<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN EMERGING MARKETS DEBT FUND
February 9, 1998
Dear Shareholder:
Your Fund has changed its name. The JPM Pierpont Emerging Markets Debt Fund is
now the J.P. Morgan Emerging Markets Debt 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.
We are pleased to present you with the first annual report for the Fund. From
its inception on April 17 of this year through December 31, it has provided a
return of 5.47%. For most of 1997, emerging debt markets saw continuing
improvement as a result of undertaking of structural economic reforms. In the
fourth quarter, however, market developments in Asia took center stage and
negatively impacted emerging markets debt portfolios.
The Fund's net asset value per share decreased from $10.00 to $9.76 during the
period. Its total net assets reached approximately $12.0 million. The Fund began
making monthly income distributions in August and paid $0.60 in income dividends
and $0.17 in short-term capital gains during the period.
The report that follows includes an interview with Eduardo Cortes, the Fund's
portfolio manager. 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 global markets with you in the future. 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
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TABLE OF CONTENTS
Letter to the shareholders...............1 Fund facts and highlights........5
Fund performance.........................2 Special fund-based services......6
Portfolio manager Q&A....................3 Financial statements.............9
1
<PAGE>
Fund performance
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to take a look at the growth of a hypothetical
investment of $10,000. The chart at right shows that $10,000 invested in the
Fund on April 30, 1997* would have been worth $10,340 at December 31, 1997.
The table below shows total returns for the Fund, its benchmark, and its Lipper
category average, which are not annualized. These returns illustrate the Fund's
absolute and relative performance since commencement of operations on April 17,
1997.
GROWTH OF $10,000 SINCE INCEPTION
APRIL 30, 1997 -- DECEMBER 31,1997
Lipper
J.P. Morgan Emerging Emerging
Emerging Markets Markets
Markets Debt Bond Index Debt Funds
Fund Plus Average
------------ ----------- ----------
4/30/97 10000 10000 10000
10304 10388 10389
10471 10627 10689
10686 11068 11076
8/31/97 10578 11024 11017
10841 11361 11331
9667 10052 10230
10146 10530 10572
12/31/97 10340 10893 10842
PERFORMANCE
<TABLE>
<CAPTION>
TOTAL RETURNS
----------------------------------
THREE SIX SINCE
AS OF DECEMBER 31, 1997 MONTHS MONTHS INCEPTION*
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<S> <C> <C> <C>
J.P. Morgan Emerging Markets Debt Fund -4.62% -1.25% 3.40%
Emerging Markets Bond Index Plus** -4.12% 2.50% 8.93%
Lipper Emerging Markets Debt Funds Average -4.36% 1.49% 8.46%
</TABLE>
* THE FUND COMMENCED OPERATIONS ON APRIL 17, 1997 AND HAS PROVIDED A TOTAL
RETURN OF 5.47% FROM THAT DATE THROUGH DECEMBER 31, 1997. FOR THE PURPOSE
OF COMPARISON, THE "SINCE INCEPTION" RETURNS IN THE TABLE ABOVE ARE
CALCULATED FROM APRIL 30, 1997, THE FIRST DATE WHEN DATA FOR THE FUND, ITS
BENCHMARK, AND ITS LIPPER CATEGORY AVERAGE WERE ALL AVAILABLE.
** THE EMERGING MARKETS BOND INDEX PLUS IS AN UNMANAGED INDEX WHICH TRACKS
TOTAL RETURN FOR EXTERNAL CURRENCY-DENOMINATED DEBT (BRADY BONDS, LOANS,
EUROBONDS, AND U.S. DOLLAR-DENOMINATED LOCAL MARKET INSTRUMENTS) IN
EMERGING MARKETS. THE INDEX DOES NOT INCLUDE FEES OR OPERATING EXPENSES AND
IS NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. ALL RETURNS ASSUME THE
REINVESTMENT OF DISTRIBUTIONS. FUND RETURNS ARE NET OF FEES, ASSUME THE
REINVESTMENT OF DISTRIBUTIONS, AND REFLECT THE REIMBURSEMENT OF CERTAIN FUND AND
PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES NOT BEEN
REIMBURSED, RETURNS WOULD HAVE BEEN LOWER. LIPPER ANALYTICAL SERVICES, INC. IS A
LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
Portfolio manager Q&A
The following is an interview with EDUARDO CORTES, VICE PRESIDENT,
the portfolio manager for the J.P. Morgan Emerging Markets Debt
Fund. Mr. Cortes joined Morgan in 1985 and became a member of the
Fixed Income Group in 1991. Eduardo is currently a member of the
Fixed Income Allocation Committee and the Global Extended Markets
Strategy Team. Eduardo received his B.A. from Stanford University
and his M.B.A. from UCLA. This interview was conducted on
February 6, 1998 and reflects Eduardo's views on that date.
COULD YOU GIVE US A BRIEF SUMMARY OF THE YEAR IN EMERGING MARKETS DEBT?
