<PAGE>
LETTER TO THE SHAREHOLDERS OF THE JPM PIERPONT SHORT TERM BOND FUND
December 5, 1997
Dear Shareholder:
We are pleased to report that for the fiscal year ended October 31, 1997,
The JPM Pierpont Short Term Bond Fund provided a return of 5.98%. This
compares to a 6.12% for the Lipper Short Investment Grade Debt Funds Average
and a 6.48% return for its benchmark, the Merrill Lynch 1-3 Year Treasury
Index.
The Fund's net asset value fell slightly from $9.86 on November 1, 1996 to $9.85
at October 31, 1997, after paying approximately $0.58 per share in dividends
from ordinary income during the year. The Fund's net assets stood at $14.5
million at the end of the reporting period. The net assets of The Short Term
Bond Portfolio, in which the Fund invests, totaled approximately $41.9 million
on October 31, 1997.
Connie J. Plaehn, lead portfolio manager for The Short Term Bond Portfolio, in
which the Fund invests, discusses some of the events affecting the Fund over the
previous year and offers her views on the upcoming months.
As chairman and president of Asset Management Services, we look forward to
sharing Morgan's insights regarding financial markets with you. If you have any
comments or questions, please call your Morgan representative or J.P. Morgan
Funds Services at (800) 521-5411.
Sincerely yours,
/s/ Ramon de Oliveira /s/ Keith M. Schappert
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS . . . .1 FUND FACTS AND HIGHLIGHTS. . . . . . 5
FUND PERFORMANCE . . . . . . . . .2 SPECIAL FUND-BASED SERVICES. . . . . 6
PORTFOLIO MANAGER Q&A. . . . . . .3 FINANCIAL STATEMENTS . . . . . . . . 8
<PAGE>
Fund performance
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to take a look at the growth of a hypothetical
investment of $10,000. The chart at right shows that $10,000 invested in the
Fund on July 31, 1993* would have grown to $12,385 at October 31, 1997. This
figure takes the fund's actual (or cumulative) return and shows 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 $10,000 OVER FIVE YEARS*
JULY 31, 1993 - OCTOBER 31, 1997
[CHART]
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURN
----------------------- ----------------------------------
THREE SIX ONE THREE SINCE
AS OF OCTOBER 31, 1997 MONTHS MONTHS YEAR YEARS INCEPTION*
- ------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
The JPM Pierpont Short Term Bond Fund 1.31% 3.68% 5.98% 6.81% 5.16%
Merrill Lynch 1-3 Year Treasury Index 1.60% 4.13% 6.48% 7.11% 5.59%
Lipper Short Investment
Grade Debt Funds Average 1.37% 3.86% 6.12% 6.61% 5.27%
AS OF SEPTEMBER 30, 1997
- ------------------------------------------------------------------------- ----------------------------------
The JPM Pierpont Short Term Bond Fund 1.94% 4.09% 6.81% 6.72% 5.16%
Merrill Lynch 1-3 Year Treasury Index 1.96% 4.21% 6.89% 6.92% 5.52%
Lipper Short Investment
Grade Debt Funds Average 1.87% 4.00% 6.54% 6.45% 5.24%
</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 THRU 10/31/97 IS 5.06%.
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 HAD EXPENSES
NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. THE MERRILL LYNCH 1-3 YEAR
TREASURY INDEX IS AN UNMANAGED INDEX WHICH MEASURES SHORT-TERM MARKET
PERFORMANCE. THE INDEX DOES NOT INCLUDE FEES OR EXPENSES AND IS NOT AVAILABLE
FOR ACTUAL INVESTMENT. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR
MUTUAL FUND DATA.
2
<PAGE>
Portfolio manager Q&A
[PHOTOGRAPH]
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 worked at J.P. Morgan Securities and J.P. Morgan
Futures. This interview was conducted on November 19, 1997 and reflects Connie's
views on that date.
WHAT HAPPENED DURING THE YEAR IN THE SHORT-TERM BOND MARKET?
CJP: The short end of the yield curve behaved a bit differently than the long
end. While longer-term rates declined for about eleven months of the year, until
October when the Asian crisis hit, shorter-term interest rates rose fairly
dramatically at the beginning of this year. Interest rates started rising in
anticipation of the Federal Reserve tightening monetary policy in March and
continued to rise until early June.
Thirty-year interest rates have come down much more, relative to two-year rates,
because it's uncertain whether the Fed will tighten again. If it were simply the
U.S. domestic economy on its own, the Fed would probably raise short-term rates.
But because of the global turmoil, for the near-term, we doubt the Fed will
tighten interest rates. The question is, how long will this global monetary
crisis keep the Fed from doing what it should do, based on economic conditions
in the U.S. alone?
