<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN BOND PORTFOLIO
August 1, 2000
Dear Shareholder:
The J.P. Morgan Bond Portfolio posted a return of 2.93% for the six months ended
June 30, 2000. The portfolio underperformed its benchmark, the Salomon Broad
Investment Grade Bond Index, which returned 3.92%, but only slightly
underperformed its peer group, the Lipper Variable Annuity Corporate Debt
A-Rated Average, which returned 3.23% for the period.
The portfolio's net asset value per share increased from $11.23 on December 31,
1999, to $11.37 on June 30, 2000. During the six months, the portfolio paid
approximately $0.20 per share from net investment income. The portfolio's total
net assets increased from $66.2 million on December 31, 1999, to $73.9 million
at the end of the reporting period.
The report that follows includes detailed performance information about the J.P.
Morgan Bond Portfolio, as well as an interview with William Tennille, the
portfolio manager primarily responsible for the portfolio. In this interview,
Bill discusses events in the fixed income market, portfolio performance, and
what he sees on the horizon.
As chairman and president of Asset Management Services, we thank you for your
participation in the J.P. Morgan Bond Portfolio. We look forward to sharing
Morgan's insights regarding financial markets with you in the future. If you
have any comments or questions, please call the trust's distributor, Funds
Distributor, Inc., at (888) 756-8645.
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 PORTFOLIO FACTS AND HIGHLIGHTS ......7
PORTFOLIO PERFORMANCE................2 FINANCIAL STATEMENTS................10
PORTFOLIO MANAGER Q&A................3
--------------------------------------------------------------------------------
1
<PAGE>
PORTFOLIO PERFORMANCE
EXAMINING PERFORMANCE
One way to look at performance is to review a fund's average annual total
return. This figure takes the fund's actual (or cumulative) return and shows
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.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
-------------------- ----------------------------------------
THREE SIX ONE THREE FIVE SINCE
AS OF JUNE 30, 2000 MONTHS MONTHS YEAR YEARS YEARS INCEPTION*
-------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan Bond Portfolio 1.13% 2.93% 3.86% 5.40% 5.47% 6.80%
Salomon Broad Investment Grade Bond Index** 1.70% 3.92% 4.51% 6.02% 6.23% 7.77%
Lipper Variable Annuity
Corporate Debt A-Rated Average*** 1.16% 3.23% 3.43% 5.20% 5.57% 7.12%
</TABLE>
*1/3/95 -- COMMENCEMENT OF OPERATIONS.
**THE SALOMON BROAD INVESTMENT GRADE BOND INDEX IS AN UNMANAGED, MARKET-WEIGHTED
INDEX THAT CONTAINS APPROXIMATELY 4,700 INDIVIDUALLY PRICED INVESTMENT GRADE
BONDS. THE INDEX DOES NOT INCLUDE FEES OR EXPENSES AND IS NOT AVAILABLE FOR
ACTUAL INVESTMENT.
***DESCRIBES THE AVERAGE TOTAL RETURN FOR ALL FUNDS IN THE INDICATED LIPPER
CATEGORY, AS DEFINED BY LIPPER INC., AND DOES NOT TAKE INTO ACCOUNT APPLICABLE
SALES CHARGES. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR FUND
DATA.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PORTFOLIO RETURNS ARE NET OF
FEES, ASSUME THE REINVESTMENT OF PORTFOLIO DISTRIBUTIONS, AND REFLECT THE
REIMBURSEMENT OF PORTFOLIO EXPENSES, AS DESCRIBED IN THE PROSPECTUS. HAD
EXPENSES NOT BEEN SUBSIDIZED, YIELDS WOULD HAVE BEEN LOWER. PORTFOLIO RETURNS DO
NOT REFLECT ANY SEPARATE ACCOUNT EXPENSES IMPOSED ON THE VARIABLE CONTRACTS.
THESE EXPENSES MAY INCLUDE A SALES CHARGE, PREMIUM TAX CHARGE, DAC TAX SALES
CHARGE, COST OF INSURANCE, MORTALITY EXPENSES, OR SURRENDER AND OTHER CHARGES.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
The following is an interview with WILLIAM G. TENNILLE, vice president and
member of the portfolio management team for the portfolio. Bill joined Morgan in
1992 and has extensive experience across a broad range of markets, including
mortgage securities and derivatives. He is a graduate of the University of North
Carolina. This interview was conducted on July 20, 2000 and reflects Bill's
views on that date.
WHAT SEPARATED THE WINNERS FROM THE LOSERS IN THE FIXED INCOME MARKETS OVER THE
PAST SIX MONTHS?
WT: It all depended on whether you correctly anticipated the timing and the
degree to which the Treasury yield curve would invert. If you loaded up on
Treasuries, particularly long bonds, before or early on in the inversion
process, you won. If you held on to spread product - corporate bonds, mortgages,
agencies, and the like - which continued to widen substantially against
Treasures, you lost. We were fortunate to have taken the former path.
Toward the end of April, expectations of another interest rate hike from the
Federal Reserve Board unnerved investors. As a consequence, credit spreads
widened an additional 10-15 basis points and held to this spread range through
the end of June, as volatility was contained for the period.
HOW WOULD YOU CHARACTERIZE THE FIXED INCOME MARKETS DURING THIS PERIOD?
WT: For various reasons, the market became extremely illiquid and, by extension,
extremely volatile. Driven to an extent by stock market volatility, the fixed
income markets experienced wave after wave of volatility run through different
parts of the market at different times. It wasn't a constant flow, as from time
to time the market would simply stall, or move sideways. Then something would
happen - a tech sell-off or a disappointing earnings report, for example - and
that would upset the market and send investors scurrying for the exits. We went
through numerous waves of this sort of behavior, from periods of calm to periods
of high volatility.
DID Y2K END UP HAVING ANY IMPACT?
WT: Yes and no. In itself, it wasn't an issue. There was no appreciable market
upheaval caused by computer glitches linked directly to Y2K. The real problem
was caused by the government's effort to quell Y2K-related fears by pumping
massive amounts of liquidity into the marketplace. This helped Y2K become a
relative non-event, but once this period was over, the Treasury Department acted
fairly quickly to take that money back. Unfortunately, people had gotten used to
having a lot of cash around and a lot of liquidity, so when the Treasury started
draining excess cash out of the system, it tipped the balance and market
illiquidity ensued as rates rose across the short and intermediate part of the
yield curve, while the yield on long Treasuries plummeted.
