<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN U.S. EQUITY FUND
January 15, 1998
Dear Shareholder:
Your Fund has changed its name. The JPM Pierpont U.S. Equity Fund is now the
J.P. Morgan U.S. Equity Fund. When J.P. Morgan began advising mutual funds
over 15 years ago, regulatory restrictions prevented us from using our name
in the title of any mutual fund, which led to the JPM acronym and the use of
the name Pierpont, the middle name of J.P. Morgan, our founder. With the
evolution of today's financial marketplace, we are now able to proudly
include the full J.P. Morgan name in the title of your Fund.
The six months ended November 30, 1997 saw extreme volatility in the world's
equity markets, which finally impacted the U.S. stock market in late October.
In this environment of numerous fallouts, fueled by sympathetic selling and a
"flight to quality," the J.P. Morgan U.S. Equity Fund was unable to beat its
benchmark, the S&P 500 Index; the Fund returned 10.89% for the period, against
the Index's 13.58%.
While the Index has been a difficult benchmark to beat over the last five
years, shareholders should know that the Fund outperformed its competitors
(as measured by the Lipper Equity Growth and Income Fund Average), on a one-,
three-, five-, and ten-year basis ending November 30, 1997.
The Fund's net asset value decreased slightly from $24.63 per share to $24.60
at the close of the six-month period, after making distributions during the
year of $1.78 from long-term capital gains, $0.82 from short-term capital
gains, and $0.08 from ordinary income. In addition, the Fund's net assets
advanced from $362.6 million on May 31, 1997 to $399.5 million at the end of
the period under review. The net assets of The U.S. Equity Portfolio, in
which the Fund invests, totaled approximately $912.3 million at November 30,
1997.
The report that follows includes a portfolio manager Q&A with William B.
Petersen, a member of the portfolio management team. This interview is
designed to answer commonly asked questions about the Fund, elaborate on what
happened during the reporting period, and provide an outlook for the months
ahead.
As chairman and president of Asset Management Services, we look forward to
sharing Morgan's insights regarding financial markets with you. If you have
any comments or questions, please call 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 FUND FACTS AND HIGHLIGHTS . . . . . . 6
FUND PERFORMANCE . . . . . . . . . 2 SPECIAL FUND-BASED SERVICES . . . . . 7
PORTFOLIO MANAGER Q&A . . . . . . 3 FINANCIAL STATEMENTS. . . . . . . . .10
- -------------------------------------------------------------------------------
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 the fund's actual (or cumulative) return and shows
what would have happened if the fund had achieved that return by performing
at a constant rate each year. Average annual total returns represent the
average yearly change in a fund's value over various time periods, typically
1, 5, or 10 years (or since inception). Total returns for periods of less
than one year are not annualized and provide a picture of how a fund has
performed over the short term.
<TABLE>
<CAPTION>
PERFORMANCE
TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
----------------------- ---------------------------------------
THREE SIX ONE THREE FIVE TEN
AS OF NOVEMBER 30, 1997 MONTHS MONTHS YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan U.S. Equity Fund 2.59% 10.89% 24.31% 27.01% 17.91% 18.05%
S&P 500 6.67% 13.58% 28.51% 31.05% 20.15% 18.72%
Lipper Equity Growth and
Income Fund Average 4.12% 12.16% 23.50% 26.19% 17.43% 16.24%
AS OF SEPTEMBER 30, 1997
- ------------------------------------------------------------------------ ---------------------------------------
J.P.Morgan U.S. Equity Fund 9.53% 25.56% 39.36% 26.13% 19.55% 14.85%
S&P 500 7.49% 26.26% 40.45% 29.92% 20.77% 14.75%
Lipper Equity Growth and
Income Fund Average 9.04% 24.59% 35.76% 25.46% 18.66% 13.17%
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET
OF FEES ASSUME THE REINVESTMENT OF DISTRIBUTIONS. LIPPER ANALYTICAL SERVICES,
INC. IS A LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with WILLIAM B. PETERSEN, who is a member of the
portfolio management team for The U.S. Equity Portfolio in which the Fund
invests. Bill originally joined Morgan in 1972 as a research analyst and
joined the firm's portfolio management team in 1977. This interview was
conducted on January 8, 1998 and reflects Bill's views on that date.
IN THE LAST SIX MONTHS, WE'VE SEEN EXTREME VOLATILITY IN THE WORLD'S EQUITY
MARKETS. CAN YOU COMMENT ON THE SITUATION IN SOUTHEAST ASIA, WHICH DROVE THAT
VOLATILITY?
WBP: The Southeast (SE) Asian crisis* really had two phases. The first came
in July, when we saw the severe devaluations of the Thailand and Malaysian
currencies. These devaluations reflected the severe economic problems within
these countries that were beginning to come to light. Once the Thai Baht and
Malaysian Ringgit drastically devalued, their equity markets followed suit.
Those were the first that fell. At that time, global equity prices were not
yet effected, and the U.S. market was not impacted. What has happened since
then, however, is that the crisis in those countries then rolled through
other SEA sian countries, moving to Indonesia, the Philippines, and Taiwan.
