<PAGE>
- --------------------------------------------------------------------------------
LETTER TO THE SHAREHOLDERS OF THE JPM PIERPONT SHORT TERM BOND FUND
December 1, 1996
Dear Shareholder:
We are pleased to report that The JPM Pierpont Short Term Bond Fund recorded an
attractive gain for the reporting period relative to its competitors, as
measured by the Lipper Short Investment Grade Debt Funds Average, for the
one-year period ended October 31, 1996. In an increasingly challenging
investment environment for short term bond fund managers, we believe that
actively managed security selection and sector allocation in the Fund's
Portfolio helped it to outperform its competitors. For the one-year period, the
Fund returned 5.77%, compared with 5.54% for the Lipper Short Investment Grade
Debt Funds Average. The Fund fell slightly short of the 5.91% one-year return
of its benchmark, the Merrill Lynch 1-3 Year Treasury Index.
The Fund's net asset value went from $9.84 on November 1, 1995 to $9.86 at
October 31, 1996, after paying approximately $0.53 per share in dividends from
ordinary income during the period. The Fund's net assets stood at $8.2 million
at the end of the reporting period. The net assets of The Short Term Bond
Portfolio, in which the Fund invests, totaled $26.0 million on October 31, 1996.
Connie J. Plaehn, lead portfolio manager for The Short Term Bond Portfolio, in
which the Fund invests, discusses here some of the events affecting the Fund
over the previous year and offers her views on the upcoming months.
As always, we welcome your comments, questions, or any suggestions on how we
can further improve your financial reports. Please call J.P. Morgan Funds
Services, toll free, at (800) 521-5411.
Sincerely yours,
/s/ EVELYN E. GUERNSEY
Evelyn E. Guernsey
J.P. Morgan Funds Services
TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS 1
FUND PERFORMANCE 2
PORTFOLIO MANAGER Q&A 3
FUND FACTS AND HIGHLIGHTS 6
SPECIAL FUND-BASED SERVICES 7
FINANCIAL STATEMENTS 10
1
<PAGE>
Fund performance
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to look at the growth of a hypothetical investment. The
minimum initial investment in the Fund is $100,000. The chart at right shows
that the minimum invested in the Funds on July 31, 1993 would have grown to
$116,870 at October 31, 1996.*
Another way to look at performance is to review a fund's average annual total
return. This figure takes the fund's actual (or cumulative) return and shows
you what would have happened if the fund had achieved that return by performing
at a constant rate each year. Average annual total returns represent the
average yearly change of a fund's value over various time periods, typically 1,
5, or 10 years (or since inception). Total returns for periods of less than one
year are not annualized and provide a picture of how a fund has performed over
the short term.
GROWTH OF $100,000 SINCE INCEPTION*
JULY 31, 1993 -- OCTOBER 31, 1996
[CHART]
Plot Points:
7/93 $100,000
10/93 101,398
10/94 102,602
10/95 111,783
10/96 118,387
<TABLE>
<CAPTION>
PERFORMANCE
TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURN
--------------- ---------------------------
THREE SIX ONE THREE SINCE
AS OF OCTOBER 31, 1996 MONTHS MONTHS YEAR YEARS INCEPTION*
- ------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
The JPM Pierpont Short Term Bond Fund 2.44% 3.71% 5.77% 4.97% 4.91%
Merrill Lynch 1-3 Year Treasury Index 2.39% 3.75% 5.91% 5.30% 5.33%
Lipper Short Investment Grade Debt
Funds Average 2.89% 4.06% 5.54% 4.63% 4.88%
AS OF SEPTEMBER 30, 1996
- ------------------------------------------------------- ---------------------------
The JPM Pierpont Short Term Bond Fund 1.50% 2.53% 5.34% 4.59% 4.65%
Merrill Lynch 1-3 Year Treasury Index 1.65% 2.68% 5.61% 4.98% 5.10%
Lipper Short Investment Grade Debt
Funds Average 1.71% 2.41% 5.01% 4.24% 4.55%
</TABLE>
*7/8/93 -- COMMENCEMENT OF OPERATIONS (GROWTH AND AVERAGE ANNUAL TOTAL RETURNS
BASED ON THE MONTH END FOLLOWING INCEPTION). THE FUND'S AVERAGE ANNUAL TOTAL
RETURN SINCE ITS COMMENCEMENT OF OPERATIONS ON 7/8/93 IS 4.78%.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES AND ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT REIMBURSEMENT OF
CERTAIN FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. THE MERRILL
LYNCH 1-3 YEAR TREASURY INDEX IS AN UNMANAGED INDEX IN WHICH INVESTORS MAY NOT
DIRECTLY INVEST. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR
MUTUAL FUND DATA. NO REPRESENTATION IS MADE THAT INFORMATION GATHERED FROM
THESE SOURCES IS ACCURATE OR COMPLETE.
2
<PAGE>
Portfolio manager Q&A
Following is an interview with CONNIE J. PLAEHN, a member of the
portfolio management team for The Short Term Bond Portfolio, in which
the Fund invests. Before assuming portfolio management
responsibilities at J.P. Morgan Investment Management, Connie also
[PHOTO] worked at J.P. Morgan Securities and J.P. Morgan Futures. This
interview was conducted on November 19, 1996 and reflects Connie's
views on that date.
A SHORT TERM BOND FUND SEEMS TO BE KIND OF A HYBRID OF MONEY MARKET
FUNDS AND BOND FUNDS, TRYING TO ACHIEVE THE YIELD OF BOND FUNDS WHILE
RETAINING A LEVEL OF SAFETY SIMILAR TO MONEY MARKET FUNDS. WHAT ARE SOME OF THE
OPPORTUNITIES AND PROBLEMS THAT A MANAGER ENCOUNTERS WORKING IN THE
ONE-TO-THREE YEAR PART OF THE YIELD CURVE?
CJP: The opportunities are exactly that--you should be able over time to
achieve better than money market returns because, with a normal yield curve
(which is what exists today), longer maturities offer higher yields. In
addition to higher yield you generally get something called "roll down" or
"rolling down the yield curve". Roll down is a kind of incremental return that
results as a longer-term security matures into a shorter-term one. Longer-term
securities normally bear higher interest rates to compensate for their added
risk. As their time to maturity shortens, their price rises to equate their
yield to that of comparable maturity securities. This characteristic is
particularly pronounced in the one-to-three year area of the yield curve
because typically, the difference in yield between one and three years is
greater than between any other two points on the yield curve. At the same time,
because the average maturity of the Portfolio remains quite low, the likelihood
of experiencing negative returns is also low. Short term bond funds are among
the lowest risk investments available.
