<PAGE>
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Balanced Portfolio
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS December 31, 1996
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ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- 49.1%
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES--0.5%
Interpublic Group, Inc. ............................ 25,600 $ 1,216,000
------------
COMMODITIES & PROCESSING--2.6%
Morton International Inc. .......................... 32,000 1,304,000
Praxair, Inc. ...................................... 54,800 2,527,650
Sigma Aldrich, Inc. ................................ 39,900 2,491,256
------------
6,322,906
------------
CONSUMER NON-DURABLES--6.4%
Clorox Co. ......................................... 26,500 2,659,937
Coca-Cola Co. ...................................... 23,900 1,257,737
Colgate-Palmolive Co. .............................. 31,200 2,878,200
Gillette Co. ....................................... 43,700 3,397,675
Kimberly-Clark Corp. ............................... 30,000 2,857,500
Procter & Gamble Co. ............................... 25,800 2,773,500
------------
15,824,549
------------
CONSUMER SERVICES--3.6%
Carnival Corp. ..................................... 81,800 2,699,400
CUC International Inc.* ............................ 96,450 2,290,688
Gannett Co. Inc. ................................... 16,000 1,198,000
Regal Cinemas Inc.* ................................ 45,500 1,399,125
Washington Post Co. ................................ 3,600 1,206,450
------------
8,793,663
------------
ELECTRONICS/TECHNOLOGICAL SERVICES--8.3%
Affiliated Computer Service* ....................... 52,400 1,558,900
Andrew Corp.* ...................................... 43,000 2,281,687
Automatic Data Processing .......................... 43,000 1,843,625
Cisco Systems, Inc.* ............................... 35,000 2,226,875
Computer Associates Intl. Inc. ..................... 42,175 2,098,206
Intel Corp. ........................................ 17,750 2,324,141
Network General Corp.* ............................. 21,500 650,375
Oracle Corp.* ...................................... 56,750 2,369,313
Parametric Technology Corp.* ....................... 34,000 1,746,750
Perkin-Elmer Corp. ................................. 33,300 1,960,538
Sungard Data Systems, Inc.* ........................ 35,400 1,398,300
------------
20,458,710
------------
ENERGY MINERALS--3.8%
Exxon Corp. ........................................ 24,900 2,440,200
Mobil Corp. ........................................ 19,300 2,359,425
Royal Dutch Petroleum Co. ADRs ..................... 13,800 2,356,350
Unocal Corp. ....................................... 54,000 2,193,750
------------
9,349,725
------------
FINANCE--7.6%
American International Group ....................... 28,700 3,106,775
Federal National Mortgage Association .............. 69,000 2,570,250
Franklin Resources Inc. ............................ 37,800 2,584,575
MBIA Inc. ......................................... 13,600 1,377,000
Norwest Corp. ...................................... 60,500 2,631,750
State Street Bank Corp. ............................ 44,300 2,857,350
Travelers Group Inc. ............................... 55,666 2,525,843
Zions BanCorporation ............................... 12,900 1,341,600
------------
18,995,143
------------
HEALTH SERVICES/TECHNOLOGY--6.7%
Cardinal Health Inc. ............................... 43,800 2,551,350
Health Management Associates* ...................... 115,250 2,593,125
