to provide any of the following information agrees to keep 28 confidential all financial statements and other financial records (other than statements and records relating solely to the Trust's business dealings with DST) and all manuals, systems and other technical information and data, not publicly disclosed, relating to DST's operations and programs furnished to it by DST pursuant to this Agreement and will not disclose the same to any person except at the request or with the consent of DST. C. (1) The Trust acknowledges that DST has proprietary rights in and to the TA2000(TM) System used to perform services hereunder including, but not limited to the maintenance of shareholder accounts and records, processing of related information and generation of output, including, without limitation any changes or modifications of the TA2000(TM) System and any other DST programs, data bases, supporting documentation, or procedures (collectively "DST Confidential Information") which the Trust's access to the TA2000(TM) System or computer hardware or software may permit the Trust or its employees or agents to become aware of or to access and that the DST Confidential Information constitutes confidential material and trade secrets of DST. The Trust agrees to maintain the confidentiality of the DST Confidential Information of which it is, or becomes, aware or to which it has access. (2) The Trust acknowledges that any unauthorized use, misuse, disclosure or taking of DST Confidential Information which is confidential as provided by law, or which is a trade secret, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be subject to civil liabilities and criminal penalties under applicable state law. The Trust will advise all of its employees and agents who have access to any DST Confidential Information or to any computer equipment capable of accessing DST or DST hardware or software of the foregoing. (3) The Trust acknowledges that disclosure of the DST Confidential Information may give rise to an irreparable injury to DST inadequately 29 compensable in damages. Accordingly, DST may seek (without the posting of any bond or other security) injunctive relief against the breach of the foregoing undertaking of confidentiality and nondisclosure, in addition to any other legal remedies which may be available, and the Trust consents to the obtaining of such injunctive relief. All of the undertakings and obligations relating to confidentiality and nondisclosure, whether contained in this Section or elsewhere in this Agreement shall survive the termination or expiration of this Agreement for a period of ten (10) years. 24. CHANGES AND MODIFICATIONS. A. During the term of this Agreement DST will use on behalf of the Trust without additional cost all modifications, enhancements, or changes which DST may make to the TA2000(TM) System in the normal course of its business and which are applicable to functions and features offered by the Trust to its shareholders, unless substantially all DST clients are charged separately for such modifications, enhancements or changes, including, without limitation, substantial system revisions or modifications necessitated by changes in existing laws, rules or regulations. The Trust agrees to pay DST promptly for modifications and improvements which are charged for separately at the rate provided for in DST's standard pricing schedule which shall be identical for substantially all clients, if a standard pricing schedule shall exist. If there is no standard pricing schedule, the parties shall mutually agree upon the rates to be charged. B. DST shall have the right, at any time and from time to time, to alter and modify any systems, programs, procedures or facilities used or employed in performing its duties and obligations hereunder; provided that the Trust will be notified as promptly as possible prior to implementation of such alterations and modifications and that no such alteration or modification or deletion shall materially adversely change or affect the operations and procedures of the Trust in using or employing the TA2000(TM) System or DST Facilities hereunder or the reports to be generated by such system and facilities hereunder, unless the Trust is given thirty (30) days prior notice to allow the Trust to change its procedures and DST provides the Trust with revised operating procedures and controls. 30 C. All enhancements, improvements, changes, modifications or new features added to the TA2000(TM) System however developed or paid for shall be, and shall remain, the confidential and exclusive property of, and proprietary to, DST. 25. ASSIGNMENT AND SUBCONTRACTORS. A. Neither this Agreement nor any rights or obligations hereunder may be assigned by either party hereto without the written consent of the other party. In the event of a mutually agreed to assignment, each party shall remain liable for the performance of its assignee(s). DST may, however, employ agents to assist it in performing its duties hereunder. B. Notwithstanding anything in this Agreement to the contrary, nothing herein shall impose any duty upon DST in connection with or make DST liable for the actions or omissions to act of unaffiliated third parties such as, by way of example and not limitation, Airborne Services, the U.S. mails, the National Securities Clearing Commission and telecommunication companies, provided, if DST selected such company, DST shall have exercised due care in selecting the same. 26. LIMITATIONS ON LIABILITY. A. Notwithstanding anything in this Agreement to the contrary, each Trust which executed this Agreement is and shall be regarded for all purposes hereunder as a separate party apart from each other Trust and any Fund of any such other Trust. To the extent that a Trust is comprised of more than one Fund, each Fund shall be regarded for all purposes hereunder as a separate party apart from each other Fund. Unless the context otherwise requires, with respect to every transaction covered by this Agreement, every reference herein to the Trust shall be deemed to relate solely to the particular Fund or Trust to which such transaction relates. Under no circumstances shall the rights, obligations or remedies with respect to a particular Trust or a particular Fund constitute a right, obligation or remedy applicable to any other Trust or Fund. The use of this single document to memorialize the separate agreement of each Trust and each Fund herein is understood to be for clerical convenience only and shall not constitute any basis for joining the Trusts or Funds for any reason. 31 B. Notice is hereby given that a copy of each Trust's Trust Agreement and all amendments thereto is on file with the Secretary of State of the state of its organization; that this Agreement has been executed on behalf of the Trust by the undersigned duly authorized representative of the Trust in his/her capacity as such and not individually; and that the obligations of this Agreement shall only be binding upon the assets and property of the Trust and shall not be binding upon any trustee, officer or shareholder of the Trust individually. 27. MISCELLANEOUS. A. This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by, the laws of the State of Missouri, excluding that body of law applicable to choice of law. B. All terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. C. The representations and warranties, and the indemnification extended hereunder, if any, are intended to and shall continue after and survive the execution, expiration, termination or cancellation of this Agreement or the performance of services hereunder until any statute of limitations applicable to the matter at issues shall have expired. D. No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by each party hereto. E. The captions in this Agreement are included for convenience of reference only, and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. F. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. G. If any part, term or provision of this Agreement is by the courts held to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the 32 parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid. H. Neither the execution nor performance of this Agreement shall be deemed to create a partnership or joint venture by and between the Trust and DST. It is understood and agreed that all services performed hereunder by DST shall be as an independent contractor and not as an employee of the Trust. This Agreement is between DST and the Trust and neither this Agreement nor the performance of services under it shall create any rights in any third parties. There are no third party beneficiaries hereto. I. Except as specifically provided herein, this Agreement does not in any way affect any other agreements entered into among the parties hereto and any actions taken or omitted by any party hereunder shall not affect any rights or obligations of any other party hereunder. J. The failure of either party to insist upon the performance of any terms or conditions of this Agreement or to enforce any rights resulting from any breach of any of the terms or conditions of this Agreement, including the payment of damages, shall not be construed as a continuing or permanent waiver of any such terms, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. K. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement, draft or agreement or proposal with respect to the subject matter hereof, whether oral or written, and this Agreement may not be modified except by written instrument executed by both parties. L. All notices to be given hereunder shall be deemed properly given if delivered in person or if sent by U.S. mail, first class, postage prepaid, or if sent by facsimile and thereafter confirmed by mail as follows: If to DST: DST Systems, Inc. 210 W. 10th St., 7th Fl. Kansas City, Missouri 64105 Attn: Senior Vice President-Full Service Facsimile No.: 816-435-3455 33 With a copy of non-operational notices to: DST Systems, Inc. 333 W. 11th St., 5th Fl. Kansas City, Missouri 64105 Attn: Legal Department Facsimile No.: 816-435-8630 If to the Trust: Judy R. Bartlett Vice President and Assistant Secretary 1211 Avenue of the Americas, 41st Floor New York, New York 10036 Telephone No.: 212-789-5700 Fax No.: 212-789-6203 or to such other address as shall have been specified in writing by the party to whom such notice is to be given. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers, to be effective as of the day and year first above written. J.P. MORGAN SERIES TRUST, J.P. Morgan Tax Aware Small Company Opportunities Fund - A Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - B Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - C Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - A Shares J.P. Morgan Tax Aware US Equity Fund - B Shares J.P. Morgan Tax Aware US Equity Fund - C Shares J.P. Morgan Tax Aware US Equity Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - Institutional Shares J.P. Morgan Global Healthcare Fund - A Shares J.P. Morgan Global Healthcare Fund - B Shares J.P. Morgan Global Healthcare Fund - C Shares J.P. Morgan Global Healthcare Fund - Select Shares J.P. Morgan Global 50 Fund - A Shares J.P. Morgan Global 50 Fund - B Shares J.P. Morgan Global 50 Fund - C Shares J.P. Morgan Global 50 Fund - Select Shares J.P. Morgan Tax Aware Disciplined Equity Fund - Institutional Shares J.P. Morgan Tax Aware Enhanced Income Fund - A Shares 34 J.P. Morgan Tax Aware Enhanced Income Fund - Select Shares J.P. Morgan Tax Aware Enhanced Income Fund - Institutional Shares J.P. Morgan SmartIndex Fund - Institutional Shares J.P. Morgan Large Cap Growth Fund - Institutional Shares J.P. Morgan Market Neutral Fund - A Shares J.P. Morgan Market Neutral Fund - B Shares J.P. Morgan Market Neutral Fund - Institutional Shares J.P. Morgan California Bond Fund - A Shares J.P. Morgan California Bond Fund - Select Shares J.P. Morgan California Bond Fund - Institutional Shares J.P. Morgan Disciplined Equity Value Fund - Institutional Shares J.P. Morgan Enhanced Income Fund - Ultra Shares J.P. Morgan Enhanced Income Fund - Institutional Shares J.P. Morgan US High Yield Bond Fund - A Shares J.P. Morgan US High Yield Bond Fund - B Shares J.P. MORGAN FUNDS, J.P. Morgan Fleming Emerging Markets Debt Fund - Select Shares J.P. Morgan US Small Company Opportunities Fund - Select Shares J.P. MORGAN INSTITUTIONAL FUNDS J.P. Morgan Bond Fund - A Shares J.P. Morgan Bond Fund - B Shares J.P. Morgan Bond Fund - Select Shares J.P. Morgan Bond Fund - Institutional Shares J.P. Morgan Bond Fund - Ultra Shares J.P. Morgan Fleming International Opportunities Fund - A Shares J.P. Morgan Fleming International Opportunities Fund - B Shares J.P. Morgan Fleming International Opportunities Fund - Institutional Shares J.P. Morgan Fleming International Opportunities Fund - Select Shares J.P. Morgan US Equity Fund - A Shares J.P. Morgan US Equity Fund - B Shares J.P. Morgan US Equity Fund - C Shares J.P. Morgan US Equity Fund - Institutional Shares J.P. Morgan US Equity Fund - Select Shares J.P. Morgan Global Strategic Income Fund - A Shares J.P. Morgan Global Strategic Income Fund - B Shares J.P. Morgan Global Strategic Income Fund - Institutional Shares J.P. Morgan Global Strategic Income Fund - Select Shares J.P. Morgan Short Term Bond Fund - A Shares J.P. Morgan Short Term Bond Fund - Institutional Shares J.P. Morgan Short Term Bond Fund - Select Shares J.P. Morgan US Small Company Fund - Institutional Shares J.P. Morgan US Small Company Fund - Select Shares J.P. Morgan Fleming International Value Fund - A Shares J.P. Morgan Fleming International Value Fund - B Shares 35 J.P. Morgan Fleming International Value Fund - Institutional Shares J.P. Morgan Fleming International Value Fund - Select Shares J.P. Morgan Fleming Emerging Markets Equity Fund - A Shares J.P. Morgan Fleming Emerging Markets Equity Fund - B Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Institutional Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Select Shares J.P. Morgan Diversified Fund - Institutional Shares J.P. Morgan Diversified Fund - Select Shares J.P. Morgan Disciplined Equity Fund - A Shares J.P. Morgan Disciplined Equity Fund - B Shares J.P. Morgan Disciplined Equity Fund - Institutional Shares J.P. Morgan Disciplined Equity Fund - Select Shares J.P. MORGAN SERIES TRUST II J.P. Morgan International Opportunities Portfolio J.P. Morgan Small Company Portfolio J.P. Morgan US Disciplined Equity Portfolio J.P. Morgan Bond Portfolio J.P. Morgan Mid Cap Value Portfolio MUTUAL VARIABLE ANNUITY TRUST, Vista Capital Advantage Variable Annuity Capital Growth Portfolio Vista Capital Advantage Variable Annuity Growth & Income Portfolio Vista Capital Advantage Variable Annuity International Equity Portfolio Vista Capital Advantage Variable Annuity Asset Allocation Portfolio Vista Capital Advantage Variable Annuity Money Market Portfolio Vista Capital Advantage Variable Annuity US Government Income Portfolio MUTUAL FUND TRUST, J.P. Morgan Prime Money Market - Morgan Shares J.P. Morgan Prime Money Market - B Shares J.P. Morgan Prime Money Market - C Shares J.P. Morgan Prime Money Market - Premier Shares J.P. Morgan Prime Money Market - Agency Shares J.P. Morgan Prime Money Market - Institutional Shares J.P. Morgan Prime Money Market - Reserve Shares J.P. Morgan Prime Money Market - Cash Mgmt Shares J.P. Morgan Prime Money Market - Select Shares J.P. Morgan Federal Money Market - Morgan Shares J.P. Morgan Federal Money Market - Premier Shares J.P. Morgan Federal Money Market - Agency Shares J.P. Morgan Federal Money Market - Institutional Shares J.P. Morgan Treasury Plus Money Market - Morgan Shares J.P. Morgan Treasury Plus Money Market - Premier Shares J.P. Morgan Treasury Plus Money Market - Agency Shares J.P. Morgan Treasury Plus Money Market - Institutional Shares 36 J.P. Morgan Treasury Plus Money Market - Reserve Shares J.P. Morgan Tax Free Money Market - Morgan Shares J.P. Morgan Tax Free Money Market - Premier Shares J.P. Morgan Tax Free Money Market - Agency Shares J.P. Morgan Tax Free Money Market - Institutional Shares J.P. Morgan US Government Money Market - Morgan Shares J.P. Morgan US Government Money Market - Premier Shares J.P. Morgan US Government Money Market - Agency Shares J.P. Morgan US Government Money Market - Institutional Shares J.P. Morgan 100% US Treasury Securities Money Market - Morgan Shares J.P. Morgan 100% US Treasury Securities Money Market - Premier Shares J.P. Morgan 100% US Treasury Securities Money Market - Agency Shares J.P. Morgan 100% US Treasury Securities Money Market - Institutional Shares J.P. Morgan California Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Reserve Shares J.P. Morgan Liquid Assets - Morgan Shares J.P. Morgan Liquid Assets - Premier Shares J.P. Morgan Liquid Assets - Agency Shares J.P. Morgan Liquid Assets - Institutional Shares J.P. Morgan Liquid Assets - Capital Shares MUTUAL FUND SELECT GROUP, J.P. Morgan Bond Fund II - A Shares J.P. Morgan Bond Fund II - B Shares J.P. Morgan Bond Fund