Annual Report o December 31, 1998
[LOGO] CitiFunds
Short-Term
U.S. Government
Income Portfolio
[GRAPHIC]
BONDS
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INVESTMENT PRODUCTS:
NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE
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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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Fund Performance 4
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CitiFunds Short-Term U.S. Government Income Portfolio
................................................................................
Statement of Assets and Liabilities 5
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Statement of Operations 5
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Statement of Changes in Net Assets 6
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Financial Highlights 7
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Notes to Financial Statements 8
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Independent Auditors' Report 12
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Government Income Portfolio
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Portfolio of Investments 13
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Statement of Assets and Liabilities 14
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Statement of Operations 14
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Statement of Changes in Net Assets 15
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Financial Highlights 15
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Notes to Financial Statements 16
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Independent Auditors' Report 20
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LETTER TO OUR SHAREHOLDERS
Dear Shareholders:
This annual report covers the period from January 1, 1998, through December
31, 1998, for the CitiFunds(SM) Short-Term U.S. Government Income 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. Low inflation and declining interest
rates were generally positive influences on the U.S. government securities in
which the Portfolio invests.
However, other financial markets, especially stocks, experienced heightened
turbulence in 1998. In our view, the recent market volatility once again
confirms the benefits of diversification. By allocating your investment assets
among a number of different markets, you may be able to reduce the effects of
volatility on your overall portfolio. In our view, CitiFunds Short-Term U.S.
Government Income 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
January 20, 1999
1
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PORTFOLIO ENVIRONMENT AND OUTLOOK
1998 was a very good year for the U.S. Treasury securities in which the
Portfolio invests. A slowing U.S. economy, persistently low inflation and
declining long-term interest rates helped boost prices of U.S. Treasury
securities throughout the year. That's partly because direct obligations of the
federal government benefited from the first federal budget surplus in recent
memory, which reduced the government's need to issue U.S. Treasury securities.
During the second and third quarters of the year, U.S. Treasury securities
were also the beneficiaries of a worldwide "flight to quality." The spread of
the global currency and credit crisis from Asia to Russia and certain Latin
American nations caused domestic and foreign investors to sell investments they
perceived as risky. Because many investors became concerned about a potential
recession in both emerging and developed markets, they flocked to the relative
"safe haven" of U.S. Treasury securities. In fact, yields on long-term U.S.
Treasury bonds fell to their lowest levels in more than 30 years.
Although CitiFunds Short-Term U.S. Government Income Portfolio does not
invest in them, it is important to note that other types of fixed-income
securities did not fare as well as U.S. Treasury securities in this environment.
That's because, during the flight to quality, investors generally avoided all
other sectors of the U.S. bond market. Prices of corporate bonds and even some
U.S. agency securities fell relative to U.S. Treasury securities when
risk-averse investors shifted their assets away from these markets.
U.S. Treasury securities retraced a portion of their gains during the
fourth quarter of 1998, after the Federal Reserve Board reduced short-term
interest rates three times in an effort to stimulate economic growth. At the
same time, the International Monetary Fund took steps to contain the spread of
the global currency and credit crisis in Latin America, and the Japanese
government announced a long-awaited program to reform its banking system and
pull its economy out of recession. These measures helped ease investors' fears
of a global economic dislocation, and they appeared to become more comfortable
with riskier assets once again, selling U.S. Treasury securities to participate
in the higher yielding investments they shunned just weeks before.
The Portfolio was well positioned to take advantage of these influences. In
anticipation of declining interest rates, we maintained the portfolio's average
duration - a measure of sensitivity to changing interest rates - toward the long
end of its range. Accordingly, we were able to maintain higher yields as
interest rates fell. As a result, we participated strongly in this past summer's
rally of the Treasury market. More recently, we reduced the portfolio's average
duration, which helped us capture higher yields when interest rates rose in the
fourth quarter.
