-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A5lxwUDeyVg9mOxLDjl+5dYJe15X6en5uSB109e+bHarfMyzV7cxW/w1KW99BLxP AdBJ738TneJAEakv6wCTCQ== /in/edgar/work/20000817/0000930413-00-001106/0000930413-00-001106.txt : 20000922 0000930413-00-001106.hdr.sgml : 20000922 ACCESSION NUMBER: 0000930413-00-001106 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIFUNDS FIXED INCOME TRUST CENTRAL INDEX KEY: 0000795808 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05033 FILM NUMBER: 704646 BUSINESS ADDRESS: STREET 1: 21 MILK STREET STREET 2: 5TH FLOOR CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6174231679 FORMER COMPANY: FORMER CONFORMED NAME: LANDMARK FIXED INCOME FUNDS/ DATE OF NAME CHANGE: 19931117 FORMER COMPANY: FORMER CONFORMED NAME: LANDMARK FIXED INCOME FUNCS/DE DATE OF NAME CHANGE: 19931115 FORMER COMPANY: FORMER CONFORMED NAME: LANDMARK U S GOVERNMENT INCOME FUND DATE OF NAME CHANGE: 19920703 N-30D 1 0001.txt SEMIANNUAL REPORT CITIFUNDS(r) - -------------- SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO SEMI-ANNUAL REPORT JUNE 30, 2000 -------------------------------------------------------------------------- INVESTMENT PRODUCTS: NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE -------------------------------------------------------------------------- TABLE OF CONTENTS Letter to Our Shareholders 1 - -------------------------------------------------------------------------------- Portfolio Environment and Outlook 2 - -------------------------------------------------------------------------------- Fund Facts 3 - -------------------------------------------------------------------------------- Fund Performance 4 - -------------------------------------------------------------------------------- CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO Statement of Assets and Liabilities 5 - -------------------------------------------------------------------------------- Statement of Operations 6 - -------------------------------------------------------------------------------- Statement of Changes in Net Assets 7 - -------------------------------------------------------------------------------- Financial Highlights 8 - -------------------------------------------------------------------------------- Notes to Financial Statements 9 - -------------------------------------------------------------------------------- GOVERNMENT INCOME PORTFOLIO Portfolio of Investments 13 - -------------------------------------------------------------------------------- Statement of Assets and Liabilities 14 - -------------------------------------------------------------------------------- Statement of Operations 14 - -------------------------------------------------------------------------------- Statement of Changes in Net Assets 15 - -------------------------------------------------------------------------------- Financial Highlights 16 - -------------------------------------------------------------------------------- Notes to Financial Statements 17 - -------------------------------------------------------------------------------- LETTER TO OUR SHAREHOLDERS Dear CitiFunds Shareholder: While the past six months have been challenging for many types of investments, short-term U.S. government securities have fared relatively well. A strengthening global economy, rising interest rates and shifting investor sentiment have created wide fluctuations in the prices of many financial assets, especially stocks and higher yielding bonds. While prices of short-term government securities also fluctuated, they performed relatively well as a result of the positive outlook for Treasury supply. We are pleased to announce that effective July 14, 2000, the front-end sales charge of CitiFunds Short-Term U.S. Government Income Portfolio is being waived. This report reviews the Fund's investment activities and performance during the six months ended June 30, 2000 and provides a summary of Citibank's perspective on and outlook for the short-term U.S. government securities market. Thank you for your continued confidence and participation. Sincerely, /s/ Philip W. Coolidge Philip W. Coolidge President July 17, 2000 1 PORTFOLIO ENVIRONMENT AND OUTLOOK PRICES OF SHORT-TERM U.S. GOVERNMENT SECURITIES GENERALLY DECLINED LESS THAN OTHER, HIGHER YIELDING SECTORS OF THE U.S. BOND MARKET over the past six months, helping many investors to preserve capital during a period of rising interest rates. The Federal Reserve Board (the "Fed") continued to raise interest rates during the period in response to the continuing growth of the U.S. economy. In fact, U.S. Gross Domestic Product ("GDP")(1) rates rose an estimated 5.5% during the first quarter of 2000. While many investment professionals expect GDP to fall later this