<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN TAX EXEMPT BOND FUND
September 1, 2000
Dear Shareholder:
The J.P. Morgan Tax Exempt Bond Fund returned 3.74% for the 12 months ended July
31, 2000. The fund outperformed its competition, as measured by the Lipper
Intermediate Municipal Debt Funds Average, which advanced 3.16% over the same
period. At the same time, the fund trailed its benchmark, the Lehman Brothers
1-16 year Municipal Bond Index, which gained 4.72%. The fund's 30-day SEC yield
has increased to 4.39% as of July 31, which is a tax equivalent yield of 7.28%
at a 39.6% federal income tax rate.
The fund's net asset value as of July 31 was $11.56, down from $11.77 on July
31, 1999. Dividends of approximately $0.63 per share were paid over the 12-month
period, of which $0.52 was tax-exempt income and $0.11 was long-term capital
gains. The net assets of the fund stood at approximately $336.6 million on July
31, 2000, while the net assets of the portfolio, in which the fund invests, were
approximately $783.9 million.
The report that follows includes an interview with Kingsley Wood, Jr., who with
Benjamin S. Thompson and Robert Meiselas, manages the portfolio. This interview
is designed to reflect what happened during the months past, as well as provide
an outlook for the future.
As chairman and president of Asset Management Services, we thank you for
investing with J.P. Morgan. Should you have any comments or questions, please
telephone 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 GLOSSARY OF TERMS ......................6
FUND PERFORMANCE...................2 FUND FACTS AND HIGHLIGHTS...............7
PORTFOLIO MANAGER Q&A..............3 FINANCIAL STATEMENTS...................10
--------------------------------------------------------------------------------
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance. One
way is to look at the growth of a hypothetical investment. The chart at right
shows that $10,000 invested on July 31, 1990 would have grown to $17,894 on July
31, 2000. Another way is to review a fund's average annual total return. This
calculation takes the fund's actual 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 one, five, or ten 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 10 years
July 31, 1990 -- July 31, 2000
<TABLE>
<CAPTION>
JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni
Tax Exempt Bond Muni Debt Muni Bond Bond Index
Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot
Index Returns Points Returns Points Index Returns Points Index Returns Points
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7/31/90 163,506 161,526.63 161,944 170,745.78 5,000,000 174.76 176,614.40 5,000,000 181,070 182,621.89 186,555
8/31/90 161,527 (0.01) 159,984 (0.01) 4,956,500 173.26 (0.01) 4,956,850
9/30/90 161,944 0.00 160,397 0.00 4,972,361 173.63 0.00 4,967,606
10/31/90 165,077 0.02 163,501 0.01 5,034,018 176.88 0.02 5,060,550
11/30/90 167,771 0.02 166,168 0.02 5,114,059 179.91 0.02 5,147,288
12/31/90 168,186 0.00 166,580 0.00 5,135,027 180.48 0.00 5,163,656
1/31/91 170,746 0.02 169,115 0.01 5,192,539 183.20 0.02 5,241,421
2/28/91 171,935 0.01 170,293 0.01 5,236,156 184.89 0.01 5,289,799
3/31/91 171,723 (0.00) 170,083 0.00 5,241,916 184.54 (0.00) 5,279,802
4/30/91 173,847 0.01 172,187 0.01 5,299,577 187.00 0.01 5,350,182
5/31/91 175,034 0.01 173,362 0.01 5,338,264 188.20 0.01 5,384,369
6/30/91 174,802 (0.00) 173,132 (0.00) 5,330,257 187.95 (0.00) 5,377,154
7/31/91 176,614 0.01 174,928 0.01 5,387,823 189.84 0.01 5,431,410
8/31/91 178,763 0.01 177,055 0.01 5,442,779 192.43 0.01 5,505,548
9/30/91 181,070 0.01 179,341 0.01 5,502,650 195.13 0.01 5,582,736
10/31/91 182,249 0.01 180,509 0.01 5,546,121 196.71 0.01 5,627,845
11/30/91 182,622 0.00 180,878 0.00 5,562,204 197.25 0.00 5,643,321
12/31/91 186,555 0.02 184,773 0.02 5,667,330 201.53 0.02 5,765,894
1/31/92 186,746 0.00 184,962 0.00 5,682,632 201.98 0.00 5,778,579
2/29/92 186,301 (0.00) 184,521 0.00 5,691,724 201.86 (0.00) 5,775,112
3/31/92 185,839 (0.00) 184,064 (0.00) 5,683,756 201.31 (0.00) 5,759,519
4/30/92 187,188 0.01 185,400 0.01 5,729,794 203.14 0.01 5,811,931
5/31/92 189,372 0.01 187,564 0.01 5,792,249 205.36 0.01 5,875,281
6/30/92 192,397 0.02 190,559 0.01 5,874,499 208.79 0.02 5,973,398
7/31/92 197,900 0.03 196,010 0.03 6,041,335 215.03 0.03 6,152,003
8/31/92 195,687 (0.01) 193,818 (0.01) 5,979,713 212.75 (0.01) 6,086,791
9/30/92 197,357 0.01 195,472 0.01 6,016,189 214.52 0.01 6,137,312
10/31/92 195,442 (0.01) 193,575 (0.01) 5,965,653 212.82 (0.01) 6,088,827
11/30/92 198,467 0.02 196,572 0.02 6,073,035 216.08 0.02 6,181,986
12/31/92 200,491 0.01 198,577 0.01 6,139,838 218.15 0.01 6,241,333
1/31/93 203,205 0.01 201,264 0.01 6,211,060 221.38 0.01 6,333,705
2/28/93 209,215 0.03 207,217 0.03 6,401,740 228.31 0.03 6,531,950
3/31/93 206,317 (0.01) 204,346 (0.01) 6,333,241 225.20 (0.01) 6,443,115
4/30/93 207,813 0.01 205,829 0.01 6,386,441 226.87 0.01 6,490,794
5/31/93 208,420 0.00 206,430 0.00 6,411,986 227.55 0.00 6,510,267
6/30/93 211,683 0.02 209,661 0.01 6,504,960 231.69 0.02 6,628,754
7/31/93 211,041 (0.00) 209,025 0.00 6,507,562 231.97 0.00 6,636,708 100.14 (1.00) 103
8/31/93 215,010 0.02 212,957 0.02 6,626,000 235.84 0.02 6,747,541 101.93 0.02 104
9/30/93 217,753 0.01 215,673 0.01 6,701,536 238.44 0.01 6,821,764 102.98 0.01 105
10/31/93 217,799 0.00 215,719 0.00 6,715,609 238.92 0.00 6,835,408 103.19 0.00 106
11/30/93 216,383 (0.01) 214,316 (0.01) 6,672,630 237.31 (0.01) 6,789,610 102.47 (0.01) 105
12/31/93 219,697 0.02 217,599 0.02 6,785,397 241.52 0.02 6,909,786 104.36 0.02 107
1/31/94 221,955 0.01 219,835 0.01 6,855,965 244.05 0.01 6,982,339 105.50 0.01 108
2/28/94 217,185 (0.02) 215,110 (0.02) 6,709,933 238.85 (0.02) 6,833,615 103.15 (0.02) 106
3/31/94 212,937 (0.02) 210,903 (0.03) 6,522,055 232.26 (0.03) 6,645,008 99.98 (0.03) 102
4/30/94 213,546 0.00 211,507 0.00 6,554,013 234.17 0.01 6,699,497 100.86 0.01 103
5/31/94 214,910 0.01 212,857 0.01 6,603,168 235.52 0.01 6,738,354 101.55 0.01 104
6/30/94 214,406 (0.00) 212,358 (0.00) 6,586,000 234.98 (0.00) 6,722,856 101.24 (0.00) 104
7/31/94 217,094 0.01 215,021 0.01 6,670,959 238.20 0.01 6,814,959 102.72 0.01 105
8/31/94 217,924 0.00 215,843 0.00 6,696,976 239.25 0.00 6,844,944 103.14 0.00 106
9/30/94 215,752 (0.01) 213,692 (0.01) 6,627,997 237.10 (0.01) 6,783,340 102.06 (0.01) 104
10/31/94 213,568 (0.01) 211,528 (0.01) 6,550,450 234.84 (0.01) 6,718,898 100.90 (0.01) 103
11/30/94 210,409 (0.01) 208,400 (0.02) 6,450,883 231.77 (0.01) 6,630,881 99.49 (0.01) 102
12/31/94 213,771 0.02 211,729 0.02 6,552,162 234.90 0.01 6,720,398 101.01 0.02 103
1/31/95 217,756 0.02 215,677 0.02 6,685,826 239.34 0.02 6,847,413 103.11 0.02 106
2/28/95 222,757 0.02 220,629 0.02 6,830,240 244.48 0.02 6,994,632 105.53 0.02 108
3/31/95 224,644 0.01 222,498 0.01 6,891,712 247.24 0.01 7,073,672 106.72 0.01 109
4/30/95 225,567 0.00 223,412 0.00 6,903,428 247.86 0.00 7,091,356 106.94 0.00 109
5/31/95 231,198 0.02 228,990 0.02 7,069,800 254.11 0.03 7,270,058 109.81 0.03 112
<PAGE>
<CAPTION>
JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni
Tax Exempt Bond Muni Debt Muni Bond Bond Index
Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot
Index Returns Points Returns Points Index Returns Points Index Returns Points
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/30/95 230,339 (0.00) 228,140 (0.00) 7,037,986 253.75 (0.00) 7,259,880 109.41 (0.00) 112
