<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN U.S. SMALL COMPANY FUND
June 29, 1998
Dear Shareholder:
The 12 months ended May 31, 1998, were volatile, but quite rewarding, for
small-company stocks. In spite of the fact that May marked the second-largest
monthly decline for small-cap stocks in seven years, the Russell 2000 Index
returned 21.24% for the 12 months. We are pleased to announce that the J.P.
Morgan U.S. Small Company Fund surpassed its benchmark, returning 23.37% for the
period. The fund also outperformed its peers, as measured by the Lipper Small
Company Fund Average, which returned 22.80%.
The fund's net asset value advanced from $26.04 per share on May 31, 1997, to
$27.68 per share at the end of the reporting period, after making distributions
of approximately $0.14 per share from ordinary income, approximately $1.70 per
share from short-term capital gains, and approximately $2.21 per share from
long-term capital gains, of which $0.58 per share represents distributions of
20% rate gains. The fund's net assets increased from approximately $238.0
million on May 31, 1997, to approximately $261.8 million at the end of the
reporting period. The net assets of The U.S. Small Company Portfolio, in which
the fund invests, totaled approximately $681.8 million on May 31, 1998.
The report that follows includes an interview with Stephen J. Rich, a member of
the portfolio management team for The U.S. Small Company Portfolio. This
interview is designed to answer commonly asked questions about the fund,
elaborate on what happened during the reporting period, and reiterate the fund's
investment strategy.
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) 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>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to look at the growth of a hypothetical investment of
$10,000. The chart at right shows that $10,000 invested on May 31, 1988, would
have grown to $41,216 on May 31, 1998.
Another way to look at performance is to review a fund's average annual total
return. This figure takes the fund's actual (or cumulative) return and shows
what would have happened if the fund had achieved that return by performing at a
constant rate each year. Average annual total returns represent the average
yearly change of a fund's value over various time periods, typically one, five,
or ten years (or since inception). Total returns for periods of less than one
year are not annualized and provide a picture of how a fund has performed over
the short term.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
---------------- ------------------------------------
THREE SIX ONE THREE FIVE TEN
AS OF MAY 31, 1998 MONTHS MONTHS YEAR YEARS YEARS YEARS
- -------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan U.S. Small Company Fund -1.28% 6.22% 23.37% 22.32% 15.76% 15.21%
Russell 2000 Index -0.94% 6.54% 21.24% 20.79% 16.14% 14.34%
Russell 2500 Index -0.08% 7.53% 22.79% 22.62% 17.52% 15.87%
Lipper Small Company Fund Average -0.42% 6.38% 22.80% 21.60% 16.75% 16.10%
AS OF MARCH 31, 1998
- -------------------------------------------------------- ------------------------------------
J.P. Morgan U.S. Small Company Fund 11.66% 8.92% 44.10% 26.47% 17.25% 15.74%
Russell 2000 Index 10.06% 6.37% 42.01% 24.42% 17.67% 14.85%
Russell 2500 Index 10.25% 7.77% 41.86% 26.02% 18.80% 16.34%
Lipper Small Company Fund Average 10.89% 5.32% 43.53% 24.88% 18.34% 16.77%
</TABLE>
THE RUSSELL 2000 INDEX IS USED TO MEASURE THE AVERAGE STOCK PERFORMANCE OF U.S.
SMALL-CAP STOCKS, WHILE THE RUSSELL 2500 INDEX MEASURES SMALL TO MEDIUM-CAP
STOCK PERFORMANCE. BOTH ARE UNMANAGED INDICES WHICH DO NOT INCLUDE FEES OR
OPERATING EXPENSES AND ARE NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES, ASSUME THE REINVESTMENT OF FUND DISTRIBUTIONS, AND REFLECT THE
REIMBURSEMENT OF FUND EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES NOT
BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. LIPPER ANALYTICAL SERVICES, INC.
IS A LEADING SOURCE FOR MUTUAL FUND DATA.
GROWTH OF $10,000 OVER 10 YEARS
MAY 31, 1988 -- MAY 31, 1998
[GRAPH]
<TABLE>
<CAPTION>
Lipper Small J.P. Morgan
Russell 2000 Company Fund Russell 2500 U.S. Small
Index Average Index Company Fund
<S> <C> <C> <C> <C>
5/88 $10,000 $10,000 $10,000 $10,000
$12,360 $12,539 $12,492 $13,036
5/90 $12,414 $13,698 $12,803 $14,469
$13,373 $15,197 $14,123 $14,194
5/92 $15,143 $17,318 $16,318 $15,813
$18,065 $20,823 $19,456 $19,831
5/94 $19,640 $22,393 $20,854 $20,057
$21,663 $25,379 $23,658 $22,521
5/96 $29,438 $36,621 $31,758 $30,512
$31,489 $38,205 $35,519 $33,407
5/98 $38,178 $47,004 $43,612 $41,216
</TABLE>
LIPPER PERFORMANCE AVERAGES ARE CALCULATED BY TAKING AN ARITHMETIC AVERAGE OF
THE RETURNS OF THE FUNDS IN THE GROUP. THE AVERAGE ANNUALIZED RETURNS WHICH
RESULT FROM THIS METHODOLOGY WILL DIFFER FROM ANNUALIZING THE GROWTH OF THE
MINIMUM INITIAL INVESTMENT.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with STEPHEN J. RICH, a member of the portfolio
management team for The U.S. Small Company Portfolio. Steve joined Morgan in
1991, and has held positions in Morgan's structured equity and balanced/equity
groups. He was educated at Princeton University, and is currently pursuing a
Masters degree in Business Administration at New York University. This interview
took place on June 8, 1998, and reflects Steve's views on that date.
HOW DID THE SMALL-CAP MARKET BEHAVE DURING THE 12 MONTHS ENDED MAY 31, 1998?
SJR: Small-cap stocks performed strongly on an absolute basis for the year
ended May 31, 1998. The Russell 2000 Index returned 21.24%, well above the
historical average for small caps. However, large-cap stocks outpaced small-cap
stocks for the fourth year in a row, with the S&P 500 Index returning a
prodigious 30.68% for the period.
Small-cap stocks were hampered by two distinct periods of turmoil and
uncertainty during the 12 months. The fourth quarter of 1997 brought the
Southeast Asian currency and economic crisis, which caused investors to flee
small caps for the perceived stability of larger stocks. Then, in May of 1998,
Asia's troubles -- this time in Indonesia -- again led investors away from small
caps. May saw the second-largest monthly decline for small stocks, as measured
by the Russell 2000, in seven years.
