<PAGE>
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Government Income Portfolio
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PORTFOLIO OF INVESTMENTS December 31, 1994
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PRINCIPAL
AMOUNT
ISSUER (000 OMITTED) VALUE
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GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--22.2%
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6.50%, 2008 ............................... $7,839 $ 7,162,440
6.50%, 2009 ............................... 3,210 2,932,828
8.00%, 2006 ............................... 368 359,457
8.00%, 2007 ............................... 292 285,101
8.00%, 2017 ............................... 700 669,605
8.00%, 2021 ............................... 294 280,848
8.00%, 2022 ............................... 281 268,930
9.50%, 2016 ............................... 4 3,825
9.50%, 2017 ............................... 82 84,198
9.50%, 2018 ............................... 96 99,060
9.50%, 2019 ............................... 92 95,394
9.50%, 2020 ............................... 86 88,930
-----------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
(Identified Cost $12,670,871) 12,330,616
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U.S. GOVERNMENT
OBLIGATIONS--76.6%
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U.S. Treasury Notes,
3.875%,2/28/1995 ......................... $ 300 $ 299,250
4.625%,2/15/1996 ......................... 7,200 6,982,848
5.125%,3/31/1996 ......................... 13,350 12,976,600
7.25%,8/31/1996 .......................... 8,250 8,202,315
4.25%,5/15/1996 .......................... 3,025 2,899,281
4.375%,11/15/1996 ........................ 9,925 9,360,466
5.375%,5/31/1998 ......................... 2,100 1,946,763
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TOTAL GOVERNMENT OBLIGATIONS
(Identified Cost $44,404,936) ............. 42,667,523
-----------
TOTAL INVESTMENTS
(Identified Cost $57,075,807) ............. 98.8% 54,998,139
OTHER ASSETS
LESS OTHER LIABILITIES .................... 1.2% 674,933
----- -----------
NET ASSETS ................................ 100.0% $55,673,072
===== ===========
See notes to financial statements
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Government Income Portfolio
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STATEMENT OF ASSETS AND LIABILITIES December 31, 1994
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ASSETS:
Investments at value (Note 1A) (Identified Cost, $57,075,807) ... $54,998,139
Cash ............................................................ 27,683
Interest receivable ............................................. 666,350
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Total assets ................................................ 55,692,172
-----------
LIABILITIES:
Payable to affiliates--Investment advisory fee (Note 2) ......... 16,712
Accrued expenses and other liabilities .......................... 2,388
-----------
Total liabilities ........................................... 19,100
-----------
NET ASSETS ...................................................... $55,673,072
===========
REPRESENTED BY:
Paid-in capital for beneficial interests ........................ $55,673,072
===========
See notes to financial statements
<PAGE>
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Government Income Portfolio
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STATEMENT OF OPERATIONS
For the Period May 1, 1994 (Commencement of Operations) to December 31, 1994
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INTEREST INCOME (Note 1B): .................... $ 2,424,128
EXPENSES:
Investment advisory fees
(Note 2) .................................... $ 148,797
Administrative fees (Note 3) .................. 21,257
Expense reimbursement fees
(Note 6) .................................... 15,578
-----------
Total expenses .............................. 185,632
Less aggregate amount waived
by the Administrator (Note 3) ............... (1,583)
-----------
Net Expense ................................... 184,049
-----------
Net investment income ....................... 2,240,079
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NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (NOTE 5):
Net realized loss from investment
transactions ................................ (2,084,009)
Unrealized appreciation
(depreciation) of investments--
Beginning of period ........................ --
End of period .............................. (2,077,668)
Less unrealized depreciation
acquired in connection with
the Landmark U.S. Government
Income Fund contribution (Note 1) ........ 2,521,279
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Net change in unrealized
appreciation (depreciation) .............. 443,611
-----------
Net realized and unrealized
loss on investments ...................... (1,640,398)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................... $ 599,681
===========
See notes to financial statements
<PAGE>
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Government Income Portfolio
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STATEMENT OF CHANGES IN NET ASSETS
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MAY 1, 1994
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1994
-----------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income ..................................... $ 2,240,079
Net realized loss on investment
transactions ............................................ (2,084,009)
Net change in unrealized appreciation
(depreciation) of investments ........................... 443,611
------------
Net increase (decrease) in net assets
resulting from operations ........................... 599,681
------------
CAPITAL TRANSACTIONS:
Proceeds from contributions ............................... 80,362,853
Value of withdrawals ...................................... (25,289,462)
------------
Net increase in net assets
from capital transactions ........................... 55,073,391
------------
NET INCREASE IN NET ASSETS: ............................... 55,673,072
