<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
COMMON STOCK (100.8%)
AUSTRIA (0.3%)
Voest-Alpine Technologie AG (Electrical
Equipment)..................................... 300 $ 45,483
------------
BELGIUM (1.6%)
Algemene Maatschappij voor Nijverheidskredit NV
(Financial Services)........................... 1,000 50,472
Arbed SA (Metals & Mining)....................... 600 65,587
Delhaize-Le Lion SA (Retail)..................... 650 32,983
PetroFina SA (Oil-Production).................... 260 95,965
------------
245,007
------------
FINLAND (1.1%)
Rautaruukki OYJ (K Shares) (Metals & Mining)..... 6,700 54,137
UPM-Kymmene OYJ (Forest Products & Paper)........ 5,600 112,093
------------
166,230
------------
FRANCE (15.4%)
AXA-UAP (Insurance).............................. 1,715 132,762
Carrefour Supermarche SA (Retail)................ 286 149,279
Compagnie de Saint Gobain SA (Building
Materials)..................................... 703 99,913
Compagnie Financiere de Paribas (Financial
Services)...................................... 1,815 157,790
Compagnie Generale des Eaux (Utilities).......... 2,427 338,884
Dexia France (Financial Services)................ 955 110,647
Elf Aquitaine SA (Oil-Services).................. 1,000 116,359
Eridania Beghin-Say SA (Food, Beverages &
Tobacco)....................................... 400 62,568
France Telecom SA (Telecommunication
Services)+..................................... 4,000 145,150
L'Air Liquide SA (Chemicals)..................... 668 104,599
Lagardere S.C.A. (Multi - Industry).............. 1,950 64,504
PSA Peugeot Citroen (Automotive)................. 605 76,331
Sanofi SA (Pharmaceuticals)...................... 1,445 160,933
SEITA (Food, Beverages & Tobacco)................ 1,000 35,905
SGS Thomson Microelectronics NV (Electronics)+... 1,251 77,461
Societe Generale (Banking)....................... 452 61,610
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
FRANCE (CONTINUED)
Synthelabo (Pharmaceuticals)..................... 722 $ 90,252
Thomson CSF (Electronics)........................ 2,552 80,473
Total SA (Oil-Services).......................... 1,111 120,964
Union des Assurances Federales (Insurance)....... 367 48,194
Usinor SA (Metals & Mining)...................... 5,026 72,601
------------
2,307,179
------------
GERMANY (12.2%)
Bilfinger & Berger Bau AG (Construction &
Housing)....................................... 2,290 71,067
Continental AG (Automotive)...................... 7,160 158,090
Deutsche Bank AG (Banking)....................... 1,700 120,075
Deutsche Pfandbrief-und Hypothekenbank AG
(Banking)...................................... 99 5,869
Douglas Holding AG (Retail)...................... 936 28,267
Dresdner Bank AG (Banking)....................... 1,580 72,935
Hannover Rueckversicherungs AG (Insurance)....... 751 70,170
Henkel KGaA (Chemicals).......................... 1,139 63,980
Lufthansa AG (Airlines).......................... 13,480 258,648
Muenchener Rueckversicherungs-Gesellschaft AG
(Insurance).................................... 800 301,661
SAP AG (Computer Software)....................... 650 197,562
Schering AG (Pharmaceuticals).................... 900 86,844
SGL Carbon AG (Chemicals)........................ 400 51,612
Siemens AG (Electrical Equipment)................ 3,000 177,693
SKW Trostberg AG (Chemicals)..................... 1,000 31,757
VEBA AG (Utilities).............................. 2,000 136,259
------------
1,832,489
------------
IRELAND (1.8%)
Allied Irish Banks PLC (Banking)................. 9,695 93,966
CRH PLC (Building Materials)..................... 3,265 38,253
Elan Corp. PLC (Spon. ADR) (Pharmaceuticals)+.... 600 30,713
Greencore Group PLC (Food, Beverages &
Tobacco)....................................... 6,647 31,265
Irish Life PLC (Insurance)....................... 5,188 29,800
Jefferson Smurfit Group PLC (Forest Products &
Paper)......................................... 13,726 38,737
------------
262,734
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
ITALY (7.0%)
Banco Ambrosiano Veneto SPA (Banking)............ 29,000 $ 56,589