Looking forward, our economic outlook calls for slow growth, low inflation
and an accommodative monetary policy. Historically, these types of conditions
have generally been favorable for U.S. Treasury securities. Although we expect
further declines in short-term interest rates over the near term if the Federal
Reserve Board continues to ease monetary policy in response to economic weak-
2
<PAGE>
ness overseas, we believe that longer term interest rates should trade in a
range near current levels for most of 1999, and may even rise modestly later in
the year. Accordingly, we have maintained the Portfolio's modestly long average
duration, potentially enabling us to maintain higher yields longer if interest
rates decline.
Of course, we remain aware of the potential for continuing instability in
overseas markets, which could cause another surge in demand for government
bonds. We are monitoring the situation carefully. If conditions change, we are
prepared to reposition the portfolio to attempt to capture the opportunities
that the future may bring.
FUND FACTS
Fund Objective
To generate current income and preserve the value of its shareholders'
investments.
Investment Adviser, Dividends
Government Income Portfolio Paid monthly, if any
Citibank, N.A.
Commencement of Operations Capital Gains
September 8, 1986 Paid semi-annually, if any
Net Assets as of 12/31/98 Benchmarks
$48.0 million o Lipper Short U.S. Government Funds Average
o Lehman 1-3 Year U.S. Government Index
3
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FUND PERFORMANCE
Total Returns
One Five Ten
All Periods Ended December 31, 1998 Year Years* Years*
================================================================================
CitiFunds Short-Term U.S.
Government Income Portfolio 6.33% 4.95% 6.97%
Lipper Short U.S. Government Funds Average 5.83% 5.03% 6.52%
Lehman 1-3 Year U.S. Government Index 6.98% 5.96% 7.36%
* Average Annual Total Return
30-Day SEC Yield 4.18%
Income Dividends Per Share $0.474
Growth of a $10,000 Investment
A $10,000 investment in the Fund made ten years ago would have grown to $19,611
(as of 12/31/98). The graph shows how this compares to its benchmarks over the
same period.
[THE FOLLOWING TABLE WAS REPRESENTED BY A GRAPH IN THE PRINTED MATERIAL]
Lipper Lehman CitiFunds
Short U.S. 1-3 Year Short-Term
Government U.S. U.S.
Income Funds Government Government
Date Avg. Index Income Portfolio
==================================================
12/31/88 $10,000 $10,000 $10,000
12/31/89 $11,036 $11,092 $11,201
12/31/90 $12,015 $12,176 $12,085
12/31/91 $13,393 $13,597 $13,753
12/31/92 $13,982 $14,446 $14,517
12/31/93 $14,793 $15,224 $15,399
12/31/94 $14,569 $15,302 $15,135
12/31/95 $16,192 $16,961 $16,873
12/31/96 $16,885 $17,825 $17,382
12/31/97 $17,850 $19,010 $18,444
12/31/98 $18,890 $20,336 $19,611
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. Returns reflect certain voluntary fee
waivers. If the waivers were not in place, the Fund's return would have been
lower.
Total returns and yields do not reflect initial sales charges in effect as of
January 4, 1999. If sales charges were in effect at December 31, 1998, the
Fund's total return and yield would have been lower.
