ANNUAL REPORT o OCTOBER 31, 1998
CitiFunds (SM)
Large Cap Growth Portfolio
LARGE CAP STOCKS
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INVESTMENT PRODUCTS:
NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE
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<PAGE>
TABLE OF CONTENTS
Letter to Our Shareholders 1
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Portfolio Environment and Outlook 2
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Fund Facts 3
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Portfolio Highlights 4
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Fund Performance 5
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CITIFUNDS LARGE CAP GROWTH PORTFOLIO
Statement of Assets and Liabilities 6
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Statement of Operations 6
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Statement of Changes in Net Assets 7
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Financial Highlights 8
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Notes to Financial Statements 9
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Independent Auditors' Report 12
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LARGE CAP GROWTH PORTFOLIO
Portfolio of Investments 13
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Statement of Assets and Liabilities 15
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Statement of Operations 15
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Statement of Changes in Net Assets 16
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Financial Highlights 16
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Notes to Financial Statements 17
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Independent Auditors' Report 20
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<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear CitiFunds Shareholder:
This annual report covers the period from November 1, 1997, through October
31, 1998, for the CitiFunds(SM) Large Cap Growth Portfolio. Inside, the
CitiFunds' investment manager, Citibank, N.A., discusses the market conditions
it faced, the strategies it employed and its outlook for the future.
Much of the 12-month period ended October 31, 1998 saw a continuation of
generally positive economic and market conditions in the United States. In fact,
broad measures of stock market performance continued to set new records during
the first half of 1998. However, over the past several months, the spreading
financial crisis overseas has caused record levels of volatility in the U.S.
stock market.
In our view, recent market volatility once again confirms the benefits of
diversification. By allocating your investment assets among a number of
different markets -- including stocks, bonds and money market securities -- you
may be able to reduce the effects of heightened volatility within one or two
market sectors on your overall portfolio. In our view, CitiFunds Large Cap
Growth Portfolio can play a valuable role in such a diversified investment
portfolio.
Thank you for your continued confidence and participation.
Sincerely,
/s/ PHILIP W. COOLIDGE
PHILIP W. COOLIDGE
President
November 20, 1998
1
<PAGE>
PORTFOLIO ENVIRONMENT AND OUTLOOK
Despite less-than-ideal market conditions over the past few months,
CitiFunds Large Cap Growth Portfolio has provided attractive returns. We
attribute this good performance to our stock selection strategy, which
emphasizes the stocks of large, high-quality companies in the United States.
We are particularly pleased with the Portfolio's performance during the
recent period of market weakness. Financial markets worldwide have been hurt by
the currency and banking crisis that began last year in Southeast Asia and has
since spread to other emerging markets. When it became apparent this past summer
that these financial problems would affect developed economies in the U.S. and
Europe, investors reacted by selling investments that they perceived as risky.
As a result, international stocks and small-capitalization U.S. stocks were
punished in this "flight to quality" during the third quarter of 1998, as were
large multinational companies doing business in overseas markets. Because we had
focused primarily on large U.S. growth companies that derive their revenues from
domestic markets, we avoided the brunt of the market declines.
Although prices of many large-capitalization U.S. stocks also fell during
the third quarter, they have generally provided positive returns for the
year-to-date and over the past 12 months. In our opinion, that's because
investors seeking risk-averse investments recognized the relative value of large
companies with proven track records of revenue growth, earnings growth and
strong balance sheets. Many companies with these characteristics have
demonstrated their ability to prosper even in difficult times, when their
financial strength gives them an opportunity to gain market share at the expense
of their weaker competitors.
The Portfolio continued to benefit from our decisions to emphasize certain
sectors of the stock market. For example, we received good returns from our
holdings of specialty retailers during the first half of 1998 because of strong
consumer spending in a growing U.S. economy. We sold some of these holdings in
the fall, taking profits when it became clearer that economic conditions might
deteriorate. We also emphasized certain health care companies, particularly
pharmaceutical companies that we believed could maintain earnings during a
period of economic weakness. Accordingly, our pharmaceutical holdings were
largely characterized by track records of consistent earnings growth and strong
research-and-development efforts.
In some market sectors, the Portfolio benefitted not only from the types of
companies in which we chose to invest, but also the types of companies we
avoided. For example, our financial holdings focused on regional banks with
little or no exposure to overseas credit markets. These medium-sized banks
performed relatively well, especially compared to the large money-center banks,
which suffered from exposure to foreign markets. Similarly, our holdings in the
technology sector favored information processing companies, which performed
relatively well, over hardware and microchip manufacturers, which did not.
Finally, we avoided certain industries that we believed were most vulnerable
to investors' flight to quality and the effects of economic deterioration.
Commodities
2
<PAGE>
producers, energy companies and certain manufacturers with earnings that are
susceptible to economic slowdowns were among the companies we de-emphasized.
Looking forward, we are cautiously optimistic about the prospects for
large-capitalization growth companies. Our economic forecast calls for slower
U.S. economic growth accompanied by low inflation and declining interest rates.
In fact, the Federal Reserve Board recently reduced short-term interest rates in
an effort to stimulate growth and offset some of the effects of foreign turmoil
on the U.S. economy. Such an environment should be positive for large, dominant
growth companies that continue to produce profitable earnings growth.
On the other hand, we have tempered our optimism with caution because we do
not believe that large-capitalization stocks can sustain the returns to which
investors have become accustomed over the past three years. During that time,
large stocks as measured by the Standard & Poor's 500 index have provided
average annual returns of more than 26%. In our view, these returns will
eventually moderate to more historically normal levels, which have averaged 13%
since 1972.
FUND FACTS
FUND OBJECTIVE
Long-term capital growth; dividend income, if any, is incidental to this
investment objective.
INVESTMENT MANAGER DIVIDENDS
Citibank, N.A. Paid semi-annually, if any
COMMENCEMENT OF OPERATIONS CAPITAL GAINS
October 19, 1990 Distributed annually, if any
NET ASSETS AS OF 10/31/98 BENCHMARKS
$378.4 million o Standard & Poor's Barra Growth
Index
o Lipper Growth Funds Average
3
<PAGE>
PORTFOLIO HIGHLIGHTS
TOP TEN EQUITY HOLDINGS AS OF OCTOBER 31, 1998
COMPANY, INDUSTRY % OF NET ASSETS
Microsoft Corp., Technology 6.57%
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General Electric Co., Capital Goods 6.45%
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Wal Mart Stores Inc., Retail 3.68%
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Pfizer Inc., Pharmaceutical 3.51%
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Eli Lilly &Co., Pharmaceutical 3.51%
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Schering Plough Corp., Healthcare 3.37%
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Procter &Gamble Co., Consumer Non-Durables 3.36%
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Intel Corp., Technology 3.34%
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Merck & Co., Pharmaceutical 3.14%
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Federal National Mortgage Association 3.11%
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[The table below represents a pie chart]
PORTFOLIO DIVERSIFICATION AS OF OCTOBER 31, 1998
Finance 10.0%
Energy/Utilities 2.0%
Consumer 15.0%
Capital Goods 6.0%
Technology 24.0%
Healthcare 0.12
Pharmaceutical 17.0%
*Short Term 3.0%
Retail 7.0%
Commercial Services 4.0%
*Includes cash and net other assets.
4
<PAGE>
FUND PERFORMANCE
TOTAL RETURNS
SINCE
ONE FIVE 10/19/90
ALL PERIODS ENDED OCTOBER 31, 1998 YEAR YEARS* INCEPTION*
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CitiFunds Large Cap Growth Portfolio 26.90% 17.97% 17.80%
Lipper Growth Funds Average 9.61% 16.38% 17.30%+
S&P Barra Growth Index 31.89% 24.56% 21.72%+
* Average Annual Total Return
+ From 10/31/90
Income Dividends Per Share $0.012
Capital Gain Distributions $4.371
GROWTH OF A $10,000 INVESTMENT
A $10,000 investment in the Fund made on inception date would have grown to
$37,326 (as of 10/31/98). The graph shows how the Fund compares to its
benchmarks over the same period.
[The table below represents a line graph]
Date Lipper Growth S&P Barra CitiFunds Large Cap
Funds Index Growth Index Growth Fund
- ---------------------------------------------------------------------
10/19/90 10000
10/31/90 10000 10000 9847
11/30/90 10660 10604 10438
12/31/90 11014 10941 10534
1/31/91 11690 11396 10996
2/28/91 12534 12280 11811
3/31/91 12938 12744 11888
4/30/91 12922 12720 11635
5/31/91 13456 13200 12427
6/30/91 12795 12649 11723
7/31/91 13430 13325 12412
8/31/91 13838 13754 13111
9/30/91 13712 13453 12667
10/31/91 13993 13617 12956
11/30/91 13435 13270 12401
12/31/91 14921 15140 13772
1/31/92 14997 14608 13549
2/29/92 15208 14695 13883
3/31/92 14755 14354 13515
4/30/92 14656 14506 13571
5/31/92 14738 14619 13538
6/30/92 14309 14316 13106
7/31/92 14821 14962 13665
8/31/92 14499 14790 13285
9/30/92 14724 14964 13576
10/31/92 15021 15189 13923
11/30/92 15769 15803 14694
12/31/92 16061 15907 14818
1/31/93 16259 15735 14897
2/28/93 16004 15608 14684
3/31/93 16447 15828 15535
4/30/93 15937 15098 15289
5/31/93 16516 15636 15726
6/30/93 16566 15503 15572
7/31/93 16526 15183 15370
8/31/93 17225 15737 16066
9/30/93 17401 15497 16110
10/31/93 17643 16073 16335
11/30/93 17297 16062 16133
12/31/93 17797 16174 16635
1/31/94 18322 16520 16973
2/28/94 18036 16225 16703
3/31/94 17187 15475 15961
4/30/94 17244 15545 16253
5/31/94 17310 15798 16579
6/30/94 16727 15462 16103
7/31/94 17169 15955 16607
8/31/94 17955 16807 17020
9/30/94 17632 16567 16584
10/31/94 17911 16953 16894
11/30/94 17239 16397 16333
12/31/94 17398 16680 16568
1/31/95 17520 17094 16674
2/28/95 18173 17761 17260
3/31/95 18678 18318 17682
4/30/95 19061 18794 17870
5/31/95 19616 19467 18444
6/30/95 20420 20213 18736
7/31/95 21372 20858 19328
8/31/95 21537 20789 19139
9/30/95 22157 21816 19719
10/31/95 21825 21990 19778
11/30/95 22585 22782 20843
12/31/95 22664 23039 21132
1/31/96 23149 23920 21685
2/29/96 23672 24137 21820
3/31/96 23883 24036 22213
4/30/96 24669 24505 22385
5/31/96 25323 25406 22791
6/30/96 24958 25724 23042
7/31/96 23475 24538 21727
8/31/96 24304 24901 22310
9/30/96 25682 26629 23551
10/31/96 25857 27207 23563
11/30/96 27398 29240 24879
12/31/96 27001 28564 24057
1/31/97 28381 30801 25481
2/28/97 27969 31059 25310
3/31/97 26646 29585 23978
4/30/97 27637 31972 26021
5/31/97 29682 33868 27313
6/30/97 30851 35585 28650
7/31/97 33446 38404 30653
8/31/97 32336 35850 28594
9/30/97 34134 37678 29930
10/31/97 32840 36544 29415
11/30/97 33392 38528 31112
12/31/97 33709 39002 31607
1/31/98 33867 40313 32389
2/28/98 36421 43114 34666
3/31/98 38024 45343 36335
4/30/98 38476 45724 36370
5/31/98 37349 44805 35431
6/30/98 38705 47999 38317
7/31/98 37807 47970 37813
8/31/98 31614 41729 32911
9/30/98 33489 44496 35362
10/31/98 35860 48229 37326
The graph assumes all dividends and distributions are reinvested at Net Asset
Value.
Notes: All Fund performance numbers represent past performance, and are no
guarantee of future results. The Fund's share price and investment return will
fluctuate, so that the value of an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns include change in
share price and reinvestment of dividends and distributions, if any. Total
return figures are provided in accordance with SEC guidelines for comparative
purposes for prospective investors, and reflect voluntary fee waivers which may
be terminated at any time. If the waivers were not in place, the Fund's returns
would have been lower.