Small-cap stocks were also held back by what the market perceived as earnings
disappointments. Earnings expectations for small caps have been higher than
expectations for large-cap stocks for some time. Small-cap earnings have been
stronger than large-cap earnings on an absolute basis, but the shortfall between
expected and actual earnings has been greater for small stocks than for large
stocks. Due to this shortfall, small-cap stocks have suffered relative to
large-cap stocks.
In spite of these setbacks, the year saw a period of relative tranquillity
during the second and third quarters of 1997. During those periods, small caps
posted better results relative to large caps. That's because the market
broadened out, allowing smaller stocks to surge ahead.
HOW DID THE FUND PERFORM DURING THIS VOLATILE YEAR?
SJR: We are pleased to announce that the fund surpassed its benchmark Russell
2000, returning 23.37% for the 12 months ended May 31, 1998, versus 21.24% for
the benchmark. The fund also outperformed its peers, as measured by the Lipper
Small Company Fund Average, which returned 22.80% for the period.
3
<PAGE>
The portfolio maintains industry group, or sector, weightings close to those of
the Russell 2000. This allows us to focus on stock selection as the sole source
of our excess return. During the 12 months, our stock selection proved
successful.
WHICH STOCKS HELPED THE FUND BEAT ITS BENCHMARK AND PEERS?
SJR: Our most successful holdings represent an eclectic group from an industry
standpoint. This reemphasizes the benefit of our sector-neutral approach -- we
can look for attractive companies anywhere.
DeKalb Genetics Corp. has been one of our largest positions for some time. It's
also been one of our most successful holdings -- up 170% for the 12 months ended
May 31, 1998. The company creates valuable agricultural genetics and
biotechnology for seed corn products, and holds several important patents. This
is a growing business, and we knew that DeKalb was well-positioned to benefit
from the industry consolidation that we expected. In February, DeKalb,
recognizing the economies of scale needed to succeed, put itself up for sale. In
mid-May, Monsanto Chemicals agreed to acquire DeKalb for $100 per share. We plan
to tender our shares for cash at that price.
Capital Re, a specialty insurance company, has also done well for us. The
company, a niche player, is run by what we consider a very solid management
team. The stock is up 70% for the year -- unusually strong performance in what
is typically a slow-growth business. Our success with Capital Re illustrates the
benefit of our in-house research. We are often able to find attractive
companies, even within staid industries.
Orbital Sciences Corp., a technology firm, launched a satellite at end of 1997.
The company was awarded an important government contract during the 12 months,
and appears poised to outperform its peers. We believe that the satellite
business offers significant room for growth in the future, and we see Orbital as
an excellent way to profit from that growth.
WHICH STOCKS HAMPERED THE FUND'S RETURNS?
SJR: Although we surpassed our benchmark, we still held some stocks that
disappointed us. American Pad & Paper, a market leader among pad and paper
suppliers, experienced slower earnings as it worked to build a more
comprehensive line of products and services without raising its prices. The
company took some one-time charges as it invested in itself, and the stock price
suffered as a result. Lately, however, earnings are picking up and appear to be
returning to more normalized levels. We view the changes American Pad & Paper is
implementing as beneficial and, at current levels, we continue to believe the
company represents value.
Electronics for Imaging manufactures software and some hardware for color
printers. When Asia's economies suffered, demand for the company's products
slowed as well. As Asia is a significant market for EFI, this slowdown hurt the
stock, particularly during the fourth quarter of 1997. Longer-term, however, we
believe that color printing has a future, and that EFI will benefit from the
growth in color printing.
4
<PAGE>
WHAT IS YOUR OUTLOOK FOR THE SMALL-CAP MARKET?
SJR: As markets become more volatile, we feel comfortable with the construction
of our portfolio. Our broad diversification -- more than 250 names -- should
make the portfolio a bit more resilient than our competition if market
volatility continues.
Our sector-neutral approach (keeping our industry group weightings similar to
those of our benchmark) means that we are neither a "growth" nor a "value"
manager. While most managers choose one camp or the other, we believe that our
style should be able to participate in periods when either approach is in favor.
This stands us in good stead during rocky markets, when value stocks do better
than growth stocks, or in calmer periods, when growth stocks prevail. The
disparity in returns of these two styles can be shocking. For the 12 months
under review, the value stocks in the Russell 2000 returned 26.7%, versus 15.8%
for the growth stocks.
We continue to view small-cap stocks as attractive relative to large caps based
on valuations. Historically, the price/earnings ratio of small-cap stocks as
measured by the Russell 2000 is 25% higher than the price/earnings ratio of
large-cap stocks as measured by the S&P 500. Now, however, the P/E ratio of
small-cap stocks is lower than that of large-cap stocks -- an extremely unusual
occurrence. We view the severe undervaluation of small stocks as a buying
opportunity, and believe the portfolio is well positioned to benefit from this
opportunity.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan U.S. Small Company Fund seeks to provide a high total return from a
portfolio of equity securities of small companies. The fund seeks to outperform
the Russell 2000 Index. It is designed for investors who are willing to assume
the somewhat higher risk of investing in small companies in order to seek a
higher total return over time than might be expected from a portfolio of stocks
of large companies.
- --------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
6/27/85
- --------------------------------------------------------------------------------
FUND NET ASSESTS AS OF 5/31/98
$261,803,657
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 5/31/98
$681,764,478
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
8/14/98, 12/18/98
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO The fund's current annualized expense ratio of 0.97% 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 MAY 31, 1998
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<S> <C>
FINANCE 24.9%
TECHNOLOGY 12.6%
CONSUMER GOODS & SERVICES 12.2%
INDUSTRIAL PRODUCTS & 12.1%
SERVICES
HEALTH CARE 11.2%
BASIC INDUSTRIES 9.9%
UTILITIES 6.0%
ENERGY 3.6%
OTHER 3.7%
SHORT-TERM 3.8%
</TABLE>
<TABLE>
<CAPTION>
LARGEST EQUITY HOLDINGS % OF TOTAL INVESTMENTS
- ------------------------------------------------------------------------
<S> <C>
CAPITAL RE CORP. (FINANCE) 3.0%
COMMERCIAL METALS CO. (BASIC INDUSTRIES) 1.6%
RENAISSANCERE HOLDINGS, INC. (FINANCE) 1.6%
DEKALB GENETICS CORP., CLASS B (BASIC INDUSTRIES) 1.6%
MUELLER INDUSTRIES, INC. (BASIC INDUSTRIES) 1.6%
D.R. HORTON, INC. (INDUSTRIAL PRODUCTS & SERVICES) 1.6%
INTERMET CORP. (INDUSTRIAL PRODUCTS & SERVICES) 1.5%
VENTANA MEDICAL SYSTEMS, INC. (HEALTH CARE) 1.2%
NATIONAL COMMERCE BANCORPORATION (FINANCE) 1.2%
CENTRAL HUDSON GAS & ELECTRIC CORP. (UTILITIES) 1.2%
</TABLE>
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 to
meet 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, the J.P.