II - Select Shares J.P. Morgan Intermediate Bond Fund - A Shares J.P. Morgan Intermediate Bond Fund - Select Shares J.P. Morgan Select Large Cap Growth Fund J.P. Morgan Select Mid Cap Equity Fund J.P. Morgan Select Small Cap Equity Fund J.P. Morgan Select Balanced Fund J.P. Morgan Select Equity Income Fund J.P. Morgan Select International Equity Fund - A Shares J.P. Morgan Select International Equity Fund - B Shares J.P. Morgan Select International Equity Fund - Institutional Shares J.P. Morgan Select International Equity Fund - Select Shares J.P. Morgan Select Large Cap Equity Fund MUTUAL FUND GROUP, J.P. Morgan Fleming European Fund - A Shares J.P. Morgan Fleming European Fund - B Shares J.P. Morgan Fleming European Fund - C Shares J.P. Morgan Fleming European Fund - Select Shares J.P. Morgan Fleming European Fund - Institutional Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - A Shares 37 J.P. Morgan Fleming Tax Aware International Opportunities Fund - B Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - C Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - Institutional Shares J.P. Morgan Short Term Bond Fund II - A Shares J.P. Morgan Short Term Bond Fund II - Select Shares J.P. Morgan Short Term Bond Fund II - M Shares J.P. Morgan US Treasury Income Fund - A Shares J.P. Morgan US Treasury Income Fund - B Shares J.P. Morgan US Treasury Income Fund - Select Shares J.P. Morgan Strategic Income Fund - A Shares J.P. Morgan Strategic Income Fund - B Shares J.P. Morgan Strategic Income Fund - C Shares J.P. Morgan Strategic Income Fund - Select Shares J.P. Morgan Strategic Income Fund - M Shares J.P. Morgan Capital Growth Fund - A Shares J.P. Morgan Capital Growth Fund - B Shares J.P. Morgan Capital Growth Fund - C Shares J.P. Morgan Capital Growth Fund - Select Shares J.P. Morgan H&Q Technology Fund - A Shares J.P. Morgan H&Q Technology Fund - B Shares J.P. Morgan H&Q Technology Fund - C Shares J.P. Morgan Focus Fund - A Shares J.P. Morgan Focus Fund - B Shares J.P. Morgan Focus Fund - C Shares J.P. Morgan Focus Fund - Select Shares J.P. Morgan Growth & Income Fund - A Shares J.P. Morgan Growth & Income Fund - B Shares J.P. Morgan Growth & Income Fund - C Shares J.P. Morgan Growth & Income Fund - Select Shares J.P. Morgan Select Growth & Income Fund J.P. Morgan Fleming International Growth Fund - A Shares J.P. Morgan Fleming International Growth Fund - B Shares J.P. Morgan Fleming International Growth Fund - C Shares J.P. Morgan Fleming Japan Fund - A Shares J.P. Morgan Fleming Japan Fund - B Shares J.P. Morgan Small Cap Equity Fund - A Shares J.P. Morgan Small Cap Equity Fund - B Shares J.P. Morgan Small Cap Equity Fund - Select Shares J.P. Morgan Dynamic Small Cap Fund - A Shares J.P. Morgan Dynamic Small Cap Fund - B Shares J.P. Morgan Dynamic Small Cap Fund - C Shares J.P. Morgan Dynamic Small Cap Fund - Select Shares MUTUAL FUND SELECT TRUST, J.P. Morgan New York Intermediate Tax Free Income Fund - A Shares J.P. Morgan New York Intermediate Tax Free Income Fund - B Shares 38 J.P. Morgan New York Intermediate Tax Free Income Fund - Select Shares J.P. Morgan New York Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan Intermediate Tax Free Income Fund - Select Shares J.P. Morgan Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan New Jersey Tax Free Income Fund - Select Shares J.P. Morgan Tax Free Income Fund - A Shares J.P. Morgan Tax Free Income Fund - B Shares J.P. Morgan Tax Free Income Fund - Select Shares MUTUAL FUND INVESTMENT TRUST, J.P. Morgan Balanced Fund - A Shares J.P. Morgan Balanced Fund - B Shares J.P. Morgan Balanced Fund - C Shares J.P. Morgan Balanced Fund - Select Shares J.P. Morgan Core Equity Fund - A Shares J.P. Morgan Core Equity Fund - B Shares J.P. Morgan Core Equity Fund - C Shares J.P. Morgan Core Equity Fund - Select Shares J.P. Morgan Equity Growth Fund - A Shares J.P. Morgan Equity Growth Fund - B Shares J.P. Morgan Equity Growth Fund - C Shares J.P. Morgan Equity Growth Fund - Select Shares J.P. Morgan Equity Growth Fund II J.P. Morgan Equity Income Fund - A Shares J.P. Morgan Equity Income Fund - B Shares J.P. Morgan Equity Income Fund - C Shares J.P. Morgan Equity Income Fund - Select Shares J.P. Morgan Mid Cap Growth Fund - A Shares J.P. Morgan Mid Cap Growth Fund - B Shares FLEMING MUTUAL FUND GROUP, AND J.P. Morgan Small Cap Growth Fund - A Shares J.P. Morgan Small Cap Growth Fund - B Shares J.P. Morgan Small Cap Growth Fund - C Shares J.P. Morgan Small Cap Growth Fund - Institutional Shares J.P. Morgan Small Cap Growth Fund - Select Shares J.P. Morgan Mid Cap Value Fund - A Shares J.P. Morgan Mid Cap Value Fund - B Shares J.P. Morgan Mid Cap Value Fund - C Shares J.P. Morgan Mid Cap Value Fund - Institutional Shares J.P. Morgan Mid Cap Value Fund - Select Shares J.P. MORGAN CHASE & CO. SOLELY WITH RESPECT TO EACH ACCOUNT REGISTERED IN THE NAME OF J.P. MORGAN CHASE BANK NA (OR AN AFFILIATE), SPECIAL ACCT. BENEFIT OF CLIENTS ATTN: KEN FAITH IN THE FOLLOWING AMERICAN CENTURY FUNDS: 39 American Century Ultra Fund American Century Select Fund American Century International Growth Fund American Century International Discovery Fund American Century Value Fund American Century California Tax Free Money Market Fund American Century Florida Municipal Money Market Fund American Century California Intermediate Tax Free Fund American Century GNMA Fund American Century California High Yield Municipal Fund American Century Florida Intermediate Term Municipal Fund American Century California Municipal Money Market Fund American Century Heritage Fund American Century Equity Income Fund American Century California Long Term Tax Free Fund American Century High Yield Bond Fund American Century Real Estate Fund American Century Growth Fund American Century Small Cap Value Fund By: -------------------------------------- Title: ----------------------------------- DST SYSTEMS, INC. By: -------------------------------------- Title: ----------------------------------- JP Morgan All Trusts Final-mk (04/10/02) 40 EXHIBIT A FEE SCHEDULE TERM: SEPTEMBER 1,2001 THROUGH AUGUST 31, 2006 I. TRANSFER AGENCY A. BASE FEES Complex Base Fee - $2,769,735 per year for the combined relationship Base Fee Per CUSIP (across the Fund Sponsor): CUSIPS 1 - 201 (excl ACI & Commingled) $ 12,000 per CUSIP per year CUSIPS 201 + (excl ACI & Commingled) $ 10,000 per CUSIP per year ACI CUSIPS $ 6,000 per CUSIP per year Commingled CUSIPS - Remote Only $ 9,000 per CUSIP per year Commingled CUSIPS - DST Full Service $ 10,000 per CUSIP per year
Closed CUSIPS - $150 per month through May of the following year B. ACCOUNT MAINTENANCE AND PROCESSING FEES Non-Institutional Non-Network Level 3 Open Accounts - $16.35 per account per year Non-Institutional Network Level 3 Open Accounts - $12.85 per account per year Institutional Open Accounts: Accounts in the range from 0 - 400: no charge, included in complex base fee Accounts in the range from 401 - 600: $1,160 per account per year Accounts in the range from 601 - 800: $930 per account per year Accounts in the range from 801 - 1,000: $700 per account per year Accounts in the range over 1,000: $580 per account per year
Closed Accounts - included in base/account fees Transaction Fees: New Account Set Up (Load funds only - monthly new accounts equal to 3.5% of prior month end open accounts at no charge; no carry over from month-to-month): Manual - $4.05 NSCC - $1.75 Manual Transactions - $2.90 (Load funds only - eight transactions per account per year excluding dividends, calculated monthly based on prior month end open accounts, at no charge; includes financial, non-financial, confirmed orders, omnibus, dealer maintenance; no carry over from month-to-month) Contingency Processing - $1,000 per initiation + $5.00 per retail transaction and/or $10.00 per institutional transaction (for entities that remotely process; includes financial, non-financial, confirmed orders, omnibus and maintenance transactions) Non-Institutional Omnibus Transactions - $1.00 per transaction 41 Phone Calls (unbundled from complex base fee for both load and no-load funds): Inbound & Outbound, including Fulfillment - $4.60 Correspondence - $4.65 (Load funds only - monthly letters equal to 2% of prior month end open accounts at no charge; no carry over from month-to-month) Lost Shareholder Compliance - $1.25 per lost shareholder account per year + $1.60 per database match Checkwriting - included in base/account fees ACH Transactions & Listbill Processing - included in base/account fees Contingent Deferred Sales Charge / Sharelot Accounting - included in base/account fees 12b-1 / TASS Processing - included in base/account fees Investor Facility - included in base/account fees Special 12b-1 Runs (more than 1 monthly cycle and 2 quarterly cycles) - $1,338/quarter plus $.01 per open and closed account per cycle C. SHAREOWNER/MANAGEMENT COMPANY CHARGES Fiduciary Trustee Fees: Paid By the Shareowner: Non-J.P. Morgan Chase Employees (Traditional and Roth IRA) - $15.00 per social security # per plan type per year Simples (Non DFI) - $10.00 per social security # per plan type per year, $0 Set-up charge Simples (DFI) - $10.00 per social security # per plan type per year, $10.00 Set-up charge Paid By the Management Company: J.P. Morgan/Chase Employees (Traditional and Roth IRA) - $5.00 per acct per year No Fee IRA's (Traditional and Roth IRA) - $15.00 per social security # per plan type per year 403(b) Loan Fees: Application/Origination Fee - $25.00 per loan Annual Processing Fee - $25.00 per loan per year D. OPTIONAL SERVICES Literature Reports - up to 10 standard reports monthly included in account fees (across the Fund Sponsor); reports requiring programming billed separately CD-ROM - 1992 - 1998 history included in account fees Market Advisor Support - $59,350 per FTE per year (across the Fund Sponsor) (currently 3.0 FTE's; changes subject to joint approval) Financial Intermediary Interface: Automated: First four funds - $19,780 per intermediary per year Each additional fund - $3,490 per year Manual/Partially Automated: First four funds - $39,570 per intermediary per year Each additional fund - $6,980 per year After Hours Messaging Service: Messages Received - $2.30 per message 42 Literature Orders - $2.90 per order Asset Allocation/Reallocation: $1,000 per model per year $2.91 per manual purchase transaction $10.00 per rebalancing event Third Party Checks - included in account fees TCB Disaster Recovery Process - included in account fees Laser Redemption Checks - included in account fees Excess History Fees - $3.80 per 1,000 lines of account history, $2.50 per 1,000 lines of purged history Sub-Accounting Dividend and Share Reconciliation - $760 per CUSIP per year Programming Rates (rates not subject to usual DST annual increases provided the existing six dedicated resources are maintained during the term of this agreement; additional resources would be priced at DST's standard rate at the time of the addition): COBOL Programmer: Dedicated Resources $140,400 per year On-Request: $111.28 per hour Additional JP Morgan COBOL Programmers: Dedicated Resources $150,000 per year On-Request $120.00 per hour Workstation Programmer: Dedicated Resources $169,520 per year On-Request $139.36 per hour Business Analyst/Tester: Dedicated Resources $85,800 per year On-Request $79.56 per hour *Full Service Staff Support: Senior Staff Support $70 per hour Staff Support $50 per hour Clerical Support $40 per hour Insight Technical Support $60,000 per year (across the Fund Sponsor) TRAC-2000 - separate schedule TA2000 Voice System - see Exhibit I *NSCC - see Exhibit II *Remote TA2000 AWD/IWS Software and Licensing Fees - under separate agreement *FAN - under separate agreement Vision - under separate agreement Fanmail - under separate agreement 43 EXHIBIT A Escheatment costs - Full Service Staff Support hourly rates plus reimbursable expenses Conversion/Acquisition Costs - out of pocket expenses including but not limited to travel and accommodations, programming, training, equipment installation, etc. NOTES TO THE ABOVE FEE SCHEDULE A. The above schedule does not include out of pocket expenses incurred by DST on the Fund's behalf. Examples of out of pocket expenses include but are not limited to forms, postage, mailing services, telephone line and long distance charges, client remote hardware, disaster recovery (range through 12/31/2003, $0.08-$0.12 per acct per year, currently $0.10 based on actual expense, solely with respect to the current standard of thirty (30) hours after the third party vendor makes the second site available to DST), magnetic tapes, printing, ACH bank charges, NSCC charges, proxy processing, microfilm/microfiche, freight, T.I.N. certification, off-site record storage, second site disaster recovery, transmission of statement data for remote processing, etc. All travel and accommodation expenses incurred for regular operations meetings away from Kansas City by DST's relationship manager and above will be borne by DST. All travel and accommodation expenses related to JP Morgan monthly marketing or distribution meetings, conversions/acquisitions and other special requests will be borne by JP Morgan. B. Service fees and out of pocket expenses are billed monthly. Any fees or out-of-pocket expenses not paid within 30 days of the date of the original invoice will be charged a late payment fee of 1.5% per month until payment is received. C. In the event a Trust were, during any term of this Agreement, to move its Transfer Agency servicing operation from the DST Full Service platform to any other TA2000 platform (i.e., become a remote user of TA2000) for any reason other than material service deficiencies brought to DST's attention which were not remedied within an acceptable timeframe: such Trust would compensate DST for staff wind down and related expenses using the aggregate of the salaries paid by DST during the two months immediately preceding the termination to all DST personnel utilized to provide Transfer Agent and Corporate Support services to the Funds. The foregoing two month wind down compensation would apply at the time of internalization. D. Six months notice is required by either party for any termination of this Transfer Agency Agreement. E. The reduced fees in this schedule, except those indicated by an "*", are guaranteed through August 31, 2006 without annual increases and are predicated on the Trust's commitment that the full Initial Term of this agreement will be fulfilled. (Items marked by an "*" are subject to change with 60 days written notice.) Should a Trust terminate this Transfer Agency Agreement prior to the end of the Initial Term, whether as a Full Service or as a Remote servicing relationship at the time of termination, DST will recover $650,000 in fee concessions for each year or partial year of this Agreement (or any subsequent Remote Agreement) that has been fulfilled. For example, if a Trust terminates this Agreement in July 2003, fees due would be $1,300,000 ($650,000 x 2). This clause is transferable to any subsequent agreement entered into with DST, Full Service or Remote, with respect to the original, initial five (5) year term of this Agreement (that is, through August 31, 2006). During the Initial Term of this Agreement, should the servicing scenario or business conditions upon which the fees in this Agreement are based materially change, causing the parties to reconsider these fees, DST will also reconsider the structure and/or the magnitude of this recovery clause. 44 F. Unless the Parties agree to a new fee schedule prior to the expiration of the then current term, immediately upon the expiration of the initial term of this Agreement (which is the term of this Fee Schedule) and, thereafter, as of each anniversary of this Agreement, the fees and charges set forth in this Exhibit A, excluding those items marked with an asterisk ("*"), shall increase annually upon each anniversary of this Agreement (therefore, the first fee increase shall take effect as of September 1, 2006) over the fees and charges during the prior 12 months in an amount not less than the annual percentage of change in the Consumer Price Index in the Kansas City, Missouri-Kansas Standard Metropolitan Statistical Area, All Items, Base 1982-1984=100, as last reported by the U.S. Bureau of Labor Statistics for the 12 calendar months immediately preceding such anniversary. G. Should a Trust terminate this Transfer Agency agreement and deconvert from TA2000 prior to the end of the then current term, DST will impose, and each Trust will pay, an early termination penalty equal to 3% of total fees (before discounts but exclusive of reimbursement of out-of- pockets) for each year of the contract remaining, prorated for partial years. This calculation will be based upon the prior 12 months of total fees (before discounts but exclusive of reimbursement of out-of- pockets) assessed. For example, if a Trust terminates the agreement on February 28, 2003, 3 1/2 years of the agreement would remain and fees due would be 10 1/2% (3 1/2 x 3%) of the total fees (before discounts but exclusive of reimbursement of out-of- pockets) paid in the previous 12 months. H. Non-Institutional open account rates will be discounted as follows: Accounts in the range of 350,000 - 750,000 5% discount Accounts in the range of 750,001 - 1,000,000 10% discount Accounts greater than 1,000,001 15% discount