The problems are a mirror of the opportunities. As you seek greater yield by
increasing maturity, you increase volatility and interest rate risk which bring
with them a possibility of negative returns. The dual objectives of greater
yield with safety--these portfolios are often called "enhanced cash"--make
managing such investments more of a balancing act than is true with either
money market or broad market bond funds.
Seeking extra yield by increasing maturity, without sacrificing quality,
raises a number of challenges. One is that the spread, the difference in yields
in the one-to-three year area, between a triple-A rated security and a
triple-B, the lowest quality that we buy, ranges from around 20 to maybe 50
basis points (a basis point is 1/100 of a percentage point). If you opt for the
longest allowable maturity in hopes of getting extra yield and rates rise,
causing the value of the portfolio to fall, there is little room to make up the
loss by choosing lower-rated securities, an option that would be available to
the manager of a longer maturity bond portfolio. In the broad market, a manager
might be able to add 60 to 100 basis points by shifting to a triple-B rated
securities. Add to this the fact that changes in rates tend to affect the
one-to-three range more dramatically than any other part of the yield curve.
The effects of Fed funds rate changes become more muted as maturities
increase--time serves as a damper--but the one-to-three range registers the
maximum effect of these
3
<PAGE>
adjustments, and a one-to-three year manager who misjudges the direction of
interest rates feels the full brunt of this. Of course, this can also work in
your favor, but because people in general are more focused on avoiding losses
than in registering gains, a manager tends to prefer to err on the conservative
side when dealing with the powerful effects of interest rate changes.
The other moderating factor, of course, is being measured against a
benchmark. Every manager wants to beat his benchmark, but without having to
take risks that might also cause underperformance. If your duration is
substantially longer than the benchmark and rates rise, your portfolio will get
punished. (Duration is a measure of interest rate risk that is related to
maturity, but more useful than maturity in managing a portfolio. A higher
duration number implies more sensitivity to interest rate changes and a lower
one less sensitivity.) If you are substantially shorter in duration than the
benchmark you give up yield. In short term portfolios that, in the best of
times, outperform the benchmark by perhaps 50 basis points, any give up in
yield hurts a lot. The result is portfolios that mimic most of the risk
characteristics of the benchmark, including the average duration. The duration
of the Merrill Lynch 1-3 Year Treasury Index is near that of the two-year
Treasury; many short term portfolios remain very close to this duration level.
WHERE DO YOU SEE THE BEST BUYING OPPORTUNITIES RIGHT NOW?
CJP: Spreads are quite narrow right now, with yields over Treasuries at around
the 30 basis point level, and the market has become very quick in spotting and
exploiting opportunities for surplus value. Our response has been to take
advantage of opportunities in new types of asset-backed securities as they are
created. We've been investing this year in more manufactured housing
asset-backed securities, in home improvement loans, and in automobile
receivables.
I think we look at asset-backed securities very differently from other
money managers and differently from Wall Street. We view them as a
full-fledged, separate sector of the market, and we have specialists who work
on nothing else. Let me give you an example. Although asset-backeds are
triple-A rated and may not seem to present any credit questions, we believe
there are credit differentials in this asset class. Last January, two of our
analysts did a study of credit card issuers, looking at the underwriting
standards, the trust structures of the securities, charge-offs--all the basic
factors involved in assembling an asset-backed security. They used their
findings to rank the various asset-backed issuers into three tiers. At that
time, you could sell one of our third-tier ranked holdings and buy a first-tier
one with no giveup in yield, and, of course, we did. The spread has since
widened to more than 5 basis points, and while this may not seem like a large
amount, it is a meaningful contributor to the 20 to 40 basis points we have
been getting over the Lipper competitive average.
We also purchase 144a securities. A 144a security is sort of a hybrid
between a private placement and an SEC publicly-traded bond, but it's not
SEC-registered. As a result, an investor doesn't have some of the protections
that SEC registration offers, and there are restrictions in what types of
buyers can buy them. However, our credit analysis capabilities supply most of
the protection that SEC-registration would offer, and their liquidity has
increased to such an extent that they are now traded by the public market
traders of most Wall Street firms. Because of this, they're priced as well as
publicly-traded securities but the bid/offer spread can be somewhat wider, and
they offer an opportunity to pick up some additional yield.
4
<PAGE>
THE FIRST SIX MONTHS OF THE FISCAL YEAR, FROM NOVEMBER 1, 1995 TO APRIL 30,
1996, COULD BE DESCRIBED AS CHALLENGING FOR ALL BOND MANAGERS AS FEARS OF
INFLATION DROVE A MAJOR BOND SELL-OFF. IN THE SIX MONTH PERIOD SINCE THEN, THE
ECONOMY SEEMS TO HAVE STABILIZED WITHOUT ANY FED INTERVENTION. IN YOUR OPINION,
WHAT HAVE BEEN SOME OF THE MAIN ECONOMIC THEMES THAT HAD AN IMPACT ON BOND
PERFORMANCE?
CJP: Before August, it looked like the economy was still going along at a
fairly healthy clip, with strong employment numbers and respectable, if not
spectacular, growth in industrial indicators. The market braced for what seemed
inevitable, a Federal Reserve rate increase. Then, the economy leveled off,
although it's difficult to say by how much. Employment gains moderated,
inventories rose, spending continued to be restrained. The market, certainly,
was taken by surprise--leading to the rally of the last two months. One thing
that may have fueled the rally was the results of the November elections. With
a Republican Congress and Democratic President, people are beginning to think
that deficit reduction may return to the agenda, and this would, of course, be
beneficial for the bond market.
OVER THE PAST YEAR, THE FUND OUTPERFORMED BOTH ITS LIPPER COMPETITIVE UNIVERSE
BY 0.23% AND A COMPOSITE AVERAGE BASED ON SHORT TERM BOND FUNDS IN THE
MORNINGSTAR UNIVERSE BY 0.44%. IN ADDITION, MORNINGSTAR GAVE A 4-STAR RATING TO
THE FUND. WHAT DISTINGUISHES OUR STRATEGY FROM THAT OF OUR COMPETITORS?
CJP: I think that, in part, we've benefited from our conservative bias, which
has kept us from diverging far from the benchmark and which also leads to a
practice of implementing changes gradually. We focus on non-Treasury sectors to
gain yield and seek pricing anomalies in some of the smaller, less-followed
markets. As noted earlier, we've also been able to make use of our research
capabilities to identify value in some of the newer and less-understood
asset-backed securities. Then, in addition to our analytical capability, we
benefit from an in-house trading group, some of whom are specialists in
asset-backed securities.
DO YOU FEEL THAT THE ECONOMY HAS STABILIZED? WHAT DO YOU EXPECT FOR THE SHORT
TERM BOND MARKET OVER THE COMING SIX MONTHS?
