<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET BACKED SECURITIES (24.2%)
FINANCIAL SERVICES (24.2%)
$ 344,815 Aegis Auto Receivables Trust, Sequential Payer, Series
1996-3, Class A, Callable, (144A), 8.80% due
03/20/02(r)............................................... NR/NR $ 269,495
1,500,000 Chase Credit Card Master Trust, Series 1997-2, Class A,
Callable, 6.30% due 04/15/03.............................. Aaa/AAA 1,513,140
425,237 CIT River Owners Trust, Series 1995-A, Class A, Sequential
Payer, Callable, 6.25% due 01/15/11....................... Aaa/AAA 427,457
968,476 CS First Boston Mortgage Securities Corp., Series 1997-C1,
Class A1A, Sequential Payer, Callable, 6.96% due
01/20/04.................................................. Aaa/AAA 988,603
1,000,000 EQCC Home Equity Loan Trust, Series 1997-3, Class A3,
Callable, 6.18% due 11/15/08.............................. Aaa/AAA 1,000,160
406,489 Fleetwood Credit Corp. Grantor Trust, Series 1994-A, Class
A, Sequential Payer, Callable, 4.70% due 07/15/09......... Aaa/AAA 398,591
251,021 Merrill Lynch Mortgage Investors, Inc., Series 1994-C1,
Class A, Callable, 8.70% due 11/25/20..................... NR/AAA 252,982
252,292 Merrill Lynch Mortgage Investors, Inc., Subordinated Bond,
CSTR, Series 1995-C2, Class E, Callable, 8.19% due
06/15/21.................................................. Ba3/NR 253,395
1,500,000 Metropolitan Asset Funding Inc., Series 1996-A, Class A2,
Callable, 6.85% due 08/20/05.............................. Aaa/NR 1,518,984
286,755 Newcourt Receivables Asset Trust, Series 1996-1, Class A,
Sequential Payer, Callable, 6.79% due 08/20/03............ NR/AAA 288,687
453,353 Newcourt Receivables Asset Trust, Series 1996-3, Class A,
Sequential Payer, Callable, 6.24% due 12/20/04............ NR/AAA 453,282
400,000 Niantic Bay Fuel Trust, 9.02% due 06/05/98.................. NR/NR 393,000
154,866 Prudential Home Mortgage Securities, Remic, Series 1992-44,
Class A1, Callable, 6.00% due 01/25/98.................... Aaa/NR 154,866
871,147 Salomon Brothers Mortgage Securities VII Inc., Series
1997-HUD1, Class A1, Sequential Payer, Callable, 6.97% due
12/25/30.................................................. Aaa/NR 877,777
342,870 Summit Acceptance Auto Receivables, Series 1996-A, Class A1,
(144A), 7.01% due 07/15/02................................ Aaa/AAA 346,621
500,000 Toyota Auto Lease Trust, Series 1997-A, Class A2, Callable,
6.35% due 04/26/04........................................ Aaa/AAA 503,359
500,000 World Omni Automobile Lease Securitization Trust, Series
1996-B, Class A1, 5.95% due 11/15/02...................... Aaa/AAA 499,845
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET
BACKED SECURITIES (COST $10,173,942).................. 10,140,244
-----------
CORPORATE OBLIGATIONS (19.8%)
APPARELS & TEXTILES (1.0%)