year, current rates of economic growth have caused many investors to become concerned that inflationary pressures may be resurfacing. In an attempt to forestall a potential reacceleration of inflation, the Fed has raised short-term interest rates by 75 basis points(2) during the six-month reporting period. In total, the Fed has raised short-term interest rates by a total of 175 basis points since this tightening cycle began in June 1999. THE SHORT-TERM U.S. GOVERNMENT SECURITIES MARKET WAS ALSO AFFECTED BY SHIFTS IN U.S. TREASURY SUPPLY. During the first half of 2000, this decline in Treasury supply helped U.S. Treasury securities outperform most other securities of comparable maturity. This was primarily the result of two related factors: as a result of higher tax revenues, the federal government announced that it would buy back roughly $30 billion of long-term U.S. Treasury bonds and the market anticipated a decrease in issuance of shorter-term debt. Both the repurchase program and the reduction in issuance have reduced the supply of U.S. Treasury securities. Given the strong demand from both domestic and foreign investors, U.S. Treasuries outperformed non-Treasury securities. In addition, during the reporting period, U.S. government agency securities were influenced by political events when the investment policies of FNMA ("Fannie Mae") and FHLMC ("Freddie Mac") became the subject of criticism from officials in the U.S. Senate and the Treasury Department. These comments temporarily hurt the performance of Fannie Mae and Freddie Mac securities, which are indirect obligations of the U.S. government, but benefited GNMA ("Ginnie Mae") securities, which are direct obligations. As some investors shifted their assets from Fannie Mae and Freddie Mac securities to what they deemed to be the relative safe haven of Ginnie Mae securities, they drove Ginnie Mae prices higher. The Fund began the reporting period with a relatively defensive posture, including an average duration (i.e., a measure of sensitivity to changing interest rates) that was slightly shorter than its neutral position. This duration strategy was designed to enhance liquidity and keep assets available for higher yielding securities as they became available. Later on in the second quarter, however, the manager extended the Fund's average duration to the neutral range when evidence emerged that the U.S. economy was slowing in response to interest rate increases by the Fed. (1) GDP is the market value of the goods and services produced by labor and property in the United States. (2) A basis point is .01% or one one-hundredth of a percent. 2 The manager also actively managed the mix of securities in the Portfolio according to his extensive set of relative value analysis'. IN A RELATIVELY VOLATILE MARKET, THE MANAGER CONTINUED TO FOCUS PRIMARILY ON U.S. TREASURY NOTES, GINNIE MAE PASS-THROUGH MORTGAGE-BACKED SECURITIES(3) AND GOVERNMENT-GUARANTEED BONDS issued by the Agency for International Development. The manager increased the Fund's holdings of Ginnie Mae securities in the second quarter in an attempt to benefit from higher prices caused by the political situation discussed previously. Looking forward, THE MANAGER MAINTAINS A POSITIVE OUTLOOK ON THE SHORT-TERM U.S. GOVERNMENT MARKET. Although the manager thinks that further interest rate increases by the Fed may be likely, the bond market appears to have already incorporated that possibility into prices. We have recently seen signs that the economy may be slowing, suggesting that the Fed's monetary policies may have proven effective. The recent weakness in the stock market has caused demand for high-quality fixed-income securities to rise, potentially supporting prices near current levels. While it is too soon to tell if the Fed's monetary policies will allow the U.S. economy to slow to sustainable levels without entering a recession, the manager thinks that short-term U.S. government securities continue to represent a solid opportunity for investors seeking capital preservation and competitive levels of income. (3) A pass-through mortgage-backed security consisting of a pool of residential mortgage loans. All payments of principal and interest are passed through to investors each month. FUND FACTS FUND OBJECTIVE To generate current income and preserve the value of its shareholders' investment. INVESTMENT ADVISER, GOVERNMENT INCOME PORTFOLIO Citibank, N.A. COMMENCEMENT OF OPERATIONS September 8, 1986 NET ASSETS AS OF 6/30/00 $27.0 million DIVIDENDS Paid monthly, if any CAPITAL GAINS Paid semi-annually, if any BENCHMARKS o Lipper Short U.S. Government Funds Average o Lehman Brothers 1-3 Year U.S. Government Index* * The Lehman Brothers 1-3 Year U.S. Government Index is a broad measure of the performance of short-term government bonds. 