45 EXHIBIT I TA2000 VOICE(TM) SYSTEM FEE SCHEDULE PER CALL SERVICE FEE Utilization of DST's TA2000 Voice(TM) System is based on a service fee of $.21 PER CALL. Each call has a maximum duration of seven (7) minutes. This charge is a flat rate regardless of the number or type of transactions that a shareholder processes during the call. A given call could result in inquiries and/or transactions being processed for various funds in the complex. Therefore, on a monthly basis, DST will report the number of inquiries and/or transactions processed by fund. A percentage of the total will be derived and reported for each fund. As a result of this process, DST will allocate the charges among the individual funds. MULTIPLE CALL FLOWS An additional fee of $525 per month will be charged for each additional call flow that requires different flows, functions, vocabulary, processing, rules or access method. An additional fee of $210 per month will be charged for each additional call flow that is identical in flows, functions, vocabulary, processing rules or access method. MINIMUM MONTHLY CHARGE DST's commitment to the reliability and continued enhancement of the TA2000 Voice System necessitates a minimum monthly charge for the service. The minimum monthly charge will only be assessed when it is greater than the monthly service fees. The minimum monthly charge will be implemented on a graduated basis based on the number of CUSIPS and shareholders in a fund complex and is the sum of the CUSIP and account charges. The schedule for this charge is as follows:
YEARS CHARGE PER CHARGE PER OF CUSIP AUTHORIZED SHAREHOLDER SERVICE FOR SERVICE* ACCOUNT** 1 $ 52.50 $ .002 2 $ 78.75 $ .003 3 $ 105.00 $ .004
* CUSIPS ADDED TO THE SERVICE will be subject to the same minimums being charged to the other CUSIPS in the complex at the time the CUSIPS are added. ** THE PER ACCOUNT CHARGE is based on the total number of shareholder accounts in authorized CUSIPS at the end of each month. OUT-OF-POCKET COSTS Each fund complex will require a unique WATS number for their shareholders to call. Each WATS number will require a specific number of trunks to service a given volume of shareholder calls. All installation and monthly usage charges associated with these will be billed through monthly out-of-pocket invoices. 46 EXHIBIT II NSCC FEES AND OUT-OF-POCKET EXPENSES SETTLING BANK FEES The fund may be charged fees by the Settling Bank at which the net settlement account resides for monthly maintenance of this account. These are negotiated directly between the Fund and the Settling Bank. NSCC PARTICIPANT FEES The NSCC charges $40 per month per management company for CPU access/shared line costs. A combined participant base fee of $200 per month is charged for the following services: FUND/SERV: The NSCC charges an activity charge of $.175 per inputted transaction. Transactions include purchases, redemptions and exchanges. NETWORKING: The NSCC charges the following activity fee: - $.02 per account for funds paying dividends on a monthly basis - $.01 per account for funds paying dividends other than monthly COMMISSION SETTLEMENT: The NSCC charges the following processing fee: - $.30 per hundred records, per month, for one to 500,000 records; there is a $50 per month minimum processing charge - $.20 per hundred records, per month, for 500,001 to 1,000,000 records - $.10 per hundred records, per month, for 1,000,001 records and above Note: Participant fees are cumulative when Fund/SERV, Networking and/or Commission Settlement are used in conjunction with each other. 47 EXHIBIT B AUTHORIZED PERSONNEL Pursuant to Section 8.B.(3) of the Agency Agreement between the Trust and DST (the "Agreement"), the Trust authorizes the following Trust personnel to provide instructions to DST, and receive inquiries from DST in connection with the Agreement:
NAME TITLE SIGNATURE ---- ----- ---------
This Exhibit may be revised by the Trust by providing DST with a substitute Exhibit B. Any such substitute Exhibit B shall become effective twenty-four (24) hours after DST's receipt of the document and shall be incorporated into the Agreement. ACKNOWLEDGMENT OF RECEIPT: DST SYSTEMS, INC. By: --------------------------------- Title: ------------------------------ Date: ------------------------------- J.P. MORGAN SERIES TRUST, J.P. Morgan Tax Aware Small Company Opportunities Fund - A Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - B Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - C Shares J.P. Morgan Tax Aware Small Company Opportunities Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - A Shares J.P. Morgan Tax Aware US Equity Fund - B Shares J.P. Morgan Tax Aware US Equity Fund - C Shares J.P. Morgan Tax Aware US Equity Fund - Select Shares J.P. Morgan Tax Aware US Equity Fund - Institutional Shares J.P. Morgan Global Healthcare Fund - A Shares 48 J.P. Morgan Global Healthcare Fund - B Shares J.P. Morgan Global Healthcare Fund - C Shares J.P. Morgan Global Healthcare Fund - Select Shares J.P. Morgan Global 50 Fund - A Shares J.P. Morgan Global 50 Fund - B Shares J.P. Morgan Global 50 Fund - C Shares J.P. Morgan Global 50 Fund - Select Shares J.P. Morgan Tax Aware Disciplined Equity Fund - Institutional Shares J.P. Morgan Tax Aware Enhanced Income Fund - A Shares J.P. Morgan Tax Aware Enhanced Income Fund - Select Shares J.P. Morgan Tax Aware Enhanced Income Fund - Institutional Shares J.P. Morgan SmartIndex Fund - Institutional Shares J.P. Morgan Large Cap Growth Fund - Institutional Shares J.P. Morgan Market Neutral Fund - A Shares J.P. Morgan Market Neutral Fund - B Shares J.P. Morgan Market Neutral Fund - Institutional Shares J.P. Morgan California Bond Fund - A Shares J.P. Morgan California Bond Fund - Select Shares J.P. Morgan California Bond Fund - Institutional Shares J.P. Morgan Disciplined Equity Value Fund - Institutional Shares J.P. Morgan Enhanced Income Fund - Ultra Shares J.P. Morgan Enhanced Income Fund - Institutional Shares J.P. Morgan US High Yield Bond Fund - A Shares J.P. Morgan US High Yield Bond Fund - B Shares J.P. MORGAN FUNDS, J.P. Morgan Fleming Emerging Markets Debt Fund - Select Shares J.P. Morgan US Small Company Opportunities Fund - Select Shares J.P. MORGAN INSTITUTIONAL FUNDS J.P. Morgan Bond Fund - A Shares J.P. Morgan Bond Fund - B Shares J.P. Morgan Bond Fund - Select Shares J.P. Morgan Bond Fund - Institutional Shares J.P. Morgan Bond Fund - Ultra Shares J.P. Morgan Fleming International Opportunities Fund - A Shares J.P. Morgan Fleming International Opportunities Fund - B Shares J.P. Morgan Fleming International Opportunities Fund - Institutional Shares J.P. Morgan Fleming International Opportunities Fund - Select Shares J.P. Morgan US Equity Fund - A Shares J.P. Morgan US Equity Fund - B Shares J.P. Morgan US Equity Fund - C Shares J.P. Morgan US Equity Fund - Institutional Shares J.P. Morgan US Equity Fund - Select Shares J.P. Morgan Global Strategic Income Fund - A Shares J.P. Morgan Global Strategic Income Fund - B Shares J.P. Morgan Global Strategic Income Fund - Institutional Shares 49 J.P. Morgan Global Strategic Income Fund - Select Shares J.P. Morgan Short Term Bond Fund - A Shares J.P. Morgan Short Term Bond Fund - Institutional Shares J.P. Morgan Short Term Bond Fund - Select Shares J.P. Morgan US Small Company Fund - Institutional Shares J.P. Morgan US Small Company Fund - Select Shares J.P. Morgan Fleming International Value Fund - A Shares J.P. Morgan Fleming International Value Fund - B Shares J.P. Morgan Fleming International Value Fund - Institutional Shares J.P. Morgan Fleming International Value Fund - Select Shares J.P. Morgan Fleming Emerging Markets Equity Fund - A Shares J.P. Morgan Fleming Emerging Markets Equity Fund - B Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Institutional Shares J.P. Morgan Fleming Emerging Markets Equity Fund - Select Shares J.P. Morgan Diversified Fund - Institutional Shares J.P. Morgan Diversified Fund - Select Shares J.P. Morgan Disciplined Equity Fund - A Shares J.P. Morgan Disciplined Equity Fund - B Shares J.P. Morgan Disciplined Equity Fund - Institutional Shares J.P. Morgan Disciplined Equity Fund - Select Shares J.P. MORGAN SERIES TRUST II J.P. Morgan International Opportunities Portfolio J.P. Morgan Small Company Portfolio J.P. Morgan US Disciplined Equity Portfolio J.P. Morgan Bond Portfolio J.P. Morgan Mid Cap Value Portfolio MUTUAL VARIABLE ANNUITY TRUST, Vista Capital Advantage Variable Annuity Capital Growth Portfolio Vista Capital Advantage Variable Annuity Growth & Income Portfolio Vista Capital Advantage Variable Annuity International Equity Portfolio Vista Capital Advantage Variable Annuity Asset Allocation Portfolio Vista Capital Advantage Variable Annuity Money Market Portfolio Vista Capital Advantage Variable Annuity US Government Income Portfolio MUTUAL FUND TRUST, J.P. Morgan Prime Money Market - Morgan Shares J.P. Morgan Prime Money Market - B Shares J.P. Morgan Prime Money Market - C Shares J.P. Morgan Prime Money Market - Premier Shares J.P. Morgan Prime Money Market - Agency Shares J.P. Morgan Prime Money Market - Institutional Shares J.P. Morgan Prime Money Market - Reserve Shares J.P. Morgan Prime Money Market - Cash Mgmt Shares J.P. Morgan Prime Money Market - Select Shares J.P. Morgan Federal Money Market - Morgan Shares 50 J.P. Morgan Federal Money Market - Premier Shares J.P. Morgan Federal Money Market - Agency Shares J.P. Morgan Federal Money Market - Institutional Shares J.P. Morgan Treasury Plus Money Market - Morgan Shares J.P. Morgan Treasury Plus Money Market - Premier Shares J.P. Morgan Treasury Plus Money Market - Agency Shares J.P. Morgan Treasury Plus Money Market - Institutional Shares J.P. Morgan Treasury Plus Money Market - Reserve Shares J.P. Morgan Tax Free Money Market - Morgan Shares J.P. Morgan Tax Free Money Market - Premier Shares J.P. Morgan Tax Free Money Market - Agency Shares J.P. Morgan Tax Free Money Market - Institutional Shares J.P. Morgan US Government Money Market - Morgan Shares J.P. Morgan US Government Money Market - Premier Shares J.P. Morgan US Government Money Market - Agency Shares J.P. Morgan US Government Money Market - Institutional Shares J.P. Morgan 100% US Treasury Securities Money Market - Morgan Shares J.P. Morgan 100% US Treasury Securities Money Market - Premier Shares J.P. Morgan 100% US Treasury Securities Money Market - Agency Shares J.P. Morgan 100% US Treasury Securities Money Market - Institutional Shares J.P. Morgan California Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Morgan Shares J.P. Morgan New York Tax Free Money Market - Reserve Shares J.P. Morgan Liquid Assets - Morgan Shares J.P. Morgan Liquid Assets - Premier Shares J.P. Morgan Liquid Assets - Agency Shares J.P. Morgan Liquid Assets - Institutional Shares J.P. Morgan Liquid Assets - Capital Shares MUTUAL FUND SELECT GROUP, J.P. Morgan Bond Fund II - A Shares J.P. Morgan Bond Fund II - B Shares J.P. Morgan Bond Fund II - Select Shares J.P. Morgan Intermediate Bond Fund - A Shares J.P. Morgan Intermediate Bond Fund - Select Shares J.P. Morgan Select Large Cap Growth Fund J.P. Morgan Select Mid Cap Equity Fund J.P. Morgan Select Small Cap Equity Fund J.P. Morgan Select Balanced Fund J.P. Morgan Select Equity Income Fund J.P. Morgan Select International Equity Fund - A Shares J.P. Morgan Select International Equity Fund - B Shares J.P. Morgan Select International Equity Fund - Institutional Shares J.P. Morgan Select International Equity Fund - Select Shares J.P. Morgan Select Large Cap Equity Fund MUTUAL FUND GROUP, 51 J.P. Morgan Fleming European Fund - A Shares J.P. Morgan Fleming European Fund - B Shares J.P. Morgan Fleming European Fund - C Shares J.P. Morgan Fleming European Fund - Select Shares J.P. Morgan Fleming European Fund - Institutional Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - A Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - B Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - C Shares J.P. Morgan Fleming Tax Aware International Opportunities Fund - Institutional Shares J.P. Morgan Short Term Bond Fund II - A Shares J.P. Morgan Short Term Bond Fund II - Select Shares J.P. Morgan Short Term Bond Fund II - M Shares J.P. Morgan US Treasury Income Fund - A Shares J.P. Morgan US Treasury Income Fund - B Shares J.P. Morgan US Treasury Income Fund - Select Shares J.P. Morgan Strategic Income Fund - A Shares J.P. Morgan Strategic Income Fund - B Shares J.P. Morgan Strategic Income Fund - C Shares J.P. Morgan Strategic Income Fund - Select Shares J.P. Morgan Strategic Income Fund - M Shares J.P. Morgan Capital Growth Fund - A Shares J.P. Morgan Capital Growth Fund - B Shares J.P. Morgan Capital Growth Fund - C Shares J.P. Morgan Capital Growth Fund - Select Shares J.P. Morgan H&Q Technology Fund - A Shares J.P. Morgan H&Q Technology Fund - B Shares J.P. Morgan H&Q Technology Fund - C Shares J.P. Morgan Focus Fund - A Shares J.P. Morgan Focus Fund - B Shares J.P. Morgan Focus Fund - C Shares J.P. Morgan Focus Fund - Select Shares J.P. Morgan Growth & Income Fund - A Shares J.P. Morgan Growth & Income Fund - B Shares J.P. Morgan Growth & Income Fund - C Shares J.P. Morgan Growth & Income Fund - Select Shares J.P. Morgan Select Growth & Income Fund J.P. Morgan Fleming International Growth Fund - A Shares J.P. Morgan Fleming International Growth Fund - B Shares J.P. Morgan Fleming International Growth Fund - C Shares J.P. Morgan Fleming Japan Fund - A Shares J.P. Morgan Fleming Japan Fund - B Shares J.P. Morgan Small Cap Equity Fund - A Shares J.P. Morgan Small Cap Equity Fund - B Shares J.P. Morgan Small Cap Equity Fund - Select Shares J.P. Morgan Dynamic Small Cap Fund - A Shares J.P. Morgan Dynamic Small Cap Fund - B Shares J.P. Morgan Dynamic Small Cap Fund - C Shares 52 J.P. Morgan Dynamic Small Cap Fund - Select Shares MUTUAL FUND SELECT TRUST, J.P. Morgan New York Intermediate Tax Free Income Fund - A Shares J.P. Morgan New York Intermediate Tax Free Income Fund - B Shares J.P. Morgan New York Intermediate Tax Free Income Fund - Select Shares J.P. Morgan New York Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan Intermediate Tax Free Income Fund - Select Shares J.P. Morgan Intermediate Tax Free Income Fund - Institutional Shares J.P. Morgan New Jersey Tax Free Income Fund - Select Shares J.P. Morgan Tax Free Income Fund - A Shares J.P. Morgan Tax Free Income Fund - B Shares J.P. Morgan Tax Free Income Fund - Select Shares MUTUAL FUND INVESTMENT TRUST, J.P. Morgan Balanced Fund - A Shares J.P. Morgan Balanced Fund - B Shares J.P. Morgan Balanced Fund - C Shares J.P. Morgan Balanced Fund - Select Shares J.P. Morgan Core Equity Fund - A Shares J.P. Morgan Core Equity Fund - B Shares J.P. Morgan Core Equity Fund - C Shares J.P. Morgan Core Equity Fund - Select Shares J.P. Morgan Equity Growth Fund - A Shares J.P. Morgan Equity Growth Fund - B Shares J.P. Morgan Equity Growth Fund - C Shares J.P. Morgan Equity Growth Fund - Select Shares J.P. Morgan Equity Growth Fund II J.P. Morgan Equity Income Fund - A Shares J.P. Morgan Equity Income Fund - B Shares J.P. Morgan Equity Income Fund - C Shares J.P. Morgan Equity Income Fund - Select Shares J.P. Morgan Mid Cap Growth Fund - A Shares J.P. Morgan Mid Cap Growth Fund - B Shares FLEMING MUTUAL FUND GROUP, AND J.P. Morgan Small Cap Growth Fund - A Shares J.P. Morgan Small Cap Growth Fund - B Shares J.P. Morgan Small Cap Growth Fund - C Shares J.P. Morgan Small Cap Growth Fund - Institutional Shares J.P. Morgan Small Cap Growth Fund - Select Shares J.P. Morgan Mid Cap Value Fund - A Shares J.P. Morgan Mid Cap Value Fund - B Shares J.P. Morgan Mid Cap Value Fund - C Shares J.P. Morgan Mid Cap Value Fund - Institutional Shares J.P. Morgan Mid Cap Value Fund - Select Shares 53 J.P. MORGAN CHASE & CO. SOLELY WITH RESPECT TO EACH ACCOUNT REGISTERED IN THE NAME OF J.P. MORGAN CHASE BANK NA (OR AN AFFILIATE), SPECIAL ACCT. BENEFIT OF CLIENTS ATTN: KEN FAITH IN THE FOLLOWING AMERICAN CENTURY FUNDS: American Century Ultra Fund American Century Select Fund American Century International Growth Fund American Century International Discovery Fund American Century Value Fund American Century California Tax Free Money Market Fund American Century Florida Municipal Money Market Fund American Century California Intermediate Tax Free Fund American Century GNMA Fund American Century California High Yield Municipal Fund American Century Florida Intermediate Term Municipal Fund American Century California Municipal Money Market Fund American Century Heritage Fund American Century Equity Income Fund American Century California Long Term Tax Free Fund American Century High Yield Bond Fund American Century Real Estate Fund American Century