As filed with the Securities and Exchange Commission on March 2, 1998
File No. 811-7459
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4
ASSET ALLOCATION PORTFOLIOS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ELIZABETHAN SQUARE, GEORGE TOWN, GRAND CAYMAN, CAYMAN ISLANDS, BWI
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(345) 945-1824
SUSAN JAKUBOSKI, ELIZABETHAN SQUARE, GEORGE TOWN,
GRAND CAYMAN, CAYMAN ISLANDS, BWI
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP,
150 FEDERAL STREET, BOSTON, MA 02110
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EXPLANATORY NOTE
Beneficial interests in the Registrant are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), because such interests are
issued solely in private placement transactions which do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant may be made only by investment companies, common
or commingled trust funds or similar organizations or entities which are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
Item 4. General Description of Registrant.
Asset Allocation Portfolios (the "Trust") currently consists of the
following separate series (each a "Portfolio" and collectively the
"Portfolios"): Short-Term Portfolio, Intermediate Income Portfolio, Large Cap
Value Portfolio, Small Cap Value Portfolio, International Portfolio and Foreign
Bond Portfolio. Citibank, N.A. ("Citibank" or the "Manager") is the investment
manager of each of the Portfolios. From time to time each Portfolio may employ
one or more Subadvisers to perform the daily management of the Portfolio's
securities. Citibank will monitor and supervise the activities of the
Subadvisers, and Citibank and the Portfolio may terminate the services of a
Subadviser at any time.
The Trust is an open-end management investment company which was organized
as a trust under the laws of the State of New York on December 14, 1995.
Beneficial interests in the Portfolios are issued solely in private placement
transactions which do not involve any "public offering" within the meaning of
Section 4(2) of the U.S. Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolios may be made only by investment companies, common
or commingled trust funds or similar organizations or entities which are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any "security" within the meaning of the 1933
Act.
BENEFICIAL INTERESTS IN THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY AND
INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
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INVESTMENT OBJECTIVES AND POLICIES:
The investment objective of SHORT-TERM PORTFOLIO is liquidity and as high
a level of current income as is consistent with the preservation of capital.
The investment objective of INTERMEDIATE INCOME PORTFOLIO is current
income and preservation of capital.
The investment objective of LARGE CAP VALUE PORTFOLIO is above average
total return consistent with reasonable risk.
The investment objective of SMALL CAP VALUE PORTFOLIO is long-term
capital growth. Dividend income, if any, is incidental to this investment
objective.
The investment objective of INTERNATIONAL PORTFOLIO is current income and
long-term growth of income accompanied by growth of capital.
The investment objective of FOREIGN BOND PORTFOLIO is maximum total
return consistent with preservation of capital.
The investment objective of each Portfolio may be changed without
investor approval. Of course, there can be no assurance that any Portfolio will
achieve its investment objective.
SHORT-TERM PORTFOLIO invests primarily in cash and in U.S.
dollar-denominated high quality money market and short-term instruments. These
instruments include short-term obligations of the U.S. Government and
repurchase agreements covering these obligations, commercial paper of U.S. and
foreign issuers, bank obligations (such as certificates of deposit, bankers'
acceptances and fixed time deposits) of U.S. and non-U.S. banks and obligations
issued or guaranteed by the governments of Western Europe, Scandinavia,
Australia, Japan and Canada. The Portfolio's investments generally will mature
in less than 13 months. These investments provide opportunities for income with
low credit risk, and may result in a lower yield than would be available from
investments with a lower quality or a longer term.
INTERMEDIATE INCOME PORTFOLIO invests primarily (i.e., at least 65% of
the Portfolio's total assets under normal circumstances) in a broad range of
fixed income securities, including fixed income securities of U.S. and foreign
corporate issuers and U.S. Government securities. Fixed income securities
include preferred and preference stocks and all types of debt obligations, such
as bonds, debentures, notes, equipment lease or trust certificates, conditional
sales contracts and commercial paper. These securities have varying degrees of
quality and varying degrees of sensitivity to changes in interest rates.
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Fixed income securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer or participations based on revenues, sales or profits. The
value of fixed income securities generally fluctuates inversely with changes in
interest rates, and also fluctuates based on other market and credit factors
and well. Changes in interest rates will generally cause bigger changes in
prices of longer-term securities than in the prices of shorter-term securities.
Corporate Bonds. Investment in bonds of U.S. and foreign corporate
issuers may provide relatively higher levels of current income. These bonds are
used by U.S. and foreign corporate issuers to borrow money from investors, and
may have varying maturities. Corporate bonds have varying degrees of quality
and varying degrees of sensitivity to changes in interest rates. The value of
these investments fluctuates based on changes in interest rates and in the
underlying credit quality of the bond issuers represented in the portfolio.
The corporate debt obligations in which the Portfolio invests will be
investment grade securities. Investment grade securities are those rated Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Group ("S&P") or securities which are not rated by
these rating agencies, but which are believed to be of comparable quality.
Securities rated Baa or BBB and securities of comparable quality may have
speculative characteristics.
Government Securities. U.S. Government securities may provide
opportunities for income with minimal credit risk. U.S. Treasury securities are
considered the safest of all government securities. U.S. Government securities
are high quality instruments issued or guaranteed as to principal and interest
by the U.S. Government or by an agency or instrumentality of the U.S.
Government. Securities issued or guaranteed as to principal and interest by
foreign governments or agencies or instrumentalities of foreign governments
(which include securities of supranational agencies) also may provide
opportunities for income with minimal credit risk. Government securities are,
however, not immune from the market risk of principal fluctuation associated
with changing interest rates.
The fixed income securities in which the Portfolio may invest also
include zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind. The Portfolio may also invest in collateralized
mortgage obligations, multiclass pass-through securities, stripped
mortgage-backed securities, corporate asset-backed securities and obligations
issued or guaranteed by the U.S. Government, any foreign government or any of
their respective agencies or instrumentalities (including obligations, such as
repurchase agreements, secured by such instruments).
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The Portfolio currently intends to invest primarily in securities of U.S.
issuers, but may also invest in securities of foreign issuers.
LARGE CAP VALUE PORTFOLIO invests primarily (i.e., at least 65% of its
total assets under normal circumstances) in equity securities of large
capitalization issuers which are deemed to be undervalued. SMALL CAP VALUE
PORTFOLIO invests primarily (i.e., at least 65% of its total assets under
normal circumstances) in equity securities of U.S. issuers that have small
market capitalizations and are deemed to be undervalued. Equity securities
include common stocks, securities convertible into common stocks, preferred
stocks, warrants for the purchase of stock and depositary receipts (receipts
which represent the right to receive the securities of non-U.S. issuers
deposited in a U.S. or correspondent bank).
Large cap issuers are those with market capitalizations within the top
1,000 stocks of the equity market. In the selection of equity securities of
large cap issuers, securities issued by established companies with stable
operating histories are emphasized.
Small cap issuers are those with market capitalizations below the top
1,000 stocks of the equity market. These stocks are comparable to, but not
limited to, the stocks comprising the Russell 2000 Index, an index of small
capitalization stocks. Small cap companies are generally represented in new or
rapidly changing industries. They may offer more profit opportunity in growing
industries and during certain economic conditions than do large and medium
sized companies. However, small cap companies also involve special risks.
Often, liquidity and overall business stability of a small cap company may be
less than that associated with larger capitalized companies. Small cap stocks
frequently involve smaller, rapidly growing companies with high growth rates,
negligible dividend yields and extremely high levels of volatility.
An issuer may be undervalued relative to the stock market in general,
relative to the underlying value of its assets or relative to what a
sophisticated private investor would pay for the entire company. A variety of
factors are analyzed in order to determine that an issuer is undervalued. These
factors include low price to earnings ratio relative to the market, industry
group or earnings growth; low price relative to book value or cash flow;
valuable franchises, patents, trademarks, trade names, distribution channels or
market share for particular products or services, tax loss carryforwards, or
other intangibles that may not be reflected in stock prices; ownership of
understated or underutilized tangible assets such as land, timber or minerals;
underutilized cash or investment assets; and unusually high current income.
These criteria and others, alone and in combination, may identify companies
that are attractive to financial or strategic acquirers (i.e., takeover
candidates). Issuers selected may include companies in cyclical businesses,
turnarounds and companies emerging from bankruptcy. Investment decisions may
also be influenced by a company's and its insiders' stock buy-backs.
