N-30D 1 c21385-n30d.txt SEMI-ANNUAL REPORT ================================================================================ CITIFUNDS(R) [LOGO] ================================================================================ CITI(SM) SHORT-TERM U.S. GOVERNMENT INCOME FUND SEMI-ANNUAL REPORT JUNE 30, 2001 -------------------------------------------------------------------------------- INVESTMENT PRODUCTS: NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE -------------------------------------------------------------------------------- TABLE OF CONTENTS Letter to Our Shareholders 1 -------------------------------------------------------------------------------- Fund Facts 4 -------------------------------------------------------------------------------- Fund Performance 5 -------------------------------------------------------------------------------- CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND Statement of Assets and Liabilities 6 -------------------------------------------------------------------------------- Statement of Operations 7 -------------------------------------------------------------------------------- Statement of Changes in Net Assets 8 -------------------------------------------------------------------------------- Financial Highlights 9 -------------------------------------------------------------------------------- Notes to Financial Statements 10 -------------------------------------------------------------------------------- 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 Shareholder: We are pleased to provide the semi-annual report for the Citi Short-Term U.S. Government Income Fund (the "Fund") for the six months ended June 30, 2001. In this report, we summarize what we believe to be the period's prevailing economic and market conditions and outline our investment strategy. We hope you find this report to be useful and informative. PERFORMANCE UPDATE For the six months ended June 30, 2001, the Fund produced a total return of 3.52%. In comparison, the Fund's benchmark, the Lehman 1-3 Year U.S. Government Index,(1) returned 4.04% over the same period. MARKET REVIEW AND PORTFOLIO HIGHLIGHTS On June 27, 2001, the Federal Reserve Board ("Fed") made its sixth reduction this year to the short-term interest rate, reducing that key rate to 3.75%. By the end of the period, Fed cuts amounted to a substantial total of 275 basis points (or 2.75%).(2) Most investors are viewing the fact that this most recent cut was only 25 basis points, versus the five previous 50 basis point cuts, as evidence that the Fed is at or near the end of lowering rates for this cycle. The yield curve(3) has steepened due to the short-term rate cuts, while rates longer than five years have tended to increase throughout the period. Consequently, the best-performing area of the municipal bond yield curve in the second quarter of 2001 was the One-Year sector, where rates fell by 138 basis points. In turn, the section of the bond market where yields rose the most was the long-intermediate section (10 to 15 years), which was up nearly 12 basis points. Currently, the yield curve has reached its steepest level in three years. Typically, the yield on 30-Year municipal bonds is approximately two percentage points above the yield on three month money markets. Often times when the slope of the yield curve increases sharply, it is our opinion that long-term bond holders are sending a message that they think the economy will improve quickly in the future. MARKET REVIEW The Fed's aggressive action regarding short term interest rates throughout the period failed to produce noticeable effects by June 30, 2001. Economic data was generally mixed, with manufacturing showing signs of bottoming while home sales continued to show surprising strength in the face of weaker than expected non-farm payroll reports. Statements released by the Fed in conjunction with the easing of short-term (1) The Lehman 1-3 Year U.S. Government Index is a broad measure of the performance of short-term government bonds. (2) A basis point is one hundredth of one percentage point (0.01%). (3) The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. 