LARGE CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS--97.3
- --------------------------------------------------------------------------------
BASIC INDUSTRIES -- 6.5%
- --------------------------------------------------------------------------------
AirProducts &
Chemicals Inc. 35,100 $ 1,325,025
Cabot Corp. 12,800 359,200
FMC Corp.* 16,600 847,637
IMC Global Inc. 39,200 1,019,200
Inland Steel Industries
Inc 55,100 1,005,575
Lubrizol Corp. 61,000 1,700,375
Rohm & Haas Co. 49,800 1,680,750
Westvaco Corp. 22,000 541,750
------------
8,479,512
------------
CAPITAL GOODS -- 7.8%
- --------------------------------------------------------------------------------
Arrow Electronics Inc.* 39,800 868,137
Case Corp. 125,400 2,758,800
Cummins Engine Inc. 59,100 2,016,787
Harnischfeger Industries
Inc 64,600 609,662
Kennametal Inc. 35,600 738,700
Parker Hannifin Corp. 48,950 1,749,962
Tecumseh Products
Co 26,200 1,362,400
------------
10,104,448
------------
CONSUMER BASICS -- 13.5%
- --------------------------------------------------------------------------------
Columbia/HCA
Healthcare Corp. 58,200 1,222,200
Dole Food Inc. 15,100 454,887
Foundation Health
Systems* 85,290 1,002,158
IBP Inc. 40,800 1,104,150
HealthSouth Corp. 84,700 1,026,987
Mallinckrodt Inc. 21,900 624,150
Philip Morris Companies
Inc 74,300 3,798,587
RJR Nabisco Holdings
Corp 80,300 2,293,569
Tenet Healthcare Corp. 82,500 2,304,844
United Healthcare Corp. 46,300 2,016,944
Universal Foods Corp. 72,100 1,563,669
------------
17,412,145
------------
CONSUMER DURABLE GOODS -- 9.5%
Dana Corp. 29,700 1,241,831
Eaton Corp. 10,600 717,487
Ford Motor Co. 63,200 3,428,600
General Motors Corp. 67,800 4,275,637
Goodyear Tire and
Rubber 49,800 2,682,975
------------
12,346,530
------------
CONSUMER NON-DURABLES -- 8.6%
- --------------------------------------------------------------------------------
Consolidated Stores
Corp 300 4,931
Dillards Inc. 48,400 1,503,425
Federated Department
Stores Inc.* 14,200 545,813
Liz Claiborne Inc. 60,200 1,768,375
Sears Roebuck & Co. 39,300 1,766,044
Springs Industries Inc. 25,400 898,525
Toys "R" Us Inc.* 102,200 1,999,287
V F Corp. 51,400 2,149,162
Venator Group Inc. 56,800 479,250
------------
11,114,812
------------
CONSUMER SERVICES -- 2.1%
- --------------------------------------------------------------------------------
AMR Corp. * 21,000 1,407,000
Delta Airlines Inc. 11,900 1,256,194
------------
2,663,194
------------
ENERGY -- 2.4%
- --------------------------------------------------------------------------------
Nabors Industries Inc.* 73,000 1,350,500
Phillips Petroleum Co. 16,600 717,950
Ultra Mar Diamond
Shamrock 39,000 1,050,562
------------
3,119,012
------------
FINANCE -- 23.7%
- --------------------------------------------------------------------------------
Allstate Corp. 62,100 2,674,181
American General Corp. 16,800 1,150,800
Banc One Corp. 43,200 2,111,400
BankAmerica Corp. 37,400 2,148,162
BankBoston Corp. 20,200 743,613
Chase Manhattan Corp. 61,000 3,465,563
Cigna Corp. 36,700 2,676,806
Everest Reinsurance
Holdings 40,900 1,408,494
First Union Corp. 62,400 3,619,200
Old Republic
International Corp. 55,600 1,056,400
PNC Bank Corp. 49,000 2,450,000
Reliastar Financial Corp. 37,400 1,638,588
Republic NY Corp. 24,700 1,032,769
St. Paul Companies Inc. 31,300 1,036,813
Transatlantic Holdings Inc. 17,250 1,345,500
Washington Mutual Inc. 55,100 2,062,806
------------
30,621,095
------------
GENERAL BUSINESS -- 2.2%
- --------------------------------------------------------------------------------
First Data Corp. 56,200 1,489,300
Olsten Corp. 91,100 836,981
Standard Register 17,200 493,425
------------
2,819,706
------------
9
<PAGE>
LARGE CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS -- 5.8%
- --------------------------------------------------------------------------------
Aeroquip Vickers Inc. 56,100 $ 1,767,150
Beckman Coulter Inc. 36,500 1,715,500
Hartford Financial
Services Group 36,800 1,955,000
Lucasvarity PLC (ADR's) 23,700 829,500
W.R. Grace & Co. 67,900 1,179,763
------------
7,446,913
------------
SHELTER -- 1.7%
- --------------------------------------------------------------------------------
Owens Corning 60,700 2,204,169
------------
TECHNOLOGY -- 6.8%
- --------------------------------------------------------------------------------
Avnet Inc. 28,200 1,402,950
Electronics Data System
Corp 22,200 903,263
International Business
Machines 24,000 3,562,500
Raytheon Co. 85 4,760
TRW Inc. 32,600 1,856,163
Tektronix Inc. 61,700 1,102,888
------------
8,832,524
------------
TRANSPORTATION -- 0.3%
- --------------------------------------------------------------------------------
Burlington Northern
Santa Fe 12,100 373,588
------------
UTILITIES -- 6.4%
- --------------------------------------------------------------------------------
Bell Atlantic Corp. 43,600 2,316,250
Cinergy Corp. 17,200 593,400
Cooper Cameron Corp. 10,300 357,925
DTE Energy Co. 27,900 1,189,238
Duke Power Co. 14,453 934,928
Entergy Corp. 28,700 825,125
GPU Inc. 24,200 1,043,625
Southern Co. 36,100 1,017,569
------------
8,278,060
------------
TOTAL COMMON
STOCKS
(Identified Cost
$132,997,084) 125,815,708
------------
SHORT TERM OBLIGATIONS
AT AMORTIZED COST -- 1.9%
- --------------------------------------------------------------------------------
State Street Bank & Trust
Repurchase Agreement
4.25% due 11/02/98
proceeds at maturity $2,406,852
(collateralized by $2,080,000
U.S. Treasury Notes
6.875% due 5/15/06,
valued at $2,325,700) $ 2,406,000
------------
TOTAL INVESTMENTS 99.2% 128,221,708
(Identified Cost
$135,403,084)
OTHER ASSETS,
LESS LIABILITIES 0.8 1,038,519
----- ------------
NET ASSETS 100.0% $129,260,227
===== ============
*Non income producing
ADRs -- American Depositary Receipts
See notes to financial statements
10
<PAGE>
LARGE CAP VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (Identified Cost, $135,403,084) $128,221,708
Cash 238
Receivable for investments sold 1,048,690
Dividends and interest receivable 160,378
- --------------------------------------------------------------------------------
Total assets 129,431,014
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to affiliates--Management fees (Note 2) 60,751
Accrued expenses and other liabilities 110,036
- --------------------------------------------------------------------------------
Total liabilities 170,787
- --------------------------------------------------------------------------------
NET ASSETS $129,260,227
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interests $129,260,227
- --------------------------------------------------------------------------------
LARGE CAP VALUE PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME (Note 1B):
Dividend income (net of foreign taxes of $13,308) $2,418,722
Interest income 144,546
- --------------------------------------------------------------------------------
$ 2,563,268
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 778,153
Custody and fund accounting fees 158,007
Audit fees 32,330
Legal fees 25,050
Trustees fees 4,185
Other 13,688
- --------------------------------------------------------------------------------
Total expenses 1,011,413
- --------------------------------------------------------------------------------
Net investment income 1,551,855
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net unrealized depreciation of investments (7,181,376)
Less unrealized appreciation from contributed
assets (Note 1) 11,022,146
- --------------------------------------------------------------------------------
Unrealized depreciation of investments (18,203,522)
Net realized gain from investment transactions 8,655,223
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments (9,548,299)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,996,444)
- --------------------------------------------------------------------------------
See notes to financial statements
11
<PAGE>
LARGE CAP VALUE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 1,551,855
Net realized gain from investment transactions 8,655,223
Unrealized depreciation of investments (18,203,522)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (7,996,444)
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions (Note 1) 279,612,949
Value of withdrawals (142,356,278)
- --------------------------------------------------------------------------------
Net increase in net assets
from capital transactions 137,256,671
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS: 129,260,227
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
END OF PERIOD $129,260,227
- --------------------------------------------------------------------------------
LARGE CAP VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $129,260
Ratio of expenses to average net assets 0.78%
Ratio of net investment income to average net assets 1.20%
Portfolio turnover 61%
- --------------------------------------------------------------------------------
See notes to financial statements
12
<PAGE>
LARGE CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Large Cap Value Portfolio (the "Portfolio"),
a separate series of The Asset Allocation Portfolios (the "Trust"), is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York. The Declaration of Trust permits
the Trustees to issue beneficial interests in the Portfolio. The Investment
Manager of the Portfolio is Citibank, N.A. ("Citibank"). Signature Financial
Group (Grand Cayman), Ltd. ("SFG") acts as the Portfolio's Sub-Administrator.
On November 1, 1997 (Commencement of Operation) CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500 transferred
a portion of their investable assets in the amounts of $12,341,545, $34,373,886,
$39,082,974 and $16,297,323 including $1,229,530, $3,795,385, $4,553,306 and
$1,443,925, respectively, of unrealized appreciation to the Portfolio in
exchange for an interest in the Portfolio. The total investable assets along
with current year contributions are included in the "Proceeds from
contributions" on the Statement of Changes in Net Assets.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Equity securities listed on securities
exchanges or reported through the NASDAQ system are valued at last sale prices.
Unlisted securities or listed securities for which last sales prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations maturing in sixty days or less), are valued on the basis
of valuations furnished by pricing services approved by Board of Trustees which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, and other market data, without exclusive reliance on quoted prices or
exchange or over-the-counter prices. Short-term obligations, maturing in sixty
days or less, are valued at amortized cost, which constitutes fair value as
determined by the Trustees. Securities, if any, for which there are no such
valuations or quotations are valued at fair value as determined in good faith by
or under guidelines established by the Trustees.
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on long-term debt securities
when required for U.S. federal income tax purposes. Dividend income is recorded
on the ex-dividend date.
C. U.S. Federal Income Taxes The Portfolio is considered a partnership under
the U.S. Internal Revenue Code. Accordingly, no provision for federal income
taxes is necessary.
13
<PAGE>
LARGE CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
D. Repurchase Agreements It is the policy of the Portfolio to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System or to have segregated within the custodian bank's
vault, all securities held as collateral in support of repurchase agreements.
Additionally, procedures have been established by the Portfolio to monitor, on a
daily basis, the market value of the repurchase agreement's underlying
investments to ensure the existence of a proper level of collateral.
E. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG. Expenses incurred by the
Portfolio Trust with respect to any two or more portfolios or series are
allocated in proportion to the average net assets of each portfolio, except when
allocations of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that portfolio.
F. Other Investment transactions are accounted for on the date the
investments are purchased or sold. Realized gains and losses are determined on
the identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolio. SFG acts
as Sub-Administrator and performs certain duties and receives compensation from
Citibank as from time to time are agreed to by Citibank and SFG. Citibank has
delegated the daily management of the Portfolio to Miller Anderson & Sherred LLP
("the Subadviser"). Citibank is a wholly-owned subsidiary of Citigroup, Inc.
Citigroup, Inc. was formed as a result of the merger of Citicorp and Travelers
Group, Inc. which was completed on October 8, 1998.
The management fees paid to Citibank, amounted to $266,423 for the period
November 1, 1997 (Commencement of Operations) to October 31, 1998. Citibank
management fees are computed at the annual rate of 0.60% of the Portfolio's
average daily net assets less the aggregate amount (if any) payable by the
Portfolio Trust pursuant to the Sub-management Agreement with the Subadviser.
The Portfolio pays the Subadviser the following fees, which are accrued daily
and payable monthly and are at the annual rates equal to the percentages of the
aggregate assets of the Portfolio allocated to the Subadviser: 0.625% on the
first $25 million; 0.375% on the next $75 million; 0.250% on the next $400
million; and 0.20% on assets in excess of $500 million. The fees paid to the
Subadviser amounted to $511,730 for the period November 1, 1997 (Commencement of
Operations) to October 31, 1998.