4
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CitiFunds Short-Term U.S. Government Income Portfolio
STATEMENT OF ASSETS AND LIABILITIES
December 31,1998
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Assets:
Investment in Government Income Portfolio, at value (Note 1A) $46,866,334
Receivable for shares of beneficial interest sold 1,372,472
Receivable from the Administrator 20,946
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Total assets 48,259,752
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Liabilities:
Payable for shares of beneficial interest repurchased 177,324
Payable to affiliates-Shareholder Servicing Agents fees (Note 2B) 9,721
Accrued expenses and other liabilities 38,610
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Total liabilities 225,655
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Net Assets for 4,937,101 shares of beneficial interest outstanding $48,034,097
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Net Assets Consist of:
Paid-in capital $50,509,198
Accumulated net realized loss (2,392,695)
Unrealized depreciation (97,063)
Undistributed net investment income 14,657
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Total $48,034,097
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Net Asset Value, Offering Price and Redemption Price
Per Share of Beneficial Interest (Note 7) $9.73
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CitiFunds Short-Term U.S. Government Income Portfolio
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
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Investment Income (Note 1B):
Interest Income from Government Income Portfolio $1,680,796
Allocated Expenses from Government Income Portfolio (100,924)
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$1,579,872
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Expenses:
Shareholder Servicing Agents fees (Note 2B) $72,730
Administrative fees (Note 2A) 72,730
Distribution fees (Note 3) 43,638
Shareholder reports 31,389
Audit fees 17,600
Custody and Fund Accounting fees 17,327
Transfer agent fees 12,500
Trustees fees 10,336
Legal fees 15,318
Miscellaneous 5,201
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Total expenses 298,769
Less aggregate amount waived by Administrator
and Distributor (Notes 2A and 3) (116,368)
Less Expenses Assumed by the Administrator (Note 6) (51,501)
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Net expenses 130,900
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Net investment income 1,448,972
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Net Realized and Unrealized Gain from
Government Income Portfolio:
Net realized gain 230,601
Unrealized appreciation of investments 40,666
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Net realized and unrealized gain from
Government Income Portfolio 271,267
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Net Increase in Net Assets Resulting from Operations $1,720,239
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See notes to financial statements
5
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CitiFunds Short-Term U.S. Government Income Portfolio
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31,
--------------------------
1998 1997
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Increase (Decrease) in Net Assets from:
Operations:
Net investment income $ 1,448,972 $ 1,211,090
Net realized gain (loss) 230,601 (48,060)
Unrealized appreciation of investments 40,666 194,316
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Net increase in net assets resulting from operations 1,720,239 1,357,346
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Distribution to Shareholders from:
Net investment income (1,442,038) (1,224,908)
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Transactions in Shares of Beneficial Interest
(Note 5):
Net proceeds from sale of shares 36,423,583 919,430
Net asset value of shares issued to shareholders
from reinvestment of dividends 1,435,786 1,216,313
Cost of shares repurchased (10,340,734) (8,775,300)
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Net increase (decrease) in net assets from
transactions in shares of beneficial interest 27,518,635 (6,639,557)
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Net Increase (Decrease) in Net Assets 27,796,836 (6,507,119)
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Net Assets:
Beginning of period 20,237,261 26,744,380
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End of period (including undistributed
net investment income of $14,657 and
$7,723, respectively) $48,034,097 $20,237,261
================================================================================
See notes to financial statements
6
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CitiFunds Short-Term U.S. Government Income Portfolio
FINANCIAL HIGHLIGHTS
Year Ended December 31,
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1998 1997 1996 1995 1994+
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Net Asset Value,
beginning of period $9.61 $9.55 $9.78 $9.28 $9.91
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Income From Operations:
Net investment income 0.473 0.504 0.516 0.543 0.466
Net realized and
unrealized gain (loss) 0.121 0.064 (0.232) 0.500 (0.635)
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Total from operations 0.594 0.568 0.284 1.043 (0.169)
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Less Distributions From:
Net investment income (0.474) (0.508) (0.514) (0.543) (0.461)
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Total distributions (0.474) (0.508) (0.514) (0.543) (0.461)
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Net Asset Value,
end of period $9.73 $9.61 $9.55 $9.78 $9.28
================================================================================
Ratios/Supplemental
Data:
Net assets, end of period
(000s omitted) $48,034 $20,237 $26,744 $35,325 $52,933
Ratio of expenses to
average net assets (A) 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of net investment
income to average
net assets 4.98% 5.20% 5.31% 5.38% 4.72%
Portfolio turnover (B) -- -- -- -- 22%
Total return 6.33% 6.11% 3.02% 11.48% (1.72%)
Note: If Agents of the Fund for the periods indicated and Agents of Government
Income Portfolio for the periods after May 1, 1994 had not voluntarily waived a
portion of their fees and assumed Fund expenses, the net investment income per
share and the ratios would have been as follows:
Net investment income
per share $0.413 $0.442 $0.460 $0.499 $0.421
Ratios:
Expenses to average
net assets (A) 1.42% 1.43% 1.38% 1.23% 1.26%
Net investment income to
average net assets 4.36% 4.57% 4.73% 4.95% 4.26%
================================================================================
(A) Includes the Funds share of Government Income 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.
