Notes to Financial Statements (unaudited)
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1. | Organization and Significant Accounting Policies |
CitiSM Premium U.S. Treasury Reserves (the “Fund”) is a separate diversified series of CitiFunds Premium Trust (the “Trust”), a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund invests all of its investable assets in U.S. Treasury Reserves Portfolio (the “Portfolio”), a management investment company that has the same investment objective as the Fund.
Effective as of close of business, April 13, 2007, the Fund is a separate diversified series of Legg Mason Partners Premium Money Market Trust (the “New Trust”). The New Trust, a Maryland business trust, is registered under the 1940 Act, as an open-end management investment company.
The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. The Fund records its investment in the Portfolio at value. The value of such investment reflects the Fund’s proportionate interest (13.8% at February 28, 2007) in the net assets of the Portfolio. Valuation of securities held by the Portfolio is discussed in Note 1(a) 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 expense, daily based on its investment in the Portfolio.
(c) 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 in the series are allocated in proportion to the 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 is charged against and reduces the amount of the Fund’s investment in the Portfolio.
(d) Method of Allocation. All the net investment income and net realized gain (loss) of the Portfolio are allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio at the time of such determination.
(e) Distributions to Shareholders. Distributions from net investment income on the shares of the Fund are declared as of 2:00 p.m. Eastern Time, each business day to shareholders of record, and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(f) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable
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8 | CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report |
Notes to Financial Statements (unaudited) (continued)
to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
(g) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share.
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2. | Investment Management Agreement and Other Transactions with Affiliates |
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. Under investment management agreements, the Fund and the Portfolio pay investment management fees calculated daily and paid monthly, at an annual rate of 0.25% and 0.10% of the Fund’s and the Portfolio’s average daily net assets, respectively. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.
During the six months ended February 28, 2007, the Fund had a voluntary expense limitation in place of 0.45% of the Fund’s average daily net assets.
During the six months ended February 28, 2007, LMPFA waived a portion of its fee in the amount of $90,418. In addition, the Fund was reimbursed for expenses in the amount of $4,620.
Citigroup Global Markets Inc. (“CGM”) and Legg Mason Investor Services, LLC (“LMIS”) serve as co-distributors of the Fund. LMIS is a wholly-owned broker-dealer subsidiary of Legg Mason.
The Fund adopted a Rule 12b-1 distribution plan under the 1940 Act, and under that plan, the Fund pays a monthly fee at an annual rate not to exceed 0.10% of the Fund’s average daily net assets. The distribution fees paid amounted to $99,950 for the six months ended February 28, 2007.
The Trust pays no compensation directly to any Trustee or any officer who is affiliated with LMPFA, all of whom receive remuneration for their services to the Fund from Legg Mason or its affiliates.
During a special meeting in June 2006, the Fund’s Board approved a number of initiatives to streamline and restructure the fund complex. In that connection the Board voted to establish a mandatory retirement age of 75 for current Trustees, and 72 for all future Trustees, and to allow current Trustees to elect to retire as of the date which Trustees elected in accordance with the Joint Proxy Statement commence service as Trustees of the realigned and consolidated Board (the “Effective Date”).
On July 10, 2006, the Board also voted to amend its retirement plans to provide for the payment of certain benefits (in lieu of any other retirement payments under the plans) to Trustees who have not elected to retire as of the Effective Date. Under the amended plan, Trustees electing to receive benefits under the amendments must waive all rights under the
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CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report | 9 |
Notes to Financial Statements (unaudited) (continued)
plan prior to amendment. Each fund overseen by the Board (including the Fund) will pay a pro rata share (based upon asset size) of such benefits. As of February 28, 2007, the Fund’s allocable share of benefits under this amendment are $5,447.