The Trust pays no compensation directly to any Trustee or any other officer
who is affiliated with the Sub-Administrator, all of whom receive remuneration
for their services to the Trust from the Sub-Administrator or its affiliates.
14
<PAGE>
LARGE CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $112,251,878 and $77,295,065
respectively, for the period November 1, 1997 (Commencement of Operations) to
October 31, 1998.
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $137,352,503
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 7,672,608
Gross unrealized depreciation (16,803,403)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (9,130,795)
- --------------------------------------------------------------------------------
5. LINE OF CREDIT The Portfolio, along with various other portfolios in the
CitiFunds Family, entered into an ongoing agreement with a bank which allows the
Funds collectively to borrow up to $60 million for temporary or emergency
purposes. Interest on the borrowings, if any, is charged to the specific fund
executing the borrowing at the base rate of the bank. The line of credit
requires a quarterly payment of a commitment fee based on the average daily
unused portion of the line of credit. For the period November 1, 1997
(Commencement of Operations) to October 31, 1998, the commitment fee allocated
to the Portfolio was $434. Since the line of credit was established, there have
been no borrowings.
15
<PAGE>
LARGE CAP VALUE PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND INVESTORS OF THE ASSET ALLOCATION PORTFOLIOS (THE TRUST),
WITH RESPECT TO ITS SERIES, LARGE CAP VALUE PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Large Cap Value Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998, and the related statements of operations and of changes in net assets and
the financial highlights for the period November 1, 1997 (Commencement of
Operations) through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian, provides a reasonable
basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period indicated in accordance with U.S. generally accepted
accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
16
<PAGE>
SMALL CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.3%
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 4.4%
- --------------------------------------------------------------------------------
Corrections Corp. of
America* 23,300 $ 448,525
Ennis Business
Forms Inc. 227,900 2,279,000
Kevco Inc.* 68,300 606,162
Nash Finch Co. 95,000 1,436,875
Rush Enterprises Inc.* 104,300 1,186,412
Unisource
Worldwide Inc. 177,200 1,628,025
------------
7,584,999
------------
CONSUMER DURABLE GOODS -- 8.7%
- --------------------------------------------------------------------------------
Cannondale Corp.* 306,300 3,331,012
Coachmen Industries Inc. 120,000 2,775,000
D.R. Horton Inc. 103,200 1,638,300
EKCO Group Inc.* 600,000 2,175,000
Engle Homes Inc. 76,000 978,500
Flexsteel Industries Inc. 127,700 1,340,850
Rockshox Inc.* 128,400 369,150
Sola International Inc.* 85,500 1,640,531
TBC Corp.* 90,100 625,069
------------
14,873,412
------------
CONSUMER NON-DURABLES -- 9.7%
- --------------------------------------------------------------------------------
Dimon Inc. 385,200 4,983,525
Ridgeview Inc.* 50,200 144,325
Schweitzer-Mauduit
International Inc. 119,900 2,180,681
Standard Commercial
Corp.* 500,000 3,843,750
Tropical Sportswear
International Corp.* 122,600 2,452,000
Wolverine World
Wide Inc. 223,400 2,918,162
------------
16,522,443
------------
CONSUMER SERVICES -- 1.2%
- --------------------------------------------------------------------------------
Aztar Corp.* 407,700 2,114,944
------------
ELECTRONIC TECHNOLOGY -- 12.1%
- --------------------------------------------------------------------------------
Aehr Test Systems* 293,800 1,395,550
Alliant Techsystems Inc.* 42,000 2,940,000
Astro-Med Inc. 50,000 312,500
Dunn Computer Corp.* 115,000 330,625
ESCO Electronics Corp.* 187,600 2,345,000
FLIR Systems, Inc.* 65,000 1,096,875
Hurco Co., Inc.* 48,200 292,213
Komag Inc.* 340,000 1,912,500
Ladish Inc.* 271,400 2,323,862
Radisys Corp.* 42,800 823,900
Read-Rite Corp.* 140,000 1,505,000
Spacehab Inc.* 233,000 1,980,500
Spectralink Corp.* 105,000 249,375
United Industrial Corp. 300,000 3,112,500
------------
20,620,400
------------
ENERGY MINERALS -- 1.4%
- --------------------------------------------------------------------------------
Nuevo Energy Co.* 108,600 2,300,963
------------
FINANCE -- 9.9%
- --------------------------------------------------------------------------------
Acceptance
Insurance Co.* 110,000 2,158,750
Centris Group Inc. 184,200 1,738,388
Executive Risk Inc. 23,800 1,130,500
MMI Companies Inc. 185,000 2,971,562
Matrix Capital Corp.* 141,200 1,676,750
PBOC Holdings Inc.* 85,000 818,125
PMI Group, Inc. 15,000 756,562
Penn-America
Group Inc. 176,500 1,665,719
Presidential Life Corp. 62,700 1,136,437
Professionals Group* 31,000 914,500
Seibels Bruce
Group Inc.* 374,700 1,405,125
Symons International
Group Inc.* 95,100 594,375
------------
16,966,793
------------
HEALTH SERVICES -- 0.8%
- --------------------------------------------------------------------------------
Cohr Inc.* 422,000 1,266,000
------------
HEALTH TECHNOLOGY -- 3.1%
- --------------------------------------------------------------------------------
DepoTech Corp.* 241,200 354,263
Matrix
Pharmaceuticals, Inc.* 375,500 938,750
Orthologic Corp.* 362,000 1,131,250
West Co., Inc. 96,600 2,867,813
------------
5,292,076
------------
INDUSTRIAL SERVICES -- 5.3%
- --------------------------------------------------------------------------------
Atwood Oceanics Inc.* 69,300 1,949,062
Butler Manufacturing Co. 31,600 711,000
Cliffs Drilling Co.* 147,200 3,367,200
Cogeneration Corp.
of America* 14,100 126,019
ENSCO International Inc. 75,000 1,007,813
25
<PAGE>
SMALL CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
Perini Corp.* 145,000 $ 833,750
Rowan Companies Inc.* 73,000 1,063,062
------------
9,057,906
------------
NON-ENERGY MINERALS -- 3.5%
- --------------------------------------------------------------------------------
Ameron International
Corp. 24,200 881,787
Carpenter Technology
Corp. 19,900 697,744
LTV Corp. 476,000 2,915,500
Lone Star
Technologies Inc.* 138,900 1,475,813
------------
5,970,844
------------
PROCESS INDUSTRIES -- 3.3%
- --------------------------------------------------------------------------------
M. A. Hanna Company 86,000 1,263,125
Myers Industries Inc. 105,200 2,524,800
RPM, Inc. 90,400 1,519,850
Tuscarora Inc. 31,800 413,400
------------
5,721,175
------------
PRODUCER MANUFACTURING -- 18.3%
- --------------------------------------------------------------------------------
Atchison Casting Corp.* 194,400 1,858,950
Baldor Electric Co. 34,200 718,200
Commercial Intertech
Corp. 156,800 2,793,000
Commonwealth
Industries Inc. 135,100 1,021,694
Easco, Inc. 138,400 1,228,300
Flowserve Corp. 146,000 2,628,000
Global Industrial
Technologies Inc.* 239,700 2,082,394
Haskel International Inc. 155,300 1,708,300
Holophane Corp.* 24,700 526,419
JLG Industries Inc. 403,200 6,678,000
Keystone Consolidated
Industries Inc.* 250,800 1,755,600
Morgan Products Ltd.* 425,600 1,064,000
Patrick Industries Inc. 143,100 2,182,275
Superior Industries
International Inc. 106,600 2,791,588
Watts Industries Inc. 122,000 2,241,750
------------
31,278,470
------------
RETAIL TRADE -- 6.3%
- --------------------------------------------------------------------------------
Brookstone Inc.* 152,500 1,744,219
Duckwall-Alco
Stores Inc.* 133,500 1,501,875
Footstar Inc.* 31,200 815,100
Haverty Furniture
Companies Inc. 58,600 1,106,075
Little Switzerland Inc.* 300,000 918,750
Schultz Sav-O Stores Inc. 150,950 2,415,200
Syms Corp.* 230,100 2,315,381
------------
10,816,600
------------
TECHNOLOGY SERVICES -- 2.9%
- --------------------------------------------------------------------------------
Interlink Computer
Sciences Inc.* 176,600 662,250
Manchester
Equipment Inc.* 182,100 580,444
Reynolds & Reynolds Co. 74,800 1,346,400
Ultrak Inc.* 300,000 2,362,500
------------
4,951,594
------------
TRANSPORTATION -- 6.4%
- --------------------------------------------------------------------------------
Conrad Industrials Inc.* 57,600 403,200
Eagle USA Airfreight Inc.* 90,300 1,156,969
Fritz Companies Inc.* 469,500 4,166,813
KENAN TRANSPORT CO 70,200 2,106,000
Motor Cargo
Industries Inc.* 268,000 2,211,000
Tidewater Inc. 31,000 877,687
------------
10,921,669
------------
TOTAL COMMON STOCKS
(Identified Cost
$210,976,026) 166,260,288
------------
SHORT-TERM OBLIGATIONS
AT AMORTIZED COST -- 2.8%
- --------------------------------------------------------------------------------
State Street Bank
Repurchase Agreement
4.25% due 11/02/98
proceeds at maturity
$4,731,675 (collateralized by
$3,510,000 U.S. Treasury Bonds
8.125% due 8/15/21
valued at $4,829,756) 4,730,000
------------
TOTAL INVESTMENTS
(Identified Cost
$215,706,026) 100.1% 170,990,288
OTHER ASSETS,
LESS LIABILITIES (0.1) (124,761)
----- ------------
NET ASSETS 100.0% $170,865,527
===== ============
* Non income producing securities.
See notes to financial statements
26
<PAGE>
SMALL CAP VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (Identified Cost, $215,706,026) $170,990,288
Cash 732
Receivable for securities sold 919,294
Dividend and interest receivable 73,576
- --------------------------------------------------------------------------------
Total assets 171,983,890
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 875,325
Payable to affiliates-- Management fees (Note 2) 26,917
Accrued expenses and other liabilities 216,121
- --------------------------------------------------------------------------------
Total liabilities 1,118,363
- --------------------------------------------------------------------------------
NET ASSETS $170,865,527
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interests $170,865,527
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income $1,867,831
Interest income 331,573
- --------------------------------------------------------------------------------
$2,199,404
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,488,277
Custody and fund accounting fees 195,800
Audit fees 30,113
Legal fees 25,050
Trustees fees 4,494
Other 22,219
- --------------------------------------------------------------------------------
Total expenses 1,765,953
- --------------------------------------------------------------------------------
Net investment income 433,451
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Unrealized depreciation of investments (44,715,738)
Less unrealized appreciation from contributed
assets (Note 1) 30,313,261
- --------------------------------------------------------------------------------
Unrealized depreciation of investments (75,028,999)
Net realized gain from investment transactions 12,366,831
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments (62,662,168)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($62,228,717)
- --------------------------------------------------------------------------------
See notes to financial statements
27
<PAGE>
SMALL CAP VALUE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM:
Operations:
Net investment income $ 433,451
Net realized gain on investment transactions 12,366,831
Unrealized depreciation of investments (75,028,999)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting
from operations (62,228,717)
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions (Note 1) 434,934,898
Value of withdrawals (201,840,654)
- --------------------------------------------------------------------------------
Net increase in net assets
from capital transactions 233,094,244
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 170,865,527
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of Period --
- --------------------------------------------------------------------------------
End of period $170,865,527
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000's omitted) $170,866
Ratio of expenses to average net assets 0.89%
Ratio of net investment income to average net assets 0.22%
Portfolio turnover 47%
- --------------------------------------------------------------------------------
See notes to financial statements
28
<PAGE>
SMALL CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Small Cap Value Portfolio (the "Portfolio"),
a separate series of The Asset Allocation Portfolios (the "Portfolio Trust"), is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York. The Declaration of Trust permits
the Trustees to issue beneficial interests in the Portfolio. The Investment
Manager of the Portfolio is Citibank N.A., ("Citibank"). Signature Financial
Group (Grand Cayman), Ltd. ("SFG") acts as the Portfolio's Sub-Administrator.
On November 1, 1997, CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect
Folio 400 and CitiSelect Folio 500 each transferred a portion of their
investable assets in the amounts of $16,913,632, $42,092,855, $81,236,129 and
$40,503,947 including $2,712,350, $7,246,592, $14,228,135 and $6,126,184,
respectively, of unrealized appreciation, to the Portfolio in exchange for an
interest in the Portfolio. The total investable assets along with current year
contributions are included in the "Proceeds from contributions" in the Statement
of Changes in Net Assets.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Equity securities listed on securities
exchanges or reported through the NASDAQ system are valued at last sale prices.