But even as late as September, the crisis remained contained to the SE Asian
region; we believe investors took solace from the fact that these economies
were small, comprising a very small portion of the world's total GDP. We also
believed then that the crisis would be contained within the region, having
little impact on the rest of the world.
But then came October, and the rest of the world reacted. When the Hong Kong
dollar was tested, the world took notice. That seemed to be the catalyst for
investors to scrutinize the world's equity markets, and reprice downward
where it was perceived that greater risk actually existed. As a result,
October saw a "repricing of risk," and it was at that time that the U.S.
market was impacted. While some of the selling was justified and based on
investors' understanding that the fundamentals behind the prices were weaker
than originally perceived, other selling was more "sympathetic," and occurred
despite strong fundamentals.
HOW WAS THE U.S. EQUITY MARKET IMPACTED BY SE ASIA'S EVENTS?
WBP: What we've seen inside the U.S. market is there has recently been a
move back to security, or a "flight to quality". The U.S. "nifty fifty"
stocks, which are the largest 50 stocks in the S&P 500 by market
capitalization, had outperformed dramatically since 1995. In the summer of
1997, however, we began to see a reversal of that trend; the "nifty fifty"
stocks started to underperform. These stocks were very highly
* FOR A MORE DETAILED EXPLANATION OF THE SOUTHEAST ASIAN "CRISIS," PLEASE
CALL 1-800-521-5411 TO OBTAIN A COPY OF J.P. MORGAN INVESTMENT'S MOST
RECENT PUBLICATION OF "INVESTMENT INSIGHTS."
3
<PAGE>
overvalued and we believe as investors began to realize this, the nifty-fifty
tide began to turn. However, when the Asian crisis unfolded, investors
reverted back to the security of these large-cap companies. As a result, we
have seen some dramatic outperformance from the nifty fifty again -- in
October and November -- which finished up the six-month fiscal period for
this Fund.
So clearly, there has been the "flight to quality" effect in the U.S. Also,
the stock prices of companies that have direct ties with SE Asia are being
impacted. Companies, such as NIKE, which do a lot of business directly in
those markets are naturally being negatively impacted. Many of the technology
stocks that have been disappointing in the last several months, have also
attributed the crisis in SE Asia for their problems.
HOW HAS THE FUND PERFORMED DURING THIS PERIOD, GIVEN THE RESULTING FLIGHT TO
QUALITY?
WBP: Unfortunately, in the last six months the Fund underperformed its
benchmark (the S&P 500). When you look at the S&P 500, it has been a very
difficult benchmark to beat the last couple of years, partly due to the
large-cap preference I mentioned earlier. Investors had been putting a lot of
their assets in large-cap stocks since 1995, which has been driving
valuations higher than we believe are warranted. In fact, in 1997 only 11% of
active equity mutual funds beat the Vanguard Index Fund. This is historically
an extremely low number; the lowest number of this decade. So really, since
1995, it has been difficult for equity managers to compete with the S&P 500.
However, performance goes in cycles. We think the last few years presented
one of those cycles where the S&P 500 and its large-cap stocks performed
well. But when we look at valuations now and think what is likely to happen
next, we believe we will move into a phase of the cycle where active equity
managers once again outperform. It has clearly taken a little bit longer than
we thought, but everything points in that direction.
Having said all that, we have a portfolio of approximately 75 to 85 stocks;
within that, there will always be a few that will detract from performance.
CABLETRON, for instance, is a company that was not only negatively impacted
by SE Asia, but that also missed an important product cycle -- this had a
very negative impact on its stock price. We were holders of Cabletron, which
hurt the Fund's performance for the period.
WASTE MANAGEMENT is another company that is in the midst of turmoil. The
company is in the process of a restructuring, and management is in
transition. The previous management stayed only a few months and the CEO
quit, causing a crisis in confidence which dramatically hurt the stock. In
fact, its price went down by about 40%. Waste Management was another holding
which negatively impacted the Fund's returns.
On the positive side, however, our investment in cable stocks -- which we
ramped up significantly during the year -- has recently paid off. Previously,
going into 1997, cable stocks had languished for about three years. During
that period, regulators reduced basic rates, and Direct Broadcast Satellite
competition increased vigorously. Though the cable industry retaliated by
embarking on an extremely ambitious capital investment program, it left many
of these companies' cash flows in negative territory.
4
<PAGE>
But good news was on the horizon. In April 1997, industry bellweather,
TELECOMMUNICATIONS, INC. (TCI), outlined an aggressive plan to restructure.
In May, the ECHOSTAR/NEWSCORP deal collapsed, diffusing a major competitive
threat to cable companies. In June, MICROSOFT's $1 billion investment in
COMCAST symbolically anointed cable's broadband network as the high-speed
data conduit of choice. And finally, in September, SBC joined an expanding
list of telephone companies throwing in the towel on video plans. All of this
- -- along with many signs that the large infrastructure investments of its
past were successfully paying off -- fueled the dramatic reversal and
outperformance of many stocks in the cable industry. Specifically, TCI, TCI
VENTURES, and TIME WARNER were among the stocks that have recently done very
well, and that has enhanced the Fund's performance.