Under the previous Retirement Plan (the “Plan”), all Trustees who were not “Interested Persons” of the Fund, within the meaning of the 1940 Act, were required to retire from the Board as of the last day of the calendar year in which the applicable Trustees attained age 75. Trustees were able to retire under the Plan before attaining the mandatory retirement age. Trustees who had served as Trustee of the Fund or any of the investment companies associated with LMPFA for at least ten years when they retired were eligible to receive the maximum retirement benefit under the previous Plan, subject to the terms of the amended plans. The maximum retirement benefit was an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the entirety of the calendar year of the Trustee’s retirement (assuming no change in relevant facts for the balance of the year following the Trustee’s retirement). Amounts owed under the Plan were paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Two former Trustees are currently receiving payments under the Plan.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
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3. | Shares of Beneficial Interest |
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (par value $0.00001 per share).
Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued in reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding capital share transactions.
On May 31, 2005, the U.S. Securities and Exchange Commission (‘‘SEC’’) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (‘‘SBFM’’) and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the ‘‘Affected Funds’’).
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (‘‘Advisers Act’’). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (‘‘First Data’’), the Affected Funds’ then existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (‘‘‘CAM’’), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM
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10 | CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report |
Notes to Financial Statements (unaudited) (continued)
and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for approval by the SEC. At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made.
The order also requires that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.
On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the Affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ Boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, the Fund’s manager does not believe that this matter will have a material adverse effect on the Affected Funds.
This Fund is not one of the Affected Funds and therefore did not implement the transfer agent arrangement described above and therefore will not receive any portion of the distributions.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
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CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report | 11 |
Notes to Financial Statements (unaudited) (continued)
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 4. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Fund’s management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.
On October 5, 2005, a motion to consolidate the five actions and any subsequently filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.
As of the date of this report, the Fund’s manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Fund or the ability of the Fund’s manager and its affiliates to continue to render services to the Fund under their respective contracts.
On September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Management Inc. (“SBAM”) that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the 1940 Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the 1940 Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.
Although there can be no assurance, the Fund’s manager believe that this matter is not likely to have a material adverse effect on the Fund.
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7. | Special Shareholder Meeting and Reorganization |
Shareholders of the Fund approved a number of initiatives designed to streamline and restructure the fund complex. These matters generally are expected to be implemented in 2007. As noted in the proxy materials, Legg Mason will pay for a portion of the costs related to these initiatives. The portions of the costs that are borne by the Fund will be recognized in the period during which the expense is incurred. Such expenses relate to obtaining shareholder votes for proposals presented in the proxy, the election of board members, retirement of board members, as well as printing, mailing, and soliciting proxies. The portions of these costs borne by the Fund and reflected in the Statement of Operations are deemed extraordinary and, therefore, are not subject to expense limitation agreements, if applicable. See also “Additional Shareholder Information” at the end of this report.
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12 | CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report |
Notes to Financial Statements (unaudited) (continued)
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8. | Recent Accounting Pronouncements |
During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Fund will be September 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the financial statements.
* * *
On September 20, 2006, FASB released Statement of Financial Accounting Standards No. 157 Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
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CitiSM Premium U.S. Treasury Reserves 2007 Semi-Annual Report | 13 |
Additional Shareholder Information (unaudited)
Results of Special Meetings of Shareholders
On December 11, 2006, a Special Meeting of Shareholders was held to vote at a Trust level on various proposals recently approved by the Fund’s Board Members. The following tables provide the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to the following proposals: (1) Election of Board Members and (2) Agreement and Plan of Reorganization.