1 interest rates argued trends continued to suggest economic weakness during the period, though possible signs of recovery may become apparent before the end of the year. The Fed dismissed the risk of rising inflation, pointing to the easing of pressure on labor and product markets. While none of the statements clearly signaled a move to a less aggressive easing stance, Chairman Greenspan's speech in late May to the Economic Club of New York did emphasize the "front-loaded policy actions" taken to date and the likelihood that "economic activity" would be "strengthening...later this year." We believe this emphasis implies that, although the Fed remains vigilant, the current easing cycle is probably nearing an end. The minutes of the May Federal Open Markets Committee(4) meeting revealed that the decision to lower rates by 50 basis points at that meeting was not unanimous. In fact, the Fed chose to lower rates only 25 basis points at their June 27th meeting. We believe this is a clear indication that the Fed can be expected to be less aggressive going forward. Another interesting development during the second quarter was the defection of Senator Jeffords from the Republican Party, which threw control of the Senate to the Democrats. This shift of control changes Senate Majority Leader and the committee chairmanships, which should slow President Bush's ability to get any meaningful legislation passed or nominations approved. In the long run this should increase monetary policy inertia which, on margin, is a positive for the treasury market. It also is a positive for agencies as Senator Sarbanes, the new head of the Banking Committee, is seen to be agency-friendly. The passage of President Bush's $1.35 trillion tax package--in conjunction with the 275 basis points of rate cuts year-to-date--is expected to stimulate and support growth in the second half of 2001. With the Fed still in easing mode during the period, we maintained a neutral to slightly long position versus the Fund's benchmark. Our slightly long position was accomplished by adding U.S. Treasury bills. We also remained overweight in spread product, specifically full faith and credit agency obligations (AID bonds) and mortgage backed securities (GNMA). We remain partial to these asset classes due to their yield advantages versus comparable maturity Treasury obligations. (4) The Federal Open Markets Committee is a policy-making body of the Federal Reserve System, the U.S. Central Bank, that is responsible for the formulation of policy designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. 2 With the most recent 25 basis points easing, we believe the Fed is approaching the beginning of the end of the 2001 easing cycle. We do not think the resumption of growth will be robust and thus we expect the Fed to be on hold for the foreseeable future. We still find the total return outlook for bonds to be positive, but much of the possible price appreciation may have already been realized. Against this backdrop we will maintain our positive duration exposure and continue to overweight the spread sectors. Thank you for investing in the Citi Short-Term U.S. Government Income Fund. Sincerely, /s/ Heath B. McLendon --------------------- Heath B. McLendon President July 3, 2001 PAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS. The information contained herein is as of June 30, 2001 and represents the opinion of the manager. It is intended to be neither a forecast of future events, a guarantee of future results, nor investment advice. The information provided should not be construed as a recommendation to purchase or sell any individual security. 3 FUND FACTS FUND OBJECTIVE To generate current income and preserve the value of its shareholders' investment. INVESTMENT MANAGER, DIVIDENDS GOVERNMENT INCOME PORTFOLIO Paid monthly, if any Citi Fund Management, Inc. COMMENCEMENT OF OPERATIONS CAPITAL GAINS September 8, 1986 Paid semi-annually, if any NET ASSETS AS OF 6/30/01 BENCHMARKS $14.9 million o Lipper Short U.S. Government Funds Average o Lehman 1-3 Year U.S. Government Index* * The Lehman 1-3 Year U.S. Government Index is a broad measure of the performance of short-term government bonds. 4 FUND PERFORMANCE TOTAL RETURNS SIX ONE FIVE TEN ALL PERIODS ENDED JUNE 30, 2001 (Unaudited) MONTHS** YEAR YEARS* YEARS* ================================================================================ Citi Short-Term U.S. Government Income Fund 3.52% 8.29% 5.79% 5.99% Lipper Short U.S. Government Funds Average 3.41% 8.10% 5.78% 5.82% Lehman 1-3 Year U.S. Government Index 4.04% 9.27% 6.50% 6.38% * Average Annual Total Return ** Not Annualized 30-Day SEC Yield 4.37% Income Dividends Per Share $0.246 GROWTH OF A $10,000 INVESTMENT A $10,000 investment in the Fund made ten years ago would have grown to $17,892, (as of 6/30/01). 