Johnson & Johnson .................................. 56,200 2,795,950
Medtronic, Inc. .................................... 38,300 2,604,400
Pfizer Inc. ........................................ 30,800 2,552,550
Schein Henry, Inc.* ................................ 37,100 1,275,313
Schering-Plough Corp. .............................. 18,200 1,178,450
Warner Lambert Co. ................................. 15,600 1,170,000
------------
16,721,138
------------
PRODUCER MANUFACTURING--5.2%
Crane Co. .......................................... 41,250 1,196,250
Danaher Corp. ...................................... 800 37,300
Deere & Co. ........................................ 53,800 2,185,625
Emerson Electric Co. ............................... 28,200 2,728,350
Federal Signal Corp. ............................... 102,400 2,649,600
General Electric Co. ............................... 29,800 2,946,475
Xerox Corp. ........................................ 24,600 1,294,575
------------
13,038,175
------------
RETAIL TRADE--3.3%
Hannaford Brothers Co. ........................... 40,200 $ 1,366,800
Kohls Corp.* ..................................... 37,300 1,464,025
Nine West Group Inc.* ............................ 57,000 2,643,375
Walgreen Co. ..................................... 70,000 2,800,000
------------
8,274,200
------------
TRANSPORTATION--1.1%
Wisconsin Central Transport.* .................... 66,700 2,642,988
------------
TOTAL COMMON STOCKS
(Identified Cost $99,277,132) ................... 121,637,197
------------
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FIXED INCOME--42.0%
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Principal
Amount
------------
ASSET BACKED SECURITIES--1.4%
Green Tree Financial Corp 8.05% due 11/15/27 ..... $ 3,500,000 3,559,045
------------
MORTGAGE OBLIGATIONS--18.6%
COLLATERALIZED MORTGAGE OBLIGATIONS--4.4%
Asset Securitization Corp. Ser.96
7.21% due 10/13/26 .............................. 2,000,000 2,034,375
Asset Securitization Corp. Ser.95
MD4 7.384% due 8/13/29 ......................... 2,500,000 2,521,875
Interamer Dev. Bank 6.95% due 8/01/26 ............ 2,000,000 2,073,340
GMAC Commercial Mortgage 7.22% due 2/15/06 ....... 1,000,000 1,011,563
Nomura Asset Securities Corp. 8.15% due 3/04/20 .. 3,000,000 3,205,312
------------
10,846,465
------------
MORTGAGE BACKED SECURITIES/PASSTHROUGHS--10.6%
Federal Home Loan Mortgage Corp.
7.50% due 1/15/20 ............................... 2,982,006 3,000,177
7.50% due 8/15/21 ............................... 6,885,366 6,927,324
7.50% due 5/15/23 ............................... 1,928,723 1,934,750
8.50% due 6/01/01 ............................... 24,165 24,996
9.50% due 2/01/01 ............................... 13,694 14,301
Federal National Mortgage Assoc. 7.00% due 5/1/03. 6,782,676 6,810,214
7.50% due 10/01/25 .............................. 274,634 274,461
7.50% due 11/01/25 .............................. 3,644,492 3,642,196
8.00% due 7/01/26 ............................... 3,397,962 3,461,674
9.00% due 11/01/01 .............................. 20,212 21,066
------------
26,111,159
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--3.6%
8.25% due 7/15/05 ............................... 777,935 794,466
7.50% due 7/15/25 ............................... 3,249,743 3,250,751
7.50% due 5/15/26 ............................... 2,962,827 2,963,745
7.50% due 6/15/26 ............................... 1,908,710 1,909,301
------------
8,918,263
------------
TOTAL MORTGAGE OBLIGATIONS ....................... 45,875,887
------------
DOMESTIC CORPORATE BONDS--1.5% Aetna Services Inc.