Edison SPA (Utilities)........................... 12,000 72,625
ENI SPA (Oil-Services)........................... 40,000 226,924
Istituto Bancario San Paolo di Torino
(Banking)...................................... 12,000 114,706
Istituto Mobiliare Italiano SPA (Financial
Services)...................................... 12,000 142,534
Istituto Nazionale Delle Assicurazioni
(Insurance).................................... 100,000 202,772
Mediaset SPA (Broadcasting & Publishing)......... 20,000 98,303
Mediolanum SPA (Financial Services).............. 2,587 48,726
Telecom Italia SPA - RNC (Telecommunication
Services)...................................... 20,000 88,235
------------
1,051,414
------------
NETHERLANDS (5.1%)
Aegon NV (Insurance)............................. 1,065 94,825
Ispat International NV (Metals & Mining)+........ 1,479 31,983
Koninklijke Ahold NV (Retail).................... 2,044 53,338
Moeara Enim Petroleum MIJ NV (Oil-Services)...... 34 60,043
Moeara Enim Petroleum MIJ NV (New shares)
(Oil-Services)................................. 5 114,195
Philips Electronics NV (Electronics)............. 1,818 109,050
Royal Dutch Petroleum Co. (Oil-Services)......... 3,398 186,559
Unilever NV (Food, Beverages & Tobacco).......... 1,800 110,989
------------
760,982
------------
NORWAY (1.4%)
Kvaerner ASA (Series B) (Capital Goods).......... 2,200 102,358
Norsk Hydro ASA (Oil-Services)................... 1,000 48,764
Nycomed Amersham PLC (Biotechnology)+............ 1,813 65,908
------------
217,030
------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
SPAIN (3.6%)
Acerinox SA (Metals & Mining).................... 268 $ 39,756
Banco Bilbao Vizcaya SA (Banking)................ 5,051 163,379
Banco Popular Espanol SA (Banking)............... 760 53,105
Cortefiel SA (Retail)............................ 1,318 26,461
Hidroelectrica del Cantabrico SA (Electric)...... 720 31,556
Iberdrola SA (Electric).......................... 9,995 131,483
Repsol SA (Gas Exploration)...................... 1,463 62,392
Vallehermoso SA (Real Estate).................... 1,032 31,620
------------
539,752
------------
SWEDEN (4.0%)
Astra AB (B Shares) (Pharmaceuticals)............ 4,875 82,025
Autoliv, Inc. (SDR) (Automotive Supplies)........ 5,710 186,031
Incentive AB (B Shares) (Pharmaceuticals)........ 1,200 108,440
Skandia Forsakrings AB (Insurance)............... 2,608 123,097
SKF AB (B Shares) (Capital Goods)................ 1,900 40,470
Svenska Handelsbanken (Banking).................. 1,500 51,895
------------
591,958
------------
SWITZERLAND (10.6%)
ABB AG (Machinery)............................... 66 83,034
BELL AG BASEL (Food, Beverages & Tobacco)........ 141 47,852
Holderbank Financiere Glarus AG (Building
Materials)..................................... 80 65,380
Liechtenstein Global Trust AG (Banking).......... 150 93,072
Nestle SA (Food, Beverages & Tobacco)............ 160 240,129
Novartis AG (Pharmaceuticals).................... 100 162,490
Roche Holding AG (Pharmaceuticals)............... 34 338,123
Schweizerische Rueckversicherungs-Gesellschaft
(Insurance).................................... 34 63,685
Union Bank of Switzerland (Banking).............. 339 490,876
------------
1,584,641
------------
UNITED KINGDOM (36.7%)
Allied Colloids Group PLC (Chemicals)............ 25,414 69,415
Associated British Foods PLC (Food, Beverages &
Tobacco)....................................... 3,100 27,034
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Bass PLC (Food, Beverages & Tobacco)............. 5,500 $ 85,704
BAT Industries PLC (Food, Beverages & Tobacco)... 9,700 88,612
Billiton PLC (Metals & Mining)+.................. 30,400 78,031
British Airways PLC (Airlines)................... 12,100 111,492
British Petroleum Co. PLC (Oil-Services)......... 16,866 223,506
British Sky Broadcasting Group PLC (Broadcasting
& Publishing).................................. 8,100 60,774
British Telecommunications PLC
(Telecommunications)........................... 26,800 211,545
Burmah Castrol PLC (Oil-Production).............. 2,900 50,675