LOOKING FORWARD, HOW WILL THE PORTFOLIO BE INVESTED AS WE MOVE INTO 1998?
WBP: We plan to keep the Portfolio fully invested and relatively sector
neutral, which we think is a good thing going forward, given our belief that
market volatility will continue. And we'll just continue to do what we
believe we do best: uncover stock opportunities within market sectors which
appear to be undervalued based on our research. If I had to generalize those
opportunities, I would say they are companies that have smaller market
capitalizations than the Index (the S&P 500).
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan U.S. Equity Fund seeks to provide a high total return from a
portfolio of selected equity securities. It is designed for investors who
want an actively managed portfolio of selected equity securities that seeks
to outperform the S&P 500 Index.
- ------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
6/27/85
- ------------------------------------------------------------------------------
NET ASSETS AS OF 11/30/97
$399,479,979
- ------------------------------------------------------------------------------
DIVIDEND PAYABLE DATE
12/24/97
- ------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE
12/24/97
EXPENSE RATIO
The Fund's current annualized expense ratio of 0.79% 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 redemption proceeds from the Fund.
FUND HIGHLIGHTS
ALL DATA AS OF NOVEMBER 30, 1997
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
CONSUMER GOODS & SERVICES 23.4%
FINANCE 16.5%
TECHNOLOGY 16.1%
HEALTH CARE 12.2%
UTILITIES 9.6%
ENERGY 8.1%
INDUSTRIAL PRODUCTS & SERVICES 7.8%
BASIC INDUSTRIES 5.1%
TRANSPORTATION 1.2%
% OF TOTAL
LARGEST EQUITY HOLDINGS INVESTMENTS
- --------------------------------------------------------
WARNER-LAMBERT CO. (HEALTH CARE) 2.8%
TOSCO CORP. (ENERGY) 2.6%
PROCTER & GAMBLE CO. 2.6%
(CONSUMER GOODS & SERVICES)
FIRST UNION CORP. (FINANCE) 2.5%
TOYS 'R' US, INC. 2.1%
(CONSUMER GOODS & SERVICES)
EMC CORP./MASS. (TECHNOLOGY) 2.1%
RALSTON-RALSTON PURINA GROUP 2.0%
(CONSUMER GOODS & SERVICES)
EXXON CORP. (ENERGY) 2.0%
GENERAL MILLS, INC. 2.0%
(CONSUMER GOODS & SERVICES)
UNITED HEALTHCARE CORP. (HEALTH CARE) 2.0%
6
<PAGE>
SPECIAL FUND-BASED SERVICES
PIERPONT ASSET ALLOCATION SERVICE (PAAS)
For many investors, a diversified portfolio -- including short-term
instruments, bonds, and stocks -- can offer an excellent opportunity to
achieve one's investment objectives. PAAS provides investors with a
comprehensive management program for their portfolios. Through this service,
investors can:
- - create and maintain an asset allocation that is specifically targeted at
meeting their most critical investment objectives;
- - make ongoing tactical adjustments in the actual asset mix of their
portfolios to capitalize on shifting market trends;
- - make investments through the J.P. Morgan Funds, a family of diversified
mutual funds.
PAAS is available to clients who invest a minimum of $500,000 in the J.P.
Morgan Funds.
IRA MANAGEMENT SERVICE
As one of the few remaining investments that can help your assets grow
tax-deferred until retirement, the IRA enables more of your dollars to work
for you longer. Morgan offers an IRA Rollover plan that helps you to build
well-balanced long-term investment portfolios, diversified across a wide
array of mutual funds. From money markets to emerging markets, J.P. Morgan
Funds provide an excellent way to help you accumulate long-term wealth for
retirement.
KEOGH
Keoghs provide another excellent vehicle to help individuals who are
self-employed or are employees of unincorporated businesses to accumulate
retirement savings. A Keogh is a tax-deferred pension plan that can allow you
to contribute the lesser of $30,000 or 25% of your annual earned gross
compensation. The J.P. Morgan Funds can help you build a comprehensive
investment program designed to maximize the retirement dollars in your Keogh
account.
7
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORK SERVES AS AN INVESTMENT ADVISOR AND MAKES THE FUNDS AVAILABLE SOLELY IN
ITS CAPACITY AS SHAREHOLDER SERVICING AGENT. SHARES OF THE FUND ARE NOT BANK
DEPOSITS AND ARE NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC.
AN INVESTMENT IN THE FUND WILL FLUCTUATE AND MAY LOSE VALUE.
Past performance is no guarantee for future performance. Returns are net of
fees and assume the reinvestment of fund distributions. References to
specific securities and their issuers are for illustrative purposes only and
are not intended to be, and should not be interpreted as, recommendations to
purchase or sell securities. 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).