3 FUND PERFORMANCE TOTAL RETURNS ALL PERIODS ENDED JUNE 30, 2000 SIX ONE FIVE TEN (See Note 7) MONTHS** YEAR YEARS* YEARS* ================================================================================ CitiFunds Short-Term U.S. Government Income Portfolio without sales charge 2.96% 4.48% 4.85% 6.13% Lipper Short U.S. Government Funds Average 2.98% 4.49% 4.94% 5.68% Lehman Brothers 1-3 Year U.S. Government Index 3.00% 4.86% 5.75% 6.48% CitiFunds Short-Term U.S. Government Income Portfolio with a maximum sales charge of 1.50% 1.41% 2.92% 4.54% 5.97% * Average Annual Total Return ** Not Annualized 30-Day SEC Yield 5.75% GROWTH OF A $10,000 INVESTMENT A $10,000 investment in the Fund made ten years ago would have grown to $17,851, including the maximum sales charge (as of 6/30/00). The graph shows how the Fund compares to its benchmarks over the same period. [The following table represents a line chart in the printed piece.] Lehman Brothers Lipper Short CitiFunds Short-Term 1-3 Year U.S. Government U.S. Government U.S. Government Funds Average Income Portfolio Index (unmanaged) 12/31/89 9850 10000 10000 1/31/90 9676 9985 10011 2/28/90 9687 10031 10063 3/31/90 9674 10061 10094 4/30/90 9516 10072 10118 5/31/90 9832 10222 10273 6/30/90 10001 10326 10381 7/31/90 10144 10447 10507 8/31/90 9997 10464 10544 9/30/90 10076 10541 10627 10/31/90 10211 10649 10745 11/30/90 10443 10766 10849 12/31/90 10628 10887 10977 1/31/91 10749 10986 11080 2/28/91 10810 11048 11151 3/31/91 10852 11109 11226 4/30/91 10960 11211 11334 5/31/91 11016 11275 11401 6/30/91 10970 11299 11444 7/31/91 11137 11408 11542 8/31/91 11401 11569 11700 9/30/91 11679 11704 11824 10/31/91 11789 11823 11952 11/30/91 11852 11935 12075 12/31/91 12094 12136 12258 1/31/92 12013 12064 12241 2/29/92 12069 12033 12278 3/31/92 12049 11963 12274 4/30/92 12119 12061 12386 5/31/92 12278 12188 12501 6/30/92 12406 12314 12627 7/31/92 12565 12462 12772 8/31/92 12648 12564 12876 9/30/92 12760 12667 12996 10/31/92 12640 12569 12922 11/30/92 12624 12549 12903 12/31/92 12766 12669 13023 1/31/93 12936 12829 13160 2/28/93 13064 12951 13264 3/31/93 13110 12992 13305 4/30/93 13190 13065 13386 5/31/93 13148 13049 13354 6/30/93 13293 13170 13453 7/31/93 13287 13206 13482 8/31/93 13481 13335 13594 9/30/93 13535 13373 13638 10/31/93 13565 13395 13668 11/30/93 13499 13357 13670 12/31/93 13542 13405 13725 1/31/94 13624 13496 13810 2/28/94 13473 13384 13727 3/31/94 13315 13246 13657 4/30/94 13215 13152 13605 5/31/94 13242 13128 13624 6/30/94 13240 13127 13658 7/31/94 13379 13233 13781 8/31/94 13405 13264 13826 9/30/94 13334 13217 13795 10/31/94 13346 13225 13826 11/30/94 13274 13172 13769 12/31/94 13310 13201 13795 1/31/95 13510 13365 13983 2/28/95 13696 13556 14173 3/31/95 13767 13627 14253 4/30/95 13910 13744 14381 5/31/95 14230 14015 14626 6/30/95 14302 14085 14705 7/31/95 14286 14102 14763 8/31/95 14388 14204 14851 9/30/95 14461 14285 14924 10/31/95 14578 14413 15048 11/30/95 14726 14551 15176 12/31/95 14838 14672 15291 1/31/96 14943 14777 15420 2/29/96 14819 14709 15360 3/31/96 14757 14692 15349 4/30/96 14724 14695 15364 5/31/96 14723 14712 15398 6/30/96 14814 14811 15510 7/31/96 14863 14860 15571 8/31/96 14895 14900 15628 9/30/96 15023 15028 15770 10/31/96 15198 15186 15949 11/30/96 15310 15304 16067 12/31/96 15286 15300 16070 1/31/97 15368 15372 16147 2/28/97 15401 15412 16186 3/31/97 15354 15384 16173 4/30/97 15486 15496 16305 5/31/97 15586 15587 16420 6/30/97 15685 15670 16533 7/31/97 15868 15833 16713 8/31/97 15870 15839 16730 9/30/97 15971 15949 16857 10/31/97 16106 16060 16982 11/30/97 16124 16096 17024 12/31/97 16220 16175 17138 1/31/98 16391 16312 17303 2/28/98 16392 16323 17318 3/31/98 16445 16379 17386 4/30/98 16512 16443 17469 5/31/98 16596 16527 17562 6/30/98 16663 16599 17653 7/31/98 16731 16666 17736 8/31/98 16938 16836 17952 9/30/98 17163 17041 18194 10/31/98 17214 17070 18282 11/30/98 17195 17067 18264 12/31/98 17246 17116 18333 1/31/99 17292 17198 18403 2/28/99 17196 17131 18320 3/31/99 17296 17232 18445 4/30/99 17361 17300 18502 5/31/99 17317 17284 18489 6/30/99 17346 17291 18544 7/31/99 17375 17313 18601 8/31/99 17404 17345 18653 9/30/99 17525 17454 18774 10/31/99 17563 17499 18825 11/30/99 17602 17545 18861 12/31/99 17604 17550 18878 1/31/00 17587 17562 18874 2/29/00 17701 17662 19002 3/31/00 17834 17802 19116 4/30/00 17873 17866 19164 5/31/00 17951 17896 19235 6/30/00 18124 18075 19445 The graph includes the initial sales charge of the Fund (no comparable charge exists for the indices) and 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 "with sales charge" 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. The maximum sales charge of 1.50% went into effect on January 4, 1999. Investors may not invest directly in an index. 