EC: Sure. The focal point for the year was, obviously, the last quarter. But if
you step away from the last quarter there are a few things of significance to
consider. First, while emerging equity markets are significantly exposed to
Asia, emerging debt markets are predominantly in Latin America and Eastern
Europe. And during 1997 there were significant improvements in the economic
performance of both of those regions. That was accompanied by good performance
in the securities markets during the first three quarters. With that, the Fund
and the index did very well and, to a large extent, ignored the problems in Asia
which started developing by the second quarter. I am speaking of the pressures
on, and the eventual devaluations of, the Thai baht, the Philippine peso, and
the Indonesian rupiah.
One should not lose sight that Latin America had one if its best years ever
from an economic growth perspective, even with Brazil not performing as well as
it could have. In Eastern Europe as well, there were a number of countries
turning a corner economically, such as Poland, the Czech Republic, Slovakia,
Hungary, Bulgaria, and Russia. They were beginning to reap the benefits of years
of economic reform. The Asian region, on the other hand, suffered in the latter
part of the year, but especially so in the fourth quarter.
CAN YOU TELL US MORE SPECIFICALLY THE DIFFERENCES IN COMPOSITION BETWEEN
EMERGING DEBT MARKETS VERSUS EMERGING EQUITY MARKETS?
EC: The benchmark that people observe, the Emerging Markets Bond Index Plus
("EMBI+"), is about 75% in Latin America. The only Asian country in it is the
Philippines at a weight of less than 2%. Meanwhile, Asia still accounts for
slightly more than 30% of the emerging equity markets.
FOR THE PERIOD UNDER REVIEW, FROM ITS INCEPTION IN APRIL THROUGH THE END OF
1997, THE FUND UNDERPERFORMED ITS BENCHMARK, THE EMBI+. WHY?
EC: There were three reasons. To begin with, the Portfolio is better diversified
than the index, which means that it had more Asian exposure. The Portfolio's
Asian exposure was small, however, Asian performance was so dramatically poor,
it had a significant impact on relative performance.
Another reason was we developed a cautious stance on emerging markets
debt as a whole in May when the Asian crisis began to develop. The market did
not react cautiously until October. During this period, the
3
<PAGE>
Portfolio's duration was shorter than the index at a time when securities did
very well.
Finally, over 25% of the securities in the benchmark are collateralized
with zero-coupon U.S. Treasury securities. Of course, in exchange for
collateral you give up some yield. The Portfolio, however, is designed to
provide pure exposure to emerging debt markets and, consequently, does not
hold collateralized securities. As you would expect, that collateral provided
a measure of protection during the flight to quality that we saw in the last
quarter of the year.
HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE MONTHS AHEAD?
EC: We are satisfied with the current structure of the Portfolio and we are
very optimistic for 1998. The events of the last quarter have made the entire
market less expensive and, in our view, a compelling buy. Furthermore, there
are a number of high yielding, high quality securities now available in Asia,
enabling us to diversify the Portfolio even further.
4
<PAGE>
Fund facts
INVESTMENT OBJECTIVE
The J.P. Morgan Emerging Markets Debt Fund seeks to provide a high total return
from a portfolio of fixed income securities of emerging markets issuers. It is
designed for investors who seek exposure to emerging markets debt in their
investment portfolios. As an international investment, the Fund is subject to
foreign political and currency risks, in addition to market risk.
- ------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
4/17/97
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NET ASSETS AS OF 12/31/97
$11,977,860
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DIVIDEND PAYABLE DATES
MONTHLY
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CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The Fund's current annualized expense ratio of 1.25% 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 DECEMBER 31, 1997
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
/ / BRAZIL 21.3%
/ / ARGENTINA 15.2%
/ / MEXICO 13.4%
/ / RUSSIA 5.5%
/ / VENEZUELA 5.4%
/ / TURKEY 3.9%
/ / PERU 3.8%
/ / BULGARIA 2.7%
/ / SOUTH KOREA 2.4%
/ / OTHER 3.1%
/ / U.S. DOLLAR (SHORT-TERM) 23.3%
30-DAY SEC YIELD
7.11%
DURATION
4.3 years
5
<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 diversified family of J.P. Morgan 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.
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.
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORK SERVES 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.
The Fund invests through a master portfolio (another fund with the same
objective). The Portfolio invests in foreign securities which are subject to
special risks including currency fluctuation and political uncertainty.
Opinions expressed herein are based on current market conditions and are
subject to change without notice.
MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES, IS PROVIDED IN THE PROSPECTUS, WHICH SHOULD BE READ CAREFULLY
BEFORE INVESTING. YOU MAY OBTAIN ADDITIONAL COPIES OF THE PROSPECTUS BY
CALLING J.P. MORGAN FUNDS SERVICES AT (800) 521-5411.