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1. | Election of Board Members† |
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Nominees | | | Votes For | | | Withheld | | | Abstentions | |
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Elliot J. Berv | | | 353,953,639.810 | | | 3,252,029.180 | | | 0.000 | |
A. Benton Cocanougher | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Jane F. Dasher | | | 353,953,639.810 | | | 3,252,029.180 | | | 0.000 | |
Mark T. Finn | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Rainer Greeven | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Stephen Randolph Gross | | | 353,849,939.940 | | | 3,355,729.050 | | | 0.000 | |
Richard E. Hanson, Jr. | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Diana R. Harrington | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Susan M. Heilbron | | | 353,849,939.940 | | | 3,355,729.050 | | | 0.000 | |
Susan B. Kerley | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
Alan G. Merten | | | 353,989,736.940 | | | 3,215,932.050 | | | 0.000 | |
R. Richardson Pettit | | | 354,093,436.810 | | | 3,112,232.180 | | | 0.000 | |
R. Jay Gerken, CFA | | | 353,989,736.940 | | | 3,215,932.050 | | | 0.000 | |
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† | Board Members are elected by the shareholders of all of the series of the Trust, of which the Fund is a series. |
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2. | Agreement and Plan of Reorganization |
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Item Voted On | | | Votes For | | | Votes Against | | | Abstentions | | | Broker
Non-Votes | |
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Reorganize as a Series of a | | | | | | | | | | | | | |
Maryland Business Trust | | | 351,204,624.070 | | | 2,853,431.740 | | | 2,806,440.180 | | | 341,173.000 | |
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On January 29, 2007, a Special Meeting of Shareholders was held to vote at a Fund level on various proposals recently approved by the Fund’s Board Members. The following table provides the number of votes cast for, against, as well as the number of abstentions and broker non-votes as to the following proposal: Revise Fundamental Investment Policies.
Revise Fundamental Investment Policies
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Items Voted On | | | Votes For | | | Votes Against | | | Abstentions | �� | | Broker
Non-Votes | |
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Borrowing Money | | | 99,401,765.000 | | | 8,416,340.280 | | | 74,505.570 | | | 1.000 | |
Underwriting | | | 107,199,806.050 | | | 618,299.230 | | | 74,505.570 | | | 1.000 | |
Lending | | | 99,401,765.000 | | | 8,416,340.280 | | | 74,505.570 | | | 1.000 | |
Issuing Senior Securities | | | 107,199,806.050 | | | 618,299.230 | | | 74,505.570 | | | 1.000 | |
Real Estate | | | 107,199,806.050 | | | 618,299.230 | | | 74,505.570 | | | 1.000 | |
Commodities | | | 107,199,806.050 | | | 618,299.230 | | | 74,505.570 | | | 1.000 | |
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14 | CitiSM Premium U.S. Treasury Reserves |
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Schedule of Investments (February 28, 2007) (unaudited) |
U.S. TREASURY RESERVES PORTFOLIO |
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Amount | | Security | | | Value | |
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SHORT-TERM INVESTMENTS (a) — 101.5% | | | | |
U.S. Treasury Bills — 101.5% | | | | |
$ | 50,000,000 | | 5.099 - 5.103% due 3/1/07 | | $ | 50,000,000 | |
| 50,000,000 | | 5.055% due 3/8/07 | | | 49,952,235 | |
| 86,653,000 | | 5.023 - 5.070% due 3/8/07 | | | 86,568,146 | |
| 41,524,000 | | 5.146% due 3/15/07 | | | 41,441,240 | |
| 156,653,000 | | 5.045 - 5.176% due 3/15/07 | | | 156,341,411 | |
| 20,000,000 | | 5.014% due 3/22/07 | | | 19,942,950 | |
| 158,666,000 | | 5.158 - 5.196% due 3/22/07 | | | 158,188,863 | |
| 100,971,000 | | 4.940 - 5.055% due 3/29/07 | | | 100,585,605 | |
| 62,758,000 | | 4.966 - 4.974% due 4/5/07 | | | 62,459,442 | |
| 25,000,000 | | 5.002% due 4/12/07 | | | 24,857,521 | |
| 25,000,000 | | 5.009% due 4/12/07 | | | 24,855,917 | |