Of course, there is still a chance of the Fed having to raise interest rates. So
you're not likely to see the two-year Treasury go through the Fed funds level,
which is currently at five and a half percent.
IN GENERAL, HOW DO YOU MANAGE THE FUND'S DURATION, AND WHAT WOULD CONSTITUTE A
BIG DURATION POSITION FOR YOU ON THE LONG SIDE?
CJP: Historically, a big bet for us has been a half-year longer than our
benchmark. But more recently, we've been comfortable in extending it a bit
longer. Our benchmark's duration is about 1.7 years. However, we think a
strategic neutral duration for the Portfolio should be a bit longer -- around
two years, instead of 1.7. We feel that we should almost always be somewhat long
because the curve is very steep in the short end, and you benefit, if interest
rates remain unchanged, just from rolling down the yield curve. Recently,
because of what's been going on in the market from the Asian crisis, that
steepness has flattened to a certain extent. So you don't get as much roll-down
benefit as you did last year. We think that two-and-a-half years should be the
target duration that we would feel comfortable with, given our outlook. And
that's about three-quarters of a year longer than the benchmark's duration.
3
<PAGE>
SPREADS BETWEEN TREASURY SECURITIES AND THE OTHER SECTORS IN WHICH THE PORTFOLIO
INVESTS HAVE RECENTLY WIDENED. DO YOU THINK THEY WILL WIDEN FURTHER, OR ARE THEY
READY TO TIGHTEN?
CJP: In terms of spreads, events in October created some opportunities. Looking
at the securities available in the short part of the yield curve, spreads have
been tight for a long period of time. In October, we finally saw a dramatic
widening. We're using this as an opportunity to add to the below investment
grade position in the Portfolio. When spreads were tight, we weren't very
aggressive about it. But now, we've raised that position to about 8%. We can add
up to another 2%, but we think that there's some vulnerability between now and
year-end, so we won't do that unless we do see additional widening.
SO THE EVENTS OF OCTOBER ESSENTIALLY PROVIDED A BUYING OPPORTUNITY?
CJP: We think so. But there will be others because the turmoil in Asia and in
the Middle East hasn't stopped, so those markets are still vulnerable. As far as
American corporations are concerned, their income from international sources of
revenue is suddenly being questioned because of problems in the world economy.
The U.S. markets are not independent any longer, and probably never will be
again.
WHAT ABOUT THE MORTGAGE POSITIONS IN THE PORTFOLIO? ANY CONCERNS?
CJP: We have held more prepayment-protected mortgages in the Portfolio lately.
The Portfolio also holds some higher coupon mortgages that home owners have had
several opportunities to refinance but haven't. The balances on these loans are
fairly low, so refinancing probably doesn't add much into a homeowner's pocket
on a monthly basis.
IS PREPAYMENT A GREATER PROBLEM IN A LONGER-TERM PORTFOLIO?
CJP: No, it's a concern for all of us. Concern about prepayment is what causes
mortgages to outperform or underperform, relative to Treasuries. So prepayment
concerns can affect a short portfolio as well as a long portfolio. In the short
portfolio, we tend to have more seasoned mortgage products, because the duration
of those securities is shorter.
WOULD THERE EVER BE A TIME WHEN YOU WOULD JUST ABANDON SPREAD PRODUCTS?
CJP: Yes. A recession scenario would cause us to abandon spread products. Such
a scenario could result in companies having balance sheet problems, that is, the
potential of credit downgrades. But with the changes that we've seen in the U.S.
economy and the overall health of U.S. corporations, we don't foresee that
happening.
4
<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 10/31/97
$14,519,284
- ------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
MONTHLY
- ------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/19/97
EXPENSE RATIO
The Fund's 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, 1997
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
Corporate debt obligations 27.20%
U.S. government agencies 24.90%
Collateralized mortgage obligations (CMOs)
and asset-backed securities 24.40%
U.S. Treasuries 14.70%
Foreign government obligations 2.60%
Repurchase agreements 1.40%
Other 4.80%
30-DAY SEC YIELD
6.20%
DURATION
2.0 years
QUALITY BREAKDOWN
AAA* 67.98%
AA 3.90%
A 7.47%
BBB 12.12%
Not Rated 2.8%
Other 5.73%
* INCLUDES U.S. GOVERNMENT AGENCY, TREASURY OBLIGATIONS, REPURCHASE
AGREEMENTS AND COMMERCIAL PAPER
5
<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
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.
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORK SERVES AS AN INVESTMENT ADVISOR AND MAKES THE FUND AVAILABLE SOLELY IN ITS
CAPACITY AS SHAREHOLDER SERVICING AGENT. SHARES OF THE FUND ARE NOT BANK
DEPOSITS AND ARE NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. AN
INVESTMENT IN THE FUND WILL FLUCTUATE AND MAY LOSE VALUE.
