<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL
MONEY MARKET FUND
December 1, 1998
Dear Shareholder:
We are pleased to provide the J.P. Morgan Institutional Service Federal Money
Market Fund shareholder letter and annual report for the period November 5, 1997
(commencement of operations) through October 31, 1998. The fund returned 5.29%
for the period versus a benchmark return of 4.88%. Security selection and active
maturity management contributed to the fund's return for the period. These
investment decisions have helped the fund to consistently outperform its
benchmark (see table on page two).
The fund's net asset value remained $1.00 per share. The fund's total net assets
were approximately $29.5 million while the net assets of The Federal Money
Market Portfolio, in which the fund invests, totaled approximately $1.5 billion
on October 31, 1998 the end of the reporting period.
We call your attention to the portfolio manager Q&A on page two, in which Robert
Johnson, the lead portfolio manager, discusses some of the events affecting the
market and how the portfolio was positioned to respond to them.
As chairman and president of Asset Management Services, we appreciate your
investment in the fund. If you have any comments or questions, please call your
Morgan representative or J.P. Morgan Funds Services at (800) 766-7722.
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>
<CAPTION>
- ---------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C> <C> <C>
LETTER TO THE SHAREHOLDERS. . . . . . 1 GLOSSARY OF TERMS. . . . . . . . . 5
FUND PERFORMANCE. . . . . . . . . . . 2 FUND FACTS AND HIGHLIGHTS. . . . . 6
PORTFOLIO MANAGER Q&A . . . . . . . . 3 FINANCIAL STATEMENTS . . . . . . . 8
- --------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
One way to look at performance is to review a fund's average annual total
return. This figure takes a fund's actual (or cumulative) return and shows what
would have happened if the fund had achieved that return by performing at a
constant rate each year. Average annual total returns represent the average
yearly change of a fund's value over a specified time period, typically one,
five, or ten years (or since inception). Total returns for periods of less than
one year are not annualized and provide a picture of how a fund has performed
over the short term.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
-------------------- --------------------------------
THREE SIX ONE FIVE SINCE
AS OF OCTOBER 31, 1998 MONTHS MONTHS YEAR* YEARS* INCEPTION*
- ---------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Institutional Service Federal
Money Market Fund 1.27% 2.59% 5.29% 4.88% 4.57%
IBC U.S. Government & Agency
Money Market Fund Average 1.17% 2.39% 4.88% 4.54% 4.28%
Lipper Institutional U.S. Government
Money Market Funds Average 1.28% 2.61% 5.29% 5.00% 4.71%
AS OF SEPTEMBER 30, 1998
- ---------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Institutional Service Federal
Money Market Fund 1.29% 2.61% 5.32% 4.84% 4.56%
IBC U.S. Government & Agency
Money Market Fund Average 1.20% 2.41% 4.90% 4.51% 4.27%
Lipper Institutional U.S. Government
Money Market Funds Average 1.31% 2.62% 5.32% 4.96% 4.70%
</TABLE>
11/5/97 -- COMMENCEMENT OF INVESTMENT OPERATIONS (AVERAGE ANNUAL TOTAL RETURN
SINCE ACTUAL INCEPTION IS 5.24%)
*REFLECTS PERFORMANCE OF THE J.P. MORGAN FEDERAL MONEY MARKET FUND FROM JANUARY
4, 1993(COMMENCEMENT OF OPERATIONS) THROUGH NOVEMBER 5, 1997, J.P. MORGAN
INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND'S INCEPTION. THE PERFORMANCE FOR
SUCH PERIOD REFLECTS THE DEDUCTION OF THE EXPENSES OF THE J.P. MORGAN FEDERAL
MONEY MARKET FUND, WHICH WERE LOWER THAN THE EXPENSES OF THE FUND AND THEREFORE
PERFORMANCE OF THE FUND FOR THIS PERIOD WOULD HAVE BEEN LOWER.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES, ASSUME THE REINVESTMENT OF DISTRIBUTIONS, AND REFLECT REIMBURSEMENT OF
CERTAIN FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES
NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. IBC IS A
NATIONALLY-RECOGNIZED SOURCE OF MONEY MARKET FUND DATA. LIPPER ANALYTICAL
SERVICES, INC. IS A LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with ROBERT R. ("SKIP") JOHNSON, a member of the
portfolio management team for The Federal Money Market Portfolio, in which the
fund invests. Prior to joining Morgan in 1988, Skip held senior positions with
the Bank of Montreal and U.S. Steel. This interview was conducted on May 20,
1998 and reflects his views on that date.
