<PAGE>
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
--------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSET-BACKED SECURITIES - 28.0%
FINANCIAL SERVICES - 28.0%
$ 2,636,378 Advanta Mortgage Loan Trust, Series 1997-4,
Class A4 SEQ, 6.66%, 3/25/22 $ 2,616,605
2,500,000 AmeriCredit Automobile Receivables
Trust, Series 1999 B, Class A4 SEQ, 5.96%, 3/12/06 2,462,110
9,000,000 Associates Automobile Receivables
Trust, Series 2000-2, Class A3 SEQ, 6.82%, 2/15/05 9,005,625
9,620,043 Associates Manufactured Housing,
Series 1997-2, Class A4 SEQ, 6.48%, 3/15/28 9,559,918
4,950,000 Carco Auto Loan Master Trust,
Series 1999-4, Class A, 6.43%, 11/15/04 4,931,438
1,125,000 Citibank Credit Card Master Trust I,
Series 1997-6, Class A, 0.00%, 8/15/06 861,680
17,300,000 Citibank Credit Card Master Trust I, Series
1998-9, Class A, 5.30%, 1/9/06 16,624,089
2,750,000 Comed Transitional Funding Trust, Series
1998-1, Class A5 SEQ, 5.44%, 3/25/07 2,627,955
6,970,726 Daimler Chrysler Auto Trust, Series 2000 A,
Class A2 SEQ, 6.76%, 1/6/03 6,968,495
4,000,000 Daimler Chrysler Auto Trust, Series 2000 C,
Class A2 SEQ, 6.81%, 7/6/03 4,003,600
5,000,000 Dealer Auto Receivables Trust, Series
2000-1, Class A2 SEQ, 7.01%, 4/15/03 5,003,125
490,986 EQCC Home Equity Loan Trust, Series
1997-3, Class A8, 6.41%, 12/15/04 486,051
8,500,000 First USA Credit Card Master Trust, Series
1999-4, Class C Floater, 7.27%, 11/19/00,
resets monthly off the 1-month LIBOR
plus 0.65% with no caps(v) 8,545,161
5,000,000 Ford Credit Auto Owner Trust, Series 1998 C,
Class D, 7.70%, 1/15/04 5,013,280
10,615,000 Ford Credit Auto Owner Trust, Series 2000 D,
Class A3 SEQ, 7.15%, 12/15/03 10,673,053
2,876,131 Green Tree Financial Corp., Series 1998-2,
Class A4 SEQ, 6.08%, 7/1/09 2,868,021
2,500,000 Green Tree Financial Corp., Series 1999-2,
Class B1, 8.41%, 12/1/30 2,289,050
278,506 Green Tree Recreational,Equipment &
Consumer Trust, Series 1997 C, Class A1
SEQ, 6.49%, 2/15/18 276,615
2,641,706 Nationslink Funding Corp., Series 1999-1,
Class A1 SEQ, 6.04%, 11/20/07 2,556,262
13,500,000 Peco Energy Transition Trust, Series 1999 A,
Class A4 SEQ, 5.80%, 3/1/07 12,989,430
3,112,823 Providian Home Equity Loan Trust, Series
1999-1, Class A Floater, 6.91%, 11/25/00,
resets monthly off the 1-month LIBOR
plus 0.29% with no caps(v) 3,113,788
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
--------------------------------------------------------------------------------------------------
<C> <S> <C>
$1,750,000 Sears Credit Account Master Trust, Series
1995-3, Class A, 7.00%, 10/15/04 $ 1,750,542
5,200,000 Sears Credit Account Master Trust, Series
1999-1, Class A, 5.65%, 3/17/09 5,040,724
15,000,000 WFS Financial Owner Trust, Series 2000 A,
Class A3 SEQ, 7.22%, 9/20/04 15,079,695
-------------------------
TOTAL ASSET-BACKED SECURITIES 135,346,312
-------------------------
(Cost $134,243,198)
COLLATERALIZED MORTGAGE OBLIGATIONS - 17.1%
FINANCIAL SERVICES - 17.1%
3,000,000 COMM, Series 2000 FL1A, Class H,
Floater, 7.90%, 11/16/00, resets monthly