4 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (Unaudited) ================================================================================ ASSETS: Investment in Government Income Portfolio, at value (Note 1A) $27,210,045 Receivable from the Administrator 36,942 - -------------------------------------------------------------------------------- Total assets 27,246,987 - -------------------------------------------------------------------------------- LIABILITIES: Payable for shares of beneficial interest repurchased 186,640 Dividends payable 45,881 Payable to affiliates--Shareholder Servicing Agents' fees (Note 2B) 5,553 Accrued expenses and other liabilities 43,348 - -------------------------------------------------------------------------------- Total liabilities 281,422 - -------------------------------------------------------------------------------- NET ASSETS for 2,840,122 shares of beneficial interest outstanding $26,965,565 ================================================================================ NET ASSETS CONSIST OF: Paid-in capital $30,458,074 Accumulated net realized loss (2,934,383) Unrealized depreciation (626,849) Undistributed net investment income 68,723 - -------------------------------------------------------------------------------- Total $26,965,565 ================================================================================ COMPUTATION OF: Net Asset Value, per share $9.49 Offering Price per share (Note 7) ($9.49 / 0.985) $9.63* ================================================================================ * Based upon single purchases of less than $50,000 See notes to financial statements 5 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (unaudited) ================================================================================ INVESTMENT INCOME (Note 1B): Interest Income from Government Income Portfolio $908,874 Allocated Expenses from Government Income Portfolio (50,694) - -------------------------------------------------------------------------------- $858,180 EXPENSES: Administrative fees (Note 2A) $ 35,675 Shareholder Servicing Agents fees (Note 2B) 35,675 Distribution fees (Note 3) 21,405 Transfer agent fees 17,500 Shareholder reports 15,224 Legal fees 10,189 Custody and fund accounting fees 8,165 Audit fees 7,340 Trustee fees 5,629 Miscellaneous 2,095 - -------------------------------------------------------------------------------- Total expenses 158,897 Less aggregate amount waived by Administrator and Distributor (Notes 2A and 3) (57,080) Less Expenses Assumed by the Administrator (Note 6) (36,941) - -------------------------------------------------------------------------------- Net expenses 64,876 - -------------------------------------------------------------------------------- Net investment income 793,304 - -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) FROM GOVERNMENT INCOME PORTFOLIO: Net realized loss (139,540) Unrealized appreciation of investments 187,491 - -------------------------------------------------------------------------------- Net realized and unrealized gain from Government Income Portfolio 47,951 - -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $841,255 ================================================================================ See notes to financial statements 6 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, (Unaudited) 1999 ================================================================================ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income $ 793,304 $ 1,967,256 Net realized loss (139,540) (402,148) Unrealized appreciation (depreciation) of investments 187,491 (717,277) - -------------------------------------------------------------------------------- Net increase in net assets resulting from operations 841,255 847,831 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (752,986) (1,953,508) - -------------------------------------------------------------------------------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (Note 5): Net proceeds from sale of shares 956,981 4,736,314 Net asset value of shares issued to shareholders from reinvestment of dividends 752,986 1,901,282 Cost of shares repurchased (5,941,985) (22,456,702) - -------------------------------------------------------------------------------- Net decrease in net assets from transactions in shares of beneficial interest (4,232,018) (15,819,106) - -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS (4,143,749) (16,924,783) - -------------------------------------------------------------------------------- NET ASSETS: Beginning of period 31,109,314 48,034,097 - -------------------------------------------------------------------------------- End