Growth Fund American Century Small Cap Value Fund By: --------------------------------- Title: ------------------------------ Date: ------------------------------- 54 EXHIBIT C TRANSFER AGENCY SERVICES AND SYSTEMS FEATURES FUNCTIONS A. Issuance of stock certificates B. Recording of non-certificate shares C. Purchase, redemptions, exchanges, transfers and legal transfer D. Changes of address, etc. E. Daily balancing of the Fund (that is maintaining the master, history and certificate files in balance, advising the Trust of any differences and resolving those caused by DST's error) F. Dividend calculation and disbursement G. Mailing of quarterly and annual reports, if requested H. Filing of 1099/1042 information to shareholders and government I. Provide N1R information - as available on TA2000 J. Systematic withdrawal and purchase plans K. Pre-authorized checks L. Purchase reminders M. Reconcilement of dividend and disbursement accounts and advising trust of any discrepancies N. Provide research and correspondence to shareholder's inquiries O. Daily communication of standard reports to the Fund P. Provide listings, labels and other special reports Q. Proxy issuance and tabulation 55 R. Annual Statements of shareholders on microfilm S. Provide reports as required under Section 19K T. Wire order processing U. 12B-1 processing 56 EXHIBIT D ABC - Auditor's Short Name DEF - Auditor's Address GHI - Auditor's Legal Name JKL - Client Short Name MNO - Client CONFIDENTIALITY AGREEMENT FOR AUDITORS This Agreement entered into this ____ day of ____________, 20__, by and between DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri, 64105 ("DST") and GHI, DEF ("ABC"). WHEREAS, DST has developed a proprietary software system for mutual fund shareholder recordkeeping and accounting ("DST System"); and WHEREAS, MNO ("JKL") and DST have entered into an Agency Agreement dated as of ________________________ (the "Agreement"), whereby JKL has obtained the right to access DST's TA2000(TM) System and the DST Facilities, as defined in the Agreement, in connection with the provisions of services to JKL's client investment companies (the "Funds"); WHEREAS, pursuant to the Agreement JKL has the right to cause its auditors, ABC, to perform on-site audits of records and accounts and operating procedures directly pertaining to JKL's securityholder accounts in and the performance of services for the Funds (the "Audit Subject Matter") subject to the execution of this Confidentiality Agreement; WHEREAS, DST will not permit any auditor access to its Facilities, its TA2000 System and JKL's records in its possession and on its computers unless and until such auditor duly executes this Agreement; WHEREAS, each person set forth on the list attached hereto as Exhibit I (the "Auditors") (a) is employed and designated by ABC, JKL's independent, public auditing firm, to perform the aforementioned 57 audit of the Audit Subject Matter and (b) must obtain such access in order (i) for ABC to fulfill its obligations to JKL and (ii) for each Auditor to perform their obligations to ABC; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties agree as follows: (a) In accordance with the terms and conditions of the Agreement, DST shall permit the Auditors reasonable access to the DST Facilities, as defined in the Agreement, and the Audit Subject Matter and provide reasonable assistance to them. (b) ABC and each Auditor recognizes the proprietary right of DST in and to the TA2000 System which ABC and each Auditor agrees that: (i) all materials, information and data, in whatever form or media, including without limitation documents, specifications, forms, systems designs, structures, procedures, flow charts, data and screen formats, algorithms and source and object code, pertaining to aspects of the DST System which DST treats as confidential and protected, and requires its customers to treat as confidential and protected ("DST Information"), provided to or disclosed to ABC and its auditors shall remain the sole and exclusive property of DST; (ii) all DST Information shall be held in strictest confidence by ABC and each Auditor; (iii) ABC and each Auditor shall use such DST Information solely for the purpose of auditing the Audit Subject Matter in accordance with generally accepted auditing standards and, except for such audit, neither ABC nor any Auditor shall utilize, distribute, transfer or disclose in any way to any person or firm other than JKL the DST Information provided or disclosed to it by DST, its employees, representatives and agents; and (iv) only those employees, representatives or agents of ABC having a "need to know" shall have access to the DST Information. (c) Upon completion of its review of the DST Information furnished or disclosed to it (or upon earlier request by DST upon reasonable cause being shown) ABC and each of its Auditors: (i) shall return to DST any tangible materials furnished to any of them hereunder, and any copies 58 thereof; (ii) shall make available to DST any portion of any analyses, compilations, studies or documents in whatever form or media made by it or any of the Auditors containing or summarizing the details of any DST Information; and (iii) shall safeguard or destroy, as DST may reasonably require, such portions thereof as might compromise the confidentiality of any DST Information; and (iv) shall provide DST with a written statement to effect that the obligations undertaken in (i) - (iii) of this Paragraph (c) have been fulfilled. Subsection (ii) hereof is not intended to, and does not, apply to or prohibit the preparation and provision solely to JKL and the Funds of an Audit Report conforming to generally accepted auditing standards and applicable law with respect thereto. (d) ABC shall be responsible for any breach of this Agreement by any of the Auditors. (e) This Agreement shall be inoperative as to such portions of the DST Information which (i) are or become generally available to the public other than as a result of a disclosure by ABC or the Auditors; or (ii) become available to ABC on a non-confidential basis from a third party (unrelated to ABC or DST) which is entitled to disclose it; or (iii) was known to ABC on a non-confidential basis prior to its disclosure to ABC by DST. The parties acknowledge that in the event of any breach or threatened breach of this Agreement remedies at law will be inadequate and the party seeking to enforce this Agreement will be entitled to injunctive and other equitable relief (without the posting of any bond). IN WITNESS WHEREOF, the parties hereto executed this Agreement the day and year first above written. ABC DST SYSTEMS, INC. By: By: ------------------------------ ---------------------------------- Dated: Dated: --------------------------- ------------------------------- 59 EXHIBIT I The following individuals are all employees of ABC and are the only persons whom ABC will use to perform the audit of the Audit Subject Matter and to whom DST Information will be disclosed. The signature of each Auditor hereupon evidences his/her acknowledgment and awareness of and agreement to be bound by the terms of the attached Confidentiality Agreement.
NAME OF AUDITOR TITLE SIGNATURE --------------- ----- ---------
60 APPENDIX I J.P. MORGAN TRUST LIST Updated February 13, 2002
MUTUAL FUND TRUST CUSIP NUMBER - ----------------- ------------ J.P. Morgan Prime Money Market - Morgan Shares 62826N846 J.P. Morgan Prime Money Market - B Shares 628263725 J.P. Morgan Prime Money Market - C Shares 62826N861 J.P. Morgan Prime Money Market - Premier Shares 628263758 J.P. Morgan Prime Money Market - Agency Shares 628263741 J.P. Morgan Prime Money Market - Institutional Shares 62826N770 J.P. Morgan Prime Money Market - Reserve Shares 62826N788 J.P. Morgan Prime Money Market - Cash Mgmt Shares 62826N747 J.P. Morgan Prime Money Market - Select Shares 62826N739 J.P. Morgan Federal Money Market - Morgan Shares 62826N309 J.P. Morgan Federal Money Market - Premier Shares 62826N408 J.P. Morgan Federal Money Market - Agency Shares 62826N507 J.P. Morgan Federal Money Market - Institutional Shares 62826N689 J.P. Morgan Treasury Plus Money Market - Morgan Shares 62826N879 J.P. Morgan Treasury Plus Money Market - Premier Shares 62826N101 J.P. Morgan Treasury Plus Money Market - Agency Shares 62826N200 J.P. Morgan Treasury Plus Money Market - Institutional Shares 62826N762 J.P. Morgan Treasury Plus Money Market - Reserve Shares 62826N713 J.P. Morgan Tax Free Money Market - Morgan Shares 928374107 J.P. Morgan Tax Free Money Market - Premier Shares 928374875 J.P. Morgan Tax Free Money Market - Agency Shares 628263840 J.P. Morgan Tax Free Money Market - Institutional Shares 62826N754 J.P. Morgan US Government Money Market - Morgan Shares 928374206 J.P. Morgan US Government Money Market - Premier Shares 928374867 J.P. Morgan US Government Money Market - Agency Shares 628263832 J.P. Morgan US Government Money Market - Institutional Shares 62826N663 J.P. Morgan 100% US Treasury Securities Money Market - Morgan Shares 62826N606 J.P. Morgan 100% US Treasury Securities Money Market - Premier Shares 62826N804 J.P. Morgan 100% US Treasury Securities Money Market - Agency Shares 62826N887 J.P. Morgan 100% US Treasury Securities Money Market - Institutional Shares 62826N671 J.P. Morgan California Tax Free Money Market - Morgan Shares 928374859 J.P. Morgan New York Tax Free Money Market - Morgan Shares 928374305 J.P. Morgan New York Tax Free Money Market - Reserve Shares 62826N820 J.P. Morgan Liquid Assets - Morgan Shares 62826N614 J.P. Morgan Liquid Assets - Premier Shares 62826N622 J.P. Morgan Liquid Assets - Agency Shares 62826N630 J.P. Morgan Liquid Assets - Institutional Shares 62826N655 J.P. Morgan Liquid Assets - Capital Shares 62826N648
December 20, 2003 61
MUTUAL FUND GROUP CUSIP NUMBER - ----------------- ------------ J.P. Morgan Fleming European Fund - A Shares 628263717 J.P. Morgan Fleming European Fund - B Shares 628263634 J.P. Morgan Fleming European Fund - C Shares 628263337 J.P. Morgan Fleming European Fund - Select Shares 61741A103 J.P. Morgan Fleming European Fund - Institutional Shares 617340724 J.P. Morgan Fleming Tax Aware International Opportunities Fund - A Shares 617449103 J.P. Morgan Fleming Tax Aware International Opportunities Fund - B Shares 617449202 J.P. Morgan Fleming Tax Aware International Opportunities Fund - C Shares 617449301 J.P. Morgan Fleming Tax Aware International Opportunities Fund - Institutional Shares 617449400 J.P. Morgan Short Term Bond Fund II - A Shares 928374784 J.P. Morgan Short Term Bond Fund II - Select Shares 628263105 J.P. Morgan Short Term Bond Fund II - M Shares 628263444 J.P. Morgan US Treasury Income Fund - A Shares 928374602 J.P. Morgan US Treasury Income Fund - B Shares 628263790 J.P. Morgan US Treasury Income Fund - Select Shares 628263113 J.P. Morgan Strategic Income Fund - A Shares 628263535 J.P. Morgan Strategic Income Fund - B Shares 628263527 J.P. Morgan Strategic Income Fund - C Shares 628263519 J.P. Morgan Strategic Income Fund - Select Shares 628263485 J.P. Morgan Strategic Income Fund - M Shares 628263493 J.P. Morgan Capital Growth Fund - A Shares 928374800 J.P. Morgan Capital Growth Fund - B Shares 628263774 J.P. Morgan Capital Growth Fund - C Shares 928374644 J.P. Morgan Capital Growth Fund - Select Shares 628263626 J.P. Morgan H&Q Technology Fund - A Shares 628263246 J.P. Morgan H&Q Technology Fund - B Shares 628263238 J.P. Morgan H&Q Technology Fund - C Shares 628263220 J.P. Morgan Focus Fund - A Shares 628263576 J.P. Morgan Focus Fund - B Shares 628263568 J.P. Morgan Focus Fund - C Shares 628263550 J.P. Morgan Focus Fund - Select Shares 628263543 J.P. Morgan Growth & Income Fund - A Shares 928374701 J.P. Morgan Growth & Income Fund - B Shares 628263782 J.P. Morgan Growth & Income Fund - C Shares 928374651 J.P. Morgan Growth & Income Fund - Select Shares 628263618 J.P. Morgan Select Growth & Income Fund 628263584 J.P. Morgan Fleming International Growth Fund - A Shares 628263170 J.P. Morgan Fleming International Growth Fund - B Shares 628263162 J.P. Morgan Fleming International Growth Fund - C Shares 628263154 J.P. Morgan Fleming Japan Fund - A Shares 628263691 J.P. Morgan Fleming Japan Fund - B Shares 628263642 J.P. Morgan Small Cap Equity Fund - A Shares 628263675
62 J.P. Morgan Small Cap Equity Fund - B Shares 628263667 J.P. Morgan Small Cap Equity Fund - Select Shares 628263592 J.P. Morgan Dynamic Small Cap Fund - A Shares 928374727 J.P. Morgan Dynamic Small Cap Fund - B Shares 928374719 J.P. Morgan Dynamic Small Cap Fund - C Shares 928374669 J.P. Morgan Dynamic Small Cap Fund - Select Shares 628263451
MUTUAL FUND INVESTMENT TRUST CUSIP NUMBER - ---------------------------- ------------ J.P. Morgan Balanced Fund - A Shares 62826M624 J.P. Morgan Balanced Fund - B Shares 62826M816 J.P. Morgan Balanced Fund - C Shares 62826M590 J.P. Morgan Balanced Fund - Select Shares 62826M467 J.P. Morgan Core Equity Fund - A Shares 62826M558 J.P. Morgan Core Equity Fund - B Shares 62826M541 J.P. Morgan Core Equity Fund - C Shares 62826M533 J.P. Morgan Core Equity Fund - Select Shares 62826M442 J.P. Morgan Equity Growth Fund - A Shares 62826M525 J.P. Morgan Equity Growth Fund - B Shares 62826M517 J.P. Morgan Equity Growth Fund - C Shares 62826M491 J.P. Morgan Equity Growth Fund - Select Shares 62826M434 J.P. Morgan Equity Growth Fund II 62826M640 J.P. Morgan Equity Income Fund - A Shares 62826M582 J.P. Morgan Equity Income Fund - B Shares 62826M574 J.P. Morgan Equity Income Fund - C Shares 62826M566 J.P. Morgan Equity Income Fund - Select Shares 62826M459 J.P. Morgan Mid Cap Growth Fund - A Shares 62826M483 J.P. Morgan Mid Cap Growth Fund - B Shares 62826M475 J.P. MORGAN SERIES TRUST CUSIP NUMBER - ------------------------ ------------ J.P. Morgan Tax Aware Small Company Opportunities Fund - A Shares 616920666 J.P. Morgan Tax Aware Small Company Opportunities Fund - B Shares 616920658 J.P. Morgan Tax Aware Small Company Opportunities Fund - C Shares 616920641 J.P. Morgan Tax Aware Small Company Opportunities Fund - Select Shares 616920716 J.P. Morgan Tax Aware US Equity Fund - A Shares 616920591 J.P. Morgan Tax Aware US Equity Fund - B Shares 616920583 J.P. Morgan Tax Aware US Equity Fund - C Shares 616920575 J.P. Morgan Tax Aware US Equity Fund - Select Shares 616920104 J.P. Morgan Tax Aware US Equity Fund - Institutional Shares 616920203 J.P. Morgan Global Healthcare Fund - A Shares 616920633 J.P. Morgan Global Healthcare Fund - B Shares 616920625 J.P. Morgan Global Healthcare Fund - C Shares 616920617 J.P. Morgan Global Healthcare Fund - Select Shares 616920724
63 J.P. Morgan Global 50 Fund - A Shares 616920690 J.P. Morgan Global 50 Fund - B Shares 616920682 J.P. Morgan Global 50 Fund - C Shares 616920674 J.P. Morgan Global 50 Fund - Select Shares 616920708 J.P. Morgan Tax Aware Disciplined Equity Fund - Institutional Shares 616920401 J.P. Morgan Tax Aware Enhanced Income Fund - A Shares 616920559 J.P. Morgan Tax Aware Enhanced Income Fund - Select Shares 616920849 J.P. Morgan Tax Aware Enhanced Income Fund - Institutional Shares 616920856 J.P. Morgan SmartIndex Fund - Institutional Shares 616920864 J.P. Morgan Large Cap Growth Fund - Institutional Shares 616920880 J.P. Morgan Market Neutral Fund - A Shares 616920468 J.P. Morgan Market Neutral Fund - B Shares 616920450 J.P. Morgan Market Neutral Fund - Institutional Shares 616920872 J.P. Morgan California Bond Fund - A Shares 616920567 J.P. Morgan California Bond Fund - Select Shares 616920500 J.P. Morgan California Bond Fund - Institutional Shares 616920609 J.P. Morgan Disciplined Equity Value Fund - Institutional Shares 62826N697 J.P. Morgan Enhanced Income Fund - Ultra Shares 616920815 J.P. Morgan Enhanced Income Fund - Institutional Shares 616920823 J.P. Morgan US High Yield Bond Fund - A Shares 616920526 J.P. Morgan US High Yield Bond Fund - B Shares 616920518
J.P. MORGAN SERIES TRUST II CUSIP NUMBER - --------------------------- ------------ J.P. Morgan International Opportunities Portfolio 616919502 J.P. Morgan Small Company Portfolio 616919403 J.P. Morgan US Disciplined Equity Portfolio 616919304 J.P. Morgan Bond Portfolio 616919205 J.P. Morgan Mid Cap Value Portfolio 616919601 J.P. MORGAN INSTITUTIONAL FUNDS CUSIP NUMBER - ------------------------------- ------------ J.P. Morgan Bond Fund - A Shares 616918595 J.P. Morgan Bond Fund - B Shares 616918587 J.P. Morgan Bond Fund - Select Shares 616918637 J.P. Morgan Bond Fund - Institutional Shares 616918504 J.P. Morgan Bond Fund - Ultra Shares 616918553 J.P. Morgan Fleming International Opportunities Fund - A Shares 616918579 J.P. Morgan Fleming International Opportunities Fund - B Shares 616918561 J.P. Morgan Fleming International Opportunities Fund - Institutional Shares 616918777 J.P. Morgan Fleming International Opportunities Fund - Select Shares 616918629 J.P. Morgan US Equity Fund - A Shares 616918660 J.P. Morgan US Equity Fund - B Shares 616918652 J.P. Morgan US Equity Fund - C Shares 616918645 J.P. Morgan US Equity Fund - Institutional Shares 616918702 J.P. Morgan US Equity Fund - Select Shares 616918611