CJP: Market interest rates have receded a bit, and the result is the
equivalent of Fed easing. The economy should be fairly stable, and I think the
Portfolio should at least get the additional yield over a money market
portfolio that is normal for a short term bond portfolio. A month ago I would
have been more optimistic, but given that the economy has already slowed down,
the rally has taken a lot of the surplus value out of the market. The Portfolio
was well-positioned to capture much of this.
WITH THIS IN MIND, HOW DO YOU EXPECT TO POSITION THE PORTFOLIO OVER THE COMING
SIX MONTHS? ARE THERE ANY SECTORS THAT SEEM PARTICULARLY APPEALING?
CJP: We expect to maintain the level of spread product (non-Treasury sectors)
that we have now. We don't expect that the Fed will make any interest rate
changes for at least the next several months and so will probably keep duration
slightly longer than the benchmark to try to capture additional yield and take
advantage of the roll down. If we see signs of further economic stability, we
would regard that as an opportunity to lengthen further.
5
<PAGE>
Fund facts
INVESTMENT OBJECTIVE
The JPM Pierpont Short Term Bond Fund seeks to provide high total return while
attempting to limit the likelihood of negative quarterly returns. It is
designed for investors who do not require the stable net asset value typical of
a money market fund, but who seek less price fluctuation than is typical of a
longer term bond fund.
- ----------------------------------------
COMMENCEMENT OF OPERATIONS
7/8/93
- ----------------------------------------
NET ASSETS AS OF 10/31/96
$8,206,750
- ----------------------------------------
DIVIDEND PAYABLE DATES
MONTHLY
- ----------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/20/96
EXPENSE RATIO
The Fund's current expense ratio of 0.50% covers shareholders' expenses for
custody, tax reporting, investment advisory, and shareholder services, after
reimbursement. The Fund is no-load and does not charge any sales, redemption,
or exchange fees. There are no additional charges for buying, selling, or
safekeeping Fund shares, or for wiring redemption proceeds from the Fund.
Fund highlights
ALL DATA AS OF OCTOBER 31, 1996
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[ CHART ]
30-DAY SEC YIELD
5.74%
DURATION
1.6 years
QUALITY BREAKDOWN
AAA* 85.9%
A 7.6%
Other 6.5%
*INCLUDES U.S. GOVERNMENT AGENCY AND TREASURY OBLIGATIONS AND REPURCHASE
AGREEMENTS
6
<PAGE>
Special fund-based services
PIERPONT ASSET ALLOCATION SERVICE (PAAS)
For many investors, a diversified portfolio -- including short-term
instruments, bonds, and stocks -- can offer an excellent opportunity to achieve
one's investment objectives. PAAS provides investors with a comprehensive
management program for their portfolios. Through this service, investors can:
- - create and maintain an asset allocation that is specifically targeted at
meeting their most critical investment objectives;
- - make ongoing tactical adjustments in the actual asset mix of their
portfolios to capitalize on shifting market trends;
- - make investments through The JPM Pierpont Funds, a family of diversified
mutual funds.
PAAS is available to clients who invest a minimum of $500,000 in The JPM
Pierpont Funds.
IRA MANAGEMENT SERVICE
As one of the few remaining investments that can help your assets grow
tax-deferred until retirement, the IRA enables more of your dollars to work for
you longer. Morgan offers an IRA Rollover plan that helps you to build
well-balanced long-term investment portfolios, diversified across a wide array
of mutual funds. From money markets to emerging markets, The JPM Pierpont Funds
provide an excellent way to help you accumulate long-term wealth for retirement.
KEOGH
In early 1995, Morgan introduced a Keogh program for its clients. Keoghs
provide another excellent vehicle to help individuals who are self-employed or
are employees of unincorporated businesses to accumulate retirement savings. A
Keogh is a tax-deferred pension plan that can allow you to contribute the
lesser of $30,000 or 25% of your annual earned gross compensation. The JPM
Pierpont Funds can help you build a comprehensive investment program designed
to maximize the retirement dollars in your Keogh account.
7
<PAGE>
FUNDS DISTRIBUTOR, INC. IS THE DISTRIBUTOR OF THE JPM PIERPONT SHORT TERM BOND
FUND (THE "FUND").
SIGNATURE BROKER-DEALER SERVICES, INC. SERVED AS THE FUND'S DISTRIBUTOR PRIOR
TO AUGUST 1, 1996.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN") SERVES AS PORTFOLIO
INVESTMENT ADVISOR AND MAKES THE FUND AVAILABLE SOLELY IN ITS CAPACITY AS
SHAREHOLDER SERVICING AGENT FOR CUSTOMERS. INVESTMENTS IN THE FUND ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, MORGAN OR ANY OTHER
BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL
AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND CAN
FLUCTUATE, SO AN INVESTOR'S SHARES WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
Performance data quoted herein represent past performance. Please remember that
past performance is not a guarantee of future performance. Fund returns are net
of fees, assume the reinvestment of Fund distributions, and reflect the
reimbursement of Fund expenses. Had expenses not been subsidized, returns would
have been lower. The Fund invests all of its investable assets in The Short
Term Bond Portfolio, a separately registered investment company which is not
available to the public but only to other collective investment vehicles such
as the Fund. The Portfolio invests in foreign securities which are subject to
special risks; prospective investors should refer to the Fund's Prospectus for
a discussion of these risks.
MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES, IS PROVIDED IN THE PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE
INVESTING. YOU MAY OBTAIN ADDITIONAL COPIES OF THE PROSPECTUS BY CALLING J.P.
MORGAN FUNDS SERVICES AT (800) 521-5411.