Unlisted securities or listed securities for which last sales prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations maturing in sixty days or less), are valued on the basis
of valuations furnished by pricing services approved by the Board of Trustees
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, and other market data, without exclusive reliance on quoted prices or
exchange or over-the-counter prices. Short-term obligations, maturing in sixty
days or less, are valued at amortized cost, which constitutes fair value as
determined by the Trustees. Securities, if any, for which there are no such
valuations or quotations are valued at fair value as determined in good faith by
or under guidelines established by the Trustees.
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on long-term debt securities
when required for U.S. federal income tax purposes. Dividend income is recorded
on the ex-dividend date.
C. U.S. Federal Income Taxes The Portfolio is considered a partnership under
the U.S. Internal Revenue Code. Accordingly, no provision for federal income
taxes is necessary.
29
<PAGE>
SMALL CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
D. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG. Expenses incurred by the
Portfolio Trust with respect to any two or more portfolios or series are
allocated in proportion to the average net assets of each portfolio, except when
allocations of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that portfolio.
E. Repurchase Agreements It is the policy of the Portfolio to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System or to have segregated within the custodian bank's
vault, all securities held as collateral in support of repurchase agreements.
Additionally, procedures have been established by the Portfolio to monitor, on a
daily basis, the market value of the repurchase agreement's underlying
investments to ensure the existence of a proper level of collateral.
F. Other Investment transactions are accounted for on the date the
investments are purchased or sold. Realized gains and losses are determined on
the identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolio. SFG acts
as Sub-Administrator and performs certain duties and receives compensation
fromCitibank as from time to time are agreed to byCitibank and SFG. Citibank has
delegated the daily management of the Portfolio toFranklin Advisory Services,
Inc. ("the Subadviser"). Citibank is a wholly owned subsidiary of Citigroup,
Inc. Citigroup, Inc. was formed as a result of the merger of Citicorp and
Travelers Group, Inc. which was completed on October 8, 1998.
The management fees paid to Citibank, amounted to $396,874 for the period
November 1, 1997 (Commencement of Operations) to October 31, 1998. Management
fees are computed at the annual rate of 0.75% of the Portfolio's average daily
net assets less the aggregate amount, if any, payable by the Portfolio pursuant
to the Sub-Management Agreement with the Subadviser. The Portfolio pays the
Subadviser the following fees, which are accrued daily and payable monthly and
are at the annual rates equal to the percentages of the aggregate assets of the
Portfolio allocated to the Subadviser: 0.55% on first $250 million and 0.50% on
remaining assets.
The management fees paid to the Subadviser amounted to $1,091,403 for the
period November 1, 1997 (Commencement of Operations) to October 31, 1998.
30
<PAGE>
SMALL CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $142,550,784 and $90,210,260,
respectively, for the period November 1, 1997 (Commencement of Operations) to
October 31, 1998.
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $215,708,690
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 11,255,721
Gross unrealized depreciation (55,974,123)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(44,718,402)
- --------------------------------------------------------------------------------
5. LINE OF CREDIT The Portfolio, along with various other Portfolios in the
CitiFunds Family, entered into an ongoing agreement with a bank which allows the
Funds collectively to borrow up to $60 million for temporary or emergency
purposes. Interest on the borrowings, if any, is charged to the specific fund
executing the borrowing at the base rate of the bank. The line of credit
requires a quarterly payment of a commitment fee based on the average daily
unused portion of the line of credit. For the period November 1, 1997
(Commencement of Operations) to October 31, 1998, the commitment fee allocated
to the Portfolio was $674. Since the line of credit was established, there have
been no borrowings.
31
<PAGE>
SMALL CAP VALUE PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE ASSET ALLOCATION PORTFOLIOS (THE
TRUST), WITH RESPECT TO ITS SERIES, SMALL CAP VALUE PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Small Cap Value Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998, and the related statements of operations and of changes in net assets and
the financial highlights for the period March 2, 1998 (Commencement of
Operations)through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period November 1, 1997 (Commencement of Operations) through
October 31, 1998, in accordance with U.S. generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
32
<PAGE>
FOREIGN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS October 31, 1998
PRINCIPAL
ISSUER CURRENCY AMOUNT VALUE
- --------------------------------------------------------------------------------
FIXED INCOME -- 95.2%
- --------------------------------------------------------------------------------
AUSTRALIA -- 13.3%
Australia Government
Bonds
9.50% due 8/15/03 AUD 3,670,000 $ 2,778,423
8.75% due 8/15/08 AUD 15,323,000 12,390,760
7.50% due 9/15/09 AUD 29,572,000 22,413,882
------------
37,583,065
------------
BELGIUM -- 0.2%
Kingdom of Belgium
9.00% due 3/28/03 BF 1,600,000 56,583
8.50% due 10/01/07 BF 12,800,000 489,388
------------
545,971
------------
CANADA -- 2.0%
Canadian Government
Bonds
6.625% due 10/03/07 CAD 1,900,000 1,028,783
8.00% due 6/01/23 CAD 5,202,000 4,514,244
------------
5,543,027
------------
COLOMBIA -- 1.0%
Republic of Colombia
3.00% due 12/22/00 COP 350,000,000 2,703,833
------------
DENMARK -- 2.6%
Kingdom of Denmark
6.00% due 11/15/02 DKK 22,000,000 3,721,626
8.00% due 5/15/03 DKK 12,950,000 2,367,724
7.00% due 11/15/07 DKK 7,200,000 1,333,452
------------
7,422,802
------------
FINLAND -- 4.8%
Republic of Finland
6.00% due 4/25/08 FIM 61,000,000 13,530,667
------------
GERMANY -- 4.2%
Bundesrepublik
6.50% due 7/04/27 DEM 13,912,000 9,980,695
Republic of Germany
5.625% due 1/04/28 DEM 2,920,000 1,876,098
------------
11,856,793
------------
GREAT BRITAIN -- 9.8%
U. K. Treasury
8.50% due 12/07/05 GBP 6,265,000 12,582,869
7.25% due 12/07/07 GBP 7,798,000 15,178,900
------------
27,761,769
------------
GREECE -- 5.2%
Hellenic Republic
12.80% due 6/17/03 GRD 64,800,000 230,665
Republic of Greece
13.10% due 10/23/03 GRD 294,000,000 1,053,317
8.80% due 6/19/07 GRD 3,621,100,000 13,387,443
------------
14,671,425
------------
ITALY -- 15.8%
Republic of Italy
6.00% due 1/01/00 ITL 15,000,000,000 9,386,722
4.75% due 5/01/03 ITL 32,100,000,000 20,244,212
6.00% due 11/01/07 ITL 10,800,000,000 7,311,762
7.25% due 11/01/26 ITL 9,595,000,000 7,365,013
SCCR Limited
4.838% due 5/15/00 ITL 200,000,000 121,600
------------
44,429,309
------------
NEW ZEALAND -- 7.0%
International Bank
Reconstruction &
Development
7.00% due 9/18/00 NED 13,150,000 7,102,853
7.25% due 4/09/01 NED 23,417,000 12,741,484
------------
19,844,337
------------
PHILIPPINES -- 0.1%
International Bank
Reconstruction
10.25% due 4/11/02 PHP 19,000,000 390,830
------------
SPAIN -- 11.0%
Government of Spain
6.00% due 1/31/29 ESP 4,073,700,000 31,050,957
------------
SWEDEN -- 5.2%
Kingdom of Sweden
10.25% DUE 5/05/00 SEK 94,600,000 13,194,591
13.00% DUE 6/15/01 SEK 7,000,000 1,091,241
6.50% DUE 5/05/08 SEK 2,700,000 395,139
------------
14,680,971
------------
UNITED STATES -- 13.0%
Associates Corp. of
North America
5.787% due 8/27/01 $2,700,000 2,679,399
Emergent Home Equity
Loan Trust
6.745% due 5/15/12 $1,800,000 1,816,092
43
<PAGE>
FOREIGN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) October 31, 1998
PRINCIPAL
ISSUER CURRENCY AMOUNT VALUE
- --------------------------------------------------------------------------------
Federal National
Mortgage Association
5.50% due 2/25/05 $ 464,017 $ 462,799
6.875% due 6/07/02 $4,150,000 7,282,037
7.25% due 6/20/02 $16,980,000 9,364,278
Government National
Mortgage Association
6.50% due 11/20/26 $ 696,486 702,469
7.00% due 9/20/25 $ 768,928 780,100
7.00% due 12/20/25 $ 192,564 197,209
7.00% due 9/20/26 $ 450,140 458,999
7.00% due 12/20/26 $ 914,407 922,984
Student Loan Marketing
Association
4.621% due 4/25/07 $11,935,867 11,924,528
United States Treasury
Inflationary Index
Notes
3.625% due 7/15/02 $ 102,022 101,958
------------
36,692,852
------------
TOTAL FIXED INCOME
(Identified Cost $259,647,669) $268,708,608
------------
SHORT-TERM OBLIGATIONS
AT AMORTIZED COST-- 43.6%
- --------------------------------------------------------------------------------
American Express Credit
5.17% due 11/13/98 $1,000,000 998,277
Dutch Government
6.50% due 1/15/99 NLG 25,000,000 13,465,068
E.I. du Pont de
Nemours & Co.
5.04% due 12/11/98 $1,200,000 1,193,280
French Discount
Treasury Bill
Zero Coupon
due 2/04/99 FRF 197,000,000 35,153,107
General Electric
Capital Corp.
5.09% due 12/18/98 $8,600,000 8,542,851
KFW International
Financing Inc.