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The Small Cap Value Portfolio will not sell the equity securities of an
issuer solely due to the fact the issuer's market capitalization has grown
above the small cap level. The Small Cap Value Portfolio will evaluate the
continued appropriateness of such securities within its investment criteria.
Miller Anderson & Sherrerd, LLP currently is the Subadviser of the Large
Cap Value Portfolio.
Franklin Advisory Services, Inc. currently is the Subadviser of the Small
Cap Value Portfolio.
INTERNATIONAL PORTFOLIO invests primarily (i.e., at least 65% of its
total assets under normal circumstances) in equity securities of issuers in at
least three non-U.S. markets whose securities are deemed to have superior
values. In general, the Portfolio will emphasize issuers located in the
developed international equity markets, which include markets in Europe as well
as Australia, New Zealand, Japan, Hong Kong, Singapore, Malaysia, Canada and
South Korea. International investments are subject to special risks not
generally present in U.S. equity investments.
In selecting securities that are deemed to have superior value, the
Portfolio will generally seek equity securities of companies in each country
that have such characteristics as dividend yield greater than the local market
average, earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.
Under normal market conditions, the Portfolio will invest at least 80% of
its total assets in income-producing equity securities issued by companies with
a record of earnings and dividends. The remainder of the Portfolio's assets may
be invested in securities of companies which pay no dividends or interest, but
have potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Portfolio will not invest in
foreign fixed income securities with a maturity in excess of one year.
The equity securities that the Portfolio may purchase consist of common
stocks or securities having characteristics of common stocks, such as
convertible preferred stocks, convertible debt securities or warrants. Any such
convertible securities will be securities of an issuer having an outstanding
issue of debt securities rated at least A by Moody's or S&P or be of comparable
quality.
The Portfolio may purchase foreign currency options or enter into forward
foreign currency exchange contracts for the purpose of hedging against the
effect that currency fluctuations will have on the value of portfolio assets or
liabilities.
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Hotchkis and Wiley currently is the Subadviser of the International
Portfolio.
FOREIGN BOND PORTFOLIO invests in fixed income securities of issuers in
at least three non-U.S. markets. The Portfolio expects that under normal
circumstances at least 85% of its assets will be so invested (for purposes of
this measurement, issuers and countries may be represented by future contracts
(including related options) with respect to underlying securities and options
on such securities). The Portfolio's fixed income securities are primarily
denominated in major foreign currencies and baskets of foreign currencies (such
as the European Currency Unit).
Fixed income securities in which the Portfolio may invest include
corporate debt securities, including convertible securities and corporate
commercial paper; mortgage-backed and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes and loan participations; bank certificates of deposit, fixed time
deposits and bankers' acceptances; repurchase agreements and reverse repurchase
agreements; obligations of the U.S. Government and of foreign governments or
their agencies and instrumentalities; and obligations of international agencies
or supranational entities. Fixed income securities may have fixed, variable, or
floating rates of interest, including rates of interest that vary inversely at
a multiple of a designated or floating rate, or that vary according to changes
in relative values of currencies.
Pacific Investment Management Company currently is the Subadviser of the
Foreign Bond Portfolio.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
FUTURES. Each of the Portfolios (other than the Small Cap Value
Portfolio) may use financial futures in order to protect the Portfolio from
fluctuations in interest rates (sometimes called "hedging") without actually
buying or selling securities, or to manage the effective maturity or duration
of fixed income securities in the Portfolio's investment portfolio in an effort
to reduce potential losses or enhance potential gain. Each of the Portfolios
may purchase stock index futures and foreign currency futures (provided that
the Small Cap Value Portfolio will not purchase foreign currency futures) in
order to protect against declines in the value of portfolio securities or
increases in the cost of securities or other assets to be acquired and, subject
to applicable law, to enhance potential gain. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a security at a specified future time and price, or for making payment of a
cash settlement based on changes in the value of a security, an index of
securities or other assets. In many cases, the futures contracts that may be
purchased by the Portfolios are standardized contracts traded on commodities
exchanges or boards of trade.
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TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, each Portfolio may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
OTHER PERMITTED INVESTMENTS. For more information regarding the
Portfolios' permitted investments and investment practices, see "Permitted
Investments and Investment Practices." The Portfolios will not necessarily
invest or engage in each of the investments and investment practices described
in "Permitted Investments and Investment Practices" but reserve the right to do
so.
INVESTMENT RESTRICTIONS. Part B of this Registration Statement contains a
list of specific investment restrictions which govern the investment policies
of the Portfolios, including a limitation that each Portfolio may borrow money
from banks in an amount not to exceed 1/3 of the Portfolio's net assets for
extraordinary or emergency purposes (e.g., to meet redemption requests). Except
as otherwise indicated, the Portfolios' investment objectives and policies may
be changed without investor approval. If a percentage or rating restriction
(other than a restriction as to borrowing) is adhered to at the time an
investment is made, a later change in percentage or rating resulting from
changes in a Portfolio's securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of each Portfolio will be sold whenever it
is appropriate to do so in light of the Portfolio's investment objective,
without regard to the length of time a particular security may have been held.
None of the Portfolios were in operation during the fiscal year ended October
31, 1997. The turnover rate for each of the Portfolios is not expected to
exceed 150% for the fiscal year ending October 31, 1998.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or
dealers for securities transactions for the Portfolios and the placing of such
orders, brokers or dealers may be selected who also provide brokerage and
research services to the Portfolios or the other accounts over which Citibank,
the Subadvisers or their affiliates exercise investment discretion. Each
Portfolio is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for a
Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Portfolio
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer.
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RISK CONSIDERATIONS:
The risks of investing in each Portfolio vary depending upon the nature of
the securities held, and the investment practices employed, on its behalf.
Certain of these risks are described below.
CHANGES IN NET ASSET VALUE. Each Portfolio's net asset value will
fluctuate based on changes in the values of the underlying portfolio
securities. This means that an investor's interest may be worth more or less at
redemption than at the time of purchase. Equity securities fluctuate in
response to general market and economic conditions and other factors, including
actual and anticipated earnings, changes in management, political developments
and the potential for takeovers and acquisitions. During periods of rising
interest rates the value of debt securities generally declines, and during
periods of falling rates the value of these securities generally increases.
Changes by recognized rating agencies in the rating of any debt security, and
actual or perceived changes in an issuer's ability to make principal or
interest payments, also affect the value of these investments.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's or BBB by S&P and equivalent securities may
have speculative characteristics. Adverse economic or changing circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade obligations.
NON-U.S. SECURITIES. Each of the Portfolios (other than the Small Cap
Value Portfolio) may purchase securities of non-U.S. companies. Investments in
non-U.S. securities involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between
the regulations to which U.S. and non-U.S. issuers and markets are subject.
These risks may include expropriation, confiscatory taxation, withholding taxes
on dividends and interest, limitations on the use or transfer of portfolio
assets and political or social instability. Enforcing legal rights may be
difficult, costly and slow in non-U.S. countries, and there may be special
problems enforcing claims against non-U.S. governments. In addition, non-U.S.
companies may not be subject to accounting standards or governmental
supervision comparable to U.S. companies, and there may be less public
information about their operations. Non-U.S. markets may be less liquid and
more volatile than U.S. markets, and may offer less protection to investors
such as the Portfolios. Prices at which a Portfolio may acquire securities may
be affected by trading by persons with material non-public information and by
securities transactions by brokers in anticipation of transactions by the
Portfolio.
Because non-U.S. securities often are denominated in currencies other
than the U.S. dollar, changes in currency exchange rates will affect a
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Portfolio's net asset value, the value of dividends and interest earned and
gains and losses realized on the sale of securities. In addition, some non-U.S.
currency values may be volatile and there is the possibility of governmental
controls on currency exchanges or governmental intervention in currency
markets.
The Portfolios (other than the Small Cap Value Portfolio) may invest in
issuers located in developing countries, which are generally defined as
countries in the initial stages of their industrialization cycles with low per
capita income. All of the risks of investing in non-U.S. securities are
heightened by investing in developing countries. Investors should be aware that
investing in the equity and fixed income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability,
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries with more mature economies; such markets often have
provided higher rates of return, and greater risks, to investors. These
heightened risks include (i) greater risks of expropriation, confiscatory
taxation and nationalization, and less social, political and economic
stability; (ii) the small current size of markets for securities of issuers
based in developing countries and the currently low or non-existent volume of
trading, resulting in a lack of liquidity and in price volatility; (iii)
certain national policies which may restrict a Portfolio's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) the absence of
developed legal structures. Such characteristics can be expected to continue in
the future.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Portfolios that invest in non-U.S. securities may be higher than
those of investment companies investing exclusively in U.S. securities.