7
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THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
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<TABLE>
<S> <C>
ASSETS
Investment in The Emerging Markets Debt Portfolio
("Portfolio"), at value $12,146,104
Deferred Organization Expenses 14,426
Receivable for Expense Reimbursements 3,926
Prepaid Expenses and Other Assets 103
-----------
Total Assets 12,164,559
-----------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 128,620
Organization Expenses Payable 13,495
Dividends Payable to Shareholders 3,032
Shareholder Servicing Fee Payable 2,038
Administrative Services Fee Payable 247
Administration Fee Payable 13
Fund Services Fee Payable 9
Accrued Trustees' Fees and Expenses 3
Accrued Expenses 39,242
-----------
Total Liabilities 186,699
-----------
NET ASSETS
Applicable to 1,226,628 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $11,977,860
-----------
-----------
Net Asset Value, Offering and Redemption Price
Per Share $9.76
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $11,935,158
Distributions in Excess of Net Investment Income (59,983)
Accumulated Net Realized Gain on Investment and
Foreign Currency Transactions 738,554
Net Unrealized Depreciation of Investment and
Foreign Currency Translations (635,869)
-----------
Net Assets $11,977,860
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 17, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $ 605,783
Allocated Portfolio Expenses (44,243)
---------
Net Investment Income Allocated from
Portfolio 561,540
FUND EXPENSES
Registration Fees $ 24,121
Transfer Agent Fees 15,936
Printing Expenses 15,716
Shareholder Servicing Fee 13,814
Professional Fees 11,353
Amortization of Organization Expenses 2,374
Administrative Services Fee 1,688
Fund Services Fee 183
Administration Fee 158
Trustees' Fees and Expenses 42
Insurance Expense 14
Miscellaneous 2,852
--------
Total Fund Expenses 88,251
Less: Reimbursement of Expenses (63,410)
--------
NET FUND EXPENSES 24,841
---------
NET INVESTMENT INCOME 536,699
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS ALLOCATED FROM PORTFOLIO 556,473
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY TRANSLATIONS
ALLOCATED FROM PORTFOLIO (635,869)
---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 457,303
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 17, 1997
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31,
1997
----------------
<S> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 536,699
Net Realized Gain on Investment and Foreign
Currency Transactions Allocated from Portfolio 556,473
Net Change in Unrealized Depreciation of
Investment and Foreign Currency Translations
Allocated from Portfolio (635,869)
----------------
Net Increase in Net Assets Resulting from
Operations 457,303
----------------
DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income (536,699)
In Excess of Net Investment Income (14,812)
From Net Realized Gain (196,090)
----------------
Total Distributions to Shareholders (747,601)
----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 11,902,012
Reinvestment of Dividends and Distributions 727,589
Cost of Shares of Beneficial Interest Redeemed (361,443)
----------------
Net Increase from Transactions in Shares of
Beneficial Interest 12,268,158
----------------
Total Increase in Net Assets 11,977,860
NET ASSETS
Beginning of Period --
----------------
End of Period (including distributions in excess
of net investment income of $59,983) $ 11,977,860
----------------
----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
FINANCIAL HIGHLIGHTS
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Selected data for a share outstanding throughout the period is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 17, 1997
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31,
1997
----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.58
Net Realized and Unrealized Loss on Investment
and Foreign Currency (0.05)
----------------
Total from Investment Operations 0.53
----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income (0.58)
In Excess of Net Investment Income (0.02)
From Net Realized Gain (0.17)
----------------
Total Distributions to Shareholders (0.77)
----------------
NET ASSET VALUE, END OF PERIOD $ 9.76
----------------
----------------
RATIOS AND SUPPLEMENTAL DATA
Total Return 5.47%(a)
Net Assets, End of Period (in thousands) $ 11,978
Ratios to Average Net Assets
Expenses 1.25%(b)
Net Investment Income 9.71%(b)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 1.15%(b)
</TABLE>
- ------------------------
(a) Not annualized
(b) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan Emerging Markets Debt 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 commenced operations on April 17, 1997. Prior to January 1, 1998, the
Trust's and the Fund's names were The JPM Pierpont Funds and The JPM Pierpont
Emerging Markets Debt Fund, respectively.
The Fund invests all of its investable assets in The Emerging Markets Debt
Portfolio (the "Portfolio"), an 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 (approximately 99.8% at December 31,
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 as
dividends daily and paid monthly. Distributions to shareholders of net
realized capital gains, if any, are declared and paid annually. Prior to
August 1, 1997, distributions to shareholders of net investment income and
net realized capital gains, if any, were declared and paid annually.
d) The Fund incurred organization expenses in the amount of $16,800. Morgan
Guaranty Trust Company of New York ("Morgan") has agreed to pay the
organization expenses of the Fund. The Fund has agreed to reimburse Morgan
for these costs which are being deferred and will be amortized on a
straight-line basis over a period not to exceed five years beginning with
the commencement of operations of the Fund.
e) The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to comply with the provisions of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and
to distribute substantially all of its income, including net realized
capital gains, if any, within the prescribed time periods. Accordingly, no
provision for federal income or excise tax is necessary.