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 IT CAREFULLY BEFORE INVESTING.
8
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The U.S. Equity Portfolio
("Portfolio"), at value $399,517,240
Receivable for Shares of Beneficial Interest Sold 50,385
Prepaid Trustees' Fees 1,827
Prepaid Expenses and Other Assets 39,581
------------
Total Assets 399,609,033
------------
LIABILITIES
Shareholder Servicing Fee Payable 81,535
Administrative Services Fee Payable 9,851
Administration Fee Payable 2,043
Payable for Shares of Beneficial Interest
Redeemed 1,738
Fund Services Fee Payable 534
Accrued Expenses 33,353
------------
Total Liabilities 129,054
------------
NET ASSETS
Applicable to 16,236,082 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $399,479,979
------------
------------
Net Asset Value, Offering and Redemption Price
Per Share $24.60
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $290,137,454
Undistributed Net Investment Income 1,364,225
Accumulated Net Realized Gain on Investment 39,181,767
Net Unrealized Appreciation of Investment 68,796,533
------------
Net Assets $399,479,979
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $13,207) $ 2,668,148
Allocated Interest Income 262,220
Allocated Portfolio Expenses (930,762)
-----------
Net Investment Income Allocated from
Portfolio 1,999,606
FUND EXPENSES
Shareholder Servicing Fee $498,790
Administrative Services Fee 60,728
Transfer Agent Fees 34,318
Registration Fees 8,524
Fund Services Fee 7,421
Professional Fees 6,839
Administration Fee 5,662
Trustees' Fees and Expenses 3,059
Printing Expenses 2,837
Insurance Expense 631
Miscellaneous 6,744
--------
Total Fund Expenses 635,553
-----------
NET INVESTMENT INCOME 1,364,053
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 40,446,383
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (1,900,483)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $39,909,953
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
NOVEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MAY 31, 1997
----------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 1,364,053 $ 3,812,324
Net Realized Gain on Investment Allocated from
Portfolio 40,446,383 50,364,233
Net Change in Unrealized Appreciation
(Depreciation) of Investment Allocated from
Portfolio (1,900,483) 22,399,004
----------------- --------------
Net Increase in Net Assets Resulting from
Operations 39,909,953 76,575,561
----------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (1,268,818) (5,464,295)
Net Realized Gain (39,060,638) (31,902,751)
----------------- --------------
Total Distributions to Shareholders (40,329,456) (37,367,046)
----------------- --------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 37,950,086 59,295,449
Reinvestment of Dividends and Distributions 37,675,771 34,833,436
Cost of Shares of Beneficial Interest Redeemed (38,329,231) (100,748,222)
----------------- --------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest 37,296,626 (6,619,337)
----------------- --------------
Total Increase in Net Assets 36,877,123 32,589,178
NET ASSETS
Beginning of Period 362,602,856 330,013,678
----------------- --------------
End of Period (including undistributed net
investment income of $1,364,225 and $1,268,990,
respectively) $ 399,479,979 $ 362,602,856
----------------- --------------
----------------- --------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, 1997 ----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.63 $ 22.15 $ 19.42 $ 19.38 $ 19.30 $ 19.02
----------------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.25 0.38 0.32 0.27 0.38
Net Realized and Unrealized Gain on Investment 2.57 4.72 4.23 2.17 1.32 1.35
----------------- -------- -------- -------- -------- --------
Total from Investment Operations 2.65 4.97 4.61 2.49 1.59 1.73
----------------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.08) (0.36) (0.29) (0.28) (0.29) (0.36)
Net Realized Gain (2.60) (2.13) (1.59) (2.17) (1.22) (1.09)
----------------- -------- -------- -------- -------- --------
Total Distributions to Shareholders (2.68) (2.49) (1.88) (2.45) (1.51) (1.45)
----------------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 24.60 $ 24.63 $ 22.15 $ 19.42 $ 19.38 $ 19.30
----------------- -------- -------- -------- -------- --------
----------------- -------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Total Return 10.89%(c) 25.00% 25.18% 15.11% 8.54% 10.02%
Net Assets, End of Period
(in thousands) $ 399,480 $362,603 $330,014 $259,338 $231,306 $202,474
Ratios to Average Net Assets
Expenses 0.79%(b) 0.80% 0.81% 0.90% 0.90% 0.90%
Net Investment Income 0.68%(b) 1.13% 1.87% 1.74% 1.43% 2.20%
Decrease Reflected in Expense Ratio due to
Expense Reimbursement -- -- -- 0.01% 0.03% 0.08%
Portfolio Turnover -- -- -- -- 10.00%(a) 60.00%
</TABLE>
- ------------------------
(a) 1994 Portfolio Turnover reflects the period from June 1, 1993 to July 18,
1993. After July 18, 1993, all of the Fund's investable assets were invested in
The U.S. Equity Portfolio.
(b) Annualized.
(c) Not annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan U.S. Equity Fund (the "Fund") is a separate series of the J.P.