400,000 Westpoint Stevens Inc., Callable, 9.375% due 12/15/05....... B2/B+ 420,000
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
17
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
FINANCIAL SERVICES (6.3%)
$ 610,000 Associates Corp. North America, 5.96% due 05/15/37.......... Aa3/AA- $ 616,442
1,000,000 Beneficial Corp. Medium Term Note, 7.37% due 11/24/99....... A2/A 1,023,910
1,000,000 National City Capital Trust I, (144A), 6.75% due 06/01/99... a1/A- 1,008,200
-----------
2,648,552
-----------
HEALTH SERVICES (1.3%)
500,000 Tenet Healthcare Corp., Callable 03/01/00, 10.125% due
03/01/05.................................................. Ba3/B+ 548,750
-----------
OIL-SERVICES (6.0%)
1,500,000 Columbia Gas System Inc., Series A, 6.39% due 11/28/00...... Baa1/BBB+ 1,509,000
1,000,000 Oil Purchase Co., Sinking Fund, (144A), 7.10% due
04/30/02.................................................. Baa3/BBB 998,750
-----------
2,507,750
-----------
PACKAGING & CONTAINERS (1.2%)
500,000 Stone Container Corp., Series B, Callable 12/05/97, 12.25%
due 04/01/02.............................................. B3/B- 517,500
-----------
RAILROADS (3.6%)
1,500,000 Norfolk Southern Corp., 6.70% due 05/01/00.................. Baa1/BBB+ 1,518,405
-----------
TELEPHONE (0.4%)
174,000 Worldcom Inc., Callable, 9.375% due 01/15/04................ Ba1/BBB- 186,615
-----------
TOTAL CORPORATE OBLIGATIONS (COST $8,308,489)........... 8,347,572
-----------
FOREIGN CORPORATE OBLIGATIONS (7.1%)
BRAZIL (0.9%)
BANKING
200,000 Banco do Brasil S.A., (144A), 9.00% due 08/05/98............ NR/NR 201,926
FINANCIAL SERVICES
200,000 Safra Leasing S.A., (144A), 8.125% due 06/16/05............. B1/NR 182,000
-----------
383,926
-----------
CANADA (2.9%)
BANKING
1,000,000 Canadian Imperial Bank, 6.20% due 08/01/00.................. Aa3/AA- 1,003,110
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL RATING
AMOUNT SECURITY DESCRIPTION (UNAUDITED) VALUE
- ----------- ------------------------------------------------------------ -------- -----------
<C> <S> <C> <C>
FOREST PRODUCTS & PAPER
$ 200,000 Canadian Pacific Forest Products Ltd., 9.25% due 06/15/02... Ba1/NR $ 210,364
-----------
1,213,474
-----------
CAYMAN ISLANDS (0.7%)
FINANCIAL SERVICES
300,000 Cheung Kong Finance Cayman, 5.50% due 09/30/98.............. NR/NR 296,437
-----------
MEXICO (0.6%)
GAS EXPLORATION
250,000 Petroleos Mexicanos, Medium Term Note, 7.60% due 06/15/00... Ba2/NR 245,625
-----------
VENEZUELA (2.0%)
FINANCIAL SERVICES
800,000 Corporacion Andina de Fomento, 7.375% due 07/21/00.......... A3/BBB+ 818,184
-----------
TOTAL FOREIGN CORPORATE OBLIGATIONS (COST $2,955,630)... 2,957,646
-----------
GOVERNMENT OBLIGATIONS (2.5%)
CANADA (2.5%)
1,000,000 Province of Quebec, 9.125% due 03/01/00 (cost $1,058,116)... A2/A+ 1,067,320
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (24.6%)
FEDERAL HOME LOAN MORTGAGE CORP.