WOULD YOU BRIEFLY DESCRIBE MARKET EVENTS THAT OCCURRED FOR THE PERIOD UNDER
REVIEW?
RJ: Throughout most of the past 12 months, the economy grew at a strong pace
while inflation remained low - setting the stage for a possible Federal Reserve
tightening. In fact, during the early part of the period the Fed held a
tightening bias, although it did not do so, largely due to the favorable level
of inflation. In mid-year, considering the fallout from the Asian and Russian
crises and the contagion effect thereof, the Fed moved to an easing mode and
did, in fact, ease twice, bringing the federal funds rate down to 5%. As a
result, the financial markets saw for the first time in many months some
stability. For the money markets, the flight to quality heightened toward the
end of the period, particularly in late August and through September, due to the
precipitous drop in the U.S. equity market at that time, general investor
sentiment and risk aversion, and perhaps most significantly, the anticipation of
a rate cut by the Fed. This rally was significant - and we saw an inverted yield
curve as short-term rates tied to the federal funds rate and LIBOR remained
above longer-term levels.
WHAT WERE THE IMPLICATIONS OF THESE EVENTS FOR THE PORTFOLIO, PARTICULARLY IN
TERMS OF ITS PERFORMANCE?
RJ: The first notable effect of the markets on the fund was a significant
increase in the fund's assets, most dramatically in the third quarter. Investors
moved to safer havens throughout most of this period but more markedly toward
the end of the summer. In addition, we saw a good amount of money come into the
fund from people who qualified for state and local tax exemptions in some of the
higher-tax states. In general, the fund performed very well throughout the
period. This was due to a combination of the general flight to quality in the
financial markets but also because of how the portfolio was structured and
managed throughout the period.
3
<PAGE>
PLEASE EXPLAIN.
RJ: We kept our focus on liquidity management and appropriately structuring the
portfolio throughout the period. For example, we kept a neutral bias while the
Fed was in a tightening mode earlier on. We thought the market was fairly valued
to Fed expectations at the time. This proved to be the right choice. Later on,
we extended our durations when we realized that the Fed would most likely have
to ease to calm financial markets. At the end of the third quarter we were long,
with expectations for further eases.
In addition, throughout the year we maintained a disciplined structure of
laddered investments in order to hedge ourselves against any unforeseen events.
We did this primarily to ensure that we had enough liquidity should there be
redemptions. We're confident this approach substantially contributed to the
fund's competitive performance during the entire period.
WHAT IS YOUR OUTLOOK MOVING FORWARD? HOW WILL YOU POSITION THE PORTFOLIO IN
LIGHT OF THAT OUTLOOK?
RJ: A big factor in our portfolio construction is to have a high degree of
liquidity. We're also going to maintain our longer bias, as we're expecting
further eases in monetary policy. This is largely because we anticipate a
slowdown in the economy, which could lead to another Fed ease, so it makes sense
that our bias would be to have a longer portfolio; the market is fairly priced
for that. The market is now pricing in eases, but not to the extent it did prior
to the September 29th meeting of the Fed. Overall, we believe during the months
ahead the fund will continue to perform competitively, relative to the benchmark
and to our competitors.
4
<PAGE>
GLOSSARY OF TERMS
AVERAGE MATURITY: The weighted average time to maturity of the entire portfolio
with the weights equal to the percentage of the portfolio invested in each
security (see Maturity).
CREDIT RATING: The rating assigned to a bond or note by independent rating
agencies such as Standard & Poor's Corporation and Moody's Investors Service. 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.
CREDIT RISK: Financial risk that an obligation will not be paid and a loss will
result.
LETTER OF CREDIT: Instrument or document issued by a bank guaranteeing the
payment of a customer's drafts up to a stated amount and eliminating the
seller's risk.
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.
VARIABLE RATE DEMAND NOTE: Note representing borrowings that is payable on
demand and that bears interest tied to a base money market rate, usually the
bank prime rate. The rate on the note is adjusted upward or downward each time
the base rate changes.
YIELD: Coupon rate of interest on a bond divided by the purchase price. As a
bond's price falls, its yield rises and vice versa.