7/31/95 232,633 0.01 230,411 0.01 7,104,143 257.03 0.01 7,353,533 110.75 0.01 113
8/31/95 234,548 0.01 232,308 0.01 7,175,895 259.80 0.01 7,432,951 112.07 0.01 115
9/30/95 235,485 0.00 233,236 0.00 7,211,057 260.92 0.00 7,464,912 112.66 0.01 115
10/31/95 237,617 0.01 235,347 0.01 7,283,889 263.06 0.01 7,526,125 113.72 0.01 116
11/30/95 240,162 0.01 237,868 0.01 7,366,197 265.87 0.01 7,606,654 115.07 0.01 118
12/31/95 242,409 0.01 240,094 0.01 7,417,760 267.31 0.01 7,647,730 115.80 0.01 119
1/31/96 244,748 0.01 242,410 0.01 7,477,102 269.93 0.01 7,722,678 116.91 0.01 120
2/29/96 243,645 (0.00) 241,318 (0.00) 7,454,671 269.15 (0.00) 7,700,282 116.51 (0.00) 119
3/31/96 240,672 (0.01) 238,373 (0.01) 7,371,178 266.67 (0.01) 7,629,440 115.37 (0.01) 118
4/30/96 239,962 (0.00) 237,670 (0.00) 7,357,173 266.19 (0.00) 7,615,707 115.13 (0.00) 118
5/31/96 240,072 0.00 237,779 0.00 7,357,909 265.82 (0.00) 7,605,045 114.99 (0.00) 118
6/30/96 241,223 0.00 238,919 0.01 7,403,528 267.81 0.01 7,662,082 115.93 0.01 119
7/31/96 243,834 0.01 241,505 0.01 7,470,160 269.95 0.01 7,723,379 116.92 0.01 120
8/31/96 243,943 0.00 241,613 0.00 7,473,148 270.11 0.00 7,728,013 116.98 0.00 120
9/30/96 245,955 0.01 243,606 0.01 7,538,911 272.38 0.01 7,792,928 118.07 0.01 121
10/31/96 248,178 0.01 245,808 0.01 7,612,039 275.22 0.01 7,873,975 119.34 0.01 122
11/30/96 251,905 0.02 249,499 0.01 7,723,936 279.54 0.02 7,997,596 121.30 0.02 124
12/31/96 250,997 (0.00) 248,600 (0.00) 7,701,536 278.73 (0.00) 7,974,403 120.92 (0.00) 124
1/31/97 251,760 0.00 249,355 0.00 7,718,480 279.81 0.00 8,005,503 121.39 0.00 124
2/28/97 253,832 0.01 251,407 0.01 7,775,596 281.97 0.01 8,067,146 122.39 0.01 125
3/31/97 250,733 (0.01) 248,338 (0.01) 7,697,063 278.75 (0.01) 7,975,180 121.01 (0.01) 124
4/30/97 251,948 0.00 249,542 0.01 7,736,318 280.26 0.01 8,018,246 121.78 0.01 125
5/31/97 255,108 0.01 252,672 0.01 7,828,380 283.68 0.01 8,116,069 123.33 0.01 126
6/30/97 257,634 0.01 255,173 0.01 7,899,618 286.17 0.01 8,187,490 124.48 0.01 127
7/31/97 263,865 0.02 261,345 0.02 8,073,410 292.16 0.02 8,358,609 127.34 0.02 130
8/31/97 260,907 (0.01) 258,415 (0.01) 8,008,015 290.26 (0.01) 8,304,278 126.42 (0.01) 129
9/30/97 263,886 0.01 261,366 0.01 8,091,299 293.22 0.01 8,388,981 127.75 0.01 131
10/31/97 265,100 0.00 262,568 0.00 8,130,137 294.68 0.00 8,430,926 128.44 0.01 131
11/30/97 266,098 0.00 263,557 0.00 8,162,658 295.74 0.00 8,461,278 128.98 0.00 132
12/31/97 269,621 0.01 267,046 0.01 8,266,323 299.15 0.01 8,558,582 130.56 0.01 134
1/31/98 271,956 0.01 269,358 0.01 8,336,587 301.99 0.01 8,639,889 131.85 0.01 135
2/28/98 271,840 (0.00) 269,244 0.00 8,339,922 302.26 0.00 8,647,665 131.96 0.00 135
3/31/98 271,709 (0.00) 269,114 0.00 8,341,590 302.32 0.00 8,649,394 132.04 0.00 135
4/30/98 270,228 (0.01) 267,647 (0.01) 8,298,213 301.02 (0.00) 8,612,202 131.50 (0.00) 135
5/31/98 274,177 0.01 271,558 0.01 8,416,048 305.08 0.01 8,728,467 133.34 0.01 136
6/30/98 274,955 0.00 272,329 0.00 8,440,455 306.09 0.00 8,757,271 133.82 0.00 137
7/31/98 275,505 0.00 272,874 0.00 8,454,803 306.98 0.00 8,782,667 134.18 0.00 137
8/31/98 279,711 0.02 277,040 0.01 8,579,934 311.21 0.01 8,903,868 136.09 0.01 139
9/30/98 283,018 0.01 280,315 0.01 8,673,456 314.70 0.01 9,003,591 137.67 0.01 141
10/31/98 283,077 0.00 280,373 (0.00) 8,670,854 315.45 0.00 9,025,199 137.92 0.00 141
11/30/98 283,601 0.00 280,892 0.00 8,687,328 316.24 0.00 9,047,762 138.29 0.00 142
12/31/98 284,369 0.00 281,653 0.00 8,716,865 317.13 0.00 9,073,096 138.72 0.00 142
1/31/99 288,159 0.01 285,406 0.01 8,816,237 321.06 0.01 9,185,603 140.48 0.01 144
2/28/99 286,108 (0.01) 283,376 (0.01) 8,766,867 319.84 (0.00) 9,150,697 139.86 (0.00) 143
3/31/99 285,913 (0.00) 283,182 (0.00) 8,759,853 319.91 0.00 9,152,527 139.92 0.00 143
4/30/99 286,429 0.00 283,694 0.00 8,783,505 320.80 0.00 9,178,155 140.32 0.00 144
5/31/99 284,805 (0.01) 282,085 (0.01) 8,730,804 319.39 (0.00) 9,137,771 139.66 (0.00) 143
6/30/99 280,806 (0.01) 278,124 (0.01) 8,605,953 315.37 (0.01) 9,022,635 137.89 (0.01) 141
7/31/99 282,030 0.00 279,336 0.00 8,645,541 317.29 0.01 9,077,673 138.63 0.01 142
8/31/99 281,347 (0.00) 278,660 (0.01) 8,600,584 317 (0.00) 9,065,872 138.29 (0.00) 142
9/30/99 282,125 0.00 279,430 0.00 8,603,164 318 0.00 9,098,509 138.69 0.00 142
10/31/99 280,732 (0.00) 278,051 (0.01) 8,538,640 317 (0.00) 9,066,664 138.01 (0.00) 141
11/30/99 282,994 0.01 280,291 0.01 8,612,072 319 0.01 9,132,851 139.21 0.01 142
12/31/99 281,874 (0.00) 279,182 (0.00) 8,571,596 318 (0.00) 9,099,973 138.64 (0.00) 142
1/31/00 281,219 (0.00) 278,534 (0.01) 8,528,738 318 (0.00) 9,087,233 138.40 (0.00) 142
2/29/00 283,048 0.01 280,345 0.01 8,594,409 319 0.00 9,130,851 139.33 0.01 143
3/31/00 286,168 0.01 283,434 0.01 8,715,590 323 0.01 9,244,074 141.35 0.01 145
4/30/00 284,998 (0.00) 282,276 (0.00) 8,679,856 322 (0.00) 9,217,266 141.00 (0.00) 144
<PAGE>
<CAPTION>
JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni
Tax Exempt Bond Muni Debt Muni Bond Bond Index
Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot
Index Returns Points Returns Points Index Returns Points Index Returns Points
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5/31/00 283,842 (0.00) 281,131 (0.00) 8,639,929 321 (0.00) 9,196,988 140.56 (0.00) 144
6/30/00 289,441 0.02 286,676 0.02 8,819,639 328 0.02 9,386,446 143.57 0.02 147
7/31/00 292,580 0.01 289,785 0.01 8,918,419 331.82 0.01 9,493,452 145.18 0.01 149
------------------------------------------------------------------------------------------
5.99% 5.96% 6.62%
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
------------------ --------------------------------------
THREE SIX ONE THREE FIVE TEN
AS OF JULY 31, 2000 MONTHS MONTHS YEAR YEARS YEARS YEARS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan Tax Exempt Bond Fund 2.66% 4.04% 3.74% 3.50% 4.69% 5.99%
Lehman 1-16 year Municipal Bond Index* 2.96% 4.89% 4.72% 4.47% 5.56% 6.69%
Lehman Quality Intermediate Municipal
Bond Index 3.00% 4.47% 4.58% 4.34% 5.24% 6.62%
Lipper Intermediate Municipal
Debt Funds Average** 2.75% 4.59% 3.16% 3.40% 4.72% 6.00%
AS OF JUNE 30, 2000
-------------------------------------------------------------------------------------------------------------------
J.P. Morgan Tax Exempt Bond Fund 1.14% 2.68% 3.07% 3.96% 4.67% 6.01%
Lehman 1-16 year Municipal Bond Index* 1.57% 3.56% 4.12% 4.87% 5.58% 6.58%
Lehman Quality Intermediate Municipal
Bond Index 1.54% 3.15% 4.03% 4.66% 5.27% 6.64%
Lipper Intermediate Municipal
Debt Funds Average** 1.20% 2.91% 2.50% 3.77% 4.68% 6.01%
</TABLE>
*THE FUND'S CURRENT BENCHMARK IS THE LEHMAN BROTHERS 1-16 YEAR MUNICIPAL BOND
INDEX. SINCE THIS INDEX DID NOT EXIST PRIOR TO JULY 31, 1993, THE TABLE AND
GRAPH ALSO INCLUDE THE PERFORMANCE DATA FOR THE LEHMAN QUALITY INTERMEDIATE
MUNICIPAL BOND INDEX, THE FUND'S BENCHMARK UNTIL MAY 1, 1997. BOTH ARE
UNMANAGED INDICES THAT MEASURE MUNICIPAL BOND MARKET PERFORMANCE. THEY DO NOT
INCLUDE FEES OR EXPENSES AND ARE NOT AVAILABLE FOR ACTUAL INVESTMENT.
**DESCRIBES THE AVERAGE ANNUAL TOTAL RETURN FOR ALL FUNDS IN THE LIPPER
CATEGORY, AS DEFINED BY LIPPER INC., AND DOES NOT TAKE INTO ACCOUNT SALES
CHARGES. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR MUTUAL FUND
DATA.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF FEES
AND ASSUME THE REINVESTMENT OF FUND DISTRIBUTIONS.