5.03% due 12/08/98 $2,800,000 2,785,525
Kingdom of Norway
4.40% due 3/17/99 KRN 185,000,000 $24,910,066
German Treasury Bill
Zero Coupon
due 1/15/99 DEM 59,000,000 35,403,282
State Street Repurchase
Agreement
4.25% due 11/02/98
proceeds at maturity
$107,038
(collateralized by $80,000
U.S. Treasury Bond 8.75%
due 5/15/17, valued at
$115,371) $107,000 107,000
United States Treasury Bill
5.00% due 12/03/98 $490,000 487,822
------------
TOTAL SHORT-TERM
OBLIGATIONS 123,046,278
------------
TOTAL INVESTMENTS 138.8% 391,754,886
(Identified Cost
$382,693,947)
OTHER ASSETS,
LESS LIABILITIES (38.8) (109,489,408)
----- ------------
TOTAL NET ASSETS 100.0% $282,265,478
===== ============
See notes to financial statements
<PAGE>
- --------------------------------------------------------------------------------
FOREIGN CURRENCY LEGEND
- --------------------------------------------------------------------------------
Symbol ...........................Country
AUD ............................Australia
BF ...............................Belgium
CAD ...............................Canada
COP .............................Colombia
DKK ..............................Denmark
FIM ..............................Finland
FRF ...............................France
DEM ..............................Germany
GBP ........................Great Britain
GRD ...............................Greece
ITL ................................Italy
NLG ..........................Netherlands
NED ..........................New Zealand
KRN ...............................Norway
PHP .........................Phillippines
ESP ................................Spain
SEK ...............................Sweden
44
<PAGE>
FOREIGN BOND PORTFOLIO
FORWARD FOREIGN CURRENCY CONTRACTS WHICH WERE OPEN AT OCTOBER 31, 1998 ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
UNREALIZED
MARKET AGGREGATE DELIVERY DATE APPRECIATION
CURRENCY COUNTRY VALUE FACE VALUE OF CONTRACTS (DEPRECIATION)
-------- ------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Deutsche Mark (Buy) Germany $89,182,273 $89,836,498 November 1998 $(654,225)
Deutsche Mark (Sell) Germany 58,749,552 57,869,416 November 1998 (880,136)
Deutsche Mark (Sell) Germany 5,079,310 5,087,826 December 1998 8,516
Dollar (Buy) Australia 211,494 211,169 December 1998 325
Dollar (Buy) Canada 17,210,494 17,168,256 December 1998 42,238
Dollar (Sell) Canada 6,631,822 6,618,589 November 1998 (13,233)
Dollar (Buy) New Zealand 237,563 233,014 December 1998 4,549
Dollar (Sell) New Zealand 4,598,807 4,335,149 December 1998 (263,658)
Dollar (Sell) New Zealand 26,080,792 25,419,486 January 1999 (661,306)
Drachma (Buy) Greece 1,827,787 1,823,500 November 1998 4,287
Drachma (Sell) Greece 2,802,572 2,819,432 November 1998 16,860
Escudo (Buy) Portugal 1,675,626 1,695,352 December 1998 (19,726)
Franc (Buy) Belgium1 1,112,265 10,301,865 December 1998 810,400
Franc (Sell) Belgium 274,113 269,956 December 1998 (4,157)
Franc (Buy) France 35,996,423 33,553,596 December 1998 2,442,827
Franc (Sell) France 36,653,002 36,281,575 December 1998 (371,427)
Franc (Buy) Switzerland 5,634,262 5,621,495 November 1998 12,767
Franc (Sell) Switzerland 16,840,663 17,211,218 November 1998 370,555
Franc (Buy) Switzerland 2,233,921 2,024,194 December 1998 209,727
Franc (Sell) Switzerland 11,488,524 11,612,129 December 1998 123,605
Guilder (Buy) Netherlands 7,901,848 8,001,062 November 1998 (99,214)
Guilder (Buy) Netherlands 13,337,666 12,878,763 December 1998 458,903
Guilder (Sell) Netherlands 14,658,885 14,523,312 December 1998 (135,573)
Krone (Buy) Norway 14,124,778 13,740,053 November 1998 384,725
Krone (Sell) Norway 11,086,518 11,025,536 November 1998 (60,982)
Krone (Buy) Norway 1,153,268 1,131,401 December 1998 21,867
Krone (Sell) Norway 25,241,179 25,011,812 December 1998 (229,367)
Krone (Buy) Norway 11,240,698 11,116,947 January 1999 123,751
Krone (Sell) Denmark 739,116 746,147 December 1998 7,031
Krona (Buy) Sweden 10,962,655 11,045,861 November 1998 (83,206)
Krona (Sell) Sweden 1,124,270 1,133,199 November 1998 8,929
Krona (Buy) Sweden 6,419,178 6,486,848 January 1999 (67,670)
Krona (Sell) Sweden 398,015 398,621 January 1999 606
Lira (Buy) Italy 34,193,984 33,778,346 November 1998 415,638
Lira (Sell) Italy 21,026,721 21,474,703 November 1998 447,982
Markka (Buy) Finland 3,110,286 3,144,379 November 1998 (34,093)
Peseta (Buy) Spain 38,119,948 38,076,518 December 1998 43,430
Peseta (Sell) Spain 40,805,866 41,734,552 December 1998 928,686
Pound (Buy) Great Britain 11,999,270 12,189,531 November 1998 (190,261)
Pound (Buy) Great Britain 5,339,701 5,334,808 December 1998 4,893
Pound (Sell) Great Britain 16,416,490 16,366,213 December 1998 (50,277)
Pound (Buy) Ireland 1,602,251 1,624,131 November 1998 (21,880)
Schilling (Buy) Austria 4,353,065 4,415,280 November 1998 (62,215)
Yen (Buy) Japan 19,145,477 15,502,298 November 1998 3,643,179
Yen (Sell) Japan 44,495,079 40,284,118 November 1998 (4,210,961)
Yen (Buy) Japan 77,318,798 68,525,780 December 1998 8,793,018
Yen (Sell) Japan 8,858,120 7,919,050 December 1998 (939,070)
-----------
$10,276,657
===========
</TABLE>
45
<PAGE>
FOREIGN BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (Identified Cost, $382,693,947) $391,754,886
Foreign currency at value (Cost $969,536) 1,155,028
Cash 28,772
Receivable for securities sold 110,823,098
Receivable for forward contracts 19,329,294
Interest receivable 6,833,389
Other assets 6,557
- --------------------------------------------------------------------------------
Total assets 529,931,024
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 238,239,470
Payable for forward contracts 9,052,637
Payable to affiliates--Management fees (Note 2) 55,008
Accrued expenses 318,431
- --------------------------------------------------------------------------------
Total liabilities 247,665,546
- --------------------------------------------------------------------------------
NET ASSETS $282,265,478
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interest $282,265,478
- --------------------------------------------------------------------------------
FOREIGN BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note 1B) (net of foreign tax of $3,781) $14,101,320
EXPENSES:
Management fees (Note 2) $1,466,849
Custody and fund accounting fees 386,771
Audit fees 37,413
Legal fees 29,642
Printing 11,077
Trustees fees 4,963
Other 36,792
- --------------------------------------------------------------------------------
Total expenses 1,973,507
- --------------------------------------------------------------------------------
Net investment income 12,127,813
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Unrealized appreciation of investments,
forward currency contracts, foreign currency,
futures, written options and other assets and
liabilities 15,388,725
Add unrealized depreciation from contributed
assets (Note 1) 2,101,991
- --------------------------------------------------------------------------------
Unrealized appreciation of investments 17,490,716
Net realized gains from investments and futures 15,926,100
Net realized loss from forward currency contracts and
foreign currency transactions (15,396,632)
Net realized loss on written options and swaps (210,178)
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 17,810,006
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $29,937,819
- --------------------------------------------------------------------------------
See notes to financial statements
46
<PAGE>
FOREIGN BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $12,127,813
Unrealized appreciation of investments, forward currency
contracts, foreign currency, futures, written options
and other assets and liabilities 17,490,716
Net realized gain from investments, forward currency contracts,
foreign currency transactions, futures and written options 319,290
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations 29,937,819
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Proceeds from contributions (Note 1) 355,866,842
Value of withdrawals (103,539,183)
- --------------------------------------------------------------------------------
Net increase in net assets from capital transactions 252,327,659
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 282,265,478
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period $282,265,478
- --------------------------------------------------------------------------------
FOREIGN BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $282,265
Ratio of expenses to average net assets 0.74%
Ratio of net investment income to average net assets 4.55%
Portfolio turnover 693%
- --------------------------------------------------------------------------------
See notes to financial statements
47
<PAGE>
FOREIGN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Foreign Bond Portfolio (the "Portfolio"), a
separate series of Asset Allocation Portfolios (the "Trust") is registered under
the U.S. Investment Company Act of 1940, as amended, as an open-end, management
investment company which was organized as a trust under the laws of the State of
New York. The Declaration of Trust permits the Trustees to issue beneficial
interests in the Portfolio. Citibank, N.A. ("Citibank") is the Investment
Manager of the Portfolio. Signature Financial Group (Grand Cayman), Ltd. ("SFG")
acts as the Portfolio's Sub-Administrator.
On November 1, 1997 (Commencement of Operations) CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500 transferred
a portion of their investable assets in the amount of $37,806,736, $69,713,620,
$91,158,260, and $19,592,443 including $(434,418), $(669,939), $(836,241), and
$(161,393), respectively, of unrealized depreciation to the Portfolio in
exchange for an interest in the Portfolio. The total investable assets along
with current year contributions are included in the "Proceeds from
Contributions" on the Statement of Changes in Net Assets.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Bonds, foreignbonds and other fixed income
securities (other than short-term obligations maturing in sixty days or less)
are valued on the basis of valuations furnished by a pricing service, the use of
which has been approved by the Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchanges or
over-the-counter prices. Short-term obligations maturing in sixty days or less
are valued at amortized cost which constitutes fair value as determined by the
Trustees. Portfolio securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or under
guidelines established by the Trustees. Trading in securities on most foreign
exchanges and over-the-counter markets is normally completed before the close of
the New York Stock Exchange and may also take place on days on which the New
York Stock Exchange 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 asset value is calculated,
such securities may be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.
48
<PAGE>
FOREIGN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on debt securities when
required for U.S. federal income tax purposes. Gain and loss from principal
paydowns are recorded as interest income.
C. Foreign Currency Translation The accounting records of the Portfolio are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars at the current rate of exchange to determine the value of investments,
assets and liabilities. Purchases and sales of securities, as well as income and
expenses are translated at the prevailing rate of exchange on the respective
dates of such transactions. The Portfolio does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuation arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. Translations of foreign currency
includes net exchange gains and losses, disposition of foreign currency and the
difference between the amount of investment income and expenses recorded and the
amount actually received or paid.
D. Forward Foreign Currency Contracts The Portfolio may enter into forward
foreign currency contracts ("contracts") in connection with planned purchases or
sales of securities, to hedge the U.S. dollar value of portfolio securities
denominated in a particular currency. The Portfolio could be exposed to risks if
the counter-parties to the contracts are unable to meet the terms of their
contracts and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized gains or
losses until the contract settlement date.
E. U.S. Federal Taxes The Portfolio is considered a partnership under the
U.S. Internal Revenue Code. Accordingly, no provision for federal income or
excise tax is necessary.
F. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG.
G. Futures contracts The Portfolio may engage in futures transactions. The
Portfolio may use futures contracts in order to protect the Portfolio from
fluctuation in interest rates without actually buying or selling debt
securities, or to manage the effective maturity or duration of fixed income
securities in the Portfolio in an effort to reduce potential losses or enhance
potential gains. Buying futures contracts tends to increase the Portfolio's
exposure to the underlying instrument. Selling futures contracts tends to either
decrease the Portfolio's exposure to the underlying instrument, or to hedge
other portfolio investments.
Upon entering into a futures contract, the Portfolio is required to deposit
with the broker an amount of cash or cash equivalents equal to a certain
percentage of the contract amount. This is known as the "initial margin".
Subsequent payments
49
<PAGE>
FOREIGN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
("variation margin") are made or received by the Portfolio each day, depending
on the daily fluctuation of the value of the contract. The daily changes in
contract value are recorded as unrealized gains or losses and the Portfolio
recognizes a realized gain or loss when the contract is closed or expires.
Futures contracts are valued at the settlement price established by the board of
trade or exchange on which they are traded.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in the value of futures contracts primarily
corresponds with the value of their underlying instruments, which may not
correlate with the change in the value of the hedged instruments. In addition,
there is the risk the Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market. Futures contracts involve,
to varying degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities.
H. Purchased Options The premium paid by the Portfolio for the purchase of a
call or a put option is included in the Portfolio's Statement of Assets and
Liabilities as an investment and subsequently marked-to market to reflect the
current market value of the option. When an option which the Portfolio has
purchased expires on the stipulated expiration date, the Portfolio will realize
a loss in the amount of the cost of the option. When the Portfolio enters into a
closing sale transaction, the Portfolio will realize a gain or loss, depending
on whether the sale proceeds from the closing sale transaction are greater or
less than the cost of the option. When the Portfolio exercises a put option, the
Portfolio will realize a gain or loss from sale of the underlying security and
the proceeds from such sale will be decreased by the premium originally paid.
When the Portfolio exercises a call option, the cost of the security which the
Portfolio purchases upon exercise will be increased by the premium originally
paid.
I. Swap Agreements To the extent permitted under respective investment
policies, the Portfolio may invest in swap agreements which involve the exchange
of cash payments based on the specified terms and conditions of such agreements.
A swap is an agreement to exchange the return generated by one instrument for
the return generated by another instrument. The value of each swap is determined
by the counterparty to the swap agreement using a methodology which discounts
the expected future cash receipts or disbursements related to the swap. The
Portfolio may also enter into interest rate swap agreements which involve the
exchange by the Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal. Interest rate
swaps are marked to market daily. Unrealized gains or losses are reported as an
asset or a liability in the statement of Assets and Liabilities. The cash paid
or received on a swap is recognized as a realized loss or gain when such a
payment is paid or received.
50
<PAGE>
FOREIGN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
Entering into swap agreements involves, to varying degrees, elements of
credit risk, market risk, and interest rate risk in excess of the amount
recognized in the Statement of Assets and Liabilities. Such risks involve the
possibility that there is not a liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform and that
there may be unfavorable changes in market conditions or interest rates.
J. Written Options When a Portfolio writes an option, the premium received by
the Portfolio is presented in the Portfolio's Statement of Assets and
Liabilities as an asset with an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market value
of the option written. Written options are valued at the last sale price or, in
the absence of a sale, the last offering price on the market on which it is
principally traded. If an option expires on its stipulated expiration date, or
if the Portfolio enters into a closing purchase transaction, the Portfolio
realizes gain (or loss if the cost of a closing purchase transaction exceeds the
premium received when the option was written) without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. If a written call option is exercised, the Portfolio
realizes a gain or loss from the sale of the underlying security and the
proceeds of the sale are increased by the premium originally received. If a
written put option is exercised, the amount of the premium originally received
reduces the cost of the security which the portfolio purchases upon exercise of
the option.