3
<PAGE>
WHAT IMPACT HAS THE GOVERNMENT'S ANNOUNCED BUYBACK OF LONG-TERM DEBT HAD ON
FIXED INCOME MARKETS?
WT: It's no longer an "announced" buyback, but one that's very much underway.
The Treasury recently affirmed that it will retire $30 billion in debt this
year. When you have this much product being taken out of the system, there's
obviously less to go around to those investors who need or want U.S. Treasuries
of all maturities. The result over much of the first half of the year was higher
demand leading to higher prices leading to lower yields leading to a deeper
inversion of the yield curve. The yield curve disinverted to a more normal shape
late in the second quarter, but we anticipated this and adjusted the portfolio
accordingly.
HOW DID YOU POSITION THE PORTFOLIO TO TAKE ADVANTAGE OF MARKET CONDITIONS DURING
THE PAST SIX MONTHS?
WT: Very early on in the movement of the yield curve toward inversion, we
reduced our positions in mortgages, corporates, and other spread securities, and
put much of that money into Treasuries. Certainly with what has been happening
on the curve, owning Treasuries, particularly on the long end, has been a very
rewarding strategy.
We sold other sectors of the market during those brief windows when conditions
were favorable. The more extended sectors, like emerging markets debt and high
yield debt, actually benefited for a short period, and we did well in these
sectors.
With emerging markets debt, we benefited from holdings in Mexican bonds, which
were re-rated to investment grade in early March. I would point out, however,
that all of our emerging markets exposure was in dollar-denominated Brady bonds
from the higher rated countries.
Overall, the high yield market was most susceptible to day-to-day market
conditions, because it has the closest connection to the equity markets, which
have been relatively illiquid for a number of months now. As a result, prices
for these securities have been lower and spreads have been wider. We reduced
where we could at levels we were comfortable with, but we weren't totally out of
the high yield market during that time period, nor do I think anyone else was.
DO YOU SEE ANY OF THE SPREAD PRODUCTS BEING ATTRACTIVE?
WT: There were a couple of times that we added to our holdings in spread
products. For example, when mortgages reached 200 basis points over Treasuries,
we increased our position a little bit. Our timing was pretty good there, as the
spreads on these securities have narrowed since. In corporates, we've reduced
our exposure to 4-5% below the Index. Corporates have been behaving like high
yields lately in terms of their sensitivity to equities, so it's been a very
expensive market with respect to bid/offer spreads.
SPEAKING ABOUT MORTGAGES, WHAT IS YOUR TAKE ON THE CONTROVERSY SWIRLING AROUND
PROPOSED CHANGES IN THE CHARTERS OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)?
WT: Speaking before the House Banking Subcommittee on March 22, Under Secretary
of the Treasury Gary Gensler voiced the Treasury's support of a House bill that,
if passed, would strip FNMA and FHLMC of some of their competitive advantages in
the mortgage market. One of these is their ability to borrow directly from the
Treasury. This ability is widely viewed by investors as a guarantee that the
U.S. government
4
<PAGE>
would bail these agencies out of any financial difficulties they might
experience. While this is erroneous, the perception persists and serves as a
beneficial backdrop to their security offerings.
Following the Under Secretary's comments, spreads widened between FNMA/FHLMC
mortgage securities, and those issued by the Government National Mortgage
Association (GNMA). This was due to investor uncertainty that arose from these
comments, and the fact that GNMA is a true government agency, one that is backed
with the full faith and credit of the United States.
For my part, I don't think this legislation will go anywhere, for several
reasons. One is that FNMA and FHLMC have done a very good job of keeping
mortgage rates relatively low and making housing affordable to more Americans
than ever before. They have also proven to be excellent managers of risk, and
both are assigned a "AAA" credit rating by Moody's and Standard & Poor's. In
fact, they have never had a financial problem, nor have they cost the government
a penny. Another is that their securities are essential to fixed income markets.
The market for FNMA and FHLMC mortgage securities, for example, is far greater
than that for all municipal bonds, so hindering their ability to issue them
would have a profound impact on fixed income markets. Their securities are also
likely to take the place of Treasuries in fixed income portfolios, if, as
expected, the supply of comparable duration Treasuries continues to decline.
In all, I don't think you will see Washington damage entities that have provided
significant assistance to the American population, the fixed income markets, and
their own shareholders. However, they likely will be asked to provide some
compensation in exchange for the benefits they enjoy, either in the form of new
taxes, fees, or other means yet to be worked out. While this controversy
continues, however, there may be opportunities to profit by capturing the spread
between FNMA/FHLMC and GNMA securities.
LOOKING AHEAD TO THE NEXT QUARTER, WHAT DO YOU SEE HAPPENING IN THE FIXED INCOME
MARKETS?
WT: I think that so long as Mr. Greenspan is uncomfortable with the things he
sees out there - the increasing cost of hiring good people, the high cost of
oil, still robust Gross Domestic Product numbers and so on - he's certainly
going to continue to raise rates in an attempt to slow our economy and ward off
inflation. While recent economic data has been encouraging in this regard, it is
far from conclusive. As such, many observers expect another 25 basis-point
increase in short-term rates by year-end. Mr. Greenspan thinks that increasing
the cost of money is the right thing to do under these circumstances, so I have
no doubt that he will continue doing so until he gets some satisfaction in the
form of lower inflation. As for how long this state of affairs might endure,
neither I nor anyone else can say.
One of the things we will certainly be paying close attention to is the effect
of a slowing economy on the default rate in the corporate bond sector. This rate
is already fairly high, despite our expanding economy. Most defaults have
occurred in the junk bond area, where we do not invest, although there have been
a few among investment grade companies, as well. In the former case, several
younger companies suffered the harsh reality that they were going to have to
compete in a more aggressive global marketplace. Some just didn't make the
grade.
5
<PAGE>
In the investment grade arena, there were and are concerns about the substantial
debt being taken on by companies to fund mergers and acquisitions. This has
resulted in a debt overhang for many companies, with some being downgraded as a
consequence.
Finally, we are keeping an eye on emerging markets debt, although there has not
been much cause for concern in this sector. In fact, it will likely be among the
first to benefit from continued global growth.