SMALLER COMPANIES. Investors should be aware that the securities of
companies with small market capitalizations may have more risks than the
securities of other companies. Small cap companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources.
Further, there is often less publicly available information about small cap
companies than about more established companies. As a result of these and other
factors, the prices of securities issued by small cap companies may be
volatile. Interests in the Portfolios investing in small cap companies,
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therefore, may be subject to greater fluctuation in value than shares of a fund
with more of its investments in securities of larger, more established
companies.
INVESTMENT PRACTICES. Certain of the investment practices employed for
the Portfolios may entail certain risks. These risks are in addition to the
risks described above and are described in "Permitted Investments and
Investment Practices" below.
PERMITTED INVESTMENTS AND INVESTMENT PRACTICES:
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase
agreements in order to earn a return on temporarily available cash. Repurchase
agreements are transactions in which an institution sells the Portfolio a
security at one price, subject to the Portfolio's obligation to resell and the
selling institution's obligation to repurchase that security at a higher price
normally within a seven day period. There may be delays and risks of loss if
the seller is unable to meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio and the agreement by the Portfolio to
repurchase the securities at an agreed-upon price, date and interest payment.
When a Portfolio enters into reverse repurchase transactions, securities of a
dollar amount equal in value to the securities subject to the agreement will be
maintained in a segregated account with the Portfolio's custodian. The
segregation of assets could impair the Portfolio's ability to meet its current
obligations or impede investment management if a large portion of the
Portfolio's assets are involved. Reverse repurchase agreements are considered
to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, each Portfolio may
lend its portfolio securities to broker-dealers and other institutional
borrowers. Such loans must be callable at any time and continuously secured by
collateral (cash or U.S. Government securities) in an amount not less than the
market value, determined daily, of the securities loaned. It is intended that
the value of securities loaned by a Portfolio would not exceed 30% of the
Portfolio's total assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or a reverse repurchase agreement, a Portfolio could
experience delays in recovering either the securities or cash. To the extent
that, in the meantime, the value of the securities loaned or sold has increased
or the value of the securities purchased has decreased, the Portfolio could
experience a loss.
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CONVERTIBLE SECURITIES. Each Portfolio may invest in convertible
securities. A convertible security is a fixed-income security (a bond or
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of common stock or other equity
securities of the same or a different issuer. Convertible securities rank
senior to common stock in a corporation's capital structure but are usually
subordinated to similar non-convertible securities. While providing a
fixed-income stream (generally higher in yield than the income derivable from
common stock but lower than that afforded by a similar non-convertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's underlying
common stock. Convertible securities are not subject to the rating requirements
applicable to the Portfolios' purchase of fixed income investments.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
RULE 144A SECURITIES. Each Portfolio may purchase restricted securities
that are not registered for sale to the general public. If it is determined
that there is a dealer or institutional market in the securities, the
securities will not be treated as illiquid for purposes of the Portfolio's
investment limitations. The Trustees will review these determinations. These
securities are known as "Rule 144A securities," because they are traded under
Rule 144A among qualified institutional buyers. Institutional trading in Rule
144A securities is relatively new, and the liquidity of these investments could
be impaired if trading in Rule 144A securities does not develop or if qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. Each Portfolio may invest up
to 15% of its net assets in securities for which there is no readily available
market. These illiquid securities may include privately placed restricted
securities for which no institutional market exists. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for a
Portfolio to sell them promptly at an acceptable price.
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"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, each Portfolio may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Portfolio at a future date beyond customary settlement time. Under normal
circumstances, the Portfolio takes delivery of the securities. In general, the
Portfolio does not pay for the securities until received and does not start
earning interest until the contractual settlement date. While awaiting delivery
of the securities, the Portfolio establishes a segregated account consisting of
cash, cash equivalents or high quality debt securities equal to the amount of
the Portfolio's commitments to purchase "when-issued" securities. An increase
in the percentage of the Portfolio's assets committed to the purchase of
securities on a "when-issued" basis may increase the volatility of its net
asset value.
COMMERCIAL PAPER. Each Portfolio may invest in commercial paper, which is
unsecured debt of corporations usually maturing in 270 days or less from its
date of issuance.
DEPOSITARY RECEIPTS FOR SECURITIES. American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") and other forms of depositary receipts for securities of non-U.S.
issuers provide an alternative method for each Portfolio (other than the Small
Cap Value Portfolio) to make non-U.S. investments. These securities are not
usually traded in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and
regulatory limitations, assets of each Portfolio may be invested in shares of
other investment companies. Each Portfolio (other than the Small Cap Value
Portfolio) may invest up to 5% of its assets in closed-end investment companies
which primarily hold securities of non-U.S. issuers.
CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts may be
entered into for each Portfolio (other than the Small Cap Value Portfolio) for
the purchase or sale of non-U.S. currency to hedge against adverse rate changes
or otherwise to achieve the Portfolio's investment objective. A currency
exchange contract allows a definite price in dollars to be fixed for securities
of non-U.S. issuers that have been purchased or sold (but not settled) for the
Portfolio.
<PAGE>
Each Portfolio (other than the Small Cap Value Portfolio) may also enter
into proxy hedges and cross hedges. In a proxy hedge, which is less costly than
the direct hedge described in the preceding paragraph, a Portfolio, having
purchased a security, will sell a currency whose value is believed to be
closely linked to the currency in which the security is denominated. Interest
rates prevailing in the country whose currency was sold would be expected to be
closer to those in the U.S. and lower than those of securities denominated in
the currency of the original holding. This type of hedging entails greater risk
than a direct hedge because it is dependent on a stable relationship between
the two currencies paired as proxies and the relationships can be very unstable
at times. A Portfolio may enter into a cross hedge if a particular currency is
expected to decrease against another currency. The Portfolio would sell the
currency expected to decrease and purchase a currency which is expected to
increase against the currency sold in an amount equal to some or all of the
Portfolios holdings denominated in the currency sold.
Entering into exchange contracts may result in the loss of all or a
portion of the benefits which otherwise could have been obtained from favorable
movements in exchange rates. In addition, entering into such contracts means
incurring certain transaction costs and bearing the risk of incurring losses if
rates do not move in the direction anticipated.
SECURITIES RATED Baa or BBB. Each Portfolio may purchase securities rated
Baa by Moody's or BBB by S&P and securities of comparable quality, which may
have poor protection of payment of principal and interest. These securities are
often considered to be speculative and involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. The market prices of these securities may fluctuate
more than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
ASSET-BACKED SECURITIES. Each Portfolio (other than the Small Cap Value
Portfolio and the International Portfolio) may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different
parties. Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral.
Each Portfolio (other than the Small Cap Value Portfolio and the
International Portfolio) also may purchase mortgage-backed securities issued or
guaranteed as to payment of principal and interest by the U.S. Government or
one of its agencies and backed by the full faith and credit of the U.S.
Government, including direct pass-through certificates of GNMA, as well as
mortgage-backed securities for which principal and interest payments are backed
<PAGE>
by the credit of particular agencies of the U.S. Government. Mortgage-backed
securities are generally backed or collateralized by a pool of mortgages. These
securities are sometimes called collateralized mortgage obligations or CMOs.
Even if the U.S. Government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment, because the underlying mortgages are refinanced to
take advantage of the lower rates. Thus the prices of mortgage-backed
securities may not increase as much as prices of other debt obligations when
interest rates decline, and mortgage-backed securities may not be an effective
means of locking in a particular interest rate. In addition, any premium paid
for a mortgage-backed security may be lost when it is prepaid. When interest
rates go up, mortgage-backed securities experience lower rates of prepayment.
This has the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease more
than prices of other debt obligations when interest rates go up.
Additionally mortgage-backed securities are also subject to maturity
extension risk, that is, the possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate. This particular risk may
effectively convert a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities. Thus, a rising interest rate would not
only likely decrease the value of the Portfolio's securities, but would also
increase the inherent volatility of the Portfolio by effectively converting
short term debt instruments into long term debt instruments.
