EX-17.(G) 8 a2043511zex-17_g.txt EXHIBIT 17(G) LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN TAX EXEMPT BOND FUND September 1, 2000 Dear Shareholder: The J.P. Morgan Tax Exempt Bond Fund returned 3.74% for the 12 months ended July 31, 2000. The fund outperformed its competition, as measured by the Lipper Intermediate Municipal Debt Funds Average, which advanced 3.16% over the same period. At the same time, the fund trailed its benchmark, the Lehman Brothers 1-16 year Municipal Bond Index, which gained 4.72%. The fund's 30-day SEC yield has increased to 4.39% as of July 31, which is a tax equivalent yield of 7.28% at a 39.6% federal income tax rate. The fund's net asset value as of July 31 was $11.56, down from $11.77 on July 31, 1999. Dividends of approximately $0.63 per share were paid over the 12-month period, of which $0.52 was tax-exempt income and $0.11 was long-term capital gains. The net assets of the fund stood at approximately $336.6 million on July 31, 2000, while the net assets of the portfolio, in which the fund invests, were approximately $783.9 million. The report that follows includes an interview with Kingsley Wood, Jr., who with Benjamin S. Thompson and Robert Meiselas, manages the portfolio. This interview is designed to reflect what happened during the months past, as well as provide an outlook for the future. As chairman and president of Asset Management Services, we thank you for investing with J.P. Morgan. Should you have any comments or questions, please telephone your Morgan representative or J.P. Morgan Funds Services at 800-521-5411. Sincerely yours, /s/ Ramon de Oliveira /s/ Keith M. Schappert Ramon de Oliveira Keith M. Schappert Chairman of Asset Management Services President of Asset Management Services J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated -------------------------------------------------------------------------------- TABLE OF CONTENTS LETTER TO THE SHAREHOLDERS.........1 GLOSSARY OF TERMS ......................6 FUND PERFORMANCE...................2 FUND FACTS AND HIGHLIGHTS...............7 PORTFOLIO MANAGER Q&A..............3 FINANCIAL STATEMENTS...................10 -------------------------------------------------------------------------------- 1 FUND PERFORMANCE EXAMINING PERFORMANCE There are several ways to evaluate a mutual fund's historical performance. One way is to look at the growth of a hypothetical investment. The chart at right shows that $10,000 invested on July 31, 1990 would have grown to $17,894 on July 31, 2000. Another way is to review a fund's average annual total return. This calculation takes the fund's actual return and shows what would have happened if the fund had achieved that return by performing at a constant rate each year. Average annual total returns represent the average yearly change of a fund's value over various time periods, typically one, five, or ten years (or since inception). Total returns for periods of less than one year are not annualized and provide a picture of how a fund has performed over the short term. Growth of $10,000 over 10 years July 31, 1990 -- July 31, 2000
JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni Tax Exempt Bond Muni Debt Muni Bond Bond Index Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot Index Returns Points Returns Points Index Returns Points Index Returns Points 7/31/90 163,506 161,526.63 161,944 170,745.78 5,000,000 174.76 176,614.40 5,000,000 181,070 182,621.89 186,555 8/31/90 161,527 (0.01) 159,984 (0.01) 4,956,500 173.26 (0.01) 4,956,850 9/30/90 161,944 0.00 160,397 0.00 4,972,361 173.63 0.00 4,967,606 10/31/90 165,077 0.02 163,501 0.01 5,034,018 176.88 0.02 5,060,550 11/30/90 167,771 0.02 166,168 0.02 5,114,059 179.91 0.02 5,147,288 12/31/90 168,186 0.00 166,580 0.00 5,135,027 180.48 0.00 5,163,656 1/31/91 170,746 0.02 169,115 0.01 5,192,539 183.20 0.02 5,241,421 2/28/91 171,935 0.01 170,293 0.01 5,236,156 184.89 0.01 5,289,799 3/31/91 171,723 (0.00) 170,083 0.00 5,241,916 184.54 (0.00) 5,279,802 4/30/91 173,847 0.01 172,187 0.01 5,299,577 187.00 0.01 5,350,182 5/31/91 175,034 0.01 173,362 0.01 5,338,264 188.20 0.01 5,384,369 6/30/91 174,802 (0.00) 173,132 (0.00) 5,330,257 187.95 (0.00) 5,377,154 7/31/91 176,614 0.01 174,928 0.01 5,387,823 189.84 0.01 5,431,410 8/31/91 178,763 0.01 177,055 0.01 5,442,779 192.43 0.01 5,505,548 9/30/91 181,070 0.01 179,341 0.01 5,502,650 195.13 0.01 5,582,736 10/31/91 182,249 0.01 180,509 0.01 5,546,121 196.71 0.01 5,627,845 11/30/91 182,622 0.00 180,878 0.00 5,562,204 197.25 0.00 5,643,321 12/31/91 186,555 0.02 184,773 0.02 5,667,330 201.53 0.02 5,765,894 1/31/92 186,746 0.00 184,962 0.00 5,682,632 201.98 0.00 5,778,579 2/29/92 186,301 (0.00) 184,521 0.00 5,691,724 201.86 (0.00) 5,775,112 3/31/92 185,839 (0.00) 184,064 (0.00) 5,683,756 201.31 (0.00) 5,759,519 4/30/92 187,188 0.01 185,400 0.01 5,729,794 203.14 0.01 5,811,931 5/31/92 189,372 0.01 187,564 0.01 5,792,249 205.36 0.01 5,875,281 6/30/92 192,397 0.02 190,559 0.01 5,874,499 208.79 0.02 5,973,398 7/31/92 197,900 0.03 196,010 0.03 6,041,335 215.03 0.03 6,152,003 8/31/92 195,687 (0.01) 193,818 (0.01) 5,979,713 212.75 (0.01) 6,086,791 9/30/92 197,357 0.01 195,472 0.01 6,016,189 214.52 0.01 6,137,312 10/31/92 195,442 (0.01) 193,575 (0.01) 5,965,653 212.82 (0.01) 6,088,827 11/30/92 198,467 0.02 196,572 0.02 6,073,035 216.08 0.02 6,181,986 12/31/92 200,491 0.01 198,577 0.01 6,139,838 218.15 0.01 6,241,333 1/31/93 203,205 0.01 201,264 0.01 6,211,060 221.38 0.01 6,333,705 2/28/93 209,215 0.03 207,217 0.03 6,401,740 228.31 0.03 6,531,950 3/31/93 206,317 (0.01) 204,346 (0.01) 6,333,241 225.20 (0.01) 6,443,115 4/30/93 207,813 0.01 205,829 0.01 6,386,441 226.87 0.01 6,490,794 5/31/93 208,420 0.00 206,430 0.00 6,411,986 227.55 0.00 6,510,267 6/30/93 211,683 0.02 209,661 0.01 6,504,960 231.69 0.02 6,628,754 7/31/93 211,041 (0.00) 209,025 0.00 6,507,562 231.97 0.00 6,636,708 100.14 (1.00) 103 8/31/93 215,010 0.02 212,957 0.02 6,626,000 235.84 0.02 6,747,541 101.93 0.02 104 9/30/93 217,753 0.01 215,673 0.01 6,701,536 238.44 0.01 6,821,764 102.98 0.01 105 10/31/93 217,799 0.00 215,719 0.00 6,715,609 238.92 0.00 6,835,408 103.19 0.00 106 11/30/93 216,383 (0.01) 214,316 (0.01) 6,672,630 237.31 (0.01) 6,789,610 102.47 (0.01) 105 12/31/93 219,697 0.02 217,599 0.02 6,785,397 241.52 0.02 6,909,786 104.36 0.02 107 1/31/94 221,955 0.01 219,835 0.01 6,855,965 244.05 0.01 6,982,339 105.50 0.01 108 2/28/94 217,185 (0.02) 215,110 (0.02) 6,709,933 238.85 (0.02) 6,833,615 103.15 (0.02) 106 3/31/94 212,937 (0.02) 210,903 (0.03) 6,522,055 232.26 (0.03) 6,645,008 99.98 (0.03) 102 4/30/94 213,546 0.00 211,507 0.00 6,554,013 234.17 0.01 6,699,497 100.86 0.01 103 5/31/94 214,910 0.01 212,857 0.01 6,603,168 235.52 0.01 6,738,354 101.55 0.01 104 6/30/94 214,406 (0.00) 212,358 (0.00) 6,586,000 234.98 (0.00) 6,722,856 101.24 (0.00) 104 7/31/94 217,094 0.01 215,021 0.01 6,670,959 238.20 0.01 6,814,959 102.72 0.01 105 8/31/94 217,924 0.00 215,843 0.00 6,696,976 239.25 0.00 6,844,944 103.14 0.00 106 9/30/94 215,752 (0.01) 213,692 (0.01) 6,627,997 237.10 (0.01) 6,783,340 102.06 (0.01) 104 10/31/94 213,568 (0.01) 211,528 (0.01) 6,550,450 234.84 (0.01) 6,718,898 100.90 (0.01) 103 11/30/94 210,409 (0.01) 208,400 (0.02) 6,450,883 231.77 (0.01) 6,630,881 99.49 (0.01) 102 12/31/94 213,771 0.02 211,729 0.02 6,552,162 234.90 0.01 6,720,398 101.01 0.02 103 1/31/95 217,756 0.02 215,677 0.02 6,685,826 239.34 0.02 6,847,413 103.11 0.02 106 2/28/95 222,757 0.02 220,629 0.02 6,830,240 244.48 0.02 6,994,632 105.53 0.02 108 3/31/95 224,644 0.01 222,498 0.01 6,891,712 247.24 0.01 7,073,672 106.72 0.01 109 4/30/95 225,567 0.00 223,412 0.00 6,903,428 247.86 0.00 7,091,356 106.94 0.00 109 5/31/95 231,198 0.02 228,990 0.02 7,069,800 254.11 0.03 7,270,058 109.81 0.03 112 JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni Tax Exempt Bond Muni Debt Muni Bond Bond Index Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot Index Returns Points Returns Points Index Returns Points Index Returns Points 6/30/95 230,339 (0.00) 228,140 (0.00) 7,037,986 253.75 (0.00) 7,259,880 109.41 (0.00) 112 7/31/95 232,633 0.01 230,411 0.01 7,104,143 257.03 0.01 7,353,533 110.75 0.01 113 8/31/95 234,548 0.01 232,308 0.01 7,175,895 259.80 0.01 7,432,951 112.07 0.01 115 9/30/95 235,485 0.00 233,236 0.00 7,211,057 260.92 0.00 7,464,912 112.66 0.01 115 10/31/95 237,617 0.01 235,347 0.01 7,283,889 263.06 0.01 7,526,125 113.72 0.01 116 11/30/95 240,162 0.01 237,868 0.01 7,366,197 265.87 0.01 7,606,654 115.07 0.01 118 12/31/95 242,409 0.01 240,094 0.01 7,417,760 267.31 0.01 7,647,730 115.80 0.01 119 1/31/96 244,748 0.01 242,410 0.01 7,477,102 269.93 0.01 7,722,678 116.91 0.01 120 2/29/96 243,645 (0.00) 241,318 (0.00) 7,454,671 269.15 (0.00) 7,700,282 116.51 (0.00) 119 3/31/96 240,672 (0.01) 238,373 (0.01) 7,371,178 266.67 (0.01) 7,629,440 115.37 (0.01) 118 4/30/96 239,962 (0.00) 237,670 (0.00) 7,357,173 266.19 (0.00) 7,615,707 115.13 (0.00) 118 5/31/96 240,072 0.00 237,779 0.00 7,357,909 265.82 (0.00) 7,605,045 114.99 (0.00) 118 6/30/96 241,223 0.00 238,919 0.01 7,403,528 267.81 0.01 7,662,082 115.93 0.01 119 7/31/96 243,834 0.01 241,505 0.01 7,470,160 269.95 0.01 7,723,379 116.92 0.01 120 8/31/96 243,943 0.00 241,613 0.00 7,473,148 270.11 0.00 7,728,013 116.98 0.00 120 9/30/96 245,955 0.01 243,606 0.01 7,538,911 272.38 0.01 7,792,928 118.07 0.01 121 10/31/96 248,178 0.01 245,808 0.01 7,612,039 275.22 0.01 7,873,975 119.34 0.01 122 11/30/96 251,905 0.02 249,499 0.01 7,723,936 279.54 0.02 7,997,596 121.30 0.02 124 12/31/96 250,997 (0.00) 248,600 (0.00) 7,701,536 278.73 (0.00) 7,974,403 120.92 (0.00) 124 1/31/97 251,760 0.00 249,355 0.00 7,718,480 279.81 0.00 8,005,503 121.39 0.00 124 2/28/97 253,832 0.01 251,407 0.01 7,775,596 281.97 0.01 8,067,146 122.39 0.01 125 3/31/97 250,733 (0.01) 248,338 (0.01) 7,697,063 278.75 (0.01) 7,975,180 121.01 (0.01) 124 4/30/97 251,948 0.00 249,542 0.01 7,736,318 280.26 0.01 8,018,246 121.78 0.01 125 5/31/97 255,108 0.01 252,672 0.01 7,828,380 283.68 0.01 8,116,069 123.33 0.01 126 6/30/97 257,634 0.01 255,173 0.01 7,899,618 286.17 0.01 8,187,490 124.48 0.01 127 7/31/97 263,865 0.02 261,345 0.02 8,073,410 292.16 0.02 8,358,609 127.34 0.02 130 8/31/97 260,907 (0.01) 258,415 (0.01) 8,008,015 290.26 (0.01) 8,304,278 126.42 (0.01) 129 9/30/97 263,886 0.01 261,366 0.01 8,091,299 293.22 0.01 8,388,981 127.75 0.01 131 10/31/97 265,100 0.00 262,568 0.00 8,130,137 294.68 0.00 8,430,926 128.44 0.01 131 11/30/97 266,098 0.00 263,557 0.00 8,162,658 295.74 0.00 8,461,278 128.98 0.00 132 12/31/97 269,621 0.01 267,046 0.01 8,266,323 299.15 0.01 8,558,582 130.56 0.01 134 1/31/98 271,956 0.01 269,358 0.01 8,336,587 301.99 0.01 8,639,889 131.85 0.01 135 2/28/98 271,840 (0.00) 269,244 0.00 8,339,922 302.26 0.00 8,647,665 131.96 0.00 135 3/31/98 271,709 (0.00) 269,114 0.00 8,341,590 302.32 0.00 8,649,394 132.04 0.00 135 4/30/98 270,228 (0.01) 267,647 (0.01) 8,298,213 301.02 (0.00) 8,612,202 131.50 (0.00) 135 5/31/98 274,177 0.01 271,558 0.01 8,416,048 305.08 0.01 8,728,467 