GIVEN THIS SCENARIO, HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE NEAR FUTURE?
WT: It's pretty much steady on the path we've been following recently. We own a
lot of Treasuries that have done quite well for our investors. Barring any major
event that would point to greater opportunity elsewhere, we'll likely maintain
most of that position into the near future. We continue to upgrade what spread
product we own by focusing on the higher quality, most liquid names. We think
this is a time to have a very high quality portfolio and a very liquid portfolio
and are working to have ours be as much of both as possible.
One change we did make toward the end of the second quarter was to reduce some
of our long-term Treasury holdings, which were fully appreciated, and take on
certain corporates, simply because we had been strikingly underweight the
sector. Here, our focus was on "BBB"-rated bonds across the curve, even out into
the long end. We favored these bonds, as they tend to tighten in, or gain value,
first when investors return to the credit markets in a meaningful way.
6
<PAGE>
PORTFOLIO FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. The portfolio is designed
for investors who seek a total return over time that is higher than that
generally available from a portfolio of short-term obligations while
acknowledging greater price fluctuation of longer-term instruments.
--------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
1/3/95
--------------------------------------------------------------------------------
NET ASSETS AS OF 6/30/00
$73,927,189
--------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES (IF APPLICABLE)
12/13/00
--------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATES (IF APPLICABLE)
12/13/00
EXPENSE RATIO(+)
The portfolio's annualized expense ratio of 0.75% covers shareholders' expenses
for custody, tax reporting, investment advisory and shareholder services. The
portfolio is no-load and does not charge any sales, redemption, or exchange
fees. There are no additional charges for buying, selling, safekeeping portfolio
shares, or for wiring redemption proceeds from the portfolio.
(+) THE EXPENSE RATIO DOES NOT REFLECT ANY SEPARATE ACCOUNT EXPENSES IMPOSED ON
THE VARIABLE CONTRACTS.
PORTFOLIO HIGHLIGHTS
ALL DATA AS OF JUNE 30, 2000
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
/ / MORTGAGE-BACKED SECURITIES 55.9%
/ / CORPORATE OBLIGATIONS 12.9%
/ / ASSET BACKED SECURITIES 11.9%
/ / SHORT-TERM INVESTMENTS* 7.3%
/ / U.S. TREASURY OBLIGATIONS 6.5%
/ / FOREIGN CORPORATE OBLIGATIONS 1.8%
/ / SOVEREIGN BONDS 1.2%
/ / U.S. GOVERMENT AGENCY OBLIGATIONS 1.1%
/ / FOREIGN GOVERNMENT OBLIGATIONS 1.1%
/ / CERTIFICATES OF DEPOSIT - FOREIGN 0.1%
/ / CONVERTIBLE PREFERRED STOCKS 0.1%
/ / SUPRANATIONAL OBLIGATIONS 0.1%
DURATION
12.27 years
<TABLE>
<CAPTION>
QUALITY BREAKDOWN
<S> <C>
AAA** 88%
AA 2%
A 4%
Other 6%
</TABLE>
*SHORT-TERM HOLDINGS EXCLUDE CASH COLLATERAL INVESTED IN SHORT-TERM SECURITIES
USED FOR PURCHASES MADE BUT NOT YET SETTLED.
**INCLUDES U.S. GOVERNMENT AGENCY OBLIGATIONS, U.S. TREASURY OBLIGATIONS, AND
SHORT-TERM INVESTMENTS.
7
<PAGE>
<TABLE>
<CAPTION>
LARGEST HOLDINGS
% OF TOTAL
(EXCLUDING SHORT-TERM HOLDINGS) INVESTMENTS
--------------------------------------------------------------------------------
<S> <C>
FNMA TBA, JULY, 7.500%
DUE 05/01/30 9.86%
FNMA TBA, JULY, 7.000%
DUE 05/01/30 5.66%
FNMA TBA, JULY, 7.500%
DUE 04/01/15 3.33%
FNMA TBA, JULY, 8.000%
DUE 05/01/30 2.85%
DAIMLERCHRYSLER AUTO TRUST,
SEQUENTIAL PAYER, SERIES 2000-A,
CLASS A2, 6.760%, DUE 01/06/03 2.42%
<CAPTION>
% OF TOTAL
(EXCLUDING SHORT-TERM HOLDINGS) INVESTMENTS
--------------------------------------------------------------------------------
<S> <C>
FNMA, 7.250%
DUE 01/15/10 2.07%
FNMA, 6.000%
DUE 12/01/08 2.00%
FNMA TBA, JULY, 6.500%
DUE 07/01/29 1.99%
GMAC COMMERCIAL MORTGAGE SECURITIES,
SEQUENTIAL PAYER, SERIES 1998-C2,
CLASS A1, 6.150% DUE 11/15/07 1.87%
WORLD OMNI AUTOMOBILE LEASE SECURITIZATION,
SEQUENTIAL PAYER, SERIES 1997-B, CLASS A4,
6.200% DUE 11/25/03 1.77%
</TABLE>
8
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC. IS
THE TRUST'S INVESTMENT ADVISOR. SHARES OF THE PORTFOLIO PRESENTLY ARE OFFERED
ONLY TO VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE SEPARATE ACCOUNTS
ESTABLISHED BY INSURANCE COMPANIES TO FUND VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES AND QUALIFIED PENSION AND RETIREMENT PLANS
OUTSIDE THE SEPARATE ACCOUNT CONTEXT.
Shares of the portfolio and investments in the variable contracts 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.
Reference to specific securities and their issuers should not be interpreted as
recommendations to purchase or sell these securities. There is no assurance the
portfolio will continue to hold these securities. Opinions expressed herein and
other fund data presented are subject to change without notice.
The portfolio invests in foreign securities, non-investment grade bonds,
mortgaged-backed securities, and derivatives that may make the portfolio more
volatile.
PLEASE CALL (888) 756-8645 FOR A PROSPECTUS WHICH CONTAINS MORE COMPLETE
INFORMATION, INCLUDING CONTRACT CHARGES AND DEDUCTIONS, AND PORTFOLIO FEES AND
EXPENSES. PLEASE READ THE PROSPECTUSES FOR COMPLETE DETAILS INCLUDING RISK
CONSIDERATIONS.