Morgan Funds provide an excellent way to help you accumulate long-term wealth
for retirement.
7
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORKSERVES AS AN INVESTMENT ADVISOR AND MAKES THE FUND 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.
RETURN AND SHARE PRICE WILL FLUCTUATE AND REDEMPTION VALUE MAY BE MORE OR LESS
THAN ORIGINAL COST.
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 such securities. Opinion expressed herein
are based on current market conditions and are subject to change without notice.
The fund invests in a master portfolio (another fund with the same objective).
Historically, small-company stocks have been more volatile than large-company
stocks.
CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
8
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The U.S. Small Company Portfolio
("Portfolio"), at value $261,692,520
Receivable for Shares of Beneficial Interest Sold 536,725
Receivable for Expense Reimbursements 6,773
Prepaid Trustees' Fees 771
Prepaid Expenses and Other Assets 62,058
------------
Total Assets 262,298,847
------------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 387,359
Shareholder Servicing Fee Payable 57,616
Administrative Services Fee Payable 6,687
Administration Fee Payable 1,399
Fund Services Fee Payable 251
Accrued Expenses 41,878
------------
Total Liabilities 495,190
------------
NET ASSETS
Applicable to 9,459,547 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $261,803,657
------------
------------
Net Asset Value, Offering and Redemption Price
Per Share $27.68
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $216,249,702
Undistributed Net Investment Income 77,927
Accumulated Net Realized Gain on Investment 22,789,619
Net Unrealized Appreciation of Investment 22,686,409
------------
Net Assets $261,803,657
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income $ 2,995,466
Allocated Interest Income 587,953
Allocated Portfolio Expenses (1,817,585)
-----------
Net Investment Income Allocated from
Portfolio 1,765,834
FUND EXPENSES
Shareholder Servicing Fee $ 662,385
Administrative Services Fee 79,620
Transfer Agent Fees 60,886
Registration Fees 24,899
Printing Expenses 24,184
Professional Fees 18,621
Fund Services Fee 9,146
Administration Fee 6,881
Line of Credit Expense 6,788
Trustees' Fees and Expenses 3,804
Insurance Expense 1,284
Miscellaneous 9,246
---------
Total Fund Expenses 907,744
Less: Reimbursement of Expenses (164,771)
---------
NET FUND EXPENSES 742,973
-----------
NET INVESTMENT INCOME 1,022,861
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 61,222,260
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (8,412,093)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $53,833,028
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 1,022,861 $ 1,529,263
Net Realized Gain on Investment Allocated from
Portfolio 61,222,260 23,593,741
Net Change in Unrealized Appreciation of
Investment Allocated from Portfolio (8,412,093) (5,712,579)
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 53,833,028 19,410,425
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (1,260,636) (1,768,257)
Net Realized Gain (36,242,647) (17,935,633)
-------------- --------------
Total Distributions to Shareholders (37,503,283) (19,703,890)
-------------- --------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 55,262,754 48,736,722
Reinvestment of Dividends and Distributions 27,700,048 13,651,883
Cost of Shares of Beneficial Interest Redeemed (75,473,543) (45,027,029)
-------------- --------------
Net Increase from Transactions in Shares of
Beneficial Interest 7,489,259 17,361,576
-------------- --------------
Total Increase in Net Assets 23,819,004 17,068,111
NET ASSETS
Beginning of Fiscal Year 237,984,653 220,916,542
-------------- --------------
End of Fiscal Year (including undistributed net
investment income of $77,927 and $593,141,
respectively) $ 261,803,657 $ 237,984,653
-------------- --------------
-------------- --------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each year are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 26.04 $ 26.20 $ 22.02 $ 21.40 $ 25.12
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.11 0.18 0.26 0.22 0.20
Net Realized and Unrealized Gain on Investment 5.58 2.00 6.96 2.13 0.19
-------- -------- -------- -------- --------
Total from Investment Operations 5.69 2.18 7.22 2.35 0.39
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.14) (0.21) (0.26) (0.21) (0.09)
Net Realized Gain (3.91) (2.13) (2.78) (1.52) (4.02)
-------- -------- -------- -------- --------
Total Distributions to Shareholders (4.05) (2.34) (3.04) (1.73) (4.11)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 27.68 $ 26.04 $ 26.20 $ 22.02 $ 21.40
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Total Return 23.37% 9.49% 35.48% 12.28% 1.14%
Net Assets, End of Year (in thousands) $261,804 $237,985 $220,917 $179,130 $204,445
Ratios to Average Net Assets
Expenses 0.97% 0.90% 0.90% 0.90% 0.90%
Net Investment Income 0.39% 0.71% 1.10% 1.02% 0.75%
Expenses Without Reimbursement 1.03% 1.03% 1.03% 1.12% 1.10%
Portfolio Turnover -- -- -- -- 14%*
</TABLE>
- ------------------------
* 1994 Portfolio Turnover reflects the period June 1, 1993 to July 18, 1993.
After July 18, 1993, all the Fund's investable assets were invested in The U.S.
Small Company Portfolio.
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan U.S. Small Company Fund (the "fund"), is a separate series of
the J.P. Morgan Funds, a Massachusetts business trust (the "trust") which was
organized on November 4, 1992. The trust is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The fund, prior to its tax-free reorganization on July 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 periods which preceded the fund's
reorganization and reflects the operations of the predecessor entity. Prior to
January 1, 1998, the trust's and fund's names were The JPM Pierpont Funds and
The JPM Pierpont U.S. Small Company Fund, respectively.
The fund invests all of its investable assets in The U.S. Small Company
Portfolio (the "portfolio"), a no-load, diversified, open-end management
investment company having the same investment objective as the fund. The value
of such investment included in the Statement of Assets and Liabilities reflects
the fund's proportionate interest in the net assets of the portfolio (38% at May
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 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) Distributions to shareholders of net investment income are declared and
paid as dividends semi-annually. Distributions to shareholders of net
realized capital gains, if any, are declared and paid annually.
d) Expenses incurred by the trust with respect to any two or more funds in
the trust are allocated in proportion to the net assets of each fund in
the trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
e) The fund is treated as a separate entity for federal income tax purposes
and 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.
14
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
f) The fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies." The effect of applying
this statement as of May 31, 1998 was to decrease undistributed net
investment income by $277,439, decrease accumulated net realized gain on
investment by $20,956,010 and increase paid-in capital by $21,233,449. The
adjustments are primarily attributable to the net realized gain on
transfer of securities as discussed in Note 5 of the portfolio's Notes to
Financial Statements which are included elsewhere in this report. Net
investment income, net realized gains and net assets were not affected by
this change.