8
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Short Term Bond
Portfolio ("Portfolio"), at value $ 8,226,020
Receivable for Expense Reimbursements 15,384
Deferred Organization Expenses 10,584
Receivable for Shares of Beneficial
Interest Sold 51
Prepaid Trustees' Fees 39
Prepaid Expenses and Other Assets 6
-------------
Total Assets 8,252,084
-------------
LIABILITIES
Dividends Payable to Shareholders 13,655
Shareholder Servicing Fee Payable 1,388
Administrative Services Fee Payable 221
Administration Fee Payable 30
Fund Services Fee Payable 4
Accrued Expenses 30,036
-------------
Total Liabilities 45,334
-------------
NET ASSETS
Applicable to 832,553 Shares of
Beneficial Interest Outstanding
(par value $0.001, unlimited shares
authorized) $ 8,206,750
-------------
-------------
Net Asset Value, Offering and
Redemption Price Per Share $9.86
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $ 8,224,651
Distributions in Excess of Net
Investment Income (473)
Accumulated Net Realized Loss on
Investment (74,897)
Net Unrealized Appreciation of
Investment 57,469
-------------
Net Assets $ 8,206,750
-------------
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM
PORTFOLIO
Allocated Interest Income $522,279
Allocated Portfolio Expenses (Net of
Reimbursement of $19,302) (33,686)
--------
Net Investment Income Allocated
from Portfolio 488,593
FUND EXPENSES
Transfer Agent Fees $ 24,258
Shareholder Servicing Fee 16,996
Registration Fees 16,164
Professional Fees 11,362
Amortization of Organization Expenses 6,242
Printing Expenses 4,865
Administrative Services Fee 1,892
Administration Fee 1,131
Fund Services Fee 439
Trustees' Fees and Expenses 157
Miscellaneous 2,745
--------
Total Fund Expenses 86,251
Less: Reimbursement of Expenses (66,602)
--------
NET FUND EXPENSES 19,649
--------
NET INVESTMENT INCOME 468,944
NET REALIZED LOSS ON INVESTMENT
ALLOCATED FROM PORTFOLIO (2,184)
NET CHANGE IN UNREALIZED APPRECIATION
OF INVESTMENT ALLOCATED FROM
PORTFOLIO 19,273
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $486,033
--------
--------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
----------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 468,944 $ 525,060
Net Realized Loss on Investment
Allocated from Portfolio (2,184) 75,914
Net Change in Unrealized Appreciation
(Depreciation) of Investment
Allocated from Portfolio 19,273 159,369
----------- ------------
Net Increase in Net Assets
Resulting from Operations 486,033 760,343
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (468,942) (525,846)
----------- ------------
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST
Proceeds from Shares of Beneficial
Interest Sold 4,035,010 8,853,925
Reinvestment of Dividends 251,276 412,442
Cost of Shares of Beneficial Interest
Redeemed (6,426,652) (5,178,395)
----------- ------------
Net Increase (Decrease) from
Transactions in Shares of
Beneficial
Interest (2,140,366) 4,087,972
----------- ------------
Total Increase (Decrease) in Net
Assets (2,123,275) 4,322,469
NET ASSETS
Beginning of Fiscal Year 10,330,025 6,007,556
----------- ------------
End of Fiscal Year $8,206,750 $10,330,025
----------- ------------
----------- ------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE PERIOD
YEAR ENDED JULY 8, 1993
OCTOBER 31, (COMMENCEMENT OF
---------------------------------- OPERATIONS) TO
1996 1995 1994 OCTOBER 31, 1993
--------- ---------- --------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $ 9.60 $ 9.99 $10.00
--------- ---------- --------- -----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.53 0.57 0.45 0.10
Net Realized and Unrealized Gain (Loss)
on Investment 0.02 0.24 (0.39) (0.01)
--------- ---------- --------- -----------------
Total from Investment Operations 0.55 0.81 0.06 0.09
--------- ---------- --------- -----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.53) (0.57) (0.45) (0.10)
--------- ---------- --------- -----------------
NET ASSET VALUE, END OF PERIOD $ 9.86 $ 9.84 $ 9.60 $ 9.99
--------- ---------- --------- -----------------
--------- ---------- --------- -----------------
Total Return 5.77% 8.70% 0.61% 0.94%(a)
--------- ---------- --------- -----------------
--------- ---------- --------- -----------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (in
thousands) $ 8,207 $ 10,330 $ 6,008 $6,842
Ratios to Average Net Assets
Expenses 0.62% 0.67% 0.69% 0.67%(b)
Net Investment Income 5.42% 5.88% 4.49% 3.44%(b)
Decrease Reflected in Expense Ratio
due to Expense Reimbursement 0.99% 0.81% 1.36% 1.83%(b)(c)
</TABLE>
- ------------------------
(a) Not annualized.
(b) Annualized.
(c) After consideration of certain state limitations.
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The JPM Pierpont Short Term Bond Fund (the "Fund") is a separate series of The
JPM Pierpont Funds, a Massachusetts business trust (the "Trust"). The Trust is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund commenced operations on July 8, 1993.
Prior to October 10, 1996, the Trust's and the Fund's names were The Pierpont
Funds and The Pierpont Short Term Bond Fund, respectively.
The Fund invests all of its investable assets in The Short Term Bond Portfolio
(the "Portfolio"), a diversified open-end management investment company having
the same investment objective as the Fund. The value of such investment reflects
the Fund's proportionate interest in the net assets of the Portfolio (32% at
October 31, 1996). The performance of the Fund is directly affected by the
performance of the Portfolio. The financial statements of the Portfolio,
including the schedule of investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Fund:
a)Valuation of securities by the Portfolio is discussed in Note 1 of the
Portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b)The Fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the Portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the Portfolio is allocated pro rata among the Fund and other
investors in the Portfolio at the time of such determination.
c)Substantially all the Fund's net investment income is declared as
dividends daily and paid monthly. Distributions to shareholders of net
realized capital gain, if any, are declared and paid annually.
d)The Fund incurred organization expenses in the amount of $31,753. These
costs were deferred and are being amortized on a straight-line basis over
a five-year period from the commencement of operations.
e)Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income,
including net realized capital gains, if any, within the prescribed time
periods. Accordingly, no provision for federal income or excise tax is
necessary.
f)Expenses incurred by the Trust with respect to any two or more funds in
the Trust are allocated in proportion to the net assets of each fund in
the Trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
g)The Fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital
13
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
Gain, and Return of Capital Distributions by Investment Companies". The
effect of applying this statement was to increase Paid-In Capital by
$1,570 and increase Accumulated Net Realized Loss on Investment by $1,570.
Net investment income, net realized gains and net assets were not affected
by this change.
h)For United States federal income tax purposes, the Fund had a capital loss
carryforward at October 31, 1996 of approximately $73,500 and $500 which
will expire in the year 2002 and 2003, respectively. No capital gains
distribution is expected to be paid to shareholders until future net gains
have been realized in excess of such carryforward.
2. TRANSACTIONS WITH AFFILIATES
a)The Trust had retained Signature Broker-Dealer Services, Inc.
("Signature") to serve as administrator and distributor. Under an
Administration Agreement, Signature provided administrative services
necessary for the operations of the Fund, furnished office space and
facilities required for conducting the business of the Fund and paid the
compensation of the Fund's officers affiliated with Signature. Until
December 28, 1995, the agreement provided for a fee to be paid to
Signature at an annual rate determined by the following schedule: 0.04% of
the first $1 billion of the aggregate average daily net assets of the
Trust, as well as two other affiliated fund families for which Signature
acted as administrator, 0.032% of the next $2 billion of such net assets,
0.024% of the next $2 billion of such net assets, and 0.016% of such net
assets in excess of $5 billion. The daily equivalent of the fee rate was
applied each day to the net assets of the Fund. For the period from
November 1, 1995 to December 28, 1995, Signature's fee for these services
amounted to $408.