9
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
ASSET BACKED SECURITY (11.9%)
$ 160,254 Chase Funding Mortgage Loan, Series 1998-2,
Class IIA2, 5.875% due 03/25/17................ Aaa/AAA $ 158,651
310,000 Citibank Credit Master Trust I, Sub. Bond, PO,
Series 1997-6, Class A, 7.355%(y) due
08/15/06....................................... Aaa/AAA 230,127
1,000,000 CNH Equipment Trust, Sequential Payer, Series
2000-A, Class A3, 7.140% due 08/15/04.......... Aaa/AAA 1,002,190
2,510,000 DaimlerChrysler Auto Trust, Sequential Payer,
Series 2000-A, Class A2, 6.760% due 01/06/03... Aaa/AAA 2,502,144
1,400,000 Ford Credit Auto Owner Trust, Sequential Payer,
Series 2000-A, Class A3, 6.820% due
06/17/02....................................... Aaa/AAA 1,396,934
700,000 Ford Credit Auto Owner Trust, Sequential Payer,
Series 2000-A, Class A4, 7.090% due
11/17/03....................................... Aaa/AAA 701,532
450,000 Sears Credit Account Master Trust, Series 1995-5,
Class A , 6.050% due 01/15/08.................. Aaa/AAA 437,904
550,000 Sears Credit Account Master Trust, Series 1999-1,
Class A, 5.650% due 03/17/09................... Aaa/AAA 524,903
1,840,868 World Omni Automobile Lease Securitization,
Sequential Payer, Series 1997-B, Class A4,
6.200% due 11/25/03............................ Aaa/AAA 1,829,363
------------
TOTAL ASSET BACKED SECURITY
(COST $8,787,606).......................... 8,783,748
------------
CERTIFICATES OF DEPOSIT - FOREIGN (0.1%)
CANADA (0.1%)
75,000 Canadian Imperial Bank of Commerce, 6.200% due
08/01/00 (cost $75,001)........................ Aa3/AA- 74,941
------------
CORPORATE OBLIGATIONS (12.9%)
AUTOMOTIVE (0.0%)
15,000 Federal-Mogul Corp., 7.750% due 07/01/06......... Ba2/BB 10,200
------------
BANKING (1.7%)
1,300,000 Northern Trust Co. Bank, 6.650% due 11/09/04..... Aa3/AA- 1,263,808
------------
BROADCASTING & PUBLISHING (0.7%)
27,000 Capstar Broadcasting, 9.546%(y)(v) due
02/01/09....................................... B2/B 24,772
500,000 TCI Communications, Inc., 7.875% due 02/15/26.... A2/AA- 487,755
------------
512,527
------------
BUILDING MATERIALS (0.4%)
345,000 Armstrong World, Inc., 6.350% due 08/15/03....... Baa1/A- 313,346
------------
CHEMICALS (0.2%)
150,000 Cytec Industries, Inc., MOPPRS, 6.846% due
05/11/05(v).................................... Baa2/BBB 136,584
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
CONSUMER GOODS & SERVICES (0.9%)
$ 700,000 Cendant Corp., 7.750% due 12/01/03............... Baa1/BBB $ 672,910
------------
ELECTRIC (0.8%)
250,000 Southern Co. Capital Trust II, 8.140% due
02/15/27....................................... a3/BBB+ 225,610
350,000 Texas Utilities Corp., 5.940%(v) due 10/15/01.... Baa3/BBB 342,461
------------
568,071
------------
ELECTRONICS (0.1%)
50,000 Motorola, Inc., 7.500% due 05/15/25.............. A1/A+ 49,915
------------
ENERGY (0.0%)
7,000 Cogentrix Energy, Inc., 8.750% due 10/15/08...... Ba1/BB+ 6,632
------------
FINANCIAL SERVICES (2.8%)
100,000 Bank of America Corp., 7.250% due 10/15/25....... Aa3/A 90,386
500,000 CIT Group, Inc., MTN, 5.920% due 11/08/02........ A1/A+ 481,040
625,000 General Motors Acceptance Corp., 6.850% due
06/17/04....................................... A2/A 609,994
300,000 Household Finance Corp., Series E, MTN, 7.077%(v)
due 06/17/05................................... A2/A 303,315
100,000 Provident Financing Trust I., 7.405% due
03/15/38....................................... baa1/BBB 74,299
500,000 Toyota Motor Credit Corp., 5.625% due 11/13/03... Aa1/AAA 476,130
------------
2,035,164
------------
GAS-PIPELINES (0.1%)
110,000 Enron Corp., 6.950% due 07/15/28................. Baa1/BBB+ 97,067
------------
HEALTH SERVICES (0.1%)
15,000 Tenet Healthcare Corp., 8.625% due 01/15/07...... Ba3/BB- 14,325
40,000 Tenet Healthcare Corp., Series B, 7.625% due
06/01/08....................................... Ba1/BB+ 36,600
------------
50,925
------------
MANUFACTURING (0.0%)
5,000 Polymer Group, Inc., Series B, 9.000% due
07/01/07....................................... B2/B 4,250
------------
MEDIA (1.9%)
150,000 Adelphia Communications, Inc., 9.375% due
11/15/09....................................... B1/B+ 139,125
365,000 AT&T Corp. - Liberity Media Group, 8.250% due
02/01/30....................................... Baa3/BBB- 349,049
150,000 Charter Communications Holdings LLC, 8.250% due
04/01/07....................................... B2/B+ 132,750
150,000 Lamar Media Corp., 8.625% due 09/15/07........... B1/B 144,000
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
MEDIA (CONTINUED)
$ 180,000 Fox Sports Networks LLC, 8.875% due 08/15/07..... Ba1/BBB- $ 179,100
590,000 Time Warner, Inc., 6.625% due 05/15/29........... Baa3/BBB 487,004
------------
1,431,028
------------
OIL-PRODUCTION (1.0%)
775,000 Conoco, Inc., 5.900% due 04/15/04................ A3/A- 740,071
------------
RAILROADS (0.4%)
300,000 Union Pacific Corp., 5.780% due 10/15/01......... Baa3/BBB- 293,055
------------
TELECOMMUNICATIONS (1.7%)
115,000 McLeodUSA, Inc., 9.250% due 07/15/07............. B1/B+ 110,687
500,000 Sprint Capital Corp., 5.700% due 11/15/03........ Baa1/BBB+ 471,640
175,000 US West Capital Funding, Inc., 6.250% due
07/15/05....................................... Baa1/A- 163,949
500,000 WorldCom, Inc., 6.400% due 08/15/05.............. A3/A- 475,960
------------
1,222,236
------------
TRUCK & FREIGHT CARRIERS (0.1%)
113,150 Federal Express Corp., Series 1999-1, Class C,
8.250% due 01/15/19............................ Baa1/BBB+ 111,209
------------
TOTAL CORPORATE OBLIGATIONS (COST