627,564 7.00% due 08/15/02.................................................... 638,195
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
52,544 8.00% due 12/01/07.................................................... 54,254
837,191 8.00% due 12/01/09.................................................... 865,195
481,944 8.00% due 05/01/10.................................................... 498,056
121,807 8.50% due 06/01/26.................................................... 127,242
467,683 8.50% due 01/01/27.................................................... 488,823
772,304 8.50% due 02/01/27.................................................... 806,949
204,404 8.50% due 08/01/27.................................................... 213,660
------------
3,054,179
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
- ----------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
$ 985,510 6.00% due 07/20/27.................................................... $ 995,365
450,775 7.00% due 03/15/09.................................................... 458,274
421,641 7.00% due 07/15/09.................................................... 428,695
305,622 8.00% due 02/15/22.................................................... 316,624
282,754 8.00% due 04/15/22.................................................... 292,896
406,575 8.00% due 06/15/22.................................................... 421,049
696,055 8.00% due 07/15/22.................................................... 721,223
280,804 8.00% due 11/15/22.................................................... 290,598
494,612 9.00% due 05/15/16.................................................... 525,065
421,915 9.00% due 10/15/16.................................................... 448,196
438,629 9.00% due 12/15/16.................................................... 472,443
46,052 9.00% due 03/15/17.................................................... 48,863
470,624 9.00% due 04/15/17.................................................... 499,963
649,534 9.00% due 12/15/26.................................................... 702,555
------------
6,621,809
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $10,292,700)....... 10,314,183
------------
U.S. TREASURY OBLIGATIONS (14.6%)
U.S. TREASURY NOTES
3,070,000 6.00% due 06/30/99.................................................... 3,087,468
3,000,000 6.00% due 08/15/00.................................................... 3,024,060
------------
6,111,528
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $6,103,406)................. 6,111,528
------------
SHORT-TERM INVESTMENTS (6.1%)
COMMERCIAL PAPER--DOMESTIC (4.7%)
1,000,000 Korea Development Bank, 6.05% due 12/15/97............................ 992,606
1,000,000 Raytheon Co., 5.82% due 12/8/97....................................... 994,018
------------
TOTAL COMMERCIAL PAPER (COST $1,986,624).......................... 1,986,624
------------
OTHER INVESTMENT COMPANIES (0.0%)*
256 Seven Seas Money Market Fund (cost $256).............................. 256
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE SHORT TERM BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
- ----------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
REPURCHASE AGREEMENT (1.4%)
$ 577,000 Goldman Sachs Repurchase Agreements, dated 10/31/97 due 11/03/97,
proceeds $577,274, (collateralized by $617,000 U.S. Treasury Bond,
8% due 9/17/98, valued at $589,189) (cost $577,000)................. $ 577,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,563,880).................... 2,563,880
------------
TOTAL INVESTMENTS (COST $41,456,163) (98.9%).......................... 41,502,373
OTHER ASSETS IN EXCESS OF LIABILITIES (1.1%).......................... 449,448
------------
NET ASSETS (100.0%)................................................... $ 41,951,821
------------
------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $41,456,163 for federal income tax
purposes at October 31, 1997, the aggregate gross unrealized appreciation and
depreciation was $169,301 and $123,091, respectively, resulting in net
unrealized appreciation of $46,210.
* Less than 0.1%
(r) -- Approximately 0.6% of the net assets of the Portfolio are represented by
securities which have been valued at fair value.
144A -- Securities restricted for resale to Qualified Institutional Buyers.
Remic -- Real estate mortgage investment conduit.
CSTR -- Collateral Strip Rate.
NR -- Not rated.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $41,456,163 ) $41,502,373
Receivable for Investments Sold 4,101,444
Interest Receivable 498,408
Receivable for Expense Reimbursement 15,897
Deferred Organization Expenses 933
Prepaid Expenses and Other Assets 225
-----------
Total Assets 46,119,280
-----------
LIABILITIES
Payable for Investments Purchased 4,122,871
Custody Fee Payable 10,138
Advisory Fee Payable 8,781
Administrative Services Fee Payable 1,057
Administration Fee Payable 83
Fund Services Fee Payable 57
Accrued Expenses 24,472
-----------
Total Liabilities 4,167,459
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $41,951,821
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $2,365,619
EXPENSES
Advisory Fee $ 92,126
Custodian Fees and Expenses 45,310
Professional Fees and Expenses 34,417
Printing Expenses 14,683
Administrative Services Fee 11,434
Amortization of Organization Expenses 1,367
Fund Services Fee 1,343
Administration Fee 886
Trustees' Fees and Expenses 415
Miscellaneous 1,474
--------
Total Expenses 203,455
Less: Reimbursement of Expenses (111,329)
--------
NET EXPENSES 92,126
----------
NET INVESTMENT INCOME 2,273,493
NET REALIZED GAIN (LOSS) ON INVESTMENTS
(including $18,094 net realized loss from
futures contracts) 79,239
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENTS (139,526)
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $2,213,206
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 2,273,493 $ 1,136,925
Net Realized Gain on Investments 79,239 146,407
Net Change in Unrealized Appreciation
(Depreciation) of Investments (139,526) 5,083
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 2,213,206 1,288,415
---------------- ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 30,736,099 54,341,812
Withdrawals (17,029,595) (58,904,692)
---------------- ----------------