| 85,000,000 | | 5.038 - 5.068% due 4/19/07 | | | 84,425,033 | |
| 45,000,000 | | 5.063 - 5.086% due 4/26/07 | | | 44,651,206 | |
| 60,637,000 | | 5.055 - 5.077% due 5/3/07 | | | 60,108,444 | |
| 50,000,000 | | 5.068 - 5.079% due 5/10/07 | | | 49,515,833 | |
| 75,000,000 | | 5.066 - 5.091% due 5/17/07 | | | 74,197,649 | |
| 125,000,000 | | 5.052 - 5.102% due 5/24/07 | | | 123,544,788 | |
| 20,000,000 | | 4.983% due 5/31/07 | | | 19,754,047 | |
| 25,000,000 | | 5.077% due 6/7/07 | | | 24,659,246 | |
| 57,676,000 | | 4.998 - 5.043% due 6/14/07 | | | 56,848,772 | |
| 25,000,000 | | 5.049% due 6/21/07 | | | 24,613,444 | |
| 20,000,000 | | 5.043% due 7/12/07 | | | 19,636,651 | |
| 25,000,000 | | 5.073% due 7/19/07 | | | 24,519,139 | |
| 20,000,000 | | 5.088% due 8/9/07 | | | 19,556,355 | |
| 25,000,000 | | 5.093% due 8/16/07 | | | 24,420,750 | |
| 25,000,000 | | 5.067% due 8/23/07 | | | 24,399,653 | |
| 25,000,000 | | 5.009% due 8/30/07 | | | 24,382,590 | |
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| | | TOTAL INVESTMENTS — 101.5% (Cost — $1,474,426,930#) | | | 1,474,426,930 | |
| | | Liabilities in Excess of Other Assets — (1.5)% | | | (21,203,134 | ) |
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| | | TOTAL NET ASSETS — 100.0% | | $ | 1,453,223,796 | |
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(a) | Rate shown represents yield-to-maturity. |
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# | Aggregate cost for federal income tax purposes is substantially the same. |
See Notes to Financial Statements.
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U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report | 15 |
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U.S. Treasury Reserves Portfolio | | | | |
Statement of Assets and Liabilities (February 28, 2007) (unaudited) | | | | |
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ASSETS: | | | | |
Investments, at amortized cost | | $ | 1,474,426,930 | |
Cash | | | 792 | |
Receivable from manager | | | 37,350 | |
Interest receivable | | | 3,375,000 | |
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Total Assets | | | 1,477,840,072 | |
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LIABILITIES: | | | | |
Payable for securities purchased | | | 24,382,590 | |
Investment management fee payable | | | 88,939 | |
Trustees’ fees payable | | | 83,880 | |
Accrued expenses | | | 60,867 | |
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Total Liabilities | | | 24,616,276 | |
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Total Net Assets | | $ | 1,453,223,796 | |
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REPRESENTED BY: | | | | |
Paid-in capital | | $ | 1,453,223,796 | |
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See Notes to Financial Statements.
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16 | U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report |
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U.S. Treasury Reserves Portfolio | | | | |
Statement of Operations (For the six months ended February 28, 2007) (unaudited) | |
INVESTMENT INCOME: | | | | |
Interest (Note 1) | | $ | 35,578,367 | |
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EXPENSES: | | | | |
Investment management fee (Note 2) | | | 707,292 | |
Trustees’ fees (Notes 2 and 6) | | | 48,976 | |
Legal fees | | | 40,014 | |
Custody fees | | | 17,731 | |
Audit and tax | | | 14,400 | |
Shareholder reports | | | 484 | |
Miscellaneous expenses | | | 16,670 | |
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Total Expenses | | | 845,567 | |
Less: Fee waivers and/or expense reimbursements (Notes 2 and 6) | | | (136,793 | ) |
Fees paid indirectly (Note 1) | | | (1,488 | ) |
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Net Expenses | | | 707,286 | |
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Net Investment Income | | | 34,871,081 | |
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Net Realized Gain on Investments | | | 2,731 | |
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Increase in Net Assets From Operations | | $ | 34,873,812 | |
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See Notes to Financial Statements.