$9,860,146)................................ 9,518,998
------------
FOREIGN CORPORATE OBLIGATIONS (1.9%)
BERMUDA (0.2%)
TELECOMMUNICATION SERVICES
145,000 Global Crossing Holdings Ltd., Inc. , 9.125% due
11/15/06....................................... Ba2/BB 139,562
------------
CANADA (0.6%)
ELECTRIC
200,000 Ontario Electricity Financial Corp., 6.100% due
01/30/08....................................... Aa3/AA- 185,206
------------
FINANCIAL SERVICES
200,000 McKesson Finance of Canada, (144A), 6.550% due
11/01/02....................................... Baa2/BBB 188,462
------------
OIL PRODUCTION
49,920 Express Pipeline LP, Series B, (144A), 7.390% due
12/31/17....................................... Baa3/BBB- 42,619
------------
416,287
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
KOREA (0.0%)
BANKING
$ 25,000 Cho Hung Bank, (144A), 11.875% due 04/01/10(v)... B1/B $ 24,000
------------
NETHERLANDS (0.2%)
TELECOMMUNICATION SERVICES
150,000 Kpnqwest B.V., 8.125% due 06/01/09............... Ba1/BB 138,750
------------
UNITED KINGDOM (0.9%)
FINANCIAL SERVICES
340,000 HSBC Capital Funding LP, (144A), 10.176% due
06/30/30(v).................................... A1/A- 364,701
------------
UTILITIES
300,000 United Utilities PLC, 6.250% due 08/15/05........ A3/BBB+ 275,796
------------
640,497
------------
TOTAL FOREIGN CORPORATE OBLIGATIONS
(COST $1,423,186).......................... 1,359,096
------------
FOREIGN GOVERNMENT OBLIGATIONS (1.1%)
CANADA (1.1%)
550,000 Province of Quebec, 7.500% due 09/15/29.......... A2/A+ 540,325
250,000 Province of Ontario, 7.625% due 06/22/04......... Aa3/AA- 254,000
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST
$815,505).................................. 794,325
------------
MORTGAGE BACKED SECURITY (55.5%)
COLLATERALIZED MORTGAGE OBLIGATIONS (11.4%)
200,000 Bear Stearns Structured Securities Inc.,
Sequential Payer, Series 1997-2, Class 1A5,
(144A), 7.000% due 08/25/36.................... Aaa/NR 181,313
1,550,000 Chase Manhattan Bank - First Union National,
Sequential Payer, Series 1999-1, Class A2,
7.439% due 07/15/09............................ NR/AAA 1,538,860
100,000 CS First Boston Mortgage Securities Corp.,
Sequential Payer, Series 1999-C1, Class A2,
7.290% due 09/15/09............................ Aaa/NR 99,656
853,467 First Nationwide Trust, Sequential Payer, Series
1999-4, Class 3PA1, 6.500% due 10/19/29........ NR/AAA 798,257
1,195,000 First Union Commercial Mortgage Trust, Sequential
Payer, Series 1999-C1, Class A2, 6.070% due
10/15/08....................................... NR/AAA 1,090,812
2,032,130 GMAC Commercial Mortgage Securities, Sequential
Payer, Series 1998-C2, Class A1, 6.150% due
11/15/07....................................... Aaa/AAA 1,937,510
1,000,000 Heller Financial Commercial Mortgage Asset Co.,
Sequential Payer, Series1999-PH1, Class A2, AF,
6.847% due 05/15/31............................ Aaa/NR 956,875
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
$ 225,000 LB Commercial Conduit Mortgage Trust, Sequential
Payer, Series 1998-C1, Class A2, 6.400% due
08/18/07....................................... Aaa/NR $ 214,805
1,621,863 LB Commercial Conduit Mortgage Trust, Sequential
Payer, Series 1999-C2, Class A1, 7.105% due
07/15/08....................................... Aaa/NR 1,598,295
------------
8,416,383
------------
MORTGAGE PASS-THROUGHS (44.1%)
2,180,000 TBA FNMA, July, 6.500% due 07/01/29.............. 2,055,326
6,057,000 TBA FNMA, July, 7.000% due 05/01/30.............. 5,847,852
3,455,000 TBA FNMA, July, 7.500% due 04/01/15.............. 3,443,668
10,335,000 TBA FNMA, July, 7.500% due 05/01/30.............. 10,188,036
2,935,000 TBA FNMA, July, 8.000% due 05/01/30.............. 2,947,386
1,660,000 TBA GNMA, July, 8.000% due 05/01/30.............. 1,677,646
2,262,232 FNMA, 6.000% due 12/01/28........................ 2,070,870
2,115,000 FNMA, 7.250% due 01/15/10........................ 2,136,298
90,970 FNMA, 7.500% due 02/01/30........................ 89,690
607,540 FNMA, 7.500% due 03/01/30........................ 598,992
50,929 FNMA, 8.500% due 05/01/09........................ 51,821
1,216,181 GNMA, 6.500% due 12/15/28........................ 1,154,824
275,257 GNMA, 7.000% due 08/15/12........................ 272,152
65,497 GNMA, 7.500% due 02/15/27........................ 65,090
------------
32,599,651
------------
TOTAL MORTGAGE BACKED SECURITY
(COST $40,836,457)......................... 41,016,034
------------
SOVEREIGN BONDS (1.1%)
ARGENTINA (0.1%)
15,000 Republic of Argentina, 12.000% due 02/01/20...... B1/BB 13,687
70,000 Republic of Argentina Global Bonds, 9.750% due
09/19/27....................................... B1/BB 54,075
------------
67,762
------------
BRAZIL (0.2%)
85,000 Republic of Brazil, 12.750% due 01/15/20......... B2/B+ 80,750
60,000 Republic of Brazil NMB L, Series RG, 7.438%(v)
due 04/15/09................................... B2/NR 50,100
55,000 Republic of Brazil Discount Bonds, Series 30 Year
ZL, 7.375%(v) due 04/15/24..................... B2/B+ 43,450
------------
174,300
------------
BULGARIA (0.2%)
215,000 Republic of Bulgaria Global FLIRB, Series A,
2.750%(v) due 07/28/12......................... B2/B+ 157,756
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
14
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
COLOMBIA (0.2%)
$ 195,000 Republic of Colombia, 9.750% due 04/23/09........ Ba2/BB $ 152,100
20,000 Republic of Colombia, 11.750% due 02/25/20....... Ba2/BB 16,550
------------
168,650
------------
MEXICO (0.1%)
75,000 United Mexican States Global Bonds, 11.375% due
09/15/16....................................... Baa3/BB+ 85,650
