<PAGE>
LETTER TO THE SHAREHOLDERS OF J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
July 1, 1999
Dear Shareholder,
The fiscal year ended May 31 proved to be another difficult period for small-cap
stocks, as investors continued to prefer larger-cap U.S. stocks to small ones.
During this time, the J.P. Morgan U.S. Small Company Opportunities Fund posted a
negative 0.49% return, falling short of the 3.93% return of the Russell 2000
Growth Index but beating the negative 4.21% return of the Lipper Small Company
Fund Average.
The fund's net asset value decreased to $12.17 per share at May 31, 1999, from
$12.57 per share at May 31, 1998. The fund made a distribution of approximately
$0.31 per share from short-term capital gains. On May 31, 1999, the net assets
of the fund were approximately $286 million, while the assets of The U.S. Small
Company Opportunities Portfolio, in which the fund invests, amounted to
approximately $285 million.
This report includes a discussion with Candice Eggerss, a member of the
portfolio management team for The U.S. Small Company Opportunities Portfolio. In
this interview, Candice talks about the events of the previous year that had the
greatest effect on the portfolio and discusses her 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) 766-7722.
Sincerely yours,
/s/ Ramon de Oliveira /s/ Keith M. Schappert
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C> <C> <C>
LETTER TO THE SHAREHOLDERS ........ 1 FUND FACTS AND HIGHLIGHTS ......... 6
FUND PERFORMANCE .................. 2 FINANCIAL STATEMENTS .............. 8
PORTFOLIO MANAGER Q&A ............. 3
- --------------------------------------------------------------------------------
</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 hypothecal investment of
$10,000. The chart at right shows that $10,000 invested on June 16, 1997, would
have grown to $12,167 on May 31, 1999.
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.
GROWTH OF $10,000 SINCE FUND INCEPTION*
JUNE 16, 1997 - MAY 31, 1999
<TABLE>
<S> <C>
J.P. Morgan U.S. Small Company Opportunities Fund $12,167
Lipper Small Company Growth Fund Average $11,239
Russell 2000 Growth Index $11,645
</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.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
--------------------- -----------------------------------
THREE SIX ONE SINCE
AS OF MAY 31, 1999 MONTHS MONTHS YEAR INCEPTION*
- ------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
J.P. Morgan U.S. Small Company Opportunities Fund 5.19% 10.59% -0.49% 10.78%
Russell 2000 Growth Index** 12.89% 16.87% 3.93% 8.27%
Lipper Small Company Fund Average 10.40% 9.41% -4.21% 5.92%
AS OF MARCH 31, 1999
- ------------------------------------------------------------------------- -----------------------------------
J.P. Morgan U.S. Small Company Opportunities Fund -1.32% 21.46% -9.88% 10.75%
Russell 2000 Growth Index** -1.68% 21.56% -11.04% 3.85%
Lipper Small Company Fund Average -5.96% 12.51% -15.48% 2.08%
</TABLE>
*THE FUND COMMENCED OPERATIONS ON JUNE 16, 1997, AND HAS PROVIDED A TOTAL RETURN
OF 12.12% FROM THAT DATE THROUGH MAY 31, 1999. FOR THE PURPOSES OF COMPARISON,
THE "SINCE INCEPTION" RETURNS ARE CALCULATED FROM JUNE 30, 1997, THE FIRST DATE
WHEN DATA FOR THE FUND, ITS BENCHMARK, AND ITS LIPPER CATEGORY AVERAGE WERE
AVAILABLE.
** THE RUSSELL 2000 GROWTH INDEX IS AN UNMANAGED INDEX OF SMALL, GROWTH-ORIENTED
U.S. STOCKS. IT DOES NOT INCLUDE FEES OR OPERATING EXPENSES AND IS NOT AVAILABLE
FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF FEES
AND ASSUME REINVESTMENT OF FUND DISTRIBUTIONS. LIPPER ANALYTICAL SERVICES, INC.
IS A LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
The following is an interview with CANDICE EGGERSS, vice president, and a member
of the portfolio management team for The U.S. Small Company Opportunities
Portfolio. Before joining Morgan in 1996, Candice was a partner at Weiss, Peck &
Greer. Prior to that, she was employed by Equitable Capital and Morgan Stanley
in such positions as analyst, portfolio manager, and research director. Candice
received her B.S. from Stanford University and her M.B.A. from Columbia
University. This interview took place on June 14, 1999, and reflects Candice's
views on that date.
HOW HAS THE U.S. EQUITY MARKET PERFORMED OVER THE PAST YEAR?
CE: The tough times persisted for small-cap stocks for most of the period, as
measured by the Russell 2000 Growth Index, while the Dow and S&P 500 continued
to surge ahead. Volatility, however, was a common trait among all the equity
indices.
For much of the second half of 1998, and particularly in the summer, there was a
flight to quality, as investors eschewed small-cap equities in favor of some of
the largest-cap stocks the U.S. market has to offer. Large U.S. stocks were seen
as a liquid and stable haven, shielding assets from the uncertainties shaking
the global economy. Small-cap issues were punished for their perceived lack of
quality and limited liquidity, regardless of their fundamentals.
In October of last year, the Federal Reserve lowered short-term interest rates
in an attempt to stabilize the global economy. As investors' nerves began to
steady, small caps began to bounce back, but a small number of larger-cap stocks
continued to dominate the market. The strong U.S. economy was a big reason for
the success of the equity market during this period, as it buoyed corporate
profits of domestically focused companies in industries like automaking,
homebuilding, and retailing. In the tech field, the emergence of e-commerce and
a rash of Internet-related IPOs generated some excitement.
Although there have been hints of a general equity market broadening since the
small-cap market hit its October 1998 lows, it really wasn't until mid-April
that market leadership began to broaden in earnest and include stocks along the
entire market-cap spectrum. Signs of a bottoming in the global economy have
helped companies in industries that would benefit from global growth, such as
those in the energy and cyclical industrial sectors.
The Federal Reserve was active over the past year. In the fall, the Fed eased
rates in an attempt to settle world markets. In mid-May, the Fed, concerned over
the continued strong pace of the domestic economy and the possibility of
inflation, announced that its position on interest rates shifted to a tightening
bias from a neutral one. As a result, the general equity market has again come
under some pressure.