133.34 0.01 136 6/30/98 274,955 0.00 272,329 0.00 8,440,455 306.09 0.00 8,757,271 133.82 0.00 137 7/31/98 275,505 0.00 272,874 0.00 8,454,803 306.98 0.00 8,782,667 134.18 0.00 137 8/31/98 279,711 0.02 277,040 0.01 8,579,934 311.21 0.01 8,903,868 136.09 0.01 139 9/30/98 283,018 0.01 280,315 0.01 8,673,456 314.70 0.01 9,003,591 137.67 0.01 141 10/31/98 283,077 0.00 280,373 (0.00) 8,670,854 315.45 0.00 9,025,199 137.92 0.00 141 11/30/98 283,601 0.00 280,892 0.00 8,687,328 316.24 0.00 9,047,762 138.29 0.00 142 12/31/98 284,369 0.00 281,653 0.00 8,716,865 317.13 0.00 9,073,096 138.72 0.00 142 1/31/99 288,159 0.01 285,406 0.01 8,816,237 321.06 0.01 9,185,603 140.48 0.01 144 2/28/99 286,108 (0.01) 283,376 (0.01) 8,766,867 319.84 (0.00) 9,150,697 139.86 (0.00) 143 3/31/99 285,913 (0.00) 283,182 (0.00) 8,759,853 319.91 0.00 9,152,527 139.92 0.00 143 4/30/99 286,429 0.00 283,694 0.00 8,783,505 320.80 0.00 9,178,155 140.32 0.00 144 5/31/99 284,805 (0.01) 282,085 (0.01) 8,730,804 319.39 (0.00) 9,137,771 139.66 (0.00) 143 6/30/99 280,806 (0.01) 278,124 (0.01) 8,605,953 315.37 (0.01) 9,022,635 137.89 (0.01) 141 7/31/99 282,030 0.00 279,336 0.00 8,645,541 317.29 0.01 9,077,673 138.63 0.01 142 8/31/99 281,347 (0.00) 278,660 (0.01) 8,600,584 317 (0.00) 9,065,872 138.29 (0.00) 142 9/30/99 282,125 0.00 279,430 0.00 8,603,164 318 0.00 9,098,509 138.69 0.00 142 10/31/99 280,732 (0.00) 278,051 (0.01) 8,538,640 317 (0.00) 9,066,664 138.01 (0.00) 141 11/30/99 282,994 0.01 280,291 0.01 8,612,072 319 0.01 9,132,851 139.21 0.01 142 12/31/99 281,874 (0.00) 279,182 (0.00) 8,571,596 318 (0.00) 9,099,973 138.64 (0.00) 142 1/31/00 281,219 (0.00) 278,534 (0.01) 8,528,738 318 (0.00) 9,087,233 138.40 (0.00) 142 2/29/00 283,048 0.01 280,345 0.01 8,594,409 319 0.00 9,130,851 139.33 0.01 143 3/31/00 286,168 0.01 283,434 0.01 8,715,590 323 0.01 9,244,074 141.35 0.01 145 4/30/00 284,998 (0.00) 282,276 (0.00) 8,679,856 322 (0.00) 9,217,266 141.00 (0.00) 144 JP Morgan Lipper Intermediate Lehman Quality Intermed. Lehman 1-16Yr Muni Tax Exempt Bond Muni Debt Muni Bond Bond Index Net Monthly Plot Monthly Plot Monthly Plot Monthly Plot Index Returns Points Returns Points Index Returns Points Index Returns Points 5/31/00 283,842 (0.00) 281,131 (0.00) 8,639,929 321 (0.00) 9,196,988 140.56 (0.00) 144 6/30/00 289,441 0.02 286,676 0.02 8,819,639 328 0.02 9,386,446 143.57 0.02 147 7/31/00 292,580 0.01 289,785 0.01 8,918,419 331.82 0.01 9,493,452 145.18 0.01 149 ------------------------------------------------------------------------------------------ 5.99% 5.96% 6.62%
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS ------------------ -------------------------------------- THREE SIX ONE THREE FIVE TEN AS OF JULY 31, 2000 MONTHS MONTHS YEAR YEARS YEARS YEARS ------------------------------------------------------------------------------------------------------------------- J.P. Morgan Tax Exempt Bond Fund 2.66% 4.04% 3.74% 3.50% 4.69% 5.99% Lehman 1-16 year Municipal Bond Index* 2.96% 4.89% 4.72% 4.47% 5.56% 6.69% Lehman Quality Intermediate Municipal Bond Index 3.00% 4.47% 4.58% 4.34% 5.24% 6.62% Lipper Intermediate Municipal Debt Funds Average** 2.75% 4.59% 3.16% 3.40% 4.72% 6.00% AS OF JUNE 30, 2000 ------------------------------------------------------------------------------------------------------------------- J.P. Morgan Tax Exempt Bond Fund 1.14% 2.68% 3.07% 3.96% 4.67% 6.01% Lehman 1-16 year Municipal Bond Index* 1.57% 3.56% 4.12% 4.87% 5.58% 6.58% Lehman Quality Intermediate Municipal Bond Index 1.54% 3.15% 4.03% 4.66% 5.27% 6.64% Lipper Intermediate Municipal Debt Funds Average** 1.20% 2.91% 2.50% 3.77% 4.68% 6.01%
*THE FUND'S CURRENT BENCHMARK IS THE LEHMAN BROTHERS 1-16 YEAR MUNICIPAL BOND INDEX. SINCE THIS INDEX DID NOT EXIST PRIOR TO JULY 31, 1993, THE TABLE AND GRAPH ALSO INCLUDE THE PERFORMANCE DATA FOR THE LEHMAN QUALITY INTERMEDIATE MUNICIPAL BOND INDEX, THE FUND'S BENCHMARK UNTIL MAY 1, 1997. BOTH ARE UNMANAGED INDICES THAT MEASURE MUNICIPAL BOND MARKET PERFORMANCE. THEY DO NOT INCLUDE FEES OR EXPENSES AND ARE NOT AVAILABLE FOR ACTUAL INVESTMENT. **DESCRIBES THE AVERAGE ANNUAL TOTAL RETURN FOR ALL FUNDS IN THE LIPPER CATEGORY, AS DEFINED BY LIPPER INC., AND DOES NOT TAKE INTO ACCOUNT SALES CHARGES. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR MUTUAL FUND DATA. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF FEES AND ASSUME THE REINVESTMENT OF FUND DISTRIBUTIONS. 2 PORTFOLIO MANAGER Q&A Following is an interview with Kingsley Wood, Jr., who with Benjamin S. Thompson and Robert Meiselas, manages the master portfolio in which the fund invests. [PHOTO] BENJAMIN S. THOMPSON, vice president, is a senior fixed income portfolio manager and head of J.P. Morgan's municipal bond strategies. His responsibilities include coordination of strategy and research, portfolio structuring and trade execution for the Tax Aware Fixed Income Group. Prior to joining Morgan in 1999, Ben was a senior fixed income portfolio manager at Goldman Sachs Asset Management. Earlier, he was in the Structured Finance Group of the Chase Manhattan Bank. He holds a B.A. in Economics from Colorado College. [PHOTO] ROBERT MEISELAS, vice president, is a portfolio manager with the Tax Aware Fixed Income Group responsible for managing municipal bonds, including tax exempt private placements. Bob is a CPA and joined Morgan's financial group in 1982, after having spent 10 years at Coopers & Lybrand. He also spent five years in J.P. Morgan's Private Banking Investment Management Group, and moved to J.P. Morgan Investment Management in 1997. Bob is a graduate of St. John's University and has completed graduate work in taxation at Long Island University. [PHOTO] KINGSLEY (KIT) WOOD, JR., vice president, is a portfolio manager in the Tax Aware Fixed Income Group. Prior to becoming a J.P. Morgan Investment Management employee in 2000, he worked at Mercantile Bank & Trust (MSD&T Funds) in Baltimore, MD as a portfolio manager where he managed all institutional tax-exempt assets (mutual funds and separate accounts). Prior to that he was a sell-side institutional trader at ABN-AMRO Bank and Kemper Securities in Chicago. Kit holds a B.A. from the University of Colorado and has completed graduate work towards an M.B.A. at the University of Maryland. This interview was conducted on August 12, 2000, and represents the views of Kit, Ben, and Bob on that date. WHAT WERE THE PRIMARY FACTORS THAT DROVE THE TAX-EXEMPT MARKET OVER THE 12-MONTH PERIOD ENDED JULY 31, 2000? KW: The Federal Reserve Board's efforts to fight inflation and slow our overheated economy by raising interest rates was perhaps the defining factor that drove market performance during the period in question. From June 1999 to May 2000, the Fed raised interest rates no less than six times, totaling 175 basis points (bps). This was a marked departure from its earlier efforts to stimulate global growth by keeping rates relatively low in the wake of the 1997 Thai currency crisis and the 1998 Russian debt crisis. 3 Municipal interest rates rose dramatically over the first six months of this reporting period, as investors grew concerned about the prospect of future rate hikes. These concerns eased during the latter six-month period, as investors felt the Fed was succeeding in its quest and thus would be less inclined to raise rates much further. In response, municipal interest rates declined sharply. DID Y2K HAVE AN EFFECT ON THE MARKETPLACE? KW: Fortunately, this much dreaded event had little-to-no effect on the financial markets, largely due to the substantial preparatory efforts that were made by market participants to ensure this desired result. THE TREASURY YIELD CURVE INVERTED DRAMATICALLY OVER THIS PERIOD. HOW DID THIS AFFECT THE MUNICIPAL BOND MARKET? KW: In sympathy with the Fed's tightening bias, short-term Treasury rates rose during much of this period, while long-term rates declined, this in response to the Treasury's buyback of higher coupon, longer-term debt. The result of both movements was an inverted yield curve that persists to this day. As a consequence, the municipal yield curve flattened dramatically, with longer-dated issues outperforming shorter-dated issues and the yield spread between 2-year and 30-year bonds narrowing by almost 50 bps. WHAT OTHER FACTORS IMPACTED MARKET PERFORMANCE? KW: One was the dominance of the muni market by retail investors. Their appetite for tax-exempt issues was almost insatiable, as they sought to avoid stock market turbulence and lock in some of the gains they had achieved over the long running equity bull market. Their influence was perhaps more pronounced than usual, owing to net redemptions suffered by mutual funds and the movement of insurance companies away from this market and toward other attractive asset classes. At the same time that demand was increasing, supply was declining dramatically. Flush with excess tax revenues and most refundings becoming "out-of-the-money" (due to higher rates) municipalities shied away from the marketplace. The result was a reduction in the supply of new issues, year-on-year through July 31, of approximately 22%. This supply/demand imbalance caused credit-quality spreads to tighten substantially, a situation that continues to weigh on today's marketplace. HOW WAS THE PORTFOLIO POSITIONED OVER THIS PERIOD? KW: Portfolio holdings throughout the period were largely composed of premium bonds. This positioning helped a great deal during the rising interest rate environment that prevailed over the latter half of 1999. But, the upward price movement of these securities was impeded during the first half of 2000, when interest rates declined. In terms of duration, we were shorter than the Lehman Brothers Municipal 1-16 year Index during the early part of this period, in anticipation of higher interest rates. We were neutral to the index during the November 1999 through January 2000 period, as we waited out the Y2K event and the release of key economic data. For the remainder of the year, we were longer than the index in response to our expectation, since realized, of lower interest rates. 