+ On May 1, 1994, the Fund began investing all its investable assets in
Government Income Portfolio.
See notes to financial statements
7
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CitiFunds Short-Term U.S. Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies The CitiFunds Short-Term U.S. Government
Income Portfolio (formerly Landmark U.S. Government Income Fund), (the "Fund")
is a separate diversified series of CitiFunds Fixed Income Trust (the "Trust"),
a Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end, management
investment company. The Fund invests all of its investable assets in Government
Income Portfolio (the "Portfolio"), a management investment company for which
Citibank, N.A. ("Citibank") serves as Investment Adviser. The value of such
investment reflects the Fund's proportionate interest (55.7% at December 31,
1998) in the net assets of the Portfolio. CFBDS, Inc. ("CFBDS") acts as the
Fund's Administrator and Distributor. Citibank also serves as Sub-Administrator
and makes Fund shares available to customers as Shareholder Servicing Agent.
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 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 disclosure 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 December 31, 1998, the Fund, for federal income tax
purposes, had a capital loss carryover of $2,428,993, of which $1,551,556 will
expire on December 31, 2002, $329,508 will expire on December 31, 2003, $367,655
will expire on December 31, 2004, and $180,274 will expire on December 31, 2005.
Such capital loss carryover will reduce the Fund's taxable income arising from
future net realized capital 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.
8
<PAGE>
CitiFunds Short-Term U.S. Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS
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.
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 and 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 a trade date
basis.
2. Administrative Services Plan The Trust has adopted an Administrative Services
Plan which provides that the Trust, on behalf of the Fund, may obtain the
services of an Administrator, one or more Shareholder Servicing Agents and other
Servicing Agents and may enter into agreements providing for the payment of fees
for such services. Under the Trust Administrative Services Plan, the aggregate
of the fees paid to the Administrator from the Fund, the fees paid to the
Shareholder Servicing Agents from the Fund under such Plan and the Basic
Distribution Fee paid from the Fund to the Distributor under the Distribution
Plan may not exceed 0.65% of the Fund's average daily net assets on an
annualized basis for the Fund's then current fiscal year.
A. Administrative Fees Under the terms of an Administrative Services
Agreement, the administrative fees paid to the Administrator, as compensation
for overall administrative services and general office facilities, may not
exceed an annual rate of 0.25% of the Fund's average daily net assets. The
Administrative fees amounted to $72,730, all of which was voluntarily waived for
the year ended December 31, 1998. Citibank acts as Sub-Administrator and
performs certain duties and receives compensation from CFBDS from time to time
as agreed to by CFBDS and Citibank. The Fund pays no compensation directly to
any Trustee or any officer who is affiliated with the Administrator, all of whom
receive remuneration for their services to the Fund from the Administrator or
its affiliates. Certain of the officers and a Trustee of the Fund are officers
or directors of the Administrator or its affiliates.
9
<PAGE>
CitiFunds Short-Term U.S. Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS (Continued)
B. Shareholder Servicing Agents' Fees The Trust, on behalf of the Fund, has
entered into shareholder servicing agreements with each Shareholder Servicing
Agent pursuant to which that Shareholder Servicing Agent acts as an agent for
its customers and provides other related services. For their services, each
Shareholder Servicing Agent receives fees from the Fund, which may be paid
periodically, which may not exceed, on an annualized basis, an amount equal to
0.25% of the average daily net assets of the Fund represented by shares owned
during the period for which payment is being made by investors for whom such
Shareholder Servicing Agent maintains a servicing relationship. Shareholder
Servicing Agents' fees amounted to $72,730, for the year ended December 31,
1998.