13
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
f) Expenses incurred by the Trust with respect to any two or more funds in
the Trust are allocated in proportion to the net assets of each fund in
the Trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
g) 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 for the period from April 17, 1997 (commencement of
operations) to December 31, 1997 was to increase distributions in excess
of net investment income by $45,171, increase accumulated net realized
gain on investment and foreign currency transactions by $378,171 and
decrease paid-in capital by $333,000. The adjustments are attributable to
foreign currency losses and net realized loss 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.
h) The Fund incurred approximately $43,000 of foreign currency losses in the
period from November 1, 1997 to December 31, 1997. These losses were
deferred for tax purposes until January 1, 1998.
2. TRANSACTIONS WITH AFFILIATES
a) The Trust, on behalf of the Fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor for the Fund. Under a Co-Administration Agreement between FDI
and the Trust on behalf of the Fund, FDI provides administrative services
necessary for the operations of the Fund, furnishes office space and
facilities required for conducting the business of the Fund and pays the
compensation of the Fund's officers affiliated with FDI. The Fund has
agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The
amount allocable to the Fund is based on the ratio of the Fund's net
assets to the aggregate net assets of the Trust and certain other
investment companies subject to similar agreements with FDI. For the
period from April 17, 1997 (commencement of operations) to December 31,
1997, the fee for these services amounted to $158.
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
14
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Master Portfolios for which Morgan provides similar services, and J.P.
Morgan Series Trust. For the period from April 17, 1997 (commencement of
operations) to December 31, 1997, the fee for these services amounted to
$1,688.
In addition, Morgan has agreed to reimburse the Fund to the extent
necessary to maintain the total operating expenses of the Fund, including
the expenses allocated to the Fund from the Portfolio, at no more than
1.25% of the average daily net assets of the Fund at least through April
30, 1998. For the period from April 17, 1997 (commencement of operations)
to December 31, 1997, Morgan has agreed to reimburse the Fund $63,410 for
expenses under this agreement.
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal and 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 period from April 17, 1997 (commencement of operations)
to December 31, 1997, the fee for these services amounted to $13,814.
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
$183 for the period from April 17, 1997 (commencement of operations) to
December 31, 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 represents the Fund's allocated portion
of these total fees and expenses. The Trust's Chairman and Chief Executive
Officer also serves as Chairman of Group and receives compensation and
employee benefits from Group in his role as Group's Chairman. The
allocated portion of such compensation and benefits included in the Fund
Services Fee shown in the financial statements was $40.
15
<PAGE>
J.P. MORGAN EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 PERIOD
APRIL 17, 1997
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31,
1997
----------------
<S> <C>
Shares sold...................................... 1,188,908
Reinvestment of dividends and distributions...... 74,548
Shares redeemed.................................. (36,828)
----------------
Net Increase..................................... 1,226,628
----------------
----------------
</TABLE>
From time to time, the Fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders could have a material impact on the Fund and Portfolio.
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
Agreement is $100,000,000. Prior to January 26, 1998, the maximum borrowing
under the Agreement was $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 December 31, 1997.
5. OTHER MATTERS
Prior to December 12, 1997, the Fund invested in the Portfolio along with a
non-U.S. fund managed by Morgan. On December 12, 1997, the non-U.S. fund
withdrew its interest in the Portfolio through an in-kind withdrawal amounting
to $111,987,828. 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.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Emerging Markets Debt Fund
(formerly The JPM Pierpont Emerging Markets Debt 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 Emerging Markets Debt Fund (one of the series constituting part of
J.P. Morgan Funds (formerly The JPM Pierpont Funds), hereafter referred to as