------------
PANAMA (0.0%)
47,668 Republic of Panama PDI, Series 20 Year, 7.063%(v)
due 07/17/16................................... Ba1/BB+ 39,088
------------
PERU (0.1%)
90,000 Republic of Peru PDI, Series 20 Year, 4.500%(v)
due 03/07/17................................... Ba3/BB 60,075
------------
PHILIPPINES (0.1%)
20,000 Republic of Philippines Global Bonds, 10.625% due
03/16/25....................................... Ba1/BB+ 17,100
110,000 Republic of Philippines Global Bonds, 9.875% due
01/15/19....................................... Ba1/BB+ 89,650
------------
106,750
------------
TURKEY (0.1%)
50,000 Republic of Turkey Global Bonds, 11.875% due
01/15/30....................................... B1/B+ 53,187
------------
TOTAL SOVEREIGN BONDS (COST $970,672)........ 913,218
------------
SUPRANATIONAL OBLIGATIONS (0.1%)
BANKING (0.1%)
100,000 Inter-American Development Bank, MTN, 6.750% due
07/15/27 (cost $97,787)........................ Aaa/AAA 92,651
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (1.1%)
FEDERAL HOME LOAN MORTGAGE CORP. (1.1%)
78,145 6.000% due 04/01/11.............................. 74,542
844,647 REMIC: Sequential Payer, Series 2080, Class Z,
6.500% due 08/15/28............................ 708,971
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $883,226)............................ 783,513
------------
U.S. TREASURY OBLIGATIONS (6.4%)
U.S. TREASURY BONDS (4.6%)
40,000 5.250% due 02/15/29.............................. 35,500
1,125,000 6.125% due 08/15/29.............................. 1,136,250
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
15
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S/S&P
AMOUNT SECURITY DESCRIPTION RATING VALUE
------------- ------------------------------------------------- ------------ -------------
<C> <S> <C> <C>
U.S. TREASURY BONDS (CONTINUED)
$ 50,000 6.500% due 11/15/26.............................. $ 52,227
483,000 6.750% due 08/15/26.............................. 519,751
1,295,000 8.875% due 02/15/19.............................. 1,666,704
------------
3,410,432
------------
U.S. TREASURY NOTES (1.8%)
70,000 6.000% due 08/15/09.............................. 69,442
1,230,000 6.875% due 05/15/06.............................. 1,265,941
------------
1,335,383
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST
$4,598,156)................................ 4,745,815
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------------
<C> <S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (0.1%)
INDUSTRIAL PRODUCTS & SERVICES (0.1%)
100 Home Ownership Funding, (144A), 13.331%(v) (cost
$100,104)...................................... Aaa/NR 75,962
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
-------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (47.6%)
COMMERCIAL PAPER-DOMESTIC (11.3%)
$ 1,400,000 Alpine Securitization, 6.550%(y) due
07/14/00(s).................................... 1,396,380
1,400,000 AT& T Corporation, 6.43%(y) due 07/17/00(s)...... 1,400,000
2,500,000 Asset Securitization, 5.975% due 09/11/00(s)..... 2,500,000
1,500,000 CXC, Inc., 6.892%(y) due 07/17/00(s)............. 1,495,050
1,500,000 Eupeka Securitization, 6.553%(y) due
7/17/00(s)..................................... 1,494,869
37,805 Niagara Mohawk Power, Series B, 7.000% due
10/01/00....................................... 37,754
------------
8,324,053
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
16
<PAGE>
J.P. MORGAN BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT SECURITY DESCRIPTION VALUE
------------- ------------------------------------------------- -------------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (36.3%)
$ 6,848,000 Federal Home Loan Bank Discount Note, 4.375(y)
due 07/03/00(s)................................ $ 6,845,622
20,021,000 Federal Home Loan Mortgage Corp. Discount Note,
6.565(y) due 07/03/00(s)....................... 20,010,038
------------
26,855,660
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $35,189,399)......................... 35,179,713
------------
TOTAL INVESTMENTS (COST $103,637,245) (139.8%)... 103,338,014
LIABILITIES IN EXCESS OF OTHER ASSETS (-39.8%)... (29,410,825)
------------
NET ASSETS (100.0%).............................. $ 73,927,189
============
</TABLE>
------------------------------
Note: The aggregate gross unrealized appreciation and depreciation was $433,611
and $732,842, respectively, resulting in net unrealized depreciation of
investments of $299,231.
(s) Security is fully or partially segregated with custodian as collateral for
TBA and when issued securities or futures contracts or with broker as initial
margin for futures contracts. $35,147,000 of the market value has been
segreated.
(v) Rate shown reflects current rate on variable or floating rate instrument or
instrument with step coupon rate.
(y) Yield to maturity.
Abbreviations used in the schedule of investments are as follows:
144A - Securities restricted for resale to Qualified Institutional Buyers.
AFC - Available Funds Class.
FLIRB - Floating Interest Rate Bond.
FNMA - Federal National Mortgage Association.
GNMA - Government National Mortgage Association.
MOPPRS - Mandatory Par Put Amount.
MTN - Medium Term Note.
NMB - New Money Bond.
NR - Not Rated.
PDI - Past Due Interest.
PO - Principal Only.
REMIC - Real Estate Mortgage Investment Conduit.
TBA - Security purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date. The actual principal amount and
maturity date will be determined upon settlement.
The Accompanying Notes are an Integral Part of the Financial Statements.