64 J.P. Morgan Global Strategic Income Fund - A Shares 616918397 J.P. Morgan Global Strategic Income Fund - B Shares 616918389 J.P. Morgan Global Strategic Income Fund - Institutional Shares 616918785 J.P. Morgan Global Strategic Income Fund - Select Shares 616918538 J.P. Morgan Short Term Bond Fund - A Shares 616918371 J.P. Morgan Short Term Bond Fund - Institutional Shares 616918405 J.P. Morgan Short Term Bond Fund - Select Shares 616918546 J.P. Morgan US Small Company Fund - Institutional Shares 616918801 J.P. Morgan US Small Company Fund - Select Shares 616918496 J.P. Morgan Fleming International Value Fund - A Shares 616918462 J.P. Morgan Fleming International Value Fund - B Shares 616918454 J.P. Morgan Fleming International Value Fund - Institutional Shares 616918884 J.P. Morgan Fleming International Value Fund - Select Shares 616918488 J.P. Morgan Fleming Emerging Markets Equity Fund - A Shares 616918439 J.P. Morgan Fleming Emerging Markets Equity Fund - B Shares 616918421 J.P. Morgan Fleming Emerging Markets Equity Fund - Institutional Shares 616918850 J.P. Morgan Fleming Emerging Markets Equity Fund - Select Shares 616918470 J.P. Morgan Diversified Fund - Institutional Shares 616918876 J.P. Morgan Diversified Fund - Select Shares 616918520 J.P. Morgan Disciplined Equity Fund - A Shares 616918363 J.P. Morgan Disciplined Equity Fund - B Shares 616918355 J.P. Morgan Disciplined Equity Fund - Institutional Shares 616918793 J.P. Morgan Disciplined Equity Fund - Select Shares 616918512
FLEMING MUTUAL FUND GROUP CUSIP NUMBER - ------------------------- ------------ J.P. Morgan Small Cap Growth Fund - A Shares 339128605 J.P. Morgan Small Cap Growth Fund - B Shares 339128704 J.P. Morgan Small Cap Growth Fund - C Shares 339128803 J.P. Morgan Small Cap Growth Fund - Institutional Shares 339128209 J.P. Morgan Small Cap Growth Fund - Select Shares 339183204 J.P. Morgan Mid Cap Value Fund - A Shares 339128308 J.P. Morgan Mid Cap Value Fund - B Shares 339128407 J.P. Morgan Mid Cap Value Fund - C Shares 339128506 J.P. Morgan Mid Cap Value Fund - Institutional Shares 339128100 J.P. Morgan Mid Cap Value Fund - Select Shares 339183105 J.P. MORGAN FUNDS CUSIP NUMBER - ----------------- ------------ J.P. Morgan Fleming Emerging Markets Debt Fund - Select Shares 617340773 J.P. Morgan US Small Company Opportunities Fund - Select Shares 617340781 MUTUAL FUND SELECT TRUST CUSIP NUMBER - ------------------------ ------------ J.P. Morgan New York Intermediate Tax Free Income Fund - A Shares 62826P791 J.P. Morgan New York Intermediate Tax Free Income Fund - B Shares 62826P783 J.P. Morgan New York Intermediate Tax Free Income Fund - Select Shares 62826T603
65 J.P. Morgan New York Intermediate Tax Free Income Fund - Institutional Shares 62826T884 J.P. Morgan Intermediate Tax Free Income Fund - Select Shares 62826T108 J.P. Morgan Intermediate Tax Free Income Fund - Institutional Shares 62826T702 J.P. Morgan New Jersey Tax Free Income Fund - Select Shares 62826T405 J.P. Morgan Tax Free Income Fund - A Shares 62826P825 J.P. Morgan Tax Free Income Fund - B Shares 62826P817 J.P. Morgan Tax Free Income Fund - Select Shares 62826T504
MUTUAL FUND SELECT GROUP CUSIP NUMBER - ------------------------ ------------ J.P. Morgan Bond Fund II - A Shares 62826P866 J.P. Morgan Bond Fund II - B Shares 62826P858 J.P. Morgan Bond Fund II - Select Shares 62826P775 J.P. Morgan Intermediate Bond Fund - A Shares 62826P841 J.P. Morgan Intermediate Bond Fund - Select Shares 62826P767 J.P. Morgan Select Large Cap Growth Fund 62826P403 J.P. Morgan Select Mid Cap Equity Fund 62826P502 J.P. Morgan Select Small Cap Equity Fund 62826P601 J.P. Morgan Select Balanced Fund 62826P106 J.P. Morgan Select Equity Income Fund 62826P205 J.P. Morgan Select International Equity Fund - A Shares 616920484 J.P. Morgan Select International Equity Fund - B Shares 616920476 J.P. Morgan Select International Equity Fund - Institutional Shares 616920492 J.P. Morgan Select International Equity Fund - Select Shares 62826P700 J.P. Morgan Select Large Cap Equity Fund 62826P304 MUTUAL VARIABLE ANNUITY TRUST CUSIP NUMBER - ----------------------------- ------------ Vista Capital Advantage Variable Annuity Capital Growth Portfolio 62826R201 Vista Capital Advantage Variable Annuity Growth & Income Portfolio 62826R300 Vista Capital Advantage Variable Annuity International Equity Portfolio 62826R102 Vista Capital Advantage Variable Annuity Asset Allocation Portfolio 62826R409 Vista Capital Advantage Variable Annuity Money Market Portfolio 62826R607 Vista Capital Advantage Variable Annuity US Government Income Portfolio 62826R508
J.P. MORGAN CHASE & CO. SOLELY WITH RESPECT TO EACH ACCOUNT REGISTERED IN THE NAME OF J.P. MORGAN CHASE BANK NA (OR AN AFFILIATE), SPECIAL ACCT. BENEFIT OF CLIENTS ATTN: KEN FAITH IN THE FOLLOWING
AMERICAN CENTURY FUNDS(1) CUSIP NUMBER - ------------------------- ------------ American Century Ultra Fund 25083882 American Century Select Fund 25083502 American Century International Growth Fund 25086109 American Century International Discovery Fund 25086505 American Century Value Fund 25076506
- ---------- (1) Sub-accounting Services only. 66 American Century California Tax Free Money Market Fund 25075300 American Century Florida Municipal Money Market Fund 24934200 American Century California Intermediate Tax Free Fund 25075508 American Century GNMA Fund 25081605 American Century California High Yield Municipal Fund 25075201 American Century Florida Intermediate Term Municipal Fund 24934309 American Century California Municipal Money Market Fund 25075102 American Century Heritage Fund 25083791 American Century Equity Income Fund 25076100 American Century California Long Term Tax Free Fund 25075607 American Century High Yield Bond Fund 25083445 American Century Real Estate Fund 25076886 American Century Growth Fund 25083106 American Century Small Cap Value Fund 25076852
67 EX-99.(J) 12 a2118929zex-99_j.txt EX-99.(J) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated October 20, 2003, relating to the financial statements and financial highlights, which appear in the August 31, 2003 Annual Report to Shareholders of JPMorgan Prime Money Market Fund, JPMorgan U.S. Government Money Market Fund, JPMorgan Treasury Plus Money Market Fund, JPMorgan Federal Money Market Fund, JPMorgan 100% U.S. Treasury Securities Money Market Fund, JPMorgan Tax Free Money Market Fund, JPMorgan California Tax Free Money Market Fund, JPMorgan New York Tax Free Money Market Fund and JPMorgan Liquid Assets Money Market Fund, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights," "Financial Statements" and "Independent Accountants" in such Registration Statement. New York, New York December 23, 2003 EX-99.(M) 13 a2118929zex-99_m.txt EX-99.(M) Exhibit 99.(m) (NAME OF TRUST) DISTRIBUTION PLAN SECTION 1. This Distribution Plan (the "Plan") is adopted with respect to one or more series of (Name of Trust), a Massachusetts business trust (the "Trust") as listed in Schedule A (a "Fund"), pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") and relates to the classes of shares (the "Shares") specified in Schedule A. SECTION 2. Each Fund may incur with respect to a class of shares, expenses at an annual rate as listed under the column "Distribution Fee" on Schedule A hereto, subject to any applicable limitations imposed from time to time by applicable rules of the National Association of Securities Dealers, Inc. (the "NASD"). SECTION 3. Amounts set forth under the column "Distribution Fee" on Schedule A hereto may be used to finance any activity which is primarily intended to result in the sale of the Shares, including, but not limited to, (i) the development, formulation and implementation of marketing and promotional activities, including direct mail promotions and television, radio, magazine, newspaper, electronic and media advertising; (ii) the preparation, printing and distribution of prospectuses and statements of additional information (and supplements thereto) and reports (other than prospectuses and statements of additional information (and supplements thereto) or reports used for regulatory purposes or for distribution to existing shareholders); (iii) the preparation, printing and distribution of sales literature; (iv) expenditures for sales or distribution support services such as for telephone facilities and in-house telemarketing; (v) preparation of information, analyses and opinions with respect to marketing and promotional activities; (vi) commissions, incentive compensation, finders fees or other compensation to, and expenses of employees of each fund's distributor (the "Distributor"), brokers, dealers and other financial institutions attributable to distribution or sales support activities, as applicable, including interest expenses and other costs associated with financing of such commissions, compensation and expenses; (vii) travel, equipment, printing, delivery and mailing costs, overhead and other office expenses of the Distributor attributable to distribution or sales support activities, as applicable; (viii) the costs of administering this Plan; (ix) expenses of organizing and conducting sales seminars; and (x) any other costs and expenses relating to distribution or sales support activities. To the extent that amounts paid hereunder are not used specifically to reimburse the Distributor for any such expense, such amounts may be treated as compensation for the Distributor's distribution-related services. All amounts expended pursuant to the Plan shall be paid to the Distributor and are the legal obligation of the applicable Fund and not of the Distributor. SECTION 4. This Plan shall not take effect until it has been approved, together with any related agreements, by votes of the majority of both (a) the Board of Trustees of the Trust with respect to each Fund and (b) those trustees of the Trust who are not "interested persons" of each Fund (as defined in the 1940 Act) and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Non-interested Trustees"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. SECTION 5. Unless sooner terminated pursuant to Section 7, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided in Section 4. SECTION 6. The distributor shall provide to the Board of Trustees and the Board of Trustees shall review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. SECTION 7. This Plan may be terminated at any time with respect to any class of Shares of any Fund by vote of a majority of the Non-interested Trustees, or by vote of a majority of the outstanding voting securities of the Shares. SECTION 8. Any agreement related to this Plan shall be made in writing, and shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Non-interested Trustees or by a vote of the outstanding voting securities of any Fund attributable to the Shares, on not more than sixty (60) days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act). SECTION 9. This Plan may not be amended with respect to any class of Shares of any Fund to increase materially the amount of distribution expenses provided for in the column "Distribution Fee" on Schedule A hereto unless such amendment is approved by a vote of at least a "majority of the outstanding securities" (as defined in the 1940 Act) of the Shares, and no material amendment to the Plan shall be made unless approved in the manner provided for in Section 4 hereof. Adopted: SCHEDULE A
DISTRIBUTION FEE (annual rate expressed as a percentage of CLASS OF the average daily net assets of each class of FUND SHARES Shares) - ------------------------------------------------------------------------------------------------------------------------
EX-99.(P)(1) 14 a2118929zex-99_p1.txt EX-99.(P)(1) CODE OF ETHICS THE J.P. MORGAN FAMILY OF FUNDS 1. PURPOSES This Code of Ethics (the "Code") has been adopted by the Trustees of the funds listed on Schedule A hereto (each, a "Portfolio"), in accordance with Rule 17j-1(c) promulgated under the Investment Company Act of 1940, as amended (the "Act"). Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to purchases or sales of Securities Held or to be Acquired by investment companies, if effected by associated persons of such companies. The purpose of this Code is to provide regulations and procedures consistent with the Act and Rule 17j-1 designed to give effect to the general prohibitions set forth in Rule 17j-1(b) as follows: It is unlawful for any affiliated person of or principal underwriter for a fund, or any affiliated person of an investment adviser of or principal underwriter for a fund, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by such fund -- (a) To employ any device, scheme or artifice to defraud the fund; (b) To make any untrue statement of a material fact to the fund or omit to state a material fact necessary in order to make the statements made to the fund, in light of the circumstances under which they are made, not misleading; (c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on the fund; or (d) To engage in any manipulative practice with respect to the fund. 2. DEFINITIONS (a) "Access Person" means any Trustee, officer or Advisory Person of the Portfolio. (b) Adviser shall mean J.P. Morgan Investment Management, Inc., J.P.Morgan Fleming Asset Management (USA) Inc., Robert Fleming Inc., J.P.Morgan Fleming Asset Management (London) Limited and JF International Management Limited. (c) "Advisory Person" of a Portfolio means: (i) any employee of the Portfolio (or any company in a control relationship to the Portfolio) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by the Portfolio, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Portfolio who obtains information concerning recommendations made to the Portfolio with regard to the purchase or sale of Covered Securities by the Portfolio. (d) "Beneficial Ownership" shall be interpreted in the same manner as it would be under Exchange Act Rule 16a-1(a)(2)in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder (see Annex A). Any report required by Section 5(a) of this Code may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the Security to which the report relates. (e) "Covered Security" shall have the meaning set forth in Section 2(a)(36) of the Act, except that it shall not include shares of open-end funds, direct obligations of the United States Government, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements. (f) "Control" has the same meaning as in Section 2(a)(9) of the Act. (g) "Disinterested Trustee" means a Trustee of the Portfolio who is not an "interested person" of the Portfolio within the meaning of Section 2(a)(19) of the Act. (h) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act. (i) "Investment Personnel" means (i) any employee of the Portfolio (or of any company in a control relationship to the Portfolio) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Portfolio; and (ii) any natural person who controls the Portfolio and who obtains information concerning recommendations made to the Portfolio regarding the purchase or sale of securities by the Portfolio. (j) "Limited Offering" means an offering that is exempt from registration under the Securities Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act. (k) "Purchase or Sale of a Covered Security" includes, INTER ALIA, the writing of an option to purchase or sell a Covered Security. (l) "Security Held or to be Acquired" by a Portfolio means: (i) any Covered Security which, within the most recent 15 days, is or has been held by the Portfolio or is being or has been considered by the Portfolio or its adviser for purchase by the Portfolio; and (ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in Section 2(k)(i) of this Code. 3. PROHIBITED PURCHASES AND SALES (a) No Access Person shall purchase or sell directly or indirectly any Covered Security in which he or she has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership and which to his or her actual knowledge at the time of such purchase or sale: (i) is being considered for purchase or sale by the Portfolio; or (ii) is being purchased or sold by the Portfolio. (b) No Access Person shall reveal to any other person (except in the normal course of his or her duties on behalf of the Portfolio) any information regarding Covered Securities transactions by the Portfolio or consideration by the Portfolio or its adviser of any such Covered Securities transactions. (c) No Access Person shall recommend any Covered Securities transaction by the Portfolio without having disclosed his or her interest, if any, in such Covered Securities or the issuer thereof, including without limitation (i) his or her direct or indirect Beneficial Ownership of any Covered Securities of such issuer, (ii) any contemplated transaction by such person in such Covered Securities (iii) any position with such issuer or its affiliates and (iv) any present or proposed business relationship between such issuer or its affiliates, on the one hand, and such person or any party in which such person has a significant interest, on the other; provided, however, that in the event the interest of such Access Person in such Covered Securities or issuer is not material to his or her personal net worth and any contemplated transaction by such person in such Covered Securities cannot reasonably be expected to have a material adverse effect on any such transaction by the Portfolio or on the market for the Covered Securities generally, such Access Person shall not be required to disclose his or her interest in the Covered Securities or issuer thereof in connection with any such recommendation. (d) No Investment Personnel shall purchase any Covered Security which is part of an Initial Public Offering. 