2. TRANSACTIONS WITH AFFILIATES
a) The trust, on behalf of the fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor for the fund. Under a Co-Administration Agreement between FDI
and the trust, on behalf of the fund, FDI provides administrative services
necessary for the operations of the fund, furnishes office space and
facilities required for conducting the business of the fund and pays the
compensation of the fund's officers affiliated with FDI. The fund has
agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The
amount allocable to the fund is based on the ratio of the fund's net
assets to the aggregate net assets of the trust and certain other
investment companies subject to similar agreements with FDI. For the
fiscal year ended May 31, 1998, the fee for these services amounted to
$6,881.
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
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 fiscal year ended May 31, 1998, the fee for
these services amounted to $79,620.
The following expense caps were in effect in order to maintain the total
operating expenses of the fund, including the expenses allocated to the
fund from the portfolio, at the indicated levels for the periods noted
below:
June 1, 1997 - October 31, 1997 ...................... 0.90%
November 1, 1997 - December 31, 1997 ................. No Cap
January 1, 1998 - May 31, 1998 ....................... 1.01%
15
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
As a result of these arrangements, Morgan has agreed to reimburse the fund
$164,771 for the fiscal year ended May 31, 1998. The total operating
expense ratio of the fund for the fiscal year ended May 31, 1998 is a
blended ratio and may not necessarily represent the actual amount incurred
by a shareholder. Effective July 1, 1998, the expense cap has been
removed.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to fund shareholders. The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.25% of the average daily net assets of
the fund. For the fiscal year ended May 31, 1998, the fee for these
services amounted to $662,385.
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 with Schwab is
terminated for reasons other than a breach by Schwab and the relationship
between the trust and Morgan is terminated, the fund would be responsible
for the ongoing payments to Schwab with respect to pre-termination shares.
d) The trust, on behalf of the fund, has a Fund Services Agreement with
Pierpont Group, Inc. ("Group") to assist the trustees in exercising their
overall supervisory responsibilities for the trust's affairs. The trustees
of the trust represent all the existing shareholders of Group. The fund's
allocated portion of Group's costs in performing its services amounted to
$9,146 for the fiscal year ended May 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 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 $1,900.
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 FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
Shares of beneficial interest sold............... 1,988,341 1,965,537
Reinvestment of dividends and distributions...... 1,058,956 579,843
Shares of beneficial interest redeemed........... (2,727,588) (1,836,933)
-------------- --------------
Net Increase..................................... 319,709 708,447
-------------- --------------
-------------- --------------
</TABLE>
16
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
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. The maximum borrowing
under the Agreement was $100,000,000. The Agreement expired on May 27, 1998,
however, the fund as party to the Agreement has extended the Agreement and
continues its participation therein for an additional 364 days until May 26,
1999. The maximum borrowing under the new Agreement is $150,000,000.
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
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 at May 31, 1998.
5. OTHER MATTERS
On January 25, 1998, one of the investors in the portfolio, a non-U.S. fund,
withdrew its interest in the portfolio through an in-kind withdrawal amounting
to $436,180,054. The withdrawal did not create a taxable event to the fund or
reduce the net assets of the fund, but did reduce the net assets of the
portfolio.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan U.S. Small Company Fund
(Formerly The JPM Pierpont U.S. Small Company 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 U.S. Small Company Fund (one of the series constituting part of the
J.P. Morgan Funds), hereafter referred to as the "Fund", at May 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 financial highlights
for each of the five years in the period then ended, 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 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 provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 17, 1998
18
<PAGE>
The U.S. Small Company Portfolio
Annual Report May 31, 1998
(The following pages should be read in conjunction
with the J.P. Morgan U.S. Small Company Fund
Annual Financial Statements)
19
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
COMMON STOCKS (96.2%)
BASIC INDUSTRIES (9.8%)
AGRICULTURE (1.6%)
Dekalb Genetics Corp., Class B................... 113,400 $ 10,872,225
-------------
CHEMICALS (2.4%)
Albemarle Corp................................... 231,300 5,623,481
Bush Boake Allen, Inc.+.......................... 107,300 3,165,350
General Chemical Group, Inc...................... 76,700 1,955,850
Geon Co.......................................... 110,100 2,380,912
Minerals Technologies, Inc....................... 37,100 1,963,981
OM Group, Inc.................................... 25,550 1,060,325
Wellman, Inc..................................... 24,000 577,500
-------------
16,727,399
-------------
FOREST PRODUCTS & PAPER (1.7%)
American Pad & Paper Co.+........................ 523,200 3,466,200
Caraustar Industries, Inc........................ 170,800 5,246,762
Universal Forest Products, Inc................... 158,800 2,714,487
-------------
11,427,449
-------------
METALS & MINING (4.1%)
Commercial Metals Co............................. 358,400 10,998,400
Mueller Industries, Inc.+........................ 348,600 10,806,600
Schnitzer Steel Industries, Inc., Class A........ 124,600 3,231,812
Steel Technologies, Inc.......................... 291,700 3,281,625
-------------
28,318,437
-------------
TOTAL BASIC INDUSTRIES......................... 67,345,510
-------------
CONSUMER GOODS & SERVICES (12.2%)
APPARELS & TEXTILES (0.8%)
Ashworth, Inc.+.................................. 279,100 3,532,359
Genesco, Inc.+................................... 155,200 1,998,200
-------------
5,530,559
-------------
AUTOMOTIVE (0.6%)
Amcast Industrial Corp........................... 92,400 1,992,375
CSK Auto Corp.+.................................. 16,000 430,000
Sonic Automotive, Inc.+.......................... 89,300 1,596,237
-------------
4,018,612
-------------
BROADCASTING & PUBLISHING (1.1%)