2
<PAGE>
PORTFOLIO MANAGER Q&A
Following is an interview with Kingsley Wood, Jr., who with Benjamin S. Thompson
and Robert Meiselas, manages the master portfolio in which the fund invests.
[PHOTO]
BENJAMIN S. THOMPSON, vice president, is a senior fixed income portfolio manager
and head of J.P. Morgan's municipal bond strategies. His responsibilities
include coordination of strategy and research, portfolio structuring and trade
execution for the Tax Aware Fixed Income Group. Prior to joining Morgan in 1999,
Ben was a senior fixed income portfolio manager at Goldman Sachs Asset
Management. Earlier, he was in the Structured Finance Group of the Chase
Manhattan Bank. He holds a B.A. in Economics from Colorado College.
[PHOTO]
ROBERT MEISELAS, vice president, is a portfolio manager with the Tax Aware Fixed
Income Group responsible for managing municipal bonds, including tax exempt
private placements. Bob is a CPA and joined Morgan's financial group in 1982,
after having spent 10 years at Coopers & Lybrand. He also spent five years in
J.P. Morgan's Private Banking Investment Management Group, and moved to J.P.
Morgan Investment Management in 1997. Bob is a graduate of St. John's University
and has completed graduate work in taxation at Long Island University.
[PHOTO]
KINGSLEY (KIT) WOOD, JR., vice president, is a portfolio manager in the Tax
Aware Fixed Income Group. Prior to becoming a J.P. Morgan Investment Management
employee in 2000, he worked at Mercantile Bank & Trust (MSD&T Funds) in
Baltimore, MD as a portfolio manager where he managed all institutional
tax-exempt assets (mutual funds and separate accounts). Prior to that he was a
sell-side institutional trader at ABN-AMRO Bank and Kemper Securities in
Chicago. Kit holds a B.A. from the University of Colorado and has completed
graduate work towards an M.B.A. at the University of Maryland.
This interview was conducted on August 12, 2000, and represents the views of
Kit, Ben, and Bob on that date.
WHAT WERE THE PRIMARY FACTORS THAT DROVE THE TAX-EXEMPT MARKET OVER THE 12-MONTH
PERIOD ENDED JULY 31, 2000?
KW: The Federal Reserve Board's efforts to fight inflation and slow our
overheated economy by raising interest rates was perhaps the defining factor
that drove market performance during the period in question. From June 1999 to
May 2000, the Fed raised interest rates no less than six times, totaling 175
basis points (bps). This was a marked departure from its earlier efforts to
stimulate global growth by keeping rates relatively low in the wake of the 1997
Thai currency crisis and the 1998 Russian debt crisis.
3
<PAGE>
Municipal interest rates rose dramatically over the first six months of this
reporting period, as investors grew concerned about the prospect of future
rate hikes. These concerns eased during the latter six-month period, as
investors felt the Fed was succeeding in its quest and thus would be less
inclined to raise rates much further. In response, municipal interest rates
declined sharply.
DID Y2K HAVE AN EFFECT ON THE MARKETPLACE?
KW: Fortunately, this much dreaded event had little-to-no effect on the
financial markets, largely due to the substantial preparatory efforts that were
made by market participants to ensure this desired result.
THE TREASURY YIELD CURVE INVERTED DRAMATICALLY OVER THIS PERIOD. HOW DID THIS
AFFECT THE MUNICIPAL BOND MARKET?
KW: In sympathy with the Fed's tightening bias, short-term Treasury rates rose
during much of this period, while long-term rates declined, this in response to
the Treasury's buyback of higher coupon, longer-term debt. The result of both
movements was an inverted yield curve that persists to this day. As a
consequence, the municipal yield curve flattened dramatically, with longer-dated
issues outperforming shorter-dated issues and the yield spread between 2-year
and 30-year bonds narrowing by almost 50 bps.
WHAT OTHER FACTORS IMPACTED MARKET PERFORMANCE?
KW: One was the dominance of the muni market by retail investors. Their appetite
for tax-exempt issues was almost insatiable, as they sought to avoid stock
market turbulence and lock in some of the gains they had achieved over the long
running equity bull market. Their influence was perhaps more pronounced than
usual, owing to net redemptions suffered by mutual funds and the movement of
insurance companies away from this market and toward other attractive asset
classes.
At the same time that demand was increasing, supply was declining dramatically.
Flush with excess tax revenues and most refundings becoming "out-of-the-money"
(due to higher rates) municipalities shied away from the marketplace. The result
was a reduction in the supply of new issues, year-on-year through July 31, of
approximately 22%. This supply/demand imbalance caused credit-quality spreads to
tighten substantially, a situation that continues to weigh on today's
marketplace.
HOW WAS THE PORTFOLIO POSITIONED OVER THIS PERIOD?
KW: Portfolio holdings throughout the period were largely composed of premium
bonds. This positioning helped a great deal during the rising interest rate
environment that prevailed over the latter half of 1999. But, the upward price
movement of these securities was impeded during the first half of 2000, when
interest rates declined.
In terms of duration, we were shorter than the Lehman Brothers Municipal 1-16
year Index during the early part of this period, in anticipation of higher
interest rates. We were neutral to the index during the November 1999 through
January 2000 period, as we waited out the Y2K event and the release of key
economic data. For the remainder of the year, we were longer than the index in
response to our expectation, since realized, of lower interest rates.
4
<PAGE>
Overall, the portfolio remains focused on very high credit-quality issues, while
we continue to search opportunistically for higher yielding securities.
HOW DID THE FUND PERFORM OVER THIS PERIOD?
KW: By the close of this reporting period, the fund had returned 3.74%, as
compared to the 4.72% return posted by the Lehman Brothers Municipal 1-16 year
Index. However, we were well ahead of the Lipper Intermediate Muni Debt Funds
Average, which returned only 3.16%.
WHAT HELPED OR HURT PERFORMANCE?
KW: Through the end of 1999, the fund performed very well as compared to the
index and to the Lipper peer group of intermediate municipal funds. This was due
primarily to our shorter duration positioning and to our concentration in
premium issues, along with an underweight position in market discounts. This
strategy helped to temper downward price movements during the rising interest
rate scenario that marked this period.
This investment posture detracted from relative performance to some degree
during the first seven months of 2000. As noted, interest rates declined over
this period, along the way boosting the performance of lower dollar-priced
issues. With our focus on higher dollar-priced issues, we were unable to
participate in much of this price appreciation. Relative performance was also
impacted negatively by our major underweight in securities subject to market
discount tax treatment, which have also performed well thus far in 2000.
On the other hand, the portfolio benefited on a yield and total return
perspective from our credit research in high-yielding sectors, such as
healthcare.
WHAT IS YOUR MARKET OUTLOOK OVER THE NEAR TERM, AND HOW ARE YOU POSITIONING THE
PORTFOLIO TO TAKE ADVANTAGE OF IT?
KW: We expect that the U.S. economy will continue to slow over the course of
this year, and that the soft landing desired by the Fed will, in fact, take
hold. There may be an additional rate hike, on the order of 25 bps, but there
should be little pressure for the Fed to do much more, if anything.
The municipal marketplace will likely continue to be driven by the factors that
have defined it in 2000. Supply will remain quite low, off approximately 25%
nationally from 1999 levels. Demand will come principally from retail investors,
as they strive for diversification and high, after-tax yields.
In this environment, duration will remain longer than the benchmark to try to
capitalize on lower rates. Our position on the yield curve will remain neutral,
and our concentration will remain on high credit-quality issues, as we identify
and selectively purchase higher yielding opportunities. The one change we are
making is to increase our exposure to discounts, as we move towards a more
neutral coupon position relative to the market.
5
<PAGE>
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting bond yields. One basis point equals 0.01%
of yield. For example, if a bond's yield changed from 10.25% to 11.00%, it would
have moved 75 basis points.
CREDIT RATING: The rating assigned to a bond by independent rating agencies such
as Standard & Poor's and Moody's. In evaluating creditworthiness, these agencies
assess the issuer's present financial condition and future ability and
willingness to make principal and interest payments when due.
DURATION: Duration is used as a measure of the relative sensitivity of the price
of the security to a change in interest rates. The longer the duration, the more
sensitive the bond is to interest rate moves. For example, a bond with a 5-year
duration will experience an approximate 5% increase in price if interest rates
drop 100 basis points (1%), while a bond with a 10-year duration would see its
price rise by approximately 10%.
MATURITY: The date on which the life of a financial instrument ends through cash
or physical settlement or expiration with no value, or the date a security comes
due and fully payable. Average maturity refers to the average time to maturity
of the entire portfolio.
YIELD CURVE: A line graph showing interest rates at a point in time, from the
shortest maturity to the longest available. The resulting curve shows if
short-term interest rates are higher or lower than long-term rates.
Typically interest rates rise with increasing time to maturity.
YIELD SPREAD: The difference in yield between different types of securities. For
example, if a Treasury bond is yielding 6.5% and a municipal is yielding 5.5%,
the spread is 1.0% or 100 basis points.
ZERO COUPON BOND: A debt instrument sold at a discount to its face value. The
bond makes no payments until maturity, at which time it is redeemed at face
value. Effectively, the interest received is the difference between face value
and the price paid for the security.
6
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Tax Exempt Bond Fund seeks to provide a high level of current income
that is exempt from federal income tax consistent with moderate risk of capital
and maintenance of liquidity. It is designed for investors who seek tax exempt
yields greater than those generally available from a portfolio of short-term
tax-exempt obligations and who are willing to incur the greater price
fluctuation of longer-term instruments.