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.] CitiFunds Short Term Lipper Short Lehman 1-3 Year U.S. Governmen U.S. Government U.S. Government Income Fund Income Funds Avg. Index 6/30/91 10000 10000 10000 7/31/91 10153 10097 10086 8/31/91 10393 10239 10224 9/30/91 10647 10358 10332 10/31/91 10747 10464 10444 11/30/91 10804 10563 10551 12/31/91 11025 10741 10711 1/31/92 10951 10677 10697 2/29/92 11002 10650 10729 3/31/92 10984 10588 10726 4/30/92 11047 10675 10824 5/31/92 11192 10787 10924 6/30/92 11309 10899 11034 7/31/92 11454 11030 11161 8/31/92 11530 11120 11251 9/30/92 11632 11211 11357 10/31/92 11522 11124 11292 11/30/92 11508 11106 11275 12/31/92 11638 11213 11380 1/31/93 11793 11354 11499 2/28/93 11909 11462 11591 3/31/93 11951 11498 11626 4/30/93 12024 11563 11697 5/31/93 11985 11549 11669 6/30/93 12118 11656 11756 7/31/93 12112 11688 11781 8/31/93 12289 11802 11879 9/30/93 12339 11835 11917 10/31/93 12366 11856 11944 11/30/93 12305 11821 11946 12/31/93 12345 11864 11993 1/31/94 12420 11944 12068 2/28/94 12282 11845 11995 3/31/94 12138 11723 11934 4/30/94 12047 11640 11889 5/31/94 12071 11619 11905 6/30/94 12070 11618 11935 7/31/94 12196 11712 12042 8/31/94 12220 11739 12081 9/30/94 12155 11698 12054 10/31/94 12167 11705 12082 11/30/94 12100 11658 12032 12/31/94 12133 11684 12055 1/31/95 12315 11829 12219 2/28/95 12485 11998 12385 3/31/95 12549 12060 12455 4/30/95 12680 12164 12566 5/31/95 12972 12403 12781 6/30/95 13037 12465 12850 7/31/95 13023 12480 12901 8/31/95 13116 12572 12978 9/30/95 13182 12643 13041 10/31/95 13289 12756 13149 11/30/95 13425 12878 13261 12/31/95 13526 12985 13362 1/31/96 13622 13079 13474 2/29/96 13509 13018 13422 3/31/96 13452 13003 13412 4/30/96 13423 13005 13425 5/31/96 13421 13021 13455 6/30/96 13505 13108 13553 7/31/96 13549 13151 13606 8/31/96 13578 13187 13656 9/30/96 13694 13300 13781 10/31/96 13854 13440 13936 11/30/96 13957 13545 14040 12/31/96 13935 13541 14042 1/31/97 14009 13604 14110 2/28/97 14040 13640 14144 3/31/97 13997 13615 14132 4/30/97 14117 13715 14248 5/31/97 14208 13796 14348 6/30/97 14299 13869 14447 7/31/97 14465 14013 14604 8/31/97 14467 14019 14619 9/30/97 14559 14115 14730 10/31/97 14682 14214 14839 11/30/97 14699 14245 14876 12/31/97 14786 14315 14976 1/31/98 14942 14437 15120 2/28/98 14943 14447 15133 3/31/98 14991 14496 15192 4/30/98 15052 14553 15265 5/31/98 15129 14627 15346 6/30/98 15190 14691 15426 7/31/98 15252 14750 15498 8/31/98 15441 14900 15687 9/30/98 15646 15082 15898 10/31/98 15692 15108 15976 11/30/98 15675 15105 15959 12/31/98 15722 15149 16020 1/31/99 15764 15221 16081 2/28/99 15676 15162 16009 3/31/99 15767 15251 16118 4/30/99 15826 15311 16168 5/31/99 15786 15297 16156 6/30/99 15813 15303 16204 7/31/99 15839 15323 16254 8/31/99 15865 15351 16300 9/30/99 15975 15447 16406 10/31/99 16011 15488 16450 11/30/99 16046 15528 16481 12/31/99 16047 15533 16496 1/31/00 16032 15543 16493 2/29/00 16136 15632 16605 3/31/00 16257 15755 16705 4/30/00 16293 15812 16746 5/31/00 16364 15839 16808 6/30/00 16522 15997 16992 7/31/00 16611 16092 17100 8/31/00 16735 16211 17230 9/30/00 16860 16328 17365 10/31/00 16950 16421 17458 11/30/00 17111 16582 17628 12/31/00 17283 16754 17845 1/31/01 17501 16969 18080 2/28/01 17611 17098 18198 3/31/01 17740 17207 18345 4/30/01 17760 17255 18398 5/31/01 17853 17355 18499 6/30/01 17892 17402 18566 The graph assumes all dividends and distributions from the Fund are reinvested at Net Asset Value. Notes: All Fund performance numbers represent past performance, and are no guarantee of future results. The Fund's share price and investment return will fluctuate, so that the value of an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns include change in share price and reinvestment of dividends and distributions, if any. Total return figures are provided in accordance with SEC guidelines for comparative purposes for prospective investors. Returns reflect certain voluntary fee waivers. If the waivers were not in place, the Fund's return would have been lower. Investors may not invest directly in an index. 5 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2001 (Unaudited) ================================================================================ ASSETS: Investment in Government Income Portfolio, at value (Note 1A) $15,047,560 Receivable from the Administrator 98,838 -------------------------------------------------------------------------------- Total assets 15,146,398 -------------------------------------------------------------------------------- LIABILITIES: Payable for shares of beneficial interest repurchased 164,305 Dividends payable 27,344 Payable to affiliates--Shareholder Servicing Agents' fees (Note 2B) 3,141 Accrued expenses and other liabilities 31,604 -------------------------------------------------------------------------------- Total liabilities 226,394 -------------------------------------------------------------------------------- NET ASSETS $14,920,004 ================================================================================ NET ASSETS CONSIST OF: Paid-in capital $17,945,053 Accumulated net realized loss (2,821,281) Unrealized depreciation (176,745) Accumulated net investment loss (27,023) -------------------------------------------------------------------------------- Total $14,920,004 ================================================================================ NET ASSET VALUE AND OFFERING PRICE PER SHARE FOR 1,537,178 SHARES OF BENEFICIAL INTEREST OUTSTANDING $9.71 ================================================================================ See notes to financial statements 6 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited) ================================================================================ INVESTMENT INCOME (Note 1B): Interest Income from Government Income Portfolio $469,579 Allocated Expenses from Government Income Portfolio (29,500) -------------------------------------------------------------------------------- $440,079 EXPENSES: Administrative fees (Note 2A) $ 20,853 Shareholder Servicing Agents fees (Note 2B) 20,853 Distribution fees (Note 3) 12,512 Legal fees 50,265 Transfer agent fees 15,877 Custody and fund accounting fees 10,282 Trustee fees 5,880 Audit fees 5,625 Shareholder reports 5,126 Miscellaneous 22,652 -------------------------------------------------------------------------------- Total expenses 169,925 Less: aggregate amount waived by Administrator and Distributor (Notes 2A and 3) (33,365) Less: expenses assumed by the Administrator (Note 6) (98,838) -------------------------------------------------------------------------------- Net expenses 37,722 -------------------------------------------------------------------------------- Net investment income 402,357 -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) FROM GOVERNMENT INCOME PORTFOLIO: Net realized gain 67,801 Unrealized appreciation of investments 128,922 -------------------------------------------------------------------------------- Net realized and unrealized gain from Government Income Portfolio 196,723 -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $599,080 ================================================================================ See notes to financial statements 7 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND STATEMENT OF CHANGES IN NET ASSETS SIX MONTHS ENDED YEAR ENDED JUNE 30, 2001 DECEMBER 31, (Unaudited) 2000 ================================================================================ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS: Net investment income $ 402,357 $ 1,405,111 Net realized gain (loss) 67,801 (94,239) Unrealized appreciation of investments 128,922 508,673 -------------------------------------------------------------------------------- Net increase in net assets resulting from operations 599,080 1,819,545 -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (433,676) (1,429,220) -------------------------------------------------------------------------------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (Note 5): Net proceeds from sale of shares 706,915 977,621 Net asset value of shares issued to shareholders from reinvestment of dividends 430,784 1,448,970 Cost of shares repurchased (4,543,509) (15,765,820) -------------------------------------------------------------------------------- Net decrease in net assets from transactions in shares of beneficial interest (3,405,810) (13,339,229) -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS (3,240,406) (12,948,904) -------------------------------------------------------------------------------- NET ASSETS: Beginning of period 18,160,410 31,109,314 -------------------------------------------------------------------------------- End of period (including accumulated net investment loss of $27,023 and undistributed net investment income of $4,296, respectively) $14,920,004 $18,160,410 -------------------------------------------------------------------------------- See notes to financial statements 8 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2001 ------------------------------------------ (Unaudited) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------- Net Asset Value, beginning of period $ 9.62 $ 9.46 $ 9.73 $ 9.61 $ 9.55 $ 9.78 -------------------------------------------------------------------------------- Income From Operations: Net investment income 0.226 0.542 0.473 0.473 0.504 0.516 Net realized and unrealized gain (loss) 0.110 0.166 (0.276) 0.121 0.064 (0.232) -------------------------------------------------------------------------------- Total from operations 0.336 0.708 0.197 0.594 0.568 0.284 -------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.246) (0.548) (0.467) (0.474) (0.508) (0.514) -------------------------------------------------------------------------------- Total distributions (0.246) (0.548) (0.467) (0.474) (0.508) (0.514) -------------------------------------------------------------------------------- Net Asset Value, end of period $ 9.71 $ 9.62 $ 