Effective December 29, 1995, the Administration Agreement was amended such
that the fee charged was equal to the Fund's proportionate share of a
complex-wide fee based on the following annual schedule: 0.03% on the
first $7 billion of the aggregate average daily net assets of the
Portfolio and the other portfolios (the "Master Portfolios") in which
series of the Trust, The JPM Institutional Funds, or The JPM Advisor Funds
invest and 0.01% on the aggregate average daily net assets of the Master
Portfolios in excess of $7 billion. The portion of this charge paid by the
Fund was determined by the proportionate share its net assets bore to the
total net assets of The Trust, The JPM Institutional Funds, The JPM
Advisor Funds and the Master Portfolios. For the period from December 29,
1995 through July 31, 1996, Signature's fee for these services amounted to
$648. The Administration Agreement with Signature was terminated July 31,
1996.
Effective August 1, 1996, certain administrative functions formerly
provided by Signature are provided by Funds Distributor, Inc. ("FDI"), a
registered broker-dealer, and by Morgan Guaranty Trust Company of New York
("Morgan"). FDI also serves as the Fund's distributor. Under a Co-
Administration Agreement between FDI and the Trust on behalf of the Fund,
the Fund has agreed to pay FDI fees equal to its allocable share of an
annual complex-wide charge of $425,000 plus FDI's out-of-pocket expenses.
The amount allocable to the Fund is based on the ratio of the Fund's net
assets to the aggregate net assets of the Trust, The JPM Institutional
Funds, The JPM Advisor Funds and the Master Portfolios. For the period
from August 1, 1996 through October 31, 1996, the fee for these services
amounted to $75.
14
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
b)Until August 31, 1995, the Trust, on behalf of the Fund, had a Financial
and Fund Accounting Services Agreement with Morgan which provided that
Morgan would receive a fee, based on the percentage described below, for
overseeing certain aspects of the administration and operation of the Fund
and that was also designed to provide an expense limit for certain
expenses of the Fund. This fee was calculated exclusive of the shareholder
servicing fee, the fund services fee and amortization of organization
expenses at 0.12% of the Fund's average daily net assets up to and
including the first $100 million and 0.10% of average daily net assets
over $100 million. From September 1, 1995 until December 28, 1995, an
interim agreement between the Trust, on behalf of the Fund, and Morgan
provided for the continuation of the oversight services that were outlined
under the prior agreement and that Morgan should bear all of its expenses
incurred in connection with these services.
Effective December 29, 1995, the Trust, on behalf of the Fund, entered
into an Administrative Services Agreement (the "Services Agreement") with
Morgan under which Morgan was responsible for certain aspects of the
administration and operation of the Fund. Under the Services Agreement,
the Fund had agreed to pay Morgan a fee equal to its proportionate share
of an annual complex-wide charge. Until July 31, 1996, this charge was
calculated daily based on the aggregate net assets of the Master
Portfolios in accordance with the following annual schedule: 0.06% on the
first $7 billion of the Master Portfolios' aggregate average daily net
assets and 0.03% of the Master Portfolios' aggregate average daily net
assets in excess of $7 billion. The portion of this charge paid by the
Fund was determined by the proportionate share that the Fund's net assets
bore to the net assets of the Trust, the Master Portfolios and other
investors in the Master Portfolios for which Morgan provided similar
services. For the period from December 29, 1995 through July 31, 1996, the
fee for these services amounted to $1,238.
Effective August 1, 1996, the Services Agreement was amended such that the
annual complex-wide charge is calculated daily based on the aggregate net
assets of the Master Portfolios in accordance with the following annual
schedule: 0.09% on the first $7 billion of the Master Portfolios'
aggregate average daily net assets and 0.04% of the Master Portfolios'
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The allocation of the Fund's portion of
this charge is described above. For the period from August 1, 1996 through
October 31, 1996, the fee for these services amounted to $654.
In addition, prior to July 1, 1996, Morgan agreed to reimburse the Fund to
the extent necessary to maintain the total operating expenses of the Fund,
including the expenses allocated to the Fund from the Portfolio, at no
more than 0.67% of the average daily net assets of the Fund. Effective
July 1,1996 through at least February 28, 1997, Morgan will reimburse the
Fund to the extent necesssary to maintain the Fund's total operating
expenses at an annual rate of no more than 0.50% of the average daily net
assets of the Fund. For the fiscal year ended October 31, 1996, Morgan has
agreed to reimburse the Fund $66,602 for expenses under this agreement.
c)The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan. Until December 28, 1995, the agreement provided for the Fund
to pay Morgan a fee for these services which was computed daily and paid
monthly at an annual rate of 0.18% of the average daily net assets of the
Fund. For the period from November 1, 1995 through December 28, 1995, the
fee for these services amounted to $2,862.
15
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
Effective December 29, 1995, the Shareholder Servicing Agreement was
amended such that the annual rate for providing these services was changed
to 0.20% of the average daily net assets of the Fund. For the period from
December 29, 1995 through October 31, 1996, the fee for these services
amounted to $14,134.
d)The Trust, on behalf of the Fund, has a Fund Services Agreement with
Pierpont Group, Inc. ("Group") to assist the Trustees in exercising their
overall supervisory responsibilities for the Trust's affairs. The Trustees
of the Trust represent all the existing shareholders of Group. The Fund's
allocated portion of Group's costs in performing its services amounted to
$439 for the fiscal year ended October 31, 1996.