17
<PAGE>
J.P. MORGAN BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $103,637,245) $103,338,014
Receivable for Investments Sold 12,106,604
Interest Receivable 498,599
Prepaid Trustees' Fees 8,117
Receivable for Shares of Beneficial Interest Sold 30
Prepaid Expenses and Other Assets 8,041
------------
Total Assets 115,959,405
------------
LIABILITIES
Due to Custodian 3,893,402
Payable for Investments Purchased 38,039,661
Advisory Fee Payable 18,023
Administrative Services Fee Payable 13,125
Variation Margin Payable 4,497
Payable for Shares of Beneficial Interest
Redeemed 4,196
Administration Fee Payable 40
Accrued Expenses 59,272
------------
Total Liabilities 42,032,216
------------
NET ASSETS
Applicable to 6,504,279 Shares of Beneficial
Interest Outstanding (no par value, unlimited
shares authorized) $ 73,927,189
============
Net Asset Value, Offering and Redemption Price
Per Share $11.37
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $ 74,115,264
Undistributed Net Investment Income 2,067,549
Accumulated Net Realized Loss on Investments and
Futures Contracts (2,109,621)
Net Unrealized Depreciation of Investments and
Futures Contracts (146,003)
------------
NET ASSETS $ 73,927,189
============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
J.P. MORGAN BOND PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income (Net of Foreign Withholding Tax
of $51) $ 2,321,796
EXPENSES
Advisory Fee $ 98,941
Fund Accounting Fees & Expenses 57,701
Trustees' Fees and Expenses 21,195
Administrative Services Fee 20,704
Custodian Fees and Expenses 20,052
Professional Fees and Expenses 15,067
Administration Fee 228
Amortization of Organization Expense 25
Miscellaneous 20,334
-----------
Total Expenses 254,247
-----------
NET INVESTMENT INCOME 2,067,549
NET REALIZED GAIN (LOSS) ON
Investments (1,281,878)
Futures Contracts 152,270
-----------
Net Realized Loss (1,129,608)
NET CHANGE IN UNREALIZED APPRECIATION OF
Investments 1,084,741
Futures Contracts 18,512
-----------
Net Change in Unrealized Appreciation 1,103,253
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 2,041,194
===========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
J.P. MORGAN BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 2,067,549 $ 2,366,841
Net Realized Loss on Investments and Futures
Contracts (1,129,608) (948,647)
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Futures
Contracts 1,103,253 (1,540,347)
------------ ----------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 2,041,194 (122,153)
------------ ----------------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (1,237,804) (1,376,216)
Net Realized Gain -- (137,587)
------------ ----------------
Total Distributions to Shareholders (1,237,804) (1,513,803)
------------ ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Proceeds from Shares of Beneficial Interest Sold 24,327,384 46,779,712
Reinvestment of Dividends and Distributions 1,237,804 1,513,803
Cost of Shares of Beneficial Interest Redeemed (18,659,473) (12,980,931)
------------ ----------------
Net Increase from Investors' Transactions 6,905,715 35,312,584
------------ ----------------
Total Increase in Net Assets 7,709,105 33,676,628
NET ASSETS
Beginning of Period 66,218,084 32,541,456
------------ ----------------
End of Period (including undistributed net
investment income of $2,067,549 and $1,237,804,
respectively) $ 73,927,189 $ 66,218,084
============ ================
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
J.P. MORGAN BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a unit outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 3, 1995
SIX MONTHS ENDED FOR THE FISCAL YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
JUNE 30, 2000 --------------------------------------- OPERATIONS) THROUGH
(UNAUDITED) 1999 1998 1997 1996 DECEMBER 31, 1995
---------------- ------- ------- ------- ------ -------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 11.67 $ 11.29 $ 10.65 $10.91 $10.00
------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.34 0.40 0.45 0.68 0.47 0.58
Net Realized and Unrealized Gain (Loss)
on Investments, Futures and Foreign
Currency Transactions (0.00)(d) (0.53) 0.45 0.31(c) (0.25) 1.11
------- ------- ------- ------- ------ ------
Total from Investment Operations 0.34 (0.13) 0.90 0.99 0.22 1.69
------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.20) (0.27) (0.39) (0.27) (0.47) (0.58)
Net Realized Gain -- (0.04) (0.13) (0.08) (0.01) (0.20)
------- ------- ------- ------- ------ ------
Total Distributions to Shareholders (0.20) (0.31) (0.52) (0.35) (0.48) (0.78)
------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.37 $ 11.23 $ 11.67 $ 11.29 $10.65 $10.91
======= ======= ======= ======= ====== ======
RATIOS AND SUPPLEMENTAL DATA
Total Return 2.93%(a) (1.13)% 8.01% 9.38% 2.09% 16.85%(a)
Net Assets, End of Period (in thousands) $73,927 $66,218 $32,541 $15,899 $2,782 $1,417
Ratios to Average Net Assets
Net Expenses 0.75%(b) 0.75% 0.75% 0.75% 0.75% 0.75%(b)
Net Investment Income 5.99%(b) 5.36% 5.39% 6.20% 5.91% 6.00%(b)
Expenses excluding Reimbursement 0.75%(b) 0.75% 1.02% 1.91% 2.18% 2.90%(b)
Portfolio Turnover 296% 479% 179% 184% 198% 239%
</TABLE>
--------------------------
(a) Not annualized.
(b) Annualized.
(c) Based on Average Daily Shares Outstanding.
(d) Less than $0.01.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
J.P. MORGAN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Bond Portfolio (the "portfolio") is one of four portfolios
comprising the J.P. Morgan Series Trust II (the "trust"). The trust is
registered under the Investment Company Act of 1940, as amended, as a no-load
diversified, open-end management investment company. The trust was organized as
a Delaware Business Trust on October 28, 1993 for the purpose of funding
flexible premium variable life insurance policies. Prior to December 30, 1999,
the trust was composed of five separate portfolios which operated as distinct
investment vehicles. J.P. Morgan Treasury Money Market Portfolio was terminated
on December 30, 1999. The investment objective of the portfolio is to seek to
provide a high total return consistent with moderate risk of capital and
maintenance of liquidity.
The portfolio may have elements of risk not typically associated with
investments in the United States 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
affecting such countries or regions which could cause the securities and their
markets to be less liquid and prices more volatile than those comparable to the
United States. The ability of issuers of debt, asset-backed, and mortgage-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 asset-backed and mortgage-backed securities can be significantly affected by
changes in interest rates or rapid principal payments including pre-payments.