HOW DID THE FUND PERFORM DURING THE PERIOD?
CE: The fund fell short of its benchmark for the period, returning negative
0.49% for the fiscal year ended May 31, compared with the Russell 2000 Growth
Index's return of 3.93%. However, we did outperform the
3
<PAGE>
Lipper Small Company Fund Average of negative 4.21%. Our goal is to outperform
the Russell 2000 Growth Index with a minimum amount of risk through the use of
sound fundamental research, valuation techniques, and portfolio construction
methodologies.
It was one of those strange years when your performance was as much affected by
what you didn't own as what you did. During the year, a small number of stocks
succeeded in becoming a significant percentage of the Russell 2000 Growth Index.
Since the composition of the index is adjusted only once a year, a strong rally
in a Russell 2000 Growth Index stock can raise its market cap well above the
index's normal maximum of around $1.5 billion. Over the past year, we saw this
happen with a number of Internet-related stocks that we felt were inappropriate
for a small-cap portfolio such as ours owing to their valuation and size; as a
result, these gains were lost to us.
WHICH STOCKS CONTRIBUTED TO THE PORTFOLIO'S PERFORMANCE?
CE: Like everyone else, we're excited about the investment possibilities in the
technology sector due to the growth of the Internet. We invest actively in
Internet-related companies that have proven business plans, strong management,
and the opportunity to capitalize on this burgeoning industry. Two of our better
performers in this realm were Exodus Communications and Concentric Network.
Exodus offers network-management services to clients with mission-critical
Internet operations. Earlier this year, following a successful convertible debt
offering and continued growth in Internet traffic, a number of Wall Street
analysts upgraded their ratings on the stock. Concentric is a leading provider
of services like high-speed Internet access, Web site hosting, and e-commerce
capabilities to small to medium-sized businesses. Concentric counts such
companies as American Greetings and CyberCash among its clients, and recently
announced a planned stock split.
Several communications companies were also positive contributors for the year.
We had a good run with MetroNet, a Canadian competitive local exchange carrier
(CLEC) that in March agreed to merge with AT&T Canada. Global Crossing was
another communications player that served us well. The company provides long
distance telecommunications facilities and services via its network of undersea
fiber-optic cable and land-based facilities. We were able to invest in the
company at its initial public offering last summer; we sold our position
recently when the company made a bid to purchase Frontier, placing Global
Crossing outside our market-cap range.
We also experienced strong gains from a number of investments we had in the
field of biotechnology. Millennium Pharmaceuticals, Human Genome Sciences, and
Affymetrix - all involved in genomic research and engineering - did well during
the period. We still hold these stocks and are positive about their prospects.
WHAT STOCKS HINDERED THE PORTFOLIO'S PERFORMANCE?
CE: CMGI and E Trade are two notable examples of high-flying stocks that we did
not hold in the portfolio, hurting us relative to the benchmark. CMGI is a
publicly traded venture capital firm that invests mainly in Internet start-up
companies. CMGI was able to take part in the success that many Internet stocks
experienced during the past year. E Trade is an online discount brokerage that
has seen its share price and market capitalization just explode over the past
six months or so.
4
<PAGE>
Mapics, which provides enterprise software for mid-sized manufacturing concerns,
was one of the bigger disappointments for the year among stocks we owned. Its
business stalled because of Year 2000 concerns, and the stock has drifted
downward over the past year. We still own the stock, as we believe growth will
resume in the second half of the year. Speaking of software, HNC Software was
another stock that didn't live up to our expectations. The company develops,
markets, and supports client-server software. We like the company's business and
long-term prospects, but management has disappointed investors with several
quarters of below-expectation earnings, and the stock has suffered. We lost
patience with the stock and sold our holding. Orbital Sciences, too, has had a
track record of disappointing quarters of late. The developer of space-related
products and services has strong long-term prospects, including the only
commercial satellite data service available today, but the stock has been
struggling. We cut back on our holdings of Orbital.
WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
CE: The success of the small-cap area is dependent upon the general equity
market remaining broad. Certainly, from a valuation standpoint, small-cap stocks
are attractive relative to large caps. But we're reluctant to call for a
reversal of the trend that has seen small caps underperform large caps every
year since 1993 - the longest and most intense period of underperformance seen
by the small-cap market in at least 20 years. Bad memories of last summer still
linger in the minds of investors, and the uncertainty about what actions the
Federal Reserve may take in the coming months may hold back the market.
From an asset allocation point of view, however, we think it's wise to have an
exposure to small-cap stocks. Since the underperformance of the small-cap market
has been so severe, we think that a snapback (when it happens) is likely to
happen very quickly. The liquidity that hurt the market as it was heading down
should help it on the way back up. Plus, there's something to be said for being
ahead of the curve in the small-cap market, because once things start moving up,
it may be hard to get into a stock because of its limited liquidity.
And, there are signs that a change may be in the offing. There has been a
significant amount of merger and acquisition activity in the small-cap market,
with larger companies swooping in and buying smaller ones; this has been
prevalent in the utility, REIT, service, and tech industries. To us, this means
that the larger companies are finding attractive values in the small-cap sector,
which is a good sign that investors may begin to do the same. We've also started
to see shifts in money flows away from the largest-cap stocks and into names
across the market-cap spectrum.
Earlier in 1999, we increased our holdings in the more cyclical sectors of the
market, like chemicals and energy, that we think stand to benefit from an
improving global economy. Though we've already seen some bounce in these areas,
we think there's more room for growth. And we remain positive on
Internet-related stocks, as we expect Internet technology to have a profound
impact on the business practices of practically every company in every industry.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan U.S. Small Company Opportunities Fund seeks to provide long term
capital appreciation from a portfolio of equity securities of small companies.