The risk in writing a call option is that the Portfolio relinquished the
opportunity to profit if the market price of the underlying security increases
and the option is exercised. In writing a put option the Portfolio assumes the
risk of incurring a loss if the market price of the underlying security
decreases and the option is exercised. In addition, there is a risk the
Portfolio may not be able to enter into a closing transaction because of an
illiquid secondary market, or if the counterparties do not perform under the
contracts terms.
K. Other Investment transactions are accounted for on the trade date.
Realized gains and losses on investment transactions are determined on the
identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolios. SFG
acts as Sub-Administrator and performs such duties and receives certain
compensation from Citibank as from time to time are agreed to by Citibank and
SFG. Citibank has delegated the daily management of the Portfolio to Pacific
Investment Management Company, ("PimCo") (the "Subadviser"). Citibank is a
wholly-owned subsidiary of Citigroup, Inc. Citigroup, Inc. was formed as a
result of the merger of Citicorp and Travelers Group, Inc. which was completed
on October 8, 1998.
51
<PAGE>
FOREIGN BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
The management fee paid to Citibank, amounted to $566,750 for the period
November 1, 1997 (Commencement of Operations) to October 31, 1998. Citibank
management fees are computed at the annual rate of 0.55% of the Portfolio's
average daily net assets less the aggregate amount (if any) payable by the
Portfolio Trust pursuant to the Sub-management Agreement with the Subadviser.
The Portfolio pays the Subadviser the following fees, which are accrued daily
and payable monthly and are at the annual rates equal to a percentage of the
aggregate assets of the Portfolio allocated to the Subadviser 0.35% on first
$200 million, 0.30% on remaining assets.
The fees paid to the Sub-adviser amount to $900,099 for the period November
1, 1997 (Commencement of Operations) to October 31, 1998.
The Trust pays no compensation directly to any Trustee or any other officer
who is affiliated with the Sub-Administrator, all of whom receive remuneration
for their services to the Trust from the Sub-Administrator or its affiliates.
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of securities, other
than short-term obligations, aggregated $2,000,406,993 and $1,846,227,426
respectively for the November 1, 1997 (Commencement of Operations) to October
31, 1998 were as follows:
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate Cost $386,859,924
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 6,865,987
Gross unrealized depreciation (1,971,025)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,894,962
- --------------------------------------------------------------------------------
5. LINE OF CREDIT The Portfolio, along with various other Portfolios in the
CitiFunds Family, entered into a line of credit agreement with a bank which
allows the Portfolios collectively to borrow up to $60 million for temporary or
emergency purposes. Interest on borrowings, if any, is charged to the specific
Portfolio executing the borrowing at the base rate of the bank. The line of
credit requires a quarterly payment of a commitment fee based on the average
daily unused portion of the line of credit. For the period November 1, 1997
(Commencement of Operations) to October 31, 1998, the commitment fee allocated
to the Portfolio was $901. Since the line of credit was established, there have
been no borrowings.
52
<PAGE>
FOREIGN BOND PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE ASSET ALLOCATION PORTFOLIOS (THE
TRUST), WITH RESPECT TO ITS SERIES, FOREIGN BOND PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Foreign Bond Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998, and the related statements of operations and of changes in net assets and
the financial highlights for the period November 1, 1997 (Commencement of
Operations) through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period November 1, 1997 (Commencement of Operations) through
October 31, 1998, in accordance with U.S. generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
53
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.7%
- --------------------------------------------------------------------------------
AUSTRIA -- 0.7%
- --------------------------------------------------------------------------------
Boehler-Uddeholm 31,283 $ 1,473,878
-----------
AUSTRALIA -- 2.5%
- --------------------------------------------------------------------------------
Australia & New Zealand
Banking Group 658,440 3,768,164
Pioneer International,
Ltd. 641,253 1,331,558
Quantas Airways 391,845 666,616
-----------
5,766,338
-----------
CANADA -- 3.5%
- --------------------------------------------------------------------------------
Canadian Imperial Bank
of Commerce 74,481 1,479,484
Imasco, Ltd. 195,322 3,670,990
Noranda, Inc. 194,180 2,869,283
-----------
8,019,757
-----------
FINLAND -- 1.8%
- --------------------------------------------------------------------------------
The Rauma Group Oy 80,393 949,461
UPM-Kymmene Oy 136,958 3,275,792
-----------
4,225,253
-----------
FRANCE -- 7.8%
- --------------------------------------------------------------------------------
BIC 5,805 357,334
BNP 29,625 1,876,390
Elf Aquitaine 27,480 3,180,338
La Farge Coppee 41,876 4,281,137
Pernod-Ricard 48,514 3,230,832
Societe Generale 22,515 2,978,550
TOTAL 18,520 2,136,705
-----------
18,041,286
-----------
GERMANY -- 7.8%
- --------------------------------------------------------------------------------
Bayer AG 52,245 2,122,601
Buderus AG 5,550 2,308,452
Commerzbank AG 115,367 3,468,323
Draegerwerk AG 124,818 2,034,462
Dyckerhoff AG 10,621 3,269,973
Veba AG 65,255 3,643,880
Vossloh AG 42,454 1,214,802
-----------
18,062,493
-----------
GREAT BRITAIN -- 24.7%
- --------------------------------------------------------------------------------
Allied Domecq 439,115 4,042,206
Allied Zurich 204,154 2,439,683
BOC Group 137,971 2,025,185
BTR 973,360 1,702,422
B.A.T. Industries 258,544 2,322,651
CGU 251,058 3,977,151
Coats Viyella 1,714,716 889,675
Cookson Group 1,183,635 2,476,311
Elementis 1,909,598 3,052,268
Fairview Holdings 66,404 90,857
Hanson 770,119 5,420,025
Hillsdown Holdings 724,318 1,030,447
Lex Service 366,400 2,195,411
Lloyds TSB Group 294,046 3,629,566
Mckenchnie 291,875 1,626,741
Medeva 938,770 1,916,886
National Westminister
Bank 182,171 3,076,435
Powergen 219,116 3,098,904
Safeway 501,006 2,515,600
TI Group 485,515 2,892,877
Terranova Foods 252,434 511,223
Tomkins 1,077,627 4,987,019
Williams 189,685 1,183,390
-----------
57,102,933
-----------
HONG KONG -- 5.7%
- --------------------------------------------------------------------------------
Dao Heng Bank Group 1,423,500 2,968,305
Hang Lung
Development Co. 1,602,635 1,820,941
New World
Development Co. 1,309,790 3,044,057
South China
Morning Post 2,661,486 1,426,103
SWIRE PACIFIC 736,000 3,905,694
-----------
13,165,100
-----------
IRELAND -- 2.3%
- --------------------------------------------------------------------------------
Greencore Group 653,730 2,553,798
Jefferson Smurfit Group 1,730,090 2,859,408
------------
5,413,206
------------
ITALY -- 3.0%
- --------------------------------------------------------------------------------
Eni Spa 664,100 3,949,239
Telecom Italia 423,000 3,057,272
------------
7,006,511
------------
54
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) October 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
JAPAN -- 7.8%
- --------------------------------------------------------------------------------
Koito Manufacturing Co. 394,000 $ 1,605,335
Kyocera Corp. 79,700 3,520,801
Nichicon Corp. 255,000 2,766,984
Nintendo Co. 45,900 3,882,089
Promise Co. 97,100 4,389,406
Yodogawa Steel Works 456,000 1,818,837
-----------
17,983,452
-----------
NETHERLANDS -- 8.0%
- --------------------------------------------------------------------------------
ABN Amro Holdings
NV 124,637 2,334,713
Akzo Nobel NV 93,348 3,627,105
Hollandsche Beton
Groep NV 101,730 1,372,044
ING Groep NV 79,108 3,827,431
KPN NV 61,406 2,385,975
Philips Electronics NV 61,415 3,267,227
TNT POST GROEP NV 64,686 1,731,008
-----------
18,545,503
-----------
NEW ZEALAND -- 0.3%
- --------------------------------------------------------------------------------
Fletcher Challenge
Building 608,789 805,960
-----------
NORWAY -- 2.1%
- --------------------------------------------------------------------------------
Kvaerner ASA 51,377 1,109,383
Nycomed Amersham 508,530 3,625,698
-----------
4,735,081
-----------
SINGAPORE -- 0.8%
- --------------------------------------------------------------------------------
Development Bank of
Singapore 285,360 1,788,431
-----------
SPAIN -- 3.5%
- --------------------------------------------------------------------------------
Banco Santander SA 207,630 3,802,963
Telefonica SA 93,300 4,212,608
-----------
8,015,571
-----------
SWEDEN -- 3.5%
- --------------------------------------------------------------------------------
Electrolux AB 225,650 3,396,602
Getinge Industrier 201,876 3,103,397
Skandinavifka Enskilda
Banking 153,530 1,553,788
-----------
8,053,787
-----------
SWITZERLAND -- 10.3%
- --------------------------------------------------------------------------------
Forbo Holdings AG 7,311 3,020,851
Nestle SA 1,594 3,387,235
Novartis AG 3,043 5,478,433
Saurer AG 3,994 2,357,559
Schweizerische
Rueckversicherungs-
Gesellschaft AG 1,856 4,130,227
Schweizerische Industrie-
Gesellschaft Holding
AG 4,498 3,020,128
Sulzer AG 4,277 2,461,492
-----------
23,855,925
-----------
UNITED STATES -- 1.6%
- --------------------------------------------------------------------------------
Creative Technology Ltd.* 163,600 2,300,625
Jardine Matheson 492,000 1,377,600
-----------
3,678,225
-----------
TOTAL COMMON STOCKS
(Identified Cost
$233,531,359) 225,738,690
-----------
WARRANTS -- 0.0%
- --------------------------------------------------------------------------------
Bolton Properties*
Exp. 9/15/01
(Identified Cost
$6,808) 23,750 1,231
-----------
SHORT-TERM OBLIGATIONS -- 1.4%
- --------------------------------------------------------------------------------
State Street Repurchase Agreement
4.25% due 11/02/98 proceeds
at maturity $3,259,154
(collateralized by $3,085,000
U.S. Treasury Note 6.25%
due 8/31/02, valued
at $3,324,233) 3,258,000
-----------
TOTAL INVESTMENTS
(Identified Cost
$236,796,167) 99.1% 228,997,921
OTHER ASSETS,
LESS LIABILITIES 0.9 1,948,385
----- ------------
NET ASSETS 100.0% $230,946,306
===== ============
* Non income producing
See notes to financial statements
55
<PAGE>
INTERNATIONAL PORTFOLIO
FORWARD CURRENCY CONTRACTS WHICH WERE OPEN AT OCTOBER 31, 1998 ARE AS FOLLOWS:
UNREALIZED
MARKET AGGREGATE DELIVERY DATE APPRECIATION
CURRENCY COUNTRY VALUE FACE VALUE OF CONTRACTS (DEPRECIATION)
--------- -------- --------- ----------- ------------- --------------
Dollar (Sell) Hong Kong $6,834,597 $6,603,187 February 1999 $ (231,410)
Dollar (Buy) Hong Kong 6,834,597 6,798,751 February 1999 35,846
Dollar (Sell) Hong Kong 7,143,558 7,125,589 April 1999 (17,969)
----------
$ (213,533)
==========
56
<PAGE>
INTERNATIONAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investments at value (Note 1A) (Identified Cost, $236,796,167) $228,997,921
Foreign currency, at value (Cost $599,767) 598,025
Cash 918
Dividends and interest receivable 1,013,973
Receivable for investments sold 1,118,258
Receivable for forward contracts 35,846
- -------------------------------------------------------------------------------
Total assets 231,764,941
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 217,060
Payable for forward contracts 249,379
Payable to affiliates-Management fees (Note 2) 65,295
Accrued expenses and other liabilities 286,901
- ------------------------------------------------------------------------------
Total liabilities 818,635
- -------------------------------------------------------------------------------
NET ASSETS $230,946,306
===============================================================================
REPRESENTED BY:
Paid-in capital for beneficial interests $230,946,306
===============================================================================
INTERNATIONAL PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
===============================================================================
INVESTMENT INCOME: (Note 1B)
Dividend income (net of foreign withholding
tax of $1,166,799) $6,427,710
Interest income 313,385
- -------------------------------------------------------------------------------
Total investment income $ 6,741,095
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,004,587
Custody and fund accounting fees 346,660
Audit fees 37,413
Legal fees 19,642
Printing 5,594
Trustees fees 4,569
Other 11,816
- -------------------------------------------------------------------------------
Total expenses 2,430,281
- -------------------------------------------------------------------------------
Net investment income 4,310,814
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions 4,022,805
Net realized loss on foreign exchange
currency & transactions (20,632)
- -------------------------------------------------------------------------------
Net realized gain 4,002,173
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments, forward currency contracts,
foreign currency transactions (8,003,050)
Less: unrealized appreciation from contributed
assets (Note 1) 12,088,710
- -------------------------------------------------------------------------------
Unrealized depreciation of investments (20,091,760)
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) of investments (16,089,587)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,778,773)
================================================================================
See notes to financial statements
57
<PAGE>
INTERNATIONAL PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $ 4,310,814
Net realized gain on investment transactions, forward currency
contracts, foreign currency transactions 4,002,173
Unrealized depreciation of investments (20,091,760)
- -------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (11,778,773)
- -------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions 593,863,296
Value of withdrawals (351,138,217)
- -------------------------------------------------------------------------------
Net increase in net assets from capital transactions 242,725,079
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS: 230,946,306
- -------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- -------------------------------------------------------------------------------
End of period $230,946,306
===============================================================================
INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $230,946
Ratio of expenses to average net assets 0.97%
Ratio of net investment income to average net assets 1.72%
PORTFOLIO TURNOVER 43%
================================================================================
See notes to financial statements
58
<PAGE>
INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES International Portfolio (the "Portfolio"), a
separate series of The Asset Allocation Portfolios (the "Portfolio Trust"), is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York. The Declaration of Trust permits
the Trustees to issue beneficial interests in the Portfolio. The Investment
Manager of the Portfolio is Citibank, N.A. ("Citibank"). Signature Financial
Group (Grand Cayman), Ltd. ("SFG") acts as the Portfolio's Sub-Administrator. On
November 1, 1997 (Commencement of Operations) the CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500 each
transferred a portion of their investable assets in the amount of $13,468,512,
$45,037,659, $115,488,801 and $69,902,939 including $657,730, $2,460,410,
$6,297,679 and $2,672,891, respectively, of unrealized appreciation to the
Portfolio in exchange for an interest in the Portfolio.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Equity securities are valued at the last
sale price on the exchange on which they are primarily traded, or at the quoted
bid price for securities in which there were no sales during the day, or for
unlisted securities not reported on the NASDAQ system. Securities listed on a
foreign exchange are valued at the last quoted sale price available. Bonds,
foreignbonds and other fixed income securities (other than short-term
obligations maturing in sixty days or less) are valued on the basis of
valuations furnished by a pricing service, the use of which has been approved by
the Board of Trustees. In making such valuations, the pricing service utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon quoted prices or exchanges or over-the-counter prices. Short-term
obligations maturing in sixty days or less are valued at amortized cost which
constitutes fair value as determined by the Trustees. Portfolio securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or under guidelines established by the Trustees.