9.46 $ 9.73 $ 9.61 $ 9.55 ================================================================================ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's omitted) $14,920 $18,160 $31,109 $48,034 $20,237 $26,744 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 4.83%* 5.50% 5.02% 4.98% 5.20% 5.31% Total return 3.52%** 7.70% 2.07% 6.33% 6.11% 3.02% Note: If Agents of the Fund 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 $0.123 $ 0.444 $ 0.411 $ 0.413 $ 0.442 $ 0.460 RATIOS: Expenses to average net assets (A) 2.77%* 1.63% 1.37% 1.42% 1.43% 1.38% Net investment income to average net assets 2.86%* 4.67% 4.45% 4.36% 4.57% 4.73% -------------------------------------------------------------------------------- (A) Includes the Fund's share of Government Income Portfolio allocated expenses. *Annualized ** Not Annualized See notes to financial statements 9 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Citi Short-Term U.S. Government Income Fund (the "Fund"), is a separate diversified series of CitiFunds Fixed Income Trust (the "Trust"), a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended, as a diversified open-end, management investment company. The Fund invests all of its investable assets in Government Income Portfolio (the "Portfolio"), a management investment company for which Citi Fund Management Inc. (the "Manager") serves as Investment Manager. On April 1, 2001, Citibank, N.A. transferred its asset management business, including investment management of the Fund to its newly formed affiliate, the Manager. The value of such investment reflects the Fund's proportionate interest (48.9% at June 30, 2001) in the net assets of the Portfolio. Salomon Smith Barney Inc. ("SSB"), acts as the Fund's distributor. SSB continues to sell Fund shares to the public as a member of the selling group. 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 disclosures 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, 2000, the Fund, for federal income tax purposes, had a capital loss carryover of $3,094,119, 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, $457,813 will expire on December 31, 2007 and $207,313 will expire on December 31, 2008. 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. 10 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND NOTES TO FINANCIAL STATEMENTS (Unaudited) D. EXPENSES The Fund bears all costs of its operations other than expenses specifically assumed by the Manager. 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 Smith Barney Fund Management LLC (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 $20,853, all of which was voluntarily waived for the six months ended June 30, 2001. 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 Share 11 CITI SHORT-TERM U.S. GOVERNMENT INCOME FUND NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) holder 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 $20,853 for the six months ended June 30, 2001. 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 $12,512, all of which were voluntarily waived for the six months ended June 30, 2001. 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, 2001. 4. INVESTMENT TRANSACTIONS Increases and decreases in the Fund's investment in the Portfolio for the six months ended June 30, 2001 aggregated $596,699 and $4,444,682, 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, 2001 DECEMBER 31, (Unaudited) 2000 ================================================================================ Shares sold 72,744 103,770 Shares issued to shareholders from reinvestment of dividends 44,355 152,480 Shares repurchased (467,092) (1,657,276) -------------------------------------------------------------------------------- Net decrease (349,993) (1,401,026) ================================================================================ 6. ASSUMPTION OF EXPENSES The Manager has voluntarily agreed to pay a portion of the expenses of the Fund for the six months ended June 30, 2001, which amounted to $98,838, to maintain a voluntary expense limitation of 0.80% of average daily net assets. This voluntary expense limitation may be discontinued at any time. 12 GOVERNMENT INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2001 (Unaudited) PRINCIPAL AMOUNT ISSUER (000'S OMITTED) VALUE -------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 32.1% -------------------------------------------------------------------------------- 6.50%, 2009 $ 109 $ 110,238 6.50%, 2011 2,187 2,219,490 6.50%, 2019 101 100,896 7.00%, 2008 623 627,371 7.00%, 2009 813 819,727 7.00%, 2013 3,393 3,483,956 7.00%, 2019 1,764 1,766,436 7.00%, 2020 297 296,352 8.00%, 2006 66 68,348 8.00%, 2007 63 65,759 8.00%, 2017 59 61,707 8.00%, 2021 123 128,755 8.00%, 2022 58 60,767 