6.97% due 8/15/36 ............................... 1,700,000 1,731,127
WMX Technologies 7.10% due 8/01/26 ............... 2,000,000 2,064,280
------------
3,795,407
------------
YANKEES--0.8%
Enersis 6.90% due12/01/06 ........................ 2,000,000 1,952,280
------------
UNITED STATES GOVERNMENT & AGENCY
OBLIGATIONS--19.7%
UNITED STATES TREASURY BONDS--2.7%
6.50% due 11/15/26 ............................... 6,800,000 6,673,588
------------
UNITED STATES TREASURY NOTES--15.6%
6.25% due 6/30/98 ............................... 13,000,000 13,087,360
5.875% due 11/15/99 ............................. 3,500,000 3,486,314
6.625% due 6/30/01 .............................. 10,900,000 11,075,381
6.375% due 9/30/01 .............................. 3,000,000 3,017,820
5.875% due 2/15/04 .............................. 7,000,000 6,815,130
6.50% due 10/15/06 .............................. 1,000,000 1,005,470
------------
38,487,475
------------
UNITED STATES AGENCY OBLIGATIONS--1.4%
Tennessee Valley Authority 1996 Ser A,
5.98% due 4/01/36 ............................... 3,500,000 3,552,049
------------
TOTAL UNITED STATES GOVERNMENT & AGENCY
OBLIGATIONS .................................... 48,713,112
------------
TOTAL FIXED INCOME
(Identified cost $103,163,179) 103,895,731
------------
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SHORT-TERM OBLIGATIONS--8.7%
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Lanston Repurchase Agreement
6.40% due 1/02/97, proceeds at
maturity $6,607,348 (collateralized
by $6,747,368 U.S. Treasury Note
5.50% due 12/31/00) ............................ 6,605,000 6,605,000
United States Treasury Bill
4.925% due 2/06/97 ............................. 15,000,000 14,915,865
------------
21,520,865
------------
TOTAL INVESTMENTS
(Identified Cost $223,961,176) .................. 99.8% 247,053,793
OTHER ASSETS
LESS LIABILITIES ............................... 0.2 472,275
----- ------------
NET ASSETS ....................................... 100.0% $247,526,068
===== ============
ADRs American Depositary Receipts
*Non-income producing
See notes to financial statements
<PAGE>
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Balanced Portfolio
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STATEMENT OF ASSETS AND LIABILITIES December 31, 1996
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ASSETS:
Investments at value (Note 1A) (Identified Cost, $223,961,176) . $247,053,793
Cash ........................................................... 155
Receivable for investments sold ................................ 3,167,813
Dividends and interest receivable .............................. 940,843
------------
Total assets ............................................... 251,162,604
------------
LIABILITIES:
Payable for investments purchased .............................. 3,511,745
Payable to affiliates--Investment advisory fees (Note 2) ....... 90,166
Accrued expenses and other liabilities ......................... 34,625
------------
Total liabilities .......................................... 3,636,536
------------
NET ASSETS ..................................................... $247,526,068
============
REPRESENTED BY:
Paid-in capital for beneficial interests ....................... $247,526,068
============
See notes to financial statements
<PAGE>
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Balanced Portfolio
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STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
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INVESTMENT INCOME:
Interest ........................................ $ 7,971,017
Dividends ....................................... 2,118,512
------------
Total Income .................................. $ 10,089,529
EXPENSES:
Investment advisory fees (Note 2) ............... 996,840
Administrative fees (Note 3) .................... 124,605
Expense fees (Note 6) ........................... 249,245
------------
Total expenses ................................ 1,370,690
------------
Net investment income ......................... 8,718,839
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain from investment
transactions and futures contracts ............ 17,739,660
Unrealized appreciation (depreciation)
of investments and futures contracts
Beginning of period ........................... 30,180,320
End of period ................................. 23,092,617
------------
Net change in unrealized appreciation
(depreciation) of investments and futures
contracts ................................... (7,087,703)
------------
Net realized and unrealized gain on
investments and futures contracts ............ 10,651,957
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................... $ 19,370,796
============
See notes to financial statements
<PAGE>
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Balanced Portfolio
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STATEMENT OF CHANGES IN NET ASSETS
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YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
---- ----
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income ......................... $ 8,718,839 $ 8,819,568
Net realized gain from investment
transactions and futures contracts ........... 17,739,660 12,205,642
Net change in unrealized appreciation
(depreciation) of investments and
futures contracts ......................... (7,087,703) 28,644,636
------------- -------------
Net increase in net assets
resulting from operations ............... 19,370,796 49,669,846
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from contributions ................... 18,210,247 8,144,524
Value of withdrawals .......................... (41,573,741) (35,243,567)
------------- -------------
Net increase (decrease) in net assets
from capital transactions ................ (23,363,494) (27,099,043)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS ......... (3,992,698) 22,570,803
NET ASSETS:
Beginning of period ........................... 251,518,766 228,947,963
------------- -------------
End of period ................................. $ 247,526,068 $ 251,518,766
============= =============
See notes to financial statements
<PAGE>
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Balanced Portfolio
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FINANCIAL HIGHLIGHTS
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MAY 1, 1994
YEAR ENDED DECEMBER 31, (COMMENCEMENT
---------------------- OF OPERATIONS) TO
1996 1995 DECEMBER 31, 1994
---- ---- -----------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
(000's omitted) ............. $247,526 $251,519 $228,948
Ratio of expenses to average
net assets .................. 0.55% 0.53% 0.51%*
Ratio of net investment income
to average net assets ....... 3.50% 3.69% 3.53%*
Portfolio turnover ............. 241% 210% 105%
Average commission rate per
share (A) .................... $ 0.0589 N/A N/A
* Annualized
(A) The average commission rate paid is applicable for Funds that invest greater
than 10% of average net assets in equity transactions on which commissions
are charged. This disclosure is required for fiscal periods beginning on or
after September 1, 1995.