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U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report | 17 |
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U.S. Treasury Reserves Portfolio | | | | | |
Statements of Changes in Net Assets | | | | | |
For the six months ended February 28, 2007 (unaudited)
and the year ended August 31, 2006 |
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| | 2007 | | 2006 | |
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OPERATIONS: | | | | | | | |
Net investment income | | $ | 34,871,081 | | $ | 61,706,118 | |
Net realized gain | | | 2,731 | | | 1,674 | |
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Increase in Net Assets From Operations | �� | | 34,873,812 | | | 61,707,792 | |
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CAPITAL TRANSACTIONS: | | | | | | | |
Proceeds from contributions | | | 2,533,103,679 | | | 6,479,872,855 | |
Values of withdrawals | | | (2,605,239,556 | ) | | (6,269,999,109 | ) |
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Increase (Decrease) in Net Assets From Capital Transactions | | | (72,135,877 | ) | | 209,873,746 | |
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Increase (Decrease) in Net Assets | | | (37,262,065 | ) | | 271,581,538 | |
NET ASSETS: | | | | | | | |
Beginning of period | | | 1,490,485,861 | | | 1,218,904,323 | |
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End of period | | $ | 1,453,223,796 | | $ | 1,490,485,861 | |
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See Notes to Financial Statements.
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18 | U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report |
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U.S. Treasury Reserves Portfolio |
Financial Highlights |
For the years ended August 31, unless otherwise noted: |
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| | 2007(1) | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
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Net Assets,
End of Period (000s) | | $ | 1,453,224 | | $ | 1,490,486 | | $ | 1,218,904 | | $ | 1,562,711 | | $ | 1,458,349 | | $ | 1,953,165 | |
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Total Return(2) | | | 2.48 | % | | 4.21 | % | | 2.25 | % | | 0.92 | % | | 1.20 | % | | 2.06 | % |
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Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | | |
Gross expenses | | | 0.12% | (3)(4) | | 0.13 | % | | 0.18 | % | | 0.18 | % | | 0.18 | % | | 0.20 | % |
Net expenses(5)(6)(7) | | | 0.10 | (3)(4) | | 0.10 | | | 0.10 | | | 0.10 | | | 0.10 | | | 0.10 | |
Net investment income | | | 4.93 | (3) | | 4.16 | | | 2.16 | | | 0.91 | | | 1.22 | | | 2.00 | |
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(1) | For the six months ended February 28, 2007 (unaudited). |
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(2) | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
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(3) | Annualized. |
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(4) | Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would not have changed (Note 6). |
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(5) | As a result of a voluntary expense limitation, the ratio of expenses to average net assets, other than interest, brokerage, taxes and extra-ordinary expenses, of the Portfolio will not exceed 0.10%. |
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(6) | Reflects fee waivers and/or expense reimbursements. |
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(7) | There was no impact to the expense ratio as a result of fees paid indirectly. |
See Notes to Financial Statements.
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U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report | 19 |
Notes to Financial Statements (unaudited)
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1. | Organization and Significant Accounting Policies |
U.S. Treasury Reserves Portfolio (the “Portfolio”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a no-load, 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. At February 28, 2007, all investors in the Portfolio were funds advised by the manager of the fund and/or its affiliates.
Effective as of close of business, April 13, 2007, the Portfolio is a no-load, diversified series of Master Portfolio Trust (the “New Trust”). The New Trust, a Maryland business trust, is registered under the 1940 Act as an open-end management investment company.
The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. Money market instruments are valued at amortized cost, in accordance with Rule 2a-7 under the 1940 Act, which approximates market value. This method involves valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to compliance with certain conditions as specified under Rule 2a-7 of the 1940 Act.
(b) Interest Income and Expenses. Interest income consists of interest accrued and discount earned including both original issue and market discount adjusted for amortization of premium on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.
(c) Fees Paid Indirectly. The Portfolio’s custodian calculates its fees based on the Portfolio’s average daily net assets. The fee is reduced according to a fee arrangement, which provides for custody fees to be reduced based on a formula developed to measure the value of cash deposited with the custodian by the Portfolio. This amount is shown as a reduction of expenses on the Statement of Operations.