off the 1-month LIBOR plus 1.28% with
a floor of 1.28% and no cap(v) 2,940,000
822,186 Commercial Mortgage Acceptance
Corp.,
Series 1997 ML1, Class A1 SEQ, 6.50%, 11/15/04 811,652
12,000,000 Conseco Finance, Series 2000 B, Class
AF2 SEQ, 7.34%, 2/15/19
11,932,501
7,180,000 CS First Boston Mortgage Securities
Corp., Series 1997 C1, Class A1B SEQ,
7.15%, 8/20/06 7,221,687
1,815,866 FHLMC Pool #2061VJ, Class VJ SEQ,
6.50%, 3/20/03 1,807,350
258,128 FHLMC, Series 1980, Class VA SEQ,
7.00%, 8/15/02 257,643
1,352,672 FNMA, Series 1998-30, Class C SEQ,
6.50%, 11/20/04 1,345,476
9,406,541 FNMA, Series 1998-63, Class PB, 5.50%,
5/25/14 9,250,675
10,198,507 Lehman Large Loan, Series 1997 LLI,
Class A1 SEQ, 6.79%, 6/12/04 10,201,700
5,419,846 Merrill Lynch Mortgage Investors, Inc.,
Series 1996 C2, Class A1 SEQ, 6.69%,
11/21/28 5,391,055
7,972,711 Merrill Lynch Mortgage Investors, Inc.,
Series 1998 C3, Class A1 SEQ, 5.65%,
12/15/30 7,648,819
1,635,258 Morgan Stanley Capital I, Series 1997
XL1, Class A1 SEQ, 6.59%, 10/3/30 1,624,270
8,706,556 Morgan Stanley Capital I, Series 1998
XL1, Class A1 SEQ, 6.22%, 6/3/30 8,499,775
3,837,910 Mortgage Capital Funding, Inc., Series
1998 MC3, Class A1 SEQ, 6.00%,
11/18/31 3,751,557
9,655,000 The Money Store Home Equity Trust,
Series 1996 C, Class A6 SEQ, 7.69%,
5/15/24 9,691,206
-------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 82,375,366
-------------------------
(Cost $81,833,144)
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
PRINCIPAL AMOUNT VALUE
--------------------------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - 31.0%
BANKS - 7.2%
$ 9,030,000 Associate Corp., 6.80%, 2/4/02 $ 9,029,999
1,250,000 Banesto Delaware, Inc., 8.25%, 7/28/02 1,274,463
6,000,000 Nationsbank Corp., VRN, 6.75%,
11/16/00, resets quarterly off the 3-month
LIBOR plus 0.06% with no caps(v) 5,999,400
1,000,000 Bank of America Corp., 5.75%, 1/25/01 997,180
1,000,000 Bank of America Corp., 8.38%, 3/15/02 1,020,460
4,000,000 Capital One Bank, 8.25%, 6/15/05 4,021,640
1,250,000 First Chicago NBD Corp., 8.88%, 3/15/02 1,275,875
7,700,000 First Union Corp., 7.55%, 8/18/05 7,741,426
3,150,000 First Union Corp., 7.70%, 2/15/05 3,189,407
-------------------------
34,549,850
-------------------------
ELECTRICAL UTILITY - 7.2%
4,000,000 Commonwealth Edison Co., 144A, VRN,
7.16%, 12/21/00, resets quarterly off the
3-month LIBOR plus 0.50% with no caps(v) 3,992,400
7,000,000 Constellation Energy Group Inc., VRN,
7.25%, 1/5/01, resets quarterly off the
3-month LIBOR plus 0.45% with no caps(v) 7,000,000
5,600,000 Dominion Resources Inc., Series F, VRN,
7.31%, 12/15/00, resets quarterly off the
3-month LIBOR plus 0.65% with no caps(v) 5,602,800
10,000,000 Georgia Power Company, VRN, 6.67%,
11/22/00, resets monthly off the 1-month
LIBOR plus 0.05% with no caps(v) 9,982,000
5,850,000 Pacific Gas & Electric Company, 144A, VRN,
0.086%, 11/1/00, resets quarterly off the
3-month LIBOR plus 0.30% with no caps(v) 5,844,969
2,500,000 TXU Eastern Funding Company, 144A,
6.15%, 5/15/02 2,462,225
-------------------------