3. Distribution Fees The Trust has adopted a Plan of Distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, in which the
Fund compensates the Distributor at an annual rate not to exceed 0.15% of the
Fund's average daily net assets. The Distribution fees amounted to $43,638, all
of which was voluntarily waived for the year ended December 31, 1998. The
Distributor may also receive an additional fee from the Fund not to exceed 0.05%
of the Fund's average daily net assets in anticipation of, or as reimbursement
for, advertising expenses incurred by the Distributor in connection with the
sale of shares of the Fund. No payment of such additional fees has been made
during the period. The Distributor has voluntarily agreed to waive this fee
through December 31, 1998.
4. Investment Transactions Increases and decreases in the Fund's investment in
the Portfolio for the year ended December 31, 1998 aggregated $30,527,046 and
$5,747,659, 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:
Year Ended December 31,
--------------------------
1998 1997
================================================================================
Shares sold 3,752,548 95,978
Shares issued to shareholders from reinvestment
of dividends 148,353 127,315
Shares repurchased (1,068,844) (917,798)
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Net increase (decrease) 2,832,057 (694,505)
================================================================================
10
<PAGE>
CitiFunds Short-Term U.S. Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Assumption of Expenses CFBDS has voluntarily agreed to pay a portion of the
expenses of the Fund for the year ended December 31, 1998, which amounted to
$51,501.
7. Subsequent Event Effective January 4, 1999 a maximum sales charge of 1.50%
will be imposed on purchases of Fund shares.
11
<PAGE>
CitiFunds Short-Term U.S. Government Income Portfolio
INDEPENDENT AUDITORS' REPORT
To the Trustees of CitiFunds Fixed Income Trust (the Trust) and the
Shareholders of CitiFunds Short-Term U.S. Government 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 Short-Term U.S. Government Income Portfolio (the "Fund"),
a series of CitiFunds Fixed Income Trust, at December 31, 1998, the results of
its operations and 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 December 31, 1998 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
12
<PAGE>
Government Income Portfolio
PORTFOLIO OF INVESTMENTS December 31, 1998
Principal
Amount
Issuer (000's omitted) Value
- -------------------------------------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION -- 14.3%
- -------------------------------------------
6.50%, 2009 $ 189 $ 192,550
6.50%, 2011 3,438 3,505,422
6.50%, 2019 825 828,266
7.00%, 2008 1,064 1,064,408
7.00%, 2013 4,984 5,123,419
7.25%, 2022 396 398,036
8.00%, 2006 140 144,049
8.00%, 2007 141 145,020
8.00%, 2017 176 184,844
8.00%, 2021 167 174,591
8.00%, 2022 124 128,807
9.50%, 2016 1 1,449
9.50%, 2017 37 39,780
9.50%, 2018 26 27,514
9.50%, 2019 27 28,585
9.50%, 2020 36 38,368
-----------
Total Government
National Mortgage
Association 12,025,108
-----------
U.S. & OTHER GOVERNMENT
OBLIGATIONS -- 77.2%
- -------------------------------------------
Israel State
U.S. Government
Guaranteed Notes
5.70% due 2/15/03 5,000 5,103,500
United States
Treasury Notes,
5.625% due 11/30/99 7,000 7,061,250
5.375% due 1/31/00 5,000 5,037,500
6.875% due 3/31/00 6,000 6,156,540
5.375% due 6/30/00 10,000 10,103,100
4.00% due 10/31/00 4,000 3,956,880
4.625% due 11/30/00 4,500 4,502,790
5.625% due 11/30/00 3,500 3,562,335
6.50% due 08/31/01 8,000 8,366,240
6.625% due 04/30/02 8,500 8,995,380
5.75% due 04/30/03 2,000 2,081,880
-----------
59,823,895
-----------
Total U.S. & Other Government
Obligations 64,927,395
-----------
Principal
Amount
Issuer (000's omitted) Value
SHORT-TERM OBLIGATIONS -- 7.6%
- -------------------------------------------------
First Union
Repurchase Agreement
4.95% due 1/04/99
proceeds at maturity
$3,433,888 (collateralized
by $2,117,000
U.S. Treasury Bond
12.50% due 08/15/14,
valued at $3,505,519) $ 3,432,000
State Street
Repurchase Agreement
4.50% due 1/04/99
proceeds at maturity
$3,001,500 (collateralized
by $2,910,000
U.S. Treasury Note
6.25% due 10/31/01,
(valued at $3,032,311) 3,000,000
-----------
Total Short-Term Obligations
at amortized cost 6,432,000
-----------
Total Investments
(Identified Cost
$83,369,009) 99.1% 83,384,503
Other Assets,
Less Liabilities 0.9 762,281
----- -----------
Net Assets 100.0% $84,146,784
===== ===========
See notes to financial statements
13
<PAGE>
Government Income Portfolio
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