e)An aggregate annual fee of $65,000 is paid to each Trustee for serving as
a Trustee of The Trust, The JPM Institutional Funds and the Master
Portfolios. The Trustees' Fees and Expenses shown in the financial
statements represents the Fund's allocated portion of the total fees and
expenses. The Trust's Chairman and Chief Executive Officer also serves as
Chairman of Group and received compensation and employee benefits from
Group in his role as Group's Chairman. The allocated portion of such
compensation and benefits included in the Fund Services Fee shown in the
financial statements was $57.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the Fund were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL FISCAL
YEAR YEAR
ENDED ENDED
OCTOBER OCTOBER
31, 1996 31, 1995
--------- ---------
<S> <C> <C>
Shares sold............................ 410,997 918,863
Reinvestment of dividends.............. 25,592 42,523
Shares redeemed........................ (654,209) (537,068)
--------- ---------
Net (Decrease) Increase................ (217,620) 424,318
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
The JPM Pierpont Short Term Bond Fund
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The JPM Pierpont Short Term Bond Fund (one of the series constituting part of
The JPM Pierpont Funds, hereafter referred to as the "Fund") at October 31,
1996, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended and for the
period July 8, 1993 (commencement of operations) through October 31, 1993, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
December 18, 1996
17
<PAGE>
The Short Term Bond Portfolio
Annual Report October 31, 1996
(The following pages should be read in conjunction
with The JPM Pierpont Short Term Bond Fund
Annual Financial Statements)
18
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ---------- -------------------------------------------------- --------------- -----------
<C> <S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET BACKED SECURITIES (41.8%)
FINANCIAL SERVICES (41.8%)
$ 495,947 Aegis Auto Receivables Trust, Series 1996-3, Class
A, Sequential Payer, Callable, (144A) 8.80% due
03/20/02........................................ NR/NR $ 509,896
260,854 Chase Manhattan Grantor Trust, Series 1996-A,
Class A, Pass Through, Callable 5.20% due
02/15/02........................................ Aaa/AAA 259,387
625,862 CIT River Owners Trust,Series 1995-A, Class A,
Sequential Payer, Callable 6.25% due 01/15/11... Aaa/AAA 627,834
443,246 Equicon Home Equity Loan Trust, Series 1992-7,
Remic: Class A, Sequential Payer, Callable 5.90%
due 09/18/05.................................... Aaa/AAA 440,441
700,000 First Plus Home Loan Trust, Series 1996-3, Class
A2, Sequential Payer, Callable 6.85% due
06/20/07........................................ Aaa/AAA 705,359
534,020 Fleetwood Credit Corp. Grantor Trust, Series
1994-A, Class A, Sequential Payer, Callable
4.70% due 07/15/09.............................. Aaa/AAA 522,805
1,500,000 Green Tree Home Improvement Loan Trust, Series
1996-2, Class A2, Sequential Payer, Callable
6.80% due 09/15/27.............................. NR/AAA 1,518,516
493,103 Merrill Lynch Mortgage Investors, Inc., Remic
Series 1994-C1, Class A, Callable 8.61% due
11/25/20........................................ NR/AAA 497,110
478,131 Newcourt Receivables Asset Trust, Series 1996-1,
Class A, Sequential Payer, Callable 6.79% due
08/20/03........................................ NR/AAA 482,291
2,000,000 Premier Auto Trust, Series 1996-2, Class A3,
Sequential Payer, Callable, 6.35% due
01/06/00........................................ Aaa/AAA 2,016,800
727,404 Prudential Home Mortgage Securities, Remic:
Sequential Payer, Series 1992-44, Class A1,
Callable 6.00% due 01/25/98..................... Aaa/AAA 722,851
566,015 Summit Acceptance Auto Receivables, Series 1996-A,
Class A-1, (144A) 7.01% due 07/15/02............ Aaa/AAA 571,498
1,500,000 World Omni Automobile Lease Securitization Trust,
Series 1996-A, Class A1, Sequential Payer,
Callable 6.30% due 06/25/02..................... Aaa/AAA 1,502,460
500,000 World Omni Automobile Lease Securitization Trust,
Series 1996-B, Class A1 5.95% due 11/15/02...... Aaa/AAA 499,531
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS AND
ASSET BACKED SECURITIES (COST
$10,819,469)................................ 10,876,779
-----------
CORPORATE OBLIGATIONS (12.9%)
ELECTRIC (4.1%)
1,000,000 Hydro Quebec 9.75% due 09/29/98................... NR/A+ 1,062,500
-----------
FINANCIAL SERVICES (1.1%)
300,000 Cheung Kong Finance Cayman 5.50% due 09/30/98..... NR/NR 293,437
-----------
OIL-SERVICES (3.8%)
1,000,000 Occidental Petroleum Corp. 5.76% due 06/15/98..... Baa3/BBB 993,120
-----------
TELEPHONE (3.9%)
1,000,000 Southwestern Bell Cap 7.30% due 07/15/99.......... A2/A+ 1,025,780
-----------
TOTAL CORPORATE OBLIGATIONS (COST
$3,310,280)................................. 3,374,837
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
- ---------- -------------------------------------------------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (23.0%)
FEDERAL HOME LOAN MORTGAGE CORP.
$ 417,051 9.00% due 05/01/97................................ $ 423,169
1,500,000 REMIC: PAC-1(11), Series 1625, Class DA 5.50% due
07/15/04........................................ 1,483,935
-----------
1,907,104
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
1,500,000 REMIC: PAC-1(11), Series 1625, Class DA 5.60% due
07/25/03........................................ 1,494,495
1,000,000 REMIC: PAC-1(11), Series 1994-33, Class D 5.50%
due 04/25/05.................................... 986,310
-----------
2,480,805
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
1,500,000 GNMA TBA Nov 9.00%................................ 1,607,805
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST
$5,966,960).................................. 5,995,714
-----------
U.S. TREASURY OBLIGATIONS (15.0%)
U.S. TREASURY NOTES
3,880,000 United States Treasury Notes 6.00% due 08/15/99
(cost $3,854,313)............................... 3,889,428
-----------
SHORT-TERM INVESTMENTS (12.9%)
OTHER INVESTMENT COMPANIES (0.0%)*
626 Seven Seas Money Market Fund (cost $626).......... 626
-----------
REPURCHASE AGREEMENT (12.9%)
3,351,000 Goldman Sachs Repurchase Agreement, 5.54% dated
10/31/96 due 11/01/96, proceeds $3,351,516,
(collateralized by $2,474,000 U.S. Treasury
Bond, 11.625% due 11/15/04, valued at
$3,418,911) (cost $3,351,000)................... 3,351,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST
$3,351,626).................................. 3,351,626
-----------
TOTAL INVESTMENTS (COST $27,302,648) (105.6%)..... 27,488,384
LIABILITIES IN EXCESS OF OTHER ASSETS (-5.6%)..... (1,456,273)
-----------
NET ASSETS (100.0%)............................... $26,032,111
-----------
-----------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $27,302,648 for federal income tax
purposes at October 31, 1996, the aggregate gross unrealized appreciation and
depreciation was $236,697 and $50,961, respectively, resulting in net unrealized
appreciation of $185,736.
* Less than 0.1%.
TBA -- Security purchased on a forward commitment basis with an appropriate
principal amount and no definitive maturity date. The actual principal amount
and maturity date will be determined upon settlement date.