-------------------------------------------------------------------------------
INCEPTION DATE
10/3/84
-------------------------------------------------------------------------------
FUND NET ASSETS AS OF 7/31/00
$336,599,481
-------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 7/31/00
$783,923,182
-------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
MONTHLY
-------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATES (IF APPLICABLE)
12/13/00
EXPENSE RATIO
The fund's current annual expense ratio of 0.67% covers shareholders' expenses
for custody, tax reporting, investment advisory and shareholder services. 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 dividend or redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF JULY 31, 2000
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
REVENUE BONDS 56.2%
GOVERNMENT OBLIGATIONS 36.8%
PRIVATE PLACEMENTS 3.8%
SHORT-TERM 3.2%
30-DAY SEC YIELD
4.39%
DURATION
5.31 YEARS
7
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC., A
WHOLLY OWNED SUBSIDIARY OF J.P. MORGAN & CO. INC., IS THE PORTFOLIO'S INVESTMENT
ADVISOR. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE NOT GUARANTEED BY ANY
BANK, GOVERNMENT ENTITY, OR THE FDIC. RETURN AND SHARE PRICE WILL FLUCTUATE AND
REDEMPTION VALUE MAY BE MORE OR LESS THAN ORIGINAL COST.
The fund invests through a master portfolio (another fund with the same
objective). Opinions expressed herein are based on current market conditions and
are subject to change without notice. Income may be subject to state and local
taxes. Some income may be subject to the federal alternative minimum tax for
certain investors. Capital gains are not exempt from taxes. Investors should be
prepared for higher share price volatility than from a tax-exempt fund of
shorter duration.
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 THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
8
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Tax Exempt Bond Portfolio
("Portfolio"), at value $335,491,758
Receivable for Shares of Beneficial Interest Sold 1,690,607
Prepaid Trustees' Fees 1,285
Prepaid Expenses and Other Assets 1,358
------------
Total Assets 337,185,008
------------
LIABILITIES
Dividends Payable to Shareholders 347,038
Payable for Shares of Beneficial Interest
Redeemed 110,358
Shareholder Servicing Fee Payable 69,929
Administrative Services Fee Payable 6,773
Fund Services Fee Payable 288
Administration Fee Payable 218
Accrued Expenses 50,923
------------
Total Liabilities 585,527
------------
NET ASSETS
Applicable to 29,120,296 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $336,599,481
============
Net Asset Value, Offering and Redemption Price
Per Share $11.56
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $329,677,682
Distributions in Excess of Net Investment Income (41,717)
Accumulated Net Realized Loss on Investment (1,137,035)
Net Unrealized Appreciation of Investment 8,100,551
------------
Net Assets $336,599,481
============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $19,404,776
Allocated Portfolio Expenses (1,357,867)
-----------
Net Investment Income Allocated from
Portfolio 18,046,909
FUND EXPENSES
Shareholder Servicing Fee $945,553
Administrative Services Fee 93,624
Transfer Agent Fees 43,537
Professional Fees 17,462
Registration Fees 16,030
Fund Services Fee 6,210
Trustees' Fees and Expenses 5,161
Administration Fee 4,660
Miscellaneous 38,823
--------
Total Fund Expenses 1,171,060
-----------
NET INVESTMENT INCOME 16,875,849
NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM
PORTFOLIO (1,487,869)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (3,155,746)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $12,232,234
===========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE ELEVEN FOR THE FISCAL
YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
DECREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 16,875,849 $ 17,347,608 $ 18,511,696
Net Realized (Loss) Gain on Investment Allocated
from Portfolio (1,487,869) 4,012,628 531,522
Net Change in Unrealized (Depreciation)
Appreciation of Investment Allocated from
Portfolio (3,155,746) (17,484,081) 9,584,077
------------- ------------ --------------
Net Increase in Net Assets Resulting from
Operations 12,232,234 3,876,155 28,627,295
------------- ------------ --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (16,875,849) (17,346,461) (18,515,231)
Net Realized Gain (4,016,116) (780,645) (119,011)
Distributions in Excess of Net Investment Income (156,332) -- --
------------- ------------ --------------
Total Distributions to Shareholders (21,048,297) (18,127,106) (18,634,242)
------------- ------------ --------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 100,708,538 152,936,932 156,589,082
Reinvestment of Dividends and Distributions 15,187,379 13,753,851 14,890,233
Cost of Shares of Beneficial Interest Redeemed (202,164,974) (159,980,035) (143,254,080)
------------- ------------ --------------
Net (Decrease) Increase from Transactions in
Shares of Beneficial Interest (86,269,057) 6,710,748 28,225,235
------------- ------------ --------------
Total (Decrease) Increase in Net Assets (95,085,120) (7,540,203) 38,218,288
NET ASSETS
Beginning of Period 431,684,601 439,224,804 401,006,516
------------- ------------ --------------
End of Period (including undistributed net
investment income of $0, $117,661 and $116,514,
respectively) $ 336,599,481 $431,684,601 $ 439,224,804
============= ============ ==============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR ELEVEN MONTHS FOR THE FISCAL YEAR ENDED AUGUST 31,
ENDED ENDED -------------------------------------------------
JULY 31, 2000 JULY 31, 1999 1998 1997 1996 1995
--------------- --------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.77 $ 12.15 $ 11.85 $ 11.63 $ 11.73 $ 11.45
------------ ------------ -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.52 0.46 0.54 0.55 0.55 0.55
Net Realized and Unrealized (Loss)
Gain on Investment (0.10) (0.36) 0.30 0.24 (0.08) 0.29
------------ ------------ -------- -------- -------- --------
Total from Investment Operations 0.42 0.10 0.84 0.79 0.47 0.84
------------ ------------ -------- -------- -------- --------
LESS DISTRIBUTIONS TO SHAREHOLDERS
FROM
Net Investment Income (0.52) (0.46) (0.54) (0.55) (0.55) (0.55)
Net Realized Gain (0.11) (0.02) (0.00)(a) (0.02) (0.02) (0.01)
Distributions in Excess of Net
Investment Income (0.00)(a) -- -- -- -- --
------------ ------------ -------- -------- -------- --------
Total Distributions to Shareholders (0.63) (0.48) (0.54) (0.57) (0.57) (0.56)
------------ ------------ -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.56 $ 11.77 $ 12.15 $ 11.85 $ 11.63 $ 11.73
============ ============ ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Total Return 3.74% 0.83%(b) 7.21% 6.95% 4.01% 7.63%
Net Assets, End of Period
(in thousands) $ 336,599 $ 431,685 $439,225 $401,007 $369,987 $352,005
Ratios to Average Net Assets
Net Expenses 0.67% 0.68%(c) 0.64% 0.64% 0.64% 0.71%
Net Investment Income 4.46% 4.21%(c) 4.44% 4.67% 4.67% 4.87%
</TABLE>
------------------------
(a) Less than $0.001 per share.
(b) Not Annualized.
(c) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Tax Exempt Bond Fund (the "fund") is a separate series of the J.P.
Morgan Funds, a Massachusetts business trust (the "trust") which was organized
on November 4, 1992. The trust is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The fund, prior
to its tax-free reorganization on July 11, 1993 to a series of the trust,
operated as a stand-alone mutual fund. At a meeting on November 12, 1998, the
trustees elected to change the fund's fiscal year end from August 31 to
July 31.
The fund invests all of its investable assets in The Tax Exempt Bond Portfolio
(the "portfolio"), a no-load 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 (43% at July 31,
2000). 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 accounting principles
generally accepted in the United States 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 1a 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 gains, if any, are declared and paid annually.
d) 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.
e) The fund is treated as a separate entity for federal income tax purposes
and 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) 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 Gain, and Return
of Capital Distributions by Investment Companies." The effect of applying
this statement as of July 31, 2000 was to increase distributions in excess
of net investment income by $3,046,
14
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
decrease accumulated net realized loss on investment by $403,344 and
decrease paid in-capital by $400,298. Net investment income, net realized
gains and net assets were not affected by this change. This adjustment is
primarily attributable to the application of tax allocation rules.
g) For federal income tax purposes, the fund incurred approximately
$1,137,035 of capital losses in the period from November 1, 1999 to July
31, 2000. These losses were deferred for tax purposes until August 1,
2000.
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 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 July 31, 2000, the fee for these services amounted to
$4,660.
b) The trust, on behalf of the fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan Guaranty Trust Company of New York
("Morgan"), a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. 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 other
portfolios in which the trust and the J.P. Morgan Institutional Funds
invest (the "master portfolios") and J.P. Morgan 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, other investors in
the master portfolios for which Morgan provides similar services, and J.P.
Morgan Series Trust. For the fiscal year ended July 31, 2000, the fee for
these services amounted to $93,624.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service 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 0.25% of the average daily net assets of
the fund. For the fiscal year ended July 31, 2000, the fee for these
services amounted to $945,553.
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
15
<PAGE>
J.P. MORGAN TAX EXEMPT BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
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
$6,210 for the fiscal year ended July 31, 2000.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P. Morgan Institutional Funds, the master
portfolios and J.P. Morgan Series Trust. 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 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 $1,200 for the fiscal
year ended July 31, 2000.
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 ELEVEN FOR THE FISCAL
YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Shares of Beneficial Interest Sold... 8,752,028 12,616,673 12,999,121
Reinvestment of Dividends and
Distributions....................... 1,319,619 1,136,791 1,238,798
Shares of Beneficial Interest
Redeemed............................ (17,621,635) (13,228,589) (11,920,060)
----------- ----------- -----------
Net Increase (Decrease).............. (7,549,988) 524,875 2,317,859
=========== =========== ===========
</TABLE>
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 26, 1999, with unaffiliated lenders. The maximum borrowing
under the Agreement was $150,000,000. The Agreement expired on May 23, 2000,
however, the fund as party to the Agreement has extended the Agreement and
continues its participation therein for an additional 364 days until May 21,
2001. The maximum borrowing under the new agreement is $150,000,000. 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. Under the Agreement, the commitment fee is at an
annual rate of 0.085% on the unused portion of the committed amount. The
commitment fee is allocated to the funds in accordance with the procedures
established by their respective trustees or directors. There were no outstanding
borrowings pursuant to the Agreement at July 31, 2000.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Tax Exempt 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
J.P. Morgan Tax Exempt Bond Fund (one of the series constituting part of the
J.P. Morgan Funds, hereafter referred to as the "fund") at July 31, 2000, the
results of its operations for the year then ended, the changes in its net assets
for the year then ended, for the eleven months ended July 31, 1999 and for the
year ended August 31, 1998 and the financial highlights for the year then ended,
for the eleven months ended July 31, 1999 and for the four years ended
August 31, 1998, in conformity with accounting principles generally accepted in
the United States. 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 auditing standards generally accepted in
the United States, 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.