DOLLAR ROLLS. Each of the Portfolios (other than the Small Cap Value
Portfolio and the International Portfolio) may enter into "dollar rolls." A
dollar roll is a transaction pursuant to which a Portfolio sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Portfolio
foregoes principal and interest paid on the mortgage-backed securities. The
Portfolio is compensated by the difference between the current sales price and
the lower forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. A "covered roll" is a specific type of dollar roll for which a Portfolio
establishes a segregated account with liquid high grade debt securities equal
in value to the securities subject to repurchase by the Portfolio. The
Portfolios will invest only in covered rolls.
SWAPS AND RELATED TRANSACTIONS. Each Portfolio (other than Small Cap
Value Portfolio) may enter into swap agreements with other institutional
investors with respect to foreign currencies, interest rates and securities
<PAGE>
indexes and may enter into other types of available swap agreements, such as
caps, collars and floors, for the purpose of attempting to obtain a particular
desired return at a lower cost to the Portfolio than if the Portfolio had
invested directly in an instrument that yielded that desired return. In a
standard swap agreement, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on a particular
predetermined investment or investments.
Each Portfolio may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying and selling a floor.
Swap agreements are subject to each Portfolio's overall limit that not
more than 15% of its net assets may be invested in illiquid securities, and no
Portfolio will enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Portfolio's assets.
FUTURES. Because the value of a futures contract changes based on the
price of the underlying security or other asset, futures contracts are
considered to be "derivatives." Futures contracts are a generally accepted part
of modern portfolio management and are regularly utilized by many mutual funds
and other institutional investors. When a Portfolio purchases or sells a
futures contract, it is required to make an initial margin deposit. Although
the amount may vary, initial margin can be as low as 1% or less of the face
amount of the contract. Additional margin may be required as the contract
fluctuates in value. Since the amount of margin is relatively small compared to
the value of the securities covered by a futures contract, the potential for
gain or loss on a futures contract is much greater than the amount of a
Portfolio's initial margin deposit. None of the Portfolios currently intends to
enter into a futures contract if, as a result, the initial margin deposits on
all of its futures contracts would exceed approximately 5% of the Portfolio's
net assets. Also, each Portfolio intends to limit its futures contracts so that
the value of the securities covered by its futures contracts would not
generally exceed 50% of the Portfolio's other assets and to segregate
sufficient assets to meet its obligations under outstanding futures contracts.
The ability of a Portfolio to utilize futures contracts successfully will
depend on the Portfolio's ability to predict interest rate, stock price or
currency movements, which cannot be assured. In addition to general risks
associated with any investment, the use of futures contracts entails the risk
that, to the extent the Portfolio's view as to interest rate, stock price or
<PAGE>
currency movements is incorrect, the use of futures contracts, even for hedging
purposes, could result in losses greater than if they had not been used. This
could happen, for example, if there is a poor correlation between price
movements of futures contracts and price movements in a Portfolio's related
portfolio position. Also, the futures markets may not be liquid in all
circumstances. As a result, in certain markets, a Portfolio might not be able
to close out a transaction without incurring substantial losses, if at all.
When futures contracts are used for hedging, even if they are successful in
minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result
from an increase in value of such position. As noted, each Portfolio may also
enter into transactions in futures contracts for other than hedging purposes
(subject to applicable law), including speculative transactions, which involve
greater risk. In particular, in entering into such transactions, a Portfolio
may experience losses which are not offset by gains on other portfolio
positions, thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, which could increase
the risks incurred by the Portfolio in entering into such transactions.
The use of futures contracts potentially exposes a Portfolio to the
effects of "leveraging," which occurs when futures are used so that the
Portfolio's exposure to the market is greater than it would have been if the
Portfolio had invested directly in the underlying securities. "Leveraging"
increases a Portfolio's potential for both gain and loss. As noted above, each
of the Portfolios intends to adhere to certain policies relating to the use of
futures contracts, which should have the effect of limiting the amount of
leverage by the Portfolio.
OPTIONS. Each Portfolio may write (sell) covered call and put options and
purchase call and put options on securities. A Portfolio will write options on
securities for the purpose of increasing its return on such securities and/or
to protect the values of its portfolio. In particular, where the Portfolio
writes an option which expires unexercised or is closed out by the Portfolio at
a profit, it will retain the premium paid for the option which will increase
its gross income and will offset in part the reduced value of the portfolio
security underlying the option, or the increased cost of portfolio securities
to be acquired. If the price of the underlying security moves adversely to the
Portfolio's position, the option may be exercised and the Portfolio will be
required to purchase or sell the underlying security at a disadvantageous
price, which may only be partially offset by the amount of the premium.
By writing a call option on a security, a Portfolio limits its
opportunity to profit from any increase in the market value of the underlying
security, since the holder will usually exercise the call option when the
market value of the underlying security exceeds the exercise price of the call.
However, the Portfolio retains the risk of depreciation in value of securities
on which it has written call options.
Each of the Portfolios (other than the Small Cap Value Portfolio) also
may purchase options on a non-U.S. currency in order to protect against
<PAGE>
currency rate fluctuations. If a Portfolio purchases a put option on a non-U.S.
currency and the value of the U.S. currency declines, the Portfolio will have
the right to sell the non-U.S. currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on the Portfolio
which otherwise would have resulted. Conversely, where a rise in the U.S.
dollar value of another currency is projected, and where the Portfolio
anticipates investing in securities traded in such currency, the Portfolio may
purchase call options on the non-U.S. currency. Each Portfolio also may buy and
write options on stock indices.
Each Portfolio (other than the Small Cap Value Portfolio) may purchase
and write options to buy or sell interest rate futures contracts and each
Portfolio (including the Small Cap Value Portfolio) may purchase and write
options to buy or sell stock index futures contracts. Such investment
strategies will be used for hedging and non-hedging purposes, subject to
applicable law. Put and call options on futures contracts may be traded by a
Portfolio in order to protect against declines in values of portfolio
securities or against increases in the cost of securities to be acquired.
Purchase of options on futures contracts may present less risk in hedging the
investment portfolio of a Portfolio than the purchase or sale of the underlying
futures contracts since the potential loss is limited to the amount of the
premium plus related transaction costs. The writing of such options, however,
does not present less risk than the trading of futures contracts and will
constitute only a partial hedge, up to the amount of the premium received. In
addition, if an option is exercised, the Portfolio may suffer a loss on the
transaction.
Each Portfolio (other than the Small Cap Value Portfolio) may enter into
forward foreign currency contracts for the purchase or sale of a fixed quantity
of a foreign currency at a future date at a price set at the time of the
contract. A Portfolio may enter into forward contracts for hedging and
non-hedging purposes including transactions entered into for the purpose of
profiting from anticipated changes in foreign currency exchange rates. Each
Portfolio has established procedures consistent with statements of the
Securities and Exchange Commission ("SEC") and its staff regarding the use of
forward contracts by registered investment companies, which requires use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.
Forward contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the futures and
options contracts described herein.
Transactions in options may be entered into on U.S. exchanges regulated
by the SEC, in the over-the-counter market and on foreign exchanges, while
forward contracts may be entered into only in the over-the-counter market.
Futures contracts and options on futures contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission and on foreign
<PAGE>
exchanges. The securities underlying options and futures contracts traded by a
Portfolio may include domestic as well as foreign securities. Investors should
recognize that transactions involving foreign securities or foreign currencies,
and transactions entered into in foreign countries, may involve considerations
and risks not typically associated with investing in U.S. markets.
Transactions in options, futures contracts, options on futures contracts
and forward contracts entered into for non-hedging purposes involve greater
risk and could result in losses which are not offset by gains on other
portfolio assets. For example, a Portfolio may sell futures contracts on an
index of securities in order to profit from any anticipated decline in the
value of the securities comprising the underlying index. In such instances, any
losses on the futures transactions will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction.
Options, futures contracts, options on futures contracts, forward
contracts and swaps may be used alone or in combinations in order to create
synthetic exposure to securities in which a Portfolio otherwise invests, such
as non-U.S. government securities. In such instances, the Portfolio will also
be subject to the risks associated with these types of securities, such as
counterparty risk in swap transactions.
Item 5. Management of the Portfolios.
TRUSTEES AND OFFICERS: Each Portfolio is supervised by the Board of
Trustees of the Trust. A majority of the Trustees are not affiliated with
Citibank. More information on the Trustees and officers of the Portfolios
appears under "Management of the Trust" in Part B to this Registration
Statement.
INVESTMENT MANAGER: Citibank offers a wide range of banking and
investment services to customers across the United States and throughout the
world, and has been managing money since 1822. Its portfolio managers are
responsible for investing in money market, equity and fixed income securities.