the "Fund") at December 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the period April 17, 1997
(commencement of operations) to December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
17
<PAGE>
The Emerging Markets Debt Portfolio
Annual Report December 31, 1997
(The following pages should be read in conjunction
with the J.P. Morgan Emerging Markets Debt Fund
Annual Financial Statements)
18
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT+ SECURITY DESCRIPTION VALUE
- ------------------- ------------------------------------------------- ------------
<C> <S> <C>
CONVERTIBLE BONDS (2.3%)
MEXICO (2.0%)
227,000 Banamex S.A., (144A), 11.00% due 07/15/03........ $ 244,025
------------
THAILAND (0.3%)
70,000 Robinson Department Store Company Ltd., 3.25% due
07/27/00....................................... 40,600
------------
TOTAL CONVERTIBLE BONDS (COST $306,721)...... 284,625
------------
CORPORATE OBLIGATIONS (21.1%)
BRAZIL (6.1%)
68,000 Abril S.A., 12.00% due 10/25/03.................. 68,507
200,000 Companhia de Saneamento Basico de Sao Paulo,
(144A), 10.00% due 07/28/05.................... 180,000
500,000 CSN Iron S.A., 9.125% due 06/01/07............... 428,750
68,000 Furnas Centrais Eletricas S.A., Callable/Putable
05/23/02, 9.00% due 05/23/05................... 63,240
------------
740,497
------------
INDONESIA (2.0%)
40,000 Indah Kiat Finance Co. Mauritius, Callable
07/01/02, (144A), 10.00% due 07/01/07.......... 32,600
136,000 Matahari International Finance Co. BV, (144A),
11.25% due 03/15/01............................ 115,600
120,000 Tjiwi Kimia Finance Co. Mauritius, (144A), 10.00%
due 08/01/04................................... 96,000
------------
244,200
------------
MEXICO (4.2%)
18,000 Altos Hornos de Mexico S.A. de CV, Series B,
11.875% due 04/30/04........................... 18,765
75,000 Axa S.A. de CV, (144A), 9.00% due 08/04/04....... 72,375
136,000 Copamex Industrias S.A., 11.375% due 04/30/04.... 149,600
102,000 Grupo Imsa S.A. de CV, Callable 09/30/02, 8.93%
due 09/30/04................................... 102,000
68,000 Grupo Iusacell S.A. de CV, (144A), 10.00% due
07/15/04....................................... 68,000
102,000 TFM S.A. de CV, (144A), 10.25% due 06/15/07...... 104,805
------------
515,545
------------
RUSSIA (1.6%)
109,000 AO Rostelecom Loan Participation SPIRES, 9.094%
due 02/15/00(r){*}............................. 102,732
100,000 Tatneft Finance PLC, (144A), 9.00% due
10/29/02....................................... 86,000
------------
188,732
------------
SOUTH KOREA (3.3%)
75,000 Korea Development Bank, 9.48% due 04/02/01....... 66,713
140,000 Korea Electric Power Corp., 6.375% due
12/01/03....................................... 104,419
300,000 Pohang Iron & Steel Co. Ltd., 7.125% due
07/15/04....................................... 234,000
------------
405,132
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT+ SECURITY DESCRIPTION VALUE
- ------------------- ------------------------------------------------- ------------
<C> <S> <C>
THAILAND (0.4%)
68,000 Bangkok Bank Public Co. Ltd., (144A), 7.25% due
09/15/05....................................... $ 48,394
------------
TURKEY (3.5%)
136,000 Pera Financial Services Co., (144A), 9.375% due
10/15/02....................................... 125,120
300,000 Sultan Ltd., 8.75% due 06/11/99{*}............... 300,000
------------
425,120
------------
TOTAL CORPORATE OBLIGATIONS (COST
$2,663,502)................................ 2,567,620
------------
GOVERNMENT OBLIGATIONS (1.0%)
ARGENTINA (1.0%)
ARS 68,000 City of Buenos Aires, (144A), 10.50% due
05/28/04....................................... 58,820
68,000 Province of Mendoza, (144A), 10.00% due
09/04/07....................................... 64,430
------------
123,250
------------
TOTAL GOVERNMENT OBLIGATIONS (COST
$137,682).................................. 123,250
------------
SOVEREIGN BONDS (79.5%)
ARGENTINA (19.9%)
1,536,000 Republic of Argentina Bearer FRB, Callable
03/31/98, Sinking Fund, 6.688%
due 03/31/05{*}................................ 1,374,720
318,000 Republic of Argentina Bonos del Tesoro, Series
BT02, 8.75% due 05/09/02....................... 301,464
102,000 Republic of Argentina Discount Bonds Series L-GL,
6.875% due 03/31/23{*}......................... 85,048
692,000 Republic of Argentina Global Bonds, 9.75% due
09/19/27....................................... 664,320
------------
2,425,552
------------
BRAZIL (23.2%)
125,000 Republic of Brazil Bearer DCB Series L, 6.75% due
04/15/12{*}.................................... 94,687
1,046,759 Republic of Brazil C Bonds, Callable 04/15/98,
Sinking Fund, 8.00% due 04/15/14............... 819,089
49,000 Republic of Brazil EI Bonds Series L, Callable
04/15/98, Sinking Fund, 6.688% due
04/15/06{*}.................................... 42,140
750,000 Republic of Brazil Global Bonds, 10.125% due