Past performance is no guarantee for future performance. Returns are net of
fees, assume the reinvestment of fund distributions and may reflect the
reimbursement of fund expenses as described in the prospectus. Had expenses not
been subsidized, returns would have been lower. The Fund invests through a
master portfolio (another fund with the same objective).
CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING.
7
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Short Term Bond Portfolio
("Portfolio"), at value $14,539,798
Receivable for Shares of Beneficial Interest Sold 20,000
Receivable for Expense Reimbursements 5,868
Deferred Organization Expenses 4,333
Prepaid Trustees' Fees 18
Prepaid Expenses and Other Assets 195
-----------
Total Assets 14,570,212
-----------
LIABILITIES
Dividends Payable to Shareholders 17,807
Shareholder Servicing Fee Payable 2,409
Administrative Services Fee Payable 363
Administration Fee Payable 58
Fund Services Fee Payable 19
Accrued Expenses 30,272
-----------
Total Liabilities 50,928
-----------
NET ASSETS
Applicable to 1,473,956 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $14,519,284
-----------
-----------
Net Asset Value, Offering and Redemption Price
Per Share $9.85
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $14,554,139
Undistributed Net Investment Income 235
Accumulated Net Realized Loss on Investment (48,607)
Net Unrealized Appreciation of Investment 13,517
-----------
Net Assets $14,519,284
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $809,021
Allocated Portfolio Expenses (Net of
Reimbursement of $38,321) (31,511)
--------
Net Investment Income Allocated from
Portfolio 777,510
FUND EXPENSES
Shareholder Servicing Fee $ 25,107
Transfer Agent Fees 23,010
Registration Fees 17,167
Printing Expenses 11,840
Professional Fees 11,433
Amortization of Organization Expenses 6,251
Administrative Services Fee 3,894
Fund Services Fee 450
Administration Fee 395
Trustees' Fees and Expenses 246
Miscellaneous 3,220
--------
Total Fund Expenses 103,013
Less: Reimbursement of Expenses (71,757)
--------
NET FUND EXPENSES 31,256
--------
NET INVESTMENT INCOME 746,254
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 26,290
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (43,952)
--------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $728,592
--------
--------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 746,254 $ 468,944
Net Realized Gain (Loss) on Investment Allocated
from Portfolio 26,290 (2,184)
Net Change in Unrealized Appreciation
(Depreciation) of Investment Allocated from
Portfolio (43,952) 19,273
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 728,592 486,033
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (745,546) (468,942)
---------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 10,363,959 4,035,010
Reinvestment of Dividends 553,236 251,276
Cost of Shares of Beneficial Interest Redeemed (4,587,707) (6,426,652)
---------------- ----------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest 6,329,488 (2,140,366)
---------------- ----------------
Total Increase (Decrease) in Net Assets 6,312,534 (2,123,275)
NET ASSETS
Beginning of Fiscal Year 8,206,750 10,330,025
---------------- ----------------
End of Fiscal Year (including undistributed net
investment income of $236 and ($473),
respectively) $ 14,519,284 $ 8,206,750
---------------- ----------------
---------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<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 PERIOD
JULY 8, 1993
FOR THE FISCAL YEAR ENDED OCTOBER 31, (COMMENCEMENT OF
-------------------------------------- OPERATIONS) TO
1997 1996 1995 1994 OCTOBER 31, 1993
------- ------ ------- ------ ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.86 $ 9.84 $ 9.60 $ 9.99 $10.00
------- ------ ------- ------ ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.58 0.53 0.57 0.45 0.10
Net Realized and Unrealized Gain (Loss) on
Investment (0.01) 0.02 0.24 (0.39) (0.01)
------- ------ ------- ------ ----------------
Total from Investment Operations 0.57 0.55 0.81 0.06 0.09
------- ------ ------- ------ ----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.58) (0.53) (0.57) (0.45) (0.10)
------- ------ ------- ------ ----------------
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.86 $ 9.84 $ 9.60 $ 9.99
------- ------ ------- ------ ----------------
------- ------ ------- ------ ----------------
RATIOS AND SUPPLEMENTAL DATA
Total Return 5.98% 5.77% 8.70% 0.61% 0.94%(a)
Net Assets, End of Period (in thousands) $14,519 $8,207 $10,330 $6,008 $6,842
Ratios to Average Net Assets
Expenses 0.50% 0.62% 0.67% 0.69% 0.67%(b)
Net Investment Income 5.94% 5.42% 5.88% 4.49% 3.44%(b)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 0.88% 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.
11
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
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 included
in the Statement of Assets and Liabilities reflects the Fund's proportionate
interest in the net assets of the Portfolio (35% at October 31, 1997). 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. Morgan
Guaranty Trust Company of New York ("Morgan") has agreed to reimburse the
Fund for these costs which are being deferred and will be amortized on a
straight-line basis over a period not to exceed five years beginning with
the commencement of operations of the Fund.
e) The Fund is treated as a seperate entity for federal income tax purposes
and 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.
