GOVERNMENT INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS December 31, 1999
PRINCIPAL
AMOUNT
ISSUER (000'S OMITTED) VALUE
- --------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 30.5%
- --------------------------------------------------------------------------------
6.50%, 2009 $153 $149,686
6.50%, 2011 2,845 2,769,810
6.50%, 2019 464 461,283
7.00%, 2008 641 628,930
7.00%, 2009 1,886 1,887,702
7.00%, 2013 4,249 4,210,513
7.00%, 2019 8,573 8,564,337
7.25%, 2022 113 113,295
8.00%, 2006 86 87,264
8.00%, 2007 98 99,156
8.00%, 2017 109 110,528
8.00%, 2021 126 127,946
8.00%, 2022 74 74,519
9.50%, 2016 1 859
9.50%, 2017 32 34,244
9.50%, 2018 17 17,871
9.50%, 2019 25 26,603
9.50%, 2020 22 23,536
----------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION 19,388,082
----------
U.S. & OTHER GOVERNMENT
OBLIGATIONS -- 49.5%
- --------------------------------------------------------------------------------
Israel State U.S. Government
Guaranteed Notes,
5.70% due 2/15/03 5,000 4,824,550
6.125% due 3/15/03 4,300 4,196,886
----------
9,021,436
United States Treasury Notes,
4.875% due 3/31/01 2,000 1,969,060
6.50% due 8/31/01 5,000 5,018,750
6.125% due 12/31/01 9,000 8,980,290
6.625% due 4/30/02 3,500 3,526,810
3.875% due 1/15/09 3,076 2,973,045
----------
22,467,955
----------
TOTAL U.S. & OTHER
GOVERNMENT OBLIGATIONS 31,489,391
----------
ISSUER VALUE
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS -- 3.7%
- --------------------------------------------------------------------------------
First Union National Bank
Repurchase Agreement
4.24% due 1/03/00 proceeds
at maturity $2,333,824
(collateralized by $ 2,070,000
U.S. Treasury Bond 7.875%
due 2/15/21, valued at
$2,380,500) $ 2,330,100
----------
TOTAL INVESTMENTS
(Identified Cost
$54,283,852) 83.7% 53,207,573
OTHER ASSETS
LESS LIABILITIES 16.3 10,398,230
----------
NET ASSETS 100.0% $63,605,803
----------
See notes to financial statements
13
<PAGE>
GOVERNMENT INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments at value (Note 1A) (Identified Cost, $54,283,852) $53,207,573
Cash 920
Receivable for investments sold 9,886,889
Interest receivable 529,196
- --------------------------------------------------------------------------------
Total assets 63,624,578
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to affiliates-Investment advisory fees (Note 2) 18,775
- --------------------------------------------------------------------------------
NET ASSETS $63,605,803
- --------------------------------------------------------------------------------
REPRESENTED BY:
Paid-in capital for beneficial interests $63,605,803
- --------------------------------------------------------------------------------
GOVERNMENT INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME (Note 1B): $ 3,777,205
EXPENSES:
Investment advisory fees (Note 2) $ 228,067
Administrative fees (Note 3) 32,582
- --------------------------------------------------------------------------------
Total expenses 260,649
Less aggregate amount waived by the Administrator (Note 3)(32,582)
- --------------------------------------------------------------------------------
Net expenses 228,067
- --------------------------------------------------------------------------------
Net investment income 3,549,138
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss from investment transactions (717,522)
Unrealized depreciation of investments (1,091,773)
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments (1,809,295)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,739,843
- --------------------------------------------------------------------------------
See notes to financial statements
14
<PAGE>
GOVERNMENT INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income $ 3,549,138 $ 3,701,589
Net realized gain (loss) on investment transactions (717,522) 495,657
Unrealized appreciation (depreciation) of investments (1,091,773) 134,572
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,739,843 4,331,818
- -------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from contributions 24,866,329 48,935,387
Value of withdrawals (47,147,153) (30,418,418)
- -------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital transactions (22,280,824) 18,516,969
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (20,540,981) 22,848,787
- -------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 84,146,784 61,297,997
- -------------------------------------------------------------------------------
End of period $63,605,803 $84,146,784
- -------------------------------------------------------------------------------
GOVERNMENT INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
(000's omitted) $63,606 $84,147 $61,298 $53,499 $53,145
Ratio of expenses to
average net assets 0.35% 0.35% 0.35% 0.35% 0.36%
Ratio of net investment income
to average net assets 5.45% 5.49% 5.65% 5.75% 5.80%
Portfolio turnover 201% 288% 126% 100% 284%
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% 0.40% 0.41% 0.40% 0.40%
Net investment income
to average net assets 5.40% 5.44% 5.59% 5.70% 5.76%
- --------------------------------------------------------------------------------
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 discounts 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 0.01% 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, 1999.
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 $228,067,
for the year ended December 31, 1999. 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 $32,582, all of which was voluntarily waived,
for the year ended December 31, 1999. Citibank acts as Sub-Administrator and
performs certain duties and receives such 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 $110,423,644 and
$130,218,864, respectively, for the year ended December 31, 1999.
5. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation
(depreciation) in value of the investment securities owned at December 31, 1999,
as computed on a federal income tax basis, are as follows:
Aggregate cost $54,283,852
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 10,272
Gross unrealized depreciation (1,086,551)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(1,076,279)
- --------------------------------------------------------------------------------
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
Portfolios collectively to borrow up to $75 million for temporary or emergency
purposes. Interest on borrowings, if any, is charged to the specific Portfolio
executing the borrowing at the base rate of the bank. The line of credit
requires a quarterly payment of a commitment fee based on the average daily
unused portion of the line of credit. For the year ended December 31, 1999, the
commitment fee allocated to the Portfolio was $173. 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, 1999 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, 1999 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 3l, 1999 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 18, 2000
20