5
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investment in Large Cap Growth Portfolio, at value (Note 1A) $376,041,100
Receivable for shares of beneficial interest sold 2,801,177
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Total assets 378,842,277
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LIABILITIES:
Payable for shares of beneficial interest repurchased 304,103
Payable to affiliates--Management fee (Note 2) 10,703
Accrued expenses and other liabilities 147,270
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Total liabilities 462,076
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NET ASSETS for 17,625,228 shares of beneficial interest outstanding $378,380,201
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NET ASSETS CONSIST OF:
Paid-in capital $267,012,171
Unrealized appreciation 76,662,830
Accumulated net realized gain 34,705,200
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Total $378,380,201
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NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE OF BENEFICIAL INTEREST $21.47
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CITIFUNDS LARGE CAP GROWTH PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME (Note 1B):
Dividend Income from Large Cap Growth Portfolio $ 2,183,182
Interest Income from Large Cap Growth Portfolio 689,628
Allocated Expenses from Large Cap Growth Portfolio (2,163,670)
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$ 709,140
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EXPENSES:
Management fees (Note 2) 915,703
Distribution fees (Note 3) 763,085
Shareholder reports 69,620
Registration fees 29,899
Audit fees 21,350
Custody and fund accounting fees 16,538
Trustees fees 15,767
Legal fees 13,884
Transfer agent fees 7,000
Other 19,542
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Total expenses 1,872,388
Less aggregate amount waived by the Manager (Note 2) (831,026)
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Net expenses 1,041,362
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Net investment loss (332,222)
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NET REALIZED AND UNREALIZED GAIN FROM
LARGE CAP GROWTH PORTFOLIO:
Net realized gain 34,918,080
Unrealized appreciation 31,323,892
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Net realized and unrealized gain from
Large Cap Growth Portfolio 66,241,972
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $65,909,750
================================================================================
See notes to financial statements
6
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
TEN MONTHS
YEAR ENDED YEAR
ENDED OCTOBER 31, ENDED
OCTOBER 31, 1997 DECEMBER 31,
1998 (Note 1F) 1996
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INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income (loss) $ (332,222) $ 357,829 $ 1,497,758
Net realized gain 34,918,080 46,948,909 26,516,316
Unrealized appreciation 31,323,892 934,665 1,062,588
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Net increase in net assets resulting
from operations 65,909,750 48,241,403 29,076,662
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (138,253) (347,415) (1,433,073)
Net realized gain (50,358,634) (13,051,223) (14,330,626)
- --------------------------------------------------------------------------------
Decrease in net assets from
distributions to shareholders (50,496,887) (13,398,638) (15,763,699)
- --------------------------------------------------------------------------------
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (Note 5):
Net proceeds from sale of shares 107,344,145 6,434,759 13,950,013
Net asset value of shares issued
to shareholders from reinvestment
of distributions 50,485,303 13,398,487 15,763,320
Cost of shares repurchased (43,022,818) (35,469,550) (27,800,567)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from transactions in shares of
beneficial interest 114,806,630 (15,636,304) 1,912,766
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 130,219,493 19,206,461 15,225,729
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NET ASSETS:
Beginning of period 248,160,708 228,954,247 213,728,518
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End of period (including
undistributed net investment
income) of $0, $135,280, and
$124,866 respectively) $378,380,201 $248,160,708 $228,954,247
================================================================================
See notes to financial statements
7
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED
ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
OCTOBER 31, 1997 -----------------------------------------------------------------------
1998 (NOTE 1F) 1996 1995 1994++ 1993++ 1992++
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $ 21.14 $ 18.25 $ 17.20 $ 14.13 $ 14.80 $ 13.23 $ 12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment
income (loss) (0.022)** 0.031 0.122 0.211 0.173 0.071** 0.065
Net realized and unrealized
gain (loss) on investments 4.735** 4.016 2.250 3.651 (0.245) 1.550** 0.868
- ------------------------------------------------------------------------------------------------------------------------------------
Total from operations 4.713 4.047 2.372 3.862 (0.072) 1.621 0.933
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.012) (0.030) (0.118) (0.210) (0.169) (0.051) (0.063)
Net realized gain on
investments (4.371) (1.127) (1.204) (0.582) (0.429) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (4.383) (1.157) (1.322) (0.792) (0.598) (0.051) (0.063)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end
of period $ 21.47 $ 21.14 $ 18.25 $ 17.20 $ 14.13 $ 14.80 $ 13.23
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $378,280 $248,161 $228,954 $213,729 $183,975 $200,903 $10,973
Ratio of expenses to
average net assets 1.05%(A) 1.05%(A)* 1.05%(A) 1.05%(A) 1.05%(A) 1.07% 1.40%
Ratio of net investment
income (loss) to
average net assets (0.11)% 0.18%* 0.67% 1.30% 1.15% 0.52% 0.53%
Portfolio turnover(B) -- -- -- -- 1.00% 23.00% 79.00%
Total return 26.90% 22.27%+ 13.84% 27.55% (0.41)% 12.26% 7.60%
Note: If Agents of the Fund for the periods indicated had not voluntarily waived
a portion of their fees and had expenses been limited to that required by
certain state securities laws for the year ended December 31, 1992, the net
investment income (loss) per share and the ratios would have been as follows:
Net investment income
(loss) per share $(0.078)** $(0.023) $0.067 $0.170 $0.136 $(0.029)** $(0.070)
RATIOS:
Expenses to average
net assets 1.32%(A) 1.35%(A)* 1.35%(A) 1.30%(A) 1.29%(A) 1.37% 2.50%
Net investment income
(loss) to average
net assets (0.38)% (0.12)%* 0.37% 1.05% 0.91% 0.21% (0.57)%
====================================================================================================================================
</TABLE>
* Annualized.
** The per share amounts were computed using a monthly average number of shares
outstanding during the year.
(A) Includes the Fund's share of Large Cap Growth Portfolio (formerly
Equity Portfolio) allocated expenses for the periods subsequent to
May 1, 1994.
(B) Portfolio turnover represents the rate of portfolio activity for the period
while the Fund was making investments directly in securities. The portfolio
turnover rate for the period since the Fund transferred all of its
investable assets to the Portfolio is shown in the Portfolio's financial
statements which are included elsewhere in this report.
+ Not Annualized.
++ On May 1, 1994 the fund began investing all of its investable assets in
Large Cap Growth Portfolio.
See notes to financial statements
8
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES CitiFunds Large Cap Growth Portfolio,
(formerly Landmark Equity Fund until March 2, 1998), (the "Fund") is a separate
diversified series of CitiFunds Trust II (the "Trust"), a Massachusetts business
trust. The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end, management investment company. The Fund invests all of
its investable assets in Large Cap Growth Portfolio (the "Portfolio"), (formerly
Equity Portfolio), a management investment company for which Citibank, N.A.
("Citibank") serves as Investment Manager. The value of such investment reflects
the Fund's proportionate interest (61.6% at October 31, 1998) in the net assets
of the Portfolio. CFBDS, Inc ("CFBDS"), acts as the Fund's Sub-Administrator and
Distributor.
The financial statements of the Portfolio, including the portfolio of
investments, are contained elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
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 Fund are
as follows:
A. INVESTMENT VALUATION Valuation of securities by the Portfolio is
discussed in Note 1A of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report.
B. INVESTMENT INCOME The Fund earns income, net of Portfolio expenses,
daily based on its investment in the Portfolio.
C. FEDERAL TAXES The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investment transactions. Accordingly, no provision for federal income or
excise tax is necessary.
D. EXPENSES The Fund bears all costs of its operations other than expenses
specifically assumed by Citibank and CFBDS. Expenses incurred by the Trust with
respect to any two or more funds or series are allocated in proportion to the
average net assets of each fund, except when allocations of direct expenses to
each fund can otherwise be made fairly. Expenses directly attributable to a fund
are charged to that fund. The Fund's share of the Portfolio's expenses are
charged against and reduce the amount of the Fund's investment in the Portfolio.
9
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
E. DISTRIBUTIONS Distributions to shareholders are recorded on ex-dividend
date. The amount and character of income and net realized gains to be
distributed are determined in accordance with income tax rules and regulations,
which may differ from generally accepted accounting principles. These
differences are attributable to permanent book and tax accounting differences.
Reclassifications are made to the Fund's capital accounts to reflect income and
net realized gains available for distribution (or available capital loss
carryovers) under income tax rules and regulations. For the year ended October
31, 1998, the Fund reclassified $225,066 from paid-in capital, $110,129 from
accumulated net gain on investments and $335,195 to accumulated net investment
loss.
F. CHANGE IN FISCAL YEAR END During fiscal year 1997, the Fund changed its
fiscal year end from December 31 to October 31.
G. OTHER All the net investment income, realized and unrealized gain and
loss of the Portfolio is allocated pro rata, based on respective ownership
interests, among the Fund and the other investors in the Portfolio at the time
of such determination. Investment transactions are accounted for on the trade
date basis. Realized gains and losses are determined on the identified cost
basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the Fund's
business affairs, and has a Management Agreement with the Fund. Citibank also
provides certain administrative services to the Fund. These administrative
services include providing general office facilities and supervising the overall
administration of the Fund. CFBDS acts as Sub-Administrator and performs certain
duties and receives compensation from Citibank as from time to time is agreed to
by Citibank and CFBDS. 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 fee is computed at the annual rate of 0.30% of the
Funds' average daily net assets. The management fee amounted to $915,703 of
which $831,026 was voluntarily waived for the year ended 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. DISTRIBUTION FEES The Fund has adopted a Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended, in which the Fund pays
fees for distribution, sales and marketing and shareholder services at an annual
rate not to exceed 0.25% of the Fund's average daily net assets. The
Distribution fees amounted to $763,085 for the year ended October 31, 1998.
10
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in
the Portfolio for the year ended October 31, 1998 aggregated $104,823,812 and
$44,079,431, respectively.
5. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest (without par value). Transactions in shares of beneficial interest were
as follows:
TEN MONTHS
YEAR ENDED
ENDED OCTOBER 31, YEAR ENDED
OCTOBER 31, 1997 DECEMBER 31,
1998 (NOTE 1F) 1996
================================================================================
Shares sold 5,093,051 318,860 770,660
Shares issued to shareholders from
reinvestment of distributions 2,873,381 643,230 862,316
Shares repurchased (2,082,551) (1,766,046) (1,514,522)
- --------------------------------------------------------------------------------
Net increase (decrease) 5,883,881 (803,956) 118,454
================================================================================
11
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE SHAREHOLDERS OF CITIFUNDS TRUST II (THE TRUST):
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of CitiFunds Large Cap Growth Portfolio (the "Fund"), a series of
CitiFunds Trust II, at October 31, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the periods indicated
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at October 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 1998
12
<PAGE>
LARGE CAP GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.4%
- --------------------------------------------------------------------------------
CAPITAL GOODS -- 6.4%
- --------------------------------------------------------------------------------
General Electric Co. 450,000 $ 39,375,000
COMMERCIAL SERVICES -- 4.0%
- --------------------------------------------------------------------------------
Interpublic Group
Companies Inc. 214,200 12,530,700
Paychex Inc. 233,800 11,631,550
-------------
24,162,250
-------------
CONSUMER DURABLES -- 3.2%
- --------------------------------------------------------------------------------
Danaher Corp. 265,000 10,583,437
Leggett & Platt Inc. 239,500 5,598,312
SafeskinCorp 156,500 3,462,562
-------------
19,644,311
-------------
CONSUMER NON-DURABLES -- 10.5%
- --------------------------------------------------------------------------------
Cintas Corp. 184,500 9,870,750
Clorox Co. 124,000 13,547,000
Coca Cola Co. 167,000 11,293,375
Gillette Co. 192,000 8,628,000
Procter & Gamble Co. 231,000 20,530,125
-------------
63,869,250
-------------
CONSUMER SERVICES -- 1.2%
- --------------------------------------------------------------------------------
Clear Channel
Communications* 162,400 7,399,350
-------------
FINANCE -- 9.7%
- --------------------------------------------------------------------------------
American International
Group Inc. 80,350 6,849,838
Federal National
Mortgage Association 268,000 18,977,750
Fifth Third Bancorp 120,200 7,963,250
Finova Group Inc. 139,000 6,776,250
Star Banc Cor 90,300 6,828,938
Zions Bancorp 226,000 11,992,125
-------------
59,388,151
-------------
HEALTHCARE -- 12.4%
- --------------------------------------------------------------------------------
Cardinal Health Inc. 135,800 12,841,588
HBO & Co. 299,500 7,861,875
HealthManagement
Associates Inc. 430,000 7,659,375
Issuer Shares Value
Lincare Holdings Inc.* 213,600 8,530,650
Medtronic Inc. 209,500 13,617,500
Schering Plough Corp. 200,000 20,575,000
Steris Corp. 191,800 4,411,400
-------------
75,497,388
-------------
RETAIL -- 7.4%
- --------------------------------------------------------------------------------
Home Depot 203,900 8,869,650
Kohls Corp.* 104,900 5,015,531
Wal Mart Stores Inc. 325,500 22,459,500
Walgreen Co. 181,400 8,831,913
-------------
45,176,594
-------------
PHARMACEUTICAL -- 16.9%
- --------------------------------------------------------------------------------
Elan Corp. PLC 84,000 5,885,250
Eli Lilly & Co. 265,000 21,448,438
Johnson & Johnson 220,000 17,930,000
Merck & Co. 142,000 19,205,500
Pfizer Inc. 200,000 21,462,500
Warner Lambert Co. 224,000 17,556,000
-------------
103,487,688
-------------
TECHNOLOGY -- 23.6%
- --------------------------------------------------------------------------------
Automatic Data
Processing Inc. 153,400 11,936,438
BMC Software Inc.* 147,200 7,074,800
Cisco Systems Inc.* 255,150 16,074,450
Compaq Computer
Corp.* 288,700 9,130,137
Compuware Corp.* 124,400 6,740,925
EMC Corp.* 193,600 12,463,000
Intel Corp. 229,000 20,423,937
Microsoft Corp.* 379,500 40,179,562
Solectron Corp.* 133,600 7,648,600
SunGard
Data Systems* 377,000 12,723,750
-------------
144,395,599
-------------
UTILITIES -- 2.1%
- --------------------------------------------------------------------------------
Ameritech Corp. 239,300 12,907,244
-------------
Total Common Stocks
(Identified Cost
$477,491,908) 595,302,825
-------------
13
<PAGE>
LARGE CAP GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (Continued) OCTOBER 31, 1998
ISSUER VALUE
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS
AT AMORTIZED COST -- 5.6%
- --------------------------------------------------------------------------------
Aubrey G. Lanston Repurchase
Agreement 5.45%
due 11/02/98 proceeds
at maturity $17,123,774
(Collateralized by $16,184,000
U.S.Treasury Note, 6.625%
due 03/31/02, valued at
$17,458,490) $ 17,116,000
HSBC Repurchase Agreement
5.40% due 11/02/98 proceeds
at maturity $17,123,702
(Collateralized by $11,917,000
U.S. Treasury Note, 9.25%
due 02/15/16, valued at
$17,179,547) 17,116,000
TOTAL SHORT-TERM OBLIGATIONS 34,232,000
TOTAL INVESTMENTS
(Identified Cost
$511,723,908) 103.0% 629,534,825
OTHER ASSETS,
LESS LIABILITIES (3.0) (18,630,358)
----- -------------
Net Assets 100.0% $610,904,467
===== =============
* Non income producing securities
See notes to financial statements
14
<PAGE>
LARGE CAP GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
================================================================================
ASSETS:
Investments at value (Note 1A) (Identified Cost, $511,723,908) $629,534,825
Cash 340
Dividends and interest receivable 281,880
- --------------------------------------------------------------------------------
Total assets 629,817,045
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 18,272,508
Payable to affiliates--Management fees (Note 2) 286,281
Accrued expenses and other liabilities 353,789
- --------------------------------------------------------------------------------
Total liabilities 18,912,578
- --------------------------------------------------------------------------------
NET ASSETS $610,904,467
================================================================================
REPRESENTED BY:
Paid-in capital for beneficial interests $610,904,467
================================================================================
LARGE CAP GROWTH PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME:
Dividend income $ 3,787,649
Interest income 1,185,975
- --------------------------------------------------------------------------------
$ 4,973,624
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 3,167,841
Custody and fund accounting fees 342,809
Legal fees 34,064
Audit fees 31,200
Trustees fees 5,561
Other 167,111
- --------------------------------------------------------------------------------
Total expenses 3,748,586
- --------------------------------------------------------------------------------
Net investment income 1,225,038
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Unrealized appreciation of investments 65,314,684
Less unrealized appreciation from
contributed assets (Note 1) 10,248,832
- --------------------------------------------------------------------------------
Unrealized appreciation of investments 55,065,852
Net realized gain from investment transactions 61,181,518
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments 116,247,370
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $117,472,408
================================================================================
See notes to financial statements
15
<PAGE>
LARGE CAP GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
YEAR TEN MONTHS
ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, 1997 DECEMBER 31,
1998 (NOTE 1F) 1996
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $ 1,225,038 $ 1,639,995 $ 3,049,790
Net realized gain on investment
transactions 61,181,518 60,297,277 28,518,761
Unrealized appreciation of
investments 55,065,852 1,141,934 4,832,223
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 117,472,408 63,079,206 36,400,774
- --------------------------------------------------------------------------------
Capital Transactions:
Proceeds from contributions
(Note 1) 369,790,712 38,002,991 61,756,061
Value of withdrawals (201,271,389) (64,731,733) (55,752,909)
- --------------------------------------------------------------------------------
Net increase (decrease)
in net assets from capital
transactions 168,519,323 (26,728,742) 6,003,152
- --------------------------------------------------------------------------------
Net Increase in Net Assets: 285,991,731 36,350,464 42,403,926
- --------------------------------------------------------------------------------
Net Assets:
Beginning of period 324,912,736 288,562,272 246,158,346
- --------------------------------------------------------------------------------
End of period $610,904,467 $324,912,736 $288,562,272
- --------------------------------------------------------------------------------
LARGE CAP GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
MAY 1, 1994
TEN MONTHS (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31,
OCTOBER 31, 1997 -------------------------------------
1998 (NOTE 1F) 1996 1995 1994
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $610,904 $324,913 $288,562 $246,158 $186,685
Ratio of expenses to
average net assets 0.71% 0.60%* 0.60% 0.60% 0.60%*
Ratio of net investment
income to average net
assets 0.23% 0.62%* 1.10% 1.73% 1.81%*
Portfolio turnover 53% 103% 90% 67% 35%
================================================================================
* Annualized
See notes to financial statements
16
<PAGE>
LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Large Cap Growth Portfolio (the "Portfolio"),
(formerly Equity Portfolio), a separate series of The Premium 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 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 $12,183,616, $34,554,616, $38,508,816 and
$16,346,503 including $1,107,028, $3,598,984, $4,092,260 and $1,450,560,
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 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.