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 mean of the bid and asked
prices on such exchange, if such exchange or market constitutes the
broadest and most representative market for the security. Securities
listed on a foreign exchange are valued at the last traded price or, in
the absence of recorded trades, at the readily available mean of the bid
and asked prices on such exchange available before the time when net
assets are valued. 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 average of the quoted bid and asked prices 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 established 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.
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
22
<PAGE>
J.P. MORGAN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
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 portfolios' 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.
b) The books and records of the portfolio are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and
foreign currency contracts are translated at the prevailing exchange rates
at the end of the period. Purchases, sales, income and expenses are
translated at the exchange rates prevailing on the respective dates of
such transactions. Translation gains and losses resulting from changes in
exchange rates during the reporting period and gains and losses realized
upon settlement of foreign currency transactions 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 as a result of changes in foreign exchange rates from
the fluctuations arising from changes in the market prices of securities
during the period.
c) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount becomes known. 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 first in first out.
d) Distributions to shareholders of net investment income and net realized
capital gains, if any, are declared and paid semi-annually.
e) The portfolio incurred organization expenses in the amount of $9,834.
These costs were deferred and were amortized on a straight line basis over
a five year period from the commencement of operations.
f) Expenses incurred by the trust with respect to any two or more portfolios
in the trust are allocated in proportion to the net assets of each
portfolio in the trust, except where allocations of direct expenses to
each portfolio can otherwise be made fairly. Expenses directly
attributable to a portfolio are charged to that portfolio.
g) The portfolio may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates and to enhance returns. A
forward foreign currency contract is an agreement to buy or sell
currencies of different countries on a specified future date at a
specified rate. Risks associated with such contracts include the movement
in the value of the foreign currency relative to the U.S. dollar and the
ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily at the current foreign exchange
rates, and the change in the market value is recorded by the portfolio as
unrealized appreciation or depreciation of forward foreign currency
contract translations.
h) 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
23
<PAGE>
J.P. MORGAN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
price at which the purchase and sale will take place is 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 the 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 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 in
movements in the price of futures contracts, interest rates and the
underlying hedged assets, and the possible inability of counterparties to
meet the terms of their contracts.
i) The portfolio may enter into commitments to buy and sell investments to
settle on future dates as part of its normal investment activities. 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.
j) The portfolio is treated as a separate entity for federal income tax
purposes and intends to comply with the provisions of the Internal Revenue
Code of 1986, as amended, (the "code") 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.
The portfolio is also a segregated portfolio of assets for insurance
purposes and intends to comply with the diversification requirements of
Subchapter L of the code. The portfolio may be subject to taxes imposed by
countries in which they invests. Such taxes are generally based on income
and/or capital gains earned. Taxes are accrued and applied to net
investment income, net realized capital gains and net unrealized
appreciation, as applicable, as the income and/or capital gains are
earned.
2. TRANSACTIONS WITH AFFILIATES
a) The trust, on behalf of 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, JPMIM is paid a fee for
its services, computed daily and paid monthly, at an annual rate of 0.30%
of the portfolio's average daily net assets. For the six months ended
June 30, 2000, such fees amounted to $98,941.
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 distributor for the portfolio. Under a Co-Administration Agreement
between FDI and the trust on behalf of the portfolio, FDI provides
administrative services
24
<PAGE>
J.P. MORGAN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
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 portfolios' 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 trust and
certain other investment companies subject to similar agreements with FDI.
For the six months ended June 30, 2000, the fee for these services
amounted to $228.
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 based on the following: if total expenses of the portfolio,
excluding the advisory fees, exceed the expense limits of 0.45% of the
average daily net assets of the portfolio, Morgan will reimburse the
portfolio for the excess expense amount and receive no fee. Should such
expenses be less than the expense limit, Morgan's fee would be limited to
the difference between such expenses and the fees calculated under the
Services Agreement. For the six months ended June 30, 2000, the fee for
these services amounted to $20,704 and there will be no reimbursement to
the portfolio from Morgan under this agreement.
d) An aggregate annual fee of $20,000 is paid to each trustee for serving as
a trustee of the trust. The Trustees' Fees and Expenses shown in the
financial statements represent the portfolio's allocated portion of the
total fees and expenses.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares. Transactions in shares of beneficial interest of
each portfolio were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FISCAL
MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Shares sold...................................... 2,157,523 4,113,778
Reinvestment of dividends and distributions...... 109,637 132,802
Shares redeemed.................................. (1,658,819) (1,139,945)
----------- ----------------
Net Increase..................................... 608,341 3,106,635
=========== ================
</TABLE>
From time to time, the portfolio may have a concentration of several
shareholders holding a significant percentage of shares outstanding. Investment
activities of these shareholders could have a material impact on the portfolio.
25
<PAGE>
J.P. MORGAN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
--------------------------------------------------------------------------------
4. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the six months
ended June 30, 2000, were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
<S> <C> <C>
U.S. Government and Agency Obligations........... $137,646,261 $128,968,974
Corporate and Collateralized Obligations......... 51,995,978 65,478,319
------------ ------------
$189,642,239 $194,447,293
============ ============
</TABLE>
Open futures contracts at June 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION/ MARKET VALUE
CONTRACTS LONG (DEPRECIATION) OF CONTRACTS
-------------- -------------- ------------
<S> <C> <C> <C>
U.S. Five Year Note, expiring September
2000................................... 8 $ (169) $ 792,125
U.S. Ten Year Note, expiring September
2000................................... 19 15,177 1,871,203
U.S. Long Bond, expiring September
2000................................... 41 138,220 3,991,094
-- -------- ----------
Totals.................................. 68 $153,228 $6,654,422
== ======== ==========
</TABLE>
26
<PAGE>
J.P. MORGAN SERIES TRUST II PORTFOLIOS
BOND PORTFOLIO
INTERNATIONAL OPPORTUNITIES PORTFOLIO
SMALL COMPANY PORTFOLIO
U.S. DISCIPLINED EQUITY PORTFOLIO
FOR MORE INFORMATION ON THE J.P. MORGAN SERIES TRUST II PORTFOLIOS, CALL FUNDS
DISTRIBUTOR, INC. AT (888) 756-8645.
J.P. MORGAN
BOND PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 2000
IMSAR376