Citibank and its affiliates manage more than $88 billion in assets worldwide.
Citibank is a wholly-owned subsidiary of Citicorp. Citibank also serves as
investment adviser to other registered investment companies. Citibank's address
is 153 East 53rd Street, New York, New York 10043.
Subject to policies set by the Trustees, Citibank is responsible for
overall management of the Portfolios and has a separate management agreement
("Management Agreement") with respect to each Portfolio. Citibank also provides
certain administrative services to the Portfolios. These administrative
services include providing general office facilities and supervising the
overall administration of the Portfolios. Pursuant to sub-administrative
services agreements with Citibank, Signature Financial Group (Cayman) Ltd.
("SFG") performs such sub-administrative duties for the Portfolios as from time
<PAGE>
to time are agreed upon by Citibank and SFG. SFG's compensation as
sub-administrator is paid by Citibank.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank since
1995, has been the overall portfolio manager of the Portfolios since their
inception and is responsible for determining asset allocations, supervising and
monitoring the performance of the Citibank personnel described below who are
responsible for the Portfolios and for supervising and monitoring the
performance of the Subadvisers. Prior to joining Citibank in 1995, Mr.
Keblusek, who has 25 years experience in the investment management industry,
was Senior Vice President and Director of Portfolio Management for The Northern
Trust Company with responsibility for investment performance in the
organization's High Net Worth, Corporate and Institutional and Mutual Fund
Group. Earlier in his career, Mr. Keblusek held senior investment positions
with Maryland National Bank and the National Bank of Washington.
The following individuals at Citibank are responsible for the daily
management of the following Portfolios (and related investments).
Short-Term Portfolio Kevin Kennedy, Vice President, has been
responsible for the daily management of
the Short-Term Portfolio since the
Portfolio's inception. Mr. Kennedy has
managed the Liquidity Management Unit of
the U.S. Fixed Income Department of
Citibank Global Asset Management since
joining Citibank in 1993. Prior to
joining Citibank, Mr. Kennedy was with
the Metropolitan Life Insurance Company
as the Managing Trader of the Treasurer's
Division. He was responsible for the
management of more than $9 billion in
short duration fixed income assets. Mr.
Kennedy has more than 15 years of fixed
income management experience.
<PAGE>
Intermediate Income Portfolio Mark Lindbloom, Vice President, has been
responsible for the daily management of
the Portfolio since its inception, and
has been a portfolio manager for fixed
income securities since joining Citibank
in 1986. Mr. Lindbloom has more than 12
years of investment management
experience. Prior to joining Citibank,
Mr. Lindbloom was a Fixed Income
Portfolio Manager with Brown Brothers
Harriman & Co., where he managed fixed
income assets for discretionary corporate
portfolios.
The following Subadvisers are responsible for the daily management of the
following Portfolios (and related investments).
Large Cap Value Portfolio Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken,
Pennsylvania 19428. Miller Anderson has
been a registered investment adviser
since 1974. Miller Anderson is an
indirect, wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover &
Co., a financial services company with
three major businesses: full service
brokerage, credit services and asset
management. Robert Marcin, CFA, has been
responsible for the daily management of
the Portfolio since its inception. Mr.
Marcin has been an investment
professional with Miller Anderson since
1988.
<PAGE>
Small Cap Value Portfolio Franklin Advisory Services, Inc., One
Parker Plaza, 16th Floor, Fort Lee, New
Jersey 07024. Franklin Advisory Services,
a wholly-owned subsidiary of Franklin
Resources, Inc., is a registered
investment adviser. William J. Lippman,
President of Franklin Advisory Services
or its predecessor since 1988, has been
responsible for the daily management of
U.S. small capitalization value
securities since the Portfolio's
inception. Mr. Lippman holds a master of
business administration degree from New
York University and a bachelor of
business administration degree from City
College of New York. Mr. Lippman also
serves as Senior Vice President of
Franklin Resources, Inc. and Franklin
Advisers, Inc. He has been in the
securities industry for over 30 years and
with the Franklin Templeton Group since
1988. Citibank manages that portion of
the Portfolio's assets allocated to cash
and invested in U.S. dollar-denominated
high quality and short-term money market
instruments.
<PAGE>
International Portfolio Hotchkis and Wiley, 800 West Sixth
Street, Fifth Floor, Los Angeles,
California 90017. Hotchkis and Wiley is a
division of Merrill Lynch Capital
Management Group, which is an operating
business unit of Merrill Lynch Asset
Management, L.P., a registered investment
adviser. Harry W. Hartford and Sarah H.
Ketterer have been responsible for the
daily management of the International
Portfolio since its inception. Mr.
Hartford and Ms. Ketterer manage
international equity accounts and are
also responsible for international
investment research. Each has served on
the Investment Policy Committee at
Hotchkis and Wiley since joining the
firm. Prior to joining the predecessor of
Hotchkis and Wiley in 1994, Mr. Hartford
was with The Investment Bank of Ireland,
where he gained 10 years of experience in
both international and global equity
management. Prior to joining the
predecessor of Hotchkis and Wiley in
1990, Ms. Ketterer was an associate with
Bankers Trust and an analyst at Dean
Witter.
<PAGE>
Foreign Bond Portfolio Pacific Investment Management Company
("PIMCO"), 840 Newport Center Drive,
Suite 360, P.O. Box 6430, Newport Beach,
California 92658-9030. PIMCO is a
registered investment adviser and is a
subsidiary partnership of PIMCO Advisors
L.P. A majority interest of PIMCO
Advisors L.P. is held by PIMCO Partners,
G.P., a general partnership between
Pacific Investment Management Company, a
California corporation and indirect
wholly-owned subsidiary of Pacific Mutual
Life Insurance Company, and PIMCO
Partners, LLC, a limited liability
company controlled by the Managing
Directors of PIMCO. Lee R. Thomas, III,
Senior International Portfolio Manager,
has been responsible for the daily
management of the Foreign Bond Portfolio
since its inception. He joined PIMCO in
1995. Previously he was a member of
Investcorp's Management Committee, where
he was responsible for global securities
and foreign exchange trading. Prior to
Investcorp, he was associated with
Goldman Sachs, where he was an Executive
Director in the fixed income division of
the London office.
Management Fees. For its services under the Management Agreements for the
Portfolios, Citibank receives a fee, which is accrued daily and paid monthly,
at the annual rate specified below with respect to each Portfolio of the
average daily net assets on an annualized basis of that Portfolio for that
Portfolio's then-current fiscal year, less the aggregate amount (if any)
payable by that Portfolio to one or more Subadvisers pursuant to investment
advisory or submanagement agreements between the Portfolio and such
Subadvisers.
Short-Term Portfolio 0.25%
Intermediate Income Portfolio 0.45%
Large Cap Value Portfolio 0.60%
Small Cap Value Portfolio 0.75%
<PAGE>
International Portfolio 0.80%
Foreign Bond Portfolio 0.55%
If the aggregate investment advisory or subadvisory fee payable by any of
the Portfolios listed above to the Subadviser or Subadvisers of that Portfolio
exceeds the percentage for that Portfolio in the chart above, Citibank will pay
that amount to the applicable Subadviser or Subadvisers on the Portfolio's
behalf.
For their services to the Portfolios listed below, the Subadvisers listed
below receive a fee, which is accrued daily and paid monthly, at the annual
rate specified below with respect to each Portfolio of the average daily net
assets on an annualized basis of that Portfolio allocated to the Subadviser for
that Portfolio's then-current fiscal year. These fees reduce the fee payable to
Citibank by the Portfolios as described above.
Large Cap Value Portfolio
Miller Anderson & Sherrerd, LLP 0.625% on first $25 million
0.375% on next $75 million
0.250% on next $400 million
0.200% on assets in excess of
$500 million
Small Cap Value Portfolio
Franklin Advisory Services, Inc. 0.55% on first $250 million
0.50% on remaining assets
International Portfolio
Hotchkis and Wiley 0.60% on first $10 million
0.55% on next $40 million
0.45% on next $100 million
0.35% on next $150 million
0.30% on remaining assets
Foreign Bond Portfolio
PIMCO 0.35% on first $200 million
0.30% on remaining assets
Citibank may voluntarily agree to waive a portion of its management fee
from any Portfolio.
The Portfolios are newly organized and had no operations during the
fiscal year ended October 31, 1997.