================================================================================
Assets:
Investments at value (Note 1A) (Identified Cost, $83,369,009) $83,384,503
Cash 242
Interest receivable 786,083
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Total assets 84,170,828
- --------------------------------------------------------------------------------
Liabilities:
Payable to affiliates-Investment advisory fees (Note 2) 24,044
- --------------------------------------------------------------------------------
Net Assets $84,146,784
================================================================================
Represented by:
Paid-in capital for beneficial interests $84,146,784
================================================================================
Government Income Portfolio
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
================================================================================
Investment Income: (Note 1B): $3,937,543
Expenses:
Investment advisory fees (Note 2) $235,934
Administrative fees (Note 3) 33,706
Expense fees (Note 6) 20
- --------------------------------------------------------------------------------
Total expenses 269,660
Less aggregate amount waived by the
Administrator (Note 3) (33,706)
- --------------------------------------------------------------------------------
Net expenses 235,954
- --------------------------------------------------------------------------------
Net investment income 3,701,589
- --------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain from investment transactions 495,657
Unrealized appreciation of investments 134,572
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments 630,229
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $4,331,818
================================================================================
See notes to financial statements
14
<PAGE>
Government Income Portfolio
STATEMENT OF CHANGES IN NET ASSETS
For the year ended
December 31,
-------------------------
1998 1997
================================================================================
Increase (Decrease) in Net Assets from:
Operations:
Net investment income $3,701,589 $3,170,048
Net realized gain (loss) from investment transactions 495,657 (113,894)
Unrealized appreciation of investments 134,572 507,465
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,331,818 3,563,619
- --------------------------------------------------------------------------------
Capital Transactions:
Proceeds from contributions 48,935,387 26,243,756
Value of withdrawals (30,418,418) (22,008,195)
- --------------------------------------------------------------------------------
Net increase in net assets from capital transactions 18,516,969 4,235,561
- --------------------------------------------------------------------------------
Net Increase in Net Assets 22,848,787 7,799,180
- --------------------------------------------------------------------------------
Net Assets:
Beginning of period 61,297,997 53,498,817
- --------------------------------------------------------------------------------
End of period $84,146,784 $61,297,997
================================================================================
<TABLE>
Government Income Portfolio
FINANCIAL HIGHLIGHTS
For the Period
May 1, 1994
(Commencement
Year Ended December 31, of Operations) to
December 31,
1998 1997 1996 1995 1994
============================================================================================
<S> <C> <C> <C> <C> <C>
Ratios/Supplemental Data:
Net Assets, end of period
(000's omitted) $84,147 $61,298 $53,499 $53,145 $55,673
Ratio of expenses to
average net assets 0.35% 0.35% 0.35% 0.36% 0.43%*
Ratio of net investment income
to average net assets 5.49% 5.65% 5.75% 5.80% 5.27%*
Portfolio turnover 288% 126% 100% 284% 40%
Note: If Agents of the Portfolio had not voluntarily waived a portion of their
fees during the periods indicated, the ratios would have been as follows:
Ratios:
Expenses to average
net assets 0.40% 0.41% 0.40% 0.40% 0.44%*
Net investment income
to average net assets 5.44% 5.59% 5.70% 5.76% 5.26%*
============================================================================================
</TABLE>
*Annualized
See notes to financial statements
15
<PAGE>
Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies Government 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 Declaration of Trust permits
the Trustees to issue beneficial interests in the Portfolio. The Investment
Adviser of the Portfolio is Citibank, N.A. ("Citibank"). Signature Financial
Group (Grand Cayman), Ltd. ("SFG") acts as the Portfolio's Administrator.