PricewaterhouseCoopers LLP
New York, New York
September 15, 2000
17
<PAGE>
The Tax Exempt Bond Portfolio
Annual Report July 31, 2000
(The following pages should be read in conjunction
with J.P. Morgan Tax Exempt Bond Fund
Annual Financial Statements)
18
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS (98.1%)
ALABAMA (0.1%)
$ 1,000 Daphne Special Care Facilities Financing
Authority, (Presbyterian Retirement,
Prerefunded, Series A)................ RB NR/NR 08/15/18 7.300% $ 1,029,680
------------
ALASKA (0.3%)
2,000 Anchorage, (Prerefunded), MBIA
Insured............................... GO Aaa/AAA 07/01/02 6.600 2,040,040
------------
ARIZONA (0.4%)
3,430 Arizona Healthcare Facilities Authority
(Catholic Healthcare Revenue,
Series A)............................. RB Baa1/BBB+ 07/01/09 6.125 3,412,850
------------
CALIFORNIA (2.6%)
2,520 California Department of Water
Resources, (Central Valley Project,
Water Systems Service, Refunding,
Series J-1)........................... RB Aa2/AA 12/01/12 7.000 3,014,953
13,070 California Statewide Community
Development Authority, (Catholic
Healthcare West)...................... RB Baa1/BBB+ 07/01/09 6.000 13,117,052
1,049 Kaweah Delta Hospital District, Tulare
County, (Series E).................... PP NR/A+ 06/01/14 5.250 1,048,567
353 Kaweah Delta Hospital District, Tulare
County, (Series G).................... PP NR/A+ 06/01/14 6.400 369,840
2,500 Los Angeles County Public Works
Financing Authority, (Lease Revenue,
Refunding, Series A), MBIA Insured.... RB Aaa/AAA 09/01/06 6.000 2,719,175
------------
TOTAL CALIFORNIA.................... 20,269,587
------------
COLORADO (1.1%)
5,000 Colorado Department of Transportation,
(Revenue Anticipation Notes, due
06/15/14), AMBAC Insured.............. RB Aaa/AAA 06/15/10(a) 6.000 5,290,350
2,850 Weld County School District #6.......... GO Aa3/AA- 12/01/04 5.750 2,971,267
------------
TOTAL COLORADO...................... 8,261,617
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
CONNECTICUT (1.6%)
$ 2,000 Connecticut Heatlh & Educational
Facilities Authority, (St Mary's
Hospital, Series D)................... RB Baa1/NR 07/01/01 5.750% $ 2,012,220
7,240 Connecticut, (Series B, due 06/15/17)... GO Aa3/AA 06/15/10(a) 5.875 7,518,885
2,815 Connecticut, (Special Tax Obligation,
Transportation Infrastructure,
Prerefunded, Series A, due
06/01/04),............................ RB NR/AA- 06/01/03(a) 6.600 2,962,450
------------
TOTAL CONNECTICUT................... 12,493,555
------------
DISTRICT OF COLUMBIA (3.0%)
220 District of Columbia, (Escrowed to
Maturity, Prerefunded, Series A),
MBIA-IBC Insured...................... GO Aaa/AAA 06/01/07 6.000 235,330
2,600 District of Columbia, (Escrowed to
Maturity, Prerefunded, Series B),
MBIA Insured.......................... GO Aaa/AAA 06/01/02 6.000 2,667,496
6,795 District of Columbia, (Escrowed to
Maturity, Prerefunded, Series C),
FGIC Insured.......................... GO Aaa/AAA 12/01/03 5.250 6,929,405
10,645 District of Columbia, (Escrowed to
Maturity, Series A)................... GO Aaa/BBB 06/01/04 5.800 11,072,716
2,780 District of Columbia, (Unrefunded
Balance, Series A), MBIA-IBC
Insured............................... GO Aaa/AAA 06/01/07 6.000 2,955,251
------------
TOTAL DISTRICT OF COLUMBIA.......... 23,860,198
------------
FLORIDA (0.3%)
465 Florida Board of Education, (Capital
Outlay, Unrefunded Balance, Series C,
due 06/01/01),........................ GO Aa2/AA+ 08/24/00(a) 7.000 467,055
2,000 Volusia County School District,
(Refunding, due 08/01/02), FGIC
Insured............................... GO Aaa/AAA 08/01/01(a) 6.100 2,063,080
------------
TOTAL FLORIDA....................... 2,530,135
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
GEORGIA (5.5%)
$ 3,200 De Kalb County, (Water & Sewer Revenue,
Refunding)............................ RB Aa/AA 10/01/02 6.000% $ 3,300,896
2,630 Fulton County School District,
(Refunding)........................... GO Aa2/AA 05/01/14 6.375 2,927,243
1,250 Georgia Municipal Electric Authority,
(Power Revenue, Refunding,
Series A)............................. RB A3/A 01/01/12 6.500 1,389,187
4,000 Georgia Municipal Electric Authority,
(Power Revenue, Refunding, Series A),
MBIA-IBC Insured...................... RB Aaa/AAA 01/01/12 6.500 4,467,360
4,895 Georgia, (Refunding, Series E).......... GO Aaa/AAA 07/01/03 5.500 5,024,277
6,000 Georgia, (Series B)..................... GO Aaa/AAA 03/01/07 7.200 6,825,240
3,000 Georgia, (Series B)..................... GO Aaa/AAA 03/01/10 6.300 3,326,220
4,470 Georgia, (Series C)..................... GO Aaa/AAA 07/01/11 5.700 4,744,234
2,500 Gwinnett County School District,
(Refunding, Series B)................. GO Aa1/AA+ 02/01/08 6.400 2,749,475
5,000 Metropolitan Atlanta Rapid Transit
Authority, (Sales Tax Revenue,
Refunding, Series P, due 07/01/11),
AMBAC Insured......................... RB Aaa/AAA 07/01/09(a) 6.250 5,558,750
3,000 Roswell, (due 02/01/13)................. GO Aaa/AAA 02/01/09(a) 5.500 3,085,440
------------
TOTAL GEORGIA....................... 43,398,322
------------
ILLINOIS (4.1%)
8,110 Chicago, (Prerefunded, due 01/01/13),
AMBAC Insured......................... GO Aaa/AAA 07/01/05(a) 6.250 8,806,649
5,000 Chicago, (Skyway Toll Bridge Revenue,
Prerefunded) due 01/01/17............. RB NR/AAA 01/01/04(a) 6.750 5,422,800
3,000 Illinois Development Bank............... PP NR/NR 08/01/28 4.900 2,927,940
1,665 Illinois Health Facilities Authority,
(due 02/15/12)........................ RB A1/NR 02/15/10(a) 6.625 1,742,506
4,175 Illinois, (Sales Tax Revenue, Refunding,
Series Q)............................. RB Aa2/AAA 06/15/12 6.000 4,481,654
3,770 Illinois Health Facilities Authority,
(Riverside Health System)............. RB A3/A 11/15/10 6.750 3,933,543
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,380 Metropolitan Pier & Exposition
Authority, (Dedicated State Tax
Revenue, Unrefunded Balance,
Series A)............................. RB Aa3/AA- 06/15/06 8.500% $ 1,636,542
2,810 Regional Transportation Authority,
(Series D), FGIC Insured.............. RB Aaa/AAA 06/01/07 7.750 3,264,433
------------
TOTAL ILLINIOS...................... 32,216,067
------------
INDIANA (1.0%)
5,400 Indiana Bond Bank, (State Revolving Fund
Program, Series A, due 08/01/13)...... RB NR/AAA 08/01/10(a) 5.875 5,672,430
2,000 Indiana Municipal Power Agency, (Power
Supply System Revenue, Refunding,
Series B), MBIA Insured............... RB Aaa/AAA 01/01/13 6.000 2,157,600
------------
TOTAL INDIANA....................... 7,830,030
------------
IOWA (0.9%)
2,095 Iowa Finance Authority, (Hospital
Facilities Revenue, due 02/15/15)..... RB A1/NR 02/15/10(a) 6.750 2,192,732
2,385 Iowa Finance Authority, (Hospital
Facilities Revenue, due 02/15/16)..... RB A1/NR 02/15/10(a) 6.750 2,483,071
2,440 Iowa Finance Authority, (Hospital
Facilities Revenue, due 02/15/17)..... RB A1/NR 02/15/10(a) 6.750 2,530,768
------------
TOTAL IOWA.......................... 7,206,571
------------
KENTUCKY (0.7%)
3,905 Kentucky Property & Buildings Commission
(Refunding, Project #64, due
05/01/10), MBIA Insured............... RB Aaa/AAA 11/01/09(a) 5.750 4,123,368
1,470 Kentucky Turnpike Authority, (Road
Recovery Revenue, Escrowed to
Maturity, due 07/01/02)............... RB Aaa/AAA 08/24/00(a) 7.100 1,496,475
------------
TOTAL KENTUCKY...................... 5,619,843
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
MAINE (0.6%)
$ 4,050 Maine Municipal Bond Bank, (Prerefunded,
Series E due 11/01/12)................ RB Aa2/NR 11/01/02(a) 6.250% $ 4,277,124
------------
MARYLAND (2.4%)
1,000 Maryland Community Development
Administration, (Department of Housing
& Community Development, First Series,
due 04/01/12)......................... RB Aa2/NR 10/01/09(a) 5.500 1,003,850
1,250 Maryland Community Development
Administration, (Department of Housing
& Community Development, Refunding,
Series A, due 09/01/10)............... RB Aa2/NR 09/01/09(a) 5.300 1,253,075
1,425 Maryland Community Development
Administration, (Department of Housing
& Community Development, Refunding,
Series A, due 09/01/11)............... RB Aa2/NR 09/01/09(a) 5.400 1,431,541
1,105 Maryland Community Development
Administration, (Department of Housing
& Communty Development, First Series,
due 04/01/10)......................... RB Aa2/NR 10/01/09(a) 5.300 1,107,729
5,435 Maryland Health & Higher Educational
Facilities Authority, (John Hopkins
University, Refunding)................ RB Aa2/AA 07/01/03 5.750 5,610,714
5,000 Maryland State, (State & Local
Facilities Loan, First Series)........ GO Aaa/AAA 08/01/05 5.125 5,116,400
3,000 Maryland, (Third Series, due
07/15/03)............................. GO Aaa/AAA 07/15/01(a) 6.400 3,066,720
------------
TOTAL MARYLAND...................... 18,590,029
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
MASSACHUSETTS (5.9%)
$ 5,650 Massachusetts Bay Transportation
Authority, (General Transportation
System, Refunding, Series A).......... RB Aa2/AA- 03/01/08 7.000% $ 6,409,134
1,495 Massachusetts State College Building
Authority, (Refunding, Series A)...... RB Aa2/AA- 05/01/11 7.500 1,799,367
9,500 Massachusetts State Water Pollution