4 Overall, the portfolio remains focused on very high credit-quality issues, while we continue to search opportunistically for higher yielding securities. HOW DID THE FUND PERFORM OVER THIS PERIOD? KW: By the close of this reporting period, the fund had returned 3.74%, as compared to the 4.72% return posted by the Lehman Brothers Municipal 1-16 year Index. However, we were well ahead of the Lipper Intermediate Muni Debt Funds Average, which returned only 3.16%. WHAT HELPED OR HURT PERFORMANCE? KW: Through the end of 1999, the fund performed very well as compared to the index and to the Lipper peer group of intermediate municipal funds. This was due primarily to our shorter duration positioning and to our concentration in premium issues, along with an underweight position in market discounts. This strategy helped to temper downward price movements during the rising interest rate scenario that marked this period. This investment posture detracted from relative performance to some degree during the first seven months of 2000. As noted, interest rates declined over this period, along the way boosting the performance of lower dollar-priced issues. With our focus on higher dollar-priced issues, we were unable to participate in much of this price appreciation. Relative performance was also impacted negatively by our major underweight in securities subject to market discount tax treatment, which have also performed well thus far in 2000. On the other hand, the portfolio benefited on a yield and total return perspective from our credit research in high-yielding sectors, such as healthcare. WHAT IS YOUR MARKET OUTLOOK OVER THE NEAR TERM, AND HOW ARE YOU POSITIONING THE PORTFOLIO TO TAKE ADVANTAGE OF IT? KW: We expect that the U.S. economy will continue to slow over the course of this year, and that the soft landing desired by the Fed will, in fact, take hold. There may be an additional rate hike, on the order of 25 bps, but there should be little pressure for the Fed to do much more, if anything. The municipal marketplace will likely continue to be driven by the factors that have defined it in 2000. Supply will remain quite low, off approximately 25% nationally from 1999 levels. Demand will come principally from retail investors, as they strive for diversification and high, after-tax yields. In this environment, duration will remain longer than the benchmark to try to capitalize on lower rates. Our position on the yield curve will remain neutral, and our concentration will remain on high credit-quality issues, as we identify and selectively purchase higher yielding opportunities. The one change we are making is to increase our exposure to discounts, as we move towards a more neutral coupon position relative to the market. 5 GLOSSARY OF TERMS BASIS POINT: A measure used in quoting bond yields. One basis point equals 0.01% of yield. For example, if a bond's yield changed from 10.25% to 11.00%, it would have moved 75 basis points. CREDIT RATING: The rating assigned to a bond by independent rating agencies such as Standard & Poor's and Moody's. In evaluating creditworthiness, these agencies assess the issuer's present financial condition and future ability and willingness to make principal and interest payments when due. DURATION: Duration is used as a measure of the relative sensitivity of the price of the security to a change in interest rates. The longer the duration, the more sensitive the bond is to interest rate moves. For example, a bond with a 5-year duration will experience an approximate 5% increase in price if interest rates drop 100 basis points (1%), while a bond with a 10-year duration would see its price rise by approximately 10%. MATURITY: The date on which the life of a financial instrument ends through cash or physical settlement or expiration with no value, or the date a security comes due and fully payable. Average maturity refers to the average time to maturity of the entire portfolio. YIELD CURVE: A line graph showing interest rates at a point in time, from the shortest maturity to the longest available. The resulting curve shows if short-term interest rates are higher or lower than long-term rates. Typically interest rates rise with increasing time to maturity. YIELD SPREAD: The difference in yield between different types of securities. For example, if a Treasury bond is yielding 6.5% and a municipal is yielding 5.5%, the spread is 1.0% or 100 basis points. ZERO COUPON BOND: A debt instrument sold at a discount to its face value. The bond makes no payments until maturity, at which time it is redeemed at face value. Effectively, the interest received is the difference between face value and the price paid for the security. 6 FUND FACTS INVESTMENT OBJECTIVE J.P. Morgan Tax Exempt Bond Fund seeks to provide a high level of current income that is exempt from federal income tax consistent with moderate risk of capital and maintenance of liquidity. It is designed for investors who seek tax exempt yields greater than those generally available from a portfolio of short-term tax-exempt obligations and who are willing to incur the greater price fluctuation of longer-term instruments. ------------------------------------------------------------------------------- INCEPTION DATE 10/3/84 ------------------------------------------------------------------------------- FUND NET ASSETS AS OF 7/31/00 $336,599,481 ------------------------------------------------------------------------------- PORTFOLIO NET ASSETS AS OF 7/31/00 $783,923,182 ------------------------------------------------------------------------------- DIVIDEND PAYABLE DATES MONTHLY ------------------------------------------------------------------------------- CAPITAL GAIN PAYABLE DATES (IF APPLICABLE) 12/13/00 EXPENSE RATIO The fund's current annual expense ratio of 0.67% covers shareholders' expenses for custody, tax reporting, investment advisory and shareholder services. The fund is no-load and does not charge any sales, redemption, or exchange fees. There are no additional charges for buying, selling, or safekeeping fund shares, or for wiring dividend or redemption proceeds from the fund. FUND HIGHLIGHTS ALL DATA AS OF JULY 31, 2000 PORTFOLIO ALLOCATION (PERCENTAGE OF TOTAL INVESTMENTS) [CHART] REVENUE BONDS 56.2% GOVERNMENT OBLIGATIONS 36.8% PRIVATE PLACEMENTS 3.8% SHORT-TERM 3.2% 30-DAY SEC YIELD 4.39% DURATION 5.31 YEARS 7 DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC., A WHOLLY OWNED SUBSIDIARY OF J.P. MORGAN & CO. INC., IS THE PORTFOLIO'S INVESTMENT ADVISOR. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. RETURN AND SHARE PRICE WILL FLUCTUATE AND REDEMPTION VALUE MAY BE MORE OR LESS THAN ORIGINAL COST. The fund invests through a master portfolio (another fund with the same objective). Opinions expressed herein are based on current market conditions and are subject to change without notice. Income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains are not exempt from taxes. Investors should be prepared for higher share price volatility than from a tax-exempt fund of shorter duration. CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411 FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. 8 THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY J.P. MORGAN TAX EXEMPT BOND FUND STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2000 -------------------------------------------------------------------------------- ASSETS Investment in The Tax Exempt Bond Portfolio ("Portfolio"), at value $335,491,758 Receivable for Shares of Beneficial Interest Sold 1,690,607 Prepaid Trustees' Fees 1,285 Prepaid Expenses and Other Assets 1,358 ------------ Total Assets 337,185,008 ------------ LIABILITIES Dividends Payable to Shareholders 347,038 Payable for Shares of Beneficial Interest Redeemed 110,358 Shareholder Servicing Fee Payable 69,929 Administrative Services Fee Payable 6,773 Fund Services Fee Payable 288 Administration Fee Payable 218 Accrued Expenses 50,923 ------------ Total Liabilities 585,527 ------------ NET ASSETS Applicable to 29,120,296 Shares of Beneficial Interest Outstanding (par value $0.001, unlimited shares authorized) $336,599,481 ============ Net Asset Value, Offering and Redemption Price Per Share $11.56 ----- ----- ANALYSIS OF NET ASSETS Paid-in Capital $329,677,682 Distributions in Excess of Net Investment Income (41,717) Accumulated Net Realized Loss on Investment (1,137,035) Net Unrealized Appreciation of Investment 8,100,551 ------------ Net Assets $336,599,481 ============
The Accompanying Notes are an Integral Part of the Financial Statements. 10 J.P. MORGAN TAX EXEMPT BOND FUND STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2000 -------------------------------------------------------------------------------- INVESTMENT INCOME ALLOCATED FROM PORTFOLIO Allocated Interest Income $19,404,776 Allocated Portfolio Expenses (1,357,867) ----------- Net Investment Income Allocated from Portfolio 18,046,909 FUND EXPENSES Shareholder Servicing Fee $945,553 Administrative Services Fee 93,624 Transfer Agent Fees 43,537 Professional Fees 17,462 Registration Fees 16,030 Fund Services Fee 6,210 Trustees' Fees and Expenses 5,161 Administration Fee 4,660 Miscellaneous 38,823 -------- Total Fund Expenses 1,171,060 ----------- NET INVESTMENT INCOME 16,875,849 NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM PORTFOLIO (1,487,869) NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENT ALLOCATED FROM PORTFOLIO (3,155,746) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,232,234 ===========
The Accompanying Notes are an Integral Part of the Financial Statements. 11 J.P. MORGAN TAX EXEMPT BOND FUND STATEMENT OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
FOR THE FISCAL FOR THE ELEVEN FOR THE FISCAL YEAR ENDED MONTHS ENDED YEAR ENDED JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998 -------------- -------------- --------------- DECREASE IN NET ASSETS FROM OPERATIONS Net Investment Income $ 16,875,849 $ 17,347,608 $ 18,511,696 Net Realized (Loss) Gain on Investment Allocated from Portfolio (1,487,869) 4,012,628 531,522 Net Change in Unrealized (Depreciation) Appreciation of Investment Allocated from Portfolio (3,155,746) (17,484,081) 9,584,077 ------------- ------------ -------------- Net Increase in Net Assets Resulting from Operations 12,232,234 3,876,155 28,627,295 ------------- ------------ -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM Net Investment Income (16,875,849) (17,346,461) (18,515,231) Net Realized Gain (4,016,116) (780,645) (119,011) Distributions in Excess of Net Investment Income (156,332) -- -- ------------- ------------ -------------- Total Distributions to Shareholders (21,048,297) (18,127,106) (18,634,242) ------------- ------------ -------------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Proceeds from Shares of Beneficial Interest Sold 100,708,538 152,936,932 156,589,082 Reinvestment of Dividends and Distributions 15,187,379 13,753,851 14,890,233 Cost of Shares of Beneficial Interest Redeemed (202,164,974) (159,980,035) (143,254,080) ------------- ------------ -------------- Net (Decrease) Increase from Transactions in Shares of Beneficial Interest (86,269,057) 6,710,748 28,225,235 ------------- ------------ -------------- Total (Decrease) Increase in Net Assets (95,085,120) (7,540,203) 38,218,288 NET ASSETS Beginning of Period 431,684,601 439,224,804 401,006,516 ------------- ------------ -------------- End of Period (including undistributed net investment income of $0, $117,661 and $116,514, respectively) $ 336,599,481 $431,684,601 $ 439,224,804 ============= ============ ==============
The Accompanying Notes are an Integral Part of the Financial Statements. 12 J.P. MORGAN TAX EXEMPT BOND FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period are as follows:
FOR THE FOR THE FISCAL YEAR ELEVEN MONTHS FOR THE FISCAL YEAR ENDED AUGUST 31, ENDED ENDED ------------------------------------------------- JULY 31, 2000 JULY 31, 1999 1998 1997 1996 1995 --------------- --------------- ---------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.77 $ 12.15 $ 11.85 $ 11.63 $ 11.73 $ 11.45 ------------ ------------ -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.52 0.46 0.54 0.55 0.55 0.55 Net Realized and Unrealized (Loss) Gain on Investment (0.10) (0.36) 0.30 0.24 (0.08) 0.29 ------------ ------------ -------- -------- -------- -------- Total from Investment Operations 0.42 0.10 0.84 0.79 0.47 0.84 ------------ ------------ -------- -------- -------- -------- LESS DISTRIBUTIONS TO SHAREHOLDERS FROM Net Investment Income (0.52) (0.46) (0.54) (0.55) (0.55) (0.55) Net Realized Gain (0.11) (0.02) (0.00)(a) (0.02) (0.02) (0.01) Distributions in Excess of Net Investment Income (0.00)(a) -- -- -- -- -- ------------ ------------ -------- -------- -------- -------- Total Distributions to Shareholders (0.63) (0.48) (0.54) (0.57) (0.57) (0.56) ------------ ------------ -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.56 $ 11.77 $ 12.15 $ 11.85 $ 11.63 $ 11.73 ============ ============ ======== ======== ======== ======== RATIOS AND SUPPLEMENTAL DATA Total Return 3.74% 0.83%(b) 7.21% 6.95% 4.01% 7.63% Net Assets, End of Period (in thousands) $ 336,599 $ 431,685 $439,225 $401,007 $369,987 $352,005 Ratios to Average Net Assets Net Expenses 0.67% 0.68%(c) 0.64% 0.64% 0.64% 0.71% Net Investment Income 4.46% 4.21%(c) 4.44% 4.67% 4.67% 4.87%
------------------------ (a) Less than $0.001 per share. (b) Not Annualized. (c) Annualized. The Accompanying Notes are an Integral Part of the Financial Statements. 13 J.P. MORGAN TAX EXEMPT BOND FUND NOTES TO FINANCIAL STATEMENTS JULY 31, 2000 -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES J.P. Morgan Tax Exempt Bond Fund (the "fund") is a separate series of the J.P. Morgan Funds, a Massachusetts business trust (the "trust") which was organized on November 4, 1992. The trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The fund, prior to its tax-free reorganization on July 11, 1993 to a series of the trust, operated as a stand-alone mutual fund. At a meeting on November 12, 1998, the trustees elected to change the fund's fiscal year end from August 31 to July 31. The fund invests all of its investable assets in The Tax Exempt Bond Portfolio (the "portfolio"), a no-load diversified, open-end management investment company having the same investment objective as the fund. The value of such investment included in the Statement of Assets and Liabilities reflects the fund's proportionate interest in the net assets of the portfolio (43% at July 31, 2000). The performance of the fund is directly affected by the performance of the portfolio. The financial statements of the portfolio, including the Schedule of Investments, are included elsewhere in this report and should be read in conjunction with the fund's financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual amounts could differ from those estimates. The following is a summary of the significant accounting policies of the fund: a) Valuation of securities by the portfolio is discussed in Note 1a of the portfolio's Notes to Financial Statements which are included elsewhere in this report. b) The fund records its share of net investment income, realized and unrealized gain and loss and adjusts its investment in the portfolio each day. All the net investment income and realized and unrealized gain and loss of the portfolio is allocated pro rata among the fund and other investors in the portfolio at the time of such determination. c) Substantially all the fund's net investment income is declared as dividends daily and paid monthly. Distributions to shareholders of net realized capital gains, if any, are declared and paid annually. d) Expenses incurred by the trust with respect to any two or more funds in the trust are allocated in proportion to the net assets of each fund in the trust, except where allocations of direct expenses to each fund can otherwise be made fairly. Expenses directly attributable to a fund are charged to that fund. e) The fund is treated as a separate entity for federal income tax purposes and the fund intends to comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its income, including net realized capital gains, if any, within the prescribed time periods. Accordingly, no provision for federal income or excise tax is necessary. f) The fund accounts for and reports distributions to shareholders in accordance with Statement of Position 93-2: "Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies." The effect of applying this statement as of July 31, 2000 was to increase distributions in excess of net investment income by $3,046, 14 J.P. MORGAN TAX EXEMPT BOND FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 -------------------------------------------------------------------------------- decrease accumulated net realized loss on investment by $403,344 and decrease paid in-capital by $400,298. Net investment income, net realized gains and net assets were not affected by this change. This adjustment is primarily attributable to the application of tax allocation rules. g) For federal income tax purposes, the fund incurred approximately $1,137,035 of capital losses in the period from November 1, 1999 to July 31, 2000. These losses were deferred for tax purposes until August 1, 2000. 2. TRANSACTIONS WITH AFFILIATES a) The trust, on behalf of the fund, has retained Funds Distributor, Inc. ("FDI"), a registered broker-dealer, to serve as co-administrator and distributor for the fund. Under a Co-Administration Agreement between FDI and the trust, on behalf of the fund, FDI provides administrative services necessary for the operations of the fund, furnishes office space and facilities required for conducting the business of the fund and pays the compensation of the fund's officers affiliated with FDI. The fund has agreed to pay FDI fees equal to its allocable share of an annual complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to the fund is based on the ratio of the fund's net assets to the aggregate net assets of the trust and certain other investment companies subject to similar agreements with FDI. For the fiscal year ended July 31, 2000, the fee for these services amounted to $4,660. b) The trust, on behalf of the fund, has an Administrative Services Agreement (the "Services Agreement") with Morgan Guaranty Trust Company of New York ("Morgan"), a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), under which Morgan is responsible for certain aspects of the administration and operation of the fund. Under the Services Agreement, the fund has agreed to pay Morgan a fee equal to its allocable share of an annual complex-wide charge. This charge is calculated based on the aggregate average daily net assets of the portfolio and other portfolios in which the trust and the J.P. Morgan Institutional Funds invest (the "master portfolios") and J.P. Morgan Series Trust in accordance with the following annual schedule: 0.09% on the first $7 billion of their aggregate average daily net assets and 0.04% of their aggregate average daily net assets in excess of $7 billion less the complex-wide fees payable to FDI. The portion of this charge payable by the fund is determined by the proportionate share that its net assets bear to the net assets of the trust, the master portfolios, other investors in the master portfolios for which Morgan provides similar services, and J.P. Morgan Series Trust. For the fiscal year ended July 31, 2000, the fee for these services amounted to $93,624. c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement with Morgan to provide account administration and personal account maintenance service to fund shareholders. The agreement provides for the fund to pay Morgan a fee for these services which is computed daily and paid monthly at an annual rate of 0.25% of the average daily net assets of the fund. For the fiscal year ended July 31, 2000, the fee for these services amounted to $945,553. Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to separate services and operating agreements (the "Schwab Agreements") whereby Schwab makes fund shares available to customers of investment advisors and other financial intermediaries who are Schwab's clients. The fund is not 15 J.P. MORGAN TAX EXEMPT BOND FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 -------------------------------------------------------------------------------- responsible for payments to Schwab under the Schwab Agreements; however, in the event the services agreement with Schwab is terminated for reasons other than a breach by Schwab and the relationship between the trust and Morgan is terminated, the fund would be responsible for the ongoing payments to Schwab with respect to pre-termination shares. d) The trust, on behalf of the fund, has a Fund Services Agreement with Pierpont Group, Inc. ("Group") to assist the trustees in exercising their overall supervisory responsibilities for the trust's affairs. The trustees of the trust represent all the existing shareholders of Group. The fund's allocated portion of Group's costs in performing its services amounted to $6,210 for the fiscal year ended July 31, 2000. e) An aggregate annual fee of $75,000 is paid to each trustee for serving as a trustee of the trust, the J.P. Morgan Institutional Funds, the master portfolios and J.P. Morgan Series Trust. The Trustees' Fees and Expenses shown in the financial statements represents the fund's allocated portion of the total fees and expenses. The trust's Chairman and Chief Executive Officer also serves as Chairman of Group and receives compensation and employee benefits from Group in his role as Group's Chairman. The allocated portion of such compensation and benefits included in the Fund Services Fee shown in the financial statements was $1,200 for the fiscal year ended July 31, 2000. 3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the trustees to issue an unlimited number of full and fractional shares of beneficial interest of one or more series. Transactions in shares of beneficial interest of the fund were as follows:
FOR THE FISCAL FOR THE ELEVEN FOR THE FISCAL YEAR ENDED MONTHS ENDED YEAR ENDED JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998 -------------- -------------- --------------- Shares of Beneficial Interest Sold... 8,752,028 12,616,673 12,999,121 Reinvestment of Dividends and Distributions....................... 1,319,619 1,136,791 1,238,798 Shares of Beneficial Interest Redeemed............................ (17,621,635) (13,228,589) (11,920,060) ----------- ----------- ----------- Net Increase (Decrease).............. (7,549,988) 524,875 2,317,859 =========== =========== ===========