Cadbury Schweppes PLC (Food, Beverages &
Tobacco)....................................... 11,300 114,250
Compass Group PLC (Food, Beverages & Tobacco).... 7,300 89,966
Diageo PLC (Food, Beverages & Tobacco)........... 18,600 170,467
Glaxo Wellcome PLC (Pharmaceuticals)............. 18,100 432,276
Glynwed International PLC (Metals & Mining)...... 21,421 91,287
Great Universal Stores PLC (Retail).............. 8,700 109,796
Hanson PLC (Building Materials).................. 11,300 50,503
HSBC Holdings PLC (75p) (Banking)................ 7,800 202,779
Hyder PLC (Water)................................ 5,116 81,485
Kingfisher PLC (Retail).......................... 7,700 107,691
Lloyds TSB Group PLC (Banking)................... 35,960 468,651
Lucas Varity PLC (Automotive Supplies)........... 39,300 139,028
MEPC PLC (Real Estate)........................... 9,100 76,064
MFI Furniture Group PLC (Household Products)..... 33,892 67,198
National Power PLC (Electric).................... 1,796 17,731
Nycomed Amersham PLC (Biotechnology)............. 1,200 44,663
Pilkington PLC (Building Materials).............. 26,600 55,804
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Prudential Corp. PLC (Insurance)................. 9,600 $ 117,109
Racal Electronic PLC
(Telecommunications-Equipment)................. 23,900 104,998
Rank Group PLC (Entertainment, Leisure &
Media)......................................... 8,600 47,970
Reed International PLC (Broadcasting &
Publishing).................................... 10,000 95,433
RMC Group PLC (Building Materials)............... 3,300 46,805
Royal & Sun Alliance Insurance Group PLC
(Insurance).................................... 13,000 131,122
Royal Bank of Scotland Group PLC (Banking)....... 14,900 190,294
RTZ Corp. PLC (Metals & Mining).................. 3,865 47,728
Sainsbury (J.) PLC (Retail)...................... 18,807 158,748
Scottish Power PLC (Electric).................... 6,900 61,081
Shell Transport & Trading Co. (Oil-Services)..... 16,900 118,737
Smith & Nephew PLC (Medical Supplies)............ 16,200 47,980
Standard Chartered PLC (Banking)................. 6,200 66,310
Tomkins PLC (Multi - Industry)................... 19,400 91,932
Unilever PLC (Food, Beverages & Tobacco)......... 12,600 108,574
Vickers PLC (Capital Goods)...................... 24,100 93,584
Vodafone Group PLC (Telecommunications).......... 29,300 212,125
Wessex Water PLC (Water)......................... 12,200 102,979
Zeneca Group PLC (Pharmaceuticals)............... 9,500 337,097
------------
5,507,033
------------
TOTAL COMMON STOCK (COST $13,413,138).......... 15,111,932
------------
</TABLE>
<TABLE>
<S> <C> <C>
PREFERRED STOCK (2.4%)
AUSTRIA (1.1%)
Bank Austria AG (Banking)+....................... 3,724 165,435
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
GERMANY (1.3%)
AXA Colonia Konzern AG (Insurance)............... 900 $ 86,093
Jungheinrich AG (Machinery)...................... 350 52,557
ProSieben Media AG (Broadcasting &
Publishing)+................................... 817 38,168
Volkswagen AG (Automotive)....................... 30 12,881
------------
189,699
------------
TOTAL PREFERRED STOCK (COST $357,275).......... 355,134
------------
</TABLE>
<TABLE>
<S> <C> <C>
RIGHTS (0.3%)
ITALY (0.3%)
Banco Ambrosiano Veneto SPA, Expiring 01/02/98,
(right to shares & warrants) (Banking)+........ 28,500 35,625
Banco Ambrosiano Veneto SPA, Expiring 01/02/98,
(right to convertible bonds) (Banking)+........ 28,500 3,853
------------
39,478
------------
TOTAL RIGHTS (COST $0)......................... 39,478
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
WARRANTS (1.2%)
<S> <C> <C>
GERMANY (1.2%)
Veba International Finance, Expiring 04/06/98
(Utilities)+................................... 240 $ 110,787
Volkswagen AG, Expiring 10/27/98 (Automotive)+... 270 76,433
------------
187,220
------------
TOTAL WARRANTS
(COST $79,202)................................ 187,220
------------
TOTAL INVESTMENTS
(COST $13,849,615) (104.7%)............................... 15,693,764
LIABILITIES IN EXCESS OF OTHER ASSETS (-4.7%)...............