Abatement Trust, (Abatement MWRA
Program, Sub-Series A, due
08/01/15)............................. RB Aa1/AA 08/01/09(a) 6.000 9,961,320
5,000 Massachusetts State, (Consolidation
Loan, Series A, due 02/01/14)......... GO Aa2/AA- 02/01/10(a) 6.000 5,301,650
14,035 Massachusetts State, (Consolidation
Loan, Series B, due 06/01/12)......... GO Aa2/AA- 06/01/10(a) 5.750 14,692,540
8,000 Massachusetts State, (Prerefunded,
Series B) AMBAC Insured............... GO Aaa/AAA 07/01/11 5.500 8,373,360
------------
TOTAL MASSACHUSETTS................. 46,537,371
------------
MICHIGAN (6.3%)
10,000 Detroit Water Supply System,
(Prerefunded due 07/01/22), FGIC
Insured............................... RB Aaa/AAA 07/01/02(a) 6.375 10,538,000
10,000 Michigan Hospital Finance Authority,
(Ascension Health Credit Corp.,
Refunding, Series B).................. RB Aa2/AA 11/15/33 5.300 10,032,500
13,050 Michigan Hospital Finance Authority,
(Ascension Health Credit Corp.,
Series A, due 11/15/15), MBIA
Insured............................... RB Aaa/AAA 11/15/09(a) 6.250 13,636,728
10,500 Michigan Hospital Finance Authority,
(Genesys Health System, Prerefunded,
Series A due 10/01/21)................ RB Baa2/AAA 10/01/05(a) 8.125 12,263,685
2,905 Michigan Hospital Finance Authority,
(Mercy Health Services, Refunding,
Series T)............................. RB Aa3/AA- 08/15/04 5.750 2,961,473
------------
TOTAL MICHIGAN...................... 49,432,386
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
MINNESOTA (2.6%)
$ 9,330 Minnesota............................... GO Aaa/AAA 06/01/10 5.500% $ 9,794,727
5,000 University of Minnesota, (Refunding,
Series A)............................. RB Aa2/AA 07/01/10 5.750 5,332,150
5,000 University of Minnesota, (Refunding,
Series A)............................. RB Aa2/AA 07/01/15 5.750 5,260,400
------------
TOTAL MINNESOTA..................... 20,387,277
------------
MISSISSIPPI (2.4%)
4,080 Jackson Redevelopment Authority, (Urban
Renewal Revenue, Jackson Medical Mall
Foundation Project, Series A), LOC
Bank One Louisiana.................... RB NR/A+ 11/01/12 4.600 4,057,438
2,505 Mississippi Higher Education,
(Refunding, Series B, due 09/01/04)... RB Aaa/NR 09/01/02(a) 5.600 2,537,765
10,875 Mississippi, (Escrowed to Maturity,
Refunding)............................ GO Aaa/AAA 02/01/08 6.200 11,788,935
------------
TOTAL MISSISSIPPI................... 18,384,138
------------
MISSOURI (1.2%)
5,000 Missouri Regional Convention & Sports
Complex Authority, (Prerefunded,
Series A, due 08/15/21)............... RB Aaa/AAA 08/15/03(a) 6.900 5,329,300
4,000 St. Louis County Regional Convention &
Sports Complex Authority,
(Prerefunded, Series B, due
08/15/21)............................. RB Aaa/AAA 08/15/03(a) 7.000 4,274,680
------------
TOTAL MISSOURI...................... 9,603,980
------------
NEBRASKA (0.7%)
5,245 Nebhelp Inc. (Sub-Series A-5B), MBIA
Insured............................... RB Aaa/NR 06/01/13 6.200 5,497,022
------------
NEVADA (3.7%)
8,200 Clark County School District,
(Series A), MBIA Insured.............. GO Aaa/AAA 06/01/11 7.000 9,487,810
1,200 Las Vegas, (Clark County Library
District, Prerefunded, Series A
due 06/01/04), FGIC Insured........... GO Aaa/AAA 06/01/01(a) 6.700 1,234,368
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
NEVADA (CONTINUED)
$ 280 Las Vegas, (Clark County Library
District, Refunding, Series B, due
08/01/04), FGIC Insured............... GO Aaa/AAA 08/01/01(a) 6.700% $ 288,053
15,500 Nevada, (Colorado River Commission,
Prerefunded due 07/01/24)............. GO Aaa/AA 07/01/04(a) 6.500 16,677,845
1,330 Nevada, (Prison Facilities, Prerefunded,
due 08/01/04)......................... GO Aa2/AAA 08/01/00(a) 7.000 1,356,600
------------
TOTAL NEVADA........................ 29,044,676
------------
NEW HAMPSHIRE (0.9%)
4,900 New Hampshire Higher Educational &
Health Facilities Authority,
(Dartmouth College, Refunding)........ RB Aaa/NR 06/01/07 6.750 5,450,172
1,720 New Hampshire, (Prerefunded,
Series A)............................. GO Aa2/AA+ 06/15/03 6.600 1,785,136
------------
TOTAL NEW HAMPSHIRE................. 7,235,308
------------
NEW JERSEY (5.3%)
4,180 Jersey City, (School Board Reserve Fund,
Refunding, Series A).................. GO Aa2/AA 10/01/11 6.250 4,590,894
10,000 New Jersey.............................. GO Aa1/AA+ 05/01/07 5.500 10,450,400
7,000 New Jersey Economic Development
Authority, (Market Transition
Facilities Revenue, Sr. Lien,
Series A), MBIA Insured............... RB Aaa/AAA 07/01/02 5.400 7,120,260
4,100 New Jersey Economic Development
Authority, (Transition Project
Sublease, Series A), FSA Insured...... RB Aaa/AAA 05/01/11 5.750 4,351,248
6,000 New Jersey Transportation Trust Fund
Authority, (Transportation System,
Series B), MBIA Insured............... RB Aaa/AAA 06/15/05 6.000 6,349,320
8,000 New Jersey Turnpike Authority,
(Series A), MBIA Insured.............. RB Aaa/AAA 01/01/11 6.000 8,666,560
------------
TOTAL NEW JERSEY.................... 41,528,682
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
26
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
NEW YORK (5.2%)
$ 75 Monroe County, (Public Improvement,
Unrefunded Balance, Series 1995, due
06/01/10), AMBAC Insured.............. GO Aaa/AAA 06/01/08(a) 6.000% $ 81,788
50 New York City, (Escrowed to Maturity,
Prerefunded, Series A)................ GO A3/A- 08/01/02 5.750 51,256
1,465 New York City, (Escrowed to Maturity,
Series B)............................. GO Aaa/AAA 06/01/01 8.000 1,508,481
2,595 New York City, (Unrefunded Balance,
Series A)............................. GO A3/A- 08/01/02 5.750 2,653,725
10,000 New York Convention Center Operating
Corp., (Yale Building Acquisition
Project).............................. PP NR/NR 12/01/04 6.500 10,147,700
2,850 New York State Dormitory Authority,
(Secured Hospital, Interfaith Medical
Center, Series D)..................... RB Baa1/A 02/15/04 5.500 2,901,100
13,010 New York State Thruway Authority,
(Highway & Bridge Trust Fund,
Series B-1), FGIC Insured............. RB NR/AAA 04/01/09 5.500 13,575,675
8,700 Triborough Bridge & Tunnel Authority,
(General Purpose, Refunding,
Series X)............................. RB Aa3/A+ 01/01/12 6.625 9,874,239
------------
TOTAL NEW YORK...................... 40,793,964
------------
NORTH CAROLINA (2.0%)
8,900 North Carolina Municipal Power Agency,
(No. 1 Catawba Electric Revenue,
Refunding, Series B).................. RB Baa1/BBB+ 01/01/06 6.125 9,179,193
6,275 North Carolina Municipal Power Agency,
(No. 1 Catawba Electric Revenue,
Refunding, Series B).................. RB Baa1/BBB+ 01/01/07 6.250 6,531,898
------------
TOTAL NORTH CAROLINA................ 15,711,091
------------
NORTH DAKOTA (1.4%)
11,280 North Dakota Housing Finance Agency,
(Mortgage Revenue, Refunding,
Series C, due 01/01/31)............... RB Aa3/NR 07/01/10(a) 5.550 11,280,113
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
27
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
OHIO (2.8%)
$ 10,000 Ohio State, (Highway Capital
Improvements, Series E)............... GO Aa1/AAA 05/01/04 5.250% $ 10,234,300
8,000 Ohio Turnpike Commission, (Prerefunded,
Series A), MBIA Insured............... RB Aaa/AAA 02/15/26 5.500 8,436,240
2,795 Ohio Water Development Authority,
(Escrowed to Maturity, Refunding, due
12/01/10)............................. RB Aaa/AAA 12/01/00(a) 9.375 3,347,012
------------
TOTAL OHIO.......................... 22,017,552
------------
PENNSYLVANIA (1.4%)
970 Pennsylvania Higher Education Assistance
Agency, (Student Loan Revenue,
Refunding, Series A), FGIC Insured.... RB Aaa/AAA 12/01/00 6.800 977,517
1,310 Pennsylvania Higher Education Facilities
Authority, (College & University
Revenue, University of Pennsylvania,
Refunding, Series A).................. RB A1/AA 09/01/02 6.500 1,362,151
2,800 Pennsylvania Higher Education Facilities
Authority, (Health Services Revenue,
University of Pennsylvania Health
Services, Refunding, Series A)........ RB A3/A 01/01/06 6.000 2,763,600
1,500 Pennsylvania, (2nd Series A,
Prerefunded), MBIA Insured............ GO Aaa/AAA 11/01/04 6.500 1,558,365
4,250 Philadelphia Authority for Industrial
Development, (Academy of Natural
Sciences)............................. PP NR/NR 01/01/18 4.750 4,246,047
------------
TOTAL PENNSYLVANIA.................. 10,907,680
------------
PUERTO RICO (0.7%)
5,000 Puerto Rico Municipal Finance Agency,
(Refunding, Series B)................. GO Baa1/A- 08/01/02 5.500 5,097,200
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
28
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
SOUTH CAROLINA (5.9%)
$ 1,000 Piedmont Municipal Power Agency,
(Electric Revenue, Escrowed to
Maturity, Refunding), MBIA Insured.... RB Aaa/AAA 01/01/08 6.200% $ 1,088,990
15,000 Piedmont Municipal Power Agency,
(Electric Revenue, Refunding), FGIC
Insured............................... RB Aaa/AAA 01/01/20 6.750 17,141,700
5,500 South Carolina Economic Development
Authority, (Hospital Facilities
Revenue, Palmetto Health Alliance,
Series A)............................. RB Baa1/BBB 12/15/10 7.000 5,628,205
3,000 South Carolina Economic Development