4. CREDIT AGREEMENT The trust, on behalf of the fund, together with other affiliated investment companies (the "funds"), entered into a revolving line of credit agreement (the "Agreement") on May 26, 1999, with unaffiliated lenders. The maximum borrowing under the Agreement was $150,000,000. The Agreement expired on May 23, 2000, however, the fund as party to the Agreement has extended the Agreement and continues its participation therein for an additional 364 days until May 21, 2001. The maximum borrowing under the new agreement is $150,000,000. The purpose of the Agreement is to provide another alternative for settling large fund shareholder redemptions. Interest on any such borrowings outstanding will approximate market rates. Under the Agreement, the commitment fee is at an annual rate of 0.085% on the unused portion of the committed amount. The commitment fee is allocated to the funds in accordance with the procedures established by their respective trustees or directors. There were no outstanding borrowings pursuant to the Agreement at July 31, 2000. 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Shareholders of J.P. Morgan Tax Exempt Bond Fund In our opinion, the accompanying statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of J.P. Morgan Tax Exempt Bond Fund (one of the series constituting part of the J.P. Morgan Funds, hereafter referred to as the "fund") at July 31, 2000, the results of its operations for the year then ended, the changes in its net assets for the year then ended, for the eleven months ended July 31, 1999 and for the year ended August 31, 1998 and the financial highlights for the year then ended, for the eleven months ended July 31, 1999 and for the four years ended August 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York September 15, 2000 17 The Tax Exempt Bond Portfolio Annual Report July 31, 2000 (The following pages should be read in conjunction with J.P. Morgan Tax Exempt Bond Fund Annual Financial Statements) 18 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ LONG-TERM INVESTMENTS (98.1%) ALABAMA (0.1%) $ 1,000 Daphne Special Care Facilities Financing Authority, (Presbyterian Retirement, Prerefunded, Series A)................ RB NR/NR 08/15/18 7.300% $ 1,029,680 ------------ ALASKA (0.3%) 2,000 Anchorage, (Prerefunded), MBIA Insured............................... GO Aaa/AAA 07/01/02 6.600 2,040,040 ------------ ARIZONA (0.4%) 3,430 Arizona Healthcare Facilities Authority (Catholic Healthcare Revenue, Series A)............................. RB Baa1/BBB+ 07/01/09 6.125 3,412,850 ------------ CALIFORNIA (2.6%) 2,520 California Department of Water Resources, (Central Valley Project, Water Systems Service, Refunding, Series J-1)........................... RB Aa2/AA 12/01/12 7.000 3,014,953 13,070 California Statewide Community Development Authority, (Catholic Healthcare West)...................... RB Baa1/BBB+ 07/01/09 6.000 13,117,052 1,049 Kaweah Delta Hospital District, Tulare County, (Series E).................... PP NR/A+ 06/01/14 5.250 1,048,567 353 Kaweah Delta Hospital District, Tulare County, (Series G).................... PP NR/A+ 06/01/14 6.400 369,840 2,500 Los Angeles County Public Works Financing Authority, (Lease Revenue, Refunding, Series A), MBIA Insured.... RB Aaa/AAA 09/01/06 6.000 2,719,175 ------------ TOTAL CALIFORNIA.................... 20,269,587 ------------ COLORADO (1.1%) 5,000 Colorado Department of Transportation, (Revenue Anticipation Notes, due 06/15/14), AMBAC Insured.............. RB Aaa/AAA 06/15/10(a) 6.000 5,290,350 2,850 Weld County School District #6.......... GO Aa3/AA- 12/01/04 5.750 2,971,267 ------------ TOTAL COLORADO...................... 8,261,617 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 19 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ CONNECTICUT (1.6%) $ 2,000 Connecticut Heatlh & Educational Facilities Authority, (St Mary's Hospital, Series D)................... RB Baa1/NR 07/01/01 5.750% $ 2,012,220 7,240 Connecticut, (Series B, due 06/15/17)... GO Aa3/AA 06/15/10(a) 5.875 7,518,885 2,815 Connecticut, (Special Tax Obligation, Transportation Infrastructure, Prerefunded, Series A, due 06/01/04),............................ RB NR/AA- 06/01/03(a) 6.600 2,962,450 ------------ TOTAL CONNECTICUT................... 12,493,555 ------------ DISTRICT OF COLUMBIA (3.0%) 220 District of Columbia, (Escrowed to Maturity, Prerefunded, Series A), MBIA-IBC Insured...................... GO Aaa/AAA 06/01/07 6.000 235,330 2,600 District of Columbia, (Escrowed to Maturity, Prerefunded, Series B), MBIA Insured.......................... GO Aaa/AAA 06/01/02 6.000 2,667,496 6,795 District of Columbia, (Escrowed to Maturity, Prerefunded, Series C), FGIC Insured.......................... GO Aaa/AAA 12/01/03 5.250 6,929,405 10,645 District of Columbia, (Escrowed to Maturity, Series A)................... GO Aaa/BBB 06/01/04 5.800 11,072,716 2,780 District of Columbia, (Unrefunded Balance, Series A), MBIA-IBC Insured............................... GO Aaa/AAA 06/01/07 6.000 2,955,251 ------------ TOTAL DISTRICT OF COLUMBIA.......... 23,860,198 ------------ FLORIDA (0.3%) 465 Florida Board of Education, (Capital Outlay, Unrefunded Balance, Series C, due 06/01/01),........................ GO Aa2/AA+ 08/24/00(a) 7.000 467,055 2,000 Volusia County School District, (Refunding, due 08/01/02), FGIC Insured............................... GO Aaa/AAA 08/01/01(a) 6.100 2,063,080 ------------ TOTAL FLORIDA....................... 2,530,135 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 20 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ GEORGIA (5.5%) $ 3,200 De Kalb County, (Water & Sewer Revenue, Refunding)............................ RB Aa/AA 10/01/02 6.000% $ 3,300,896 2,630 Fulton County School District, (Refunding)........................... GO Aa2/AA 05/01/14 6.375 2,927,243 1,250 Georgia Municipal Electric Authority, (Power Revenue, Refunding, Series A)............................. RB A3/A 01/01/12 6.500 1,389,187 4,000 Georgia Municipal Electric Authority, (Power Revenue, Refunding, Series A), MBIA-IBC Insured...................... RB Aaa/AAA 01/01/12 6.500 4,467,360 4,895 Georgia, (Refunding, Series E).......... GO Aaa/AAA 07/01/03 5.500 5,024,277 6,000 Georgia, (Series B)..................... GO Aaa/AAA 03/01/07 7.200 6,825,240 3,000 Georgia, (Series B)..................... GO Aaa/AAA 03/01/10 6.300 3,326,220 4,470 Georgia, (Series C)..................... GO Aaa/AAA 07/01/11 5.700 4,744,234 2,500 Gwinnett County School District, (Refunding, Series B)................. GO Aa1/AA+ 02/01/08 6.400 2,749,475 5,000 Metropolitan Atlanta Rapid Transit Authority, (Sales Tax Revenue, Refunding, Series P, due 07/01/11), AMBAC Insured......................... RB Aaa/AAA 07/01/09(a) 6.250 5,558,750 3,000 Roswell, (due 02/01/13)................. GO Aaa/AAA 02/01/09(a) 5.500 3,085,440 ------------ TOTAL GEORGIA....................... 43,398,322 ------------ ILLINOIS (4.1%) 8,110 Chicago, (Prerefunded, due 01/01/13), AMBAC Insured......................... GO Aaa/AAA 07/01/05(a) 6.250 8,806,649 5,000 Chicago, (Skyway Toll Bridge Revenue, Prerefunded) due 01/01/17............. RB NR/AAA 01/01/04(a) 6.750 5,422,800 3,000 Illinois Development Bank............... PP NR/NR 08/01/28 4.900 2,927,940 1,665 Illinois Health Facilities Authority, (due 02/15/12)........................ RB A1/NR 02/15/10(a) 6.625 1,742,506 4,175 Illinois, (Sales Tax Revenue, Refunding, Series Q)............................. RB Aa2/AAA 06/15/12 6.000 4,481,654 3,770 Illinois Health Facilities Authority, (Riverside Health System)............. RB A3/A 11/15/10 6.750 3,933,543
The Accompanying Notes are an Integral Part of the Financial Statements. 21 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ ILLINOIS (CONTINUED) $ 1,380 Metropolitan Pier & Exposition Authority, (Dedicated State Tax Revenue, Unrefunded Balance, Series A)............................. RB Aa3/AA- 06/15/06 8.500% $ 1,636,542 2,810 Regional Transportation Authority, (Series D), FGIC Insured.............. RB Aaa/AAA 06/01/07 7.750 3,264,433 ------------ TOTAL ILLINIOS...................... 32,216,067 ------------ INDIANA (1.0%) 5,400 Indiana Bond Bank, (State Revolving Fund Program, Series A, due 08/01/13)...... RB NR/AAA 08/01/10(a) 5.875 5,672,430 2,000 Indiana Municipal Power Agency, (Power Supply System Revenue, Refunding, Series B), MBIA Insured............... RB Aaa/AAA 01/01/13 6.000 2,157,600 ------------ TOTAL INDIANA....................... 7,830,030 ------------ IOWA (0.9%) 2,095 Iowa Finance Authority, (Hospital Facilities Revenue, due 02/15/15)..... RB A1/NR 02/15/10(a) 6.750 2,192,732 2,385 Iowa Finance Authority, (Hospital Facilities Revenue, due 02/15/16)..... RB A1/NR 02/15/10(a) 6.750 2,483,071 2,440 Iowa Finance Authority, (Hospital Facilities Revenue, due 02/15/17)..... RB A1/NR 02/15/10(a) 6.750 2,530,768 ------------ TOTAL IOWA.......................... 7,206,571 ------------ KENTUCKY (0.7%) 3,905 Kentucky Property & Buildings Commission (Refunding, Project #64, due 05/01/10), MBIA Insured............... RB Aaa/AAA 11/01/09(a) 5.750 4,123,368 1,470 Kentucky Turnpike Authority, (Road Recovery Revenue, Escrowed to Maturity, due 07/01/02)............... RB Aaa/AAA 08/24/00(a) 7.100 1,496,475 ------------ TOTAL KENTUCKY...................... 5,619,843 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 22 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ MAINE (0.6%) $ 4,050 Maine Municipal Bond Bank, (Prerefunded, Series E due 11/01/12)................ RB Aa2/NR 11/01/02(a) 6.250% $ 4,277,124 ------------ MARYLAND (2.4%) 1,000 Maryland Community Development Administration, (Department of Housing & Community Development, First Series, due 04/01/12)......................... RB Aa2/NR 10/01/09(a) 5.500 1,003,850 1,250 Maryland Community Development Administration, (Department of Housing & Community Development, Refunding, Series A, due 09/01/10)............... RB Aa2/NR 09/01/09(a) 5.300 1,253,075 1,425 Maryland Community Development Administration, (Department of Housing & Community Development, Refunding, Series A, due 09/01/11)............... RB Aa2/NR 09/01/09(a) 5.400 1,431,541 1,105 Maryland Community Development Administration, (Department of Housing & Communty Development, First Series, due 04/01/10)......................... RB Aa2/NR 10/01/09(a) 5.300 1,107,729 5,435 Maryland Health & Higher Educational Facilities Authority, (John Hopkins University, Refunding)................ RB Aa2/AA 07/01/03 5.750 5,610,714 5,000 Maryland State, (State & Local Facilities Loan, First Series)........ GO Aaa/AAA 08/01/05 5.125 5,116,400 3,000 Maryland, (Third Series, due 07/15/03)............................. GO Aaa/AAA 07/15/01(a) 6.400 3,066,720 ------------ TOTAL MARYLAND...................... 