12
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
g) For United States federal income tax purposes, the Fund had a capital loss
carryforward at October 31, 1997 of approximately $46,225 and $449 which
will expire in the year 2002 and 2003, respectively. Such carryforward is
after utilization of $27,215 to offset the Fund's net taxable gains
realized and recognized in the year ended October 31, 1997. 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, on behalf of the Fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as the co-administrator and
distributor for the Fund. Under a Co-Administration Agreement between FDI
and the Trust on behalf of the Fund, FDI provides administrative services
necessary for the operations of the Fund, furnishes office space and
facilities required for conducting the business of the Fund and pays the
compensation of the Fund's officers affiliated with FDI. 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 and certain other
investment companies subject to similar agreements with FDI. For the
fiscal year ended October 31, 1997, the fee for these services amounted to
$395.
b) The Trust, on behalf of the Fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for certain aspects of the administration and operation of the Fund. Under
the Services Agreement, the Fund has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
Portfolio and the other portfolios in which the Trust and The JPM
Institutional Funds invest (the "Master Portfolios") and JPM Series Trust
in accordance with the following annual schedule: 0.09% on the first $7
billion of their aggregate average daily net assets and 0.04% of their
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The portion of this charge payable by
the Fund is determined by the proportionate share that its net assets bear
to the net assets of the Trust, the Master Portfolios, certain other
investors in the Master Portfolios for which Morgan provides similar
services, and JPM Series Trust. For the fiscal year ended October 31,
1997, the fee for these services amounted to $3,894.
In addition, Morgan has 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
0.50% of the average daily net assets of the Fund through February 28,
1998. For the fiscal year ended October 31, 1997, Morgan has agreed to
reimburse the Fund $71,757 for expenses under this agreement.
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance services to Fund shareholders. The agreement provides for the
Fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.20% of the average daily net assets of
the Fund. For the fiscal year ended October 31, 1997, the fee for these
services amounted to $25,107.
Morgan, Charles Schwab & Co. ("Schwab") and the Trust are parties to
separate services and operating agreements (the "Schwab Agreements")
whereby Schwab makes Fund shares available to customers of investment
advisors and other financial intermediaries who are Schwab's clients. The
Fund is not
13
<PAGE>
THE JPM PIERPONT SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
responsible for payments to Schwab under the Schwab Agreements; however,
in the event the Services Agreement with Schwab is terminated for reasons
other than a breach by Schwab and the relationship between the Trust and
Morgan is terminated, the Fund would be responsible for the ongoing
payments to Schwab with respect to pre-termination shares.
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
$450 for the fiscal year ended October 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of The Trust, The JPM Institutional Funds, the Master Portfolios
and JPM Series Trust. The Trustees' Fees and Expenses shown in the
financial statements represents the Fund's allocated portion of these
total fees and expenses. Prior to April 1, 1997, the aggregate annual
Trustee Fee was $65,000. The Trust's Chairman and Chief Executive Officer
also serves as Chairman of Group and receives 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 $100.
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 FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Shares sold...................................... 1,052,422 410,997
Reinvestment of dividends........................ 56,273 25,592
Shares redeemed.................................. (467,292) (654,209)
---------------- ----------------
Net Increase (Decrease).......................... 641,403 (217,620)
---------------- ----------------
---------------- ----------------
</TABLE>
From time to time, the Fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders could have a material impact on the Fund and Portfolio.
4. CREDIT AGREEMENT
The Trust, on behalf of the Fund, together with other affiliated investment
companies (the "Funds"), entered into a revolving line of credit agreement (the
"Agreement") on May 28, 1997, with unaffiliated lenders. Additionally, since all
the investable assets of the Fund are in the Portfolio, the Portfolio is party
to certain covenants of the Agreement. The maximum borrowing under the
commitment Agreement is $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund as party to the Agreement will have the ability to extend the
Agreement and continue its participation therein for an additional 364 days. The
purpose of the Agreement is to provide another alternative for settling large
fund shareholder redemptions. Interest on any such borrowings outstanding will
approximate market rates. The Funds pay a commitment fee at an annual rate of
0.065% on the unused portion of the committed amount which is allocated to the
Funds in accordance with procedures established by their respective Trustees or
Directors. The Fund has not borrowed pursuant to the Agreement as of October 31,
1997.