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
17
<PAGE>
LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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. Change in Fiscal Year End During the fiscal year 1997, the Portfolio
changed its fiscal year end from December 31 to October 31.
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.
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 $3,167,841 for the year
ended October 31, 1998. Management fees are computed at the annual rate of 0.60%
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.
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $262,967,294 and $456,978,747,
respectively, for the year ended 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 $511,980,788
================================================================================
Gross unrealized appreciation $126,276,678
Gross unrealized depreciation (8,722,641)
- --------------------------------------------------------------------------------
Net unrealized appreciation $117,554,037
================================================================================
18
<PAGE>
LARGE CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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 year ended October 31, 1998, the
commitment fee allocated to the Portfolio was $1,788. Since the line of credit
was established, there have been no borrowings.
19
<PAGE>
LARGE CAP GROWTH PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE PREMIUM PORTFOLIOS (THE TRUST), WITH
RESPECT TO ITS SERIES, LARGE CAP GROWTH PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Large Cap Growth Portfolio (the
"Portfolio"), a series of The Premium Portfolios, as at October 31, 1998, and
the related statements of operations and of changes in net assets and the
financial highlights for the periods indicated. 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 audits.
We conducted our audits 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 audits, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian and brokers, provide 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 periods indicated in accordance with U.S. generally accepted
accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
20
<PAGE>
TRUSTEES AND OFFICERS
Philip W. Coolidge*, President
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
C. Oscar Morong Jr.
E. Kirby Warren
William S. Woods Jr.
SECRETARY
Linda T. Gibson*
TREASURER
John R. Elder*
*Affiliated Person of Sub-Administrator and Distributor
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, 5th Floor,
Boston, MA 02109
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street, Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
21
<PAGE>
THE CITIFUNDS FAMILY
LARGE CAP STOCKS
oCitiFunds Growth & Income Portfolio
oCitiFunds Large Cap Growth Portfolio
SMALL CAP STOCKS
oCitiFunds Small Cap Growth Portfolio
oCitiFunds Small Cap Value Portfolio
INTERNATIONAL STOCKS
oCitiFunds International Growth & Income Portfolio
oCitiFunds International Growth Portfolio
GROWTH WITH INCOME
oCitiFunds Balanced Portfolio
BONDS
oCitiFunds Intermediate Income Portfolio
oCitiFunds Short-Term U.S. Government Income Portfolio
oCitiFunds New York Tax Free Income Portfolio
oCitiFunds CaliforniaTax Free Income Portfolio
oCitiFunds National Tax Free Income Portfolio
MONEY MARKETS
oCitiFunds Cash Reserves
oCitiFunds U.S. Treasury Reserves
oCitiFunds Tax Free Reserves
oCitiFunds New York Tax Free Reserves
oCitiFunds California Tax Free Reserves
oCitiFunds Connecticut Tax Free Reserves
This report is prepared for the information of shareholders. It is authorized
for distribution to prospective investors only when preceded or accompanied by
an effective prospectus.
For more information contact your Service Agent
or call 1-800-625-4554
CitiFunds are made available by CFBDS, Inc. as distributor.
(C)1998 Citicorp [logo] Printed on recycled paper CFA/LCG/1098
ANNUAL REPORT - OCTOBER 31, 1998
CITIFUNDS
SMALL CAP GROWTH
PORTFOLIO
INVESTMENT PRODUCTS:
NOT FDIC INSURED O NO BANK GUARANTEE O MAY LOSE VALUE
SMALL CAP STOCKS
<PAGE>
TABLE OF CONTENTS
Letter to Our Shareholders 1
................................................................................
Portfolio Environment and Outlook 2
................................................................................
Fund Facts 3
................................................................................
Portfolio Highlights 4
................................................................................
Fund Performance 5
................................................................................
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
Statement of Assets and Liabilities 6
................................................................................
Statement of Operations 6
................................................................................
Statement of Changes in Net Assets 7
................................................................................
Financial Highlights 8
................................................................................
Notes to Financial Statements 9
................................................................................
Independent Auditors' Report 12
................................................................................
SMALL CAP GROWTH PORTFOLIO
Portfolio of Investments 13
................................................................................
Statement of Assets and Liabilities 15
................................................................................
Statement of Operations 15
................................................................................
Statement of Changes in Net Assets 16
................................................................................
Financial Highlights 16
................................................................................
Notes to Financial Statements 17
................................................................................
Independent Auditors' Report 20
................................................................................
<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear CitiFunds Shareholder:
This annual report covers the period from November 1, 1997 through October
31, 1998 for the CitiFundsSM Small Cap Growth Portfolio. Inside, the CitiFunds'
investment manager, Citibank, N.A., discusses the market conditions it faced,
the strategies it employed and its outlook for the future.
Much of the 12-month period saw a continuation of generally positive economic
conditions in the United States. In fact, broad measures of stock market
performance continued to set new records during the first half of 1998. However,
over the past several months, the spreading financial crisis overseas has caused
prices in the U.S. stock market to decline sharply. The small-capitalization
sector of the stock market was particularly hard-hit during the recent
correction.
In our view, recent market volatility once again confirms the benefits of
diversification. By allocating your investment assets among a number of
different markets -- including stocks, bonds and money market securities -- you
may be able to reduce the effects of heightened volatility on your overall
portfolio. In our view, CitiFunds Small Cap Growth Portfolio can play a valuable
role in such a diversified investment portfolio.
Thank you for your continued confidence and participation.
Sincerely,
Philip W. Coolidge
President
November 20, 1998
1
<PAGE>
PORTFOLIO ENVIRONMENT AND OUTLOOK
THE PAST YEAR HAS BEEN A DIFFICULT ONE for the stocks in the small-cap sector
of the U.S. stock market. Gains achieved during the first few months of 1998
were later retraced when U.S. and global financial markets declined sharply in
response to the currency and banking crisis that began last year in Southeast
Asia. During the summer of 1998, it became more apparent that spreading global
financial problems would have a greater effect on the earnings of U.S. companies
than most analysts had anticipated. Investors reacted by selling investments
they perceived as risky. As a result, small-capitalization stocks, corporate
bonds and many non-U.S. securities experienced steep price declines.
Large-capitalization growth stocks also declined, but to a lesser extent.
Small-capitalization growth stocks were particularly hard-hit during the
recent sell-off. Investors seeking risk-averse investments in anticipation of a
slower economy preferred the relative security of large companies with proven
track records of revenue growth, earnings growth and strong balance sheets.
Because many small-cap stocks are relatively young companies, they tend to have
shorter track records, and as a result, they tend to be more volatile during
uncertain times. Therefore, even small-cap growth stocks with sound fundamentals
and bright future prospects declined during the third quarter of 1998.
WE CONTINUE TO APPLY OUR STOCK SELECTION PROCESS, which carefully evaluates
the fundamental characteristics of companies that we expect to deliver
above-average earnings growth. We took steps to reduce the overall volatility of
the portfolio during the reporting period by shifting assets to companies with
market capitalizations toward the higher end of the portfolio's range and with a
demonstrated ability to maintain earnings growth under difficult economic
conditions.
Although we evaluate companies one at a time rather than investing in
response to macroeconomic trends, the process of restructuring the portfolio led
us to change our mix of industries and market sectors. For example, we increased
our technology representation, and we were able to identify growing domestic
technology businesses that were selling at attractive prices. Similarly, we
increased our holdings of certain financial services companies, such as regional
banks. Despite having little or no exposure to overseas credit markets, these
smaller bank stocks had been punished along with large money-center banks, whose
earnings suffered from weakness in foreign markets. As a result, we were able to
acquire the stocks of sound domestic banks at attractive valuation levels.
Valuation measures indicate that small-cap stocks appear to be attractively
priced relative to larger-cap stocks. At the same time, many large-cap growth
stocks continue to sell at near the high end of their valuation ranges. We
believe that such a large disparity is unsustainable over the long term. While
we cannot predict the timing of a return to more reasonable price relationships
between small- and large-cap growth stocks, we are confident that a rebound for
small-cap stocks is ahead. Accordingly, we are maintaining the disciplined
approach that has worked well for us in the past: buying the stocks of
small-capitalization companies that we believe are likely to become the mid-cap
and large-cap leaders of tomorrow.
2
<PAGE>
Looking forward over the near term, we anticipate slower economic growth and
low inflation. This environment may reduce earnings for many companies,
contributing to continued volatility in the stock market. When global economic
growth reaccelerates, so should corporate profits.
Unlike the past three years, however, when large-cap stocks led the market's
advance, we expect leadership to shift to smaller companies. Historically,
market declines are usually followed by a change in leadership. Considering the
above-average growth prospects and attractive current valuations of many
small-cap growth stocks, we believe that small companies may be poised for
excellent returns over the long term.
FUND FACTS
FUND OBJECTIVE
Long-term capital growth; dividend income, if any, is incidental to this
investment objective.
INVESTMENT MANAGER DIVIDENDS
Citibank, N.A. Paid semi-annually, if any
COMMENCEMENT OF OPERATIONS CAPITAL GAINS
June 21, 1995 Distributed annually, if any
NET ASSETS AS OF 10/31/98 BENCHMARKS
$27.8 million o Lipper Small Cap Funds Average
o Russell 2000 Growth Index
3
<PAGE>
PORTFOLIO HIGHLIGHTS
TOP TEN EQUITY HOLDINGS AS OF OCTOBER 31, 1998
COMPANY, INDUSTRY % OF NET ASSETS
Abacus Direct Corp., Commercial Services 3.25%
................................................................................
Profit Recovery Group International Inc., Commercial Services 3.15%
................................................................................
Probusiness Services Inc., Commercial Services 2.75%
................................................................................
Lamar Advertising Co., Commercial Services 2.69%
................................................................................
Total Renal Care Holdings Inc., Health Services/Technology 2.56%
................................................................................
Heftel Broadcasting Corp., Consumer Services 2.50%
................................................................................
Central Packing Corp., Consumer Services 2.39%
................................................................................
Premier Parks Inc., Consumer Services 2.35%
................................................................................
CDW Computer Centers Inc., Electronics/Technical Services 2.33%
................................................................................
Lernout & Hauspie Speech Products, Electronics/Technical Services 2.29%
...............................................................................
PORTFOLIO DIVERSIFICATION AS OF OCTOBER 31, 1998
Commercial Services 23.0%
Electronics/Technical Services 21.0%
Consumer 17.0%
Finance 8.0%
Health Services 11.0%
Retail/Manufacturer 5.0%
Commodities & Processing 3.0%
Energy Minerals 3.0%
Transportation 3.0%
Industrial 2.0%
*Short Term 4.0%
* Includes cash and other net assets.
4
<PAGE>
FUND PERFORMANCE
TOTAL RETURNS
SINCE
ONE JUNE 21, 1995
ALL PERIODS ENDED OCTOBER 31, 1998 YEAR* (INCEPTION)*
========================================+++++===================================
CitiFunds Small Cap Growth Portfolio (16.56)% 21.93%
Lipper Small Cap Funds Average (13.76)% 12.07%+
Russell 2000 Growth Index (15.86)% 6.20%+
* Average Annual Total Return
+ From 6/30/95
CitiFunds Small Cap Growth Portfolio
Lipper Small Cap Funds Average
Russell 2000 Growth Index (unmanaged)
GROWTH OF A $10,000 INVESTMENT
Date Lipper Small Cap Russell 2000 CitiFunds Small
Funds Avg. Value Index Cap Value
--------------- ----------- -------------
6/21/95 10000 10000 1005
7/31/95 10748 10779 10970
8/31/95 10925 10912 11640
9/30/95 11188 11136 12000
10/31/95 10812 10588 11980
11/30/95 11212 11055 13550
12/31/95 11375 11301 14478
1/31/96 11295 11207 14842
2/29/96 11763 11718 16297
3/31/96 12077 11950 17126
4/30/96 12980 12868 19199
5/31/96 13547 13528 20584
6/30/96 13023 12649 19963
7/31/96 11903 11104 17674
8/31/96 12624 11926 19870
9/30/96 13265 12540 20712
10/31/96 13000 12000 20076
11/30/96 13378 12333 20445
12/31/96 13582 12574 19950
1/31/97 13929 12878 20804
2/28/97 13333 12100 19599
3/31/97 12634 11246 18416
4/30/97 12538 11115 17868
5/31/97 14062 12786 20497
6/30/97 14804 13220 21615
7/31/97 15727 13896 22352
8/31/97 16014 14313 22681
9/30/97 17228 15456 24627
10/31/97 16463 14527 23352
11/30/97 16221 14181 23143
12/31/97 16358 14189 23105
1/31/98 16076 14001 22071
2/28/98 17327 15237 24690
3/31/98 18133 15875 25690
4/30/98 18281 15972 25793
5/31/98 17250 14811 23782
6/30/98 17387 14962 25540
7/31/98 16136 13713 23380
8/31/98 12908 10548 17544
9/30/98 14074 11617 19129
10/31/98 14633 12224 19485
A $10,000 investment in the Fund made on inception date would have grown to
$19,485 (as of 10/31/98). The graph shows how the Fund compares to its
benchmarks over the same period.