NET ASSETS:
Beginning of period ....................................... --
------------
End of period ............................................. $ 55,673,072
============
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Government Income Portfolio
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FINANCIAL HIGHLIGHTS
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FOR THE PERIOD
MAY 1, 1994
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1994
-----------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted) .................... $55,673
Ratio of expenses to average net assets .................... 0.43%*
Ratio of net investment income to average net assets ... 5.27%*
Portfolio turnover ........................................ 40%
Note: If Agents of the Portfolio had not voluntarily waived a portion of their
fees and an expense reimbursement agreement had not been in effect during the
period indicated, the ratios would have been as follows:
RATIOS:
Expenses to average net assets ............................. 0.44%*
Net investment income to average net assets ................ 5.26%*
* Annualized
See notes to financial statements
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Government Income Portfolio
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NOTES TO FINANCIAL STATEMENTS
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(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. On May 1, 1994 (commencement of operations) the
Landmark U.S. Government Income Fund transferred all of its investable assets
($74,423,365 including $2,521,279 of unrealized depreciation), to the Portfolio
in exchange for an interest in the Portfolio.
The significant accounting policies consistently followed by the Portfolio are
in conformity with generally accepted accounting principles and 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, 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, since such
valuations are believed to reflect more accurately the fair value of the
securities. 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 ordinary 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.
E. 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 fee paid to Citibank, as compensation for overall
investment management services, amounted to $148,797, for the period May 1, 1994
(commencement of operations) to December 31, 1994. The investment advisory fee
is computed at the annual rate of 0.35% of the Portfolio's average daily net
assets.
(3) ADMINISTRATIVE FEE
Under the terms of an Administrative Services Agreement, the administrative fee
paid to the Administrator, as compensation for overall administrative services
and general office facilities, is computed at the annual rate of 0.05% of the
Portfolio's average daily net assets. The administrative fee amounted to $21,257
of which $1,583 was voluntarily waived, for the period May 1, 1994 (commencement
of operations) to December 31, 1994. Citibank acts as Sub-Administrator and
performs such duties and receives such compensation from SFG as from time to
time is 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 $24,815,368 and $40,532,002, respectively, for the
period May 1, 1994 (commencement of operations) to December 31, 1994.
<PAGE>
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Government Income Portfolio
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NOTES TO FINANCIAL STATEMENTS continued
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(5) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation (depreciation) in value of the investment
securities owned at December 31, 1994, as computed on a federal income tax
basis, are as follows:
Aggregate cost ......................................... $ 57,075,807
============
Gross unrealized appreciation .......................... $ 27,101
Gross unrealized depreciation .......................... (2,104,769)
------------
Net unrealized depreciation ............................ $ (2,077,668)
============
(6) EXPENSE REIMBURSEMENT FEE
SFG has entered into an expense reimbursement 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 shall terminate on April
30, 2004, unless sooner terminated by either party upon not less than 30 days
nor more than a 60 days written notice to the other party.
The Portfolio Trust has agreed to pay SFG an expense reimbursement fee from the
Portfolio, in addition to the administrative fee 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 would, on an annual basis, exceed an agreed upon rate, currently 0.45%
of the Portfolio's average daily net assets.
(7) LINE OF CREDIT
As of May 1, 1994 the Portfolio, along with other Landmark Funds entered into an
agreement with a bank which allows the Funds collectively to borrow up to $40
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. In addition, the $15 million committed portion of 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, 1994 the
commitment fee allocated to the Portfolio was $464. Since the line of credit was
established, there have been no borrowings.
<PAGE>
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Government Income Portfolio
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INDEPENDENT
AUDITORS' REPORT
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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, 1994 and
the related statements of operations and of changes in net assets and the
financial highlights for the period May 1, 1994 (commencement of operations) to
December 31, 1994. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of investments owned at
December 31, 1994, by correspondence with the custodian, provides a reasonable
basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Portfolio as at December 31, 1994, the
results of its operations and the changes in its net assets and the financial
highlights for the period May 1, 1994 (commencement of operations) to December
31, 1994 in accordance with U.S. generally accepted accounting principles.
PRICE WATERHOUSE
Chartered Accountants
Toronto, Ontario
February 3, 1995