14
<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,
1997, 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 four 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, 1997
15
<PAGE>
The Short Term Bond Portfolio
Annual Report October 31, 1997
(The following pages should be read in conjunction
with The JPM Pierpont Short Term Bond Fund
Annual Financial Statements)
16
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET BACKED SECURITIES (24.2%)
FINANCIAL SERVICES (24.2%)
$ 344,815 Aegis Auto Receivables Trust, Sequential Payer, Series
1996-3, Class A, Callable, (144A), 8.80% due
03/20/02(r)............................................... NR/NR $ 269,495
1,500,000 Chase Credit Card Master Trust, Series 1997-2, Class A,
Callable, 6.30% due 04/15/03.............................. Aaa/AAA 1,513,140
425,237 CIT River Owners Trust, Series 1995-A, Class A, Sequential
Payer, Callable, 6.25% due 01/15/11....................... Aaa/AAA 427,457
968,476 CS First Boston Mortgage Securities Corp., Series 1997-C1,
Class A1A, Sequential Payer, Callable, 6.96% due
01/20/04.................................................. Aaa/AAA 988,603
1,000,000 EQCC Home Equity Loan Trust, Series 1997-3, Class A3,
Callable, 6.18% due 11/15/08.............................. Aaa/AAA 1,000,160
406,489 Fleetwood Credit Corp. Grantor Trust, Series 1994-A, Class
A, Sequential Payer, Callable, 4.70% due 07/15/09......... Aaa/AAA 398,591
251,021 Merrill Lynch Mortgage Investors, Inc., Series 1994-C1,
Class A, Callable, 8.70% due 11/25/20..................... NR/AAA 252,982
252,292 Merrill Lynch Mortgage Investors, Inc., Subordinated Bond,
CSTR, Series 1995-C2, Class E, Callable, 8.19% due
06/15/21.................................................. Ba3/NR 253,395
1,500,000 Metropolitan Asset Funding Inc., Series 1996-A, Class A2,
Callable, 6.85% due 08/20/05.............................. Aaa/NR 1,518,984
286,755 Newcourt Receivables Asset Trust, Series 1996-1, Class A,
Sequential Payer, Callable, 6.79% due 08/20/03............ NR/AAA 288,687
453,353 Newcourt Receivables Asset Trust, Series 1996-3, Class A,
Sequential Payer, Callable, 6.24% due 12/20/04............ NR/AAA 453,282
400,000 Niantic Bay Fuel Trust, 9.02% due 06/05/98.................. NR/NR 393,000
154,866 Prudential Home Mortgage Securities, Remic, Series 1992-44,
Class A1, Callable, 6.00% due 01/25/98.................... Aaa/NR 154,866
871,147 Salomon Brothers Mortgage Securities VII Inc., Series
1997-HUD1, Class A1, Sequential Payer, Callable, 6.97% due
12/25/30.................................................. Aaa/NR 877,777
342,870 Summit Acceptance Auto Receivables, Series 1996-A, Class A1,
(144A), 7.01% due 07/15/02................................ Aaa/AAA 346,621
500,000 Toyota Auto Lease Trust, Series 1997-A, Class A2, Callable,
6.35% due 04/26/04........................................ Aaa/AAA 503,359
500,000 World Omni Automobile Lease Securitization Trust, Series
1996-B, Class A1, 5.95% due 11/15/02...................... Aaa/AAA 499,845
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET
BACKED SECURITIES (COST $10,173,942).................. 10,140,244
-----------
CORPORATE OBLIGATIONS (19.8%)
APPARELS & TEXTILES (1.0%)
400,000 Westpoint Stevens Inc., Callable, 9.375% due 12/15/05....... B2/B+ 420,000
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
17
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
FINANCIAL SERVICES (6.3%)
$ 610,000 Associates Corp. North America, 5.96% due 05/15/37.......... Aa3/AA- $ 616,442
1,000,000 Beneficial Corp. Medium Term Note, 7.37% due 11/24/99....... A2/A 1,023,910
1,000,000 National City Capital Trust I, (144A), 6.75% due 06/01/99... a1/A- 1,008,200
-----------
2,648,552
-----------
HEALTH SERVICES (1.3%)
500,000 Tenet Healthcare Corp., Callable 03/01/00, 10.125% due
03/01/05.................................................. Ba3/B+ 548,750
-----------
OIL-SERVICES (6.0%)
1,500,000 Columbia Gas System Inc., Series A, 6.39% due 11/28/00...... Baa1/BBB+ 1,509,000
1,000,000 Oil Purchase Co., Sinking Fund, (144A), 7.10% due
04/30/02.................................................. Baa3/BBB 998,750
-----------
2,507,750
-----------
PACKAGING & CONTAINERS (1.2%)
500,000 Stone Container Corp., Series B, Callable 12/05/97, 12.25%
due 04/01/02.............................................. B3/B- 517,500
-----------
RAILROADS (3.6%)
1,500,000 Norfolk Southern Corp., 6.70% due 05/01/00.................. Baa1/BBB+ 1,518,405
-----------
TELEPHONE (0.4%)
174,000 Worldcom Inc., Callable, 9.375% due 01/15/04................ Ba1/BBB- 186,615
-----------
TOTAL CORPORATE OBLIGATIONS (COST $8,308,489)........... 8,347,572
-----------
FOREIGN CORPORATE OBLIGATIONS (7.1%)
BRAZIL (0.9%)
BANKING
200,000 Banco do Brasil S.A., (144A), 9.00% due 08/05/98............ NR/NR 201,926
FINANCIAL SERVICES
200,000 Safra Leasing S.A., (144A), 8.125% due 06/16/05............. B1/NR 182,000
-----------
383,926
-----------
CANADA (2.9%)
BANKING
1,000,000 Canadian Imperial Bank, 6.20% due 08/01/00.................. Aa3/AA- 1,003,110