Morgan Funds, a Massachusetts business trust (the "Trust"). 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 18, 1993, to a series of the Trust, operated as a stand-alone mutual fund.
Costs related to the reorganization were borne by Morgan Guaranty Trust Company
of New York ("Morgan"). This report includes a period which preceded the Fund's
reorganization and reflects the operations of the predecessor entity. Prior to
January 1, 1998, The Trust's and the Fund's names were The JPM Pierpont Funds
and The JPM Pierpont U.S. Equity Fund, respectively.
The Fund invests all of its investable assets in The U.S. Equity 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 (44% at November 30, 1997). 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 1 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 and paid as
dividends semi-annually. Distributions to shareholders of net realized
capital gain, if any, are declared and paid annually.
d) The Fund is treated as a separate entity for federal income tax purposes
and intends to comply with the provisions of the Internal Revenue Code of
1986, as amended, 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.
e) 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.
14
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
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 six
months ended November 30, 1997, the fee for these services amounted to
$5,662.
b) The Trust, on behalf of the Fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for overseeing certain aspects of the administration and operation of the
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 Institutional Funds (formerly The JPM Institutional Funds) invest
(the "Master Portfolios") and J.P. Morgan Series Trust (formerly JPM
Series Trust) in accordance with the following annual schedule: 0.09% on
the first $7 billion of their aggregate average daily net assets and 0.04%
of their aggregate average daily net assets in excess of $7 billion less
the complex-wide fees payable to FDI. The portion of this charge payable
by the 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 six months ended November
30, 1997, the fee for these services amounted to $60,728.
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance services 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 six months ended November 30, 1997, the fee for these
services amounted to $498,790.
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 responsible for payments to Schwab under the Schwab
Agreements; however, in the event the Services Agreement 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
15
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
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 $7,421 for the six months ended November 30, 1997.
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 represent 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 $1,500.
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:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
NOVEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MAY 31, 1997
----------------- --------------
<S> <C> <C>
Shares of beneficial interest sold............... 1,483,911 2,669,035
Reinvestment of dividends and distributions...... 1,545,040 1,683,473
Shares of beneficial interest redeemed........... (1,514,798) (4,528,123)
----------------- --------------
Net Increase (Decrease).......................... 1,514,153 (175,615)
----------------- --------------
----------------- --------------
</TABLE>
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 28, 1997, with unaffiliated lenders. Additionally, since all
of the investable assets of the Fund are in the Portfolio, the Portfolio is
party to certain covenants of the Agreement. The maximum borrowing under the
committment Agreement is $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund and the unaffiliated lenders as parties to the Agreement will
have the ability to extend the Agreement and continue their participation
therein for an additional 364 days. 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. The Funds pay a
commitment fee at an annual rate of 0.065% on the unused portion of the
committed amount which is allocated to the Funds in accordance with procedures
established by their respective Trustees or Directors. The Fund has not borrowed
pursuant to the Agreement as of November 30, 1997.
16
<PAGE>
The U.S. Equity Portfolio
Semi-Annual Report November 30, 1997
(unaudited)
(The following pages should be read in conjunction
with the J.P. Morgan U.S. Equity Fund
Semi-Annual Financial Statements)
17
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
COMMON STOCKS (98.0%)
BASIC INDUSTRIES (5.1%)
CHEMICALS (2.5%)
Albemarle Corp................................... 119,500 $ 2,980,031
E.I. du Pont de Nemours & Co..................... 151,000 9,144,937
Union Carbide Corp............................... 233,600 10,307,600
-------------
22,432,568
-------------
FOREST PRODUCTS & PAPER (1.4%)
Temple-Inland, Inc............................... 224,900 12,847,412
-------------
METALS & MINING (1.2%)
Allegheny Teledyne, Inc.......................... 420,672 10,832,304
-------------
TOTAL BASIC INDUSTRIES......................... 46,112,284
-------------
CONSUMER GOODS & SERVICES (23.1%)
AUTOMOTIVE (0.8%)
Goodyear Tire and Rubber Co...................... 113,500 6,888,031
-------------
BROADCASTING & PUBLISHING (3.6%)
Tele-Communications Inc., Series A+.............. 380,329 8,711,911
Tele-Communications TCI Ventures Group+.......... 608,871 13,832,788
U.S. West Media Group+........................... 375,100 9,963,594
-------------
32,508,293