34,884,394
-------------------------
FINANCIAL SERVICES - 7.8%
1,500,000 Beneficial Corp., 8.20%, 3/15/02 1,521,375
1,500,000 Case Credit Corp., 6.24%, 11/6/00 1,499,844
2,200,000 Comdisco, Inc., 6.38%, 11/30/01 1,845,800
10,800,000 Countrywide Home Loan, VRN, 6.81%,
12/22/00, resets quarterly off the 3-month
LIBOR plus 0.15% with no caps(v) 10,793,843
5,000,000 ERP Operating Limited Partnership, VRN,
7.34%, 11/25/00, resets quarterly off the
3-month LIBOR plus 0.65% with no caps(v) 4,997,950
5,000,000 Finova Capital Corp., 7.25%, 4/1/01 3,325,000
7,900,000 Ford Credit Co., MTN, VRN, 6.95%,
12/21/00, resets quarterly off the
3-month LIBOR plus 0.29% with no caps(v) 7,856,550
1,000,000 General Motors Acceptance Corp., 5.80%,
2/23/01 995,530
1,000,000 General Motors Acceptance Corp., 6.75%,
2/7/02 995,660
1,500,000 General Motors Acceptance Corp., 7.13%,
5/1/03 1,505,040
800,000 Homeside Lending Inc., 6.88%, 6/30/02 798,568
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------
<C> <S> <C>
$1,000,000 Mellon Funding Corp., 6.88%, 3/1/03 $ 999,150
458,728 Oil Purchase Company, 7.10%, 4/30/02 438,085
-------------------------
37,572,395
-------------------------
FOOD & BEVERAGE - 1.0%
5,000,000 General Mills Inc., 6.68%, 2/9/01 4,995,750
-------------------------
FOREST PRODUCTS & PAPER - 0.1%
500,000 Stone Container Corp., 12.25%, 4/1/02 500,000
-------------------------
MEDIA - 0.3%
1,500,000 News America Holdings, 8.63%, 2/1/03 1,532,475
-------------------------
MOTOR VEHICLES & PARTS - 3.1%
15,000,000 Daimler Chrysler AG, 7.13%, 3/1/02 15,003,900
-------------------------
OIL SERVICES - 2.5%
1,000,000 Enron Corp., 6.50%, 8/1/02 991,230
0,000,000 Enron Corp., 144A, VRN, 7.11%, 12/12/00,
resets quarterly off the 3-month LIBOR
plus 0.45% with no caps(v) 9,995,000
1,000,000 Williams Cos. Inc., 6.13%, 2/15/12 985,820
-------------------------
11,972,050
-------------------------
RAILROADS - 0.5%
2,500,000 Norfolk Southern Corp., 6.88%, 5/1/01 2,493,350
-------------------------
TELEPHONE - 1.3%
6,500,000 Sprint Capital Corp., MTN, VRN, 7.01%,
12/22/00, resets quarterly off the 3-month
LIBOR plus 0.35% with no caps(v) 6,488,950
-------------------------
TOTAL CORPORATE BONDS 149,993,114
-------------------------
(Cost $152,112,458)
PREFERRED STOCKS - 0.2%
ENTERTAINMENT - 0.1%
10,000 AT&T Corp. 253,125
-------------------------
REAL ESTATE INVESTMENT TRUST - 0.1%
19,774 Equity Residential Properties Trust 484,463
-------------------------
TOTAL PREFERRED STOCKS 737,588
-------------------------
(Cost $787,415)
FOREIGN CORPORATE BONDS - 2.7%
TELEPHONE - 1.9%
4,500,000 Deutsche Telekom International
Finance BV, 7.75%, 6/15/05 4,574,790
4,350,000 Telefonica Europe BV, 7.35%, 9/15/05 4,355,351
-------------------------
8,930,141
-------------------------
WIRELESS TELECOMMUNICATIONS - 0.8%
4,000,000 Vodafone Group PLC, 144A, VRN, 6.86%,
12/21/00, resets quarterly off the 3-month
LIBOR plus 0.20% with no caps(v) 3,997,000
-------------------------
TOTAL FOREIGN CORPORATE BONDS 12,927,141
-------------------------