Trading in securities on most foreign exchanges and over-the-counter markets is
normally completed before the close of the New York Stock Exchange and may also
take place on days on which the New York Stock Exchange 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
59
<PAGE>
INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
asset value is calculated, such securities may be valued at fair value in
accordance with procedures established by and under the general supervision of
the Trustees.
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on debt securities when
required for U.S. federal income tax purposes. Dividend income and other
distributions from investments are recorded on the ex-dividend date. Dividend
and interest income is recorded net of foreign taxes withheld. Reclaims of
recoverable foreign taxes are the responsibility of the qualified investors.
C. Foreign Currency Translation The accounting records of the Portfolio are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars at the current rate of exchange to determine the value of investments,
assets and liabilities. Purchases and sales of securities, as well as income and
expenses, are translated at the prevailing rate of exchange on the respective
dates of such transactions. The Portfolio does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuation arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. Translations of foreign currency
includes net exchange gains and losses, disposition of foreign currency and the
difference between the amount of investment income and expenses recorded and the
amount actually received or paid.
D. Forward Foreign Currency Contracts The Portfolio may enter into forward
foreign currency contracts ("contracts") in connection with planned purchases or
sales of securities, to hedge the U.S. dollar value of portfolio securities
denominated in a particular currency. The Portfolio could be exposed to risks if
the counter-parties to the contracts are unable to meet the terms of their
contracts and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized gains or
losses until the contract settlement date.
E. U.S. Federal Taxes The Portfolio is considered a partnership under the
U.S. Internal Revenue Code. Accordingly, no provision for federal income or
excise tax is necessary.
F. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG. Expenses incurred by the
Portfolio Trust with respect to any two or more portfolios or series are
allocated in proportion to the average net assets of each portfolio, except when
allocations of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that portfolio.
G. Other Investment transactions are accounted for on the date the
investments are purchased or sold. Realized gains and losses are determined on
the identified cost basis.
60
<PAGE>
INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolio. SFG acts
as Sub-Administrator and performs certain duties and receives compensation from
Citibank as from time to time are agreed to by Citibank and SFG.
Citibank has delegated the daily management of the Portfolio to Hotchkis and
Wiley (the "Subadviser"). Citibank is a wholly-owned subsidiary of Citigroup,
Inc. Citigroup, Inc. was formed as a result of the merger of Citicorp and
Travelers Group, Inc. which was completed on October 8, 1998.
The management fee paid to Citibank, amounted to $922,580 for the period
November 1, 1997 (Commencement of Operations) to October 31, 1998. Management
fees are computed at the annual rate of 0.80% of the Portfolio's average daily
net assets less the aggregate amount (if any) payable by the Portfolio Trust
pursuant to the Sub-management Agreement with the Subadviser. The Portfolio pays
the Subadviser the following fees, which are accrued daily and payable monthly
and are at the annual rates equal to a percentage of the aggregate assets of the
Portfolio allocated to the Subadviser: 0.60% on first $10 million, 0.55% on next
$40 million, 0.45% on next $100 million, 0.35% on next $150 million, 0.30% on
remaining assets.
The management fees paid to the Subadviser amounted to $1,082,007 for the
year ended October 31, 1998.
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $114,456,273 and $105,252,733,
respectively, for the period November 1, 1997 (Commencement of Operations) to
October 31, 1998.
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $236,845,911
================================================================================
Gross unrealized appreciation $ 25,968,967
Gross unrealized depreciation (33,816,957)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(7,847,990)
================================================================================
61
<PAGE>
INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
5. LINE OF CREDIT The Portfolio, along with other CitiFunds, entered into an
ongoing agreement with a bank which allows the Funds collectively to borrow up
to $60 million for temporary or emergency purposes. Interest on the borrowings,
if any, is charged to the specific fund executing the borrowing at the base rate
of the bank. The line of credit requires a quarterly payment of a commitment fee
based on the average daily unused portion of the line of credit. For the period
November 1, 1997 (Commencement of Operations) to October 31, 1998, the
commitment fee allocated to the Portfolio was $834. Since the line of credit was
established, there have been no borrowings.
62
<PAGE>
INTERNATIONAL PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND INVESTORS OF THE ASSET ALLOCATION PORTFOLIO (THE TRUST),
WITH RESPECT TO ITS SERIES, INTERNATIONAL PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of International Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998 and the related statements of operations and of changes in net assets and
the financial highlights for the period March 2, 1998 (Commencement of
Operations) through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period March 2, 1998 (Commencement of Operations) through
October 31, 1998 in accordance with U.S. generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
63
<PAGE>
SHORT-TERM PORTFOLIO
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
PRINCIPAL
ISSUER AMOUNT VALUE
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS -- 99.5%
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (YANKEE) -- 22.6%
- --------------------------------------------------------------------------------
Bank of New York
5.75% due 5/14/99 $2,000,000 $ 2,005,000
Credit Suisse
First Boston
5.69% due 7/06/99 3,000,000 3,014,857
CREGEM
North America Inc.
4.96% due 4/07/99 4,000,000 3,916,800
Delaware Funding Corp.
5.47% due 11/19/98 3,745,000 3,734,757
Deutsche Bank
5.645% due 8/09/99 2,000,000 2,011,593
Enterprise Funding Corp.
5.15 % due 12/29/98 4,000,000 3,966,811
-----------
18,649,818
-----------
COMMERCIAL PAPER -- 21.1%
- --------------------------------------------------------------------------------
Atlantis One
Funding Corp.
5.53% due 11/10/98 4,500,000 4,493,779
General Electric
Capital Services
5.17% due 12/18/98 4,000,000 3,973,001
MONSANTO CO.
5.50% due 12/14/98 5,000,000 4,967,153
Rose Funding
5.37% due 1/28/99 4,000,000 3,946,300
-----------
17,380,233
-----------
FLOATING RATE NOTES -- 32.2%
- --------------------------------------------------------------------------------
J. P. Morgan & Co.
5.75% due 3/10/99 5,000,000 5,012,500
Morgan Stanley
Dean Witter Discover
5.20% due 1/22/99 4,000,000 3,953,740
PNC Bank
5.07% due 1/29/99 4,500,000 4,496,895
Royal Bank of Canada
5.54% due 2/16/99 5,000,000 5,001,913
Toronto Dominion
5.65% due 7/26/99 3,000,000 3,016,012
Toyota Motor Corp.
5.73% due 3/10/99 5,000,000 5,013,904
-----------
26,494,964
-----------
UNITED STATES
GOVERNMENT AGENCY -- 15.7%
- --------------------------------------------------------------------------------
Federal Home Loan Banks
5.63% due 6/15/99 $4,000,000 $ 4,018,086
Federal Home Loan
Mortgage Discount
Notes
4.98% due 2/25/99 4,000,000 3,938,411
Federal National
Mortgage Association
5.37% due12/22/98 5,000,000 4,961,963
-----------
12,918,460
-----------
REPURCHASE AGREEMENTS -- 7.9%
- --------------------------------------------------------------------------------
Aubrey G. Lanston & Co.
5.45% due 11/02/98 proceeds
at maturity $6,500,951
(collateralized by $ 6,202,000
U.S. Treasury Note 5.625%
due 12/31/02 valued at
$ 6,628,388) 6,498,000
-----------
TOTAL INVESTMENTS 99.5% 81,941,475
(Identified Cost
$81,841,534)
OTHER ASSETS,
LESS LIABILITIES 0.5 407,720
----- -----------
NET ASSETS 100.0% $82,349,195
===== ===========
See notes to financial statements
64
<PAGE>
SHORT-TERM PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investments, at value (Note 1A) (Identified Cost $81,841,534) $81,941,475
Cash 229
Interest receivable 565,556
- --------------------------------------------------------------------------------
Total assets 82,507,260
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to affiliate--Management fee (Note 2) 17,355
Accrued expenses and other liabilities 140,710
- --------------------------------------------------------------------------------
Total liabilities 158,065
- --------------------------------------------------------------------------------
NET ASSETS $82,349,195
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interests $82,349,195
- --------------------------------------------------------------------------------
SHORT-TERM PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INTEREST INCOME (NOTE 1B): $5,288,201
EXPENSES:
Management fees (Note 2) $232,872
Custody and fund accounting fees 137,739
Legal fees 29,968
Audit fees 22,400
Printing 7,294
Trustees fees 4,734
Other 21,360
- --------------------------------------------------------------------------------
Total expenses 456,367
- --------------------------------------------------------------------------------
Net investment income 4,831,834
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net unrealized appreciation of investments 99,941
Less unrealized appreciation from contributed
assets (Note 1) 7,254
- --------------------------------------------------------------------------------
Unrealized appreciation of investments 92,687
Net realized gain from investment transactions 40,471
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments 133,158
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,964,992
================================================================================
See notes to financial statements
65
<PAGE>
SHORT-TERM PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 4,831,834
Net realized gain from investment transactions 40,471
Unrealized appreciation of investments 92,687
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,964,992
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions (Note 1) 476,612,362
Value of withdrawals (399,228,159)
- --------------------------------------------------------------------------------
Net increase in net assets from capital transactions 77,384,203
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 82,349,195
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of priod --
- --------------------------------------------------------------------------------
End of period $ 82,349,195
================================================================================
SHORT-TERM PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $82,349
Ratio of expenses to average net assets 0.49%
Ratio of net investment income to average net assets 5.19%
================================================================================
See notes to financial statements
66
<PAGE>
SHORT-TERM PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Short-Term Portfolio (the "Portfolio"), a
separate series of the Asset Allocation Portfolios (the "Trust"), is registered
under the U.S. Investment Company Act of 1940, as amended, as an open-end,
management investment company which was organized as a trust under the laws of
the State of New York. The Declaration of Trust permits the Trustees to issue
beneficial interests in the Portfolio. Citibank, N.A. ("Citibank") acts as the
Investment Manager. Signature Financial Group (Grand Cayman), Ltd. ("SFG") acts
as the Portfolio's Sub-Administrator.