-------------
ENTERTAINMENT, LEISURE & MEDIA (2.4%)
International Game Technology.................... 515,100 12,877,500
Time Warner, Inc................................. 159,900 9,314,175
-------------
22,191,675
-------------
FOOD, BEVERAGES & TOBACCO (7.4%)
Anheuser Busch Companies, Inc.................... 398,400 17,205,900
General Mills, Inc............................... 241,000 17,834,000
Philip Morris Companies, Inc..................... 326,500 14,202,750
Ralston-Ralston Purina Group..................... 196,900 18,311,700
-------------
67,554,350
-------------
HOUSEHOLD PRODUCTS (2.5%)
Procter & Gamble Co.............................. 301,260 22,989,904
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
RETAIL (5.4%)
Circuit City Stores, Inc......................... 313,900 $ 10,299,844
Dillard's Inc. - Class A......................... 149,200 5,455,125
Federated Department Stores, Inc.+............... 210,700 9,600,019
Toys 'R' Us, Inc.+............................... 549,400 18,748,275
Wal-Mart Stores, Inc............................. 124,100 4,956,244
-------------
49,059,507
-------------
TEXTILES (1.0%)
Fruit of the Loom, Inc., Class A+................ 389,700 9,084,881
-------------
TOTAL CONSUMER GOODS & SERVICES................ 210,276,641
-------------
ENERGY (8.0%)
OIL-PRODUCTION (7.5%)
Atlantic Richfield Co............................ 142,300 11,597,450
British Petroleum Co. (ADR)...................... 980 81,340
Exxon Corp....................................... 293,400 17,897,400
Mobil Corp....................................... 218,000 15,682,375
Tosco Corp....................................... 712,800 23,210,550
-------------
68,469,115
-------------
OIL-SERVICES (0.5%)
Cooper Cameron Corp.+............................ 73,700 4,491,094
-------------
TOTAL ENERGY................................... 72,960,209
-------------
FINANCE (15.5%)
BANKING (7.2%)
Chase Manhattan Corp............................. 101,400 11,014,575
First Union Corp................................. 454,300 22,147,125
Fleet Financial Group, Inc....................... 132,700 8,766,494
Providian Financial Corp......................... 306,600 13,509,562
Washington Mutual, Inc........................... 154,900 10,688,100
-------------
66,125,856
-------------
FINANCIAL SERVICES (2.8%)
Federal National Mortgage Association............ 308,300 16,282,094
Travelers Group, Inc............................. 190,518 9,621,159
-------------
25,903,253
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
INSURANCE (3.1%)
AMBAC, Inc....................................... 352,700 $ 14,152,087
Marsh & McLennan Companies, Inc.................. 187,700 13,971,919
-------------
28,124,006
-------------
REAL ESTATE INVESTMENT TRUSTS (2.4%)
Beacon Properties Corp........................... 214,200 9,639,000
Starwood Lodging Trust........................... 234,900 12,596,512
-------------
22,235,512
-------------
TOTAL FINANCE.................................. 142,388,627
-------------
HEALTHCARE (12.0%)
HEALTH SERVICES (2.9%)
Humana, Inc.+.................................... 411,200 9,123,500
United Healthcare Corp........................... 337,900 17,591,919
-------------
26,715,419
-------------
MEDICAL SUPPLIES (1.3%)
Bausch & Lomb, Inc............................... 293,700 11,637,862
-------------
PHARMACEUTICALS (7.8%)
Alza Corp.+...................................... 322,500 8,606,719
Bristol-Myers Squibb Co.......................... 96,600 9,044,175
Crescendo Pharmaceuticals Corp.+................. 16,095 183,081
Forest Laboratories, Inc.+....................... 105,800 4,734,550
Pfizer, Inc...................................... 118,600 8,628,150
Schering-Plough Corp............................. 235,800 14,781,712
Warner-Lambert Co................................ 182,200 25,485,225
-------------
71,463,612
-------------
TOTAL HEALTHCARE............................... 109,816,893
-------------
INDUSTRIAL PRODUCTS & SERVICES (7.7%)
BUILDING MATERIALS (0.5%)
Johns Manville Corp.............................. 410,400 4,488,750
-------------
DIVERSIFIED MANUFACTURING (4.6%)
AlliedSignal, Inc................................ 371,200 13,780,800
Cooper Industries, Inc........................... 261,800 13,515,425
Tyco International Ltd........................... 367,646 14,430,105
-------------
41,726,330
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
ELECTRICAL EQUIPMENT (1.0%)
Anixter International, Inc.+..................... 484,200 $ 8,685,337
-------------
POLLUTION CONTROL (1.6%)
Waste Management, Inc............................ 607,700 14,964,613
-------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 69,865,030
-------------
TECHNOLOGY (15.9%)
AEROSPACE (1.9%)
Boeing Co........................................ 170,100 9,036,563
Coltec Industries, Inc.+......................... 354,225 8,257,870
-------------
17,294,433
-------------
COMPUTER PERIPHERALS (2.0%)
EMC Corp.+....................................... 612,400 18,563,375
-------------
COMPUTER SOFTWARE (1.1%)
Autodesk, Inc.................................... 146,200 5,614,994
Oracle Corp.+.................................... 133,300 4,436,391
-------------
10,051,385
-------------
COMPUTER SYSTEMS (4.4%)
International Business Machines Corp............. 149,100 16,335,769
Nextlevel Systems, Inc.+......................... 681,300 9,027,225
Sun Microsystems, Inc.+.......................... 403,200 14,502,600
-------------
39,865,594
-------------
ELECTRONICS (5.0%)
Bay Networks, Inc.+.............................. 582,900 17,523,431
Cabletron Systems, Inc.+......................... 461,100 10,605,300
Perkin-Elmer Corp................................ 130,600 9,084,863