(Cost $12,955,257)
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
2
<PAGE>
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE PASS THRU - 6.8%
$20,500,000 FNMA, TBA, 6.50%, 11/1/30 $ 19,699,270
220,000 FNMA, TBA, 7.00%, 11/1/15 218,625
839,000 FNMA, TBA, 7.00%, 9/1/29 821,960
2,600,726 FNMA, 6.50%, 5/1/28 - 4/1/29 2,500,679
9,289,426 GNMA, 6.50%, 12/15/28 8,968,941
518,056 GNMA, 7.00%, 3/15/09 - 7/15/09 520,808
-------------------------
TOTAL MORTGAGE PASS THRU 32,730,283
-------------------------
(Cost $32,476,006)
PRIVATE PLACEMENTS - 0.3%
1,500,000 Charter Communication TL, 8.59%,
11/19/00(v) 1,488,750
-------------------------
(Cost $1,497,750)
SOVEREIGN GOVERNMENTS AND AGENCIES - 0.2%
1,000,000 Province of Quebec, 7.50%, 7/15/02 1,011,070
-------------------------
(Cost $1,022,631)
U.S. GOVERNMENT AGENCY SECURITIES - 6.1%
15,200,000 FHLMC, 7.00%, 7/15/05 15,485,000
14,000,000 FNMA MTN, 6.16%, 5/8/03 13,768,160
-------------------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 29,253,160
-------------------------
(Cost $29,086,529)
U.S. TREASURY SECURITIES - 0.4%
1,125,000 U.S. Treasury Notes, 5.63%, 9/30/01(s) 1,117,789
1,000,000 U.S. Treasury Notes, 6.25%, 2/28/02(s) 1,000,620
-------------------------
TOTAL U.S. TREASURY SECURITIES 2,118,409
-------------------------
(Cost $2,122,302)
SHORT-TERM INVESTMENTS - 7.2%
COMMERCIAL PAPER - 1.0%
5,000,000 International Paper, 6.81%, 12/11/00(y) 4,960,879
-------------------------
INVESTMENT COMPANIES - 6.2%
29,683,481 J.P. Morgan Institutional Prime Money
Market Fund*(s) 29,683,481
-------------------------
TOTAL SHORT-TERM INVESTMENTS 34,644,360
-------------------------
(Cost $34,645,314)
TOTAL INVESTMENT SECURITIES - 100.0% $482,625,553
=========================
(Cost $482,782,004)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
--------------------------------------------------------------------------------
FUTURES CONTRACTS
<S> <C> <C> <C>
CONTRACTS EXPIRATION UNDERLYING FACE UNREALIZED
SOLD DATE AMOUNT AT VALUE GAIN
-------------------------------------------------------------------------------------
71 U.S. Five-Year Note December 2000 $7,148,813 $30,672
==========================================
</TABLE>
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
SEQ - Sequential Payor
TBA - Securities purchased (sold) on a forward commitment basis with an
approximate principal amount and no definite maturity date. The actual
principal amount and maturity will be determined upon settlement.
VRN - Variable rate note. Interest rate date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
October 31, 2000.
144A - Securities restricted for resale to Qualified Institutional Buyers
(s) Security is fully or partially segregated with custodian as collateral for
futures or with brokers as initial margin for futures contracts.
(v) Variable or floating rate instrument or instrument with step coupon rate.
(y) Yield to maturity
* Money Market mutual fund registered under the Investment 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.