4. EXEMPTED TRANSACTIONS The prohibitions of Section 3 of this Code shall not apply to: (a) Purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control. (b) Purchases or sales of Covered Securities which are not eligible for purchase or sale by the Portfolio. (c) Purchases or sales which are non-volitional on the part of either the Access Person or the Portfolio. (d) Purchases which are part of an automatic dividend reinvestment plan. (e) Purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its Covered Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. (f) Purchases or sales which are only remotely potentially harmful to the Portfolio because they would be very unlikely to affect a highly institutional market, or because they clearly are not related economically to the Covered Securities to be purchased, sold or held by the Portfolio. 5. REPORTING REQUIREMENTS (a) Every Access Person must report to the Adviser's compliance department in accordance with Section 5(d) of this Code: (i)Initial Holdings Reports. No later than 10 days after the person becomes an Access Person, the following information: (A) the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; (B) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any Covered Securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and (C) the date that the report is submitted by the Access Person. (ii)Quarterly Transaction Reports. No later than 10 days after the end of a calendar quarter, with respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect Beneficial Ownership: (A) the date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and principal amount of each Covered Security involved; (B) the nature of the transaction; (C) the price of the Covered Security at which the transaction was effected; (D) the name of the broker, dealer or bank with or through which the transaction was effected; and (E) the date that the report is submitted by the Access Person. (iii)New Account Report. With respect to any account established by the Access Person in which any Covered Securities were held during the calendar quarter for the direct or indirect benefit of the Access Person: (A) the name of the broker, dealer or bank with whom the Access Person established the account; (B) the date the account was established; and (C) the date that the report is submitted by the Access Person. Such report shall be filed no later than 10 days after the end of each calendar quarter. (iv) Annual Holdings Report. Annually, the following information (which information must be current as of a date no more than 30 days before the report is submitted): (A) the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership; (B) the name of any broker, dealer or bank with whom the Access Person maintains an account in which any Covered Securities are held for the direct or indirect benefit of the Access Person: and (C) the date that the report is submitted by the Access Person. (b) Exceptions from the Reporting Requirements. (i) Notwithstanding the provisions of Section 5(a), no Access Person shall be required to make: A. a report with respect to transactions effected for any account over which such person does not have any direct or indirect influence or control; B. to make a Quarterly Transaction or New Account Report under Section 5(a)(ii) or (iii) if the report would duplicate information contained in broker trade confirmations or account statements received by the Adviser with respect to the Access Person no later than 10 days after the calendar quarter end, if all of the information required by Sections 5(a)(ii) or (ii), as the case may be, is contained in the broker trade confirmations or account statements, or in the records of the Adviser. (ii) a Disinterested Trustee who would be required to make a report solely by reason of being a Trustee need not make: A. an initial holdings report and annual holdings reports; and B. quarterly transaction and new account reports, since the Trustees generally have no involvement in the security selection process. Such reports need to be filed ONLY IF a Trustee, at the time of that transaction, knew, or in the ordinary course of fulfilling his or her official duties as a Trustee of the Portfolio, should have known, that during the 15-day period immediately before or after the date of the Trustee's transaction in a Covered Security, such Covered Security is or was purchased or sold by the Portfolio or was being considered for purchase or sale by the Portfolio or the Adviser. (c) Each Access Person shall promptly report any transaction which is, or might appear to be, in violation of this Code. Such report shall contain the information required in quarterly transaction reports filed pursuant to Section 5(a)(ii). (d) All reports prepared pursuant to this Section 5 shall be filed with the person designated by the Adviser's compliance department to review these materials. (e) The Adviser's compliance department will identify all Access Persons who are required to file reports pursuant to this Section 5 and will inform them of their reporting obligation. 6. RECORDKEEPING REQUIREMENTS The Adviser will, on behalf of each Portfolio, maintain at its principal place of business maintain records in the manner and extent set out in this Section of this Code and will make available to the Securities and Exchange Commission (SEC) at any time and from time to time for reasonable, periodic, special or other examination: (a) A copy of each code of ethics of the Adviser, distributor and the Portfolios that is in effect, or at any time within the past five years was in effect, must be maintained in an easily accessible place; (b) A record of any violation of this Code, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs; (c) A copy of each report made by an Access Person as required by Section 5(a) of this Code, including any information provided in lieu of a quarterly transaction report, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place. (d) A record of all persons, currently or within the past five years, who are or were required to make reports as Access Persons or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place. (e) A copy of each report required by Section 7(b) of this Code must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. (f) The Portfolio must maintain a record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of any Covered Security that is part of an Initial Public Offering or a Limited Offering, for at least five years after the end of the fiscal year in which the approval is granted. 7. FIDUCIARY DUTIES OF THE PORTFOLIO'S BOARD OF TRUSTEES a. Each Portfolio's Trustees, including a majority of Disinterested Trustees, must approve the code of ethics of the Portfolio, the Adviser and distributor and any material change to these codes. The Board must base its approval of a code and any material changes to the code on a determination that the code contains provisions reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by Rule 17j-1(b) of the Act as described in Section 1. Before approving the codes of the Adviser, distributor and the Portfolios, each Portfolio's Board must receive certification from the Adviser, distributor and the Portfolios that each has adopted procedures reasonably necessary to prevent Access Persons from violating its code of ethics. The Portfolio's Board must approve the codes of the Adviser and the distributor before initially retaining the services of the Adviser or distributor. The Portfolio's Board must approve a material change to a code not later than six months after adoption of the material change. The Adviser, distributor and the Portfolios must each use reasonable diligence and institute procedures reasonably necessary to prevent violations of its code of ethics. b. No less frequently than annually, the Adviser, distributor, and the Portfolios must furnish to the Portfolio's Board a written report that: 1. Describes any issues arising under the code of ethics or procedures since the last report to the Board, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations; and 2. Certifies that the Adviser, the distributor, and the Portfolios have adopted procedures reasonably necessary to prevent Access Persons from violating the code. 8. SANCTIONS Upon discovering a violation of this Code, the Trustees of the Portfolio may impose such sanctions as they deem appropriate, including, INTER ALIA, a letter of censure or suspension or termination of the employment of the violator. ANNEX A The term "beneficial owner" shall mean any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the securities, subject to the following: (i) The term "pecuniary interest" in any class of securities shall mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. (ii) The term "indirect pecuniary interest" in any class of securities shall include, but not be limited to: (A) Securities held by members of a person's immediate family sharing the same household; PROVIDED, HOWEVER, that the presumption of such beneficial ownership may be rebutted; (B) A general partner's proportionate interest in the portfolio securities held by a general or limited partnership. The general partner's proportionate interest, as evidenced by the partnership agreement in effect at the time of the transaction and the partnership's most recent financial statements, shall be the greater of: (1) the general partner's share of the partnership's profits, including profits attributed to any limited partnership interests held by the general partner and any other interests in profits that arise from the purchase and sale of the partnership's portfolio securities; or (2) the general partner's share of the partnership capital account, including the share attributable to any limited partnership interest held by the general partner; (C) A performance-related fee, other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; PROVIDED, HOWEVER, that no pecuniary interest shall be present where (1) the performance-related fee, regardless of when payable, is calculated based upon net capital gains and/or net capital appreciation generated from the portfolio or from the fiduciary's overall performance over a period of one year or more; and (2) securities of the issuer do not account for more than 10 percent of the market value of the portfolio. A right to a nonperformance-related fee alone shall not represent a pecuniary interest in the securities; (D) A person's right to dividends that is separated or separable from the underlying securities. Otherwise, a right to dividends alone shall not represent a pecuniary interest in the securities; (E) A person's interest in the securities held by a trust, as follows: (1) TRUSTEES. If a trustee has a pecuniary interest, as provided above, in any holding or transaction in the issuer's securities held by the trust, such holding or transaction shall be attributed to the trustee in the trustee's individual capacity, as well as on behalf of the trust. With respect to performance fees and holdings of the trustee's immediate family, trustees shall be deemed to have a pecuniary interest in the trust holdings and transactions in the following circumstances: (i) a performance fee is received that does not meet the proviso of paragraph (ii)(C) above; or (ii)at least one beneficiary of the trust is a member of the trustee's immediate family. The pecuniary interest of the immediate family member(s) shall be attributed to the trustee; (2) BENEFICIARIES. A beneficiary shall have or share reporting obligations with respect to transactions in the issuer's securities held by the trust, if the beneficiary is a beneficial owner of the securities, as follows: (aa) If a beneficiary shares investment control with the trustee with respect to a trust transaction, the transaction shall be attributed to both the beneficiary and the trust; (bb) If a beneficiary has investment control with respect to a trust transaction without consultation with the trustee, the transaction shall be attributed to the beneficiary only; and (cc) In making a determination as to whether a beneficiary is the beneficial owner of the securities, beneficiaries shall be deemed to have a pecuniary interest in the issuer's securities held by the trust to the extent of their pro rata interest in the trust where the trustee does not exercise exclusive investment control. (3) SETTLORS. If a settlor reserves the right to revoke the trust without the consent of another person, the trust holdings and transactions shall be attributed to the settlor instead of the trust; provided, however, that if the settlor does not exercise or share investment control over the issuer's securities held by the trust, the trust holdings and transactions shall be attributed to the trust instead of the settlor; and (F) A person's right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable. (iii) A shareholder shall not be deemed to have a pecuniary interest in the portfolio securities held by a corporation or similar entity in which the person owns securities if the shareholder is not a controlling shareholder of the entity and does not have or share investment control over the entity's portfolio. CODE OF ETHICS SCHEDULE A FUND ADOPTION DATE J.P. MORGAN FUNDS October 25, 2001 J.P. MORGAN INSTITUTIONAL FUNDS October 25, 2001 J.P. MORGAN SERIES TRUST October 25, 2001 J.P. MORGAN SERIES TRUST II October 25, 2001 MUTUAL FUND GROUP October 25, 2001 FLEMING MUTUAL FUND GROUP October 25, 2001 MUTUAL FUND TRUST October 25, 2001 MUTUAL FUND SELECT GROUP October 25, 2001 MUTUAL FUND SELECT TRUST October 25, 2001 MUTUAL FUND VARIABLE ANNUITY TRUST October 25, 2001 MUTUAL FUND INVESTMENT TRUST October 25, 2001 EX-99.(P)(2) 15 a2118929zex-99_p2.txt EX-99.(P)(2) BISYS FUND SERVICES CODE OF ETHICS I. INTRODUCTION This Code of Ethics (the "Code") sets forth the basic policies of ethical conduct for all directors, officers and associates (hereinafter referred to as "Covered Persons") of the BISYS Fund Services companies listed on Exhibit A hereto (hereinafter collectively referred to as "BISYS"). Rule 17j-1(b) under the Investment Company Act of 1940, as amended, (the "1940 Act") makes it unlawful for BISYS companies operating as a principal underwriter of a registered investment company (hereinafter referred to individually as a "Fund" or collectively as the "Funds"), or any affiliated person of such principal underwriter, in connection with the purchase or sale by such person of a security "HELD OR TO BE ACQUIRED"(1) by any Fund: (1) to employ any device, scheme or artifice to defraud the Fund; (2) to make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (3) to engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Fund; or (4) to engage in any manipulative practice with respect to the Fund. Any violation of this provision by a Covered Person shall be deemed to be a violation of this Code. II. RISKS OF NON-COMPLIANCE Any violation of this Code may result in the imposition by BISYS of sanctions against the Covered Person, or may be grounds for the immediate termination of the Covered Person's position with BISYS. In addition, in some cases (e.g., the misuse of inside information), a violation of federal and state civil and criminal statutes may subject the Covered Person to fines, imprisonment and/or monetary damages. - ---------- (1) A security "HELD OR TO BE ACQUIRED" is defined under Rule 17j-l(a)(10) as any COVERED SECURITY which, within the most recent fifteen (15) days: (A) is or has been held by a Fund, or (B) is being or has been considered by a Fund or the investment adviser for a Fund for purchase by the Fund. A purchase or sale includes the writing of an option to purchase or sell and any security that is convertible into or exchangeable for, any security that is held or to be acquired by a Fund. "COVERED SECURITIES", as defined under Rule 17j-1(a)(4), DO NOT INCLUDE: (i) securities issued by the United States Government; (ii) bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (iii) shares of open-end investment companies; (iv) transactions which you had no direct or indirect influence or control; (v) transactions that are not initiated, or directed, by you; and (vi) securities acquired upon the exercise of rights issued by the issuer to all shareholders pro rata. III. ETHICAL STANDARDS The foundation of