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
FOREST PRODUCTS & PAPER
$ 200,000 Canadian Pacific Forest Products Ltd., 9.25% due 06/15/02... Ba1/NR $ 210,364
-----------
1,213,474
-----------
CAYMAN ISLANDS (0.7%)
FINANCIAL SERVICES
300,000 Cheung Kong Finance Cayman, 5.50% due 09/30/98.............. NR/NR 296,437
-----------
MEXICO (0.6%)
GAS EXPLORATION
250,000 Petroleos Mexicanos, Medium Term Note, 7.60% due 06/15/00... Ba2/NR 245,625
-----------
VENEZUELA (2.0%)
FINANCIAL SERVICES
800,000 Corporacion Andina de Fomento, 7.375% due 07/21/00.......... A3/BBB+ 818,184
-----------
TOTAL FOREIGN CORPORATE OBLIGATIONS (COST $2,955,630)... 2,957,646
-----------
GOVERNMENT OBLIGATIONS (2.5%)
CANADA (2.5%)
1,000,000 Province of Quebec, 9.125% due 03/01/00 (cost $1,058,116)... A2/A+ 1,067,320
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (24.6%)
FEDERAL HOME LOAN MORTGAGE CORP.
627,564 7.00% due 08/15/02.................................................... 638,195
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
52,544 8.00% due 12/01/07.................................................... 54,254
837,191 8.00% due 12/01/09.................................................... 865,195
481,944 8.00% due 05/01/10.................................................... 498,056
121,807 8.50% due 06/01/26.................................................... 127,242
467,683 8.50% due 01/01/27.................................................... 488,823
772,304 8.50% due 02/01/27.................................................... 806,949
204,404 8.50% due 08/01/27.................................................... 213,660
------------
3,054,179
------------
</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, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
- ----------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
$ 985,510 6.00% due 07/20/27.................................................... $ 995,365
450,775 7.00% due 03/15/09.................................................... 458,274
421,641 7.00% due 07/15/09.................................................... 428,695
305,622 8.00% due 02/15/22.................................................... 316,624
282,754 8.00% due 04/15/22.................................................... 292,896
406,575 8.00% due 06/15/22.................................................... 421,049
696,055 8.00% due 07/15/22.................................................... 721,223
280,804 8.00% due 11/15/22.................................................... 290,598
494,612 9.00% due 05/15/16.................................................... 525,065
421,915 9.00% due 10/15/16.................................................... 448,196
438,629 9.00% due 12/15/16.................................................... 472,443
46,052 9.00% due 03/15/17.................................................... 48,863
470,624 9.00% due 04/15/17.................................................... 499,963
649,534 9.00% due 12/15/26.................................................... 702,555
------------
6,621,809
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $10,292,700)....... 10,314,183
------------
U.S. TREASURY OBLIGATIONS (14.6%)
U.S. TREASURY NOTES
3,070,000 6.00% due 06/30/99.................................................... 3,087,468
3,000,000 6.00% due 08/15/00.................................................... 3,024,060
------------
6,111,528
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $6,103,406)................. 6,111,528
------------
SHORT-TERM INVESTMENTS (6.1%)
COMMERCIAL PAPER--DOMESTIC (4.7%)
1,000,000 Korea Development Bank, 6.05% due 12/15/97............................ 992,606
1,000,000 Raytheon Co., 5.82% due 12/8/97....................................... 994,018
------------
TOTAL COMMERCIAL PAPER (COST $1,986,624).......................... 1,986,624
------------
OTHER INVESTMENT COMPANIES (0.0%)*
256 Seven Seas Money Market Fund (cost $256).............................. 256
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
- ----------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
REPURCHASE AGREEMENT (1.4%)
$ 577,000 Goldman Sachs Repurchase Agreements, dated 10/31/97 due 11/03/97,
proceeds $577,274, (collateralized by $617,000 U.S. Treasury Bond,
8% due 9/17/98, valued at $589,189) (cost $577,000)................. $ 577,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,563,880).................... 2,563,880
------------
TOTAL INVESTMENTS (COST $41,456,163) (98.9%).......................... 41,502,373
OTHER ASSETS IN EXCESS OF LIABILITIES (1.1%).......................... 449,448
------------
NET ASSETS (100.0%)................................................... $ 41,951,821
------------
------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $41,456,163 for federal income tax
purposes at October 31, 1997, the aggregate gross unrealized appreciation and
depreciation was $169,301 and $123,091, respectively, resulting in net
unrealized appreciation of $46,210.