3
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
OCTOBER 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $482,782,004) $482,625,553
Cash 7,906
Dividend and Interest Receivable 4,094,011
Receivable for Investments Sold 2,474,472
Prepaid Trustees Fees and Expenses 751
Prepaid and Other Assets 4,034
-----------------
TOTAL ASSETS 489,206,727
-----------------
LIABILITIES
Payable for Investments Purchased 35,498,279
Advisory Fee Payable 96,063
Administration Services Fee Payable 9,196
Variation Margin Payable 4,438
Fund Services Fee Payable 305
Administration Fee Payable 236
Accrued Expenses and Other Liabilities 68,606
-----------------
TOTAL LIABILITIES 35,677,123
-----------------
NET ASSETS
Applicable to Investors' Beneficial Interests $453,529,604
=================
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
4
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
INCOME
Interest Income $25,270,367
Dividend Income 71,345
Dividend Income from Affiliated Investment
(Includes reimbursement of $55,932
from affiliate) 1,591,617
-------------------
Investment Income 26,933,329
-------------------
EXPENSES
Advisory Fee 1,018,928
Administrative Services Fee 99,162
Custodian Fees and Expenses 79,791
Professional Fees and Expenses 38,474
Printing Expenses 9,709
Fund Services Fee 6,453
Trustees' Fees and Expenses 6,143
Administration Fee 2,933
Insurance Expenses 902
Miscellaneous 1,081
-------------------
Total Expenses 1,263,576
Less: Reimbursement of Expenses (45,204)
-------------------
Net Expenses 1,218,372
-------------------
NET INVESTMENT INCOME 25,714,957
-------------------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON
Investment Transactions (3,201,377)
Futures Contracts (2,208,102)
Foreign Currency Contracts and Translations 255,841
-------------------
Net Realized Loss (5,153,638)
-------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON
Investments 1,954,392
Futures Contracts 102,424
Foreign Currency Contracts and Translations (255,841)
-------------------
Net Change in Unrealized Appreciation (Depreciation) 1,800,975
-------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,362,294
===================
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
5
<PAGE>
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
INCREASE IN NET ASSETS 2000 1999
FROM OPERATIONS
<S> <C> <C>
Net Investment Income $ 25,714,957 $ 17,750,854
Net Realized Loss on Investments, Futures and Foreign
Currency Contracts and Transactions (5,153,638) (3,791,010)
Net Change in Unrealized Appreciation (Depreciation) of Investments
Futures, and Foreign Currency Contracts and Translations 1,800,975 (3,929,871)
------------------ -------------------
Net Increase in Net Assets Resulting from Operations 22,362,294 10,029,973
------------------ -------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST
Contributions 309,730,016 312,753,504
Withdrawals (272,384,441) (193,444,721)
------------------ -------------------
Net Increase from Investors' Transactions 37,345,575 119,308,783
------------------ -------------------
Total Increase in Net Assets 59,707,869 129,338,756
------------------ -------------------
NET ASSETS
Beginning of Year 393,821,735 264,482,979
------------------ -------------------
End of Year $453,529,604 $393,821,735
================== ===================
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTARY DATA
FOR THE YEARS ENDED OCTOBER 31
2000 1999 1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Net Expenses 0.30% 0.29% 0.25% 0.25% 0.38%
Net Investment Income 6.31% 5.49% 5.84% 6.17% 5.65%
Expenses without Reimbursement 0.31% 0.34% 0.38% 0.55% 0.61%
Portfolio Turnover 271% 398% 381% 219% 191%
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
6
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
OCTOBER 31, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--The Short Term Bond Portfolio (the "Portfolio") is registered
under the Investment Company Act of 1940, as amended, as a no-load, 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, consistent with low volatility of principal. The Declaration of Trust
permits the Trustees to issue an unlimited number of beneficial interests in
the Portfolio.
The preparation of financial statements in accordance with 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:
Security Valuations--Fixed Income Securities, (other than convertible
bonds), with a maturity of 60 days or more held by Funds other than money market
funds will be valued each day based on readily available market quotations
received from independent or affiliated commercial pricing services. Such
pricing services will generally provide bidside quotations. Convertible bonds
are valued at the last sale price on the primary exchange on which the bond is
principally traded. When valuations are not readily available, securities are
valued at fair value as determined in accordance with procedures adopted by the
Trustees. All short-term securities with a remaining maturity of sixty days or
less are valued using the amortized cost method.