144A -- Securities restricted for resale to Qualified Institutional Buyers
REMIC -- Real estate mortgage investment conduit.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $27,302,648) $27,488,384
Interest Receivable 178,275
Receivable for Expense Reimbursement 15,700
Deferred Organization Expenses 2,300
Prepaid Expenses and Other Assets 22
-----------
Total Assets 27,684,681
-----------
LIABILITIES
Payable for Investments Purchased 1,601,250
Payable to Custodian 24,958
Advisory Fee Payable 5,693
Administrative Services Fee Payable 726
Custody Fee Payable 135
Administration Fee Payable 67
Fund Services Fee Payable 13
Accrued Trustees' Fees and Expenses 250
Accrued Expenses 19,478
-----------
Total Liabilities 1,652,570
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $26,032,111
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $1,212,907
EXPENSES
Advisory Fee $ 50,319
Professional Fees and Expenses 34,359
Custodian Fees and Expenses 25,934
Administrative Services Fee 4,344
Administration Fee 1,703
Printing Expenses 1,601
Amortization of Organization Expenses 1,365
Fund Services Fee 1,005
Registration Fees 610
Trustees' Fees and Expenses 602
Insurance Expense 508
Miscellaneous 250
--------
Total Expenses 122,600
Less: Reimbursement of Expenses (46,618)
--------
NET EXPENSES 75,982
----------
NET INVESTMENT INCOME 1,136,925
NET REALIZED GAIN ON INVESTMENTS
(including $25,919 net realized
loss from futures contracts) 146,407
NET CHANGE IN UNREALIZED APPRECIATION
OF INVESTMENTS 5,083
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,288,415
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 1,136,925 $ 3,574,946
Net Realized Gain on Investments 146,407 407,824
Net Change in Unrealized Appreciation
of Investments 5,083 1,076,791
------------- -------------
Net Increase in Net Assets
Resulting from Operations 1,288,415 5,059,561
------------- -------------
TRANSACTIONS IN INVESTORS' BENEFICIAL
INTERESTS
Contributions 54,341,812 32,690,159
Withdrawals (58,904,692) (61,766,958)
------------- -------------
Net Decrease from Investors'
Transactions (4,562,880) (29,076,799)
------------- -------------
Total Decrease in Net Assets (3,274,465) (24,017,238)
NET ASSETS
Beginning of Fiscal Year 29,306,576 53,323,814
------------- -------------
End of Fiscal Year $ 26,032,111 $ 29,306,576
------------- -------------
------------- -------------
</TABLE>
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 8, 1993
(COMMENCEMENT
FOR THE FISCAL YEAR ENDED OCTOBER 31, OF
OPERATIONS) TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.38% 0.42% 0.36% 0.37%(a)
Net Investment Income 5.65% 6.11% 5.01% 3.99%(a)
Decrease Reflected in Expense Ratio
due to Expense Reimbursement 0.23% 0.04% 0.05% 1.00%(a)
Portfolio Turnover 191% 177% 230% 116%
</TABLE>
- ------------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Short Term Bond Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940, as amended, as a no-load, diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York. The Portfolio's investment objective is to provide a high
total return while attempting to limit the likelihood of negative quarterly
returns. The Portfolio commenced operations on July 8, 1993. The Declaration of
Trust permits the Trustees to issue an unlimited number of beneficial interests
in the Portfolio.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a)The Portfolio values mortgage and asset-backed securities and other debt
securities with a maturity of 60 days or more, including securities that
are listed on an exchange or traded over the counter, using prices
supplied daily by an independent pricing service or services that (i) are
based on the last sale price on a national securities exchange, or in the
absence of recorded sales, at the readily available bid price on such
exchange or at the quoted bid price in the over-the-counter market, if
such exchange or market constitutes the broadest and most representative
market for the security and (ii) in other cases, take into account various
factors affecting market value, including yields and prices of comparable
securities, indication as to value from dealers and general market
conditions. If such prices are not supplied by the Portfolio's independent
pricing services, such securities are priced in accordance with procedures
adopted by the Trustees. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method. The
ability of issuers of mortgage and asset-backed securities, held by the
Portfolio, to meet their obligations may be affected by economic
developments in a specific industry or region. The value of mortgage and
asset-backed securities can be significantly affected by changes in
interest rates, rapid principal repayments including pre-payments.
The Portfolio's custodian or designated subcustodians, as the case may be,
under triparty repurchase agreements takes possession of the collateral
pledged for investments in repurchase agreements on behalf of the
Portfolio. It is the policy of the Portfolio to value the underlying
collateral daily on a mark-to-market basis to determine that the value,
including accrued interest, is at least equal to the repurchase price plus
accrued interest. In the event of default of the obligation to repurchase,
the Portfolio has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances,
in the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral or proceeds may be subject
to legal proceedings.
b)Futures: A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date. The price
at which the purchase and sale will take place is fixed when the Portfolio
enters in the contract. Upon entering into such a contract the Portfolio
is required to pledge to the broker an amount of cash and/or securities
equal to the minimum "initial margin" requirements of the exchange.
Pursuant to the contract, the Portfolio agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or
24
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
payments are known as "variation margin" and are recorded by the Portfolio
as unrealized gains or losses. When the contract is closed, the Portfolio
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time when
it was closed. The Portfolio invests in futures contracts solely for the
purpose of hedging its existing portfolio securities, or securities the
Portfolio intends to purchase, against fluctuations in value caused by
changes in prevailing market interest rates. The use of futures
transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged
assets, and the possible inability of counterparties to meet the terms of
their contracts. Futures transactions in U.S. Treasury securities during
the fiscal year ended October 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
PRINCIPAL
NUMBER OF AMOUNT
CONTRACTS OF CONTRACTS
--------- -------------
<S> <C> <C>
Contracts open at beginning of year.......... 10 $ 1,076,009
Contracts opened............................. 26 5,356,975
Contracts closed............................. (36) (6,432,984)
--------- -------------
Contracts open at end of year................ 0 $ 0
--------- -------------
--------- -------------
</TABLE>
c)Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discount, if any,
is recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
d)The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxable on
its share of the Portfolio's ordinary income and capital gains. It is
intended that the Portfolio's assets will be managed in such a way that an
investor in the Portfolio will be able to satisfy the requirements of
Subchapter M of the Internal Revenue Code.
e)The Portfolio incurred organization expenses in the amount of $5,380.
These costs were deferred and are being amortized on a straight-line basis
over a five-year period from the commencement of operations.
2. TRANSACTIONS WITH AFFILIATES
a)The Portfolio has an investment advisory agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the investment
advisory agreement, the Portfolio pays Morgan at an annual rate of 0.25%
of the Portfolio's average daily net assets. For the fiscal year ended
October 31, 1996, such fees amounted to $50,319.
b)The Portfolio had retained Signature Broker-Dealer Services, Inc.