Banta Corp....................................... 119,100 3,770,259
Digital Generation Systems, Inc.+................ 29,400 115,762
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
BROADCASTING & PUBLISHING (CONTINUED)
Emmis Broadcasting Corp., Class A+............... 10,800 $ 453,600
HA-LO Industries, Inc.+.......................... 25,500 788,906
Journal Register Co.+............................ 26,400 528,000
Ziff-Davis, Inc.+................................ 93,700 1,581,187
-------------
7,237,714
-------------
EDUCATION (0.3%)
Education Management Corp.+...................... 61,100 2,136,591
-------------
ENTERTAINMENT, LEISURE & MEDIA (0.9%)
Cinar Films Inc., Class B+....................... 46,000 891,250
Imax Corp.+...................................... 119,900 3,038,716
Steiner Leisure, Ltd.(i)+........................ 64,800 1,923,750
-------------
5,853,716
-------------
FOOD, BEVERAGES & TOBACCO (0.5%)
American Italian Pasta Co., Class A+............. 42,700 1,531,862
Beringer Wine Estates Holdings, Inc., Class B+... 41,200 1,751,000
-------------
3,282,862
-------------
HOUSEHOLD APPLIANCES & FURNISHINGS (1.5%)
Aaron Rents, Inc................................. 131,900 2,580,294
Bush Industries, Inc., Class A................... 250,200 6,724,125
Stanley Furniture Co., Inc.+..................... 58,200 1,182,187
-------------
10,486,606
-------------
RESTAURANTS & HOTELS (1.7%)
Applebee's International, Inc.................... 50,200 1,226,762
Candlewood Hotel Company, Inc.+.................. 100,000 815,625
Extended Stay America, Inc.+..................... 105,500 1,160,500
Friendly Ice Cream Corp.+........................ 84,700 2,128,087
Papa John's International, Inc.+................. 110,200 4,580,187
Showbiz Pizza Time, Inc.+........................ 53,800 1,914,944
-------------
11,826,105
-------------
RETAIL (4.8%)
Central Garden & Pet Co.+........................ 87,900 2,598,544
Delia's, Inc.+................................... 84,000 1,968,750
Garden Ridge Corp.+.............................. 292,500 5,100,469
Guitar Center, Inc.+............................. 63,400 1,674,156
Gymboree Corp.+.................................. 130,600 2,048,787
Let's Talk Cellular & Wireless, Inc.+............ 43,100 721,925
Lithia Motors, Inc., Class A+.................... 110,400 1,552,500
Pacific Sunwear of California+................... 24,350 1,090,423
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
RETAIL (CONTINUED)
Party City Corp.+................................ 123,550 $ 3,652,447
ShopKo Stores, Inc.+............................. 108,800 3,794,400
Sunglass Hut International, Inc.+................ 187,000 2,284,906
Urban Outfitters, Inc.+.......................... 337,400 5,524,925
USA Floral Products, Inc.+....................... 28,600 545,187
-------------
32,557,419
-------------
TOTAL CONSUMER GOODS & SERVICES................ 82,930,184
-------------
ENERGY (3.5%)
GAS EXPLORATION (1.5%)
Devon Energy Corp................................ 85,400 3,133,112
Newfield Exploration Co.+........................ 110,000 2,461,250
Patterson Energy, Inc.+.......................... 289,800 3,251,194
St. Mary Land & Exploration Co................... 60,300 1,643,175
-------------
10,488,731
-------------
OIL-PRODUCTION (0.7%)
Plains Resources, Inc.+.......................... 83,000 1,587,375
Snyder Oil Corp.................................. 51,200 992,000
Vintage Petroleum, Inc........................... 122,100 2,213,062
-------------
4,792,437
-------------
OIL-SERVICES (1.3%)
Dril-Quip, Inc.+................................. 66,900 2,086,444
Input/Output, Inc.+.............................. 144,200 3,172,400
National-Oilwell, Inc.+.......................... 105,700 3,692,894
-------------
8,951,738
-------------
TOTAL ENERGY................................... 24,232,906
-------------
FINANCE (24.9%)
BANKING (9.7%)
Bank of Commerce................................. 55,200 993,600
Bank United Corp., Class A....................... 134,800 6,727,362
Banknorth Group, Inc............................. 157,000 5,671,625
Colonial BancGroup, Inc.......................... 124,300 4,024,212
Commercial Federal Corp.......................... 81,900 2,728,294
Community First Bankshares, Inc.................. 108,300 2,649,966
First International Bancorp, Inc................. 39,000 604,500
FirstFed Financial Corp.+........................ 101,600 4,984,750
Flagstar Bancorp, Inc............................ 125,400 3,009,600
GBC Bancorp...................................... 143,500 4,094,234
Hamilton Bancorp, Inc.+.......................... 29,700 951,328
HUBCO, Inc....................................... 114,473 4,031,596
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
BANKING (CONTINUED)
Imperial Bancorp+................................ 22,600 $ 661,050
InterWest Bancorp, Inc........................... 47,200 2,138,750
Irwin Financial Corp............................. 58,000 1,564,187
National Commerce Bancorporation................. 188,500 8,347,016
North Fork Bancorporation, Inc................... 136,350 3,280,922
Prime Bancshares, Inc............................ 54,500 1,447,656
Republic Banking Corp. of Florida................ 72,300 1,369,181
Southwest Bancorporation of Texas, Inc.+......... 46,600 1,826,137
Sterling Bancshares, Inc......................... 38,300 652,297
Summit Bancshares, Inc........................... 26,900 591,800
Sun Bancorp, Inc.+............................... 14,227 394,799
Trustco Bank Corp................................ 114,800 3,235,925
-------------
65,980,787
-------------
FINANCIAL SERVICES (2.0%)
Amresco, Inc..................................... 74,000 2,497,500
First Alliance Corp.+............................ 36,000 382,500
Hanover Capital Mortgage Holdings, Inc........... 38,000 693,500
Investors Financial Services Corp................ 18,600 928,256
Litchfield Financial Corp........................ 126,240 2,840,400
Ocwen Financial Corp.+........................... 33,700 821,437
Waddell & Reed Financial, Inc., Class A.......... 46,400 1,073,000
WFS Financial, Inc.+............................. 43,500 373,828
Willis Lease Finance Corp.+...................... 169,900 3,716,562
-------------
13,326,983
-------------
INSURANCE (5.1%)
Annuity and Life Re (Holdings), Ltd.(i)+......... 148,700 3,387,572
Capital Re Corp.................................. 277,350 20,662,575
RenaissanceRe Holdings, Ltd.(i).................. 235,000 10,986,250
-------------
35,036,397
-------------
REAL ESTATE INVESTMENT TRUSTS (8.1%)
American General Hospitality Corp................ 136,900 3,251,375
Arden Realty Group, Inc.......................... 212,500 5,830,469
Brandywine Realty Trust.......................... 62,000 1,437,625
Burnham Pacific Properties, Inc.................. 161,800 2,275,312
Camden Property Trust............................ 109,614 3,350,078
CBL & Associates Properties, Inc................. 97,100 2,385,019
Correctional Properties Trust+................... 19,300 404,094