YIELD CURVE: A graph showing the term structure or level of interest rates
ranging from the shortest to the longest maturities. The resulting curve shows
if short-term interest rates are higher or lower than long-term rates. Normally,
the longer the bond, the higher the yield it offers, resulting in a positive
yield curve. An inverted yield curve can occur when there are supply/demand
imbalances for various maturities, which results in short-term rates at higher
levels than longer-term instruments.
YIELD SPREAD: The difference in yield between different types of securities. For
example, if a Treasury bond is yielding 6.00% and a municipal is yielding 5.00%,
the yield spread is 1.00% or 100 basis points.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Institutional Service Federal Money Market Fund seeks to provide
current income, maintain a high level of liquidity, and preserve capital. It is
designed for investors who seek to preserve capital and earn current income from
a portfolio of direct obligations of the U.S. Treasury and obligations of
certain U.S. government agencies.
- --------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
11/5/97
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 10/31/98
$29,459,254
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 10/31/98
$1,463,575,654
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
MONTHLY
- --------------------------------------------------------------------------------
SHORT-TERM CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
MONTHLY
- --------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/11/98
EXPENSE RATIO
The fund's current expense ratio of 0.45% covers shareholders' expenses for
custody, tax reporting, investment advisory, and shareholder services, after
reimbursement. 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 redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF OCTOBER 31, 1998
DAYS TO MATURITY
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<CAPTION>
<S> <C>
0-30 DAYS 42.9%
31-60 DAYS 41.8%
61-90 DAYS 6.1%
90+ DAYS 9.2%
</TABLE>
AVERAGE 7-DAY CURRENT YIELD
4.71%*
AVERAGE LIFE
39 days
*YIELD REFLECTS THE REIMBURSEMENT OF CERTAIN FUND EXPENSES AS DESCRIBED IN THE
PROSPECTUS. HAD EXPENSES NOT BEEN SUBSIDIZED, THE AVERAGE 7-DAY CURRENT YIELD
WOULD HAVE BEEN 4.14%.
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC.
SERVES AS INVESTMENT ADVISOR. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE
NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. WHILE THE FUND SEEKS
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, THERE IS NO ASSURANCE
THAT IT WILL CONTINUE TO DO SO.
Opinions expressed herein are based on current market conditions and are subject
to change without notice. The fund invests through a master portfolio (another
fund with the same objective). Income may be subject to some state or local
taxes. Some income may be subject to the Federal alternative minimum tax for
certain investors. Capital gains are not exempt from taxes.
CALL J.P. MORGAN FUNDS SERVICES AT (800) 766-7722 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
7
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Federal Money Market Portfolio
("Portfolio"), at value $29,564,821
Receivable for Expense Reimbursements 22,198
Deferred Organization Expenses 8,825
Prepaid Expenses and Other Assets 533
-----------
Total Assets 29,596,377
-----------
LIABILITIES
Dividends Payable to Shareholders 60,996
Organization Expenses Payable 11,000
Service Organization Fee Payable 5,128
Shareholder Servicing Fee Payable 1,025
Administrative Services Fee Payable 569
Administration Fee Payable 104
Accrued Trustees' Fees and Expenses 56
Fund Services Fee Payable 12
Accrued Expenses 58,233
-----------
Total Liabilities 137,123
-----------
NET ASSETS
Applicable to 29,459,281 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $29,459,254
-----------
-----------
Net Asset Value, Offering and Redemption Price
Per Share $1.00
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $29,459,281
Accumulated Net Realized Loss on Investment (27)
-----------
Net Assets $29,459,254
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 5, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $617,570
Allocated Portfolio Expenses (Net of
Reimbursement of $4,459) (22,487)
--------
Net Investment Income Allocated from
Portfolio 595,083
FUND EXPENSES
Registration Fees $ 34,636
Service Organization Fee 27,961
Transfer Agent Fees 16,224
Printing Expenses 13,883
Professional Fees and Expenses 11,731
Shareholder Servicing Fee 5,626
Administrative Services Fee 3,189
Amortization of Organization Expenses 2,175
Fund Services Fee 264
Administration Fee 227
Trustees' Fees and Expenses 160
Miscellaneous 5,040
--------
Total Fund Expenses 121,116
Less: Reimbursement of Expenses (93,222)
--------
NET FUND EXPENSES 27,894
--------
NET INVESTMENT INCOME 567,189
NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM
PORTFOLIO (27)
--------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $567,162
--------
--------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 5, 1997
(COMMENCEMENT OF
OPERATIONS) THROUGH
OCTOBER 31, 1998
-------------------
<S> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 567,189
Net Realized Loss on Investment Allocated from
Portfolio (27)
-------------------
Net Increase in Net Assets Resulting from
Operations 567,162