The graph assumes all dividends and distributions are reinvested at Net Asset
Value.
Notes: All Fund performance numbers represent past performance, and are no
guarantee of future results. The Fund's share price and investment return will
fluctuate, so that the value of an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns include change in
share price and reinvestment of dividends and distributions, if any. Total
return figures are provided in accordance with SEC guidelines for comparative
purposes for prospective investors and reflect certain voluntary fee waivers
which may be terminated at any time. If the waivers were not in place, the
fund's returns would have been lower.
5
<PAGE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investment in Small Cap Growth Portfolio, at value (Note 1A) $27,572,720
Receivable for shares of beneficial interest sold 391,551
Receivable from the Sub-Administrator 79,839
- --------------------------------------------------------------------------------
Total assets 28,044,110
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for shares of beneficial interest repurchased 182,146
Accrued expenses and other liabilities 59,653
- --------------------------------------------------------------------------------
Total liabilities 241,799
- --------------------------------------------------------------------------------
NET ASSETS for 1,639,161 shares of beneficial interest outstanding $27,802,311
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $27,021,657
Unrealized appreciation 2,307,383
Accumulated net realized loss (1,526,729)
- --------------------------------------------------------------------------------
Total $27,802,311
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE OF BENEFICIAL INTEREST $16.96
- --------------------------------------------------------------------------------
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME (LOSS) (Note 1B):
Dividend Income from Small Cap Growth Portfolio $ 46,612
Interest Income from Small Cap Growth Portfolio 54,058
Allocated Expenses from Small Cap Growth Portfolio (236,255)
- --------------------------------------------------------------------------------
$ (135,585)
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 92,432
Distribution fees (Note 3) 67,515
Shareholder reports 37,837
Legal fees 21,161
Audit fees 19,750
Custody and fund accounting fees 17,072
Transfer agent fees 11,500
Trustees fees 10,254
Registration fees 2,116
Other 20,992
- --------------------------------------------------------------------------------
Total expenses 300,629
Less expenses assumed by the Sub-Administrator (Note 6)(79,839)
Less aggregate amount waived by the Manager (Note 2) (92,432)
- --------------------------------------------------------------------------------
Net expenses 128,358
- --------------------------------------------------------------------------------
Net investment loss (263,943)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS FROM
SMALL CAP GROWTH PORTFOLIO:
Net realized loss (1,484,882)
Unrealized depreciation (3,811,810)
- --------------------------------------------------------------------------------
Net realized and unrealized loss from
Small Cap Growth Portfolio (5,296,692)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,560,635)
- --------------------------------------------------------------------------------
See notes to financial statements
6
<PAGE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, 1997 DECEMBER 31,
1998 (Note 1F) 1996
================================================================================
INCREASE (DECREASE) IN NET
ASSETS FROM:
OPERATIONS:
Net investment loss $ (263,943) $ (181,929) $ (20,835)
Net realized gain (loss) (1,484,882) 299,622 1,458,685
Unrealized appreciation
(depreciation) (3,811,810) 3,648,039 1,745,364
- --------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations (5,560,635) 3,765,732 3,183,214
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain (1,049,618) (88,390) (1,756,057)
- --------------------------------------------------------------------------------
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (Note 5):
Net proceeds from sale of shares 15,634,929 5,626,760 20,246,660
Net asset value of shares issued
to shareholders from
reinvestment of distribution 1,020,162 86,659 1,743,625
Cost of shares repurchased (8,041,832) (7,902,725) (4,253,714)
- --------------------------------------------------------------------------------
Net increase (decrease) in net
assets from transactions in
shares of beneficial interest 8,613,259 (2,189,306) 17,736,571
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 2,003,006 1,488,036 19,163,728
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 25,799,305 24,311,269 5,147,541
- --------------------------------------------------------------------------------
End of period (undistributed
net investment income of
$0, $0 and $0 respectively) $27,802,311 $25,799,305 $24,311,269
- --------------------------------------------------------------------------------
See notes to financial statements
7
<PAGE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
TEN MONTHS JUNE 21, 1995
ENDED (COMMENCEMENT
YEAR ENDED OCTOBER 31, YEAR ENDED OF OPERATIONS)
OCTOBER 31, 1997 DECEMBER 31, TO DECEMBER 31,
1998 (Note 1F) 1996 1995
================================================================================
Net Asset Value, beginning
of period $21.24 $18.21 $14.32 $10.00
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) (0.193)+ (0.138)+ (0.016) 0.050
Net realized and unrealized
gain (loss) (3.224)+ 3.236+ 5.407 4.420
- --------------------------------------------------------------------------------
Total from operations (3.417) 3.098 5.391 4.470
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- (0.050)
Net realized gain (0.863) (0.068) (1.501) (0.100)
- --------------------------------------------------------------------------------
Total distributions (0.863) (0.068) (1.501) (0.150)
- --------------------------------------------------------------------------------
Net Asset Value,
end of period $16.96 $21.24 $18.21 $14.32
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $27,802 $25,799 $24,311 $5,148
Ratio of expenses to
average net assets (A) 1.35% 1.35%* 0.88% 0.00%*
Ratio of net investment
income (loss) to
average net assets (0.98)% (0.87)%* (0.13)% 1.21%*
Total return (16.56)% 17.05%** 37.80% 44.78%**
Note: If Agents of the Fund and Agents of Small Cap Growth Portfolio had not
voluntarily waived a portion of their fees, assumed Fund expenses for the
periods indicated and had expenses been limited to that required by certain
state securities laws for the period ended December 31, 1995, the net investment
income (loss) per share and the ratios would have been as follows:
Net investment loss
per share $(0.319)+ $(0.252)+ $(0.133) $(0.288)
RATIOS:
Expenses to average
net assets(A) 1.99% 2.06%* 1.83% 2.50%*
Net investment loss to
average net assets (1.62)% (1.58)%* (1.08)% (1.29)%*
- --------------------------------------------------------------------------------
* Annualized
** Not Annualized
+ The per share amounts were computed using a monthly average number of shares
outstanding during the period.
(A) Includes the Fund's share of Small Cap Growth Portfolio (formerly Small Cap
Equity Portfolio) allocated expenses for the periods indicated.
See notes to financial statements
8
<PAGE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES CitiFunds Small Cap Growth Portfolio,
(formerly Landmark Small Cap Equity until March 2, 1998), (the "Fund") is a
separate diversified series of CitiFunds Trust II (the "Trust"), a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. The Fund
invests all of its investable assets in Small Cap Growth Portfolio (the
"Portfolio"), (formerly Small Cap Equity Portfolio), a management investment
company for which Citibank, N.A. ("Citibank") serves as Investment Manager. The
value of such investment reflects the Fund's proportionate interest (14.2% at
October 31, 1998) in the net assets of the Portfolio. CFBDS, Inc. ("CFBDS") acts
as the Fund's Sub-Administrator and Distributor.
The financial statements of the Portfolio, including the portfolio of
investments, are contained elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
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 Fund are as
follows:
A. INVESTMENT VALUATION Valuation of securities by the Portfolio is discussed
in Note 1A of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
B. INVESTMENT INCOME The Fund earns income, net of Portfolio expenses, daily
based on its investment in the Portfolio.
C. FEDERAL TAXES The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investment transactions. Accordingly, no provision for federal income or
excise tax is necessary. At October 31, 1998, the Fund, for federal income tax
purposes, had a capital loss carryover of $2,190,643 which will expire on
October 31, 2006. Such capital loss carryover will reduce the Fund's taxable
income arising from future net realized gain on investment transactions, if any,
to the extent permitted by the Internal Revenue Code, and thus will reduce the
amount of the distributions to shareholders which would otherwise be necessary
to relieve the Fund of any liability for federal income or excise tax.
D. EXPENSES The Fund bears all costs of its operations other than expenses
specifically assumed by Citibank and CFBDS. Expenses incurred by the Trust with
respect to any two or more funds or series are allocated in proportion to the
average net assets of each fund, except when allocations of direct expenses to
each fund can otherwise be made fairly. Expenses directly attributable to a fund
9
<PAGE>
are charged to that fund. The Fund's share of the Portfolio's expenses are
charged against and reduce the amount of the Fund's investment in the Portfolio.
E. DISTRIBUTIONS Distributions to shareholders are recorded on ex-dividend
date. The amount and character of income and net realized gains to be
distributed are determined in accordance with income tax rules and regulations,
which may differ from generally accepted accounting principles. These
differences are attributable to permanent book and tax accounting differences.
Reclassifications are made to the Fund's capital accounts to reflect income and
net realized gains available for distribution (or available capital loss
carryovers) under income tax rules and regulations. For the year ended October
31, 1998, the Fund reclassified $263,943 to undistributed net investment income
from paid-in-capital.
F. CHANGE IN FISCAL YEAR END During fiscal year 1997, the Fund changed its
fiscal year end from December 31 to October 31.
G. OTHER All the net investment income, realized and unrealized gain and
loss of the Portfolio are allocated pro rata, based on respective ownership
interests, among the Fund and the other investors in the Portfolio at the time
of such determination. Investment transactions are accounted for on the trade
date basis. Realized gains and losses are determined on the identified cost
basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the Funds'
business affairs, and has a Management Agreement with the Fund. Citibank also
provides certain administrative services to the Fund. These administrative
services include providing general office facilities and supervising the overall
administration of the Fund. CFBDS acts as Sub-Administrator and performs certain
duties and receives compensation from Citibank as from time to time is agreed to
by Citibank and CFBDS. 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 fee is computed at the annual rate of 0.35% of the Funds' average
daily net assets. The management fee amounted to $92,432 all of which was
voluntarily waived for the year ended 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. DISTRIBUTION FEES The Fund has adopted a Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended, under which the Fund pays
fees for distribution, sales and marketing and shareholder services at an annual
rate not to exceed 0.25% of the Fund's average daily net assets. The
Distribution fees amounted to $67,515 for the year ended October 31, 1998.
4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in
the Portfolio for the period aggregated $17,211,268 and $10,295,336,
respectively.
10
<PAGE>
5. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest (without par value). Transactions in shares of beneficial interest were
as follows:
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, 1997 DECEMBER 31,
1998 (Note 1F) 1996
================================================================================
Shares sold 775,662 295,369 1,099,302
Shares issued to shareholders from
reinvestment of distributions 53,147 4,540 96,298
Shares repurchased (404,041) (420,429) (220,253)
- --------------------------------------------------------------------------------
Net increase (decrease) 424,768 (120,520) 975,347
- --------------------------------------------------------------------------------
6. ASSUMPTION OF EXPENSES CFBDS has voluntarily agreed to pay a portion of the
unwaived expenses of the Fund for the year ended October 31, 1998, which
amounted to $79,839.
11
<PAGE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE SHAREHOLDERS OF CITIFUNDS TRUST II (THE TRUST):
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
CitiFunds Small Cap Growth Portfolio (the "Fund"), a series of CitiFunds Trust
II, at October 31, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at October 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 1998
12
<PAGE>
SMALL CAP GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 96.4%
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 23.9%
- --------------------------------------------------------------------------------
AHL Services Inc.* 125,595 $ 4,238,831
Abacus Direct Corp.* 129,950 6,335,063
Cultural Access
Worldwide * 136,765 1,162,502
Lamar Advertising Co.* 167,900 5,241,628
Metzler Group Inc.* 100,085 4,203,570
NFO Worldwide Inc.* 191,595 1,796,203
Probusiness
Services Inc.* 146,482 5,355,748
Profit Recovery Group
International Inc.* 200,005 6,137,653
Rental Service Corp.* 188,710 4,198,798
Romac International Inc.* 168,950 2,956,625
Sylan Learning
System Inc.* 60,900 1,922,346
Wilmar Industries Co.* 121,190 2,999,453
- --------------------------------------------------------------------------------
46,548,420
- --------------------------------------------------------------------------------
COMMODITIES & PROCESSING -- 2.7%
- --------------------------------------------------------------------------------
OM Group Inc. 115,795 3,777,812
Synthetic Industries Inc.* 102,390 1,446,259
- --------------------------------------------------------------------------------
5,224,071
- --------------------------------------------------------------------------------
CONSUMER DURABLE -- 2.1%
- --------------------------------------------------------------------------------
Tower Automotive Inc.* 186,165 4,142,171
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 2.8%
- --------------------------------------------------------------------------------
Beringer Wine Estate
Holdings * 78,240 3,550,140
Horizon Organic
Holding Corp. 80,030 1,010,379
Natrol Inc. 81,010 931,615
- --------------------------------------------------------------------------------
5,492,134
- --------------------------------------------------------------------------------
CONSUMER SERVICES -- 12.3%
- --------------------------------------------------------------------------------
Central Packing Corp. 111,155 4,661,563
DeVry Inc. 82,875 1,823,250
Gray Communications
Systems Inc.* 163,792 2,272,614
Heftel Broadcasting
Corp.* 118,293 4,864,800
Metro Networks Inc.* 83,275 3,049,947
Premier Parks Inc.* 206,415 4,579,833
SFX Entertainment Inc. 83,600 2,643,850
- --------------------------------------------------------------------------------
23,895,857
- --------------------------------------------------------------------------------
ELECTRONICS/TECHNICAL SERVICES -- 21.0%
- --------------------------------------------------------------------------------
Aspect Development Inc. 44,700 $ 1,412,241
CDW Computer
Centers Inc.* 60,430 4,528,473
Engineering
Animation Inc.* 37,000 1,621,062
Harbinger Corp.* 175,250 1,161,031
Inacom Corp.* 117,930 2,284,894
Legato Systems Inc. 52,295 2,046,042
Lernout & Hauspie
Speech Products* 112,460 4,456,227
Lycos Inc.* 90,000 3,656,250
Micron Electronics Inc. 122,805 2,571,230
Network Appliance Inc. 35,620 1,950,195
PC Connection Inc.* 118,835 1,812,234
Sapient Corp.* 70,385 3,171,724
Sipex Corp.* 158,675 4,403,231
Tekelec Inc.* 75,900 1,337,281
Whittman Hart Inc.* 220,140 4,375,283
- --------------------------------------------------------------------------------
40,787,398
- --------------------------------------------------------------------------------
ENERGY MINERALS -- 2.5%
- -------------------------------------------------------------------------------
Forcenergy Inc.* 156,880 931,475
Petroleum Geo.