The fund seeks to outperform the Russell 2000 Growth 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 INVESTMENT OPERATIONS
6/16/97
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 5/31/99
$286,082,179
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 5/31/99
$284,800,833
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
8/20/99, 12/20/99
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/20/99
EXPENSE RATIO
The fund's current annualized expense ratio of 1.07% covers shareholders'
expenses for custody, tax reporting, investment advisory and shareholder
services. The fund is no-load and does not charge any sales, redemption, or
exchange fees. There are no additional charges for buying, selling, or
safekeeping fund shares, or for wiring redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF MAY 31, 1999
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
- - TECHNOLOGY 33.5%
- - CONSUMER GOODS
& SERVICES 18.9%
- - HEALTHCARE 12.9%
- - FINANCE 8.4%
- - TELECOMMUNICATIONS 6.3%
- - INDUSTRIAL PRODUCTS
& SERVICES 5.7%
- - OTHER 5.7%
- - BASIC INDUSTRIES 5.3%
- - ENERGY 3.1%
- - TRANSPORTATION 0.2%
<TABLE>
<CAPTION>
LARGEST EQUITY HOLDINGS % OF TOTAL INVESTMENTS
- ------------------------------------------------------------------------------
<S> <C>
NEXTLINK COMMUNICATIONS, INC., CLASS A 1.7%
(TELECOMMUNICATIONS)
MILLENNIUM PHARMACEUTICALS, INC. (HEALTHCARE) 1.6%
HUMAN GENOME SCIENCES, INC. (HEALTHCARE) 1.6%
CINAR CORP., CLASS B 1.6%
(CONSUMER GOODS & SERVICES)
ATMI, INC.( TECHNOLOGY) 1.5%
UNIVISION COMMUNICATIONS INC., CLASS A 1.5%
(CONSUMER GOODS & SERVICES)
L-3 COMMUNICATIONS HOLDINGS, INC. 1.4%
(TECHNOLOGY)
DEVON ENERGY CORP. (ENERGY) 1.3%
NATIONAL COMMERCE BANCORPORATION 1.2%
(FINANCE)
MICROSTRATEGY INC. (TECHNOLOGY) 1.2%
</TABLE>
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC.
SERVES AS INVESTMENT ADVISOR. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE
NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. 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.
7
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The U.S. Small Company Portfolio
("Portfolio"), at value $284,800,833
Receivable for Shares of Beneficial Interest Sold 1,480,077
Deferred Organization Expenses 5,154
Prepaid Trustees' Fees 317
Prepaid Expenses and Other Assets 732
------------
Total Assets 286,287,113
------------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 74,831
Shareholder Servicing Fee Payable 60,362
Organization Expense Payable 7,223
Administrative Services Fee Payable 6,233
Fund Services Fee Payable 248
Administration Fee Payable 14
Accrued Expenses 56,023
------------
Total Liabilities 204,934
------------
NET ASSETS
Applicable to 23,503,718 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $286,082,179
------------
------------
Net Asset Value, Offering and Redemption Price
Per Share $12.17
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $282,615,073
Accumulated Net Realized Loss on Investment (19,639,245)
Net Unrealized Appreciation of Investment 23,106,351
------------
Net Assets $286,082,179
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $ 752,810
Allocated Dividend Income 605,486
Allocated Portfolio Expenses (1,495,549)
-----------
Net Investment Income Allocated from
Portfolio (137,253)
FUND EXPENSES
Shareholder Servicing Fee $524,790
Registration Fees 59,193
Administrative Services Fee 56,775
Transfer Agent Fees 42,374
Printing Expenses 17,055
Professional Fees 14,434
Fund Services Fee 5,042
Administration Fee 3,581
Amortization of Organization Expenses 2,799
Trustees' Fees and Expenses 2,214
Insurance Expense 827
Miscellaneous 18,241
--------
Total Fund Expenses 747,325
-----------
NET INVESTMENT LOSS (884,578)
NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM
PORTFOLIO (19,297,966)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO 15,587,441
-----------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(4,595,103)
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 16, 1997
FOR THE FISCAL (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
MAY 31, 1999 MAY 31, 1998
-------------- -------------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Loss $ (884,578) $ (369,945)
Net Realized (Loss)/Gain on Investment Allocated
from Portfolio (19,297,966) 4,883,980
Net Change in Unrealized Appreciation of
Investment Allocated from Portfolio 15,587,441 7,518,910
-------------- -------------------
Net (Decrease)/Increase in Net Assets
Resulting from Operations (4,595,103) 12,032,945
-------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Realized Gain (4,869,937) --
-------------- -------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 208,981,870 207,393,425
Reinvestment of Dividends and Distributions 3,462,981 --
Cost of Shares of Beneficial Interest Redeemed (105,829,742) (30,494,260)
-------------- -------------------
Net Increase from Transactions in Shares of
Beneficial Interest 106,615,109 176,899,165
-------------- -------------------
Total Increase in Net Assets 97,150,069 188,932,110
NET ASSETS
Beginning of Period 188,932,110 --
-------------- -------------------
End of Period $ 286,082,179 $ 188,932,110
-------------- -------------------
-------------- -------------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 16, 1997
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS)
YEAR ENDED THROUGH
MAY 31, 1999 MAY 31, 1998
----------------- -----------------
<S> <C> <C>
NET ASSET VALUE PER UNIT, BEGINNING OF PERIOD $ 12.57 $ 10.00
----------------- -----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.01) (0.02)
Net Realized and Unrealized (Loss)/Gain on
Investment (0.08) 2.59
----------------- -----------------
Total from Investment Operations (0.09) 2.57
----------------- -----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Realized Gain (0.31) --
----------------- -----------------
Total Distributions to Shareholders (0.31) --
----------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 12.17 $ 12.57
----------------- -----------------
----------------- -----------------
RATIOS AND SUPPLEMENTAL DATA
Total Return (0.49)% 25.70%(b)
Net Assets, End of Period (in thousands) $286,082 $188,932
Ratios to Average Net Assets
Net Expenses 1.07% 1.19%(a)
Net Investment Loss (0.42)% (0.37)%(a)
Expenses without Reimbursement 1.07% 1.25%
</TABLE>
- ------------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan U.S. Small Company Opportunities Fund (the "fund") is a separate
series of 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 June 16, 1997.
The fund invests all of its investable assets in The U.S. Small Company
Opportunities 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
(99% at May 31, 1999). 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.