See notes to financial statements
<PAGE>
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Balanced Portfolio
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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(1) SIGNIFICANT ACCOUNTING POLICIES
Balanced 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. Signature Financial Group (Grand Cayman), Ltd. ("SFG") acts as
the Portfolio's 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 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 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 federal income tax purposes. Gain and loss from principal
paydowns are recorded as interest income. Dividend income is recorded on the
ex-dividend date.
C. U.S. FEDERAL TAXES -- The Portfolio is considered a partnership under the
U.S. Internal Revenue Code. Accordingly, no provision for federal income or
excise tax is necessary.
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 agreement
investments. Additionally, procedures have been established by the Portfolio to
monitor, on a daily basis, the market value of the repurchase agreement's
underlying investments to ensure the existence of a proper level of collateral.
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 Portfolios may engage in futures transactions.The
Portfolios 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. The underlying value of a futures contract is incorporated
within unrealized appreciation/depreciation in the Portfolio of Investments
under the caption "Futures Contracts". The Portfolio had no open futures
contracts at December 31, 1996. 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 values at the settlement price established by the board of
trade or exchange on which they are traded.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in the value of futures contracts primarily
corresponds with the value of their underlying instruments, which may not
correlate with the change in the value of the hedged instruments. In addition,
there is the risk the Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market. Futures contracts involve,
to varying degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities.
H. 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 $996,840 for the year ended December
31, 1996. The investment advisory fees are computed at the annual rate of 0.40%
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, is computed at an annual rate of 0.05% of the
Portfolio's average daily net assets. The Administrative fees amounted to
$124,605 for the year ended December 31, 1996. 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 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 investments, other than short-term obligations,
aggregated $570,884,966 and $599,271,849, respectively, for the year ended
December 31, 1996. Purchases and sales of U.S. Government securities aggregated
to $224,173,699 and $247,684,664, respectively.
(5) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation (depreciation) in value of the investment
securities owned at December 31, 1996, as computed on a federal income tax
basis, are as follows:
Aggregate cost ................................... $223,972,268
============
Gross unrealized appreciation .................... $ 24,401,391
Gross unrealized depreciation .................... (1,319,866)
------------
Net unrealized appreciation ...................... $ 23,081,525
============
(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 0.55% of average daily net
assets.
(7) LINE OF CREDIT
The Portfolio, along with the other Landmark Funds, entered into an ongoing
agreement with a bank which allows the Funds collectively to borrow up to $40
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. 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, 1996, the
commitment fee allocated to the Portfolio was $989. Since the line of credit was
established, there have been no borrowings.
<PAGE>
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Balanced Portfolio
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
TO THE TRUSTEES AND THE INVESTORS OF THE PREMIUM PORTFOLIOS (THE TRUST), WITH
RESPECT TO ITS SERIES, BALANCED PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Balanced Portfolio (the "Portfolio"),
a series of The Premium Portfolios, as at December 31, 1996 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 December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, 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, 1996, 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.
PRICE WATERHOUSE
Chartered Accountants
Toronto, Ontario
February 4, 1997