On November 1, 1997 (Commencement of Operations) CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500 transferred
a portion of their investable assets in the amounts of $37,516,585, $13,484,141,
$17,666,426 and $8,038,078 including $1,369, $2,238, $2,239 and $1,408,
respectively, of unrealized appreciation to the Portfolio in exchange for an
interest in the Portfolio. The total investable assets, along with current year
contributions, are included in the "Proceeds from contributions" on the
Statement of Changes in Net Assets.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Debt securities (other than short-term
obligations maturing in sixty days or less), are valued on the basis of
valuations furnished by pricing services approved by Board of Trustees which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, and other market data, without exclusive reliance on quoted prices or
exchange or over-the-counter prices. Short-term obligations, maturing in sixty
days or less, are valued at amortized cost, which constitutes fair value as
determined by the Trustees. Securities, if any, for which there are no such
valuations or quotations are valued at fair value as determined in good faith by
or under guidelines established by the Trustees.
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on long-term debt securities
when required for U.S. federal income tax purposes.
C. U.S. Federal Income Taxes The Portfolio is considered a partnership under
the U.S. Internal Revenue Code. Accordingly, no provision for federal income
taxes is necessary.
67
<PAGE>
SHORT-TERM PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
D. Repurchase Agreements It is the policy of the Portfolio to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System or to have segregated within the custodian bank's
vault, all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Portfolio to
monitor, on a daily basis, the market value of the repurchase agreement's
underlying investments to ensure the existence of a proper level of collateral.
E. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG. Expenses incurred by the
Portfolio Trust with respect to any two or more portfolios or series are
allocated in proportion to the average net assets of each portfolio, except when
allocations of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that portfolio.
F. Other Purchases, maturities and sales of money market instruments are
accounted for on the date of the transaction. Realized gains and losses are
determined on the identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolio. SFG acts
as Sub-Administrator and performs certain duties and receives compensation from
Citibank as from time to time are agreed to by Citibank an SFG. Citibank is a
wholly owned subsidiary of Citigroup, Inc. Citigroup, Inc. was formed as a
result of the merger of Citicorp and Travelers Group, Inc. which was completed
on October 8, 1998.
The management fees paid to Citibank are accrued daily and payable monthly.
The management fees are computed at an annual rate of 0.25% of the Portfolio's
average daily net assets. The management fees paid to Citibank amounted to
$232,872 for the period November 1, 1997 (Commencement of Operations) to October
31, 1998. The Trust pays no compensation directly to any Trustee or any other
officer who is affiliated with the Sub-Administrator, all of whom receive
remuneration for their services to the Trust from the Sub-Administrator or its
affiliates.
3. PURCHASES AND SALES OF INVESTMENTS Purchases, maturities and sales of money
market instruments aggregated $3,417,274,661 and $3,413,666,649, respectively,
for the period November 1, 1997 (Commencement of Operations) to October 31,
1998.
68
<PAGE>
SHORT-TERM PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $81,841,534
================================================================================
Gross unrealized appreciation $ 103,472
Gross unrealized depreciation (3,531)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 99,941
================================================================================
5. Line of Credit The Portfolio, along with various other Portfolios in the
CitiFunds Family, entered into an agreement with a bank which allows the Funds
collectively to borrow up to $60 million for temporary or emergency purposes.
Interest on borrowings, if any, is charged to the specific fund executing the
borrowing at the base rate of the bank. The line of credit requires a quarterly
payment of a commitment fee based on the average daily unused portion of the
line of credit. For the period November 1, 1997 (Commencement of Operations) to
October 31, 1998, the commitment fee allocated to the Portfolio was $305. Since
the line of credit was established, there have been no borrowings.
69
<PAGE>
SHORT-TERM PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND INVESTORS OF THE ASSET ALLOCATION PORTFOLIO (THE TRUST),
WITH RESPECT TO ITS SERIES, SHORT-TERM PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Short-Term Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998, and the related statements of operations and of changes in net assets and
the financial highlights for the period November 1, 1997 (Commencement of
Operations) through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned at
October 31, 1998 by correspondence with the custodian, provides a reasonable
basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period November 1, 1997 (Commencement of Operations) through
October 31, 1998, in accordance with U.S. generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
70
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTSOCTOBER 31, 1998
PRINCIPAL
ISSUER AMOUNT VALUE
- --------------------------------------------------------------------------------
FIXED INCOME -- 98.3%
- --------------------------------------------------------------------------------
ASSET BACKED -- 30.5%
- --------------------------------------------------------------------------------
Aames Mortgage Trust
6.59% due 6/15/24 $1,974,000 $2,009,453
Amresco Residential
Securities Mortgage
Loan Trust
6.245% due 4/25/22 3,000,000 3,021,390
Asset Securitization Corp.
6.50% due 2/14/41 2,984,771 3,065,301
6.85% due 2/14/41 1,600,000 1,670,944
7.10% due 8/13/29 1,145,422 1,214,113
BB&T Corp.
6.375% due 6/30/05 3,820,000 3,975,627
British Columbia
Province of Canada
5.375% due 10/29/08 1,200,000 1,190,279
Canadian Government
5.25% due 11/05/08 1,000,000 995,120
Century Telephone
Enterprises Inc.
6.30% due 1/15/08 1,200,000 1,225,260
Chase Mortgage
Financial Corp.
6.50% due 6/25/13 2,467,349 2,441,134
6.50% due 9/25/13 2,100,000 2,121,481
Commercial Mortgage
Acceptance Corp.
5.80% due 3/15/06 1,417,535 1,411,227
Conseco Inc.
Medium Term Notes
6.40% due 6/15/01 2,200,000 2,218,304
Contimortgage Home
Equity Loan Trust
6.13% due 3/15/13 2,400,000 2,404,488
Dayton Hudson Corp.
5.95% due 6/15/00 1,200,000 1,217,064
Ford Motor Co.
6.50% due 8/01/18 1,200,000 1,183,184
GMAC Commercial
Mortgage
Securities Corp.
6.83% due 12/15/03 2,779,615 2,864,449
6.42% due 8/15/08 2,460,000 2,496,949
General Electric
Capital Corp.
5.60% due 1/14/00 1,230,000 1,238,422
Green Tree
Financial Corp.
6.71% due 8/15/29 2,250,000 2,200,430
7.65% due 4/15/27 3,000,000 3,065,610
Hartford Financial
Services Group Inc.
6.375% due 11/01/08 1,140,000 1,133,770
J.P. Morgan Commercial
Mortgage Finance Corp.
6.373% due 1/15/30 1,380,508 1,411,584
Money Store
Residential Trust
6.42% due 4/15/06 1,324,887 1,327,709
Morgan Stanley
Capital Inc.
6.44% due 1/15/28 1,800,000 1,844,856
6.55% due 12/15/07 1,500,000 1,511,760
Nissan Auto Receivables
Grantor Trust
6.15% due 2/17/03 2,824,530 2,841,279
Norfolk Southern Corp.
6.95% due 5/01/02 1,610,000 1,681,114
Sears Credit Account
Master Trust
5.25% due 10/16/08 2,430,000 2,413,863
Structured Asset
Securities Corp.
6.79% due 6/12/04 2,756,852 2,872,281
UCFC Loan Trust
6.80% due 2/15/12 2,906,005 2,913,182
Walt Disney Co.
6.75% due 3/30/06 1,095,000 1,180,903
-----------
64,362,530
-----------
CORPORATE BONDS -- 18.3%
- --------------------------------------------------------------------------------
Associates Corp. N. A.
6.25% 11/01/08 2,100,000 2,107,812
Atlantic City Electric Co.
7.01% due 8/23/02 1,495,000 1,577,808
Commonwealth Edison
Electric Co.
7.00% due 7/01/05 2,043,000 2,178,716
Detroit Edison Co.
6.69% due 3/17/03 1,000,000 1,058,400
Equitable Life
Assurance Co.
6.95% due 12/01/05 2,275,000 2,418,507
Ericsson
Telecommunications Inc.
6.75% due 2/12/02 1,450,000 1,539,329
GTE Corp.
6.36% due 4/15/06 625,000 653,681
IMC Home Equity
Loan Trust
6.34% due 8/20/29 3,600,000 3,650,148
Jackson National Life
Insurance Co.
8.15% due 3/15/27 1,890,000 2,204,893
33
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTSOCTOBER 31, 1998
PRINCIPAL
ISSUER AMOUNT VALUE
- --------------------------------------------------------------------------------
CORPORATE BONDS (continued)
- --------------------------------------------------------------------------------
Lockheed Martin Corp.
7.20% due 5/01/36 $1,390,000 $1,514,071
Manitoba Province
of Canada
5.50% due 10/01/08 600,000 597,378
MCI Communications
Corp.
6.125% due 4/15/12 24,400,000 2,495,022
Mattel Inc.
6.00% due 7/15/03 1,240,000 1,274,189
Merrill Lynch & Co., Inc.
6.00% due 7/15/05 1,315,000 1,314,724
Occidental
Petroleum Corp.
6.40% due 4/01/03 2,125,000 2,130,992
Petroleum Geographic
Services
6.625% due 3/30/08 1,460,000 1,426,478
Philadelphia Electric Co.
6.625% due 3/01/03 1,415,000 1,477,246
7.125% due 9/01/02 700,000 739,942
Raytheon Co.
5.95% due 3/15/01 480,000 485,990
6.30% due 3/15/05 725,000 743,045
Republic of Ireland
6.875% due 3/10/03 1,180,000 1,271,450
Sony Corp.
6.125% due 3/04/03 1,000,000 1,022,460
Suntrust Banks Inc.
6.00% due 1/15/28 1,800,000 1,817,892
TCI Communications Inc.
6.875% due 2/15/06 750,000 802,012
USA Waste Services Inc.
6.50% due 12/15/02 1,270,000 1,303,592
Union Pacific
Resource Group, Inc.
6.50% due 5/15/05 815,000 810,860
-----------
38,616,637
-----------
MORTGAGE BACKED -- 18.5%
- --------------------------------------------------------------------------------
CMC Securities Corp.
7.00% due 10/25/27 2,140,889 2,154,034
CWMBS Inc.
6.50% due 7/25/13 2,266,744 2,245,848
6.75% due 10/25/27 1,252,836 1,256,444
6.75% due 4/25/28 2,185,042 2,181,611
7.50% due 9/25/14 783,042 783,771
Federal Home Loan
Mortgage Corp.
6.00% due 8/01/00 3,455,410 3,461,803
6.00% due 4/15/08 1,520,000 1,529,424
6.25% due 06/15/24 2,045,000 2,105,077
6.50% TBA
due 12/01/99* 1,500,000 1,512,187
6.50% due 2/01/11 79,811 81,108
6.50% due 4/01/11 260,840 265,079
6.50% due 7/01/11 350,166 355,418
6.50% due 8/01/11 78,569 79,748
6.50% due 9/15/22 1,707,972 1,709.560
Federal National
Mortgage Association
6.00% TBA
due 12/01/99* 1,780,000 1,758,862
6.50% TBA
due 12/01/99* 2,375,000 2,393,549
6.50% due 5/01/11 407,295 413,274
6.50% due 7/01/11 358,779 364,046
6.50% due 8/25/22 1,500,000 1,512,269
7.00% due 6/01/03 232,206 235,575
7.00% due 7/01/03 641,353 650,659
7.35% due 8/17/21 1,940,690 2,083,020
8.00% due 5/01/26 538,885 557,320
8.00% due 6/01/26 305,351 315,797
8.00% due 7/01/26 142,556 147,432
First Union Lehman
Brothers Commercial
Mortgage Trust
6.479% due 3/18/04 908,880 925,640
Government National
Mortgage Association
7.25% due 10/16/2 2480,774 484,226
Norwest Asset
Securitization Corp.
6.75% due 2/25/13 4,697,384 4,766,556
PNC Mortgage
Securities Corp.
6.392% due 10/25/13 845,000 826,252
Residential Fundings
Mortgage
Securitization Inc.