Banking Relationships. Citibank and its affiliates may have deposit, loan
and other relationships with the issuers of securities purchased on behalf of
<PAGE>
the Portfolios, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities so purchased. Citibank has
informed the Trust that, in making its investment decisions, it does not obtain
or use material inside information in the possession of any division or
department of Citibank or in the possession of any affiliate of Citibank.
Bank Regulatory Matters. The Glass-Steagall Act prohibits certain
financial institutions, such as Citibank, from underwriting securities of
open-end investment companies, such as the Trust. Citibank believes that its
services under the Management Agreements and the activities performed by it or
its affiliates as Service Agents (which are securities dealers or other
industry professionals that have entered into service agreements with CFBDS,
Inc.) are not underwriting and are consistent with the Glass-Steagall Act and
other relevant federal and state laws. However, there is no controlling
precedent regarding the performance of the combination of investment advisory,
shareholder servicing and administrative activities by banks. State laws on
this issue may differ from applicable federal law, and banks and financial
institutions may be required to register as dealers pursuant to state
securities laws. Changes in either federal or state statutes or regulations, or
in their interpretations, could prevent Citibank or its affiliates from
continuing to perform these services. If Citibank or its affiliates were to be
prevented from acting as the investment manager or a Service Agent, the Trust
would seek alternative means for obtaining these services. The Trust does not
expect that investors would suffer any adverse financial consequences as a
result of any such occurrence.
CUSTODIAN, FUND ACCOUNTING AGENT AND TRANSFER AGENT: The Trust, on behalf
of the Portfolios, has entered into Custodian Agreements with State Street Bank
and Trust Company ("State Street") pursuant to which State Street acts as
custodian for each Portfolio. Securities may be held by a sub-custodian bank
approved by the Trustees. State Street Cayman Trust Company, Ltd. ("State
Street Cayman") provides fund accounting and transfer agency services for each
Portfolio.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, Cayman Islands.
EXPENSES: In addition to amounts payable under the Management Agreements,
each Portfolio is responsible for its own expenses, including, among other
things, the costs of securities transactions, the compensation of Trustees that
are not affiliated with Citibank or SFG, government fees, taxes, accounting and
legal fees, expenses of communicating with investors, interest expense, and
insurance premiums. The Portfolios are newly organized and had no operations
during the fiscal year ended October 31, 1997.
<PAGE>
Item 6. Capital Stock and Other Securities.
Investments in the Portfolios have no pre-emptive or conversion rights and
are fully paid and non-assessable, except as set forth below. The Trust is not
required to hold, and has no current intention of holding, annual meetings of
investors, but the Trust will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Investors have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of investors) the right to communicate with other investors in
connection with requesting a meeting of investors for the purpose of removing
one or more Trustees. Investors also have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified number of
investors. Upon liquidation or dissolution of a Portfolio, investors in that
Portfolio would be entitled to share pro rata in the net assets of the
Portfolio available for distribution to its investors.
The Trust reserves the right to create and issue a number of series, in
which case investors in each series would participate equally in the earnings,
dividends and assets of the particular series.
The Trust is organized as a trust under the laws of the State of New York.
Under the Declaration of Trust, the Trustees are authorized to issue beneficial
interests in the Portfolios. Each investor in a Portfolio is entitled to a vote
in proportion to the amount of its beneficial interest in that Portfolio.
Investments in a Portfolio may not be transferred, but an investor may withdraw
all or any portion of its investment at any time.
The net asset value of each Portfolio (i.e., the value of its securities
and other assets less its liabilities) is determined each day on which the New
York Stock Exchange (the "Exchange") is open for trading ("Business Day") (and
on such other days as are deemed necessary in order to comply with Rule 22c-1
under the 1940 Act). This determination is made once during each day as of the
close of regular trading on such Exchange. Values of a Portfolio's assets are
determined on the basis of their market or other fair value, as described in
Item 19 of Part B.
Each investor in a Portfolio may add to or reduce its investment in the
Portfolio on each Business Day. As of the close of regular trading on the
Exchange, on each Business Day, the value of each investor's beneficial
interest in a Portfolio is determined by multiplying the net asset value of the
Portfolio by the percentage, effective for that day, which represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals, which are to be effected on that day, are then
effected. Thereafter, the investor's percentage of the aggregate beneficial
interests in the Portfolio is then re-computed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
<PAGE>
in the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
the same time on such day plus or minus, as the case may be, the amount of the
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined is then applied
to determine the value of the investor's interest in the Portfolio as of the
close of regular trading on the following Business Day of the Portfolio.
The Trust has determined that each Portfolio is properly treated as a
partnership for U.S. federal and New York state income tax purposes.
Accordingly, no Portfolio is subject to any U.S. federal or New York state
income taxes, but each investor in a Portfolio must take into account its share
of that Portfolio's ordinary income, expenses, capital gains and losses,
credits and other items in determining its income tax liability. The
determination of such share is made in accordance with the governing
instruments of the Trust and the U.S. Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder.
The Trust intends to conduct its activities and those of the Portfolios so
that they will not be deemed to be engaged in the conduct of a U.S. trade or
business for U.S. federal income tax purposes. Therefore, it is not anticipated
that an investor in a Portfolio, other than an investor which would be deemed a
"U.S. person" for U.S. federal income tax purposes, will be subject to U.S.
federal income taxation (other than a 30% withholding tax on dividends and
certain interest income) solely by reason of its investment in a Portfolio.
There can be no assurance that the U.S. Internal Revenue Service may not
challenge the above conclusions or take other positions that, if successful,
might result in the payment of U.S. federal income taxes by investors in a
Portfolio.
Item 7. Purchase of Securities.
Beneficial interests in the Portfolios are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolios may only
be made by investment companies, common or commingled trust funds or similar
organizations or entities which are "accredited investors" within the meaning
of Regulation D under the 1933 Act. This Registration Statement does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
An investment in each Portfolio is made without a sales load. All
investments are made at net asset value next determined after an order is
received by a Portfolio. There is no minimum initial or subsequent investment
in a Portfolio. However, since each Portfolio intends to be as fully invested
at all times as is reasonably practicable in order to enhance the yield on its
assets, investments must be made in federal funds (i.e., moneys credited to the
account of a Portfolio's custodian bank by a U.S. Federal Reserve Bank).
<PAGE>
The Trust reserves the right to cease accepting investments for any
Portfolio at any time or to reject any investment order.
The exclusive placement agent for the Portfolios is CFBDS, Inc. The
address of CFBDS is c/o Signature Financial Group (Cayman) Ltd., Elizabethan
Square, George Town, Grand Cayman, Cayman Islands, BWI. CFBDS receives no
compensation for serving as the exclusive placement agent for the
Portfolios.
Item 8. Redemption or Repurchase.
An investor in a Portfolio may withdraw all or any portion of its
investment at any time after a withdrawal request in proper form is received by
the Portfolio from the investor. The proceeds of a withdrawal will be paid by
the Portfolio in federal funds normally on the Business Day the withdrawal is
effected, but in any event within seven days. See "Purchase, Redemption and
Pricing of Securities" in Part B of this Registration Statement regarding the
Trust's right to pay the redemption price in kind with readily marketable
securities (instead of cash). Investments in a Portfolio may not be
transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the Exchange is closed (other than weekends or
holidays) or trading on the Exchange is restricted, or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists.
Item 9. Pending Legal Proceedings.
Not applicable.
<PAGE>
PART B
Item 10. Cover Page.
Not applicable.
Item 11. Table of Contents.
Page
General Information and History......................... 1
Investment Objectives and Policies...................... 1
Management of the Trust.................................25
Control Persons and Principal Holders of Securities.....28
Investment Advisory and Other Services..................29
Brokerage Allocation and Other Practices................32
Capital Stock and Other Securities......................34
Purchase, Redemption and Pricing of Securities..........35
Tax Status..............................................37
Underwriters............................................40
Calculations of Performance Data........................40
Financial Statements....................................40
Item 12. General Information and History.
Not applicable.
Item 13. Investment Objectives and Policies.
Part A contains information about the investment objectives and policies
of the following separate series (each a "Portfolio" and collectively the
"Portfolios") of Asset Allocation Portfolios (the "Trust"): Short-Term
Portfolio, Intermediate Income Portfolio, Large Cap Value Portfolio, Small Cap
Value Portfolio, International Portfolio and Foreign Bond Portfolio. This Part
B should be read in conjunction with Part A.
INVESTMENT OBJECTIVES
The investment objective of SHORT-TERM PORTFOLIO is liquidity and as high
a level of current income as is consistent with the preservation of capital.