9.50%, 2016 1 687 9.50%, 2017 21 22,483 9.50%, 2018 15 16,713 9.50%, 2019 22 23,696 9.50%, 2020 13 14,488 ----------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 9,887,869 ----------- U.S. & OTHER GOVERNMENT OBLIGATIONS -- 67.2% -------------------------------------------------------------------------------- Israel State U.S. Government Guaranteed Notes, 5.70% due 2/15/03 5,000 5,058,150 6.125% due 3/15/03 4,300 4,381,743 ----------- 9,439,893 ----------- United States Treasury Bills, 3.36% due 9/13/01 468 464,811 3.405% due 9/13/01 260 258,205 ----------- 723,016 ----------- United States Treasury Notes, 6.25% due 7/31/02 950 973,009 3.875% due 6/30/03 5,000 4,965,600 5.25% due 5/15/04 4,500 4,577,355 ----------- 10,515,964 ------------ TOTAL U.S. & OTHER GOVERNMENT OBLIGATIONS 20,678,873 ------------ REPURCHASE AGREEMENTS -- 16.0% -------------------------------------------------------------------------------- First Union National Bank Repurchase Agreement 3.93% due 7/02/01, proceeds at maturity $2,500,819 (collateralized by $2,616,000 U.S. Treasury Notes 4.75% due 11/15/08, valued at $2,550,600) $ 2,500,000 Westdeutsche Landesbank Repurchase Agreement 3.97% due 7/02/01, proceeds at maturity $2,423,802 (collateralized by $2,380,000 U.S. Treasury Notes 5.875% due 11/15/04, valued at $2,431,884) 2,423,000 ----------- TOTAL SHORT-TERM OBLIGATIONS 4,923,000 ----------- TOTAL INVESTMENTS (Identified Cost-- $ 35,352,099) 115.3% 35,489,742 OTHER ASSETS, LESS LIABILITIES (15.3) (4,697,022) ----- ----------- NET ASSETS 100.0% $30,792,720 ===== =========== See notes to financial statements 13 GOVERNMENT INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2001 (Unaudited) ================================================================================ ASSETS: Investments at value (Note 1A) (Identified Cost, $30,429,099) $30,566,741 Repurchase Agreements (Identified Cost, $4,923,000) 4,923,000 Cash 534 Receivable from the Administrator 20,404 Interest receivable 303,229 -------------------------------------------------------------------------------- Total assets 35,813,908 -------------------------------------------------------------------------------- LIABILITIES: Payable for investments purchased 4,997,453 Payable to affiliates--Management fees (Note 2) 3,331 Accrued expenses and liabilities 20,404 -------------------------------------------------------------------------------- Total liabilities 5,021,188 -------------------------------------------------------------------------------- NET ASSETS $30,792,720 ================================================================================ REPRESENTED BY: Paid-in capital for beneficial interests $30,792,720 ================================================================================ GOVERNMENT INCOME PORTFOLIO STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited) ================================================================================ INVESTMENT INCOME (Note 1B): $ 869,952 EXPENSES: Management fees (Note 2) $ 54,679 Legal fees 28,015 Custodian & accounting fees 22,133 Audit fees 12,480 Administrative fees (Note 3) 7,811 Trustee fees 4,434 Miscellaneous 4,299 -------------------------------------------------------------------------------- Total expenses 133,851 Less: aggregate amount waived by the Manager and Administrator (Note 3) (58,467) Less: expenses assumed by the Administrator (Note 7) (20,404) -------------------------------------------------------------------------------- Net expenses 54,980 -------------------------------------------------------------------------------- Net investment income 814,972 -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain from investment transactions 133,597 Unrealized appreciation of investments 209,762 -------------------------------------------------------------------------------- Net realized and unrealized gain on investments 343,359 -------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,158,331 ================================================================================ See notes to financial statements 14 GOVERNMENT INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS SIX MONTHS ENDED YEAR ENDED JUNE 30, 2001 DECEMBER 31, (Unaudited) 2000 ================================================================================ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS: Net investment income $ 814,972 $ 3,058,531 Net realized gain (loss) on investment transactions 133,597 (211,943) Unrealized appreciation of investments 209,762 1,004,159 -------------------------------------------------------------------------------- Net increase in net assets resulting from operations 1,158,331 3,850,747 -------------------------------------------------------------------------------- CAPITAL