Services* 110,600 2,364,075
Range Resources Corp. 261,995 1,490,096
- --------------------------------------------------------------------------------
4,785,646
- --------------------------------------------------------------------------------
FINANCE -- 7.6%
- --------------------------------------------------------------------------------
Cullen Frost Bankers Inc. 57,730 3,074,122
Centura Banks Inc. 27,000 1,863,000
Executive Risk Inc. 84,415 4,009,712
First Republic Bank
of San Francisco* 121,225 3,000,319
Peoples Heritage
Financial Group 154,590 2,782,620
- --------------------------------------------------------------------------------
14,729,773
- --------------------------------------------------------------------------------
HEALTH SERVICES/TECHNOLOGY -- 11.4%
- --------------------------------------------------------------------------------
Andrx Corp.* 24,600 956,202
Barr Labs Inc.* 63,700 2,177,744
Concentra Managed
Care Inc.* 88,315 905,229
Human Genome
Sciences Inc.* 52,000 1,800,500
Parexel International
Corp.* 156,785 $ 3,459,069
Professional Detailing Inc. 110,470 2,582,236
Steris Corp. 92,515 2,127,845
Total Renal Care
Holdings Inc. 203,768 4,992,316
Viropharma Inc.* 181,365 3,287,241
- --------------------------------------------------------------------------------
22,288,382
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES -- 2.1%
- --------------------------------------------------------------------------------
Service Experts Inc.* 86,905 2,623,445
Waste Connections Inc. 78,500 1,491,500
- --------------------------------------------------------------------------------
4,114,945
- --------------------------------------------------------------------------------
13
<PAGE>
PRODUCER MANUFACTURING -- 1.8%
- --------------------------------------------------------------------------------
Aptargroup Inc. 34,200 959,604
Ha Lo Industrial Inc. 91,745 2,591,796
- --------------------------------------------------------------------------------
3,551,400
- --------------------------------------------------------------------------------
RETAIL -- 3.2%
- --------------------------------------------------------------------------------
Men's Wearhouse Inc.* 93,757 2,273,607
Wholesales Foods
Market Inc.* 98,545 3,947,959
- --------------------------------------------------------------------------------
6,221,566
- --------------------------------------------------------------------------------
TRANSPORTATION -- 3.0%
- --------------------------------------------------------------------------------
Eagle U.S.A.
Airfreight Inc.* 159,755 2,046,861
Hub Group Inc.* 57,040 1,026,720
United Road
Services Inc. 178,525 2,856,400
- --------------------------------------------------------------------------------
5,929,981
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Identified Cost $181,875,215) 187,711,744
- --------------------------------------------------------------------------------
ISSUER VALUE
SHORT-TERM OBLIGATIONS AT AMORTIZED COST -- 4.1%
- --------------------------------------------------------------------------------
Aubrey G. Lanston
Government
Repurchase Agreement
5.45% due 11/02/98
proceeds at
maturity $7,890,582
(collateralized by
$7,528,000 U.S.
Treasury Note
5.625% due 12/31/02
valued at $8,045,550) $ 7,887,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Identified Cost
$189,762,215) 100.5% 195,598,744
OTHER ASSETS,
LESS LIABILITIES (0.5) (927,501)
- --------------------------------------------------------------------------------
NET ASSETS 100.0% $194,671,243
- --------------------------------------------------------------------------------
*Non income producing securities
See notes to financial statements
14
<PAGE>
SMALL CAP GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investments at value (Note 1A) (Identified Cost, $189,762,215) $195,598,744
Cash 884
Receivable for securities sold 4,504,213
Interest receivable 2,388
- --------------------------------------------------------------------------------
Total assets 200,106,229
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 5,175,433
Payable to affiliates-- Management fees (Note 2) 110,621
Accrued expenses and other liabilities 148,932
- --------------------------------------------------------------------------------
Total liabilities 5,434,986
- --------------------------------------------------------------------------------
NET ASSETS $194,671,243
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interests $194,671,243
- --------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME:
Dividend income $395,671
Interest income 444,717
- --------------------------------------------------------------------------------
$840,388
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,673,322
Custody and fund accounting fees 151,541
Audit fees 29,300
Legal fees 27,037
Shareholder reports 5,970
Trustees fees 5,049
Other 71,065
- --------------------------------------------------------------------------------
Total expenses 1,963,284
- --------------------------------------------------------------------------------
Net investment loss (1,122,896)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Unrealized depreciation of investments (2,606,875)
Less unrealized appreciation from contributed assets (Note 1) 25,188,211
- --------------------------------------------------------------------------------
Unrealized depreciation of investments (27,795,086)
Net realized loss from investment transactions (9,691,394)
- --------------------------------------------------------------------------------
Net realized and unrealized (loss) on investments (37,486,480)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($38,609,376)
- --------------------------------------------------------------------------------
See notes to financial statements
15
<PAGE>
SMALL CAP GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, 1997 DECEMBER 31,
1998 (Note 1F) 1996
================================================================================
INCREASE (DECREASE) IN NET
ASSETS FROM:
OPERATIONS:
Net investment income gain (loss)$ (1,122,896) $ (139,259) $ 28,536
Net realized gain (loss)
on investment transactions (9,691,394) 785,204 1,063,995
Unrealized appreciation
(depreciation)of investments (27,795,086) 6,200,702 1,516,882
- --------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting
from operations (38,609,376) 6,846,647 2,609,413
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions
(Note 1) 260,666,527 18,404,723 45,631,942
Value of withdrawals (76,983,925) (22,795,675) (6,088,455)
- --------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
capital transactions 183,682,602 (4,390,952) 39,543,487
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS: 145,073,226 2,455,695 42,152,900
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 49,598,017 47,142,322 4,989,422
- --------------------------------------------------------------------------------
End of period $194,671,243 $49,598,017 $47,142,322
- --------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
TEN MONTHS JUNE 21, 1995
ENDED (COMMENCEMENT
YEAR ENDED OCTOBER 31, YEAR ENDED OF OPERATIONS)
OCTOBER 31, 1997 DECEMBER 31, TO DECEMBER 31,
1998 (Note 1F) 1996 1995
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
(000's omitted) $194,671 $49,598 $47,142 $4,989
Ratio of expenses to
average net assets 0.88% 0.85%* 0.61% 0.00%*
Ratio of net investment
income (loss) to average
net assets (0.50)% (0.37)%* 0.15% 1.22%*
Portfolio turnover 51% 108% 89% 41%
Note: If Agents of the Portfolio had not voluntarily waived a portion of their
fees and assumed Portfolio expenses for the periods indicated and had expenses
been limited to that required by certain state securities law for the period
ended December 31, 1995, the ratios would have been as follows:
RATIOS:
Expenses to average net assets 0.88% 1.04%* 1.17% 2.50%*
Net investment loss to average
net assets (0.50)% (0.56)%* (0.41)% (1.28)%*
- --------------------------------------------------------------------------------
* Annualized
See notes to financial statements
16
<PAGE>
SMALL CAP GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Small Cap Growth Portfolio (the
"Portfolio"), (formerly Small Cap Equity Portfolio), a separate series of The
Premium 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 amount of $15,439,632, $38,272,468, $75,166,816 and
$37,432,299 including $2,166,532, $5,841,516, $11,815,501 and $5,364,662,
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 require 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.
17
<PAGE>
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.
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. CHANGE IN FISCAL YEAR END During fiscal year 1997, the Portfolio changed
its fiscal year end from December 31 to October 31. 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.
2. MANAGEMENT FEES Citibank is responsible for overall management of the
Portfolios' 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 $1,673,322 for the period
ended October 31, 1998. The management fees are computed at the annual rate of
0.75% of the Portfolio's average daily net assets.
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $103,419,429 and $127,921,527,
respectively, for the year ended October 31, 1998.
18
<PAGE>
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 $189,825,40
- --------------------------------------------------------------------------------
Gross unrealized appreciation $30,096,256
Gross unrealized depreciation (24,322,913)
- --------------------------------------------------------------------------------
Net unrealized appreciation $5,773,343
- --------------------------------------------------------------------------------
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 year ended October 31, 1998, the
commitment fee allocated to the Portfolio was $765. Since the line of credit was
established, there have been no borrowings.
19
<PAGE>
SMALL CAP GROWTH PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE PREMIUM PORTFOLIOS (THE TRUST), WITH
RESPECT TO ITS SERIES, SMALL CAP GROWTH PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Small Cap Growth Portfolio (the
"Portfolio"), a series of The Premium Portfolios, as at October 31, 1998, and
the related statements of operations and of changes in net assets and the
financial highlights for the periods indicated. 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 audits.
We conducted our audits 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 audits, which included confirmation of investments owned as
at October 31, 1998 by correspondence with the custodian and brokers, provide 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 periods indicated in accordance with U.S. generally accepted
accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
December 14, 1998
20
<PAGE>
TRUSTEES AND OFFICERS
Philip W. Coolidge*, PRESIDENT
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
C. Oscar Morong Jr.
E. Kirby Warren
William S. Woods Jr.
SECRETARY
Linda T. Gibson*
TREASURER
John R. Elder*
*AFFILIATED PERSON OF SUB-ADMINISTRATOR AND DISTRIBUTOR
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, 5th Floor
Boston, MA 02109
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street,Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
<PAGE>
THE CITIFUNDS FAMILY
LARGE CAP STOCKS
o CitiFunds Growth & Income Portfolio
o CitiFunds Large Cap Growth Portfolio
SMALL CAP STOCKS
o CitiFunds Small Cap Growth Portfolio
o CitiFunds Small Cap Value Portfolio
INTERNATIONAL STOCKS
o CitiFunds International Growth & Income Portfolio
o CitiFunds International Growth Portfolio
GROWTH WITH INCOME
o CitiFunds Balanced Portfolio
BONDS
o CitiFunds Intermediate Income Portfolio
o CitiFunds Short-Term U.S. Government Income Portfolio
o CitiFunds New York Tax Free Income Portfolio
o CitiFunds California Tax Free Income Portfolio
o CitiFunds National Tax Free Income Portfolio
MONEY MARKETS
o CitiFunds Cash Reserves
o CitiFunds U.S. Treasury Reserves
o CitiFunds Tax Free Reserves
o CitiFunds New York Tax Free Reserves
o CitiFunds California Tax Free Reserves
o CitiFunds Connecticut Tax Free Reserves
This report is prepared for the information of share holders. It is authorized
for distribution to prospective investors only when preceded or accompanied by
an effective prospectus.
For more information contact your Service Agent
or call 1-800-625-4554
CitiFunds are made available by CFBDS, Inc. as distributor.
(C)1998 Citicorp
R Printed on recycled paper
CFA/SCG/1098
<PAGE>
Annual Report - October 31, 1998
CITIFUNDS
SMALL CAP VALUE
PORTFOLIO
INVESTMENT PRODUCTS:
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
SMALL CAP STOCKS
<PAGE>
TABLE OF CONTENTS
Letter to Our Shareholders 1
................................................................................
Portfolio Environment and Outlook 2
................................................................................
Fund Facts 3
................................................................................
Portfolio Highlights 4
................................................................................
Fund Performance 5
................................................................................
CITIFUNDS SMALL CAP VALUE PORTFOLIO
Statement of Assets and Liabilities 6
................................................................................
Statement of Operations 6
................................................................................
Statement of Changes in Net Assets 7
................................................................................
Financial Highlights 8
................................................................................
Notes to Financial Statements 9
................................................................................
Independent Auditors' Report 12
................................................................................
SMALL CAP VALUE PORTFOLIO
Portfolio of Investments 13
................................................................................
Statement of Assets and Liabilities 15
................................................................................
Statement of Operations 15
................................................................................
Statement of Changes in Net Assets 16
................................................................................
Financial Highlights 16
................................................................................
Notes to Financial Statements 17
................................................................................
Independent Auditors' Report 20
................................................................................
<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear Shareholder:
This annual report covers the period from the CitiFundsSM Small Cap Value
Portfolio's Commencement of Operations on March 2, 1998, through October 31,
1998. Inside, we discuss the market conditions faced by the Portfolio's
sub-adviser, Franklin Advisory Services, Inc., as well as the strategies it
employed and its outlook for the future.
Much of the reporting period saw a continuation of generally positive
economic conditions in the United States. In fact, broad measures of stock
market performance continued to set new records during the first half of 1998.
However, during the third quarter, the spreading financial crisis overseas
caused prices in the U.S. stock market to decline sharply. The
small-capitalization sector of the stock market was particularly hard-hit during
the recent correction.
In our view, recent market volatility once again confirms the benefits of
diversification. By allocating your investment assets among a number of
different markets -- including stocks, bonds and money market securities -- you
may be able to reduce the effects of heightened volatility on your overall
portfolio. In our view, CitiFunds Small Cap Value Portfolio can play a valuable
role in such a diversified investment portfolio.
Thank you for your continued confidence and participation.
Sincerely,
/s/ PHILIP W. COOLIDGE
-------------------
Philip W. Coolidge
President
November 20, 1998
1
<PAGE>
PORTFOLIO ENVIRONMENT AND OUTLOOK
1998 HAS BEEN A DIFFICULT YEAR for the stocks in which CitiFunds Small Cap
Value Portfolio invests. Gains achieved during the first few months of 1998 were
later retraced when U.S. and global financial markets declined sharply in
response to the currency and banking crisis that began last year in Southeast
Asia. When it became clearer this past summer that spreading global financial
problems would affect the earnings of U.S. companies more than most analysts had
anticipated, investors reacted by selling investments they perceived as risky.
As a result, small-capitalization stocks, corporate bonds and many international
securities experienced steep price declines.
Value-oriented small-capitalization stocks were particularly hard-hit during
the recent sell-off. Investors seeking risk-averse investments in anticipation
of a slower economy preferred the relative security of large companies with
proven track records of revenue growth, earnings growth and strong balance
sheets. Because many small-cap companies are relatively new enterprises, their
performance is less certain during economic downturns. Therefore, even small-cap
stocks with sound fundamentals, bright future prospects and low valuations
declined during the third quarter of 1998.
WE ATTEMPTED TO ADD VALUE IN THIS DIFFICULT MARKET ENVIRONMENT through our
stock selection process, which carefully evaluates each company's stock price
relative to its book value, earnings and cash flow. We also consider companies
with understated assets, as well as "fallen angels" with strong prospects for
recovery. When the market climate changed, we took steps to reduce the risks
affecting the portfolio. We sold some of the smallest companies in the portfolio
because of liquidity concerns, and we shifted assets to larger companies within
the small-cap category. In addition, we began to reduce the number of companies
in the portfolio, and continued to emphasize high-quality businesses with strong
balance sheets and low debt levels. We also focused more intently on companies
that derive their revenues from domestic operations, rather than from overseas
markets.