(d) Income Taxes. The Portfolio is classified as a partnership for Federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized gains and losses of the Portfolio. Therefore, no Federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of the subchapter M of the Internal Revenue Code.
(e) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.
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20 | U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report |
Notes to Financial Statements (unaudited) (continued)
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2. | Investment Management Agreement and Other Transactions with Affiliates |
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
Under the investment management agreement, the Portfolio pays an investment management fee calculated daily, and paid monthly at an annual rate of 0.10% of the Portfolio’s average daily net assets.
LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset 70% of the net management fee that it receives from the Portfolio.
During the six months ended February 28, 2007, the Portfolio had a voluntary expense limitation in place of 0.10% of the Portfolio’s average daily net assets.
During the six months ended February 28, 2007, LMPFA waived a portion of its fee in the amount of $99,443. In addition, the Portfolio was reimbursed for expenses amounting to $37,350.
The Portfolio pays no compensation directly to any Trustee or any officer who is affiliated with LMPFA, all of whom receive remuneration for their services to the Portfolio from Legg Mason or its affiliates.
During a special meeting in June 2006, the Portfolio’s Board approved a number of initiatives to streamline and restructure the fund complex. In that connection the Board voted to establish a mandatory retirement age of 75 for current Trustees, and 72 for all future Trustees and to allow current Trustees to elect to retire as of the date on which Trustees elected in accordance with the Joint Proxy Statement commence service as Trustees of the realigned and consolidated Board (the “Effective Date”).
On July 10, 2006, the Board also voted to amend its retirement plans to provide for the payment of certain benefits (in lieu of any other retirement payments under the plans) to Trustees who have not elected to retire as of the Effective Date. Under the amended plan, Trustees electing to receive benefits under the amendments must waive all rights under the plan prior to amendment. Each fund overseen by the Board (including the Portfolio) will pay a pro rata share (based upon asset size) of such benefits. As of February 28, 2007, the Portfolio’s allocable share of benefits under this amendment are $44,063.
Under the previous Retirement Plan (the “Plan”), all Trustees who were not “Interested Persons” of the Fund, within the meaning of the 1940 Act, were required to retire from the Board as of the last day of the calendar year in which the applicable Trustees attained age 75. Trustees were able to retire under the Plan before attaining the mandatory retirement age. Trustees who had served as Trustee of the Trust or any of the investment companies associated with LMPFA for at least ten years when they retired were eligible to receive the maximum retirement benefit under the previous Plan, subject to the terms of the amended plans. The maximum retirement benefit was an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the entirety of the calendar year of the Trustee’s retirement (assuming no change in relevant facts for the balance of the year follow-
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U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report | 21 |
Notes to Financial Statements (unaudited) (continued)
ing the Trustee’s retirement). Amounts owed under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Two former Trustees are currently receiving payments under the Plan.
Certain officers and one Trustee of the Portfolio are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”) and Citigroup Global Markets Inc. (“CGM”) relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Affected Funds”).
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data’’), the Affected Funds’ then existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for approval by the SEC. At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made.
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22 | U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report |
Notes to Financial Statements (unaudited) (continued)
The order also requires that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.
On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the Affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Portfolio’s Board selected a new transfer agent for the Portfolio. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, the Portfolio’s manager does not believe that this matter will have a material adverse effect on the Affected Funds.
This Portfolio is not one of the Affected Funds and therefore did not implement the transfer agent arrangement described above and therefore will not receive any portion of the distributions.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 3. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Fund’s management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.
On October 5, 2005, a motion to consolidate the five actions and any subsequently filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.
As of the date of this report, the Portfolio’s manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Portfolio or the ability of the Portfolio’s manager and its affiliates to continue to render services to the Portfolio under their respective contracts.
On September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Management Inc (“SBAM”) that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the 1940 Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a)
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U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report | 23 |
Notes to Financial Statements (unaudited) (continued)
and related Rule 19a-1 of the 1940 Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.
Although there can be no assurance, the Portfolio’s manager believes that this matter is not likely to have a material adverse effect on the Portfolio.