-------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (567,189)
-------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (AT
A CONSTANT $1.00 PER SHARE)
Proceeds from Shares of Beneficial Interest Sold 176,099,673
Reinvestment of Dividends 186,964
Cost of Shares of Beneficial Interest Redeemed (146,827,356)
-------------------
Net Increase from Transactions in Shares of
Beneficial Interest 29,459,281
-------------------
Total Increase in Net Assets 29,459,254
NET ASSETS
Beginning of Period --
-------------------
End of Period $ 29,459,254
-------------------
-------------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INSTITIUTIONAL SERVICE FEDERAL MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout the period is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 5, 1997
(COMMENCEMENT OF
OPERATIONS) THROUGH
OCTOBER 31, 1998
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
-------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0517
Net Realized Loss on Investment (0.0000)(a)
-------------------
Total from Investment Operations 0.0517
-------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.0517)
-------------------
NET ASSET VALUE, END OF PERIOD $ 1.00
-------------------
-------------------
RATIOS AND SUPPLEMENTAL DATA
Total Return 5.24%(b)
Net Assets, End of Period (in thousands) $ 29,459
Ratios to Average Net Assets
Expenses 0.45%(c)
Net Investment Income 5.07%(c)
Expenses without Reimbursement 1.32%(c)
</TABLE>
- ------------------------
(a) Less than $0.0001.
(b) Not annualized.
(c) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Institutional Service Federal Money Market Fund (the "fund") is a
separate series of the J.P. Morgan Institutional 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 commenced operations on November 5,
1997.
The fund invests all of its investable assets in The Federal Money Market
Portfolio (the "portfolio"), a 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 (2% at October
31, 1998). 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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the 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 gain and
loss and adjusts its investment in the portfolio each day. All the net
investment income and realized 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 and net realized
capital gains, if any, are declared as dividends daily and paid monthly.
Net short term capital gains, if any, will be distributed in accordance
with the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), and may be reflected in the fund's daily dividends.
Substantially all the realized net long-term capital gains, if any, are
declared and paid annually, except that an additional capital gains
distribution may be made in a given year to the extent necessary to avoid
the imposition of federal excise tax on the fund.
d) The fund incurred organization expenses in the amount of $11,000. Morgan
Guaranty Trust Company of New York ("Morgan"), a wholly owned subsidiary
of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), has paid the
organization expenses of the fund. The fund has agreed to reimburse Morgan
for these costs which are being deferred and amortized on a straight-line
basis over a period not to exceed five-years beginning with the
commencement of operations of the fund.
e) The fund is treated as a separate entity for federal income tax purposes
and intends to comply with the provisions of the Code, 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. For United States federal
income tax purposes, the fund had a capital loss carryforward at October
31, 1998 of $27, which expires in 2006. To the extent that this capital
loss is used to offset future capital gains, it is probable that the gains
so offset will not be distributed to shareholders.
12
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
f) 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.
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
period November 5, 1997 (commencement of operations) through October 31,
1998, the fee for these services amounted to $227.
b) The trust, on behalf of the fund, 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 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 the other portfolios in which the trust and the J.P. Morgan
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 period November 5, 1997 (commencement of
operations) through October 31, 1998, the fee for these services amounted
to $3,189.
In addition, J.P. Morgan has agreed to reimburse the fund to the extent
necessary to maintain the total operating expenses of the fund, including
the expenses allocated to the fund from the portfolio, at no more than
0.45% of the average daily net assets of the fund through February 28,
1999. For the period November 5, 1997 (commencement of operations) through
October 31, 1998, J.P. Morgan has agreed to reimburse the fund $93,222 for
expenses under this agreement. This reimbursement arrangement can be
changed or terminated at any time after February 28, 1999, at the option
of J.P. Morgan.
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. This rate was 0.05% of the average daily
net assets of the fund from November 1, 1997 through July 31, 1998. For
the period November 5, 1997 (commencement of operations) through October
31, 1998, the fee for these services amounted to $5,626.