this Code consists of basic standards of conduct including, but not limited to, the avoidance of conflicts between personal interests and interests of BISYS or its Fund clients. To this end, Covered Persons should understand and adhere to the following ethical standards: (a) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF FUND SHAREHOLDERS FIRST; This duty requires that all Covered Persons avoid serving their own personal interests ahead of the interests of the shareholders of any Fund for which BISYS serves as the administrator, distributor, transfer agent or fund accountant. (b) THE DUTY TO ENSURE THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED IN A MANNER THAT IS CONSISTENT WITH THIS CODE TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF SUCH COVERED PERSON'S POSITION OF TRUST AND RESPONSIBILITY; AND Covered Persons should study this Code and ensure that they understand its requirements. Covered Persons should conduct their activities in a manner that not only achieves technical compliance with this Code but also abides by its spirit and principles. (c) THE DUTY TO ENSURE THAT COVERED PERSONS DO NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITION WITH BISYS. Covered Persons engaged in personal securities transactions should not take inappropriate advantage of their position or of information obtained during the course of their association with BISYS. Covered Persons should avoid situations that might compromise their judgment (e.g., the receipt of perquisites, gifts of more than de minimis value or unusual investment opportunities from persons doing or seeking to do business with BISYS or the Funds). A "PERSONAL SECURITIES TRANSACTION" is considered to be a transaction in a Covered Security of which the Covered Person is deemed to have "BENEFICIAL OWNERSHIP." (2) This includes, but is not limited to, transactions in accounts of the Covered Person's spouse, minor children, or other relations residing in the Covered Person's household, or accounts in which the Covered Person has discretionary investment control. - ---------- (2) "BENEFICIAL OWNERSHIP" of a security is defined under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, which provides that a Covered Person should consider himself/herself the beneficial owner of securities held by his/her spouse, his/her minor children, a relative who shares his/her home, or other persons, directly or indirectly, if by reason of any contract, understanding, relationship, agreement or other arrangement, he/she obtains from such securities benefits substantially equivalent to those of ownership. He/she should also consider himself/herself the beneficial owner of securities if he/she can vest or revest title in himself/herself now or in the future. 2 IV. RESTRICTIONS AND PROCEDURES This section is divided into two (2) parts. Part A relates to restrictions and procedures applicable to all Covered Persons in addition to the aforementioned Rule 17j-1(b) provisions. Part B imposes additional restrictions and reporting requirements for those Covered Persons who are listed on Exhibit B hereto (hereinafter referred to as "ACCESS PERSONS"(3)). A. RESTRICTIONS AND PROCEDURES FOR ALL COVERED PERSONS: 1. PROHIBITION AGAINST USE OF MATERIAL INSIDE INFORMATION Covered Persons may have access to information about Funds that is confidential and not available to the general public, such as (but not limited to) information concerning securities held in, or traded by, Fund portfolios, information concerning certain underwritings of broker/dealers affiliated with a Fund that may be deemed to be "MATERIAL INSIDE INFORMATION", and information which involves a merger or acquisition that has not been disclosed to the public. "MATERIAL INSIDE INFORMATION" IS DEFINED AS ANY INFORMATION ABOUT A COMPANY WHICH HAS NOT BEEN DISCLOSED TO THE GENERAL PUBLIC AND WHICH EITHER A REASONABLE PERSON WOULD DEEM TO BE IMPORTANT IN MAKING AN INVESTMENT DECISION OR THE DISSEMINATION OF WHICH IS LIKELY TO IMPACT THE MARKET PRICE OF THE COMPANY'S SECURITIES. Covered Persons in possession of material inside information must not trade in or recommend the purchase or sale of the securities concerned until the information has been properly disclosed and disseminated to the public. 2. INITIAL AND ANNUAL CERTIFICATIONS Within ten (10) days following the commencement of their employment or otherwise becoming subject to this Code and at least annually following the end of the calendar year, all Covered Persons shall be required to sign and submit to the Code Compliance Officer a written certification, in the form of Exhibit C hereto, affirming that he/she has read and understands this Code to which he/she is subject. In addition, the Covered Person must certify annually that he/she has complied with the requirements of this Code and has disclosed and reported all personal securities transactions that are required to be disclosed and reported by this Code. The Code - -------- (3) An "ACCESS PERSON" is defined under Rule 17j-1(a)(1)(ii) to include any director, officer or general partner of a principal underwriter for a Fund who, in the ordinary course of business, makes, participates in or OBTAINS INFORMATION regarding the purchase or sale of securities for such Fund or whose functions or duties in the ordinary course of business relate to the making of any recommendation to such Fund regarding the purchase or sale of securities. This Code has included BISYS associates that are not directors, officers or general partners of any BISYS Fund Services company but would otherwise be deemed Access Persons for purposes of this Code. 3 Compliance Officer will circulate the Annual Certifications and Holdings Reports for completion following the end of each calendar year. B. RESTRICTIONS AND REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS: Each Access Person must refrain from engaging in a PERSONAL SECURITIES TRANSACTION when the Access Person knows, or in the ordinary course of fulfilling his/her duties would have reason to know, that at the time of the personal securities transaction a Fund has a pending buy or sell order in the same Covered Security. 1. INITIAL AND ANNUAL HOLDINGS REPORTS All Access Persons must file a completed Initial and Annual Holdings Report, in the form of Exhibit D hereto, with the Code Compliance Officer WITHIN TEN (10) DAYS OF COMMENCEMENT OF THEIR EMPLOYMENT OR OTHERWISE BECOMING SUBJECT TO THIS CODE AND THEREAFTER ON AN ANNUAL BASIS FOLLOWING THE END OF THE CALENDAR YEAR IN ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE CODE COMPLIANCE OFFICER. 2. TRANSACTION/NEW ACCOUNT REPORTS All Access Persons must file a completed Transaction/New Account Report, in the form of Exhibit E hereto, with the Code Compliance Officer WITHIN TEN (10) DAYS AFTER (i) OPENING AN ACCOUNT WITH A BROKER, DEALER OR BANK IN WHICH COVERED SECURITIES ARE HELD; OR (ii) ENTERING INTO ANY PERSONAL SECURITIES TRANSACTION IN WHICH AN ACCESS PERSON HAS ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP. Personal securities transactions are those involving any COVERED SECURITY1 in which the person has, or by reason of such personal securities transaction acquires, any direct or indirect, "BENEFICIAL OWNERSHIP."(2) 3. CONFIRMATIONS AND STATEMENTS In order to provide BISYS with information to determine whether the provisions of this Code are being observed, each Access Person shall direct his/her broker, dealer or bank to supply to the Code Compliance Officer, on a timely basis, duplicate copies of confirmations of all personal securities transactions and copies of monthly statements for all Covered Securities accounts. The confirmations should match the Transaction/New Account Reports. These confirmations and statements should be mailed, on a confidential basis, to the Code Compliance Officer at the following address: 4 ATTN: Code Compliance Officer Regulatory Services BISYS Fund Services 3435 Stelzer Road, Suite 1000 Columbus, Ohio 43219-8001 C. REVIEW OF REPORTS AND ASSESSMENT OF CODE ADEQUACY: The Code Compliance Officer shall review and maintain the Initial and Annual Certifications, Initial and Annual Holdings Reports and Transaction/New Account Reports (the "Reports") with the records of BISYS. Following receipt of the Reports, the Code Compliance Officer shall consider in accordance with Procedures designed to prevent Access Persons from violating this Code: (a) whether any personal securities transaction evidences an apparent violation of this Code; and (b) whether any apparent violation of the reporting requirement has occurred pursuant to Section B above. Upon making a determination that a violation of this Code, including its reporting requirements, has occurred, the Code Compliance Officer shall report such violations to the General Counsel of BISYS Fund Services who shall determine what sanctions, if any, should be recommended to be taken by BISYS. The Code Compliance Officer shall prepare quarterly reports to be presented to the Fund Boards of Directors/Trustees with respect to any material trading violations under this Code. This Code, a copy of all Reports referenced herein, any reports of violations, and lists of all Covered and Access Persons required to make Reports, shall be preserved for the period(s) required by Rule 17j-1. BISYS shall review the adequacy of the Code and the operation of its related Procedures at least once a year. V. REPORTS TO FUND BOARDS OF DIRECTORS/TRUSTEES BISYS shall submit the following reports to the Board of Directors/Trustees for each Fund for which it serves as principal underwriter: A. BISYS FUND SERVICES CODE OF ETHICS A copy of this Code shall be submitted to the Board of each Fund no later than September 1, 2000 or for new Fund clients, prior to BISYS commencing operations as principal underwriter, for review and approval. Thereafter, all material changes to this Code shall be submitted to each Board for review and approval not later than six (6) months following the date of implementation of such material changes. 5 B. ANNUAL CERTIFICATION OF ADEQUACY The Code Compliance Officer shall annually prepare a written report to be presented to the Board of each Fund detailing the following: 1. Any issues arising under this Code or its related Procedures since the preceding report, including information about material violations of this Code or its related Procedures and sanctions imposed in response to such material violations; and 2. A Certification to Fund Boards, in the form of Exhibit F hereto, that BISYS has adopted Procedures designed to be reasonably necessary to prevent Access Persons from violating this Code. 6 BISYS FUND SERVICES CODE OF ETHICS EXHIBIT A The following companies are subject to the BISYS Fund Services Code of Ethics(1): Barr Rosenberg Funds Distributor, Inc. BISYS Fund Services, Inc. BISYS Fund Services Limited Partnership BISYS Fund Services Ohio, Inc. BNY Hamilton Distributors, Inc. CFD Fund Distributors, Inc. Centura Funds Distributor, Inc. Concord Financial Group, Inc. Kent Funds Distributors, Inc. Evergreen Distributor, Inc. IBJ Funds Distributor, Inc.. Mentor Distributors, LLC The One Group Services Company Performance Funds Distributor, Inc. J.P. Morgan Fund Distributors, Inc. Funds Distributor, Inc. - ------------------------- (1) The companies listed on this Exhibit A may be amended from time to time, as required. AS OF APRIL 11, 2001 A-1 BISYS FUND SERVICES CODE OF ETHICS EXHIBIT B The following Covered Persons are considered ACCESS PERSONS under the BISYS Fund Services Code of Ethics(1): Client Services - all associates CFD Fund Distributors, Inc. - all directors, officers and employees Directors/Officers of each BISYS entity listed on Exhibit A that met the statutory definition of Access Person under Rule17j-1 Financial Services (Fund Accounting and Financial Administration) - all associates Fund Administration - all associates Information Systems - all associates Legal Services - all paralegals and attorneys The One Group Services Company - all directors, officers and employees Tax Services - all associates J.P. Morgan Fund Distributors, Inc. - all officers, directors and employees Funds Distributor, Inc. - all officers and directors All wholesalers and telewholesalers employed by the BISYS companies listed on Exhibit A - ------------------------- (1) The Access Persons listed on this Exhibit B may be amended from time to time, as required. AS OF APRIL 11, 2001 B-1 BISYS FUND SERVICES CODE OF ETHICS EXHIBIT C INITIAL AND ANNUAL CERTIFICATIONS I hereby certify that I have read and thoroughly understand and agree to abide by the conditions set forth in the BISYS Fund Services Code of Ethics. I further certify that, during the time of my affiliation with BISYS, I will comply or have complied with the requirements of this Code and will disclose/report or have disclosed/reported all personal securities transactions required to be disclosed/reported by the Code. If I am deemed to be an Access Person under this Code, I certify that I will comply or have complied with the Transaction/New Account Report requirements as detailed in the Code and submit herewith my Initial and Annual Holdings Report. I further certify that I will direct or have directed each broker, dealer or bank with whom I have an account or accounts to send to the BISYS Code Compliance Officer duplicate copies of all confirmations and statements relating to my account(s). - -------------------------------- Print or Type Name - --------------------------------- Signature - --------------------------------- Date C-1 BISYS FUND SERVICES CODE OF ETHICS EXHIBIT D INITIAL AND ANNUAL HOLDINGS REPORT
NAME AND ADDRESS OF ACCOUNT NUMBER(S) IF NEW ACCOUNT, BROKER, DEALER OR BANK(S) DATE ESTABLISHED - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------ - -------------------------------------- ------------------ ------------------
|_| ATTACHED ARE THE COVERED SECURITIES BENEFICIALLY OWNED BY ME AS OF THE DATE OF THIS INITIAL AND ANNUAL HOLDINGS REPORT. |_| I DO NOT HAVE ANY COVERED SECURITIES BENEFICIALLY OWNED BY ME AS OF THE DATE OF THIS INITIAL AND ANNUAL HOLDINGS REPORT. - -------------------------------- Print or Type Name - --------------------------------- Signature - --------------------------------- Date D-1 SECURITY NUMBER OF PRINCIPAL AMOUNT DESCRIPTION COVERED (SYMBOL/CUSIP) SECURITIES/ SHARES HELD - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- - ------------------ ---------------- ---------------- D-2 BISYS FUND SERVICES CODE OF ETHICS -TRANSACTION/NEW ACCOUNT REPORT EXHIBIT E I hereby certify that the Covered Securities described below (or attached hereto in the annual statement from my broker, dealer or bank) were purchased or sold on the date(s) indicated. Such Covered Securities were purchased or sold in reliance upon public information lawfully obtained by me through independent research. I have also listed below the account number(s) for any new account(s) opened in which Covered Securities are held. My decision to enter into any personal securities transaction(s) was not based upon information obtained as a result of my affiliation with BISYS. COVERED SECURITIES PURCHASED/ACQUIRED OR SOLD/DISPOSED
Security Trade Number of Per Share Principal Interest Maturity Name of Broker, Dealer Bought (B) or Sold (S) Dealer Date Shares Price Amount Rate Rate or Bank (and Account Number Description (If Applicable)(If Applicable) and Date Established, If New) - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ---------------------- - ----------- ----- --------- --------- -------- -------------- -------------- ---------------------------- ----------------------