TRANSACTIONS: Proceeds from contributions 3,133,531 8,472,107 Value of withdrawals (5,841,094) (43,586,705) -------------------------------------------------------------------------------- Net decrease in net assets from capital transactions (2,707,563) (35,114,598) -------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS (1,549,232) (31,263,851) -------------------------------------------------------------------------------- NET ASSETS: Beginning of period 32,341,952 63,605,803 -------------------------------------------------------------------------------- End of period $30,792,720 $32,341,952 ================================================================================ See notes to financial statements 15 GOVERNMENT INCOME PORTFOLIO FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2001 ----------------------------------------- (Unaudited) 2000 1999 1998 1997 1996 ================================================================================ RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (000's omitted) $30,793 $32,342 $63,606 $84,147 $61,298 $53,499 Ratio of expenses to average net assets 0.35%* 0.35% 0.35% 0.35% 0.35% 0.35% Ratio of net investment income to average net assets 5.22%* 5.90% 5.45% 5.49% 5.65% 5.75% Portfolio turnover 256% 340% 201% 288% 126% 100% 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 0.86%* 0.40% 0.40% 0.40% 0.41% 0.40% Net investment income to average net assets 4.71%* 5.85% 5.40% 5.44% 5.59% 5.70% ================================================================================ * 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 Manager of the Portfolio is Citi Fund Management Inc. (the "Manager"). On April 1, 2001, Citibank N.A., transferred its asset management business, including management of the Portfolio to its newly formed affiliate, the Manager. 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 interest 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 the Manager. 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. 17 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 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. 18 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (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 June 30, 2001. 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. MANAGEMENT FEES The investment management paid to the Manager, as compensation for overall investment management services, amounted to $54,679, of which $50,656 was voluntarily waived for the six months ended June 30, 2001. The management 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 $7,811, all of which was voluntarily waived, for the six months ended June 30, 2001. 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 $87,015,049 and $83,243,959, respectively, for the six months ended June 30, 2001. 5. FEDERAL INCOME TAX BASIS OF INVESTMENTS The cost and unrealized appreciation (depreciation) in value of the investment securities owned at June 30, 2001, as computed on a federal income tax basis, are as follows: Aggregate cost $35,352,099 =============================================================================== Gross unrealized appreciation $ 180,467 Gross unrealized depreciation (42,825) ------------------------------------------------------------------------------- Net unrealized appreciation $ 137,642 =============================================================================== 19 GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 6. 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, 2001, the commitment fee allocated to the Portfolio was $31. Since the line of credit was established, there have been no borrowings by the Portfolio. 7. ASSUMPTION OF EXPENSES The Administrator has voluntarily agreed to pay a portion of the expenses of the Fund for the six months ended June 30, 2001, which amounted to $20,404. 20 TRUSTEES AND OFFICERS C. OscarMorong, Jr., CHAIRMAN Riley C. Gilley Diana R. Harrington Susan B. Kerley Heath B. McLendon* E.Kirby Warren William S. Woods, Jr.** SECRETARY Robert I. Frenkel* TREASURER Lewis E. Daidone* * AFFILIATED PERSON OF INVESTMENT ADVISER ** TRUSTEE EMERITUS INVESTMENT MANAGER (OF GOVERNMENT INCOME PORTFOLIO) Citi Fund Management Inc. 100 First Stamford Place Stamford, CT 06902 DISTRIBUTOR Salomon Smith Barney Inc. TRANSFER AGENT CitiFiduciary Trust Company 125 Broad Street, 11th Floor New York, NY 10004 SUB-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 Citi Short-Term U.S. Government Income Fund. It is authorized for distribution to prospective investors only when preceded or accompanied by an effective prospectus of Citi Short-Term U.S. Government Income Fund. (C)2001 Citicorp [Logo] Printed on recycled paper CFS/USG/601