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) The fund incurred organization expenses in the amount of $14,000. Morgan
Guaranty Trust Company of New York ("Morgan"), a wholly owned subsidiary
of J.P. Morgan Co. Inc. ("J.P. Morgan"), has paid the organization
expenses of the fund. The fund has agreed to reimburse Morgan for these
costs which are being deferred and amortized on a straight-line basis over
a period not to exceed five-years beginning with the commencement of
operations of the fund.
e) 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.
f) 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.
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 Investments Companies."' The effect of applying
this
12
<PAGE>
J.P MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
statement was to increase Undistributed Net Income by $884,578 and
increase Accumulated Net Realized Loss on Investment by $11,940 and to
decrease paid-in capital by $896,518. Net investment income, net realized
gains and net assets were not affected by this change. The primary reason
for this adjustment is due to the reclassification of net investment loss.
h) For United States federal income tax purposes, the fund had a capital loss
carryforward at May 31, 1999, of $14,885,080 which will expire in the year
2007. To the extent that this capital loss is used to offset future
capital gains, it is probable that gains so offset will not be distributed
to shareholders.
i) For United States federal income tax purposes, the fund incurred
approximately $1,722,190 of realized capital losses in the period from
November 1, 1998, to May 31, 1999. These losses were deferred for tax
purposes until June 1, 1999.
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, 1999, the fee for these services amounted to
$3,581.
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 J.P. Morgan
Institutional Funds invest (the "master portfolios") and J.P. Morgan
Series Trust in accordance with the following annual schedule: 0.09% on
the first $7 billion of their aggregate average daily net assets and 0.04%
of their aggregate average daily net assets in excess of $7 billion less
the complex-wide fees payable to FDI. The portion of this charge payable
by the fund is determined by the proportionate share that its net assets
bear to the net assets of the trust, the master portfolios, other
investors in the master portfolios for which Morgan provides similar
services, and J.P. Morgan Series Trust. For the fiscal year ended May 31,
1999, the fee for these services amounted to $56,775.
In addition J.P. Morgan has agreed to reimburse the fund to the extent
necessary to maintain the total operating expenses of the fund, including
the expenses allocated to the fund from the portfolio, at no more than
1.20% of the average daily net assets of the fund. The reimbursement
arrangement was terminated at October 1, 1998. For the fiscal year ended
May 31, 1999, there was no reimbursement for the fund.
13
<PAGE>
J.P MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
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 the fiscal year ended May 31, 1999, the fee for these
services amounted to $524,790.
Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to
separate services and operating agreements (the "Schwab Agreements")
whereby Schwab makes fund shares available to customers of investment
advisors and other financial intermediaries who are Schwab's clients. The
fund is not responsible for payments to Schwab under the Schwab
Agreements; however, in the event the services agreement 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. For the
fiscal year ended May 31, 1999, the fund's allocated portion of Group's
costs in performing its services amounted to $5,042.
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 $1,000.
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
JUNE 16, 1997
FOR THE FISCAL (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
MAY 31, 1999 MAY 31, 1998
-------------- -------------------
<S> <C> <C>
Shares of beneficial interest sold............... 17,770,492 17,556,034
Reinvestment of dividends and distributions...... 313,960 --
Shares of beneficial interest redeemed........... (9,615,757) (2,521,012)
-------------- -------------------
Net Increase..................................... 8,468,695 15,035,022
-------------- -------------------
-------------- -------------------
</TABLE>
14
<PAGE>
J.P MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
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 27, 1998, with unaffiliated lenders. The maximum borrowing
under the agreement is $150,000,000. The Agreement expired on May 26, 1999,
however, the fund as party to the Agreement extended the Agreement and continues
its participation therein for an additional 364 days until May 25, 2000. 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
0.085% (0.065% prior to May 26, 1999) on the unused portion of the committed
amount. This is allocable 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, 1999.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan U.S. Small Company Opportunities 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 Opportunities Fund (the "fund") at May 31, 1999,
the results of its operations for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period June 16, 1997 (commencement of operations) through May 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our responsibility
is to express an opinion on these financial statements based on our 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 14, 1999
16
<PAGE>
The U.S. Small Company Opportunities Portfolio
Annual Report May 31, 1999
(The following pages should be read in conjunction
with J.P Morgan U.S. Small Company Opportunities Fund
Annual Financial Statements)
17
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
SCHEDULE OF INVESTMENTS
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
COMMON STOCKS (95.2%)
BASIC INDUSTRIES (5.3%)
CHEMICALS (3.8%)
Albemarle Corp................................... 124,800 $ 2,800,200
Bush Boake Allen, Inc.+.......................... 44,800 1,290,800
General Chemical Group, Inc...................... 118,700 504,475
Geon Co.......................................... 76,000 2,289,500