This Transaction/New Account Report is not an admission that you have or had any direct or indirect beneficial ownership in the Covered Securities listed above. - -------------------------------- Print or Type Name - -------------------------------- ----------------------- Signature Date E-1 BISYS FUND SERVICES CODE OF ETHICS EXHIBIT F CERTIFICATION TO FUND BOARDS BISYS Fund Services ("BISYS") requires that all directors, officers and associates of BISYS ("Covered Persons") certify that they have read and thoroughly understand and agree to abide by the conditions set forth in the BISYS Code of Ethics (the "Code"). If such Covered Persons are deemed to be Access Persons under the Code, they are required to submit Initial and Annual Holdings Reports, as well as Transaction/New Account Reports, to the Code Compliance Officer, listing all personal securities transactions in Covered Securities for all such accounts in which the Access Person has any direct or indirect beneficial interest within ten (10) days of entering into any such transactions. Access Persons must direct their broker, dealer or bank(s) to send duplicate trade confirmations and statements of all such personal securities transactions directly to the Code Compliance Officer who compares them to the required Transaction/New Account Reports. Additionally, the Code Compliance Officer undertakes a quarterly review of all Access Person's personal securities transactions against the Fund's Investment Adviser for all such Funds that BISYS serves as principal underwriter. The undersigned hereby certifies that BISYS has adopted Procedures designed to be reasonably necessary to prevent Access Persons from violating BISYS' Code and the required provisions of Rule 17j-1 under the Investment Company Act of 1940, as amended. - -------------------------------- ------------------ Kathleen McGinnis Date Code Compliance Officer BISYS Fund Services F-1 EX-99.(P)(3) 16 a2118929zex-99_p3.txt EX-99.(P)(3) J.P.MORGAN FLEMING ASSET MANAGEMENT (USA) INC. J.P. MORGAN INVESTMENT MANAGEMENT INC. ROBERT FLEMING, INC. J.P.MORGAN FLEMING ASSET MANAGEMENT (LONDON) LIMITED JF INTERNATIONAL MANAGEMENT LIMITED CODE OF ETHICS 1. PURPOSES This Code of Ethics (the "Code") has been adopted by investment advisers listed above, and any affiliates thereof that provide investment advisory service (collectively, "J.P.Morgan Fleming"), in accordance with Rule 17j-1(c) promulgated under the Investment Company Act of 1940, as amended (the "Act"). Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to purchases or sales of securities Held or to be Acquired (defined in Section 2(k) of this Code) by investment companies, if effected by associated persons of such companies. The purpose of this Code is to adopt provisions reasonably necessary to prevent Access Persons from engaging in any unlawful conduct as set forth in Rule 17j-1(b) as follows: It is unlawful for any affiliated person of or principal underwriter for a Fund, or any affiliated person of an investment adviser of or principal underwriter for a Fund, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Fund: (a) To employ any device, scheme or artifice to defraud the Fund; (b) To make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading; (c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on the Fund; or (d) To engage in any manipulative practice with respect to the Fund. 2. DEFINITIONS (a) "Access Person" means any director, officer, general partner or Advisory Person of the Adviser. (b) "Administrator" means Morgan Guaranty Trust Company or any successors. (c) "Advisory Person" means (i) any employee of the Adviser or the Administrator (or any company in a control relationship to the Adviser or Administrator) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of securities for a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Adviser who obtains information concerning recommendations regarding the purchase or sale of securities by a Fund. (d) "Beneficial ownership" shall be interpreted in the same manner as it would be under Exchange Act Rule 16a-1(a)(2)in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder. (e) "Control" has the same meaning as in Section 2(a)(9) of the Act. (f) "Covered Security" shall have the meaning set forth in Section 2(a)(36) of the Act, except that it shall not include shares of open-end funds, direct obligations of the United States Government, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements. (g) "Fund" means an Investment Company registered under the Investment Company Act of 1940. (h) "Initial Public Offering" means an offering of Securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act. (i) "Limited Offering" means an offering that is exempt from registration under the Securities Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act. (j) "Purchase or sale of a Covered Security" includes, among other things, the writing of an option to purchase or sell a Covered Security. (k) "Security Held or to be Acquired" by a Adviser means: (i) any Covered Security which, within the most recent 15 days, is or has been held by a Fund or other client of the Adviser or is being or has been considered by the Adviser for purchase by a Fund or other client of the Adviser; and (ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in Section 2(k)(i) of this Code. 3. STATEMENT OF PRINCIPLES It is understood that the following general fiduciary principles govern the personal investment activities of Access Persons: (a) the duty to at all times place the interests of shareholders and other clients of the Adviser first; (b) the requirement that all personal securities transactions be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility; (c) the fundamental standard that Investment Personnel may not take inappropriate advantage of their position; and (d) all personal transactions must be oriented toward investment, not short-term or speculative trading. It is further understood that the procedures, reporting and recordkeeping requirements set forth below are hereby adopted and certified by the Adviser as reasonably necessary to prevent Access Persons from violating the provisions of this Code of Ethics. 4. PROCEDURES TO BE FOLLOWED REGARDING PERSONAL INVESTMENTS BY ACCESS PERSONS (a) Pre-clearance requirement. Each Access Person must obtain prior written approval from his or her group head (or designee) and from the Adviser's Compliance Department before transacting in any Covered Security based on certain guidelines set forth from time to time by the Adviser's compliance department. For details regarding transactions in mutual funds, see Section 4(e). (b) Brokerage transaction reporting requirement. Each Access Person working in the United States must maintain all of his or her accounts and the accounts of any person of which he or she is deemed to be a beneficial owner with a broker designated by the Adviser and must direct such broker to provide broker trade confirmations to the Adviser's compliance department, unless an exception has been granted by the Adviser's compliance department. Each Access Person to whom an exception to the designated broker requirement has been granted must instruct his or her broker to forward all trade confirms and monthly statements to the Adviser's compliance department. Access Persons located outside the United States are required to provide details of each brokerage transaction of which he or she is deemed to be the beneficial owner, to the Adviser's compliance group, within the customary period for the confirmation of such trades in that market. (c) Initial public offerings (new issues). Access Persons are prohibited from participating in Initial Public Offerings, whether or not J.P. Morgan Chase or any of its affiliates is an underwriter of the new issue, while the issue is in syndication. (d) Minimum investment holding period. Each Access Person is subject to a 60-day minimum holding period for personal transactions in Covered Securities. An exception to this minimum holding period requirement may be granted in the case of hardship as determined by the Adviser's compliance department. (e) Mutual funds. Each Access Person must pre-clear transactions in shares of closed-end Funds with the Adviser's Compliance Department, as they would with any other Covered Security. See Section 4(a). Each Access Person must obtain pre-clearance from his or her group head(or designee) before buying or selling shares in an open-end Fund or a sub-advised Fund managed by the Adviser if such Access has had recent dealings or responsibilities regarding such mutual fund. (f) Limited offerings. An Access Person may participate in a limited offering only with advance notification to the Adviser's compliance department and with written approval of such Access Person's group head (or designee). (g) Blackout periods. Advisory Persons are subject to blackout periods 7 calendar days before and after the trade date of a Covered Security where such Advisory Person makes, participates in, or obtains information regarding the purchase or sale of such Covered Security for any of their client accounts. In addition, Access Persons are prohibited from executing a transaction in a Covered Security during a period in which there is a pending buy or sell order on the Adviser's trading desk. (h) Prohibitions. Short sales are generally prohibited. Transactions in options, rights, warrants, or other short-term securities and in futures contracts (unless for bona fide hedging) are prohibited, except for purchases of options on widely traded indices specified by the Adviser's compliance department. (i) Securities of J.P. Morgan Chase. All transactions in securities issued by J.P. Morgan Chase must be pre-cleared with the Adviser's compliance department. (j) Each Advisory Person must disclose any potential conflict of interest (personal or professional) to his or her group head either prior to or at the time of making any recommendation that may result in the purchase or sale of securities for a Fund. 5. REPORTING REQUIREMENTS (a) Every Access Person must report to the Adviser: (i)Initial Holdings Reports. No later than 10 days after the person becomes an Access Person, the following information: (A) the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; (B) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any Covered Securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and (C) the date that the report is submitted by the Access Person. (ii)Quarterly Transaction Reports. No later than 10 days after the end of a calendar quarter, with respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect Beneficial Ownership: (A) the date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and principal amount of each Covered Security involved; (B) the nature of the transaction; (C) the price of the Covered Security at which the transaction was effected; (D) the name of the broker, dealer or bank with or through which the transaction was effected; and (E) the date that the report is submitted by the Access Person. (iii)New Account Report. No later than 10 days after the calendar quarter, with respect to any account established by the Access Person in which any Covered Securities were held during the quarter for the direct or indirect benefit of the Access Person: (A) the name of the broker, dealer or bank with whom the Access Person established the account; (B) the date the account was established; and (C) the date that the report is submitted by the Access Person. (iv)Annual Holdings Report. Annually, the following information (which information must be current as of a date no more than 30 days before the report is submitted): (A) the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership; (B) the name of any broker, dealer or bank with whom the Access Person maintains an account in which any Covered Securities are held for the direct or indirect benefit of the Access Person: and (C) the date that the report is submitted by the Access Person. (b) Exceptions from the Reporting Requirements. (i) Notwithstanding the provisions of Section 5(a), no Access Person shall be required to make: A. a report with respect to transactions effected for any account over which such person does not have any direct or indirect influence or control; B. a Quarterly Transaction or New Account Report under Sections 5(a)(ii) or (iii) if the report would duplicate information contained in broker trade confirmations or account statements received by the Adviser with respect to the Access Person no later than 10 days after the calendar quarter end, if all of the information required by Sections 5(a)(ii) or (iii), as the case may be, is contained in the broker trade confirmations or account statements, or in the records of the Adviser. (c) Each Access Person shall promptly report any transaction which is, or might appear to be, in violation of this Code. Such report shall contain the information required in Quarterly Transaction Reports filed pursuant to Section 5(a)(ii). (d) All reports prepared pursuant to this Section 5 shall be filed with the appropriate compliance personnel designated by the Adviser and reviewed in accordance with procedures adopted by such personnel. (e) The Adviser will identify all Access Persons who are required to file reports pursuant to this Section 5 and will inform them of their reporting obligation. (f) The Adviser no less frequently than annually shall furnish to a Fund's board of directors for their consideration a written report that: (a) describes any issues under this Code of Ethics or related procedures since the last report to the board of directors, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations; and (b) certifies that the Adviser has adopted procedures reasonably necessary to prevent Access Persons from violating this Code of Ethics. 6. RECORDKEEPING REQUIREMENTS The Adviser must at its principal place of business maintain records in the manner and extent set out in this Section of this Code and must make available to the Securities and Exchange Commission (SEC) at any time and from time to time for reasonable, periodic, special or other examination: (a) A copy of its code of ethics that is in effect, or at any time within the past five years was in effect, must be maintained in an easily accessible place; (b) A record of any violation of the code of ethics, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs; (c) A copy of each report made by an Access Person as required by Section 5(a) including any information provided in lieu of a quarterly transaction report, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place. (d) A record of all persons, currently or within the past five years, who are or were required to make reports as Access Persons or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place. (e) A copy of each report required by 5(f) above must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. (f) A record of any decision and the reasons supporting the decision to approve the acquisition by Access Persons of securities under Section 4(f) above, for at least five years after the end of the fiscal year in which the approval is granted. 7. SANCTIONS Upon discovering a violation of this Code, the Adviser may impose such sanctions as they deem appropriate, including, INTER ALIA, financial penalty, a letter of censure or suspension or termination of the employment of the violator. EX-99.(A) 17 a2118929zex-99_a.txt EX-99.(A) Exhibit (99)(a) J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Robert J. Higgins, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Robert J. Higgins J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY William J. Armstrong, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ William J. Armstrong J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Roland R. Eppley, Jr., whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Roland R. Eppley, Jr. J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Dr. Matthew Goldstein, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Dr. Matthew Goldstein J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Ann Maynard Gray, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, her true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Ann Maynard Gray J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Matthew Healey, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Matthew Healey J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY William G. Morton, Jr., whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ William G. Morton, Jr. J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Fergus Reid, III, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Fergus Reid, III J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY James J. Schonbachler, whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ James J. Schonbachler J.P. MORGAN FUNDS J.P. MORGAN INSTITUTIONAL FUNDS J.P. MORGAN SERIES TRUST J.P. MORGAN MUTUAL FUND GROUP J.P. MORGAN FLEMING MUTUAL FUND GROUP, INC. J.P. MORGAN MUTUAL FUND TRUST J.P. MORGAN MUTUAL FUND SELECT GROUP J.P. MORGAN MUTUAL FUND SELECT TRUST J.P. MORGAN MUTUAL FUND SERIES MUTUAL FUND VARIABLE ANNUITY TRUST J.P. MORGAN MUTUAL FUND INVESTMENT TRUST POWER OF ATTORNEY Leonard M. Spalding, Jr., whose signature appears below, hereby constitutes and appoints Sharon J. Weinberg, Paul DeRusso, Stephen M. Ungerman, Martin R. Dean, Alaina V. Metz, Lisa Hurley, Joseph J. Bertini, Judy R. Bartlett, Thomas J. Smith, Lai Ming Fung, Matthew Healey, David Wezdenko, Patricia Maleski, Wayne H. Chan and Michael Maye, and each of them, his true and lawful attorneys and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or any of them, may deem necessary or advisable or which may be required to enable any of the investment companies named above (each, a "Company") to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the "Acts"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of any and all amendments (including post-effective amendments) to a Company's Registration Statement on Form N-1A and any other registration statements pursuant to said Acts, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a trustee and/or officer of a Company any and all such amendments and registration statements filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. - ------------------------------ Leonard M. Spalding, Jr. -----END PRIVACY-ENHANCED MESSAGE-----