6.50% DUE 3/25/13 1,892,425 1,913,548
------------
39,069,137
------------
U. S. TREASURY OBLIGATIONS -- 31.0%
- --------------------------------------------------------------------------------
UNITED STATES TREASURY BONDS -- 3.5%
- --------------------------------------------------------------------------------
6.875% due 8/15/25 975,000 1,180,813
6.50% due 11/15/26 250,000 290,977
6.625% due 2/15/27 1,000,000 1,184,060
6.125% due 11/15/27 2,000,000 2,250,620
3.625% due 4/15/28 2,353,813 2,355,272
------------
7,261,742
------------
34
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) OCTOBER 31, 1998
PRINCIPAL
ISSUER AMOUNT VALUE
- --------------------------------------------------------------------------------
UNITED STATES TREASURY NOTES -- 27.5%
- --------------------------------------------------------------------------------
5.625% due 4/30/00 $ 2,275,000 $ 2,316,223
6.50% due 5/31/01 20,875,000 21,964,466
6.25% due 1/31/02 3,694,000 3,899,460
6.50% due 5/31/02 3,515,000 3,757,219
6.25% due 6/30/02 6,505,000 6,907,464
5.50% due 3/31/03 3,055,000 3,195,347
5.25% due 8/15/03 1,255,000 1,309,517
5.875% due 2/15/04 4,280,000 4,581,612
6.875% due 5/15/06 2,770,000 3,171,207
6.50% due 10/15/06 4,330,000 4,857,048
5.625% due 5/15/08 1,915,000 2,064,313
-----------
58,023,876
-----------
TOTAL U.S.
TREASURY OBLIGATIONS 65,285,618
-----------
TOTAL FIXED INCOME
(Identified Cost $201,779,543) 207,333,922
-----------
PREFERRED STOCKS -- 1.4%
- --------------------------------------------------------------------------------
Comed Financing
(Identified Cost
$2,941,579) 114,928 2,901,932
-----------
SHORT-TERM OBLIGATIONS -- 4.3%
- --------------------------------------------------------------------------------
Aubrey Lanston Government
Repurchase Agreement
5.45% due 11/02/98
proceeds at maturity
$3,154,432 (collateralized
by $3,010,000 U.S.
Treasury Notes valued at
$3,216,938 5.625%
due 12/31/02) 3,153,000 3,153,000
FCC National Bank
5.68% due 6/03/99 5,000,000 5,018,750
United States Treasury Bills
4.14% due 12/24/98 800,000 795,124
4.60% due 12/24/98 20,000 19,865
4.68% due 12/24/98 63,000 62,566
4.72% due 12/24/98 140,000 139,027
------------
TOTAL SHORT-TERM OBLIGATIONS
(Identified Cost $9,167,616) 9,188,332
------------
TOTAL INVESTMENTS 104.0% 219,424,186
(Identified Cost
$213,888,738)
OTHER ASSETS,
LESS LIABILITIES (4.0) (8,438,456)
----- ------------
NET ASSETS 100.0% $210,985,730
===== ============
FUTURES CONTRACTS
- --------------------------------------------------------------------------------
Futures contracts which were open at
October 31, 1998 are as follows :
AGGREGATE
DESCRIPTION/ NUMBER OF FACE VALUE EXPIRATION UNREALIZED
POSITION CONTRACTS OF CONTRACTS DATE GAIN/(LOSS)
- --------------------------------------------------------------------------------
U.S. Treasury
10-30 year December
(sell) Bond 80 $8,000,000 1998 $135,025
*TBA's are mortgage-backed securities traded under delayed delivery
commitments, settling after October 31, 1998. Although the unit price for the
trade has been established, the principal value has not been finalized. However,
the amount of the commitment will not fluctuate more than 2% from the principal
amount. Income on TBA's is not earned until the settlement date.
See notes to financial statements
35
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investments, at value (Note 1A) (Identified Cost, $213,888,738) $219,424,186
Cash 25,772
Interest receivable 2,736,170
Receivable for investments sold 1,314,359
Receivable for variation margin 72,500
- --------------------------------------------------------------------------------
Total assets 223,572,987
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 12,320,783
Payable to affiliates--Management fees (Note 2) 83,591
Accrued expenses and other liabilities 182,883
- --------------------------------------------------------------------------------
Total liabilities 12,587,257
- --------------------------------------------------------------------------------
NET ASSETS $210,985,730
================================================================================
REPRESENTED BY:
Paid-in capital for beneficial interests $210,985,730
================================================================================
INTERMEDIATE INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME (Note 1B)
Interest income $12,595,748
Dividend income 132,162
- --------------------------------------------------------------------------------
$12,727,910
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) $930,567
Custody and fund accounting fees 208,853
Audit fees 32,200
Legal fees 24,968
Trustees fees 4,878
Other 39,164
- --------------------------------------------------------------------------------
Total expenses 1,240,630
- --------------------------------------------------------------------------------
Net investment income 11,487,280
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net unrealized appreciation of investments and
futures contracts 5,670,473
Less unrealized appreciation from contributed
assets (Note 1) 2,730,073
- --------------------------------------------------------------------------------
Unrealized appreciation of investments and futures contracts 2,940,400
Net realized gain from investment transactions 2,491,094
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments
and futures contracts 5,431,494
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,918,774
================================================================================
See notes to financial statements
36
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
========================= ======================================================
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $11,487,280
Net realized gain from investments
transactions and futures contracts 2,491,094
Unrealized appreciation of investments
and futures contracts 2,940,400
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations 16,918,774
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions (Note 1) 347,139,773
Value of withdrawals (153,072,817)
- --------------------------------------------------------------------------------
Net increase in net assets from capital transactions 194,066,956
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 210,985,730
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- -------------------------------------------------------------------------------
End of period $210,985,730
================================================================================
INTERMEDIATE INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD NOVEMBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $210,986
Ratio of expenses to average net assets 0.60%
Ratio of net investment income to average net assets 5.55%
Portfolio turnover 98%
================================================================================
See notes to financial statements
37
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Intermediate Income Portfolio (the
"Portfolio"), a separate series of The Asset Allocation Portfolios (the
"Trust"), is registered under the U.S. Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company which
was organized as a trust under the laws of the State of New York. The
Declaration of Trust permits the Trustees to issue beneficial interests in the
Portfolio. The Investment Manager of the Portfolio is Citibank, N.A.
("Citibank") Signature Financial Group (Grand Cayman), Ltd. ("SFG") acts as the
Portfolio's Sub-Administrator.
On November 1, 1997 (Commencement of Operations) the CitiSelect Folio 200,
CitiSelect Folio 300 and CitiSelect Folio 400, transferred a portion of their
investable assets, in the amounts of $48,473,071, $89,250,334 and $23,537,184
including $808,525, $1,515,914 and $405,634, respectively, of unrealized
appreciation to the Portfolio in exchange for an interest in the Portfolio. The
total investable assets along with current year contributions, are included in
"Proceeds from contributions" in the Statement of Changes in Net Assets.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Equity securities listed on securities
exchanges or reported through the NASDAQ system are valued at last sale prices.
Unlisted securities or listed securities for which last sales prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations maturing in sixty days or less), are valued on the basis
of valuations furnished by pricing services approved by Board of Trustees which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, and other market data, without exclusive reliance on quoted prices or
exchange or over-the-counter prices. Short-term obligations, maturing in sixty
days or less, are valued at amortized cost, which constitutes fair value as
determined by the Trustees. Securities, if any, for which there are no such
valuations or quotations are valued at fair value as determined in good faith by
or under guidelines established by the Trustees.
B. Income Interest income consists of interest accrued and discount earned,
adjusted for amortization of premium or discount on long-term debt securities
when required for U.S. federal income tax purposes.
C. U.S. Federal Income Taxes The Portfolio is considered a partnership under
the U.S. Internal Revenue Code. Accordingly, no provision for federal income
taxes is necessary.
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
D. Repurchase Agreements It is the policy of the Portfolio to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System or to have segregated within the custodian bank's
vault, all securities held as collateral in support of repurchase agreements.
Additionally, procedures have been established by the Portfolio to monitor, on a
daily basis, the market value of the repurchase agreement's underlying
investments to ensure the existence of a proper level of collateral.
E. Futures Contracts The Portfolio may engage in futures transactions. The
Portfolio may use futures contracts in order to protect the Portfolio from
fluctuations in interest rates without actually buying or selling debt
securities, or to manage the effective maturity or duration of fixed income
securities in the Portfolio in an effort to reduce potential losses or enhance
potential gains. Buying futures contracts tends to increase the Portfolio's
exposure to the underlying instrument. Selling futures contracts tends to either
decrease the Portfolio's exposure to the underlying instrument, or to hedge
other fund investments.
Upon entering into a futures contract, the Portfolio is required to deposit
with the broker an amount of cash or cash equivalents equal to a certain
percentage of the contract amount. This is known as the "initial margin."
Subsequent payments ("variation margin") are made or received by the Portfolio
each day, depending on the daily fluctuation of the value of the contract. The
daily changes in contract value are recorded as unrealized gains or losses and
the Portfolio recognizes a realized gain or loss when the contract is closed.
Futures contracts are valued at the settlement price established by the board of
trade or exchange on which they are traded.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in the value of futures contracts primarily
corresponds with the value of their underlying instruments, which may not
correlate with the change in the value of the hedged instruments. In addition,
there is the risk the Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market. Futures contracts involve,
to varying degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities.
39
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
F. TBA Purchase Commitments The Portfolio enters into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount of
the commitment will not fluctuate more than 2.0% from the principal amount. The
Portfolio holds, and maintains until the settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price. TBA
purchase commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Unsettled TBA purchase commitments are valued
at the current market value of the underlying securities, generally according to
the procedure described under Note 1A.
Although the Portfolio will generally enter TBA purchase commitments with the
intention of acquiring securities for its portfolio, the Portfolio may dispose
of a commitment prior to settlement if the Portfolio's Adviser deems it
appropriate to do so.
G. Expenses The Portfolio bears all costs of its operations other than
expenses specifically assumed by Citibank and SFG. Expenses incurred by the
Portfolio Trust with respect to any two or more portfolios or series are
allocated in proportion to the average net assets of each portfolio, except when
allocations of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that portfolio.
H. Other Investment transactions are accounted for on the date the
investments are purchased or sold. Realized gains and losses are determined on
the identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolio's business affairs, and has a separate Management Agreement with the
Portfolio. Citibank also provides certain administrative services to the
Portfolio. These administrative services include providing general office
facilities and supervising the overall administration of the Portfolio. SFG acts
as Sub-Administrator and performs certain duties and receives compensation from
Citibank as from time to time are agreed to by Citibank and SFG. Citibank is a
wholly-owned subsidiary of Citigroup, Inc. Citigroup, Inc. was formed as a
result of the merger of Citicorp and Travelers Group, Inc. which was completed
on October 8, 1998.
The management fees paid to Citibank, amounted to $930,567, for the period
November 1, 1997 (Commencement of Operations) to October 31, 1998. The
investment management fees are computed at the annual rate of 0.45% of the
Portfolio's average daily net assets.
The Trust pays no compensation directly to any Trustee or any other officer
who is affiliated with the Sub-Administrator, all of whom receive remuneration
for their services to the Trust from the Sub-Administrator or its affiliates.
40
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $270,810,065 and $202,660,714
respectively, for the period November 1, 1997 (Commencement of Operations) to
October 31, 1998.
4. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at October 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $213,888,738
================================================================================
Gross unrealized appreciation $ 5,794,759
Gross unrealized depreciation (259,311)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 5,535,448
================================================================================
5. LINE OF CREDIT The Portfolio, along with various other Portfolios in the
CitiFunds Family, entered into an ongoing agreement with a bank which allows the
Funds collectively to borrow up to $60 million for temporary or emergency
purposes. Interest on the borrowings, if any, is charged to the specific fund
executing the borrowing at the base rate of the bank. The line of credit
requires a quarterly payment of a commitment fee based on the average daily
unused portion of the line of credit. For the period November 1, 1997
(Commencement of Operations) to October 31, 1998, the commitment fee allocated
to the Portfolio was $696. Since the line of credit was established, there have
been no borrowings.
41
<PAGE>
INTERMEDIATE INCOME PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE ASSET ALLOCATION PORTFOLIO (THE TRUST),
WITH RESPECT TO ITS SERIES, INTERMEDIATE INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Intermediate Income Portfolio (the
"Portfolio"), a series of The Asset Allocation Portfolios, as at October 31,
1998, and the related statements of operations and of changes in net assets and
the financial highlights for the period November 1, 1997 (Commencement of
Operations)through October 31, 1998. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned at
October 31, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at October 31, 1998, the
results of its operations and the changes in its net assets and the financial
highlights for the period November 1, 1997 (Commencement of Operations)through
October 31, 1998, in accordance with U.S. generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