Although we evaluate companies one at a time rather than investing in
response to macroeconomic trends, our search for good values in high-quality
small-cap companies led us to emphasize certain industries and market sectors.
For example, some electronic technology companies, including computer hardware
and software manufacturers, became attractively valued after their stock prices
declined sharply amid Asia concerns. In addition, low oil prices helped create
attractive values in the stocks of some oil drillers and oil service companies,
which began to see better performance late in the reporting period.
In our view, many small-cap value stocks are now priced at recessionary
levels. At the same time, many large-cap growth stocks continue to sell near the
high end of their valuation ranges. We believe that such a large disparity is
unsustainable over the long term. While we cannot predict the timing of a return
to more reasonable price relationships between small- and large-cap stocks, we
are confident that a rebound for small-cap stocks is ahead. Accordingly, we are
maintaining the disciplined approach that has worked well for us in the past:
buying the stocks of
2
<PAGE>
small-capitalization companies that we believe are attractively valued and have
bright prospects for the future.
Looking forward over the near term, we are proceeding cautiously. While we do
not anticipate a recession in the United States, we may see further economic
weakness in the months ahead. Slower economic growth may have negative
implications for corporate earnings, leading to continued volatility in the
stock market. When the global economic turnaround arrives, however, as we
believe it inevitably will, corporate earnings should improve and stocks should
rebound. Considering the attractive current valuations of many small-cap stocks,
we believe that smaller companies may be poised for excellent returns over the
long term.
FUND FACTS
FUND OBJECTIVE
Long-term capital growth; dividend income, if any, is incidental to this
investment objective.
INVESTMENT MANAGER DIVIDENDS
Citibank, N.A. Paid semi-annually, if any
PORTFOLIO SUBADVISER CAPITAL GAINS
Franklin Advisory Services, Inc. Distributed annually, if any
COMMENCEMENT OF OPERATIONS BENCHMARKS
March 2, 1998 o Lipper Small Cap Funds Average
o Russell 2000(R) Value Index
NET ASSETS AS OF 10/31/98
$33.3 million
3
<PAGE>
PORTFOLIO HIGHLIGHTS
TOP TEN EQUITY HOLDINGS AS OF OCTOBER 31, 1998
COMPANY, INDUSTRY % OF NET ASSETS
JLG Industries, Inc., Producer Manufacturing 3.91%
...............................................................................
Dimon Inc., Consumer Non-Durables 2.92%
...............................................................................
Fritz Companies Inc., Transportation 2.44%
...............................................................................
Standard Commercial Corp., Consumer Non-Durables 2.25%
...............................................................................
Cliffs Drilling Co., Industrial Services 1.97%
...............................................................................
Cannondale Corp., Consumer Durable Goods 1.95%
...............................................................................
United Industrial Corp., Electronic Technology 1.82%
...............................................................................
MMI Companies Inc., Finance 1.74%
...............................................................................
Alliant Techsystems Inc., Electronic Technology 1.72%
...............................................................................
Wolverine World Wide Inc., Consumer Non-Durables 1.71%
...............................................................................
PORTFOLIO DIVERSIFICATION AS OF OCTOBER 31, 1998
Consumer 21.0%
Commercial Services 4.0%
Capital Goods 24.0%
Finance 10.0%
Health 4.0%
Technology 15.0%
Energy/Utilities 8.0%
Transportation 6.0%
*Short Term 3.0%
Industrial Services 5.0%
*Includes cash and net other assets.
4
<PAGE>
FUND PERFORMANCE
TOTAL RETURNS
FOR THE PERIOD MARCH 2, 1998 SINCE
(COMMENCEMENT OF OPERATIONS) 3/2/98
TO OCTOBER 31, 1998 (INCEPTION)*
================================================================================
CitiFunds SmallCap Value Portfolio (28.40%)
Lipper Small Cap Funds Average (15.54%)+
Russell 2000(R)Value Index (15.18%)+
* Not Annualized
+ From 2/28/98
[The following represents a graph in the printed piece.]
GROWTH OF A $10,000 INVESTMENT
CitiFunds Lipper Small Russell 2000
Small Cap Value Cap Funds Avg. Value Index
--------------- ------------- ------------
3/2/98 $10000 $10000 $10000
3/31/98 10380 10465 10406
4/30/98 10340 10551 10457
5/31/98 9720 9956 10086
6/30/98 9280 10034 10030
7/31/98 8230 9313 9245
8/31/98 6730 7449 7797
9/30/98 6830 8123 8237
10/31/98 7160 8445 8482
A $10,000 investment in the Fund made on inception date would have declined to
$7,160 (as of 10/31/98). The graph shows how the Fund compares to its benchmarks
over the same period.
The graph assumes all dividends and distributions are reinvested at Net Asset
Value.
Notes: All Fund performance numbers represent past performance, and are no
guarantee of future results. The Fund's share price and investment return will
fluctuate, so that the value of an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns include change in
share price and reinvestment of dividends and distributions, if any. Total
return figures are provided in accordance with SEC guidelines for comparative
purposes for prospective investors, and reflect voluntary fee waivers which may
be terminated at anytime. If the waivers were not in place, the Fund's returns
would have been lower.
5
<PAGE>
CITIFUNDS SMALL CAP VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investment in Small Cap Value Portfolio, at value (Note 1A) $33,284,029
Receivable for shares of beneficial interest sold 140,174
- --------------------------------------------------------------------------------
Total assets 33,424,203
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for shares of beneficial interest repurchased 36,017
Accrued expenses and other liabilities 75,528
- --------------------------------------------------------------------------------
Total liabilities 111,545
- --------------------------------------------------------------------------------
NET ASSETS for 4,653,487 shares of beneficial interest outstanding $33,312,658
================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $49,105,631
Unrealized depreciation (17,414,112)
Accumulated net realized gain 1,621,139
- --------------------------------------------------------------------------------
Total $33,312,658
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE OF BENEFICIAL INTEREST $7.16
================================================================================
CITIFUNDS SMALL CAP VALUE PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
Investment Income (Note 1B):
Dividend Income from Small Cap Value Portfolio $269,331
Interest Income from Small Cap Value Portfolio 54,664
Allocated Expenses from Small Cap Value Portfolio (254,677)
- --------------------------------------------------------------------------------
$69,318
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 72,642
Distribution fees (Note 3) 72,642
Shareholder reports 27,003
Registration fees 14,619
Audit fees 13,450
Custody and fund accounting fees 11,469
Transfer agent fees 9,000
Legal fees 8,704
Blue Sky fees 5,721
Trustees fees 2,398
Other 12,769
- --------------------------------------------------------------------------------
Total expenses 250,417
Less aggregate amount waived by the Manager (Note 2) (68,513)
- --------------------------------------------------------------------------------
Net expenses 181,904
- --------------------------------------------------------------------------------
Net investment loss (112,586)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
SMALL CAP VALUE PORTFOLIO:
Net realized gain 1,621,139
Unrealized depreciation (17,414,112)
- -------------------------------------------------------------------------------
Net realized and unrealized loss from Small
Cap Value Portfolio (15,792,973)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(15,905,559)
================================================================================
See notes to financial statements
6
<PAGE>
CITIFUNDS SMALL CAP VALUE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment loss $ (112,586)
Net realized gain 1,621,139
Unrealized depreciation (17,414,112)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (15,905,559)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gain --
- --------------------------------------------------------------------------------
Decrease in net assets from distributions to shareholders --
- --------------------------------------------------------------------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
(Note 5):
Net proceeds from sale of shares 67,749,327
Net asset value of shares issued to shareholders from reinvestment
of distributions --
Cost of shares repurchased (18,531,110)
- --------------------------------------------------------------------------------
Net increase in net assets from transactions in shares of
beneficial interest 49,218,217
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 33,312,658
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period (including undistributed
net investment income of $0) $33,312,658
================================================================================
See notes to financial statements
7
<PAGE>
CITIFUNDS SMALL CAP VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
Net Asset Value, beginning of period $10.00
- --------------------------------------------------------------------------------
Income From Operations:
Net investment loss (0.022)+
Net realized and unrealized loss on investments (2.818)+
- --------------------------------------------------------------------------------
Total from operations (2.840)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income --
Net realized gain on investments --
- --------------------------------------------------------------------------------
Total distributions --
- --------------------------------------------------------------------------------
Net Asset Value, end of period $7.16
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $33,313
Ratio of expenses to average net assets (A) 1.50%*
Ratio of net investment loss to average net assets (0.39)%*
Total return (28.40)%**
Note: If Agents of the Fund had not voluntarily waived a portion of their fees,
the net investment loss per share and the ratios would have been as follows:
Net investment loss per share $(0.036)
RATIOS:
Expenses to average net assets (A) 1.74%*
Net investment loss to average net assets (0.63)%*
================================================================================
* Annualized
** Not Annualized
+ The per share amounts were computed using monthly average of shares during
the period.
(A) Includes the Fund's share of Small Cap Value Portfolio allocated expenses
for the period indicated.
See notes to financial statements
8
<PAGE>
CITIFUNDS SMALL CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES CitiFunds Small Cap Value Portfolio (the
"Fund") is a separate diversified series of CitiFunds Trust II (the "Trust"), a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment company.
The Fund invests all of its investable assets in Small Cap Value Portfolio (the
"Portfolio"), a management investment company for which Citibank, N.A.
("Citibank") serves as Investment Manager. The value of such investment reflects
the Fund's proportionate interest (19.5% at October 31, 1998) in the net assets
of the Portfolio. CFBDS, Inc.
("CFBDS") acts as the Fund's Sub-Administrator and Distributor.
The financial statements of the Portfolio, including the portfolio of
investments, are contained elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
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 Fund are as
follows:
A. INVESTMENT VALUATION Valuation of securities by the Portfolio is discussed
in Note 1A of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
B. INVESTMENT INCOME The Fund earns income, net of Portfolio expenses,
daily based on its investment in the Portfolio.
C. FEDERAL TAXES The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investment transactions. Accordingly, no provision for federal income or
excise tax is necessary. At October 31, 1998, the Fund, for federal income tax
purposes, had a capital loss carryover of $7,280,447 which will expire on
October 31, 2006. Such capital loss carryover will reduce the Fund's taxable
income arising from future net realized gain on investment transactions, if any,
to the extent permitted by the Internal Revenue Code, and thus will reduce the
amount of the distributions to shareholders which would otherwise be necessary
to relieve the Fund of any liability for federal income or excise tax.
D. EXPENSES The Fund bears all costs of its operations other than expenses
specifically assumed by Citibank and CFBDS. Expenses incurred by the Trust with
respect to any two or more funds or series are allocated in proportion to the
average net assets of each fund, except when allocations of direct expenses to
each fund can otherwise be made fairly. Expenses directly attributable to a fund
are charged to that fund. The Fund's share of the Portfolio's expenses are
charged against and reduce the amount of the Fund's investment in the Portfolio.
9
<PAGE>
E. DISTRIBUTIONS DISTRIBUTIONS to shareholders are recorded on ex-dividend
date. The amount and character of income and net realized gains to be
distributed are determined in accordance with income tax rules and regulations,
which may differ from generally accepted accounting principles. These
differences are attributable to permanent book and tax accounting differences.
Reclassifications are made to the Fund's capital accounts to reflect income and
net realized gains available for distribution (or available capital loss
carryovers) under income tax rules and regulations. For the period March 2, 1998
(Commencement of Operations) to October 31, 1998, the Fund reclassified $112,586
to accumulated net investment loss from paid in capital.
F. OTHER All the net investment income, realized and unrealized gain and
loss of the Portfolio is allocated pro rata, based on respective ownership
interests, among the Fund and the other investors in the Portfolio at the time
of such determination. Investment transactions are accounted for on the trade
date basis. Realized gains and losses are determined on the identified cost
basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the Fund's
business affairs and has a separate Management Agreement with the Fund. Citibank
also provides certain administrative services to the Fund.These administrative
services include providing general office facilities and supervising the overall
administration of the Fund. CFBDS acts as Sub-Administrator and performs certain
duties and receives compensation from Citibank as from time to time is agreed to
by Citibank and CFBDS. 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 fee is computed at the annual rate of 0.25% of the Fund's average
daily net assets. The management fee amounted to $72,642, of which $68,513 was
voluntarily waived for the period March 2, 1998 (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. DISTRIBUTION FEES The Fund has adopted a Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended, in which the Fund pays
fees for distribution, sales and marketing and shareholder services at an annual
rate not to exceed 0.25% of the Fund's average daily net assets. The
Distribution fees amounted to $72,642 for the period March 2, 1998 (Commencement
of Operations) to October 31, 1998.
4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in
the Portfolio for the period aggregated $67,643,045 and $18,635,361,
respectively.
10
<PAGE>
5. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest (without par value). Transactions in shares of beneficial interest were
as follows:
FOR THE PERIOD
MARCH 2, 1998
(COMMENCEMENT
OF OPERATIONS) TO
OCTOBER 31, 1998
================================================================================
Shares sold 6,804,115
Shares repurchased (2,150,628)
- --------------------------------------------------------------------------------
Net increase 4,653,487
================================================================================
11
<PAGE>
CITIFUNDS SMALL CAP VALUE PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE SHAREHOLDERS OF CITIFUNDS TRUST II (THE TRUST):
CITIFUNDS SMALL CAP VALUE PORTFOLIO
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
CitiFunds Small Cap Value Portfolio (the "Fund"), a series of CitiFunds Trust
II, at October 31, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the period March 2, 1998 (Commencement
of Operations) through October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of investments owned at October 31, 1998 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 1998
12
<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
13
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
14
<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
15
<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
16
<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.
17
<PAGE>
SMALL CAP VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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.
18
<PAGE>
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.
19
<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
20
<PAGE>
TRUSTEES AND OFFICERS
Philip W. Coolidge*, PRESIDENT
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
C. Oscar Morong Jr.
E. Kirby Warren
William S. Woods Jr.