13
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
d) The trust on behalf of the fund, has a Service Plan with respect to fund
shares which authorizes it to compensate Service Organizations for
providing account administration and other services to their customers who
are beneficial owners of such shares. The fund will enter into agreements
with Service Organizations which purchase shares on behalf of their
customers ("Service Agreements"). The Service Agreements provide that the
fund pay Service Organizations a fee which is computed daily and paid
monthly at an annual rate of up to 0.25% of the average daily net assets
of the fund with respect to the shares of the fund attributable to or held
in the name of the Service Organization for its customers. For the period
November 5, 1997 (commencement of operations) through October 31, 1998,
the fee for these services amounted to $27,961.
e) 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
$264 for the period November 5, 1997 (commencement of operations) through
October 31, 1998.
f) 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 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 these
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 $100.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Institutional Service Federal Money Market 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 Institutional Service Federal Money Market Fund (one of the series
constituting part of the J.P. Morgan Institutional Funds, hereafter referred to
as the "fund") at October 31, 1998, and the results of its operations, the
changes in its net assets and the financial highlights for the period November
5, 1997 (commencement of operations) through October 31, 1998, in conformity
with generally accepted accounting principles. 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 audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
December 17, 1998
15
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FEDERAL MONEY MARKET FUND
SUPPLEMENTAL PROXY INFORMATION
- --------------------------------------------------------------------------------
A Joint Special Meeting of Shareholders of the J.P. Morgan Family of Funds was
held on August 20, 1998. Each of the applicable funds voted in favor of adopting
the following proposals, therefore, the results are aggregated for the trust
unless otherwise specified. The meeting was held for the following purposes:
1. To elect a slate of five trustees to hold office for a term of unlimited
duration subject to the current retirement age of 70.
2a.To approve the amendment of the fund's investment restriction relating to
diversification of assets.
2b.To approve the amendment of the fund's investment restriction relating to
concentration of assets in a particular industry.
2c.To approve the amendment of the fund's investment restriction relating to the
issuance of senior securities.
2d.To standardize the borrowing ability of the fund to the extent permitted by
applicable law.
2e.To approve the amendment of the fund's investment restriction relating to
underwriting.
2f.To approve the amendment of the fund's investment restriction relating to
investment in real estate.
2g.To approve the amendment of the fund's investment restriction relating to
commodities.
2h.To approve the amendment of the fund's investment restriction relating to
lending.
2i.To approve the reclassification of the fund's other fundamental restrictions
as nonfundamental.
3. To approve the reclassification of the fund's investment objective from
fundamental to nonfundamental.
4. To approve a new investment advisory agreement of the fund.
5. To amend the Declaration of Trust to provide dollar-based voting rights.
6. To ratify the selection of independent accountants, PricewaterhouseCoopers
LLP.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
DIRECTORS/MATTER VOTES FOR VOTES AGAINST ABSTENTIONS
- ------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
1. Frederick S. Addy............................. 2,592,561,591 8,840,251 --
William G. Burns............................... 2,592,561,591 8,840,251 --
Arthur C. Eschenlauer.......................... 2,592,561,591 8,840,251 --
Matthew Healey................................. 2,592,561,591 8,840,251 --
Michael P. Mallardi............................ 2,592,561,591 8,840,251 --
2. Amending of Investment Restrictions:
a. Relating to diversification of assets....... 10 0 0
b. Relating to concentration of assets......... 10 0 0
c. Relating to issuance of senior securities... 10 0 0
d. Relating to borrowing....................... 10 0 0
e. Relating to underwriting.................... 10 0 0
f. Relating to investment in real estate....... 10 0 0
g. Relating to commodities..................... 10 0 0
h. Relating to lending......................... 10 0 0
i.Reclassification of other restrictions as
nonfundamental............................. 10 0 0
3. Reclassification of investment objectives..... 10 0 0
4. Investment advisory agreement................. 10 0 0
5. Dollar-based voting rights.................... 2,411,567,264 7,638,329 179,591,823
6.Independent accountants,
PricewaterhouseCoopers LLP................... 2,402,592,025 19,567,729 179,242,087
</TABLE>
16
<PAGE>
The Federal Money Market Portfolio
Annual Report October 31, 1998
(The following pages should be read in conjunction