The investment objective of INTERMEDIATE INCOME PORTFOLIO is current
income and preservation of capital.
<PAGE>
The investment objective of LARGE CAP VALUE PORTFOLIO is above average
total return consistent with reasonable risk.
The investment objective of SMALL CAP VALUE PORTFOLIO is long-term
capital growth. Dividend income, if any, is incidental to this investment
objective.
The investment objective of INTERNATIONAL PORTFOLIO is current income
and long-term growth of income, accompanied by growth of capital.
The investment objective of FOREIGN BOND PORTFOLIO is maximum total
return consistent with preservation of capital.
The investment objective of each Portfolio may be changed without
approval by the Portfolio's investors. Of course, there can be no assurance
that a Portfolio will achieve its investment objective.
INVESTMENT POLICIES
Part A contains a discussion of the various types of securities in which
the Portfolios may invest and the risks involved in such investments. The
following supplements the information contained in Part A concerning the
investment objective, policies and techniques of each Portfolio.
The policies described below are not fundamental and may be changed
without investor approval.
BANK OBLIGATIONS
Each of the Portfolios may invest in bank obligations, i.e., certificates
of deposit, time deposits (including, with respect to the Portfolios other than
the Small Cap Value Portfolio, Eurodollar time deposits) and bankers'
acceptances and other short-term debt obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and
foreign branches of foreign banks, domestic savings and loan associations and
other banking institutions. A bankers' acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less. A certificate of deposit is a
negotiable interest-bearing instrument with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange
for the deposit of funds and normally can be traded in the secondary market
prior to maturity. A time deposit is a non-negotiable receipt issued by a bank
in exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
<PAGE>
MORTGAGE-BACKED SECURITIES
Each of the Portfolios (other than the Small Cap Value Portfolio and the
International Portfolio) may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in
pools of mortgage-related securities differ from other forms of debt securities
which normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only. Although GNMA certificates may offer
yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price
of a GNMA certificate originally purchased at a premium to decline in price to
its par value, which may result in a loss.
Each Portfolio (other than the Small Cap Value Portfolio and the
International Portfolio) may also invest a portion of its assets in
collateralized mortgage obligations or "CMOs," a type of mortgage-backed
security. CMOs are securities collateralized by mortgages, mortgage
pass-through certificates, mortgage pay-through bonds (bonds representing an
interest in a pool of mortgages where the cash flow generated from the mortgage
collateral pool is dedicated to bond repayment), and mortgage-backed bonds
(general obligations of the issuers payable out of the issuers' general funds
and additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
<PAGE>
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior
to their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed
by U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The price of mortgage-backed securities may
not increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
Each of the Portfolios (other than the Small Cap Value Portfolio and the
International Portfolio) may enter into mortgage "dollar roll" transactions
pursuant to which they sell mortgage-backed securities for delivery in the
future and simultaneously contract to repurchase substantially similar
securities on a specified future date. During the roll period, a Portfolio
foregoes principal and interest paid on the mortgage-backed securities. The
Portfolio is compensated for the lost principal and interest by the difference
between the current sales price and the lower price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The Portfolio may also be compensated by receipt
of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES
Each of the Portfolios (other than the Small Cap Value Portfolio and the
International Portfolio) may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
<PAGE>
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A
Portfolio will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, each of the
Portfolios may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933 (the "Securities Act"), but can
be offered and sold to "qualified institutional buyers" under Rule 144A under
the Securities Act. However, none of the Portfolios invests more than 15% of
its net assets in illiquid investments, which include securities for which
there is no readily available market, securities subject to contractual
restrictions on resale and restricted securities, unless the Board of Trustees
of the Trust determine, based on the trading markets for the specific
restricted security, that it is liquid. The Trustees have adopted guidelines
and delegated to the Manager or to a Subadviser the daily function of
determining and monitoring liquidity of restricted securities. The Trustees,
<PAGE>
however, retain sufficient oversight and are ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Trust's Trustees will carefully monitor each Portfolio's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information.
SECURITIES OF NON-U.S. ISSUERS
Each of the Portfolios (other than the Small Cap Value Portfolio) may
invest in securities of non-U.S. issuers. Investing in securities of foreign
issuers may involve significant risks not present in domestic investments. For
example, the value of such securities fluctuates based on the relative strength
on the U.S. dollar. In addition, there is generally less publicly available
information about foreign issuers, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Non-U.S.
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in securities of non-U.S. issuers also involve the risk of possible
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitation on the removal of funds or other assets of a
Portfolio, political or financial instability or diplomatic and other
developments which would affect such investments. Further, economies of other
countries or areas of the world may differ favorably or unfavorably from the
economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. stock markets, while growing in
volume and sophistication, are generally not as developed as those in the U.S.,
and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. security trading practices, including those
involving securities settlement where a Portfolio's assets may be released
prior to receipt of payments, may expose a Portfolio to increased risk in the
event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, foreign brokerage commissions are generally higher than commissions
on securities traded in the U.S. and may be non-negotiable. In general, there
is less overall governmental supervision and regulation of non-U.S. securities
exchanges, brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of
such investments may be substantially less than their net asset value and that
there would be duplication of investment management and other fees and
expenses.
<PAGE>
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Portfolios (other than the Small Cap Value Portfolio) to make non-U.S.
investments. These securities are not usually denominated in the same currency
as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs and
GDRs, in bearer form, are designed for use in European and global securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs and GDRs are European
and global receipts, respectively, evidencing a similar arrangement.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there may
not be a correlation between such information and the market value of the
depositary receipts.
The Portfolios may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than securities of non-U.S. issuers of the same
class that are not subject to such restrictions.
REPURCHASE AGREEMENTS
Each of the Portfolios may invest in repurchase agreements collateralized
by securities in which that Portfolio may otherwise invest. Repurchase
agreements are agreements by which a Portfolio purchases a security and
simultaneously commits to resell that security to the seller (which is usually
a member bank of the U.S. Federal Reserve System or a member firm of the New
York Stock Exchange (or a subsidiary thereof)) at an agreed upon date within a
number of days (usually not more than seven) from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of
the underlying security, usually U.S. Government or Government agency issues.
Under the 1940 Act repurchase agreements may be considered to be loans by the
buyer. A Portfolio's risk is limited to the ability of the seller to pay the
agreed-upon amount on the delivery date. If the seller defaults, the underlying
security constitutes collateral for the seller's obligation to pay although
that Portfolio may incur certain costs in liquidating this collateral and in
<PAGE>
certain cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Portfolios are fully collateralized, with such
collateral being marked to market daily.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Portfolios may lend its securities to
broker-dealers and other institutional borrowers. Such loans will usually be
made only to member banks of the U.S. Federal Reserve System and to member
firms of the New York Stock Exchange (and subsidiaries thereof). Loans of
securities would be secured continuously by collateral in cash, cash
equivalents, or U.S. Treasury obligations maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The cash
collateral would be invested in high quality short-term instruments. Either
party has the right to terminate a loan at any time on customary industry
settlement notice (which will not usually exceed three business days). During
the existence of a loan, a Portfolio would continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
with respect to cash collateral would also receive compensation based on
investment of cash collateral (subject to a rebate payable to the borrower) or
a fee from the borrower in the event the collateral consists of securities.
Where the borrower provides the Portfolio with collateral consisting of U.S.
Treasury obligations, the borrower is also obligated to pay the Portfolio a fee
for use of the borrowed securities. The Portfolio, would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to entities deemed by the Manager or a Subadviser to be of good
standing, and when, in the judgment of the Manager or a Subadviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. In addition, the Portfolio could suffer loss if the
borrower terminates the loan and the Portfolio is forced to liquidate
investments in order to return the cash collateral to the buyer. If the Manager
or a Subadviser determines to make loans, it is not intended that the value of
the securities loaned would exceed 30% of the value of the respective
Portfolio's total assets.
WHEN-ISSUED SECURITIES
Each of the Portfolios may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Portfolio would take delivery of such securities. When a Portfolio
commits to purchase a security on a "when-issued" or on a "forward delivery"
basis, it sets up procedures consistent with Securities and Exchange Commission
policies. Since those policies currently require that an amount of a
<PAGE>
Portfolio's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the respective Portfolio
expects always to have cash, cash equivalents, or high quality debt securities
sufficient to cover any commitments or to limit any potential risk. However,
even though the Portfolios do not intend to make such purchases for speculative
purposes and intend to adhere to the provisions of Securities and Exchange
Commission policies, purchases of securities on such bases may involve more
risk than other types of purchases. For example, a Portfolio may have to sell
assets which have been set aside in order to meet redemptions. Also, if the
Manager or a Subadviser determines it is advisable as a matter of investment
strategy to sell the "when-issued" or "forward delivery" securities, the
Portfolio would be required to meet its obligations from the then available
cash flow or the sale of securities, or, although it would not normally expect
to do so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Portfolio's payment
obligation).