(701,543)
------------
NET ASSETS (100.0%)......................................... $ 14,992,221
------------
------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $13,853,149 for federal income tax
purposes at December 31, 1997, the aggregate gross unrealized appreciation and
depreciation was $2,434,151 and $593,536, respectively, resulting in net
unrealized appreciation of $1,840,615.
+ - Non-income producing securities.
Spon. ADR - Sponsored American Depository Receipt
SDR - Swedish Depository Receipt
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION
PERCENT OF
PORTFOLIO
----------
<S> <C>
Banking.......................................................... 16.3%
Pharmaceuticals.................................................. 11.7%
Insurance........................................................ 8.9%
Oil-Services..................................................... 8.4%
Food, Beverages & Tobacco........................................ 7.7%
Retail........................................................... 4.2%
Utilities........................................................ 4.2%
Financial Services............................................... 3.2%
Metals & Mining.................................................. 3.1%
Telecommunications............................................... 2.7%
Airlines......................................................... 2.4%
Building Materials............................................... 2.3%
Automotive Supplies.............................................. 2.1%
Automotive....................................................... 2.1%
Chemicals........................................................ 2.0%
Broadcasting & Publishing........................................ 1.9%
Electronics...................................................... 1.7%
Electric......................................................... 1.5%
Capital Goods.................................................... 1.5%
Telecommunication Services....................................... 1.5%
Electrical Equipment............................................. 1.4%
Computer Software................................................ 1.2%
Water............................................................ 1.2%
Multi-Industry................................................... 1.0%
Forest Products & Paper.......................................... 1.0%
Machinery........................................................ 0.9%
Real Estate...................................................... 0.7%
Telecommunications-Equipment..................................... 0.7%
Household Products............................................... 0.4%
Biotechnology.................................................... 0.4%
Construction & Housing........................................... 0.4%
Gas Exploration.................................................. 0.4%
Oil-Production................................................... 0.3%
Medical Supplies................................................. 0.3%
Entertainment, Leisure & Media................................... 0.3%
----------
100.0%
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $13,849,615 ) $15,693,764
Receivable for Investments Sold 1,598,673
Receivable for Expense Reimbursement 58,185
Dividends Receivable 32,269
Deferred Organization Expenses 9,720
Prepaid Trustees' Fees 19
Prepaid Expenses and Other Assets 10,036
-----------
Total Assets 17,402,666
-----------
LIABILITIES
Payable to Custodian 2,064,507
Custody Fee Payable 196,575
Advisory Fee Payable 128,551
Administrative Services Fee Payable 5,927
Fund Services Fee Payable 561
Accrued Expenses 14,324
-----------
Total Liabilities 2,410,445
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $14,992,221
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $3,463,688 ) $ 12,743,649
Interest Income (Net of Foreign Withholding Tax
of $43 ) 1,227,939
-------------
Investment Income 13,971,588
EXPENSES
Advisory Fee $ 3,879,040
Custodian Fees and Expenses 1,104,843
Administrative Services Fee 184,239
Professional Fees and Expenses 55,441
Fund Services Fee 21,837
Administration Fee 14,117
Trustees' Fees and Expenses 10,520
Printing Expenses 7,981
Amortization of Organization Expenses 6,676
Insurance Expense 204
Miscellaneous 2
-------------
Total Expenses 5,284,900
Less: Reimbursement of Expenses (58,185)
-------------
NET EXPENSES 5,226,715
-------------
NET INVESTMENT INCOME 8,744,873
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $4,802,639
net realized gain from futures contracts) 214,374,485
Foreign Currency Transactions (1,010,604)
-------------
Net Realized Gain 213,363,881
NET CHANGE IN UNREALIZED DEPRECIATION OF
Investments (110,198,297)
Foreign Currency Contracts and Translations (23,726)
-------------
Net Change in Unrealized Depreciation (110,222,023)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 111,886,731
-------------
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,744,873 $ 9,485,132
Net Realized Gain on Investment and Foreign
Currency Transactions 213,363,881 28,212,359
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Foreign
Currency Translations (110,222,023) 75,161,064
----------------- -----------------
Net Increase in Net Assets Resulting from
Operations 111,886,731 112,858,555
----------------- -----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 230,293,076 276,685,442
Withdrawals (1,017,256,734) (131,367,814)
----------------- -----------------
Net Increase (Decrease) from Investors'
Transactions (786,963,658) 145,317,628