Citibank is a wholly owned subsidiary of Citigroup, Inc.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The significant accounting policies consistently followed by the Portfolio
are as follows:
A. Investment Security Valuations Debt securities (other than short-term
obligations maturing in 60 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 60 days or less are valued at
amortized cost, which approximates market value. 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. Gain and loss from principal
paydowns are recorded as income.
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.
16
<PAGE>
Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS
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. TBA Purchase Commitments The Portfolio enters into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit price at
a future date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount of
the commitment will not fluctuate more than 2.0% from the principal amount. The
Portfolio holds, and maintains until the settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price. TBA
purchase commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Unsettled TBA purchase commitments are valued
at the current market value of the underlying securities, generally according to
the procedures described under Note 1A.
Although the Portfolio will generally enter into TBA purchase commitments
with the intention of acquiring securities for its portfolio, the Portfolio may
dispose of a commitment prior to settlement if the Portfolio's Adviser deems it
appropriate to do so.
G. Futures contracts The Portfolio may engage in futures transactions.The
Portfolio may use futures contracts in order to protect the Portfolio from
fluctuation in interest rates without actually buying or selling debt
securities, or to manage the effective maturity or duration of fixed income
securities in the Portfolio in an effort to reduce potential losses or enhance
potential gains. Buying futures contracts tends to increase the Portfolio's
exposure to the underlying instrument.
Selling futures contracts tends to either decrease the Portfolio's exposure
to the underlying instrument, or to hedge other Portfolio investments.
Upon entering into a futures contract, the Portfolio is required to deposit
with the broker an amount of cash or cash equivalents equal to a certain
percentage of the contract amount. This is known as the "initial margin".
Subsequent payments ("variation margin") are made or received by the Portfolio
each day, depending on the daily fluctuation of the value of the contract.The
daily changes in contract value are recorded as unrealized gains or losses and
the Portfolio recognizes a realized gain or loss when the contract is closed.
Futures contracts are valued at the settlement price established by the board of
trade or exchange on which they are traded.
17
<PAGE>
Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS (Continued)
There are several risks in connection with the use of futures contracts as
a hedging device. The change in the value of futures contracts primarily
corresponds with the value of their underlying instruments, which may not
correlate with the change in the value of the hedged instruments. In addition,
there is the risk the Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market. Futures contracts involve,
to varying degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities. No such instruments were
held at December 31, 1998.
H. Other Investment transactions are accounted for on the date the
investments are purchased or sold. Realized gains and losses are determined on
the identified cost basis.
2. Investment Advisory Fees The investment advisory fees paid to Citibank, as
compensation for overall investment management services, amounted to $235,934
for the year ended December 31, 1998. The investment advisory fees are computed
at the annual rate of 0.35% of the Portfolio's average daily net assets.