Georgia Gulf Corp................................ 99,400 1,484,787
Wellman, Inc..................................... 184,600 2,515,175
-------------
10,884,937
-------------
FOREST PRODUCTS & PAPER (0.8%)
Universal Forest Products, Inc................... 130,500 2,357,156
-------------
METALS & MINING (0.7%)
Kennametal, Inc.................................. 20,100 571,594
Mueller Industries, Inc.+........................ 48,800 1,415,200
-------------
1,986,794
-------------
TOTAL BASIC INDUSTRIES......................... 15,228,887
-------------
CONSUMER GOODS & SERVICES (19.0%)
AUTOMOTIVE (0.1%)
Ducati Motor Holding (Spon. ADR)+................ 8,900 267,000
-------------
BROADCASTING & PUBLISHING (2.1%)
Entercom Communications Corp.+................... 42,800 1,396,350
Radio One, Inc.+................................. 5,500 221,719
Scholastic Corp.+................................ 5,700 276,984
Univision Communications, Inc., Class A+......... 70,300 4,169,669
-------------
6,064,722
-------------
BUSINESS & PUBLIC SERVICES (0.3%)
Realty Information Group, Inc.+.................. 22,100 799,053
-------------
EDUCATION (2.5%)
Advantage Learning Systems, Inc.+................ 17,300 382,762
Argosy Education Group, Inc., Class A+........... 19,500 169,406
Bright Horizons Family Solutions, Inc.+.......... 153,557 2,907,986
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
EDUCATION (CONTINUED)
Education Management Corp.+...................... 154,400 $ 2,764,725
Sylvan Learning Systems, Inc.+................... 37,500 1,021,875
-------------
7,246,754
-------------
ENTERTAINMENT, LEISURE & MEDIA (5.4%)
American Classic Voyages Co.+.................... 30,200 530,387
Anchor Gaming+................................... 19,000 852,031
Cinar Corp., Class B+............................ 190,600 4,538,662
Media Metrix, Inc.+.............................. 1,900 90,487
MGM Grand, Inc.+................................. 26,300 1,104,600
Nielsen Media Research, Inc...................... 113,700 3,041,475
Pixar, Inc.+..................................... 24,300 962,887
Premier Parks, Inc.+............................. 61,000 2,173,125
Steiner Leisure Ltd.+(i)......................... 71,250 2,043,984
-------------
15,337,638
-------------
FOOD, BEVERAGES & TOBACCO (1.3%)
American Italian Pasta Co.,
Class A+....................................... 28,700 789,250
Keebler Foods Co.+............................... 47,400 1,587,900
Robert Mondavi Corp., Class A+................... 42,800 1,445,837
-------------
3,822,987
-------------
HOUSEHOLD APPLIANCES & FURNISHINGS (0.3%)
Furniture Brands International, Inc.+............ 34,000 824,500
-------------
HOUSEHOLD PRODUCTS (0.1%)
Blyth Industries, Inc.+.......................... 12,200 341,600
-------------
MISCELLANEOUS (0.1%)
Carriage Services, Inc.+......................... 13,300 219,912
-------------
RESTAURANTS & HOTELS (1.5%)
Foodmaker, Inc.+................................. 44,300 1,196,100
Sun International Hotels Ltd.+(i)................ 30,800 1,360,975
Vail Resorts, Inc.+.............................. 80,700 1,664,437
-------------
4,221,512
-------------
RETAIL (5.3%)
Alloy Online, Inc.+.............................. 8,300 100,897
Ames Department Stores, Inc.+.................... 18,500 757,922
barnesandnoble.com, inc.+........................ 18,600 431,869
bebe stores, inc.+............................... 43,100 1,252,594
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
RETAIL (CONTINUED)
eToys, Inc.+..................................... 10,400 $ 629,525
General Nutrition Companies, Inc.+............... 15,300 253,406
Hibbett Sporting Goods, Inc.+.................... 49,500 1,228,219
Kenneth Cole Productions, Inc., Class A+......... 34,400 1,032,000
Nautica Enterprises, Inc.+....................... 92,800 1,502,200
Pacific Sunwear of California, Inc.+............. 38,800 1,457,425
Quiksilver, Inc.+................................ 20,750 591,375
School Specialty, Inc.+.......................... 105,900 1,578,572
Steven Madden Ltd.+.............................. 155,900 1,671,053
Talbots, Inc..................................... 61,900 1,965,325
The Buckle, Inc.+................................ 21,700 600,819
-------------
15,053,201
-------------
TOTAL CONSUMER GOODS & SERVICES................ 54,198,879
-------------
ENERGY (3.1%)
GAS EXPLORATION (1.3%)
Devon Energy Corp................................ 106,100 3,686,975
-------------
OIL-PRODUCTION (0.3%)
Valero Energy Corp............................... 44,300 888,769
-------------
OIL-SERVICES (1.5%)
Cooper Cameron Corp.+............................ 47,500 1,718,906
National-Oilwell, Inc.+.......................... 77,700 937,256
Smith International, Inc.+....................... 39,500 1,708,375
-------------
4,364,537
-------------
TOTAL ENERGY................................... 8,940,281
-------------
FINANCE (8.6%)
BANKING (4.5%)
Bank of Commerce................................. 44,500 860,797
Bank United Corp., Class A....................... 62,300 2,583,503
Banknorth Group, Inc............................. 29,800 796,219
Commercial Federal Corp.......................... 34,400 784,750
FNB Financial Services Corp...................... 25,600 408,000
Hamilton Bancorp, Inc.+.......................... 21,000 478,406
Independent Bank Corp............................ 27,800 476,075
National Commerce Bancorporation................. 149,200 3,492,212
Prime Bancshares, Inc.+.......................... 27,100 462,394
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
BANKING (CONTINUED)
Sterling Bancshares, Inc......................... 72,500 $ 910,781
Sun Bancorp, Inc.+............................... 32,100 637,987
Webster Financial Corp........................... 28,300 820,700
-------------
12,711,824
-------------
FINANCIAL SERVICES (2.6%)
Allied Capital Corp.............................. 82,700 1,553,209
Creditrust Corp.+................................ 26,300 618,050
Donaldson, Lufkin & Jenrette, Inc-DLJdirect+..... 5,600 231,000
Financial Federal Corp.+......................... 107,900 2,414,262
Gabelli Asset Management, Inc., Class A+......... 43,700 729,244
Heller Financial, Inc............................ 39,500 1,175,125