Trading in securities on most foreign exchanges and over-the-counter markets
is normally completed before the close of the domestic market and may also take
place on days on which the domestic market is closed. If events materially
affecting the value of foreign securities occur between the time when the
exchange on which they are traded closes and the time when the Portfolio's net
assets are calculated, such securities will be valued at fair value in
accordance with procedures established by and under the general supervision of
the Portfolio's Trustees.
Security Transactions--Security transactions are accounted for as of the
trade date. Realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date or as of the time that the relevant
ex-dividend and amount becomes known. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
Futures Contracts--The Portfolio may enter into futures contracts in order
to hedge 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 and to manage exposure to changing
interest rates and securities prices. The risks of entering into futures
contracts include the possibility that the change in value of the contract may
not correlate with the changes in value of the underlying securities. Upon
entering into a futures contract, the Portfolio is required to deposit either
cash or securities in an amount equal to a certain percentage of the contract
value (initial margin). Subsequent payments (variation margin) are made or
received daily, in cash, by the Portfolio. The variation margin is equal to the
daily change in the contract value and is recorded as unrealized gain or loss.
The Portfolio will recognize a gain or loss when the contract is closed or
expires.
Foreign Currency Transactions--All assets and liabilities initially
expressed in foreign currencies are translated into U.S. dollars at prevailing
exchange rates at period end. Purchases and sales of investment securities,
dividend and interest income, and certain expenses are translated at the rates
of exchange prevailing on the respective dates of such transactions. Realized
and unrealized gains and losses from foreign currency translations arise from
changes in currency exchange rates and are reported in the Statement of
Operations.
Although the net assets of the Portfolio are presented at the exchange rates
and market values prevailing at the end of the period, the Portfolio does not
isolate the portion of the results of operations arising from changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of securities during the period.
Forward Foreign Currency Exchange Contracts--The Portfolio may enter into
forward foreign currency exchange contracts to facilitate transactions of
securities denominated in a foreign currency or to manage the Portfolio's
exposure to foreign currency exchange fluctuations. The net U.S. dollar value
of foreign currency underlying all contractual commitments held by the Portfolio
and the resulting unrealized appreciation or depreciation are determined daily
using prevailing exchange rates. The Portfolio bears the risk of an unfavorable
change in the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
Commitments--The Portfolio may enter into commitments to buy and sell
investments to settle on furture dates as part of its normal investment
activities.
The Accompanying Notes are an Integral Part of the Financial Statements.
7
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These commitments are reported at market value in the financial statements.
Credit risk exists on these commitments to the extent of any unrealized gains on
the underlying securities purchased and any unrealized losses on the underlying
securities sold. Market risk exists on these commitments to the same extent as
if the security were owned on a settled basis and gains and losses are recorded
and reported in the same manner. However, during the commitment period, these
investments earn no interest or dividends.
Income Tax Status--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 provisions of the Internal
Revenue Code.
--------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
Advisory--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") and a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"). Under the terms of the agreement, the
Portfolio pays JPMIM at an annual rate of 0.25% of the Portfolio's average
daily net assets.
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
investment advisory, administrative fee and shareholder servicing fees related
to a Portfolio investment in an affiliated money market fund. The amount listed
on the Statement of Operations as Dividend Income from Affiliated Investment is
the amount the Fund earned.
Administrative Services--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 registered investment companies for which JPMIM acts as
investment advisor 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 Funds Distributor, Inc. 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 Trust and certain other investment
companies for which Morgan provides similar services.
Morgan has agreed to reimburse the Portfolio to the extent necessary to
maintain the total operating expenses (which excludes interest and dividend
expenses, taxes and extraordinary items) of the Portfolio at no more than 0.30%
of the average daily net assets of the Portfolio. This reimbursement arrangement
can be changed or terminated at any time after February 28, 2001 at the option
of Morgan.