Cousins Properties, Inc.......................... 113,400 3,465,787
Developers Diversified Realty Corp............... 36,600 1,434,262
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
ElderTrust....................................... 47,800 $ 752,850
Entertainment Properties Trust................... 82,400 1,601,650
Impac Commercial Holdings, Inc................... 37,300 582,812
Innkeepers USA Trust............................. 2,100 29,269
LaSalle Hotel Properties+........................ 58,000 982,375
Manufactured Home Communities, Inc............... 108,200 2,698,237
Merry Land & Investment Company, Inc............. 58,900 1,306,844
Mills Corp....................................... 203,400 5,021,437
National Golf Properties, Inc.................... 72,800 2,188,550
Post Properties, Inc............................. 174,047 7,157,683
Summit Properties, Inc........................... 1,100 21,931
Sunstone Hotel Investors, Inc.................... 122,300 1,758,062
Tower Realty Trust, Inc.......................... 66,700 1,529,931
Urban Shopping Centers, Inc...................... 53,900 1,778,700
Weeks Corp....................................... 132,900 4,244,494
-------------
55,488,846
-------------
TOTAL FINANCE.................................. 169,833,013
-------------
HEALTHCARE (11.2%)
BIOTECHNOLOGY (3.1%)
Affymetrix, Inc.+................................ 24,700 664,584
Applied Analytical Industries, Inc.+............. 143,000 1,474,687
ArQule, Inc.+.................................... 42,100 602,556
Genome Therapeutics Corp.+....................... 108,400 707,987
Human Genome Sciences, Inc.+..................... 153,100 5,516,384
IDEC Pharmaceuticals Corp.+...................... 70,300 2,210,056
Incyte Pharmaceuticals, Inc.+.................... 73,000 2,680,469
Millennium Pharmaceuticals, Inc.+................ 67,300 1,190,369
Novoste Corp.+................................... 71,500 1,796,437
SangStat Medical Corp.+.......................... 155,700 4,077,394
-------------
20,920,923
-------------
HEALTH SERVICES (3.8%)
Alternative Living Services, Inc.+............... 67,900 1,841,788
Boron, LePore & Associates, Inc.+................ 21,100 619,813
Lifeline Systems, Inc.+.......................... 98,900 1,842,013
Mariner Health Group, Inc.+...................... 441,000 6,587,438
Monarch Dental Corp.+............................ 56,100 985,256
Pediatrix Medical Group, Inc.+................... 56,800 2,055,450
ProMedCo Management Co.+......................... 125,400 1,402,913
Renal Care Group, Inc.+.......................... 63,200 2,285,075
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
HEALTH SERVICES (CONTINUED)
Sierra Health Services, Inc.+.................... 204,800 $ 7,603,200
Sunrise Assisted Living, Inc.+................... 39,000 1,176,094
-------------
26,399,040
-------------
MEDICAL SUPPLIES (3.5%)
Aurora Biosciences Corp.+........................ 62,500 476,563
CONMED Corp.+.................................... 53,800 1,144,931
Endocardial Solutions, Inc.+..................... 66,000 779,625
Focal, Inc.+..................................... 60,000 746,250
Kensey Nash Corp.+............................... 213,100 3,968,988
Physio-Control International Corp.+.............. 63,200 1,333,125
ResMed, Inc.+.................................... 40,000 1,430,000
Sola International, Inc.+........................ 108,200 4,280,663
Symphonix Devices, Inc.+......................... 32,600 342,300
Ventana Medical Systems, Inc.+................... 328,200 8,512,688
Vital Signs, Inc................................. 30,100 531,453
-------------
23,546,586
-------------
PHARMACEUTICALS (0.8%)
Kos Pharmaceuticals, Inc.+....................... 144,400 1,665,113
Ligand Pharmaceuticals, Class B+................. 214,400 2,994,900
U.S. Bioscience, Inc.+........................... 67,600 633,750
-------------
5,293,763
-------------
TOTAL HEALTHCARE............................... 76,160,312
-------------
INDUSTRIAL PRODUCTS & SERVICES (12.2%)
BUILDING MATERIALS (1.1%)
American Residential Services, Inc.+............. 171,200 1,979,500
Comfort Systems USA, Inc.+....................... 75,600 1,663,200
Service Experts, Inc.+........................... 116,800 3,664,600
-------------
7,307,300
-------------
CAPITAL GOODS (4.7%)
ABC Rail Products Corp.+......................... 69,200 1,297,500
Applied Power, Inc., Class A..................... 107,800 3,692,150
Collins & Aikman Corp.+.......................... 101,700 711,900
IDEX Corp........................................ 147,300 5,450,100
MagneTek, Inc.+.................................. 386,100 6,539,569
Modine Manufacturing Co.......................... 101,300 3,469,525
Shaw Group, Inc.+................................ 116,300 2,849,350
Wabash National Corp............................. 306,900 7,960,219
-------------
31,970,313
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
COMMERCIAL SERVICES (0.9%)
Equity Corp. International+...................... 66,900 $ 1,588,875
Hospitality Worldwide Services+.................. 22,600 192,100
Pinkertons, Inc.+................................ 98,050 2,046,794
Wackenhut Corrections Corp.+..................... 53,900 1,307,075
Youth Services International, Inc.+.............. 92,400 667,012
-------------
5,801,856
-------------
CONSTRUCTION & HOUSING (1.7%)
D.R. Horton, Inc................................. 595,600 10,720,800
NCI Building Systems, Inc.+...................... 21,400 1,132,194
-------------
11,852,994
-------------
DIVERSIFIED MANUFACTURING (1.5%)
Intermet Corp.................................... 529,200 10,120,950
-------------
ELECTRICAL EQUIPMENT (0.5%)
Anixter International, Inc.+..................... 164,900 3,318,613
-------------
MACHINERY (0.2%)
Sauer, Inc....................................... 94,500 1,523,813
-------------
MANUFACTURING (0.1%)
Rock of Ages Corp.+.............................. 44,200 704,438
-------------
PACKAGING & CONTAINERS (0.4%)
Gaylord Container Corp., Class A+................ 193,800 1,623,075
Ivex Packaging Corp.+............................ 50,600 1,173,288
-------------
2,796,363
-------------
POLLUTION CONTROL (1.1%)
American Disposal Services, Inc.+................ 71,700 2,807,503
Sevenson Environmental Services, Inc............. 68,100 606,516
Tetra Technologies, Inc.+........................ 176,900 3,858,631
-------------
7,272,650
-------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 82,669,290
-------------
TECHNOLOGY (12.5%)
AEROSPACE (1.0%)
L-3 Communications Holdings, Inc.+............... 11,700 327,600
Orbital Sciences Corp.+.......................... 160,200 6,558,188
-------------
6,885,788
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
COMPUTER PERIPHERALS (1.3%)
Bolder Technologies Corp.+....................... 63,500 $ 738,188
HMT Technology Corp.+............................ 256,700 2,992,159
Hutchinson Technology, Inc.+..................... 31,600 791,975
Pinnacle Systems, Inc.+.......................... 94,200 3,167,475