* Less than 0.1%
(r) -- Approximately 0.6% of the net assets of the Portfolio are represented by
securities which have been valued at fair value.
144A -- Securities restricted for resale to Qualified Institutional Buyers.
Remic -- Real estate mortgage investment conduit.
CSTR -- Collateral Strip Rate.
NR -- Not rated.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $41,456,163 ) $41,502,373
Receivable for Investments Sold 4,101,444
Interest Receivable 498,408
Receivable for Expense Reimbursement 15,897
Deferred Organization Expenses 933
Prepaid Expenses and Other Assets 225
-----------
Total Assets 46,119,280
-----------
LIABILITIES
Payable for Investments Purchased 4,122,871
Custody Fee Payable 10,138
Advisory Fee Payable 8,781
Administrative Services Fee Payable 1,057
Administration Fee Payable 83
Fund Services Fee Payable 57
Accrued Expenses 24,472
-----------
Total Liabilities 4,167,459
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $41,951,821
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $2,365,619
EXPENSES
Advisory Fee $ 92,126
Custodian Fees and Expenses 45,310
Professional Fees and Expenses 34,417
Printing Expenses 14,683
Administrative Services Fee 11,434
Amortization of Organization Expenses 1,367
Fund Services Fee 1,343
Administration Fee 886
Trustees' Fees and Expenses 415
Miscellaneous 1,474
--------
Total Expenses 203,455
Less: Reimbursement of Expenses (111,329)
--------
NET EXPENSES 92,126
----------
NET INVESTMENT INCOME 2,273,493
NET REALIZED GAIN (LOSS) ON INVESTMENTS
(including $18,094 net realized loss from
futures contracts) 79,239
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENTS (139,526)
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $2,213,206
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 2,273,493 $ 1,136,925
Net Realized Gain on Investments 79,239 146,407
Net Change in Unrealized Appreciation
(Depreciation) of Investments (139,526) 5,083
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 2,213,206 1,288,415
---------------- ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 30,736,099 54,341,812
Withdrawals (17,029,595) (58,904,692)
---------------- ----------------
Net Increase (Decrease) from Investors'
Transactions 13,706,504 (4,562,880)
---------------- ----------------
Total Increase (Decrease) in Net Assets 15,919,710 (3,274,465)
NET ASSETS
Beginning of Fiscal Year 26,032,111 29,306,576
---------------- ----------------
End of Fiscal Year $ 41,951,821 $ 26,032,111
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR ENDED JULY 8, 1993
OCTOBER 31, (COMMENCEMENT OF
------------------------- OPERATIONS) TO
1997 1996 1995 1994 OCTOBER 31, 1993
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.25% 0.38% 0.42% 0.36% 0.37%(a)
Net Investment Income 6.17% 5.65% 6.11% 5.01% 3.99%(a)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 0.30% 0.23% 0.04% 0.05% 1.00%(a)
Portfolio Turnover 219% 191% 177% 230% 116%
</TABLE>
- ------------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Short Term Bond Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940, as amended (the "Act"), 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 on January 29, 1993. The Portfolio
commenced operations on July 8, 1993. The Portfolio's investment objective is to
provide a high total return while attempting to limit the likelihood of negative
quarterly returns. The Declaration of Trust permits the Trustees to issue an
unlimited number of beneficial interests in the Portfolio.
Investments in emerging markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in emerging market countries could adversely affect the
liquidity or value, or both, of such securities in which the Portfolio is
invested. The ability of the issuers of debt, mortgage and asset-backed
securities held by the Portfolio to meet their obligations may be affected by
economic and political developments in a specific industry or region. The value
of mortgage and asset-backed securities can be significantly affected by changes
in interest rates or rapid principal repayments including pre-payments.