3. Administrative Fees Under the terms of an Administrative Services Agreement,
the administrative fees paid to the Administrator, as compensation for overall
administrative services and general office facilities, are computed at the
annual rate of 0.05% of the Portfolio's average daily net assets. The
Administrative fees amounted to $33,706, all of which was voluntarily waived,
for the year ended December 31, 1998. Citibank acts as Sub-Administrator and
performs certain duties and receives compensation from SFG from time to time as
agreed to by SFG and Citibank. The Portfolio pays no compensation directly to
any Trustee or any officer who is affiliated with the Administrator, all of whom
receive remuneration for their services to the Portfolio from the Administrator
or its affiliates. Certain of the officers and a Trustee of the Portfolio are
officers or directors of the Administrator or its affiliates.
4. Purchases And Sales Of Investments Purchases and sales of U.S. Government
securities, other than short-term obligations, aggregated $197,220,054 and
$175,826,293, respectively, for the year ended December 31, 1998.
5. Federal Income Tax Basis Of Investments The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at December 31, 1998,
as computed on a federal income tax basis, are as follows:
Aggregate cost $83,369,009
================================================================================
Gross unrealized appreciation $ 391,611
Gross unrealized depreciation (376,117)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 15,494
================================================================================
18
<PAGE>
Government Income Portfolio
NOTES TO FINANCIAL STATEMENTS
6. Expense Fees SFG has entered into an expense agreement with the Portfolio.
SFG has agreed to pay all of the ordinary operating expenses (excluding
interest, taxes, brokerage commissions, litigation costs or other extraordinary
costs or expenses) of the Portfolio, other than fees paid under the Advisory
Agreement and Administrative Services Agreement. The Agreement may be terminated
by either party upon not less than 30 days nor more than 60 days written notice.
The Portfolio has agreed to pay SFG an expense fee on an annual basis,
accrued daily and paid monthly; provided, however, that such fee shall not
exceed the amount such that immediately after any such payment the aggregate
ordinary expenses of the Portfolio less expenses waived by the Administrator
would, on an annual basis, exceed an agreed upon rate, currently 0.35% of the
Portfolio's average daily net assets.
7. 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 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 December 31, 1998, the
commitment fee allocated to the Portfolio was $215. Since the line of credit was
established, there have been no borrowings.
19
<PAGE>
Government Income Portfolio
INDEPENDENT AUDITORS' REPORT
To the Trustees and the Investors of The Premium Portfolios (the Trust), with
respect to its series, Government Income Portfolio:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Government Income Portfolio (the
"Portfolio"), a series of The Premium Portfolios, as at December 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 (hereinafter 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 incudes
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 December 31, 1998 by correspondence with the custodian, 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 December 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
February 12, 1999
20
<PAGE>
Trustees and Officers
C. Oscar Morong, Jr., Chairman
Philip W. Coolidge*, President
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
E.Kirby Warren
William S. Woods, Jr.
Secretary
Linda T. Gibson*
Treasurer
John R. Elder*
*Affiliated Person of Administrator and Distributor
Investment Adviser
(of Government Income Portfolio)
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
Administrator and 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 Value Portfolio
o CitiFunds Small Cap Growth Portfolio
International Stocks
o CitiFunds International Growth & Income Portfolio
o CitiFunds International Growth Portfolio
Growth with Income
o CitiFunds Balanced Portfolio
Bonds
o CitiFunds Short-Term U.S. Government Income Portfolio
o CitiFunds Intermediate Income Portfolio
o CitiFunds National Tax Free Income Portfolio
o CitiFunds California Tax Free Income Portfolio
o CitiFunds New York Tax Free Income Portfolio
Money Markets
o CitiFunds Cash Reserves
o CitiFunds U.S. Treasury Reserves
o CitiFunds Tax Free Reserves
o CitiFunds California Tax Free Reserves
o CitiFunds Connecticut Tax Free Reserves
o CitiFunds New York 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) 1999 Citicorp [RECYCLE LOGO] Printed on recycled paper CFA/USG/1298