Net Increase (Decrease) from Investors'
Transactions 13,706,504 (4,562,880)
---------------- ----------------
Total Increase (Decrease) in Net Assets 15,919,710 (3,274,465)
NET ASSETS
Beginning of Fiscal Year 26,032,111 29,306,576
---------------- ----------------
End of Fiscal Year $ 41,951,821 $ 26,032,111
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR ENDED JULY 8, 1993
OCTOBER 31, (COMMENCEMENT OF
------------------------- OPERATIONS) TO
1997 1996 1995 1994 OCTOBER 31, 1993
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.25% 0.38% 0.42% 0.36% 0.37%(a)
Net Investment Income 6.17% 5.65% 6.11% 5.01% 3.99%(a)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 0.30% 0.23% 0.04% 0.05% 1.00%(a)
Portfolio Turnover 219% 191% 177% 230% 116%
</TABLE>
- ------------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Short Term Bond Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a no-load,
diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York on January 29, 1993. The Portfolio
commenced operations on July 8, 1993. The Portfolio's investment objective is to
provide a high total return while attempting to limit the likelihood of negative
quarterly returns. The Declaration of Trust permits the Trustees to issue an
unlimited number of beneficial interests in the Portfolio.
Investments in emerging markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in emerging market countries could adversely affect the
liquidity or value, or both, of such securities in which the Portfolio is
invested. The ability of the issuers of debt, mortgage and asset-backed
securities held by the Portfolio to meet their obligations may be affected by
economic and political developments in a specific industry or region. The value
of mortgage and asset-backed securities can be significantly affected by changes
in interest rates or rapid principal repayments including pre-payments.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a) The Portfolio values mortgage and asset-backed securities and other debt
securities with a maturity of 60 days or more, including securities that
are listed on an exchange or traded over the counter, using prices
supplied daily by an independent pricing service or services that (i) are
based on the last sale price on a national securities exchange, or in the
absence of recorded sales, at the readily available bid price on such
exchange or at the quoted bid price in the over-the-counter market, if
such exchange or market constitutes the broadest and most representative
market for the security and (ii) in other cases, take into account various
factors affecting market value, including yields and prices of comparable
securities, indications as to value from dealers and general market
conditions. If such prices are not supplied by the Portfolio's independent
pricing services, such securities are priced in accordance with procedures
adopted by the Trustees. Such procedures may include the use of
independent pricing services or affiliated pricing, which uses prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; operating data
and general market conditions. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method. The
ability of issuers of mortgage and asset-backed securities, held by the
Portfolio, to meet their obligations may be affected by economic
developments in a specific industry or region.
The Portfolio's custodian or designated subcustodians, as the case may be,
under triparty repurchase agreements takes possession of the collateral
pledged for investments in repurchase agreements on behalf of the
Portfolio. It is the policy of the Portfolio to value the underlying
collateral daily on a mark-to-market basis to determine that the value,
including accrued interest, is at least equal to the repurchase price plus
accrued interest. In the event of default of the obligation to repurchase,
the Portfolio has the
25
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
right to liquidate the collateral and apply the proceeds in satisfaction
of the obligation. Under certain circumstances, in the event of default or
bankruptcy by the other party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
b) Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discounts, if any,
is recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
c) Futures: A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place will be fixed when
the Portfolio enters into the contract. Upon entering into such a contract
the Portfolio is required to pledge to the broker an amount of cash and/or
liquid securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the Portfolio agrees to receive
from, or pay to, the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as "variation margin" and are recorded by the Portfolio as unrealized
gains or losses. When the contract is closed, the Portfolio records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time when it was
closed. The Portfolio invests in futures contracts solely for the purpose
of hedging its existing portfolio securities, or securities the Portfolio
intends to purchase, against fluctuations in value caused by changes in
prevailing market interest rates or securities movements. The use of
futures transactions involves the risk of imperfect correlation of
movements in the price of futures contracts, interest rates and the
underlying hedged assets. Futures transactions during the fiscal year
ended October 31, 1997 are summarized as follows:
SUMMARY/OPEN FUTURES CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT
CONTRACTS OF CONTRACTS
---------------- ----------------
<S> <C> <C>
Contracts open at beginning of year..... 0 $ 0
Contracts opened - long positions....... 8 1,655,875
Contracts opened - short positions...... (16) (3,288,000)
Contracts closed - long positions....... (8) (1,655,875)
Contracts closed - short positions...... 16 3,288,000
---------------- ----------------
Contracts open at end of year........... 0 $ 0
---------------- ----------------
---------------- ----------------
</TABLE>
d) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed on its
share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed in such a way that an investor
in the Portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code.