of period (including undistributed net investment income of $68,723 and $28,405, respectively) $26,965,565 $31,109,314 ================================================================================ See notes to financial statements 7 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2000 -------------------------------------------- (Unaudited) 1999 1998 1997 1996 1995 ================================================================================ Net Asset Value, beginning of period $ 9.46 $ 9.73 $ 9.61 $ 9.55 $ 9.78 $ 9.28 - -------------------------------------------------------------------------------- Income From Operations: Net investment income 0.258 0.473 0.473 0.504 0.516 0.543 Net realized and unrealized gain (loss) 0.018 (0.276) 0.121 0.064 (0.232) 0.500 - -------------------------------------------------------------------------------- Total from operations 0.276 0.197 0.594 0.568 0.284 1.043 - -------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.246) (0.467) (0.474) (0.508) (0.514) (0.543) - -------------------------------------------------------------------------------- Total distributions (0.246) (0.467) (0.474) (0.508) (0.514) (0.543) - -------------------------------------------------------------------------------- Net Asset Value, end of period $ 9.49 $ 9.46 $ 9.73 $ 9.61 $ 9.55 $ 9.78 ================================================================================ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's omitted) $26,966 $31,109 $48,034 $20,237 $26,744 $35,525 Ratio of expenses to average net assets (A) 0.80%* 0.80% 0.80% 0.80% 0.80% 0.80% Ratio of net investment income to average net assets 5.56%* 5.02% 4.98% 5.20% 5.31% 5.38% Total return 2.96%** 2.07% 6.33% 6.11% 3.02% 11.48% Note: If Agents of the Fund for the periods indicated and Agents of Government Income Portfolio for the periods indicated 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 $ 0.253 $ 0.411 $ 0.413 $ 0.442 $ 0.460 $ 0.499 RATIOS: Expenses to average net assets (A) 1.46%* 1.37% 1.42% 1.43% 1.38% 1.23% Net investment income to average net assets 4.90%* 4.45% 4.36% 4.57% 4.73% 4.95% ================================================================================ (A) Includes the Fund's share of Government Income Portfolio allocated expenses for the periods. * Annualized ** Not Annualized See notes to financial statements 8 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES CitiFunds Short-Term U.S. Government Income Portfolio (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 (46.8% at June 30, 2000) in the net assets of the Portfolio. CFBDS, Inc. ("CFBDS") acts as the Fund's Administrator and Distributor. For the six months ended June 30, 2000, CFBDS, acting as the distributor, received net commissions paid by investors of $1,620 from the sale of fund shares (see Note 7). 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. 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, 1999, the Fund, for federal income tax purposes, had a capital loss carryover of $2,886,806, 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, $180,274 will expire on December 31, 2005, and $457,813 will expire on December 31, 2007. 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. 9 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 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 $35,675, all of which was voluntarily waived for the six months ended June 30, 2000. Citibank acts as Sub-Administrator and performs 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. B. SHAREHOLDER SERVICING AGENTS' FEES The Trust, on behalf of the Fund, has entered into shareholder servicing agency 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 10 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 $35,675 for the six months ended June 30, 2000. 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 $21,405, all of which was voluntarily waived for the six months ended June 30, 2000. 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 voluntarily agreed to waive this fee through June 30, 2000. 4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in the Portfolio for the six months ended June 30, 2000 aggregated $785,852 and $5,675,342, 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: SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, (Unaudited) 1999 ================================================================================ Shares sold 101,575 491,458 Shares issued to shareholders from reinvestment of dividends 79,736 198,280 Shares repurchased (629,386) (2,338,642) - -------------------------------------------------------------------------------- Net decrease (448,075) (1,648,904) ================================================================================ 11 CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 6. ASSUMPTION OF EXPENSES CFBDS has voluntarily agreed to pay a portion of the expenses of the Fund for the six months ended June 30, 2000, which amounted to $36,941, to maintain a voluntary expense limitation of 0.80% of average daily net assets. This voluntary expense limitation may be discontinued at any time. 7. SUBSEQUENT EVENTS Effective July 14, 2000, the front-end sales charge is being waived. 