Proxim, Inc.+.................................... 107,600 1,418,975
-------------
9,108,772
-------------
COMPUTER SOFTWARE (3.0%)
Aspect Development, Inc.+........................ 47,300 2,688,709
Aspen Technologies, Inc.+........................ 80,400 3,580,313
Edify Corp.+..................................... 223,400 2,359,663
Evolving Systems, Inc.+.......................... 6,100 114,375
Integrated Systems, Inc.+........................ 84,000 1,551,375
Macromedia, Inc.................................. 155,400 2,462,119
MAPICS, Inc.+.................................... 174,100 3,057,631
Omtool, Ltd.+.................................... 34,700 277,600
Remedy Corp.+.................................... 94,600 1,528,381
Transaction Systems Architects, Inc., Class A+... 76,800 3,096,000
-------------
20,716,166
-------------
COMPUTER SYSTEMS (0.9%)
Avid Technology, Inc.+........................... 77,100 3,124,959
PC Connection, Inc.+............................. 10,600 153,038
Quickturn Design System, Inc.+................... 176,300 1,347,042
Radiant Systems, Inc.+........................... 97,200 1,597,725
-------------
6,222,764
-------------
ELECTRICAL EQUIPMENT (0.1%)
Advanced Lighting Technologies, Inc.+............ 37,100 920,544
-------------
INFORMATION PROCESSING (2.7%)
CNET, Inc.+...................................... 61,400 2,225,750
Computer Horizons Corp.+......................... 20,950 699,861
Condor Technology Solutions, Inc.+............... 162,000 2,273,063
CSG Systems International, Inc.+................. 30,500 1,302,922
International Network Services+.................. 93,400 2,927,506
Metro Information Services, Inc.+................ 86,900 2,813,388
ONSALE, Inc.+.................................... 54,800 1,395,688
Pegasus Systems, Inc.+........................... 61,100 1,573,325
Sapient Corp.+................................... 68,700 3,048,563
-------------
18,260,066
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
SEMICONDUCTORS (1.7%)
8 x 8, Inc.+..................................... 127,500 $ 784,922
Alliance Semiconductor Corp.+.................... 120,600 587,925
American Xtal Technology, Inc.+.................. 18,500 205,813
ARM Holdings plc (Spons. ADR)+(i)................ 6,600 235,950
ATMI, Inc.+...................................... 105,400 1,910,375
Exar Corp.+...................................... 51,700 1,197,178
Genesis Microchip, Inc.+......................... 8,000 97,500
Integrated Device Technology, Inc.+.............. 227,200 2,126,450
Integrated Silicon Solution, Inc.+............... 111,000 770,063
SDL, Inc.+....................................... 111,400 2,478,650
SIPEX Corp.+..................................... 47,700 1,034,494
-------------
11,429,320
-------------
TELECOMMUNICATIONS-EQUIPMENT (1.8%)
ANTEC Corp.+..................................... 98,000 1,877,313
Davox Corp.+..................................... 53,100 979,031
Excel Switching Corp.+........................... 129,300 2,545,594
Glenayre Technologies, Inc.+..................... 221,600 3,400,175
Natural Microsystems Corp.+...................... 81,900 1,753,172
P-COM, Inc.+..................................... 93,400 1,403,919
Verio, Inc.+..................................... 14,600 333,519
-------------
12,292,723
-------------
TOTAL TECHNOLOGY............................... 85,836,143
-------------
TELECOMMUNICATIONS (2.0%)
TELECOMMUNICATION SERVICES (2.0%)
Concentric Network Corp.+........................ 179,900 3,991,531
Exodus Communications, Inc.+..................... 6,000 204,938
IDT Corp.+....................................... 34,200 893,475
MetroNet Communications Corp., Class B+.......... 95,800 2,694,375
Mobile Telecommunication Technologies Corp.+..... 127,200 2,885,850
Premiere Technologies, Inc.+..................... 111,900 2,678,606
-------------
13,348,775
-------------
TOTAL TELECOMMUNICATIONS....................... 13,348,775
-------------
TRANSPORTATION (1.8%)
AIRLINES (0.2%)
ASA Holdings, Inc................................ 37,200 1,461,263
-------------
RAILROADS (0.3%)
Genesee & Wyoming Inc., Class A+................. 83,500 1,889,188
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- -------- -------------
<S> <C> <C>
TRUCK & FREIGHT CARRIERS (1.3%)
Allied Holdings, Inc.+........................... 127,400 $ 2,293,200
American Freightways Corp.+...................... 140,400 1,623,375
Jevic Transportation, Inc.+...................... 20,800 262,600
Werner Enterprises, Inc.......................... 252,125 4,821,891
-------------
9,001,066
-------------
TOTAL TRANSPORTATION........................... 12,351,517
-------------
UTILITIES (6.1%)
ELECTRIC (2.1%)
Central Hudson Gas & Electric Corp............... 189,900 8,296,256
Cleco Corporation................................ 158,900 4,757,069
Otter Tail Power Co.............................. 31,600 1,009,225
-------------
14,062,550
-------------
NATURAL GAS (2.2%)
Atmos Energy Corp................................ 167,000 5,135,250
Indiana Energy, Inc.............................. 66,700 2,059,363
Public Service Company of North Carolina, Inc.... 21,800 463,250
Wicor, Inc....................................... 162,700 7,443,525
-------------
15,101,388
-------------
TELEPHONE (1.0%)
ICG Communications, Inc.+........................ 26,100 791,156
Intermedia Communications, Inc.+................. 33,000 2,444,063
ITC DeltaCom, Inc.+.............................. 15,200 546,250
NEXTLINK Communications, Inc., Class A+.......... 21,900 683,006
Omnipoint Corp.+................................. 110,600 2,274,213
-------------
6,738,688
-------------
WATER (0.8%)
E'Town Corp...................................... 74,100 2,556,450
SJW Corp......................................... 19,600 1,269,100
Southern California Water Co..................... 61,600 1,343,650
-------------
5,169,200
-------------
TOTAL UTILITIES................................ 41,071,826
-------------
TOTAL COMMON STOCKS (COST $577,906,411)........ 655,779,476
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.7%)
REPURCHASE AGREEMENT (3.7%)
Goldman Sachs, Repurchase Agreement 5.50% dated
05/29/98 due 06/01/98, proceeds $25,570,714
(collateralized by $24,795,000 various notes,
5.55% - 9.20% due 06/11/98 - 7/12/21, valued at
$26,070,804)
(cost $25,559,000)............................. $ 25,559,000 $ 25,559,000
-------------
TOTAL INVESTMENTS
(COST $603,465,411) (99.9%).................................. 681,338,476
OTHER ASSETS IN EXCESS OF
LIABILITIES (0.1%)........................................... 426,002
-------------
NET ASSETS (100.0%)............................................ $ 681,764,478
-------------
-------------
</TABLE>
- ------------------------------
Note: For Federal Income Tax purposes, the cost of securities at May 31, 1998,
was $604,485,853, the aggregate gross unrealized appreciation and depreciation
was $108,884,971 and $32,032,348, respectively, resulting in net unrealized
appreciation of $76,852,623.