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6. | Special Investor Meeting and Reorganization |
Investors of the Portfolio approved a number of initiatives designed to streamline and restructure the fund complex. These matters generally are expected to be implemented in 2007. Legg Mason will pay for a portion of the costs related to these initiatives. The portions of the costs that are borne by the Portfolio will be recognized in the period during which the expense is incurred. Such expenses include obtaining investor votes for proposals relating to the initiatives noted above, the election of board members, and the retirement of board members. The portions of these costs borne by the Portfolio and reflected in the Statement of Operations are deemed extraordinary and, therefore, are not subject to the expense limitation agreements, if applicable.
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7. | Recent Accounting Pronouncements |
During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Portfolio will be September 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the financial statements.
* * *
On September 20, 2006, the FASB released Statement of Financial Accounting Standards No. 157 Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
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24 | U.S. Treasury Reserves Portfolio 2007 Semi-Annual Report |
| | | | |
| | CitiSM
Premium U.S. Treasury
Reserves |
|
| | | | |
| |
TRUSTEES
Elliot J. Berv
A. Benton Cocanougher
Jane F. Dasher
Mark T. Finn
R. Jay Gerken, CFA
Chairman
Rainer Greeven
Stephen Randolph Gross
Richard E. Hanson, Jr.
Diana R. Harrington
Susan M. Heilbron
Susan B. Kerley
Alan G. Merten
R. Richardson Pettit
| |
INVESTMENT MANAGER
(OF U.S. TREASURY
RESERVES PORTFOLIO)
Legg Mason Partners Fund
Advisor, LLC.
SUBADVISER
Western Asset Management
Company
DISTRIBUTORS
Citigroup Global Markets Inc.
Legg Mason Investor Services, LLC
CUSTODIAN
State Street Bank and Trust
Company
TRANSFER AGENT
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
PFPC Inc.
4400 Computer Drive
Westborough, MA 01581
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
345 Park Avenue
New York, NY 10154
|
CitiSM
Premium U.S. Treasury Reserves
The Fund is a separate investment Fund of Legg Mason Partners Premium Money Market Trust, a Maryland business trust.
The Fund files its complete schedule of portfolio holdings with Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-800-451-2010.
Information on how the fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions is available (1) without charge, upon request, by calling 1-800-451-2010, (2) on each Fund’s website at www.leggmason.com/InvestorServices and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of CitiSM Premium U.S. Treasury Reserves.
This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.
©2007 Legg Mason Investor Services, LLC Member NASD, SIPC
CFS/PUS/207 SR07-303
| ITEM 2. | CODE OF ETHICS. |
|
| | Not Applicable. |
| | |
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
|
| | Not Applicable. |
|
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
|
| | Not applicable. |
|
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
|
| | Not applicable. |
|
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
|
| | Included herein under Item 1. |
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| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END |
| | MANAGEMENT INVESTMENT COMPANIES. |
|
| | Not applicable. |
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| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
|
| | Not applicable. |
|
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT |
| | COMPANY AND AFFILIATED PURCHASERS. |
|
| | Not applicable. |
|
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
|
| | Not applicable. |
|
| ITEM 11. | CONTROLS AND PROCEDURES. |
|
| | (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
|
| | (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, |
| | | or are likely to materially affect the registrant’s internal control over financial reporting. |
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| ITEM 12. | EXHIBITS. |
| | (a) (1) Not applicable. |
|
| | Exhibit 99.CODE ETH |
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| | (a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto. |
|
| | Exhibit 99.CERT |
|
| | (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto. |
|
| | Exhibit 99.906CERT |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason Partners Premium Money Market Trust
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Legg Mason Partners Premium Money Market Trust |
Date: May 4, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Legg Mason Partners Premium Money Market Trust |
Date: May 4, 2007
| By: | /s/ Frances M. Guggino |
| | Frances M. Guggino |
| | Chief Financial Officer of |
| | Legg Mason Partners Premium Money Market Trust |
Date: May 4, 2007