("Signature") to serve as Administrator and exclusive placement agent.
Under an Administration Agreement, Signature provided administrative
services necessary for the operations of the Portfolio, furnished office
space and facilities required for conducting the business of the Portfolio
and paid the compensation of the Portfolio's officers affiliated with
Signature. Until December 28, 1995, the agreement provided for a fee to be
paid to Signature at an annual rate determined by the following schedule:
0.01% of the first
25
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
$1 billion of the aggregate average daily net assets of the Portfolio and
the other portfolios subject to the agreement, 0.008% of the next $2
billion of such net assets, 0.006% of the next $2 billion of such net
assets, and 0.004% of such net assets in excess of $5 billion. The daily
equivalent of the fee rate was applied each day to the net assets of the
Portfolio. For the period from November 1, 1995 to December 28, 1995,
Signature's fee for these services amounted to $801.
Effective December 29, 1995, the Administration Agreement was amended such
that the fee charged was equal to the Portfolio's proportionate share of a
complex-wide fee based on the following annual schedule: 0.03% on the
first $7 billion of the aggregate average daily net assets of the
Portfolio and the other portfolios (the "Master Portfolios") in which The
JPM Pierpont Funds, The JPM Institutional Funds or The JPM Advisor Funds
invest and 0.01% on the aggregate average daily net assets of the Master
Portfolios in excess of $7 billion. The portion of this charge paid by the
Portfolio was determined by the proportionate share its net assets bore to
the total net assets of The JPM Pierpont Funds, The JPM Institutional
Funds, The JPM Advisor Funds and the Master Portfolios. For the period
from December 29, 1995 through July 31, 1996, Signature's fee for these
services amounted to $746. The Administration Agreement with Signature was
terminated July 31, 1996.
Effective August 1, 1996, certain administrative functions formerly
provided by Signature are provided by Funds Distributor, Inc. ("FDI"), a
registered broker-dealer, and by Morgan. FDI also serves as the
Portfolio's exclusive placement agent. Under a Co-Administration Agreement
between FDI and the Portfolio, the Portfolio has agreed to pay FDI fees
equal to its allocable share of an annual complex-wide charge of $425,000
plus FDI's out-of-pocket expenses. The amount allocable to the Portfolio
is based on the ratio of the Portfolio's net assets to the aggregate net
assets of the The JPM Pierpont Funds, The JPM Institutional Funds, The JPM
Advisor Funds and the Master Portfolios. For the period from August 1,
1996 through October 31, 1996, the fee for these services amounted to
$156.
c)Until August 31, 1995, the Portfolio had a Financial and Fund Accounting
Services Agreement with Morgan which provided that Morgan would receive a
fee, based on the percentages described below, for overseeing certain
aspects of the administration and operation of the Portfolio and that was
also designed to provide an expense limit for certain expenses of the
Portfolio. This fee was calculated exclusive of the advisory fee, custody
expenses, fund services fee, brokerage costs and amortization of
organization expenses at 0.05% of the Portfolio's average daily net assets
up to and including $200 million and 0.03% of average daily net assets on
any excess over $200 million. From September 1, 1995 until December 28,
1995, an interim agreement between the Portfolio and Morgan provided for
the continuation of the oversight functions that were outlined under the
prior agreement and that Morgan should bear all of its expenses incurred
in connection with these services.
Effective December 29, 1995, the Portfolio entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan under which
Morgan was responsible for overseeing certain aspects of the
administration and operation of the Portfolio. Under the Services
Agreement, the Portfolio had agreed to pay Morgan a fee equal to its
proportionate share of an annual complex-wide charge. Until July 31, 1996,
this charge was calculated daily based on the aggregate net assets of the
Master Portfolios in accordance with the following annual schedule: 0.06%
on the first $7 billion of the Master Portfolios' aggregate average daily
net assets and 0.03% of the Master Portfolios' aggregate
26
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
average daily net assets in excess of $7 billion. The portion of this
charge paid by the Portfolio was determined by the proportionate share
that the Portfolio's net assets bore to the net assets of the Master
Portfolios and investors in the Master Portfolios for which Morgan
provided similar services. For the period from December 29, 1995 through
July 31, 1996, Morgan's fee for these services amounted to $2,474.
Effective August 1, 1996, the Services Agreement was amended such that the
annual complex-wide charge is calculated daily based on the aggregate net
assets of the Master Portfolios in accordance with the following annual
schedule: 0.09% on the first $7 billion of the Master Portfolios'
aggregate average daily net assets and 0.04% of the Master Portfolio's
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The allocation of the Portfolio's
portion of this charge is described above. For the period from August 1,
1996 through October 31, 1996, the fee for these services amounted to
$1,870.
In addition, prior to July 1, 1996, Morgan agreed to reimburse the
Portfolio to the extent necessary to maintain the total operating expenses
of the Portfolio at no more than 0.45% of the average daily net assets of
the Fund. Effective July 1, 1996 through at least February 28, 1997,
Morgan will reimburse the Portfolio to the extent necesssary to maintain
the Portfolio's total operating expenses at an annual rate of no more than
0.25% of the average daily net assets of the Fund. For the fiscal year
ended October 31, 1996, Morgan has agreed to reimburse the Portfolio
$46,618 for expenses under this agreement.
d)The Portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The Trustees of the
Portfolio represent all the existing shareholders of Group. The
Portfolio's allocated portion of Group's costs in performing its services
amounted to $1,005 for the fiscal year ended October 31, 1996.
e)An aggregate annual fee of $65,000 is paid to each Trustee for serving as
a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds and the
Master Portfolios. The Trustees' Fees and Expenses shown in the financial
statements represent the Portfolio's allocated portion of the total fees
and expenses. The Portfolio's Chairman and Chief Executive Officer also
serves as Chairman of Group and received compensation and employee
benefits from Group in his role as Group's Chairman. The allocated portion
of such compensation and benefits included in the Fund Services Fee shown
in the financial statements was $130.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the period were
as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------- -------------
<S> <C> <C>
U.S. Government and Agency Obligations....... $ 23,963,743 $ 26,603,778
Corporate and Collateralized Obligations..... 14,057,809 15,536,455
------------- -------------
Total........................................ $ 38,021,552 $ 42,140,233
------------- -------------
------------- -------------
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Short Term Bond Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of The Short Term Bond Portfolio (the
"Portfolio") at October 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its supplementary data for each of the three years in the
period then ended and for the period July 8, 1993 (commencement of operations)
through October 31, 1993, in conformity with generally accepted accounting
principles. These financial statements and supplementary data (hereafter
referred to as "financial statements") are the responsibility of the Portfolio's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
December 18, 1996
28