05/15/27....................................... 703,875
82,425 Republic of Brazil IDU Series A, 6.813% due
01/01/01{*}.................................... 78,510
564,516 Republic of Brazil MYDFA Trust Certificates
Series REGS, Sinking Fund, 6.688% due
09/15/07{*}.................................... 479,133
750,000 Republic of Brazil NMB-1994L Bearer, Callable
04/15/98, Sinking Fund, 6.75% due
04/15/09{*}.................................... 605,625
------------
2,823,059
------------
BULGARIA (3.7%)
750,000 Republic of Bulgaria FLIRB Series A Global
Bearer, Callable 01/28/98, Sinking Fund, 2.25%
due 07/28/12{*}................................ 455,625
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT+ SECURITY DESCRIPTION VALUE
- ------------------- ------------------------------------------------- ------------
<C> <S> <C>
ECUADOR (1.5%)
273,390 Republic of Ecuador Global Bearer PDI Bonds,
6.688% due 02/27/15{*}......................... $ 178,742
------------
MEXICO (12.2%)
50,000 United Mexican States Discount Bonds Series A
(including 76,900 value recovery rights
expiring 6/30/03), 6.693% due 12/31/19{*}...... 46,312
250,000 United Mexican States Discount Bonds Series D
(including 384,500 value recovery rights
expiring 6/30/03), 6.75% due 12/31/19{*}....... 231,563
319,000 United Mexican States Global Bonds, 9.875% due
01/15/07....................................... 332,558
404,000 United Mexican States Global Bonds, 11.375% due
09/15/16....................................... 462,580
344,000 United Mexican States Global Bonds, 11.50% due
05/15/26....................................... 407,227
------------
1,480,240
------------
PERU (5.3%)
250,000 Republic of Peru FLIRB, Sinking Fund, 3.25% due
03/07/17{*}.................................... 148,450
750,000 Republic of Peru PDI, Sinking Fund, 4.00% due
03/07/17{*}.................................... 492,150
------------
640,600
------------
RUSSIA (6.0%)
272,000 Russia IAN, Sinking Fund, 6.719% due
12/15/15{*}.................................... 191,080
863,000 Russia Principal Loans, Sinking Fund, 6.719% due
12/15/20{*}.................................... 532,903
------------
723,983
------------
TURKEY (0.3%)
34,000 Republic of Turkey, (144A), 10.00% due
09/19/07....................................... 34,510
------------
VENEZUELA (7.4%)
476,190 Republic of Venezuela DCB Series DL, Callable
03/19/98, Sinking Fund, 6.813% due
12/18/07{*}.................................... 426,761
226,190 Republic of Venezuela FLIRB Series B, Callable
03/31/98, Sinking Fund, 6.75% due
03/31/07{*}.................................... 203,006
308,000 Republic of Venezuela Global Bonds, 9.25% due
09/15/27....................................... 276,584
------------
906,351
------------
TOTAL SOVEREIGN BONDS (COST $9,724,704)...... 9,668,662
------------
</TABLE>
<TABLE>
<C> <S> <C>
SHORT-TERM INVESTMENTS (33.6%)
EURO DOLLAR TIME DEPOSITS (31.9%)
3,887,000 State Street Bank, Euro Dollar 4.50% due
01/02/98....................................... 3,887,000
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT+ SECURITY DESCRIPTION VALUE
- ------------------- ------------------------------------------------- ------------
<C> <S> <C>
TURKEY (1.6%)
TRL 22,508,000,000 Turkey Treasury Bills, 102.207%* due 08/05/98.... $ 64,192
TRL 47,610,000,000 Turkey Treasury Bills, 130.273%* due 08/12/98.... 133,698
------------
197,890
------------
U.S. TREASURY OBLIGATIONS (0.1%)
10,000 U.S. Treasury Bills, 5.404%* due 07/23/98........ 9,706
------------
TOTAL SHORT-TERM INVESTMENTS (COST
$4,149,385)................................ 4,094,596
------------
TOTAL INVESTMENTS (COST $16,981,994) (137.5%).... 16,738,753
LIABILITIES IN EXCESS OF OTHER ASSETS (-37.5%)... (4,567,211)
------------
NET ASSETS (100.0%).............................. $ 12,171,542
------------
------------
</TABLE>
- ------------------------------
Note: The cost of securities for Federal Income Tax purposes at December 31,
1997, was $17,871,277; the aggregate gross unrealized appreciation and
depreciation was $101,326 and $1,233,850, respectively, resulting in net
unrealized depreciation of $1,132,524.
{*} -- Rate shown reflects current rate on variable rate instrument or
instrument with step coupon rates.
* -- Yield to maturity.
(r) -- Restricted security.
+ -- Denominated in USD unless otherwise indicated.
144A -- Securities restricted for resale to qualified institutional buyers.
ARS -- Argentine Peso.
C -- Capitalization.
DCB -- Debt Conversion Bonds.
EI -- Eligible Interest.
FLIRB -- Front Loaded Interest Reduction Bonds.
GKO -- Russian Treasury Bills.
IAN -- Interest in Arrears Notes.
IDU -- Interest Due and Unpaid.
MYDFA -- Multi-Year Refinancing Agreement.
NMB -- New Money Bonds.
PDI -- Past Due Interest.
SPIRES -- Special purpose investment vehicle registered in Ireland.
TRL -- Turkish Lira.
USD -- United States Dollar.