18,590,029 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 23 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ MASSACHUSETTS (5.9%) $ 5,650 Massachusetts Bay Transportation Authority, (General Transportation System, Refunding, Series A).......... RB Aa2/AA- 03/01/08 7.000% $ 6,409,134 1,495 Massachusetts State College Building Authority, (Refunding, Series A)...... RB Aa2/AA- 05/01/11 7.500 1,799,367 9,500 Massachusetts State Water Pollution Abatement Trust, (Abatement MWRA Program, Sub-Series A, due 08/01/15)............................. RB Aa1/AA 08/01/09(a) 6.000 9,961,320 5,000 Massachusetts State, (Consolidation Loan, Series A, due 02/01/14)......... GO Aa2/AA- 02/01/10(a) 6.000 5,301,650 14,035 Massachusetts State, (Consolidation Loan, Series B, due 06/01/12)......... GO Aa2/AA- 06/01/10(a) 5.750 14,692,540 8,000 Massachusetts State, (Prerefunded, Series B) AMBAC Insured............... GO Aaa/AAA 07/01/11 5.500 8,373,360 ------------ TOTAL MASSACHUSETTS................. 46,537,371 ------------ MICHIGAN (6.3%) 10,000 Detroit Water Supply System, (Prerefunded due 07/01/22), FGIC Insured............................... RB Aaa/AAA 07/01/02(a) 6.375 10,538,000 10,000 Michigan Hospital Finance Authority, (Ascension Health Credit Corp., Refunding, Series B).................. RB Aa2/AA 11/15/33 5.300 10,032,500 13,050 Michigan Hospital Finance Authority, (Ascension Health Credit Corp., Series A, due 11/15/15), MBIA Insured............................... RB Aaa/AAA 11/15/09(a) 6.250 13,636,728 10,500 Michigan Hospital Finance Authority, (Genesys Health System, Prerefunded, Series A due 10/01/21)................ RB Baa2/AAA 10/01/05(a) 8.125 12,263,685 2,905 Michigan Hospital Finance Authority, (Mercy Health Services, Refunding, Series T)............................. RB Aa3/AA- 08/15/04 5.750 2,961,473 ------------ TOTAL MICHIGAN...................... 49,432,386 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 24 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ MINNESOTA (2.6%) $ 9,330 Minnesota............................... GO Aaa/AAA 06/01/10 5.500% $ 9,794,727 5,000 University of Minnesota, (Refunding, Series A)............................. RB Aa2/AA 07/01/10 5.750 5,332,150 5,000 University of Minnesota, (Refunding, Series A)............................. RB Aa2/AA 07/01/15 5.750 5,260,400 ------------ TOTAL MINNESOTA..................... 20,387,277 ------------ MISSISSIPPI (2.4%) 4,080 Jackson Redevelopment Authority, (Urban Renewal Revenue, Jackson Medical Mall Foundation Project, Series A), LOC Bank One Louisiana.................... RB NR/A+ 11/01/12 4.600 4,057,438 2,505 Mississippi Higher Education, (Refunding, Series B, due 09/01/04)... RB Aaa/NR 09/01/02(a) 5.600 2,537,765 10,875 Mississippi, (Escrowed to Maturity, Refunding)............................ GO Aaa/AAA 02/01/08 6.200 11,788,935 ------------ TOTAL MISSISSIPPI................... 18,384,138 ------------ MISSOURI (1.2%) 5,000 Missouri Regional Convention & Sports Complex Authority, (Prerefunded, Series A, due 08/15/21)............... RB Aaa/AAA 08/15/03(a) 6.900 5,329,300 4,000 St. Louis County Regional Convention & Sports Complex Authority, (Prerefunded, Series B, due 08/15/21)............................. RB Aaa/AAA 08/15/03(a) 7.000 4,274,680 ------------ TOTAL MISSOURI...................... 9,603,980 ------------ NEBRASKA (0.7%) 5,245 Nebhelp Inc. (Sub-Series A-5B), MBIA Insured............................... RB Aaa/NR 06/01/13 6.200 5,497,022 ------------ NEVADA (3.7%) 8,200 Clark County School District, (Series A), MBIA Insured.............. GO Aaa/AAA 06/01/11 7.000 9,487,810 1,200 Las Vegas, (Clark County Library District, Prerefunded, Series A due 06/01/04), FGIC Insured........... GO Aaa/AAA 06/01/01(a) 6.700 1,234,368
The Accompanying Notes are an Integral Part of the Financial Statements. 25 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ NEVADA (CONTINUED) $ 280 Las Vegas, (Clark County Library District, Refunding, Series B, due 08/01/04), FGIC Insured............... GO Aaa/AAA 08/01/01(a) 6.700% $ 288,053 15,500 Nevada, (Colorado River Commission, Prerefunded due 07/01/24)............. GO Aaa/AA 07/01/04(a) 6.500 16,677,845 1,330 Nevada, (Prison Facilities, Prerefunded, due 08/01/04)......................... GO Aa2/AAA 08/01/00(a) 7.000 1,356,600 ------------ TOTAL NEVADA........................ 29,044,676 ------------ NEW HAMPSHIRE (0.9%) 4,900 New Hampshire Higher Educational & Health Facilities Authority, (Dartmouth College, Refunding)........ RB Aaa/NR 06/01/07 6.750 5,450,172 1,720 New Hampshire, (Prerefunded, Series A)............................. GO Aa2/AA+ 06/15/03 6.600 1,785,136 ------------ TOTAL NEW HAMPSHIRE................. 7,235,308 ------------ NEW JERSEY (5.3%) 4,180 Jersey City, (School Board Reserve Fund, Refunding, Series A).................. GO Aa2/AA 10/01/11 6.250 4,590,894 10,000 New Jersey.............................. GO Aa1/AA+ 05/01/07 5.500 10,450,400 7,000 New Jersey Economic Development Authority, (Market Transition Facilities Revenue, Sr. Lien, Series A), MBIA Insured............... RB Aaa/AAA 07/01/02 5.400 7,120,260 4,100 New Jersey Economic Development Authority, (Transition Project Sublease, Series A), FSA Insured...... RB Aaa/AAA 05/01/11 5.750 4,351,248 6,000 New Jersey Transportation Trust Fund Authority, (Transportation System, Series B), MBIA Insured............... RB Aaa/AAA 06/15/05 6.000 6,349,320 8,000 New Jersey Turnpike Authority, (Series A), MBIA Insured.............. RB Aaa/AAA 01/01/11 6.000 8,666,560 ------------ TOTAL NEW JERSEY.................... 41,528,682 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 26 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ NEW YORK (5.2%) $ 75 Monroe County, (Public Improvement, Unrefunded Balance, Series 1995, due 06/01/10), AMBAC Insured.............. GO Aaa/AAA 06/01/08(a) 6.000% $ 81,788 50 New York City, (Escrowed to Maturity, Prerefunded, Series A)................ GO A3/A- 08/01/02 5.750 51,256 1,465 New York City, (Escrowed to Maturity, Series B)............................. GO Aaa/AAA 06/01/01 8.000 1,508,481 2,595 New York City, (Unrefunded Balance, Series A)............................. GO A3/A- 08/01/02 5.750 2,653,725 10,000 New York Convention Center Operating Corp., (Yale Building Acquisition Project).............................. PP NR/NR 12/01/04 6.500 10,147,700 2,850 New York State Dormitory Authority, (Secured Hospital, Interfaith Medical Center, Series D)..................... RB Baa1/A 02/15/04 5.500 2,901,100 13,010 New York State Thruway Authority, (Highway & Bridge Trust Fund, Series B-1), FGIC Insured............. RB NR/AAA 04/01/09 5.500 13,575,675 8,700 Triborough Bridge & Tunnel Authority, (General Purpose, Refunding, Series X)............................. RB Aa3/A+ 01/01/12 6.625 9,874,239 ------------ TOTAL NEW YORK...................... 40,793,964 ------------ NORTH CAROLINA (2.0%) 8,900 North Carolina Municipal Power Agency, (No. 1 Catawba Electric Revenue, Refunding, Series B).................. RB Baa1/BBB+ 01/01/06 6.125 9,179,193 6,275 North Carolina Municipal Power Agency, (No. 1 Catawba Electric Revenue, Refunding, Series B).................. RB Baa1/BBB+ 01/01/07 6.250 6,531,898 ------------ TOTAL NORTH CAROLINA................ 15,711,091 ------------ NORTH DAKOTA (1.4%) 11,280 North Dakota Housing Finance Agency, (Mortgage Revenue, Refunding, Series C, due 01/01/31)............... RB Aa3/NR 07/01/10(a) 5.550 11,280,113 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 27 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ OHIO (2.8%) $ 10,000 Ohio State, (Highway Capital Improvements, Series E)............... GO Aa1/AAA 05/01/04 5.250% $ 10,234,300 8,000 Ohio Turnpike Commission, (Prerefunded, Series A), MBIA Insured............... RB Aaa/AAA 02/15/26 5.500 8,436,240 2,795 Ohio Water Development Authority, (Escrowed to Maturity, Refunding, due 12/01/10)............................. RB Aaa/AAA 12/01/00(a) 9.375 3,347,012 ------------ TOTAL OHIO.......................... 22,017,552 ------------ PENNSYLVANIA (1.4%) 970 Pennsylvania Higher Education Assistance Agency, (Student Loan Revenue, Refunding, Series A), FGIC Insured.... RB Aaa/AAA 12/01/00 6.800 977,517 1,310 Pennsylvania Higher Education Facilities Authority, (College & University Revenue, University of Pennsylvania, Refunding, Series A).................. RB A1/AA 09/01/02 6.500 1,362,151 2,800 Pennsylvania Higher Education Facilities Authority, (Health Services Revenue, University of Pennsylvania Health Services, Refunding, Series A)........ RB A3/A 01/01/06 6.000 2,763,600 1,500 Pennsylvania, (2nd Series A, Prerefunded), MBIA Insured............ GO Aaa/AAA 11/01/04 6.500 1,558,365 4,250 Philadelphia Authority for Industrial Development, (Academy of Natural Sciences)............................. PP NR/NR 01/01/18 4.750 4,246,047 ------------ TOTAL PENNSYLVANIA.................. 10,907,680 ------------ PUERTO RICO (0.7%) 5,000 Puerto Rico Municipal Finance Agency, (Refunding, Series B)................. GO Baa1/A- 08/01/02 5.500 5,097,200 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 28 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ SOUTH CAROLINA (5.9%) $ 1,000 Piedmont Municipal Power Agency, (Electric Revenue, Escrowed to Maturity, Refunding), MBIA Insured.... RB Aaa/AAA 01/01/08 6.200% $ 1,088,990 15,000 Piedmont Municipal Power Agency, (Electric Revenue, Refunding), FGIC Insured............................... RB Aaa/AAA 01/01/20 6.750 17,141,700 5,500 South Carolina Economic Development Authority, (Hospital Facilities Revenue, Palmetto Health Alliance, Series A)............................. RB Baa1/BBB 12/15/10 7.000 5,628,205 3,000 South Carolina Economic Development Authority, (Hospital Facilities Revenue, Palmetto Health Alliance, Series A, due 12/15/15)............... RB Baa1/BBB 12/15/10(a) 7.125 3,057,720 7,000 South Carolina Public Service Authority, (Santee Cooper, Prerefunded Series D due 07/01/31)......................... RB Aaa/AAA 07/01/02(a) 6.625 7,408,310 5,385 South Carolina, (Capital Improvement, Series A)............................. GO Aaa/AAA 10/01/09 5.500 5,654,681 5,655 South Carolina, (Capital Improvement, Series A, due 10/01/10)............... GO Aaa/AAA 10/01/09(a) 5.500 5,944,310 ------------ TOTAL SOUTH CAROLINA................ 45,923,916 ------------ TENNESSEE (1.2%) 3,320 Knox County, (Public Improvement, due 05/01/12)............................. GO Aa2/AA 05/01/08(a) 6.000 3,520,661 3,500 Knox County, (Public Improvement, due 05/01/13)............................. GO Aa2/AA 05/01/08(a) 6.000 3,695,440 2,310 Shelby County, (School Board, Prerefunded).......................... GO Aa3/AA+ 03/01/14 5.900 2,381,956 ------------ TOTAL TENNESSEE..................... 9,598,057 ------------ TEXAS (9.8%) 1,500 Austin Utilities System, (Escrowed to Maturity, due 10/01/01)............... RB Aaa/AAA 10/01/00(a) 6.500 1,534,650 6,920 Austin Utilities System, (Refunding, Series A), FSA Insured................ RB Aaa/AAA 11/15/03 5.750 7,152,996