Administration--The Portfolio has retained Funds Distributor, Inc. ("FDI"),
a registered broker-dealer, to serve as the co-administrator and distributor for
the Fund. Under a Co-Administration Agreement between FDI and the 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 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 Trust and
certain other investment companies for which FDI provides similar services.
Fund Services--The Portfolio has a Fund Services Agreement with Pierpont
Group, Inc. ("PGI") 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 PGI.
Each Trustee receives an aggregate annual fee of $75,000 for serving on the
boards of the Trust, the J.P. Morgan
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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(Continued)
OCTOBER 31, 2000
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2. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Funds, the J.P. Morgan Institutional Funds, and other registered investment
companies in which they invest. The Trustees' Fees and Expenses shown in the
financial statements represent the Portfolio's allocated portion of the total
Trustees' fees and expenses. The Portfolio's Chairman and Chief Executive
Officer also serves as Chairman of PGI and receives compensation and employee
benefits from PGI. The allocated portion of such compensation and benefits
included in the Fund Services Fee (PGI) shown on the Statement of Operations
was $1,230.
--------------------------------------------------------------------------------
3. FEDERAL INCOME TAXES
As of October 31, 2000, accumulated net unrealized depreciation was
$156,451, based on the aggregate cost of investments for federal income tax
purposes of $482,782,004, which consisted of unrealized appreciation of
$2,643,974 and unrealized depreciation of $2,800,425.
--------------------------------------------------------------------------------
4. INVESTMENT TRANSACTIONS
During the year ended October 31, 2000, the Portfolio purchased $921,581,045
of investment securities and sold $825,535,464 of investment securities other
than U.S. government securities and short-term investments. Purchases and sales
of U.S. government securities were $513,254,586 and $446,003,072, respectively.
--------------------------------------------------------------------------------
5. CONCENTRATIONS OF CREDIT RISKS
The ability of the issuers of debt, asset-backed and mortgage-backed
securities to meet their obligations may be affected by the economic and
political developments in a specific industry or region. The value of
asset-backed and mortgage-backed securities can be significantly affected by
changes in interest rates or rapid principal payments including prepayments.
The Portfolio may have elements of risk not typically associated with
investments in the United States of America due to concentrated investments in a
limited number of countries or regions which may vary throughout the year. Such
concentrations may subject the Portfolio to additional risks resulting from
political or economic conditions in such countries or regions and the possible
imposition of adverse governmental laws or currency exchange restrictions could
cause the securities and their markets to be less liquid and their prices more
volatile than those of comparable U.S. securities.
--------------------------------------------------------------------------------
6. SUBSEQUENT EVENTS
On September 13, 2000, J.P. Morgan & Co. Incorporated and The Chase
Manhattan Corporation announced that they have entered into an agreement and
plan of merger. The transaction is expected to close in December 2000 and is
subject to approval by shareholders of both companies.
9
<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, 2000, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. 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 of America, 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, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
December 21, 2000
10
<PAGE>
[back cover]
J.P. MORGAN FUNDS
Federal Money Market Fund
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Prime Money Market Fund
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Emerging Markets Debt
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Tax Aware Enhanced Income Fund:
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Tax Exempt Money Market Fund
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Short Term Bond Fund
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Bond Fund
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Global Strategic Income Fund
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Tax Exempt Bond Fund
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California Bond Fund:
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New York Tax Exempt Bond Fund
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Diversified Fund
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Disciplined Equity Fund
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Tax Aware U.S. Equity Fund:
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U.S. Equity Fund
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U.S. Small Company Fund
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U.S. Small Company Opportunities Fund
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Emerging Markets Equity Fund
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European Equity Fund
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International Equity Fund
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International Opportunities Fund
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Global 50 Fund:
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Global Healthcare Fund
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For more information on the J.P. Morgan
Funds, call J.P. Morgan Funds
Services at (800) 521-5411.
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Morgan Guaranty Trust Company MAILING
500 Stanton Christiana Road INFORMATION
Newark, Delaware 19713-2107
SH-ANN-23742 1000