NextCard, Inc.+.................................. 4,600 137,281
Ocwen Financial Corp.+........................... 49,400 429,162
-------------
7,287,333
-------------
INSURANCE (1.0%)
Fremont General Corp............................. 60,500 1,281,844
RenaissanceRe Holdings Ltd.+(i).................. 40,100 1,493,725
-------------
2,775,569
-------------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
Arden Realty, Inc................................ 22,800 582,825
IndyMac Mortgage Holdings, Inc................... 36,800 545,100
The Macerich Co.................................. 10,200 269,662
-------------
1,397,587
-------------
TOTAL FINANCE.................................. 24,172,313
-------------
HEALTHCARE (13.1%)
BIOTECHNOLOGY (5.7%)
Affymetrix, Inc.+................................ 48,200 1,690,012
Applied Analytical Industries, Inc.+............. 38,200 510,925
Human Genome Sciences, Inc.+..................... 107,800 4,547,812
IDEC Pharmaceuticals Corp.+...................... 22,600 1,139,181
Millennium Pharmaceuticals, Inc.+................ 121,200 4,582,875
Novoste Corp.+................................... 49,000 1,251,031
SangStat Medical Corp.+.......................... 181,500 2,512,641
-------------
16,234,477
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
HEALTH SERVICES (3.5%)
Accredo Health, Inc.+............................ 5,000 $ 135,625
IDX Systems Corp.+............................... 54,900 1,312,453
Kendle International, Inc.+...................... 70,100 957,303
LCA-Vision, Inc.+................................ 59,200 710,400
Mediconsult.com, Inc.+........................... 32,700 491,522
MedQuist, Inc.+.................................. 73,400 2,683,687
OnHealth Network Co.+............................ 30,500 346,937
Professional Detailing, Inc.+.................... 10,100 268,281
Sunrise Technologies International, Inc.+........ 21,300 276,234
Superior Consultant Holdings Corp.+.............. 72,500 2,709,687
-------------
9,892,129
-------------
MEDICAL SUPPLIES (2.0%)
Closure Medical Corp.+........................... 45,100 1,399,509
IDEXX Laboratories, Inc.+........................ 125,600 3,194,950
Ventana Medical Systems, Inc.+................... 48,400 966,488
-------------
5,560,947
-------------
PHARMACEUTICALS (1.9%)
Algos Pharmaceutical Corp.+...................... 39,100 867,531
AXYS Pharmaceuticals, Inc.+...................... 103,900 373,391
Ligand Pharmaceuticals, Class B+................. 206,000 2,105,063
U.S. Bioscience, Inc.+........................... 247,200 1,993,050
-------------
5,339,035
-------------
TOTAL HEALTHCARE............................... 37,026,588
-------------
INDUSTRIAL PRODUCTS & SERVICES (5.7%)
CAPITAL GOODS (0.5%)
Harnischfeger Industries, Inc.................... 47,900 344,281
Milacron, Inc.................................... 34,900 743,806
Newport News Shipbuilding Inc.................... 16,200 445,500
-------------
1,533,587
-------------
COMMERCIAL SERVICES (1.7%)
@plan., Inc.+.................................... 3,700 48,909
Central Parking Corp............................. 3,100 100,750
Newgen Results Corp.+............................ 9,200 106,950
On Assignment, Inc.+............................. 96,000 2,484,000
Provant, Inc.+................................... 125,100 1,970,325
Romac International, Inc.+....................... 15,500 223,297
-------------
4,934,231
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
DIVERSIFIED MANUFACTURING (1.0%)
Gentek, Inc...................................... 126,600 $ 1,645,800
Olin Corp........................................ 94,700 1,254,775
-------------
2,900,575
-------------
MACHINERY (0.6%)
AGCO Corp........................................ 52,400 609,150
New Holland N.V.(i).............................. 75,800 1,132,263
-------------
1,741,413
-------------
MANUFACTURING (1.0%)
Herman Miller, Inc............................... 39,800 802,219
Hon Industries, Inc.............................. 9,800 238,875
MKS Instruments, Inc.+........................... 113,800 1,735,450
Steelcase, Inc., Class A......................... 9,300 170,306
-------------
2,946,850
-------------
METALS & MINING (0.2%)
RTI International Metals, Inc.+.................. 33,600 447,300
-------------
PACKAGING & CONTAINERS (0.7%)
Ivex Packaging Corp.+............................ 101,600 1,955,800
-------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 16,459,756
-------------
TECHNOLOGY (33.7%)
AEROSPACE (2.3%)
Alliant Techsystems, Inc.+....................... 19,800 1,683,000
L-3 Communications Holdings, Inc.+............... 79,400 3,910,450
Orbital Sciences Corp.+.......................... 45,600 1,031,700
-------------
6,625,150
-------------
COMPUTER PERIPHERALS (2.6%)
Creative Technology Ltd.+........................ 30,700 411,572
HMT Technology Corp.+............................ 155,000 627,266
In Focus Systems, Inc.+.......................... 148,100 1,559,678
Maxtor Corp.+.................................... 167,600 987,269
Radiant Systems, Inc.+........................... 168,700 2,114,022
SanDisk Corp.+................................... 53,500 1,671,875
-------------
7,371,682
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
COMPUTER SOFTWARE (8.5%)
Actuate Software Corp.+.......................... 15,400 $ 275,756
Acxiom Corp.+.................................... 20,700 560,841
Aspen Technologies, Inc.+........................ 134,500 1,408,047
BindView Development Corp.+...................... 44,400 885,225
CBT Group Public Ltd. Co., (Spon. ADR)(i)+....... 60,500 924,516
Concord Communications, Inc.+.................... 41,300 1,848,175
Concur Technologies, Inc.+....................... 25,600 822,400
Exchange Applications, Inc.+..................... 41,000 1,040,375
Informatica Corp.+............................... 10,700 257,134
Lycos, Inc.+..................................... 9,800 983,981
Macromedia, Inc.+................................ 51,500 1,974,703
MAPICS, Inc.+.................................... 156,200 1,474,138
MicroStrategy, Inc.+............................. 136,100 3,393,994
NEON Systems, Inc.+.............................. 22,700 813,653
New Era of Networks, Inc.+....................... 33,800 1,506,213
ONYX Software Corp.+............................. 26,400 468,600