with J.P. Morgan Institutional Service Federal Money Market Fund
Annual Financial Statements)
17
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL YIELD TO
AMOUNT MATURITY/
(IN THOUSANDS) SECURITY DESCRIPTION MATURITY DATES RATE VALUE
- -------------- ------------------------------------------------- --------------------- --------------- ---------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS (99.7%)
$ 25,000 Federal Farm Credit Bank (due 01/14/99).......... 11/02/98(a) 5.040% $ 24,998,531
50,000 Federal Farm Credit Bank (due 02/10/99).......... 11/02/98(a) 5.010 49,993,952
40,000 Federal Farm Credit Bank......................... 03/02/99-05/03/99 5.375-5.600 39,980,250
25,000 Federal Farm Credit Bank (due 05/20/99).......... 11/20/98(a) 5.017 24,989,863
80,000 Federal Farm Credit Bank (due 08/24/99).......... 11/24/98(a) 4.999 79,955,885
45,000 Federal Farm Credit Bank (due 09/01/99).......... 12/01/98(a) 5.498 44,985,323
261,389 Federal Farm Credit Bank Discount Note........... 11/16/98-01/14/99 4.730-5.100 260,108,968
50,000 Federal Home Loan Bank (due 02/11/99)............ 11/11/98(a) 5.210 49,990,432
100,000 Federal Home Loan Bank (due 03/10/99)............ 11/02/98(a) 5.180 99,979,289
50,000 Federal Home Loan Bank (due 05/05/99)............ 11/05/98(a) 5.165 49,981,344
65,000 Federal Home Loan Bank........................... 12/17/98-07/06/99 5.415-5.825 64,978,591
362,730 Federal Home Loan Bank Discount Note............. 11/04/98-02/16/99 4.740-5.080 360,590,933
50,000 Student Loan Marketing Association (due
01/27/99)...................................... 11/02/98(a) 5.200 49,995,330
10,000 Student Loan Marketing Association............... 02/10/99 5.400 9,997,573
100,000 Student Loan Marketing Association (due
10/29/99)...................................... 11/02/98(a) 5.250 100,000,000
50,000 Student Loan Marketing Association Discount
Note........................................... 01/19/99 4.990 49,452,486
100,000 Tennessee Valley Authority Discount Note......... 11/30/98-12/18/98 4.750-5.320 99,475,652
---------------
TOTAL INVESTMENTS AT AMORTIZED COST AND VALUE (99.7%)..................................... 1,459,454,402
OTHER ASSETS IN EXCESS OF LIABILITIES (0.3%).............................................. 4,121,252
---------------
NET ASSETS (100.0%)....................................................................... $ 1,463,575,654
---------------
---------------
</TABLE>
- ------------------------------
(a)Date listed represents the next interest rate reset date. The actual maturity
date is indicated in the security description.
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Amortized Cost and Value $1,459,454,402
Cash 5,693
Interest Receivable 4,351,587
Receivable for Expense Reimbursement 58,115
Prepaid Trustees' Fees 1,067
Prepaid Expenses and Other Assets 9,146
--------------
Total Assets 1,463,880,010
--------------
LIABILITIES
Advisory Fee Payable 212,708
Administrative Services Fee Payable 35,783
Custody Fee Payable 26,194
Administration Fee Payable 3,181
Fund Services Fee Payable 1,223
Accrued Expenses 25,267
--------------
Total Liabilities 304,356
--------------
NET ASSETS
Applicable to Investors' Beneficial Interests $1,463,575,654
--------------
--------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $50,716,068
EXPENSES
Advisory Fee $1,736,610
Administrative Services Fee 264,799
Custodian Fees and Expenses 141,173
Professional Fees and Expenses 52,676
Fund Services Fee 25,893
Administration Fee 12,377
Trustees' Fees and Expenses 11,800
Amortization of Organization Expenses 974
Miscellaneous 10,878
----------
Total Expenses 2,257,180
Less: Reimbursement of Expenses (415,825)
----------
NET EXPENSES 1,841,355
-----------
NET INVESTMENT INCOME 48,874,713
NET REALIZED GAIN ON INVESTMENTS 178
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $48,874,891
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 48,874,713 $ 17,100,620
Net Realized Gain on Investments 178 36,079
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 48,874,891 17,136,699
---------------- ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 6,623,456,255 2,410,983,122
Withdrawals (5,585,739,299) (2,346,071,346)
---------------- ----------------
Net Increase from Investors' Transactions 1,037,716,956 64,911,776
---------------- ----------------
Total Increase in Net Assets 1,086,591,847 82,048,475
NET ASSETS
Beginning of Fiscal Year 376,983,807 294,935,332
---------------- ----------------
End of Fiscal Year $ 1,463,575,654 $ 376,983,807
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
OCTOBER 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.20% 0.20% 0.20% 0.20% 0.22%
Net Investment Income 5.31% 5.18% 5.08% 5.55% 3.65%
Expenses without Reimbursement 0.25% 0.28% 0.27% 0.26% 0.27%
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Federal Money Market 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 November 4, 1992. The portfolio's investment objective
is to provide current income, maintain a high level of liquidity and preserve
capital. The portfolio commenced operations on January 4, 1993. The Declaration
of Trust permits the trustees to issue an unlimited number of beneficial
interests in the portfolio.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the portfolio:
a) Investments are valued at amortized cost which approximates market value.