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $16,981,994) $16,738,753
Cash 952
Foreign Currency at Value (Cost $129,464 ) 129,408
Receivable for Investments Sold 1,350,527
Interest Receivable 271,418
Unrealized Appreciation of Forward Foreign
Currency Contracts 22,870
Deferred Organization Expenses 13,547
Prepaid Expenses and Other Assets 384
-----------
Total Assets 18,527,859
-----------
LIABILITIES
Payable for Investments Purchased 6,240,164
Custody Fee Payable 49,250
Advisory Fee Payable 37,263
Organization Expenses Payable 14,200
Unrealized Depreciation of Forward Foreign
Currency Contracts 4,820
Administrative Services Fee Payable 1,597
Fund Services Fee Payable 145
Administration Fee Payable 20
Accrued Trustees' Fees and Expenses 7
Accrued Expenses 8,851
-----------
Total Liabilities 6,356,317
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $12,171,542
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 7, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $ 9,767,718
EXPENSES
Advisory Fee $ 652,074
Custodian Fees and Expenses 105,724
Professional Fees and Expenses 48,376
Administrative Services Fee 28,564
Printing Expenses 5,571
Fund Services Fee 3,074
Amortization of Organization Expenses 2,653
Administration Fee 2,152
Trustees' Fees and Expenses 1,209
Registration Fees 610
Insurance Expense 211
Miscellaneous 291
-----------
Total Expenses 850,509
-----------
NET INVESTMENT INCOME 8,917,209
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $134,200 net
realized gain from futures contracts and
$13,391 net realized gain from swap
contracts) (6,194,283)
Foreign Currency Transactions 937,710
-----------
Net Realized Loss (5,256,573)
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF
Investments (243,241)
Foreign Currency Contracts and Translations 17,994
-----------
Net Change in Unrealized Depreciation (225,247)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,435,389
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 7, 1997
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31,
1997
----------------
<S> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,917,209
Net Realized Loss on Investment and Foreign
Currency Transactions (5,256,573)
Net Change in Unrealized Depreciation of
Investments and Foreign Currency Contracts and
Translations (225,247)
----------------
Net Increase in Net Assets Resulting from
Operations 3,435,389
----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 178,496,163
Withdrawals (169,760,010)
----------------
Net Increase from Investors' Transactions 8,736,153
----------------
Total Increase in Net Assets 12,171,542
NET ASSETS
Beginning of Period --
----------------
End of Period $ 12,171,542
----------------
----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 7, 1997
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31,
1997
----------------
<S> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.91%(a)
Net Investment Income 9.57%(a)
Portfolio Turnover 182%
</TABLE>
- ------------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Emerging Markets Debt Portfolio (the "Portfolio") is one of eight subtrusts
(portfolios) comprising The Series Portfolio (the "Series Portfolio"). The
Series Portfolio is registered under the Investment Company Act of 1940, as
amended, as a no-load open-end management investment company which was organized
as a trust under the laws of the State of New York on June 24, 1994. The
Portfolio commenced operations on March 7, 1997 and received a contribution of
certain assets and liabilities, including securities, with a value of
$113,127,989 on that date from the JPM Emerging Markets Debt Fund, Ltd. in
exchange for a beneficial interest in the Portfolio. The Portfolio's investment
objective is high total return from a portfolio of fixed income securities of
emerging markets issuers. The Declaration of Trust permits the Trustees to issue
an unlimited number of beneficial interests in the Portfolio.
Investments in emerging markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in emerging market countries could adversely affect the
liquidity or value, or both, of such securities in which the Portfolio is
invested. The ability of the issuers of the debt securities held by the
Portfolio to meet their obligations may be affected by economic and political
developments in a specific industry or region.
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 on the
most recent sale price, or, in the absence of recorded sales, at the
closing bid price. 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 quoted bid price 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.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the domestic market and
may also take place on days on which the domestic market is closed. If
events materially affecting the value of foreign securities occur between
the time when the exchange on which they are traded closes and the time
when the Portfolio's net assets are calculated, such securities will be
valued at fair value in accordance with procedures established by and
under the general supervision of the Portfolio's Trustees.
b) The books and records of the Portfolio are maintained in U.S. dollars. The
market values of investment securities, other assets and liabilities and
foreign currency contracts are translated at the prevailing exchange rates
at the end of the period. Purchases, sales, income and expenses are
translated at the
26
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
exchange rates prevailing on the respective dates of such transactions.
Translation gains and losses resulting from changes in exchange rates
during the reporting period and gains and losses realized upon settlement
of foreign currency transactions are reported in the Statement of
Operations.
Although the net assets of the Portfolio are presented at the exchange
rates and market values prevailing at the end of the period, the Portfolio
does not isolate the portion of the results of operations arising as a
result of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of securities during the period other
than with respect to debt instruments for income tax reporting purposes.