Private Business, Inc.+.......................... 79,500 911,766
SalesLogix Corp.+................................ 27,900 322,594
TSI International Software Ltd.+................. 53,200 1,173,725
Unify Corp.+..................................... 78,900 1,097,203
Visio Corp.+..................................... 66,800 2,187,700
-------------
24,330,739
-------------
COMPUTER SYSTEMS (0.9%)
Avid Technology, Inc.+........................... 66,000 1,082,813
Brocade Communications Systems, Inc.+............ 1,975 127,881
National Computer Systems, Inc................... 45,700 1,425,269
-------------
2,635,963
-------------
INFORMATION PROCESSING (8.8%)
CAIS Internet, Inc.+............................. 8,000 104,500
Computer Horizons Corp.+......................... 13,900 254,544
Condor Technology Solutions, Inc.+............... 145,400 1,553,963
Covad Communications Group, Inc.+................ 8,250 419,461
Diamond Technology Partners, Inc., Class A+...... 80,100 1,907,381
Exodus Communications, Inc.+..................... 33,500 2,510,406
Getty Images, Inc.+.............................. 40,200 871,838
Mpath Interactive, Inc.+......................... 45,500 1,180,156
Multex.com, Inc.+................................ 40,000 1,212,500
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
INFORMATION PROCESSING (CONTINUED)
NorthPoint Communications Group, Inc.+........... 9,350 $ 396,498
pcOrder.com, Inc.+............................... 24,200 883,300
Pegasus Systems, Inc.+........................... 51,600 1,794,713
Prodigy Communications Corp.+.................... 57,600 1,485,000
Profit Recovery Group International, Inc.+....... 27,800 1,023,388
Rhythms NetConnections, Inc.+.................... 8,900 429,981
Safeguard Scientifics, Inc.+..................... 37,100 2,712,938
SoftNet Systems, Inc.+........................... 32,250 836,484
Sykes Enterprises, Inc.+......................... 45,900 1,431,506
TheStreet.com, Inc.+............................. 7,400 265,013
TMP Worldwide, Inc.+............................. 25,300 1,234,956
USinternetworking, Inc.+......................... 16,000 464,000
USWeb Corp.+..................................... 43,800 1,112,794
Verio, Inc.+..................................... 13,000 705,656
Xoom.com, Inc.+.................................. 7,300 335,572
-------------
25,126,548
-------------
SEMICONDUCTORS (8.8%)
Applied Mircro Circuits Corp.+................... 50,700 2,992,884
ATMI, Inc.+...................................... 195,300 4,284,394
Brooks Automation, Inc.+......................... 38,600 706,863
Cognex Corp.+.................................... 78,200 2,101,625
Cypress Semiconductor Corp.+..................... 157,100 1,747,738
Exar Corp.+...................................... 53,400 1,118,063
Galileo Technology Ltd.+......................... 19,000 594,938
GaSonics International Corp.+.................... 80,100 973,716
hi / fn, inc.+................................... 28,500 1,648,547
Integrated Device Technology, Inc.+.............. 134,000 1,059,438
Intevac, Inc.+................................... 174,700 786,150
Lam Research Corp.+.............................. 61,200 1,696,388
Maker Communications, Inc.+...................... 19,700 443,250
Microchip Technology, Inc.+...................... 36,600 1,604,681
MMC Networks, Inc.+.............................. 40,500 1,126,406
PLX Technology, Inc.+............................ 69,500 1,259,688
Veeco Instruments, Inc.+......................... 33,000 1,012,688
-------------
25,157,457
-------------
TELECOMMUNICATIONS-EQUIPMENT (1.8%)
ACT Networks, Inc.+.............................. 74,700 1,508,006
Computer Network Technology Corp.+............... 38,500 967,313
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
TELECOMMUNICATIONS-EQUIPMENT (CONTINUED)
Polycom, Inc.+................................... 74,500 $ 1,904,406
Tekelec+......................................... 59,600 601,588
-------------
4,981,313
-------------
TOTAL TECHNOLOGY............................... 96,228,852
-------------
TELECOMMUNICATIONS (6.4%)
TELECOMMUNICATION SERVICES (6.4%)
Allegiance Telecom, Inc.+........................ 82,300 3,042,528
American Mobile Satellite Corp.+................. 71,200 1,007,925
CapRock Communications Corp.+.................... 71,500 1,604,281
Concentric Network Corp.+........................ 76,000 2,458,125
Intermedia Communications, Inc.+................. 45,900 1,157,541
NEXTLINK Communications, Inc., Class A+.......... 64,300 4,916,941
Teligent, Inc., Class A+......................... 57,700 2,823,694
WinStar Communications, Inc.+.................... 23,800 1,177,356
-------------
TOTAL TELECOMMUNICATIONS....................... 18,188,391
-------------
TRANSPORTATION (0.3%)
AIRLINES (0.3%)
Alaska Air Group, Inc.+.......................... 16,900 701,350
-------------
TOTAL COMMON STOCKS (COST $247,950,162)........ 271,145,297
-------------
</TABLE>
<TABLE>
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (0.1%)
ENERGY (0.1%)
GAS EXPLORATION (0.1%)
Tesoro Petroleum Corp.
(cost $470,009)................................ 29,900 381,225
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.6%)
OTHER INVESTMENT COMPANIES (1.5%)
Seven Seas Money Market Fund, 4.615%, due
06/01/99....................................... $ 4,271,208 $ 4,271,208
-------------
U.S. TREASURY OBLIGATIONS (4.1%)
U.S. Treasury Bills, 4.370-4.445% due 07/29/99... 11,660,000 11,576,781
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$15,847,989).................................. 15,847,989
-------------
TOTAL INVESTMENTS (COST $264,268,160) (100.9%).................
287,374,511
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.9%)..................
(2,573,678)
-------------
NET ASSETS (100.0%)............................................ $ 284,800,833
-------------
-------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $267,300,135 for federal income tax
purposes at May 31, 1999, the aggregate gross unrealized appreciation and
depreciation was $38,294,552 and $18,220,176, respectively, resulting in net
unrealized appreciation of $20,074,376.
(i) - Foreign security.
+ - Non-income producing security.
Spon. ADR - Sponsored American Depositary Receipt.