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, indications 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. Such procedures may include the use of
independent pricing services or affiliated pricing, which uses prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; operating data
and general market conditions. 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 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
25
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
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) Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discounts, 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.
c) Futures: A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place will be fixed when
the Portfolio enters into the contract. Upon entering into such a contract
the Portfolio is required to pledge to the broker an amount of cash and/or
liquid 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 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 or securities movements. The use of
futures transactions involves the risk of imperfect correlation of
movements in the price of futures contracts, interest rates and the
underlying hedged assets. Futures transactions during the fiscal year
ended October 31, 1997 are summarized as follows:
SUMMARY/OPEN FUTURES CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT
CONTRACTS OF CONTRACTS
---------------- ----------------
<S> <C> <C>
Contracts open at beginning of year..... 0 $ 0
Contracts opened - long positions....... 8 1,655,875
Contracts opened - short positions...... (16) (3,288,000)
Contracts closed - long positions....... (8) (1,655,875)
Contracts closed - short positions...... 16 3,288,000
---------------- ----------------
Contracts open at end of year........... 0 $ 0
---------------- ----------------
---------------- ----------------
</TABLE>
d) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed 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.
Morgan Guaranty Trust Company of New York ("Morgan") has agreed to pay the
organization expenses of the Portfolio. The
26
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
Portfolio has agreed to reimburse Morgan for these costs which are being
deferred and amortized on a straight-line basis over a period not to
exceed five years beginning with the commencement of operations of the
Portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan. Under the
terms of the 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, 1997, this fee amounted to $92,126.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the Portfolio,
FDI provides administrative services necessary for the operations of the
Portfolio, furnishes office space and facilities required for conducting
the business of the Portfolio and pays the compensation of the officers
affiliated with FDI. 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
Portfolio and certain other investment companies subject to similar
agreement with FDI. For the fiscal year ended October 31, 1997, the fee
for theses services amounted to $886.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio has agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge. This charge
is calculated based on the aggregate average daily net assets of the
Portfolio and certain other portfolios for which Morgan acts as investment
advisor (the "Master Portfolios") and JPM Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion less the complex-wide fees
payable to FDI. The portion of this charge payable by the Portfolio is
determined by the proportionate share that its net assets bear to the net
assets of the Master Portfolios, certain other investors in the Master
Portfolios for which Morgan provides similar services, and JPM Series
Trust. For the fiscal year ended October 31, 1997, the fee for these
services amounted to $11,434.
In addition, Morgan has agreed to reimburse the Portfolio to the extent
necessary to maintain the total operating expenses of the Portfolio at no
more than 0.25% of the average daily net assets of the Portfolio through
February 28, 1998. For the fiscal year ended October 31, 1997, Morgan has
agreed to reimburse the Portfolio $111,329 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 $1,343 for the fiscal year ended October 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds, the
Master Portfolios and JPM Series Trust. The Trustees' Fees
27
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
and Expenses shown in the financial statements represents the Portfolio's
allocated portion of the total fees and expenses. Prior to April 1, 1997,
the aggregate annual Trustee Fee was $65,000. The Portfolio's Chairman and
Chief Executive Officer also serves as Chairman of Group and receives
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 $300.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
----------- -----------
<S> <C> <C>
U.S. Government and Agency Obligations........... $73,931,821 $63,540,960
Corporate and Collateralized Mortgage
Obligations..................................... 18,711,782 14,102,700
----------- -----------
$92,643,603 $77,643,660
----------- -----------
----------- -----------
</TABLE>
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the Fund's Notes to the Financial
Statements which are included elsewhere in this report.
28
<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, 1997, 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 four 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, 1997 by correspondence with the
custodian and brokers, and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
December 18, 1997
29
<PAGE>
JPM PIERPONT FEDERAL MONEY MARKET FUND
JPM PIERPONT PRIME MONEY MARKET FUND
JPM PIERPONT TAX EXEMPT MONEY MARKET FUND
JPM PIERPONT BOND FUND
JPM PIERPONT EMERGING MARKETS DEBT FUND
JPM PIERPONT NEW YORK TOTAL RETURN BOND FUND
JPM PIERPONT SHORT TERM BOND FUND
JPM PIERPONT TAX EXEMPT BOND FUND
JPM PIERPONT SHARES: CALIFORNIA BOND FUND
JPM PIERPONT DIVERSIFIED FUND
JPM PIERPONT U.S. EQUITY FUND
JPM PIERPONT U.S. SMALL COMPANY FUND
JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
JPM PIERPONT SHARES: TAX AWARE U.S. EQUITY FUND
JPM PIERPONT SHARES: TAX AWARE DISCIPLINED EQUITY FUND
JPM PIERPONT EMERGING MARKETS EQUITY FUND
JPM PIERPONT EUROPEAN EQUITY FUND
JPM PIERPONT INTERNATIONAL EQUITY FUND
JPM PIERPONT INTERNATIONAL OPPORTUNITIES FUND
JPM PIERPONT JAPAN EQUITY FUND
The
JPM Pierpont
Short Term
Bond Fund
FOR MORE INFORMATION ON HOW THE JPM PIERPONT FUNDS CAN HELP YOU PLAN FOR YOUR
FUTURE, CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411.
ANNUAL REPORT
OCTOBER 31, 1997