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 may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates. A forward contract is an
agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. Risks associated with such contracts
include the movement in the value of the foreign currency relative to the
U.S. dollar and the ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily based on procedures established
by and under the general supervision of the Portfolio's Trustees, and the
change in the market value is recorded by the Portfolio as unrealized
appreciation or depreciation of foreign currency translations. At December
31, 1997, the Portfolio had open forward foreign currency contracts as
follows:
SUMMARY OF OPEN FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
COST/PROCEEDS 12/31/97 (DEPRECIATION)
------------- ----------- --------------
<S> <C> <C> <C>
PURCHASE CONTRACTS
- ------------------
Malaysian Ringgit 692,738, expiring 1/8/98....... $ 198,067 $ 178,033 $ (20,034)
Mexican Peso 1,244,479, expiring 6/26/98......... 136,031 153,410 17,379
Mexican Peso 1,424,924, expiring 9/22/98......... 160,230 175,104 14,874
SALES CONTRACTS
- ---------------
German Mark 54,140, expiring 1/12/98............. 31,128 30,132 996
German Mark 126,521, expiring 8/12/98............ 71,416 71,232 184
Malaysian Ringgit 692,738, expiring 1/8/98....... 204,065 178,033 26,032
Mexican Peso 428,293, expiring 6/26/98........... 47,977 52,797 (4,820)
Mexican Peso 816,186, expiring 6/26/98........... 94,368 100,613 (6,245)
Mexican Peso 1,424,924, expiring 9/22/98......... 164,788 175,104 (10,316)
--------------
NET UNREALIZED APPRECIATION ON FORWARD FOREIGN
CURRENCY CONTRACTS.............................. $ 18,050
--------------
--------------
</TABLE>
27
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
e) 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 is fixed when the
Portfolio enters into the contract. Upon entering into such a contract,
the Portfolio is required to pledge to the broker an amount of cash and/or
liquid securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the Portfolio agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation
in the value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the Portfolio as unrealized gains
or losses. When the contract is closed, the Portfolio records a realized
gain or loss equal to the difference between the value of the contract at
the time it was opened and the value at the time when it was closed. The
Portfolio invests in futures contracts for the purpose of hedging its
existing portfolio securities, or securities the Portfolio intends to
purchase, against fluctuations in value caused by changes in prevailing
market interest rates or securities movements. The use of futures
transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged
assets, and the possible inability of counterparties to meet the terms of
their contracts. At December 31, 1997, the Portfolio had no open futures
contracts.
f) The Portfolio may engage in swap transactions, specifically interest rate,
currency, index and total return swaps as part of its investment
strategies. Swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, effective
return or total return throughout the lives of the agreements. The
interest to be paid or received on swaps is recognized as net interest
expense or net interest income on the Statement of Operations over the
life of the agreement, while related receivables and payables are recorded
on a gross basis on the Statement of Assets and Liabilities. Swap
agreements are stated at fair value. Unrealized gains are reported as an
asset and unrealized losses are reported as a liability on the Statement
of Assets and Liabilities. A realized gain or loss is recorded upon
termination of swap agreements. Notional principal amounts are used to
express the extent of involvement in these transactions, but the amounts
potentially subject to credit risk are much smaller. At December 31, 1997,
the Portfolio had no open swap transactions.
g) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed on its
share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed in such a way that an investor
in the Portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code. The Portfolio earns foreign income which may
be subject to foreign withholding taxes at various rates.
h) The Portfolio incurred organization expenses in the amount of $16,200.
Morgan Guaranty Trust Company of New York ("Morgan") has paid the
organization expenses of the Portfolio. The Portfolio has agreed to
reimburse Morgan for these costs which are being deferred and amortized on
a straight-line basis over a period not to exceed five years beginning
with the commencement of operations of the Portfolio.
28
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
i) Expenses incurred by the Series Portfolio with respect to any two or more
portfolios in the Series Portfolio are allocated in proportion to the net
assets of each portfolio in the Series Portfolio, except where allocations
of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that
portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan. Under the
terms of the agreement, the Portfolio pays Morgan at an annual rate of
0.70% of the Portfolio's average daily net assets. For the period from
March 7, 1997 (commencement of operations) to December 31, 1997, such fees
amounted to $652,074.
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 period from March 7, 1997 (commencement of
operations) to December 31, 1997, the fee for these services amounted to
$2,152.
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 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 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 period from March 7, 1997 (commencement of
operations) to December 31, 1997, the fee for these services amounted to
$28,564.
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 $3,074 for the period from March 7, 1997 (commencement of
operations) to December 31, 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
29
<PAGE>
THE EMERGING MARKETS DEBT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Trustees' Fees and Expenses shown in the financial statements represents
the Portfolio's allocated portion of the total fees and expenses. Prior to
April 1, 1997, the aggregate annual Trustee Fee was $65,000. 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 $600.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the period from
March 7, 1997 (commencement of operations) to December 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ----------------- ------------
<S> <C>
$205,233,912...... $181,137,367
</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 Financial Statements which are included
elsewhere in this report.
5. OTHER MATTERS
On December 12, 1997, the Portfolio received a withdrawal request in the amount
of $111,987,828 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 the securities in the amount of $4,757,425, which is included in the
Net Realized Loss on Investment and Foreign Currency Transactions in the
Statement of Operations.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Emerging Markets Debt 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 Emerging Markets Debt Portfolio (one of
the portfolios comprising part of The Series Portfolio, hereafter referred to as
the "Portfolio") at December 31, 1997, and the results of its operations, the
changes in its net assets and the supplementary data for the period March 7,
1997 (commencement of operations) to December 31, 1997, 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 audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
31
<PAGE>
J.P. MORGAN FUNDS J.P. Morgan
Emerging Markets
FEDERAL MONEY MARKET FUND Debt 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 THE J.P. MORGAN ANNUAL REPORT
FAMILY OF FUNDS, CALL J.P. MORGAN FUNDS DECEMBER 31, 1997
SERVICES AT (800) 521-5411.