Authority, (Hospital Facilities
Revenue, Palmetto Health Alliance,
Series A, due 12/15/15)............... RB Baa1/BBB 12/15/10(a) 7.125 3,057,720
7,000 South Carolina Public Service Authority,
(Santee Cooper, Prerefunded Series D
due 07/01/31)......................... RB Aaa/AAA 07/01/02(a) 6.625 7,408,310
5,385 South Carolina, (Capital Improvement,
Series A)............................. GO Aaa/AAA 10/01/09 5.500 5,654,681
5,655 South Carolina, (Capital Improvement,
Series A, due 10/01/10)............... GO Aaa/AAA 10/01/09(a) 5.500 5,944,310
------------
TOTAL SOUTH CAROLINA................ 45,923,916
------------
TENNESSEE (1.2%)
3,320 Knox County, (Public Improvement, due
05/01/12)............................. GO Aa2/AA 05/01/08(a) 6.000 3,520,661
3,500 Knox County, (Public Improvement, due
05/01/13)............................. GO Aa2/AA 05/01/08(a) 6.000 3,695,440
2,310 Shelby County, (School Board,
Prerefunded).......................... GO Aa3/AA+ 03/01/14 5.900 2,381,956
------------
TOTAL TENNESSEE..................... 9,598,057
------------
TEXAS (9.8%)
1,500 Austin Utilities System, (Escrowed to
Maturity, due 10/01/01)............... RB Aaa/AAA 10/01/00(a) 6.500 1,534,650
6,920 Austin Utilities System, (Refunding,
Series A), FSA Insured................ RB Aaa/AAA 11/15/03 5.750 7,152,996
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
29
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
TEXAS (CONTINUED)
$ 4,040 Austin, (Public Improvement, due
09/01/12)............................. GO Aa2/AA 09/01/09(a) 5.750% $ 4,205,802
4,500 Austin, (Public Improvement, due
09/01/14)............................. GO Aa2/AA 09/01/09(a) 5.750 4,625,505
10,000 Brazos River Authority, (Pollution
Control Revenue, Refunding, Texas
Utilities Electric Co., Series A, due
04/01/33)............................. RB A3/BBB+ 04/01/01(a) 5.000 10,028,700
2,260 Corpus Christi Independent School
District, (Refunding), PSFG Insured... GO Aaa/AAA 08/15/05 6.000 2,388,504
1,305 Dallas County Flood Control District #1,
(Prerefunded)......................... GO Aaa/NR 04/01/10 9.250 1,562,085
1,650 El Paso Independent School District,
(Prerefunded), PSFG Insured........... GO Aaa/AAA 07/01/03 6.550 1,682,290
5,000 Humble Independent School District, Zero
Coupon, (Compensation Interest,
Refunding), PSFG Insured.............. GO Aaa/AAA 02/15/16 0.000 2,082,200
5,880 Humble Independent School District, Zero
Coupon, (Compensation Interest,
Refunding), PSFG Insured.............. GO Aaa/AAA 02/15/17 0.000 2,292,142
3,805 Lewisville Independent School District,
(Refunding), PSFG Insured............. GO Aaa/NR 08/15/03 6.000 3,949,780
10,000 Lower Colorado River Authority,
(Refunding, Series B, due 05/15/10),
FSA Insured........................... RB Aaa/AAA 05/15/09(a) 6.000 10,784,900
7,000 Texas Water Development Board,
(Revolving Fund, Sr. Lien, Series B,
due 07/15/12)......................... RB Aa1/AAA 01/15/10(a) 5.750 7,312,830
10,000 Texas, (Prerefunded, Series C).......... GO NR/AA 04/01/20 5.500 10,351,600
4,000 Texas, (Public Finance Authority,
Refunding, Series B).................. GO Aa1/AA 10/01/03 6.000 4,168,680
2,500 University of Texas, (Permanent
University Fund, Refunding)........... RB Aaa/AAA 07/01/01 6.300 2,544,100
------------
TOTAL TEXAS......................... 76,666,764
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
30
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
UTAH (2.0%)
$ 4,155 Intermountain Power Agency, (Power
Supply Revenue, Refunding, Series C),
MBIA Insured.......................... RB Aaa/AAA 07/01/01 6.000% $ 4,213,544
6,645 Intermountain Power Agency, (Power
Supply Revenue, Refunding, Series C),
MBIA Insured.......................... RB Aaa/AAA 07/01/02 6.000 6,816,707
4,180 Jordan School District, (Refunding, due
06/15/06)............................. GO Aa3/NR 06/15/03(a) 6.050 4,336,207
------------
TOTAL UTAH.......................... 15,366,458
------------
VIRGINIA (5.6%)
13,390 Fairfax County, (Economic Development
Authority Resource Recovery Revenue,
Refunding, Series A), AMBAC Insured... RB NR/AAA 02/01/04 5.700 13,816,873
2,730 Fairfax County, (Water Authority
Revenue, Prerefunded due 04/01/22).... RB Aaa/AAA 04/01/07(a) 6.000 2,972,479
3,650 Loudoun County, (Public Improvement,
Series B)............................. GO Aa1/AA 01/01/04 5.125 3,712,013
3,650 Loudoun County, (Public Improvement,
Series B)............................. GO Aa1/AA 01/01/05 5.125 3,719,533
3,650 Loudoun County, (Public Improvement,
Series B)............................. GO Aa1/AA 01/01/06 5.250 3,747,236
3,665 Metropolitan Airport Washington D.C.
Authority, (General Airport Revenue,
Series A, due 10/01/10), FGIC
Insured............................... RB Aaa/AAA 10/01/00(a) 7.250 3,751,347
5,000 Virginia College Building Authority,
(Educational Facilities Revenue, 21st
Century College Program).............. RB Aa1/AA+ 02/01/03 5.750 5,138,800
2,000 Virginia Public School Authority,
(Prerefunded, Series A)............... RB Aa1/AA 08/01/04 6.500 2,081,120
5,000 Virginia Public School Authority,
(Refunding)........................... RB Aa1/AA 01/01/02 6.000 5,106,000
------------
TOTAL VIRGINIA...................... 44,045,401
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
31
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
WASHINGTON (5.0%)
$ 7,215 Clark County, (Industrial Revenue Bond,
Camas Power Boiler Ltd. Solid Waste
Disposal Project, Series A, due
08/01/07), LOC Landesbank Hessen...... RB Aaa/NR 08/01/02(a) 4.650% $ 7,159,661
2,995 Grant County Public Utility
District #2, (Priest Rapids
Hydroelectric Revenue, Refunding, 2nd
Series C, due 01/01/13), AMBAC
Insured............................... RB Aaa/AAA 01/01/07(a) 6.000 3,136,843
1,315 Grant County Public Utility
District #2, (Wanapum Hydroelectric
Revenue, Refunding, 2nd Series C, due
01/01/13), AMBAC Insured.............. RB Aaa/AAA 01/01/07(a) 6.000 1,373,623
1,555 King & Snohomish Counties School
District # 417, (due 12/01/02), FGIC
Insured............................... GO Aaa/AAA 12/01/00 6.600 1,564,890
605 King County, (Escrowed to Maturity,
Prerefunded, Series B)................ GO Aa1/AA+ 01/01/01 6.700 610,602
5,750 King County, (Unrefunded Balance,
Series B)............................. GO Aa1/AA+ 01/01/01 6.700 5,805,143
1,000 Pierce County School District #320,
(Prerefunded due 12/01/02), MBIA-IBC
Insured............................... GO Aaa/AAA 12/01/01(a) 6.600 1,027,600
1,250 Snohomish County School District #2,
(Refunding, Series A, due 12/01/02),
MBIA-IBC Insured...................... GO Aaa/AAA 06/01/01(a) 6.700 1,271,175
2,000 Washington Public Power Supply System,
(Nuclear Project #2, Refunding,
Series A)............................. RB Aa1/AA- 07/01/06 7.250 2,227,380
5,265 Washington Public Power Supply System,
(Nuclear Project #2, Refunding,
Series A)............................. RB Aa1/AA- 07/01/01 6.300 5,348,398
2,000 Washington Public Power Supply System,
(Nuclear Project #2, Refunding,
Series C, due 07/01/01), FGIC
Insured............................... RB Aaa/AAA 01/01/01(a) 7.000 2,043,140
1,500 Washington Public Power Supply System,
(Nuclear Project #2, Refunding,
Series C, due 07/01/02)............... RB Aa1/AA- 01/01/01(a) 7.500 1,546,500
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
32
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MOODY'S/
AMOUNT TYPE S&P RATING MATURITY
(IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------
<C> <S> <C> <C> <C> <C> <C>
WASHINGTON (CONTINUED)
$ 1,750 Washington, (Refunding, Series R-92-A,
due 09/01/02)......................... GO Aa1/AA+ 09/01/01(a) 6.300% $ 1,799,193
4,000 Washington, (Series B & AT-7)........... GO Aa1/AA+ 06/01/17 6.400 4,413,960
------------
TOTAL WASHINGTON.................... 39,328,108
------------
WISCONSIN (1.5%)
6,250 Wisconsin Health & Educational
Facilities............................ PP NR/NR 05/01/19 5.950 5,889,063
6,250 Wisconsin Health & Educational
Facilities............................ PP NR/NR 05/01/14 5.700 6,006,125
------------
TOTAL WISCONSIN..................... 11,895,188
------------
TOTAL LONG TERM INVESTMENTS (COST $754,481,750).................................... 769,317,980
------------
SHORT-TERM INVESTMENTS (3.2%)
OTHER INVESTMENT COMPANIES (3.2%)
<CAPTION>
SHARES
--------------
<C> <S> <C> <C> <C> <C> <C>
25,177,479 J.P. Morgan Institutional Tax Exempt Money Market Fund* (cost $25,177,479)............. 25,177,479
------------
TOTAL INVESTMENTS (COST $779,659,229) (101.3%)......................................... 794,495,459
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.3%).......................................... (10,572,277)
------------
NET ASSETS (100.0%).................................................................... $783,923,182
============
</TABLE>
------------------------------
Note: Based on the cost of investments of $779,659,229 for federal income tax
purposes at July 31, 2000 the aggregate gross unrealized appreciation and
depreciation was $15,705,322 and $869,092 respectively, resulting in net
unrealized appreciation of investments of $14,836,230.