Sensormatic Electronics Corp..................... 538,900 8,757,125
-------------
45,970,719
-------------
SEMICONDUCTORS (1.2%)
General Semiconductor, Inc.+..................... 170,300 1,852,013
Texas Instruments, Inc........................... 178,500 8,791,125
-------------
10,643,138
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
TELECOMMUNICATIONS-EQUIPMENT (0.3%)
Commscope, Inc.+................................. 227,033 $ 2,483,173
-------------
TOTAL TECHNOLOGY............................... 144,871,817
-------------
TRANSPORTATION (1.2%)
RAILROADS (1.2%)
CSX Corp......................................... 203,200 10,629,900
-------------
UTILITIES (9.5%)
ELECTRIC (2.2%)
Northern States Power Co......................... 108,100 5,931,988
Southern Co...................................... 319,000 7,656,000
Western Resources, Inc........................... 165,200 6,453,125
-------------
20,041,113
-------------
GAS-PIPELINES (1.0%)
Enron Corp....................................... 237,600 9,207,000
-------------
TELEPHONE (6.3%)
GTE Corp......................................... 281,500 14,233,344
SBC Communications, Inc.......................... 178,500 12,997,031
Sprint Corp...................................... 253,200 14,828,025
WorldCom, Inc.+.................................. 484,900 15,531,953
-------------
57,590,353
-------------
TOTAL UTILITIES................................ 86,838,466
-------------
TOTAL COMMON STOCKS
(COST $736,361,493)........................... 893,759,867
-------------
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
CONVERTIBLE BONDS (0.6%)
FINANCE (0.6%)
FINANCIAL SERVICES (0.6%)
Berkshire Hathaway, Inc., Senior Exchangeable
Notes; 1.00% due 12/03/01. Exchangeable for
shares of Travelers Group, Inc. Common Stock,
(cost $3,567,926).............................. $ 3,800,000 $ 5,685,750
-------------
TOTAL INVESTMENTS (COST $739,929,419) (98.6%).................
899,445,617
OTHER ASSETS IN EXCESS OF LIABILITIES (1.4%)..................
12,892,771
-------------
NET ASSETS (100.0%)........................................... $ 912,338,388
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
Note: Based on the cost of securities of $742,042,594 for Federal Income Tax
Purposes at November 30, 1997, the aggregate gross unrealized appreciation and
depreciation was $175,876,482 and $18,473,459, respectively, resulting in net
unrealized appreciation of $157,403,023.
(ADR) - Securities whose value is determined or significantly influenced by
trading on exchanges not located in the United States or Canada. ADR after the
name of a foreign holding stands for American Depositary Receipt, representing
ownership of foreign securities on deposit with a domestic custodian bank.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $739,929,419 ) $899,445,617
Receivable for Investments Sold 13,518,311
Dividends Receivable 1,592,618
Interest Receivable 18,894
Prepaid Trustees' Fees 2,370
Prepaid Expenses and Other Assets 6,391
------------
Total Assets 914,584,201
------------
LIABILITIES
Payable for Investments Purchased 1,785,779
Advisory Fee Payable 300,372
Payable to Custodian 75,559
Custody Fee Payable 44,405
Administrative Services Fee Payable 22,680
Fund Services Fee Payable 3,299
Administration Fee Payable 979
Accrued Expenses 12,740
------------
Total Liabilities 2,245,813
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $912,338,388
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $29,438 ) $ 6,183,001
Interest Income 609,255
-----------
Investment Income 6,792,256
EXPENSES
Advisory Fee $1,857,873
Administrative Services Fee 141,388
Custodian Fees and Expenses 92,643
Professional Fees and Expenses 22,816
Fund Services Fee 17,272
Administration Fee 10,478
Trustees' Fees and Expenses 8,958
Printing Expenses 8,458
Insurance Expense 1,672
Registration Fees 306
Miscellaneous 50
----------
Total Expenses 2,161,914
-----------
NET INVESTMENT INCOME 4,630,342
NET REALIZED GAIN ON INVESTMENTS 93,896,398
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENTS (2,890,629)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $95,636,111
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
NOVEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MAY 31, 1997
----------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 4,630,342 $ 11,014,128
Net Realized Gain on Investments 93,896,398 114,253,160
Net Change in Unrealized Appreciation
(Depreciation) of Investments (2,890,629) 54,102,181
----------------- --------------
Net Increase in Net Assets Resulting from
Operations 95,636,111 179,369,469
----------------- --------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 96,879,681 205,179,647
Withdrawals (139,437,621) (244,500,948)
----------------- --------------
Net Decrease from Investors' Transactions (42,557,940) (39,321,301)
----------------- --------------
Total Increase in Net Assets 53,078,171 140,048,168
NET ASSETS
Beginning of Period 859,260,217 719,212,049
----------------- --------------
End of Period $ 912,338,388 $ 859,260,217
----------------- --------------
----------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FOR THE FISCAL YEAR JULY 19, 1993
SIX MONTHS ENDED ENDED MAY 31, (COMMENCEMENT OF
NOVEMBER 30, 1997 ------------------------ OPERATIONS) TO
(UNAUDITED) 1997 1996 1995 MAY 31, 1994
----------------- ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.47%(a) 0.47% 0.46% 0.51% 0.53%(a)
Net Investment Income 1.00%(a) 1.44% 2.20% 2.12% 1.79%(a)
Portfolio Turnover 58% 99% 85% 71% 76%+
Average Broker Commissions 0.0464 0.0506 -- -- --
</TABLE>
- ------------------------
(a) Annualized.