e) The Portfolio incurred organization expenses in the amount of $5,380.
Morgan Guaranty Trust Company of New York ("Morgan") has agreed to pay the
organization expenses of the Portfolio. The
26
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
Portfolio has agreed to reimburse Morgan for these costs which are being
deferred and amortized on a straight-line basis over a period not to
exceed five years beginning with the commencement of operations of the
Portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan. Under the
terms of the agreement, the Portfolio pays Morgan at an annual rate of
0.25% of the Portfolio's average daily net assets. For the fiscal year
ended October 31, 1997, this fee amounted to $92,126.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the Portfolio,
FDI provides administrative services necessary for the operations of the
Portfolio, furnishes office space and facilities required for conducting
the business of the Portfolio and pays the compensation of the officers
affiliated with FDI. The Portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the Portfolio is based on
the ratio of the Portfolio's net assets to the aggregate net assets of the
Portfolio and certain other investment companies subject to similar
agreement with FDI. For the fiscal year ended October 31, 1997, the fee
for theses services amounted to $886.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio has agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge. This charge
is calculated based on the aggregate average daily net assets of the
Portfolio and certain other portfolios for which Morgan acts as investment
advisor (the "Master Portfolios") and JPM Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion less the complex-wide fees
payable to FDI. The portion of this charge payable by the Portfolio is
determined by the proportionate share that its net assets bear to the net
assets of the Master Portfolios, certain other investors in the Master
Portfolios for which Morgan provides similar services, and JPM Series
Trust. For the fiscal year ended October 31, 1997, the fee for these
services amounted to $11,434.
In addition, Morgan has agreed to reimburse the Portfolio to the extent
necessary to maintain the total operating expenses of the Portfolio at no
more than 0.25% of the average daily net assets of the Portfolio through
February 28, 1998. For the fiscal year ended October 31, 1997, Morgan has
agreed to reimburse the Portfolio $111,329 for expenses under this
agreement.
d) The Portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The Trustees of the
Portfolio represent all the existing shareholders of Group. The
Portfolio's allocated portion of Group's costs in performing its services
amounted to $1,343 for the fiscal year ended October 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds, the
Master Portfolios and JPM Series Trust. The Trustees' Fees
27
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
and Expenses shown in the financial statements represents the Portfolio's
allocated portion of the total fees and expenses. Prior to April 1, 1997,
the aggregate annual Trustee Fee was $65,000. The Portfolio's Chairman and
Chief Executive Officer also serves as Chairman of Group and receives
compensation and employee benefits from Group in his role as Group's
Chairman. The allocated portion of such compensation and benefits included
in the Fund Services Fee shown in the financial statements was $300.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
----------- -----------
<S> <C> <C>
U.S. Government and Agency Obligations........... $73,931,821 $63,540,960
Corporate and Collateralized Mortgage
Obligations..................................... 18,711,782 14,102,700
----------- -----------
$92,643,603 $77,643,660
----------- -----------
----------- -----------
</TABLE>
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the Fund's Notes to the Financial
Statements which are included elsewhere in this report.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Short Term Bond Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of The Short Term Bond Portfolio (the
"Portfolio") at October 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its supplementary data for each of the four years in the
period then ended and for the period July 8, 1993 (commencement of operations)
through October 31, 1993, in conformity with generally accepted accounting
principles. These financial statements and supplementary data (hereafter
referred to as "financial statements") are the responsibility of the Portfolio's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 by correspondence with the
custodian and brokers, and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
December 18, 1997
29