----------------- -----------------
Total Increase (Decrease) in Net Assets (675,076,927) 258,176,183
NET ASSETS
Beginning of Fiscal Year 690,069,148 431,892,965
----------------- -----------------
End of Fiscal Year $ 14,992,221 $ 690,069,148
----------------- -----------------
----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 28, 1995
(COMMENCEMENT OF
FOR THE FISCAL FOR THE FISCAL OPERATIONS) TO
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.88% 0.84% 0.90%(a)
Net Investment Income 1.47% 1.65% 1.67%(a)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 0.01% -- --
Portfolio Turnover 65% 57% 36%(b)
Average Broker Commissions $ 0.0237 $ 0.0230 --
</TABLE>
- ------------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The European Equity 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's investment objective is to provide a high total return from a
portfolio of equity securities of European companies. The Portfolio commenced
operations on March 28, 1995. The Declaration of the Trust permits the Trustees
to issue an unlimited number of beneficial interests in the Portfolio.
Investments in European markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in European 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 either
on the last sale price on a national securities exchange or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices on such exchanges. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the
time when net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures
established by the Portfolio's Trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. All
portfolio securities with a remaining maturity of less than 60 days are
valued 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 value 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 EUROPEAN EQUITY 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.
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 no open forward foreign currency contracts.
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.
27
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
f) The Portfolio's custodian takes possession of the collateral pledged for
investments in repurchase agreements on behalf of the Portfolio. It is the
policy of the Portfolio to value the underlying collateral daily on a
mark-to-market basis to determine that the value, including accrued
interest, is at least equal to the repurchase price plus accrued interest.
In the event of default of the obligation to repurchase, the Portfolio has
the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. Under certain circumstances, in the event
of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral or proceeds may be subject to legal
proceedings.
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 $33,000.
These costs 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.
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 Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the Portfolio pays Morgan at an annual rate of 0.65% of the Portfolio's
average daily net assets. For the fiscal year ended December 31, 1997 such
fees amounted to $3,879,040.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the Portfolio,
FDI provides administrative services necessary for the operations of the
Portfolio, furnishes office space and facilities required for conducting
the business of the Portfolio and pays the compensation of the officers
affiliated with FDI. The Portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the Portfolio is based on
the ratio of the Portfolio's net assets to the aggregate net assets of the
Portfolio and certain other investment companies subject to similar
agreements with FDI. For the fiscal year ended December 31, 1997, the fee
for these services amounted to $14,117.
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
28
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 fiscal year ended December
31, 1997, the fee for these services amounted to $184,239.
In addition, Morgan has agreed to reimburse the Portfolio to the extent
necessary to maintain the total operating expenses of the Portfolio at no
more than 1.00% of the average daily net assets of the Portfolio through
April 30, 1998. For the fiscal year ended December 31, 1997, Morgan has
agreed to reimburse the Portfolio $58,185 for the expenses that exceeded
this limit.
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 $21,837 for the fiscal year ended 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 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 $4,400.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended December 31, 1997 were as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
$362,455,602 $637,902,752
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 $472,588,477 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 gain on
transfer of the securities in the amount of $97,478,979, which is included in
Net Realized Gain on Investment Transactions in the Statement of Operations.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The European Equity 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 European Equity Portfolio (one of the
portfolios comprising part of The Series Portfolio, hereafter referred to as the
"Portfolio") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the two years in the
period then ended and for the period March 28, 1995 (commencement of operations)
to December 31, 1995, 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 December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
30