SECRETARY
Linda T. Gibson*
TREASURER
John R. Elder*
*AFFILIATED PERSON OF SUB-ADMINISTRATOR AND DISTRIBUTOR
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, 5th Floor
Boston, MA 02109
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street,Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
<PAGE>
THE CITIFUNDS FAMILY
LARGE CAP STOCKS
o CitiFunds Growth & Income Portfolio
o CitiFunds Large Cap Growth Portfolio
SMALL CAP STOCKS
o CitiFunds Small Cap Growth Portfolio
o CitiFunds Small Cap Value Portfolio
INTERNATIONAL STOCKS
o CitiFunds International Growth & Income Portfolio
o CitiFunds International Growth Portfolio
GROWTH WITH INCOME
o CitiFunds Balanced Portfolio
BONDS
o CitiFunds Intermediate Income Portfolio
o CitiFunds Short-Term U.S. Government Income Portfolio
o CitiFunds California Tax Free Income Portfolio
o CitiFunds New York Tax Free Income Portfolio
o CitiFunds California Tax Free Income Portfolio
o CitiFunds National Tax Free Income Portfolio
MONEY MARKETS
o CitiFunds Cash Reserves
o CitiFunds U.S. Treasury Reserves
o CitiFunds Tax Free Reserves
o CitiFunds New York Tax Free Reserves
o CitiFunds California Tax Free Reserves
o CitiFunds Connecticut Tax Free Reserves
This report is prepared for the information of shareholders. It is authorized
for distribution to prospective investors only when preceded or accompanied by
an effective prospectus.
For more information contact your Service Agent
or call 1-800-625-4554
CitiFunds are made available by CFBDS, Inc. as distributor.
(C)1998 Citicorp [LOGO]Printed on recycled paper CFA/SCV/1098
<PAGE>
ANNUAL REPORT - OCTOBER 31, 1998
CITIFUNDS
GROWTH & INCOME PORTFOLIO
INVESTMENT PRODUCTS:
NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE
LARGE CAP STOCKS
<PAGE>
TABLE OF CONTENTS
Letter to Our Shareholders 1
................................................................................
Portfolio Environment and Outlook 2
................................................................................
Fund Facts 3
................................................................................
Portfolio Highlights 4
................................................................................
Fund Performance 5
................................................................................
CITIFUNDS GROWTH & INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES 6
................................................................................
Statement of Operations 6
................................................................................
Statement of Changes in Net Assets 7
................................................................................
Financial Highlights 8
................................................................................
Notes to Financial Statements 9
................................................................................
Independent Auditors' Report 12
................................................................................
GROWTH & INCOME PORTFOLIO
Portfolio of Investments 13
................................................................................
Statement of Assets and Liabilities 15
................................................................................
Statement of Operations 15
................................................................................
Statement of Changes in Net Assets 16
................................................................................
Financial Highlights 16
................................................................................
Notes to Financial Statements 17
................................................................................
Independent Auditors' Report 20
................................................................................
<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear CitiFunds Shareholder:
This annual report covers the period from the CitiFundsSM Growth & Income
Portfolio's Commencement of Operations on March 2, 1998, through October 31,
1998. Inside, the CitiFunds' investment manager, Citibank, N.A., discusses the
market conditions it faced, the strategies it employed and its outlook for the
future.
Much of the reporting period saw a continuation of generally positive
economic and market conditions in the United States. In fact, broad measures of
stock market performance continued to set new records during the first half of
1998. However, over the past several months, the spreading financial crisis
overseas has caused prices in the U.S. stock market to decline sharply from
their highs. Value-oriented stocks were particularly hard-hit during the recent
correction.
In our view, recent market volatility once again confirms the benefits of
diversification. By allocating your investment assets among a number of
different markets and investment styles, you may be able to reduce the effects
of heightened volatility on your overall portfolio. In our view, CitiFunds
Growth & Income Portfolio can play a valuable role in such a diversified
investment portfolio.
Thank you for your continued confidence and participation.
Sincerely,
Philip W. Coolidge
President
November 20, 1998
1
<PAGE>
PORTFOLIO ENVIRONMENT AND OUTLOOK
THE PAST YEAR HAS BEEN A DIFFICULT ONE for the value-oriented stocks in which
CitiFunds Growth & Income Portfolio invests. Gains achieved during the first
half of 1998 were retraced in the third quarter, when U.S. and global financial
markets declined sharply in response to the currency and banking crisis that
began last year in Southeast Asia. When it became clearer this past summer that
spreading global financial problems would affect the earnings of U.S. companies
more than most analysts had anticipated, investors reacted by selling
investments that they perceived as vulnerable. As a result, small-capitalization
stocks, corporate bonds and many non-U.S. securities experienced steep price
declines.
Stocks of large, global companies that are considered sensitive to the
economic cycle were also punished in this "flight to quality" during the third
quarter of 1998. Economic weakness overseas and declining prices for certain raw
materials eroded earnings for worldwide energy producers, agricultural
companies, commodities producers and manufacturers. In addition, many financial
services companies doing business in overseas markets were adversely affected.
Because companies within these sectors had already appeared inexpensive relative
to companies in other areas of the stock market, they were selected for the
portfolios of many value-oriented mutual funds, including CitiFunds Growth &
Income Portfolio. Accordingly, the Portfolio's performance suffered when these
stocks declined.
WE ATTEMPTED TO ADD VALUE IN THIS DIFFICULT MARKET ENVIRONMENT through our
stock selection process, which carefully evaluates the fundamental prospects of
companies whose stocks are selling at low prices relative to historical
measures. This approach led us to certain sectors of the market, including
energy producers and other economically sensitive companies. These fundamentally
sound companies had already underperformed the broader market, and it appeared
to us that they were at the low end of their relative valuation ranges in
anticipation of slower economic growth. Since then, however, the differences in
valuations between value stocks and growth stocks have widened to their greatest
levels in more than 20 years.
We also shifted assets to some companies that we consider defensive
investments, including utilities and selected telephone companies. These
companies are more likely to maintain their values than other types of value
stocks because of their high dividend yields and the consistency of their
revenue streams. In addition, we de-emphasized some of the hardest-hit
industries during the reporting period, including financial services, which
helped the Portfolio's performance incrementally.
In our view, many value-oriented stocks are now priced at recessionary
levels. At the same time, many growth-oriented stocks continue to sell at near
the high end of their valuation ranges. We believe that such a large disparity
is unsustainable over the long term. While we cannot predict the timing of a
return to more reasonable price relationships between growth and value stocks,
we are confident that a rebound for value stocks is ahead. Accordingly, we are
maintaining the value-oriented approach that has worked well for us in the past:
buying the stocks
2
<PAGE>
of large-capitalization companies that we believe are priced below the
discounted value of their future cash flows, and holding them until their true
values are reached.
Looking forward over the near term, we are proceeding cautiously. While we do
not anticipate a recession in the United States, we may see further economic
weakness in the months ahead. Slower economic growth may have negative
implications for corporate earnings, leading to continued volatility in the
stock market. When the global economic turnaround arrives, however, as we
believe it inevitably will, corporate earnings should improve. Because they tend
to anticipate economic trends rather than react to them, we expect that
large-capitalization, value-oriented stocks will be in an excellent position to
lead the stock market higher over the longer term.
FUND FACTS
FUND OBJECTIVE
Long-term capital growth and current income.
INVESTMENT MANAGER DIVIDENDS
Citibank, N.A. Paid quarterly, if any
COMMENCEMENT OF OPERATIONS CAPITAL GAINS
March 2, 1998 Distributed annually, if any
NET ASSETS AS OF 10/31/98 BENCHMARKS
$70.5 million o Standard & Poor's Barra Value Index
o Lipper Growth & Income
Funds Average
3
<PAGE>
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
TOP TEN EQUITY HOLDINGS AS OF OCTOBER 31, 1998
COMPANY, INDUSTRY % OF NET ASSETS
American Telephone & Telegraph Corp., Utilities 4.84%
................................................................................
Morgan Stanley Dean Witter & Co., Finance 3.60%
................................................................................
Chase Manhattan Bank Corp., Finance 3.31%
................................................................................
Safeco Corp., Finance 3.15%
................................................................................
Bank One Corp., Finance 3.07%
................................................................................
Exxon Corp., Energy 3.01%
................................................................................
Philip Morris Co., Inc., Consumer Basics 2.90%
................................................................................
Mobil Corp, Energy 2.86%
................................................................................
Raytheon Corp, Technology 2.61%
................................................................................
Halliburton Co., Energy 2.55%
................................................................................
PORTFOLIO DIVERSIFICATION AS OF OCTOBER 31, 1998
Finance 23.0%
Energy 16.0%
Consumer 14.0%
Basic Industries 7.0%
Utilities 15.0%
Technology 9.0%
Healthcare Services 6.0%
Transportation 2.0%
Short Term 3.0%
Retail 3.0%
Industrial Services 2.0%
*Includes cash and net other assets.
4
<PAGE>
FUND PERFORMANCE
TOTAL RETURNS
FOR THE PERIOD MARCH 2, 1998 SINCE
(COMMENCEMENT OF OPERATIONS) 3/2/98
TO OCTOBER 31, 1998 (INCEPTION)*
================================================================================
CitiFunds Growth & Income Portfolio (7.90)%
Lipper Growth & Income Funds Average (1.74)%+
S&P Barra Value Index (0.84)%+
*Not Annualized
+From 2/28/98
GROWTH OF A $10,000 INVESTMENT
[The following represents a Graph in the Printed piece.]
Date Lipper Growth & S&P Barra CitiFunds Growth
Income Funds Avg. Value Index & Income Fund
---------------- ---------- ---------------
2/28/98 $10000 $10000 $10000
3/31/98 10441 10507 10480
4/30/98 10513 10631 10510
5/31/98 10294 10481 10130
6/30/98 10468 10561 10130
7/31/98 10197 10327 9640
8/31/98 8702 8667 8068
9/30/98 9163 9195 8418
10/31/98 9827 9915 9210
A $10,000 investment in the Fund made on inception date would have been $9,210
(as of 10/31/98). The graph shows how the Fund compares to its benchmarks over
the same period.
The graph assumes all dividends and distributions from the Fund are reinvested
at Net Asset Value.
Notes: All Fund performance numbers represent past performance, and are no
guarantee of future results. The Fund's share price and investment return will
fluctuate, so that the value of an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns include change in
share price and reinvestment of dividends and distributions, if any. Total
return figures are provided in accordance with SEC guidelines for comparative
purposes for prospective investors and reflect certain voluntary fee waivers
which may be terminated at anytime. If the waivers were not in place, the Fund's
returns would have been lower.
5
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investment in Growth & Income Portfolio, at value (Note 1A) $70,584,600
Receivable for shares of beneficial interest sold 114,590
- --------------------------------------------------------------------------------
Total assets 70,699,190
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for shares of beneficial interest repurchased 153,800
Payable to affiliates--Management fees (Note 2) 5,425
Accrued expenses and other liabilities 79,413
- --------------------------------------------------------------------------------
Total liabilities 238,638
- --------------------------------------------------------------------------------
NET ASSETS for 7,666,049 shares of beneficial interest outstanding $70,460,552
================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $79,653,140
Unrealized depreciation (5,002,138)
Accumulated net realized loss (4,352,369)
Undistributed net investment income 161,919
- --------------------------------------------------------------------------------
Total $70,460,552
================================================================================
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE OF BENEFICIAL INTEREST $9.19
================================================================================
CITIFUNDS GROWTH & INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME (Note 1B):
Dividend Income from Growth & Income Portfolio
(net of foreign withholding tax of $8,756) $822,899
Interest Income from Growth & Income Portfolio 130,276
Allocated Expenses from Growth & Income Portfolio (353,193)
- --------------------------------------------------------------------------------
$599,982
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 120,697
Management fees (Note 2) 48,279
Printing fees 34,139
Registration fees 24,184
Audit fees 10,400
Custody and fund accounting fees 9,383
Legal fees 8,704
Transfer agent fees 4,000
Trustees fees 3,481
Other 9,379
- --------------------------------------------------------------------------------
Total expenses 272,646
- --------------------------------------------------------------------------------
Net investment income 327,336
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS FROM
GROWTH & INCOME PORTFOLIO:
Net realized loss (4,352,369)
Unrealized depreciation (5,002,138)
- --------------------------------------------------------------------------------
Net realized and unrealized loss from
Growth & Income Portfolio (9,354,507)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($9,027,171)
================================================================================
See notes to financial statements
6
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $327,336
Net realized loss (4,352,369)
Unrealized depreciation (5,002,138)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting
from operations (9,027,171)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (165,417)
- --------------------------------------------------------------------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (NOTE 5):
Net proceeds from sale of shares 101,995,867
Net asset value of shares issued to shareholders
from reinvestment of distributions 165,417
Cost of shares repurchased (22,508,144)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
from transactions in shares of
beneficial interest 79,653,140
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 70,460,552
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period (including undistributed
net investment income of $161,919) $70,460,552
================================================================================
See notes to financial statements
7
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
Net Asset Value, beginning of period $10.00
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.041
Net realized and unrealized loss on investments (0.831)
- --------------------------------------------------------------------------------
Total from operations (0.790)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.020)
- --------------------------------------------------------------------------------
Total distributions (0.020)
- --------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.19
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $70,461
Ratio of expenses to average net assets (A) 1.30%*
Ratio of net investment income to average net assets 0.68%*
Total return (7.90)%**
Note: If Agents of the Fund for the period indicated had not voluntarily waived
a portion of their fees, the net investment income per share and the ratios
would have been as follows:
Net investment income per share $0.03
RATIOS:
Expenses to average net assets 1.47%*
Net investment income to average net assets 0.51%*
================================================================================
* Annualized.
** Not Annualized.
(A) Includes the Fund's share of Growth & Income Portfolio allocated expenses
for the period indicated.
See notes to financial statements
8
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES CitiFunds Growth & Income Portfolio (the
"Fund") is a separate diversified series of CitiFunds Trust II (the "Trust"), a
Massachusetts business trust. The Fund commenced operations on March 2, 1998.
The Trust is registered under the Investment Company Act of 1940, as amended, as
an open-end, management investment company. The Fund invests all of its
investable assets in Growth & Income Portfolio (the "Portfolio"), a management
investment company for which Citibank, N.A. ("Citibank") serves as Investment
Manager. The value of such investment reflects the Fund's proportionate interest
(approximately 99.9% at October 31, 1998) in the net assets of the Portfolio.
CFBDS, Inc. ("CFBDS") acts as the Fund's Sub-Administrator and Distributor.
The financial statements of the Portfolio, including the portfolio of
investments, are contained elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
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 Fund are as
follows:
A. INVESTMENT VALUATION Valuation of securities by the Portfolio is discussed
in Note 1A of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
B. INVESTMENT INCOME The Fund earns income, net of Portfolio expenses, daily
based on its investment in the Portfolio.