+ Portfolio turnover is for the twelve month period ended May 31, 1994, and
includes the portfolio activity of the Portfolio's predecessor entity, The
Pierpont Equity Fund, for the period June 1, 1993 to June 18, 1993.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The U.S. Equity Portfolio (the "Portfolio") is registered under the Investment
Company Act of 1940, as amended, as a no-load, diversified, open-end management
investment company which was organized as a trust under the laws of the State of
New York. The Portfolio commenced operations on July 19, 1993 and received a
contribution of certain assets and liabilities, including securities, with a
value of $209,477,219 on that date from The Pierpont Equity Fund in exchange for
a beneficial interest in the Portfolio. At that date, net unrealized
appreciation of $12,039,552 was included in the contributed securities. On
October 31, 1993, the Portfolio received a contribution of securities and
certain assets and liabilities, with a market value and cost of $128,337,342
from the JPM North America Fund, Ltd., in exchange for a beneficial interest in
the Portfolio. The Portfolio's investment objective is to provide a high total
return from a portfolio of selected equity securities. 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) The value of each security for which readily available market quotations
exist is based on a decision as to the broadest and most representative
market for such security. The value of such security will be based either
on the last sale price on a national securities exchange or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange
are valued at the last quoted sale price available before the time when
net assets are valued. Unlisted securities are valued at the average of
the quoted bid and asked prices in the over-the-counter market. Securities
or other assets for which market quotations are not readily available are
valued at fair value in accordance with procedures established by the
Portfolio's Trustees. Such procedures include the use of independent
pricing services, which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications
as to values from dealers; and general market conditions. All portfolio
securities with a remaining maturity of less than 60 days are valued at
amortized cost.
b) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place will be fixed when
the Portfolio enters into the contract. Upon entering into such a contract
the Portfolio is required to pledge to the broker an amount of cash and/or
securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the Portfolio agrees to receive from,
or pay to, the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as "variation
margin" and are recorded by the Portfolio as unrealized gains or losses.
When the contract is closed, the Portfolio records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time when it was closed. The Portfolio
invests in futures contracts solely for the purpose of hedging its
existing portfolio securities, or securities the Portfolio intends to
purchase, against fluctuations in value caused by changes in prevailing
market
24
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
interest rates. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible
inability of counterparties to meet the terms of their contract. At
November 30, 1997, the Portfolio had no open futures contracts.
c) Securities transactions are recorded on a trade-date basis. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount become known. Interest income, which
includes the amortization of premiums and discounts, if any, is recorded
on an accrual basis. For financial and tax reporting purposes, realized
gains and losses are determined on the basis of specific lot
identification.
d) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed on its
share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed in such a way that an investor
in the Portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code.
e) The Portfolio's custodian 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.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the Portfolio pays Morgan at an annual rate of 0.40% of the Portfolio's
average daily net assets. For the six months ended November 30, 1997 this
fee amounted to $1,857,873.
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 six months ended November 30, 1997, the fee
for these services amounted to $10,478.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio has agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge.This charge
is calculated based on the aggregate
25
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
average daily net assets of the Portfolio and certain other portfolios for
which Morgan 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 six months ended November
30, 1997, the fee for these services amounted to $141,388.
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 $17,272 for the six months ended November 30, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of 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 $3,500.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the six months
ended November 30, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
<S> <C>
$513,561,056 $546,402,830
</TABLE>
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement as discussed more
fully in Note 4 of the Fund's Notes to the Financial Statements which are
included elsewhere in this report.
26
<PAGE>
J.P. MORGAN FUNDS
FEDERAL MONEY MARKET FUND
PRIME MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
EMERGING MARKETS DEBT FUND
GLOBAL STRATEGIC INCOME FUND
NEW YORK TOTAL RETURN BOND FUND
SHORT TERM BOND FUND
TAX EXEMPT BOND FUND
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
JAPAN EQUITY FUND
FOR MORE INFORMATION ON HOW THE J.P. MORGAN
FUNDS CAN HELP YOU PLAN FOR YOUR FUTURE, CALL
J.P. MORGAN FUNDS SERVICES AT (800) 521-5411.
J.P. MORGAN
U.S. EQUITY FUND
SEMI-ANNUAL REPORT
NOVEMBER 30, 1997