The Accompanying Notes are an Integral Part of the Financial Statements. 29 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ TEXAS (CONTINUED) $ 4,040 Austin, (Public Improvement, due 09/01/12)............................. GO Aa2/AA 09/01/09(a) 5.750% $ 4,205,802 4,500 Austin, (Public Improvement, due 09/01/14)............................. GO Aa2/AA 09/01/09(a) 5.750 4,625,505 10,000 Brazos River Authority, (Pollution Control Revenue, Refunding, Texas Utilities Electric Co., Series A, due 04/01/33)............................. RB A3/BBB+ 04/01/01(a) 5.000 10,028,700 2,260 Corpus Christi Independent School District, (Refunding), PSFG Insured... GO Aaa/AAA 08/15/05 6.000 2,388,504 1,305 Dallas County Flood Control District #1, (Prerefunded)......................... GO Aaa/NR 04/01/10 9.250 1,562,085 1,650 El Paso Independent School District, (Prerefunded), PSFG Insured........... GO Aaa/AAA 07/01/03 6.550 1,682,290 5,000 Humble Independent School District, Zero Coupon, (Compensation Interest, Refunding), PSFG Insured.............. GO Aaa/AAA 02/15/16 0.000 2,082,200 5,880 Humble Independent School District, Zero Coupon, (Compensation Interest, Refunding), PSFG Insured.............. GO Aaa/AAA 02/15/17 0.000 2,292,142 3,805 Lewisville Independent School District, (Refunding), PSFG Insured............. GO Aaa/NR 08/15/03 6.000 3,949,780 10,000 Lower Colorado River Authority, (Refunding, Series B, due 05/15/10), FSA Insured........................... RB Aaa/AAA 05/15/09(a) 6.000 10,784,900 7,000 Texas Water Development Board, (Revolving Fund, Sr. Lien, Series B, due 07/15/12)......................... RB Aa1/AAA 01/15/10(a) 5.750 7,312,830 10,000 Texas, (Prerefunded, Series C).......... GO NR/AA 04/01/20 5.500 10,351,600 4,000 Texas, (Public Finance Authority, Refunding, Series B).................. GO Aa1/AA 10/01/03 6.000 4,168,680 2,500 University of Texas, (Permanent University Fund, Refunding)........... RB Aaa/AAA 07/01/01 6.300 2,544,100 ------------ TOTAL TEXAS......................... 76,666,764 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 30 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ UTAH (2.0%) $ 4,155 Intermountain Power Agency, (Power Supply Revenue, Refunding, Series C), MBIA Insured.......................... RB Aaa/AAA 07/01/01 6.000% $ 4,213,544 6,645 Intermountain Power Agency, (Power Supply Revenue, Refunding, Series C), MBIA Insured.......................... RB Aaa/AAA 07/01/02 6.000 6,816,707 4,180 Jordan School District, (Refunding, due 06/15/06)............................. GO Aa3/NR 06/15/03(a) 6.050 4,336,207 ------------ TOTAL UTAH.......................... 15,366,458 ------------ VIRGINIA (5.6%) 13,390 Fairfax County, (Economic Development Authority Resource Recovery Revenue, Refunding, Series A), AMBAC Insured... RB NR/AAA 02/01/04 5.700 13,816,873 2,730 Fairfax County, (Water Authority Revenue, Prerefunded due 04/01/22).... RB Aaa/AAA 04/01/07(a) 6.000 2,972,479 3,650 Loudoun County, (Public Improvement, Series B)............................. GO Aa1/AA 01/01/04 5.125 3,712,013 3,650 Loudoun County, (Public Improvement, Series B)............................. GO Aa1/AA 01/01/05 5.125 3,719,533 3,650 Loudoun County, (Public Improvement, Series B)............................. GO Aa1/AA 01/01/06 5.250 3,747,236 3,665 Metropolitan Airport Washington D.C. Authority, (General Airport Revenue, Series A, due 10/01/10), FGIC Insured............................... RB Aaa/AAA 10/01/00(a) 7.250 3,751,347 5,000 Virginia College Building Authority, (Educational Facilities Revenue, 21st Century College Program).............. RB Aa1/AA+ 02/01/03 5.750 5,138,800 2,000 Virginia Public School Authority, (Prerefunded, Series A)............... RB Aa1/AA 08/01/04 6.500 2,081,120 5,000 Virginia Public School Authority, (Refunding)........................... RB Aa1/AA 01/01/02 6.000 5,106,000 ------------ TOTAL VIRGINIA...................... 44,045,401 ------------
The Accompanying Notes are an Integral Part of the Financial Statements. 31 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ WASHINGTON (5.0%) $ 7,215 Clark County, (Industrial Revenue Bond, Camas Power Boiler Ltd. Solid Waste Disposal Project, Series A, due 08/01/07), LOC Landesbank Hessen...... RB Aaa/NR 08/01/02(a) 4.650% $ 7,159,661 2,995 Grant County Public Utility District #2, (Priest Rapids Hydroelectric Revenue, Refunding, 2nd Series C, due 01/01/13), AMBAC Insured............................... RB Aaa/AAA 01/01/07(a) 6.000 3,136,843 1,315 Grant County Public Utility District #2, (Wanapum Hydroelectric Revenue, Refunding, 2nd Series C, due 01/01/13), AMBAC Insured.............. RB Aaa/AAA 01/01/07(a) 6.000 1,373,623 1,555 King & Snohomish Counties School District # 417, (due 12/01/02), FGIC Insured............................... GO Aaa/AAA 12/01/00 6.600 1,564,890 605 King County, (Escrowed to Maturity, Prerefunded, Series B)................ GO Aa1/AA+ 01/01/01 6.700 610,602 5,750 King County, (Unrefunded Balance, Series B)............................. GO Aa1/AA+ 01/01/01 6.700 5,805,143 1,000 Pierce County School District #320, (Prerefunded due 12/01/02), MBIA-IBC Insured............................... GO Aaa/AAA 12/01/01(a) 6.600 1,027,600 1,250 Snohomish County School District #2, (Refunding, Series A, due 12/01/02), MBIA-IBC Insured...................... GO Aaa/AAA 06/01/01(a) 6.700 1,271,175 2,000 Washington Public Power Supply System, (Nuclear Project #2, Refunding, Series A)............................. RB Aa1/AA- 07/01/06 7.250 2,227,380 5,265 Washington Public Power Supply System, (Nuclear Project #2, Refunding, Series A)............................. RB Aa1/AA- 07/01/01 6.300 5,348,398 2,000 Washington Public Power Supply System, (Nuclear Project #2, Refunding, Series C, due 07/01/01), FGIC Insured............................... RB Aaa/AAA 01/01/01(a) 7.000 2,043,140 1,500 Washington Public Power Supply System, (Nuclear Project #2, Refunding, Series C, due 07/01/02)............... RB Aa1/AA- 01/01/01(a) 7.500 1,546,500
The Accompanying Notes are an Integral Part of the Financial Statements. 32 THE TAX EXEMPT BOND PORTFOLIO SCHEDULE OF INVESTMENTS (CONTINUED) JULY 31, 2000 --------------------------------------------------------------------------------
PRINCIPAL SECURITY MOODY'S/ AMOUNT TYPE S&P RATING MATURITY (IN THOUSANDS) SECURITY DESCRIPTION (UNAUDITED) (UNAUDITED) DATE RATE VALUE -------------- ---------------------------------------- ----------- ----------- ----------- ------ ------------ WASHINGTON (CONTINUED) $ 1,750 Washington, (Refunding, Series R-92-A, due 09/01/02)......................... GO Aa1/AA+ 09/01/01(a) 6.300% $ 1,799,193 4,000 Washington, (Series B & AT-7)........... GO Aa1/AA+ 06/01/17 6.400 4,413,960 ------------ TOTAL WASHINGTON.................... 39,328,108 ------------ WISCONSIN (1.5%) 6,250 Wisconsin Health & Educational Facilities............................ PP NR/NR 05/01/19 5.950 5,889,063 6,250 Wisconsin Health & Educational Facilities............................ PP NR/NR 05/01/14 5.700 6,006,125 ------------ TOTAL WISCONSIN..................... 11,895,188 ------------ TOTAL LONG TERM INVESTMENTS (COST $754,481,750).................................... 769,317,980 ------------ SHORT-TERM INVESTMENTS (3.2%) OTHER INVESTMENT COMPANIES (3.2%) SHARES -------------- 25,177,479 J.P. Morgan Institutional Tax Exempt Money Market Fund* (cost $25,177,479)............. 25,177,479 ------------ TOTAL INVESTMENTS (COST $779,659,229) (101.3%)......................................... 794,495,459 LIABILITIES IN EXCESS OF OTHER ASSETS (-1.3%).......................................... (10,572,277) ------------ NET ASSETS (100.0%).................................................................... $783,923,182 ============
------------------------------ Note: Based on the cost of investments of $779,659,229 for federal income tax purposes at July 31, 2000 the aggregate gross unrealized appreciation and depreciation was $15,705,322 and $869,092 respectively, resulting in net unrealized appreciation of investments of $14,836,230. (a) The date under the heading maturity date represents an optional tender date. The actual maturity date is indicated in the security description. AMBAC - Ambac Indemnity Corp., FGIC - Financial Guaranty Insurance Co., FSA - Financial Securities Assurance, GO - General Obligation, IBC - IBC Financial Data, Inc., LOC - Letter of Credit, MBIA - Municipal Bond Assurance Corp., NR - Not Rated, PP - Private Placement, PSFG - Permanent School Fund Guarantee, RB - Revenue Bond Escrowed to Maturity: Bonds for which cash and/or securities have been deposited with a third party to cover the payments of principal and interest at the maturity which coincides with the first call date of the first bond. * Money market mutual fund registered under the Investment Company Act of 1940, as amended, and advised by J.P. Morgan Investment Management, Inc. The Accompanying Notes are an Integral Part of the Financial Statements. 33 THE TAX EXEMPT BOND PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2000 -------------------------------------------------------------------------------- ASSETS Investments at Value (Cost $779,659,229 ) $794,495,459 Interest Receivable 9,548,091 Prepaid Trustees' Fees 3,273 Prepaid Expenses and Other Assets 93,876 ------------ Total Assets 804,140,699 ------------ LIABILITIES Payable to Custodian 10,726 Payable for Investments Purchased 19,883,269 Advisory Fee Payable 196,848 Administrative Services Fee Payable 15,888 Administration Fee Payable 343 Fund Services Fee Payable 676 Accrued Expenses 109,767 ------------ Total Liabilities 20,217,517 ------------ NET ASSETS Applicable to Investors' Beneficial Interests $783,923,182 ============
The Accompanying Notes are an Integral Part of the Financial Statements. 34 THE TAX EXEMPT BOND PORTFOLIO STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2000 -------------------------------------------------------------------------------- INVESTMENT INCOME Interest Income $ 40,506,238 EXPENSES Advisory Fee $2,344,217 Custodian Fees and Expenses 195,879 Administrative Services Fee 194,913 Professional Fees and Expenses 47,183 Fund Services Fee 12,760 Trustees' Fees and Expenses 9,104 Administration Fee 5,677 Miscellaneous 11,522 ---------- Total Expenses 2,821,255 ------------ NET INVESTMENT INCOME 37,684,983 NET REALIZED LOSS ON INVESTMENTS (13,494,852) NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS 6,100,102 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,290,233 ============
The Accompanying Notes are an Integral Part of the Financial Statements. 35 THE TAX EXEMPT BOND PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