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $264,268,160 ) $287,374,511
Receivable for Investments Sold 3,016,511
Dividends Receivable 75,010
Interest Receivable 25,056
Deferred Organization Expenses 3,699
Prepaid Trustees' Fees 436
Prepaid Expenses and Other Assets 725
------------
Total Assets 290,495,948
------------
LIABILITIES
Payable for Investments Purchased 5,490,717
Advisory Fee Payable 144,926
Custody Fee Payable 24,557
Administrative Services Fee Payable 6,235
Fund Services Fee Payable 248
Accrued Expenses 28,432
------------
Total Liabilities 5,695,115
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $284,800,833
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income $ 605,486
Interest Income 752,810
-----------
Investment Income 1,358,296
EXPENSES
Advisory Fee $ 1,260,259
Custodian Fees and Expenses 115,246
Administrative Services Fee 56,809
Professional Fees and Expenses 42,634
Printing Expenses 6,741
Fund Services Fee 5,046
Administration Fee 3,103
Trustees' Fees and Expenses 2,081
Amortization of Organization Expenses 1,799
Insurance Expense 833
Miscellaneous 998
-----------
Total Expenses 1,495,549
-----------
NET INVESTMENT LOSS (137,253)
NET REALIZED LOSS ON INVESTMENTS (19,297,966)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENTS 15,587,441
-----------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(3,847,778)
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 16, 1997
FOR THE FISCAL (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
MAY 31, 1999 MAY 31, 1998
-------------- -------------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Loss $ (137,253) $ (36,198)
Net Realized (Loss)/Gain on Investments (19,297,966) 4,883,980
Net Change in Unrealized Appreciation of
Investments 15,587,441 7,518,910
-------------- -------------------
Net (Decrease)/Increase in Net Assets
Resulting from Operations (3,847,778) 12,366,692
-------------- -------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 208,622,616 206,272,601
Withdrawals (108,552,920) (30,060,378)
-------------- -------------------
Net Increase from Investors' Transactions 100,069,696 176,212,223
-------------- -------------------
Total Increase in Net Assets 96,221,918 188,578,915
NET ASSETS
Beginning of Period 188,578,915 --
-------------- -------------------
End of Period $ 284,800,833 $ 188,578,915
-------------- -------------------
-------------- -------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 16, 1997
FOR THE (COMMENCEMENT OF
FISCAL YEAR ENDED OPERATIONS) THROUGH
MAY 31, 1999 MAY 31, 1998
----------------- -------------------
<S> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.71% 0.84%(a)
Net Investment Loss (0.07)% (0.04)%(a)
Expenses without Reimbursement 0.71% 0.84%(a)(b)
Portfolio Turnover 116% 73%
</TABLE>
- ------------------------
(a) Annualized.
(b) Reimbursement was less than 0.01%
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The U.S. Small Company Opportunities Portfolio (the "portfolio") is one of seven
subtrusts (portfolios) comprising The Series Portfolio (the "series portfolio").
The portfolio is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company which was
organized as a trust under the laws of the State of New York on June 24, 1994.
The portfolio commenced operations on June 16, 1997. The portfolio's investment
objective is long term capital appreciation from a portfolio of equity
securities of small companies. 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 portfolio values securities that are listed on an exchange using
prices supplied daily by an independent pricing service that are based on
the last traded price on a national securities exchange or in the absence
of recorded trades, at the readily available mean of the bid and asked
prices on such exchange, if such exchange or market constitutes the
broadest and most representative market for the security. Securities
listed on a foreign exchange are valued at the last traded price or in the
absence of recorded trades, at the readily available mean of the bid and
asked prices on such exchange available before the time when net assets
are valued. Independent pricing service procedures may also include the
use of prices based on yields or prices of securities of comparable
quality, coupon, maturity and type, indications as to values from dealers,
operating data, and general market conditions. Unlisted securities are
valued at the average of the quoted bid and asked prices in the
over-the-counter market provided by a principal market maker or dealer. If
prices are not supplied by the portfolio's independent pricing service or
principal market maker or dealer, such securities are priced using fair
values in accordance with procedures adopted by the portfolio's Trustees.
All short-term securities with a remaining maturity of sixty days or less
are valued using the amortized cost method.
b) Securities transactions are recorded on a trade date basis. 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.
c) The portfolio incurred organization expenses in the amount of $9,000 which
were deferred and are being amortized on a straight-line basis over a
period not to exceed five years beginning with the commencement of
operations of the portfolio.
d) 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.
26
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
e) 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) Prior to October 1, 1998, the portfolio had an Investment Advisory
Agreement with Morgan Guaranty Trust Company of New York ("Morgan"). Under
the terms of the agreement, the portfolio paid Morgan at an annual rate of
0.60% of the portfolio's average daily net assets. Effective October 1,
1998, the portfolio's Investment Advisor is J.P. Morgan Investment
Management Inc. ("JPMIM"), an affiliate of Morgan and a wholly owned
subsidiary of J.P. Morgan and Co. Inc., and the terms of the agreement
will remain the same. For the fiscal year ended May 31, 1999, such fees
amounted to $1,260,259.
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 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, 1999, the
fee for these services amounted to $3,103.
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 the other portfolios for which JPMIM acts as investment
advisor (the "master portfolios") and J.P. Morgan Series Trust in
accordance with the following annual schedule: 0.09% on the first $7
billion of their aggregate average daily net assets and 0.04% of their
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The portion of this charge payable by
the portfolio is determined by the proportionate share that its net assets
bear to the net assets of the 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,
1999, the fee for these services amounted to $56,809.
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. For the fiscal
year ended May 31, 1999, the portfolio's allocated portion of Group's
costs in performing its services amounted to $5,046 .
27
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
- --------------------------------------------------------------------------------
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the J.P. Morgan Funds, the J.P. Morgan Institutional Funds,
the master portfolios and J.P. Morgan Series Trust. The Trustees' Fees and
Expenses shown in the financial statements represents the portfolio's
allocated portion of the total fees and expenses. The portfolio's Chairman
and Chief Executive Officer also serves as Chairman of Group and receives
compensation and employee benefits from Group in his role as Group's
Chairman. The allocated portion of such compensation and benefits included
in the Fund Services Fee shown in the financial statements was $1,000.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended May 31, 1999 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ----------------- ------------
<S> <C>
$334,816,748...... $230,736,529
</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.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The U.S. Small Company Opportunities 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 Opportunities
Portfolio (the "portfolio") at May 31, 1999, the results of its operations for
the year then ended, the changes in its net assets and the supplementary data
for the year then ended and for the period June 16, 1997 (commencement of
operations) through May 31, 1998, 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, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 14, 1999
29
<PAGE>
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
TAX AWARE ENHANCED INCOME FUND: SELECT SHARES
SHORT TERM BOND FUND
BOND FUND
GLOBAL STRATEGIC INCOME FUND
EMERGING MARKETS DEBT FUND
TAX EXEMPT BOND FUND
NEW YORK TAX EXEMPT BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
INTERNATIONAL EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
GLOBAL 50 FUND: SELECT SHARES
FOR MORE INFORMATION ON THE J.P. MORGAN
FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800) 521-5411.
IM0466
J.P. MORGAN
U.S. SMALL COMPANY
OPPORTUNITIES
FUND
ANNUAL REPORT
MAY 31, 1999