12 GOVERNMENT INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2000 (Unaudited) PRINCIPAL AMOUNT ISSUER (000'S OMITTED) VALUE - -------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 30.7% - -------------------------------------------------------------------------------- 6.50%, 2009 $ 136 $ 133,617 6.50%, 2011 2,562 2,499,707 6.50%, 2019 351 348,380 7.00%, 2008 641 630,044 7.00%, 2009 1,512 1,509,296 7.00%, 2013 4,034 3,997,817 7.00%, 2019 6,648 6,620,532 7.00%, 2020 1,502 1,494,009 7.25%, 2022 62 61,763 8.00%, 2006 77 77,365 8.00%, 2007 83 83,590 8.00%, 2017 103 104,610 8.00%, 2021 125 126,939 8.00%, 2022 71 71,689 9.50%, 2016 1 678 9.50%, 2017 30 31,648 9.50%, 2018 16 16,511 9.50%, 2019 25 26,098 9.50%, 2020 21 22,450 ----------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 17,856,743 ----------- U.S. & OTHER GOVERNMENT OBLIGATIONS -- 63.0% - -------------------------------------------------------------------------------- Israel State U.S. Government Guaranteed Notes, 6.05% due 8/15/00 8,640 8,633,434 5.70% due 2/15/03 5,000 4,852,700 6.125% due 3/15/03 4,300 4,213,613 ----------- 17,699,747 ----------- United States Treasury Notes, 5.875% due 10/31/01 3,000 2,976,570 6.625% due 4/30/02 2,500 2,507,800 6.375% due 6/30/02 10,000 10,003,100 5.875% due 11/15/04 1,300 1,281,111 3.875% due 1/15/09 1,253 1,233,360 ----------- 18,001,941 ----------- United States Treasury Notes, Strip Principal, due 08/15/01 1,000 931,180 ----------- TOTAL U.S. & OTHER GOVERNMENT OBLIGATIONS 36,632,868 ----------- ISSUER VALUE - -------------------------------------------------------------------------------- SHORT-TERM OBLIGATIONS-- 5.3% - -------------------------------------------------------------------------------- First Union National Bank of Florida Repurchase Agreement 6.55% due 7/3/00 proceeds at maturity $3,060,670 (collateralized by $3,147,000 U.S. Treasury Note 5.50% due 12/31/00 valued at $3,131,265) $ 3,059,000 ----------- TOTAL INVESTMENTS (Identified Cost $58,231,279) 99.0% 57,548,611 OTHER ASSETS, LESS LIABILITIES 1.0 582,321 ------ ----------- NET ASSETS 100.0% $58,130,932 ====== =========== See notes to financial statements 13 GOVERNMENT INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (Unaudited) ================================================================================ ASSETS: Investments at value (Note 1A) (Identified Cost, $55,172,279) $54,489,611 Repurchase Agreement at value (1A) (Identified Cost, $3,059,000) 3,059,000 Cash 899 Interest receivable 599,054 - -------------------------------------------------------------------------------- Total assets 58,148,564 - -------------------------------------------------------------------------------- LIABILITIES: Payable to affiliates-Investment advisory fees (Note 2) 17,632 - -------------------------------------------------------------------------------- NET ASSETS $58,130,932 ================================================================================ REPRESENTED BY: Paid-in capital for beneficial interests $58,130,932 ================================================================================ GOVERNMENT INCOME PORTFOLIO STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) ================================================================================ INVESTMENT INCOME (NOTE 1B): $1,892,252 EXPENSES: Investment advisory fees (Note 2) $ 104,444 Administrative fees (Note 3) 14,921 Expense fees (Note 6) 1,061 - -------------------------------------------------------------------------------- Total expenses 120,426 Less aggregate amount waived by the Administrator (Note 3) (14,921) - -------------------------------------------------------------------------------- Net expenses 105,505 - -------------------------------------------------------------------------------- Net investment income 1,786,747 - -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss from investment transactions (290,707) Unrealized appreciation of investments 393,612 - -------------------------------------------------------------------------------- Net realized and unrealized gain on investments 102,905 - -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,889,652 ================================================================================ See notes to financial