The amortized cost method of valuation values a security at its cost at
the time of purchase and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instruments.
The portfolio's custodian or designated subcustodians, as the case may be
under tri-party repurchase agreements, takes possession of the collateral
pledged for investments in repurchase agreements on behalf of the
portfolio. It is the policy of the portfolio to value the underlying
collateral daily on a mark-to-market basis to determine that the value,
including accrued interest, is at least equal to the repurchase price plus
accrued interest. In the event of default of the obligation to repurchase,
the portfolio has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances,
in the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral or proceeds may be subject
to legal proceedings.
b) Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discounts, if any,
is recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
c) 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.
d) The portfolio incurred organization expenses in the amount of $27,491
which were deferred and are amortized on a straight-line basis over a
period not to exceed five years beginning with the commencement of
operations of the portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) Prior to October 1, 1998, the portfolio had an Investment Advisory
Agreement with Morgan Guaranty Trust Company of New York ("Morgan"), a
wholly owned subsidiary of J.P. Morgan & Co.
22
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Incorporated ("J.P. Morgan"). Under the terms of the agreement, the
portfolio paid Morgan at an annual rate of 0.20% of the portfolio's
average daily net assets up to $1 billion and 0.10% on any excess over $1
billion. Effective October 1, 1998 the portfolio's investment advisor is
J.P. Morgan Investment Management Inc. ("JPMIM"), an affiliate of Morgan
and a wholly owned subsidiary of J.P. Morgan, and the terms of the
agreement have remained the same. For the fiscal year ended October 31,
1998, such fees amounted to $1,736,610.
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the portfolio,
FDI provides administrative services necessary for the operations of the
portfolio, furnishes office space and facilities required for conducting
the business of the portfolio and pays the compensation of the officers
affiliated with FDI. The portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the portfolio is based on
the ratio of the portfolio's net assets to the aggregate net assets of the
portfolio and certain other investment companies subject to similar
agreements with FDI. For the fiscal year ended October 31, 1998, the fee
for these services amounted to $12,377.
c) 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 October 31, 1998, the fee
for these services amounted to $264,799.
In addition, J.P. Morgan has agreed to reimburse the portfolio to the
extent necessary to maintain the total operating expenses of the portfolio
at no more than 0.20% of the average daily net assets of the portfolio
through February 28, 1999. For the fiscal year ended October 31, 1998,
J.P. Morgan has agreed to reimburse the portfolio $415,825 for expenses
under this agreement. This reimbursement arrangement can be changed or
terminated at any time after February 28, 1999 at the option of J.P.
Morgan.
d) The portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the trustees in exercising their overall supervisory
responsibilities for the portfolio's affairs. The trustees of the
portfolio represent all the existing shareholders of Group. The
portfolio's allocated portion of Group's costs in performing its services
amounted to $25,893 for the fiscal year ended October 31, 1998.
23
<PAGE>
THE FEDERAL MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
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 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 $5,400.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Federal Money Market 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 Federal Money Market Portfolio (the
"portfolio") at October 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and supplementary data (hereafter referred to as
"financial statements") are the responsibility of the portfolio's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
December 17, 1998
25
<PAGE>
J.P. MORGAN INSTITUTIONAL SERVICE FUNDS
PRIME MONEY MARKET FUND
TREASURY MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
FOR MORE INFORMATION ON THE J.P. MORGAN INSTITUTIONAL
FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800) 766-7722.
J.P. MORGAN
INSTITUTIONAL
SERVICE FEDERAL
MONEY MARKET FUND
ANNUAL REPORT
OCTOBER 31, 1998