C. FEDERAL TAXES The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investment transactions. Accordingly, no provision for federal income or
excise tax is necessary. At October 31, 1998, the Fund, for federal income tax
purposes, had a capital loss carryover of $4,188,946 which will expire on
October 31, 2006. Such capital loss carryover will reduce the Fund's taxable
income arising from future net realized gain on investment transactions, if any,
to the extent permitted by the Internal Revenue Code, and thus will reduce the
amount of the distributions to shareholders which would otherwise be necessary
to relieve the Fund of any liability for federal income or excise tax.
D. EXPENSES The Fund bears all costs of its operations other than expenses
specifically assumed by Citibank and CFBDS. Expenses incurred by the Trust with
respect to any two or more funds or series are allocated in proportion to the
average net assets of each fund, except when allocations of direct expenses to
each fund can otherwise be made fairly. Expenses directly attributable to a fund
are charged to that fund. The Fund's share of the Portfolio's expenses are
charged against and reduce the amount of the Fund's investment in the Portfolio.
9
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
E. DISTRIBUTIONS Distributions to shareholders are recorded on ex-dividend
date. The amount and character of income and net realized gains to be
distributed are determined in accordance with income tax rules and regulations,
which may differ from generally accepted accounting principles. These
differences are attributable to permanent book and tax accounting differences.
Reclassifications are made to the Fund's capital accounts to reflect income and
net realized gains available for distribution (or available capital loss
carryovers) under income tax rules and regulations.
F. OTHER All the net investment income, realized and unrealized gain and loss
of the Portfolio is allocated pro rata, based on respective ownership interests,
among the Fund and the other investors in the Portfolio at the time of such
determination. Investment transactions are accounted for on the trade date
basis. Realized gains and losses are determined on the identified cost basis.
2. MANAGEMENT FEES Citibank is responsible for overall management of the Fund's
business affairs and has a Management Agreement with the Fund. Citibank also
provides certain administrative services to the Fund. These administrative
services include providing general office facilities and supervising the overall
administration of the Fund. CFBDS acts as Sub-Administrator and performs certain
duties and receives compensation from Citibank as from time to time is agreed to
by Citibank and CFBDS. 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 fee is computed at the annual rate of 0.10% of the Fund's average
daily net assets. The management fee amounted to $48,279 for the period March 2,
1998 (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. DISTRIBUTION FEES The Fund has adopted a Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended, in which the Fund pays
fees for distribution, sales and marketing and shareholder services at an annual
rate not to exceed 0.25% of the Fund's average daily net assets. The
Distribution fees amounted to $120,697 for the period March 2, 1998
(Commencement of Operations) to October 31, 1998.
10
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in
the Portfolio for the period March 2, 1998 (Commencement of Operations) to
October 31, 1998 aggregated $89,327,925 and $9,988,801, respectively.
5. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest (without par value). Transactions in shares of beneficial interest were
as follows:
FOR THE PERIOD
MARCH 2, 1998
(COMMENCEMENT
OF OPERATIONS) TO
OCTOBER 31, 1998
================================================================================
Shares sold 10,026,741
Shares issued to shareholders from reinvestment
of distributions 17,590
Shares repurchased (2,378,282)
- --------------------------------------------------------------------------------
Net increase 7,666,049
================================================================================
11
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE SHAREHOLDERS OF CITIFUNDS TRUST II (THE TRUST):
CITIFUNDS GROWTH & INCOME PORTFOLIO
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
CitiFunds Growth & Income Portfolio (the "Fund"), a series of CitiFunds Trust
II, at October 31, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the period March 2, 1998 (Commencement
of Operations) through October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of investments owned at October 31, 1998 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 1998
12
<PAGE>
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.0%
- --------------------------------------------------------------------------------
BASIC INDUSTRIES -- 6.5%
Barrick Gold Corp. ADR's 51,100 $ 1,092,263
E. I. du Pont
de Nemours & Co. 11,400 655,500
Martin Marietta
Materials Inc. 34,000 1,668,125
Mead Corp. 36,200 1,144,825
-----------
4,560,713
-----------
CONSUMER BASICS -- 2.9%
- --------------------------------------------------------------------------------
Philip Morris Co., Inc. 40,000 2,045,000
-----------
CONSUMER DURABLE -- 7.0%
- --------------------------------------------------------------------------------
Dana Corp. 42,600 1,781,213
Goodyear Tire & Rubber 20,300 1,093,663
Meritor Automotive Inc. 84,000 1,569,750
Sunbeam Corp. 73,900 498,825
-----------
4,943,451
-----------
CONSUMER SERVICES -- 3.7%
- --------------------------------------------------------------------------------
McDonalds Corp. 22,600 1,511,375
Walt Disney Co. 41,850 1,127,334
-----------
2,638,709
-----------
ENERGY -- 15.6%
- --------------------------------------------------------------------------------
Amerada Hess Corp. 27,300 1,508,325
Burlington Resources Inc. 40,300 1,659,856
Diamond Offshore
Drilling, Inc. 35,500 1,089,406
Exxon Corp. 29,800 2,123,249
Halliburton Co. 50,100 1,800,469
Mobil Corp. 26,700 2,020,856
Transocean Offshore Inc. 21,900 808,931
-----------
11,011,092
-----------
FINANCE -- 23.4%
- --------------------------------------------------------------------------------
Bank One Corp. 44,400 2,170,049
Bankamerica Corp. 31,000 1,780,563
Bankers Trust Corp. 10,900 684,656
Chase Manhattan
Bank Corp. 41,100 2,334,993
Everest Reinsurance
Holdings 34,400 1,184,650
Franklin Resources Inc. 19,700 744,906
J.P. Morgan & Co., Inc. 16,300 1,536,275
Morgan Stanley
Dean Witter & Co. 39,230 2,540,142
Safeco Corp. 51,400 2,226,262
Washington Mutual Inc. 36,700 1,373,956
-----------
16,576,452
-----------
HEALTHCARE SERVICES -- 5.8%
- --------------------------------------------------------------------------------
American Home
Products Corp. 33,400 1,628,250
Oxford Health Plans 105,400 1,245,038
Wellpoint Health
Networks Inc. 16,700 1,229,538
-----------
4,102,826
-----------
INDUSTRIAL SERVICES -- 1.7%
- --------------------------------------------------------------------------------
Waste Management Inc. 25,900 1,168,738
-----------
RETAIL -- 3.5%
- --------------------------------------------------------------------------------
Federated Department
Stores Inc.* 16,200 622,688
Premark International Inc. 15,700 497,494
Tommy Hilfiger Corp.* 16,700 775,506
Toys "R" Us Inc.* 27,800 543,838
-----------
2,439,526
-----------
TECHNOLOGY -- 9.4%
- --------------------------------------------------------------------------------
Compaq Computer Corp. 27,800 879,175
Hewlett Packard Co. 12,900 776,419
Honeywell Inc. 17,900 1,429,763
International Business
Machines 7,000 1,039,063
Raytheon Corp. 31,700 1,840,581
Sun Microsystems Inc.* 11,600 675,700
-----------
6,640,701
-----------
TRANSPORTATION -- 2.4%
- --------------------------------------------------------------------------------
Union Pacific Corp. 35,400 1,685,925
-----------
UTILITIES -- 15.1%
- --------------------------------------------------------------------------------
American Electric
Power Inc. 18,600 910,238
American Telephone
& Telegraph Corp. 54,900 3,417,524
Bell Atlantic Corp. 26,100 1,386,563
Cinergy Corp. 28,700 990,150
Entergy Corp. 32,800 943,000
13
<PAGE>
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
Public Service
Enterprise Group 17,000 $ 646,000
SBC Communications Inc. 37,000 1,713,563
Texas Utilities Co. 14,600 638,750
-----------
10,645,788
-----------
TOTAL COMMON
STOCKS
(Identified Cost
$73,461,059) $68,458,921
-----------
SHORT-TERM OBLIGATIONS
AT AMORTIZED COST -- 0.9%
- --------------------------------------------------------------------------------
Federal Home Loan Bank
5.35% due 11/02/98 610,909
-----------
TOTAL INVESTMENTS
(Identified Cost
$74,071,968) 97.9% 69,069,830
OTHER ASSETS,
LESS LIABILITIES 2.1 1,514,870
----- -----------
NET ASSETS 100.0% $70,584,700
===== ===========
ADRs -- American Depositary Receipts
* Non income producing securities
See notes to financial statements
14
<PAGE>
GROWTH & INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
================================================================================
ASSETS:
Investments at value (Note 1A) (Identified Cost, $74,071,968) $69,069,830
Cash 37,340
Receivable for investments sold 2,039,939
Dividends and interest receivable 102,917
- --------------------------------------------------------------------------------
Total assets 71,250,026
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for investment purchased 575,524
Payable to affiliate--Management fee (Note 2) 39,907
Accrued expenses and other liabilities 49,895
- --------------------------------------------------------------------------------
Total liabilities 665,326
- --------------------------------------------------------------------------------
NET ASSETS $70,584,700
================================================================================
REPRESENTED BY:
Paid-in capital for beneficial interests $70,584,700
================================================================================
GrOWTH & INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INVESTMENT INCOME:
Dividend income (net of foreign tax of $8,756) $822,900
Interest income 130,277
- --------------------------------------------------------------------------------
$953,177
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 329,723
Custody and fund accounting fees 64,163
Audit fees 27,500
Legal fees 11,869
Trustees fees 2,039
Other 1,401
- --------------------------------------------------------------------------------
Total expenses 436,695
Less aggregate amounts waived by the Manager (83,501)
- --------------------------------------------------------------------------------
Net expense 353,194
- --------------------------------------------------------------------------------
Net investment income 599,983
Net realized loss from investment transactions (4,352,369)
Unrealized depreciation of investments (5,002,138)
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments (9,354,507)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($8,754,524)
================================================================================
See notes to financial statements
15
<PAGE>
GROWTH & INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $599,983
Net realized loss on investment transactions (4,352,369)
Unrealized depreciation of investments (5,002,138)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (8,754,524)
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions 89,328,025
Value of withdrawals (9,988,801)
- --------------------------------------------------------------------------------
Net increase in net assets from capital transactions 79,339,224
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS: 70,584,700
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period $70,584,700
================================================================================
GROWTH & INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD MARCH 2, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $70,585
Ratio of expenses to average net assets 0.75%*
Ratio of net investment income to average net assets 1.27%*
Portfolio turnover 59%
Note: If Agents of the Portfolio had not voluntarily waived a portion of their
fees during the period indicated, the ratios would have been as follows:
RATIOS:
Expenses to average net assets 0.93%*
Net investment income to average net assets 1.09%*
================================================================================
* Annualized
See notes to financial statements
16
<PAGE>
GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Growth & Income Portfolio (the "Portfolio"),
a separate series of The Premium 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 Portfolio commenced
operations on March 2, 1998. 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.
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.
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.
17
<PAGE>
GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Continued)
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 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 $329,723, of which $83,501
was voluntarily waived for the period March 2, 1998 (Commencement of Operations)
to October 31, 1998. The management fees are computed at the annual rate of
0.70% 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.
3. PURCHASES AND SALES OF INVESTMENTS Purchases and sales of investments, other
than short-term obligations, aggregated $118,582,038 and $40,768,610,
respectively, for the period March 2, 1998 (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 $74,235,391
================================================================================
Gross unrealized appreciation $ 2,514,044
Gross unrealized depreciation (7,679,605)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(5,165,561)
================================================================================
18
<PAGE>
GROWTH & INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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 March 2, 1998 (Commencement
of Operations) to October 31, 1998, the commitment fee was allocated to the
Portfolio was $168. Since the line of credit was established, there have been no
borrowings.
19
<PAGE>
GROWTH & INCOME PORTFOLIO
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND THE INVESTORS OF THE PREMIUM PORTFOLIOS (THE TRUST), WITH
RESPECT TO ITS SERIES, GROWTH &INCOME PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Growth &Income Portfolio (the
"Portfolio"), a series of The Premium 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 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
20
<PAGE>
TRUSTEES AND OFFICERS
Philip W. Coolidge*, PRESIDENT
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
C. Oscar Morong Jr.
E. Kirby Warren
William S. Woods Jr.
SECRETARY
Linda T. Gibson*
TREASURER
John R. Elder*
*AFFILIATED PERSON OF SUB-ADMINISTRATOR AND DISTRIBUTOR
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street,
New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, 5th Floor,
Boston, MA 02109
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street,Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
<PAGE>
THE CITIFUNDS FAMILY
LARGE CAP STOCKS
o CitiFunds Growth & Income Portfolio
o CitiFunds Large Cap Growth Portfolio
SMALL CAP STOCKS
o CitiFunds Small Cap Growth Portfolio
o CitiFunds Small Cap Value Portfolio
INTERNATIONAL STOCKS
o CitiFunds International Growth & Income Portfolio
o CitiFunds International Growth Portfolio
GROWTH WITH INCOME
o CitiFunds Balanced Portfolio
BONDS
o CitiFunds Intermediate Income Portfolio
o CitiFunds Short-Term U.S. Government Income Portfolio
o CitiFunds New York Tax Free Income Portfolio
o CitiFunds California Tax Free Income Portfolio
o CitiFunds National Tax Free Income Portfolio
MONEY MARKETS
o CitiFunds Cash Reserves
o CitiFunds U.S. Treasury Reserves
o CitiFunds Tax Free Reserves
o CitiFunds New York Tax Free Reserves
o CitiFunds California Tax Free Reserves
o CitiFunds Connecticut Tax Free Reserves
This report is prepared for the information of shareholders. It is authorized
for distribution to prospective investors only when preceded or accompanied by
an effective prospectus.
For more information contact your Service Agent or call 1-800-625-4554
CitiFunds are made available by CFBDS, Inc. as distributor.
(C)1998 Citicorp
R Printed on recycled paper
CFA/GI/1098
<PAGE>
[CitiSelect]
TO: Securities and Exchange Commission
Division of Investment Management
Judiciary Plaza
450 Fifth Street, N.W.
Washington D.C. 20549
FROM: CitiFunds Trust II
CitiFunds Large Cap Growth Portfolio
CitiFunds Small Cap Growth Portfolio
CitiFunds Small Cap Value Portfolio
CitiFunds Growth & Income Portfolio
(CIK No. 0000744389)
(CCC No. #boxwnb3)
(Registration File Nos. 2-90519; 811-4007)
DATE: December 28, 1998
On behalf of the above-noted registrant, transmitted herewith for filing
pursuant to Rule 30b2-1 are the annual financial statements for the period ended
October 31, 1998.
Please call Linda T. Gibson of CFBDS, Inc. at (617) 423-0800 with any comments
or questions relating to this report.