statements 14 GOVERNMENT INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS SIX MONTHS YEAR ENDED ENDED JUNE 30, 2000 DECEMBER 31, (Unaudited) 1999 ================================================================================ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income $ 1,786,747 $ 3,549,138 Net realized loss on investment transactions (290,707) (717,522) Unrealized appreciation (depreciation) of investments 393,612 (1,091,773) - -------------------------------------------------------------------------------- Net increase in net assets resulting from operations 1,889,652 1,739,843 - -------------------------------------------------------------------------------- CAPITAL TRANSACTIONS: Proceeds from contributions 2,912,503 24,866,329 Value of withdrawals (10,277,026) (47,147,153) - -------------------------------------------------------------------------------- Net decrease in net assets from capital transactions (7,364,523) (22,280,824) - -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS (5,474,871) (20,540,981) - -------------------------------------------------------------------------------- NET ASSETS: Beginning of period 63,605,803 84,146,784 - -------------------------------------------------------------------------------- End of period $58,130,932 $63,605,803 ================================================================================ See notes to financial statements 15 GOVERNMENT INCOME PORTFOLIO FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2000 ------------------------------------------- (Unaudited) 1999 1998 1997 1996 1995 ================================================================================ RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (000's omitted) $58,131 $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% 0.35% 0.36% Ratio of net investment income to average net assets 5.99%* 5.45% 5.49% 5.65% 5.75% 5.80% Portfolio turnover 168% 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% 0.40% 0.41% 0.40% 0.40% Net investment income to average net assets 5.94%* 5.40% 5.44% 5.59% 5.70% 5.76% ================================================================================ * Annualized See notes to financial statements 16 GOVERNMENT INCOME PORTFOLIO Notes to Financial Statements (Unaudited) 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. 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 repur- 17 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) chase 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. 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 June 30, 2000. 18 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 $104,444, for the six months ended June 30, 2000. 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 $14,921, all of which was voluntarily waived, for the six months ended June 30, 2000. 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 $99,512,731 and $90,266,069, respectively, for the six months ended June 30, 2000. 5. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation (depreciation) in value of the investment securities owned at June 30, 2000, as computed on a federal income tax basis, are as follows: Aggregate cost $ 58,231,279 ================================================================================ Gross unrealized appreciation $ 74,048 Gross unrealized depreciation (756,716) - -------------------------------------------------------------------------------- Net unrealized depreciation $ (682,668) ================================================================================ 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. 19 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 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 six months ended June 30, 2000, the commitment fee allocated to the Portfolio was $90. Since the line of credit was established, there have been no borrowings. 20 TRUSTEES AND OFFICERS C. Oscar Morong, Jr., CHAIRMAN Philip W. Coolidge*, PRESIDENT Riley C. Gilley Diana R. Harrington Susan B. Kerley Heath B. McLendon** E. Kirby Warren William S. Woods, Jr.*** SECRETARY Robert Frenkel** TREASURER Linwood Downs* * AFFILIATED PERSON OF ADMINISTRATOR AND DISTRIBUTOR ** AFFILIATED PERSON OF INVESTMENT ADVISER *** TRUSTEE EMERITUS 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 LEGAL COUNSEL Bingham Dana LLP 150 Federal Street, Boston, MA 02110 This report is prepared for the information of shareholders of CitiFunds California Tax Free Income Portfolio. It is authorized for distribution to prospective investors only when preceded or accompanied by an effective prospectus of CitiFunds California Tax Free Income Portfolio. (C)2000 Citicorp (R) Printed on recycled paper CFS/USG/600 -----END PRIVACY-ENHANCED MESSAGE-----