(a) The date under the heading maturity date represents an optional tender date.
The actual maturity date is indicated in the security description.
AMBAC - Ambac Indemnity Corp., FGIC - Financial Guaranty Insurance Co., FSA -
Financial Securities Assurance, GO - General Obligation, IBC - IBC Financial
Data, Inc., LOC - Letter of Credit, MBIA - Municipal Bond Assurance Corp., NR -
Not Rated, PP - Private Placement, PSFG - Permanent School Fund Guarantee, RB -
Revenue Bond
Escrowed to Maturity: Bonds for which cash and/or securities have been deposited
with a third party to cover the payments of principal and interest at the
maturity which coincides with the first call date of the first bond.
* Money market mutual fund registered under the Investment Company Act of 1940,
as amended, and advised by J.P. Morgan Investment Management, Inc.
The Accompanying Notes are an Integral Part of the Financial Statements.
33
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $779,659,229 ) $794,495,459
Interest Receivable 9,548,091
Prepaid Trustees' Fees 3,273
Prepaid Expenses and Other Assets 93,876
------------
Total Assets 804,140,699
------------
LIABILITIES
Payable to Custodian 10,726
Payable for Investments Purchased 19,883,269
Advisory Fee Payable 196,848
Administrative Services Fee Payable 15,888
Administration Fee Payable 343
Fund Services Fee Payable 676
Accrued Expenses 109,767
------------
Total Liabilities 20,217,517
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $783,923,182
============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
34
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $ 40,506,238
EXPENSES
Advisory Fee $2,344,217
Custodian Fees and Expenses 195,879
Administrative Services Fee 194,913
Professional Fees and Expenses 47,183
Fund Services Fee 12,760
Trustees' Fees and Expenses 9,104
Administration Fee 5,677
Miscellaneous 11,522
----------
Total Expenses 2,821,255
------------
NET INVESTMENT INCOME 37,684,983
NET REALIZED LOSS ON INVESTMENTS (13,494,852)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENTS 6,100,102
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 30,290,233
============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
35
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE ELEVEN FOR THE FISCAL
YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 37,684,983 $ 34,387,277 $ 31,583,373
Net Realized (Loss) Gain on Investments (13,494,852) 4,500,130 680,094
Net Change in Unrealized Appreciation
(Depreciation) of Investments 6,100,102 (30,158,895) 15,917,500
------------- ------------- --------------
Net Increase in Net Assets Resulting from
Operations 30,290,233 8,728,512 48,180,967
------------- ------------- --------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 318,241,114 417,545,311 337,310,680
Withdrawals (386,477,921) (361,383,038) (232,110,590)
------------- ------------- --------------
Net (Decrease) Increase from Investors'
Transactions (68,236,807) 56,162,273 105,200,090
------------- ------------- --------------
Total (Decrease) Increase in Net Assets (37,946,574) 64,890,785 153,381,057
NET ASSETS
Beginning of Period 821,869,756 756,978,971 603,597,914
------------- ------------- --------------
End of Period $ 783,923,182 $ 821,869,756 $ 756,978,971
============= ============= ==============
</TABLE>
--------------------------------------------------------------------------------
SUPPLEMENTARY DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
FOR THE FISCAL FOR THE ELEVEN AUGUST 31,
YEAR ENDED MONTHS ENDED ----------------------------
JULY 31, 2000 JULY 31, 1999 1998 1997 1996 1995
-------------- -------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Net Expenses 0.36% 0.37%(a) 0.37% 0.38% 0.38% 0.42%
Net Investment Income 4.78% 4.49%(a) 4.70% 4.93% 4.92% 5.15%
Portfolio Turnover 84% 29%(b) 16% 25% 25% 47%
</TABLE>
------------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
36
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Tax Exempt Bond Portfolio (the "portfolio") is registered under the
Investment Company Act of 1940, as amended, as a 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 12, 1993. The portfolio's investment objective is to provide a high level
of current income that is exempt from federal income tax consistent with
moderate risk of capital. The Declaration of Trust permits the trustees to issue
an unlimited number of beneficial interests in the portfolio. At a meeting on
November 12, 1998, the trustees elected to change the portfolio's fiscal year
from August 31 to July 31.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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 securities that are listed on an exchange using
prices supplied daily by an independent pricing service that are based on
the last traded price on a national securities exchange or in the absence
of recorded trades, at the readily available bid price on such exchange,
if such exchange or market constitutes the broadest and most
representative market for the security. Independent pricing service
procedures may also include the use of prices based on yields or prices of
securities of comparable quality, coupon, maturity and type, indications
as to values from dealers, operating data, and general market conditions.
Unlisted securities are valued at the quoted bid price in the over-the-
counter market provided by a principal market maker or dealer. If prices
are not supplied by the portfolio's independent pricing service or
principal market maker or dealer, such securities are priced using fair
values in accordance with procedures adopted by the portfolio's trustees.
All short-term securities with a remaining maturity of sixty days or less
are valued using the amortized cost method.
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) 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. The cost of securities is substantially the
same for book and tax purposes.
2. TRANSACTIONS WITH AFFILIATES
a) The portfolio has an Investment Advisory Agreement with J.P. Morgan
Investment Management Inc. ("JPMIM"), an affiliate of Morgan Guaranty
Trust Company of New York ("Morgan"), a wholly owned subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan"). Under the terms of the
agreement, the portfolio paid JPMIM at an annual rate of 0.30% of the
portfolio's average daily net assets. For the fiscal year ended July 31,
2000, such fees amounted to $2,365,565.
37
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
The portfolio may invest in one or more affiliated money market funds:
J.P. Morgan Institutional Prime Money Market Fund, J.P. Morgan
Institutional Tax Exempt Money Market Fund, J.P. Morgan Institutional
Federal Money Market Fund and J.P. Morgan Institutional Treasury Money
Market Fund. The Advisor has agreed to reimburse its advisory fee from the
portfolio in an amount to offset any doubling of investment advisory,
shareholder servicing, and administrative services fees. For the fiscal
year ended July 31 ,2000, J.P. Morgan has agreed to reimburse the
portfolio $21,348 under this agreement. Interest income included in the
Statement of Operations for the year ended July 31, 2000 includes $269,024
of interest income from investment in affiliated Money Market Funds.
b) The trust on behalf of 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 portfolio's 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 agreements with FDI.
For the fiscal year ended July 31, 2000, the fee for these services
amounted to $5,677.
c) The trust on behalf of the portfolio 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
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 JPMIM acts
as investment advisor (the "master portfolios") and J.P. Morgan 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, other investors in the
master portfolios for which Morgan provides similar services, and
J.P. Morgan Series Trust. For the fiscal year ended July 31, 2000, the fee
for these services amounted to $194,913.
d) The trust on behalf of 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. For the fiscal year ended July 31, 2000, the portfolio's allocated
portion of Group's costs in performing its services amounted to $12,760.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P. Morgan Funds, the J.P. Morgan
Institutional Funds, the master portfolios and J.P. Morgan Series Trust.
The Trustees' Fees and Expenses shown in the financial statements
represents the portfolio's allocated portion of the total fees and
expenses. The portfolio's Chairman and Chief Executive Officer
38
<PAGE>
THE TAX EXEMPT BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2000
--------------------------------------------------------------------------------
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 $2,400 for the fiscal year ended July 31,
2000.
3. INVESTMENT TRANSACTIONS
Investments transactions (excluding short-term investments) for the fiscal year
ended July 31, 2000 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ------------
<S> <C>
$644,817,931 $656,683,081
</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.
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Tax Exempt 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 Tax Exempt Bond Portfolio (the
"portfolio") at July 31, 2000, the results of its operations for the year then
ended, and the changes in its net assets for the year then ended, for the eleven
months ended July 31, 1999 and for the year ended August 31, 1998 and the
supplementary data for the year then ended, for the eleven months ended July 31,
1999 and for the four years ended August 31, 1998, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 July 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
September 15, 2000
40
<PAGE>
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
TAX AWARE ENHANCED INCOME FUND: SELECT SHARES
SHORT TERM BOND FUND
BOND FUND
GLOBAL STRATEGIC INCOME FUND
EMERGING MARKETS DEBT FUND
TAX EXEMPT BOND FUND
NEW YORK TAX EXEMPT BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
INTERNATIONAL EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
GLOBAL 50 FUND: SELECT SHARES
FOR MORE INFORMATION ON THE J.P. MORGAN FUNDS, CALL J.P. MORGAN FUNDS
SERVICES AT (800) 521-5411.
IMAR 206
J.P. MORGAN TAX EXEMPT BOND FUND
ANNUAL REPORT
JULY 31, 2000