+ Non-income producing security.
(i) Foreign security.
Spon. ADR - Sponsored American Depositary Receipt.
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $603,465,411) $681,338,476
Cash 610
Receivable for Investments Sold 3,663,969
Dividends Receivable 362,050
Interest Receivable 11,714
Prepaid Trustees' Fees 3,500
Prepaid Expenses and Other Assets 453
------------
Total Assets 685,380,772
------------
LIABILITIES
Payable for Investments Purchased 3,199,064
Advisory Fee Payable 360,375
Custody Fee Payable 25,500
Administrative Services Fee Payable 17,427
Administration Fee Payable 941
Fund Services Fee Payable 656
Accrued Expenses 12,331
------------
Total Liabilities 3,616,294
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $681,764,478
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
26
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income $ 11,726,555
Interest Income 2,287,683
------------
Investment Income 14,014,238
EXPENSES
Advisory Fee $6,161,868
Custodian Fees and Expenses 369,671
Administrative Services Fee 309,695
Professional Fees and Expenses 72,695
Fund Services Fee 36,011
Administration Fee 22,248
Trustees' Fees and Expenses 16,540
Printing Expenses 11,988
Insurance Expense 6,004
----------
Total Expenses 7,006,720
------------
NET INVESTMENT INCOME 7,007,518
NET REALIZED GAIN ON INVESTMENTS 248,748,288
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENTS (57,304,380)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $198,451,426
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
27
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 7,007,518 $ 8,348,905
Net Realized Gain on Investments 248,748,288 87,877,628
Net Change in Unrealized Appreciation of
Investments (57,304,380) (2,676,687)
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 198,451,426 93,549,846
-------------- --------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 244,010,077 386,255,018
Withdrawals (830,979,636) (269,567,535)
-------------- --------------
Net Increase (Decrease) from Investors'
Transactions (586,969,559) 116,687,483
-------------- --------------
Total Increase (Decrease) in Net Assets (388,518,133) 210,237,329
NET ASSETS
Beginning of Fiscal Year 1,070,282,611 860,045,282
-------------- --------------
End of Fiscal Year $ 681,764,478 $1,070,282,611
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 19, 1993
(COMMENCEMENT OF
FOR THE FISCAL YEAR ENDED MAY 31, OPERATIONS)
----------------------------------------- THROUGH
1998 1997 1996 1995 MAY 31, 1994
-------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.68% 0.68% 0.67% 0.71% 0.72%(a)
Net Investment Income 0.68% 0.92% 1.33% 1.21% 0.99%(a)
Portfolio Turnover 96% 98% 93% 75% 97%+
</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 Capital Appreciation Fund, for the period June 1, 1993 to July 18,
1993.
The Accompanying Notes are an Integral Part of the Financial Statements.
28
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The U.S. Small Company 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. The portfolio commenced operations on July 19, 1993 and
received a contribution of certain assets and liabilities, including securities,
with a value of $200,358,103 on that date from The Pierpont Capital Appreciation
Fund in exchange for a beneficial interest in the portfolio. At that date, net
unrealized appreciation of $29,458,073 was included in the contributed
securities. The portfolio's investment objective is to provide a high total
return from a portfolio of small company stocks. 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 exchanges. 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 by the amortized cost method.
b) 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.
c) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount becomes known. Interest income, which
includes the amortization of premiums and discounts, if any, is recorded
on an accrual basis. For financial and tax reporting purposes, realized
gains and losses are determined on the basis of specific lot
identification.
29
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
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.
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 0.60% of the portfolio's
average daily net assets. For the fiscal year ended May 31, 1998, such
fees amounted to $6,161,868.
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as co-administrator and exclusive placement agent.
Under a Co-Administration Agreement between FDI and the portfolio, FDI
provides administrative services necessary for the operations of the
portfolio, furnishes office space and facilities required for conducting
the business of the portfolio and pays the compensation of the portfolio's
officers affiliated with FDI. The portfolio has agreed to pay FDI fees
equal to its allocable share of an annual complex-wide charge of $425,000
plus FDI's out-of-pocket expenses. The amount allocable to the portfolio
is based on the ratio of the portfolio's net assets to the aggregate net
assets of the portfolio and certain other investment companies subject to
similar agreements with FDI. For the fiscal year ended May 31, 1998, the
fee for these services amounted to $22,248.
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 Morgan acts as investment
advisor (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 portfolio is determined by the proportionate share that its
net assets bear to the net assets of the portfolio, 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 May 31,
1998, the fee for these services amounted to $309,695.
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 $36,011 for the fiscal year ended May 31, 1998.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the portfolio, the J.P. Morgan Funds (formerly The JPM
Pierpont Funds), the J.P. Morgan Institutional Funds (formerly The JPM
Institutional Funds), the master portfolios and J.P. Morgan Series Trust.
The Trustees' Fees and
30
<PAGE>
THE U.S. SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
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 $7,600.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended May 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------- --------------
<S> <C>
$ 924,737,757 $1,066,449,241
</TABLE>
4. CREDIT AGREEMENT
The portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the fund's Notes to the Financial
Statements which are included elsewhere in this report.
5. OTHER MATTERS
On January 25, 1998, the portfolio received a withdrawal request in the amount
of $436,180,054 as discussed in Note 5 of the fund's Notes to Financial
Statements which are included elsewhere in this report. This amount is included
in Withdrawals shown on the Statement of Changes in Net Assets. The withdrawal,
which was made in-kind by transferring certain assets and liabilities, including
securities, directly to a non-U.S. fund, resulted in a net realized loss on
transfer of securities in the amount of $85,104,130, which is included in the
Net Realized Gain on Investments in the Statement of Operations.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The U.S. Small Company 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 U.S. Small Company Portfolio (the
"Portfolio") at May 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 four years in the period
then ended and for the period July 19, 1993 (commencement of operations) through
May 31, 1994, 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 May 31,
1998 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 17, 1998
32
<PAGE>
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
CALIFORNIA MONEY MARKET FUND
SHORT TERM BOND FUND
BOND FUND
GLOBAL STRATEGIC INCOME FUND
EMERGING MARKETS DEBT FUND
TAX EXEMPT BOND FUND
NEW YORK TOTAL RETURN BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
INTERNATIONAL EQUITY FUND
EUROPEAN EQUITY FUND
JAPAN EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
GLOBAL 50 FUND: SELECT SHARES
FOR MORE INFORMATION ON THE J.P. MORGAN
FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800) 521-5411.
J.P. Morgan
U.S. Small Company Fund
ANNUAL REPORT
MAY 31, 1998