FOR THE FISCAL FOR THE ELEVEN FOR THE FISCAL YEAR ENDED MONTHS ENDED YEAR ENDED JULY 31, 2000 JULY 31, 1999 AUGUST 31, 1998 -------------- -------------- --------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net Investment Income $ 37,684,983 $ 34,387,277 $ 31,583,373 Net Realized (Loss) Gain on Investments (13,494,852) 4,500,130 680,094 Net Change in Unrealized Appreciation (Depreciation) of Investments 6,100,102 (30,158,895) 15,917,500 ------------- ------------- -------------- Net Increase in Net Assets Resulting from Operations 30,290,233 8,728,512 48,180,967 ------------- ------------- -------------- TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS Contributions 318,241,114 417,545,311 337,310,680 Withdrawals (386,477,921) (361,383,038) (232,110,590) ------------- ------------- -------------- Net (Decrease) Increase from Investors' Transactions (68,236,807) 56,162,273 105,200,090 ------------- ------------- -------------- Total (Decrease) Increase in Net Assets (37,946,574) 64,890,785 153,381,057 NET ASSETS Beginning of Period 821,869,756 756,978,971 603,597,914 ------------- ------------- -------------- End of Period $ 783,923,182 $ 821,869,756 $ 756,978,971 ============= ============= ==============
-------------------------------------------------------------------------------- SUPPLEMENTARY DATA --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED FOR THE FISCAL FOR THE ELEVEN AUGUST 31, YEAR ENDED MONTHS ENDED ---------------------------- JULY 31, 2000 JULY 31, 1999 1998 1997 1996 1995 -------------- -------------- ---- ---- ---- ---- RATIOS TO AVERAGE NET ASSETS Net Expenses 0.36% 0.37%(a) 0.37% 0.38% 0.38% 0.42% Net Investment Income 4.78% 4.49%(a) 4.70% 4.93% 4.92% 5.15% Portfolio Turnover 84% 29%(b) 16% 25% 25% 47%
------------------------ (a) Annualized. (b) Not Annualized. The Accompanying Notes are an Integral Part of the Financial Statements. 36 THE TAX EXEMPT BOND PORTFOLIO NOTES TO FINANCIAL STATEMENTS JULY 31, 2000 -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Tax Exempt Bond Portfolio (the "portfolio") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company which was organized as a trust under the laws of the State of New York on January 29, 1993. The portfolio commenced operations on July 12, 1993. The portfolio's investment objective is to provide a high level of current income that is exempt from federal income tax consistent with moderate risk of capital. The Declaration of Trust permits the trustees to issue an unlimited number of beneficial interests in the portfolio. At a meeting on November 12, 1998, the trustees elected to change the portfolio's fiscal year from August 31 to July 31. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual amounts could differ from those estimates. The following is a summary of the significant accounting policies of the portfolio: a) The portfolio values securities that are listed on an exchange using prices supplied daily by an independent pricing service that are based on the last traded price on a national securities exchange or in the absence of recorded trades, at the readily available bid price on such exchange, if such exchange or market constitutes the broadest and most representative market for the security. Independent pricing service procedures may also include the use of prices based on yields or prices of securities of comparable quality, coupon, maturity and type, indications as to values from dealers, operating data, and general market conditions. Unlisted securities are valued at the quoted bid price in the over-the- counter market provided by a principal market maker or dealer. If prices are not supplied by the portfolio's independent pricing service or principal market maker or dealer, such securities are priced using fair values in accordance with procedures adopted by the portfolio's trustees. All short-term securities with a remaining maturity of sixty days or less are valued using the amortized cost method. b) Securities transactions are recorded on a trade date basis. Interest income, which includes the amortization of premiums and discounts, if any, is recorded on an accrual basis. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification. c) The portfolio intends to be treated as a partnership for federal income tax purposes. As such, each investor in the portfolio will be taxed on its share of the portfolio's ordinary income and capital gains. It is intended that the portfolio's assets will be managed in such a way that an investor in the portfolio will be able to satisfy the requirements of Subchapter M of the Internal Revenue Code. The cost of securities is substantially the same for book and tax purposes. 2. TRANSACTIONS WITH AFFILIATES a) The portfolio has an Investment Advisory Agreement with J.P. Morgan Investment Management Inc. ("JPMIM"), an affiliate of Morgan Guaranty Trust Company of New York ("Morgan"), a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"). Under the terms of the agreement, the portfolio paid JPMIM at an annual rate of 0.30% of the portfolio's average daily net assets. For the fiscal year ended July 31, 2000, such fees amounted to $2,365,565. 37 THE TAX EXEMPT BOND PORTFOLIO NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 -------------------------------------------------------------------------------- The portfolio may invest in one or more affiliated money market funds: J.P. Morgan Institutional Prime Money Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury Money Market Fund. The Advisor has agreed to reimburse its advisory fee from the portfolio in an amount to offset any doubling of investment advisory, shareholder servicing, and administrative services fees. For the fiscal year ended July 31 ,2000, J.P. Morgan has agreed to reimburse the portfolio $21,348 under this agreement. Interest income included in the Statement of Operations for the year ended July 31, 2000 includes $269,024 of interest income from investment in affiliated Money Market Funds. b) The trust on behalf of the portfolio has retained Funds Distributor, Inc. ("FDI"), a registered broker-dealer, to serve as the co-administrator and exclusive placement agent. Under a Co-Administration Agreement between FDI and the portfolio, FDI provides administrative services necessary for the operations of the portfolio, furnishes office space and facilities required for conducting the business of the portfolio and pays the compensation of the portfolio's officers affiliated with FDI. The portfolio has agreed to pay FDI fees equal to its allocable share of an annual complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to the portfolio is based on the ratio of the portfolio's net assets to the aggregate net assets of the portfolio and certain other investment companies subject to similar agreements with FDI. For the fiscal year ended July 31, 2000, the fee for these services amounted to $5,677. c) The trust on behalf of the portfolio has an Administrative Services Agreement (the "Services Agreement") with Morgan under which Morgan is responsible for certain aspects of the administration and operation of the portfolio. Under the Services Agreement, the portfolio has agreed to pay Morgan a fee equal to its allocable share of an annual complex-wide charge. This charge is calculated based on the aggregate average daily net assets of the portfolio and certain other portfolios for which JPMIM acts as investment advisor (the "master portfolios") and J.P. Morgan Series Trust in accordance with the following annual schedule: 0.09% on the first $7 billion of their aggregate average daily net assets and 0.04% of their aggregate average daily net assets in excess of $7 billion less the complex-wide fees payable to FDI. The portion of this charge payable by the portfolio is determined by the proportionate share that its net assets bear to the net assets of the master portfolios, other investors in the master portfolios for which Morgan provides similar services, and J.P. Morgan Series Trust. For the fiscal year ended July 31, 2000, the fee for these services amounted to $194,913. d) The trust on behalf of the portfolio has a Fund Services Agreement with Pierpont Group, Inc. ("Group") to assist the trustees in exercising their overall supervisory responsibilities for the portfolio's affairs. The trustees of the portfolio represent all the existing shareholders of Group. For the fiscal year ended July 31, 2000, the portfolio's allocated portion of Group's costs in performing its services amounted to $12,760. e) An aggregate annual fee of $75,000 is paid to each trustee for serving as a trustee of the trust, the J.P. Morgan Funds, the J.P. Morgan Institutional Funds, the master portfolios and J.P. Morgan Series Trust. The Trustees' Fees and Expenses shown in the financial statements represents the portfolio's allocated portion of the total fees and expenses. The portfolio's Chairman and Chief Executive Officer 38 THE TAX EXEMPT BOND PORTFOLIO NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 -------------------------------------------------------------------------------- also serves as Chairman of Group and receives compensation and employee benefits from Group in his role as Group's Chairman. The allocated portion of such compensation and benefits included in the Fund Services Fee shown in the financial statements was $2,400 for the fiscal year ended July 31, 2000. 3. INVESTMENT TRANSACTIONS Investments transactions (excluding short-term investments) for the fiscal year ended July 31, 2000 were as follows:
COST OF PROCEEDS PURCHASES FROM SALES --------- ------------ $644,817,931 $656,683,081
4. CREDIT AGREEMENT The portfolio is party to a revolving line of credit agreement (the "Agreement") as discussed more fully in Note 4 of the fund's Notes to the Financial Statements which are included elsewhere in this report. 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Investors of The Tax Exempt Bond Portfolio In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the supplementary data present fairly, in all material respects, the financial position of The Tax Exempt Bond Portfolio (the "portfolio") at July 31, 2000, the results of its operations for the year then ended, and the changes in its net assets for the year then ended, for the eleven months ended July 31, 1999 and for the year ended August 31, 1998 and the supplementary data for the year then ended, for the eleven months ended July 31, 1999 and for the four years ended August 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements and supplementary data (hereafter referred to as "financial statements") are the responsibility of the portfolio's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at July 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York September 15, 2000 40 J.P. MORGAN FUNDS PRIME MONEY MARKET FUND FEDERAL MONEY MARKET FUND TAX EXEMPT MONEY MARKET FUND TAX AWARE ENHANCED INCOME FUND: SELECT SHARES SHORT TERM BOND FUND BOND FUND GLOBAL STRATEGIC INCOME FUND EMERGING MARKETS DEBT FUND TAX EXEMPT BOND FUND NEW YORK TAX EXEMPT BOND FUND CALIFORNIA BOND FUND: SELECT SHARES DIVERSIFIED FUND DISCIPLINED EQUITY FUND U.S. EQUITY FUND U.S. SMALL COMPANY FUND U.S. SMALL COMPANY OPPORTUNITIES FUND TAX AWARE U.S. EQUITY FUND: SELECT SHARES INTERNATIONAL EQUITY FUND EUROPEAN EQUITY FUND INTERNATIONAL OPPORTUNITIES FUND EMERGING MARKETS EQUITY FUND GLOBAL 50 FUND: SELECT SHARES FOR MORE INFORMATION ON THE J.P. MORGAN FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411. IMAR 206 J.P. MORGAN TAX EXEMPT BOND FUND ANNUAL REPORT JULY 31, 2000