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because each of the Portfolios (other than the Small Cap Value Portfolio)
may buy and sell securities denominated in currencies other than the U.S.
dollar, and receive interest, dividends and sale proceeds in currencies other
than the U.S. dollar, each of the Portfolios (other than the Small Cap Value
Portfolio) may enter into foreign currency exchange transactions to convert
United States currency to foreign currency and foreign currency to United
States currency, as well as convert foreign currency to other foreign
currencies. A Portfolio either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or uses forward contracts to purchase or sell foreign currencies. The
Portfolios (other than the Small Cap Value Portfolio) may also enter into
foreign currency hedging transactions (including proxy hedges and cross hedges)
in an attempt to protect the value of the assets of the respective Portfolio as
measured in U.S. dollars from unfavorable changes in currency exchange rates
and control regulations. (Although each Portfolio's assets are valued daily in
terms of U.S. dollars, the Trust does not intend to convert a Portfolio's
holdings of other currencies into U.S. dollars on a daily basis.)
The Portfolios may convert currency on a spot basis from time to time,
and investors should be aware of the costs of currency conversion. Although
currency exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
currency at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
<PAGE>
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When a Portfolio enters into a contract for the purchase or sale of a
security denominated in a non-U.S. currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of non-U.S.
currency involved in the underlying security transaction, the Portfolio will be
able to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Manager or a Subadviser believes that the currency of a
particular country may suffer a substantial decline against the U.S. dollar, a
Portfolio may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of non-U.S. currency approximating the value of some or all
of the Portfolio's securities denominated in such non-U.S. currency. The
precise matching of the forward contract amounts and the value of the
securities involved is not generally possible since the future value of such
securities in non-U.S. currencies changes as a consequence of market movements
in the value of those securities between the date the forward contract is
entered into and the date it matures. The projection of a short-term hedging
strategy is highly uncertain. The Portfolios do not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation
of the contracts obligates a Portfolio to deliver an amount of non-U.S.
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated in the investment decisions
made with regard to overall diversification strategies. However, each of the
Portfolios believes that it is important to have the flexibility to enter into
such forward contracts when it determines that its best interests will be
served.
The Portfolios generally would not enter into a forward contract with a
term greater than one year. At the maturity of a forward contract, a Portfolio
will either sell the security and make delivery of the non-U.S. currency, or
retain the security and terminate its contractual obligation to deliver the
non-U.S. currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the non-U.S. currency. If a Portfolio retains the security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
If a Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the non-U.S. currency. Should forward
prices decline during the period between the date a Portfolio enters into a
forward contract for the sale of the non-U.S. currency and the date it enters
into an offsetting contract for the purchase of such currency, the Portfolio
will realize a gain to the extent the selling price of the currency exceeds the
purchase price of the currency. Should forward prices increase, the Portfolio
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will suffer a loss to the extent that the purchase price of the currency
exceeds the selling price of the currency.
It is impossible to forecast with precision the market value of Portfolio
securities at the expiration of the contract. Accordingly, it may be necessary
for a Portfolio to purchase additional non-U.S. currency on the spot market if
the market value of the security is less than the amount of non-U.S. currency
the Portfolio is obligated to deliver and if a decision is made to sell the
security and make delivery of such currency. Conversely, it may be necessary to
sell on the spot market some of the non-U.S. currency received upon the sale of
the security if its market value exceeds the amount of such currency the
Portfolio is obligated to deliver.
Each of the Portfolios (other than the Small Cap Value Portfolio) may
also purchase put options on a non-U.S. currency in order to protect against
currency rate fluctuations. If a Portfolio purchases a put option on a non-U.S.
currency and the value of the U.S. currency declines, the Portfolio will have
the right to sell the non-U.S. currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on the Portfolio
which otherwise would have resulted. Conversely, where a rise in the U.S.
dollar value of another currency is projected, and where a Portfolio
anticipates investing in securities traded in such currency, such Portfolio may
purchase call options on the non-U.S. currency.
The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. However, the benefit to a
Portfolio from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, a Portfolio could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
Each of the Portfolios (other than the Small Cap Value Portfolio) may
write options on non-U.S. currencies for hedging purposes or otherwise to
achieve their investment objectives. For example, where a Portfolio anticipates
a decline in the value of the U.S. dollar value of a foreign security due to
adverse fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
value of the security held by the Portfolio will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because
of an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, a Portfolio could write a put option on the
relevant currency which, if rates move in the manner projected, will expire
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unexercised and allow the Portfolio to hedge such increased cost up to the
amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on currencies, a Portfolio also may be
required to forgo all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
Put and call options on non-U.S. currencies written by a Portfolio will
be covered by segregation of cash, short-term money market instruments or high
quality debt securities in an account with the custodian in an amount
sufficient to discharge the Portfolio's obligations with respect to the option,
by acquisition of the non-U.S. currency or of a right to acquire such currency
(in the case of a call option) or the acquisition of a right to dispose of the
currency (in the case of a put option), or in such other manner as may be in
accordance with the requirements of any exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
denominated in currencies other than the U.S. dollar. Because the securities
underlying these receipts are traded primarily in non-U.S. currencies, changes
in currency exchange rates will affect the value of these receipts. For
example, decline in the U.S. dollar value of another currency in which
securities are primarily traded will reduce the U.S. dollar value of such
securities, even if their value in the other non-U.S. currency remains
constant, and thus will reduce the value of the receipts covering such
securities. A Portfolio may employ any of the above described foreign currency
hedging techniques to protect the value of its assets invested in depositary
receipts.
Of course, no Portfolio is required to enter into the transactions
described above and will not do so unless deemed appropriate by the Manager or
a Subadviser. It should also be realized that this method of protecting the
value of a Portfolio's securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
Each Portfolio has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts. Since those
policies currently recommend that an amount of a Portfolio's assets equal to
the amount of the purchase be held aside or segregated to be used to pay for
the commitment, each Portfolio expects to always have cash, cash equivalents or
high quality debt securities available sufficient to cover any commitments
under these contracts or to limit any potential risk.
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OPTIONS
Each of the Portfolios may write covered call and put options and
purchase call and put options on securities. Call and put options written by a
Portfolio may be covered in the manner set forth below.
A call option written by a Portfolio is "covered" if the Portfolio owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if a Portfolio holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by a Portfolio in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put
option written by a Portfolio is "covered" if the Portfolio maintains cash,
short term money market instruments or high quality debt securities with a
value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written or where the exercise price of the
put held is less than the exercise price of the put written if the difference
is maintained by the Portfolio in cash, short-term money market instruments or
high quality debt securities in a segregated account with its custodian. Put
and call options written by a Portfolio may also be covered in such other
manner as may be in accordance with the requirements of the exchange on which,
or the counter party with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to the
risk of the full change in value of the underlying security from the time the
option is written until exercise.
Each of the Portfolios may purchase options for hedging purposes or to
increase the Portfolio's return. Put options may be purchased to hedge against
a decline in the value of portfolio securities. If such decline occurs, the put
options will permit a Portfolio to sell the securities at the exercise price,
or to close out the options at a profit. By using put options in this way, the
Portfolio will reduce any profit it might otherwise have realized in the
underlying security by the amount of the premium paid for the put option and by
transaction costs.
Each of the Portfolios may purchase call options to hedge against an
increase in the price of securities that the Portfolio anticipates purchasing
in the future. If such increase occurs, the call option will permit the
Portfolio to purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any transaction
costs will reduce the benefit, if any, realized by the Portfolio upon exercise
of the option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Portfolio.
Each of the Portfolios may write (sell) covered call and put options and
purchase call and put options on stock indices. In contrast to an option on a
security, an option on a stock index provides the holder with the right, but
not the obligation, to make or receive a cash settlement upon exercise of the
option, rather than the right to purchase or sell a security. The amount of
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this settlement is equal to (i) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a call) or is below (in the case of
a put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier."
Each of the Portfolios may cover call options on stock indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities in
its portfolio. Where a Portfolio covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Portfolio will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. A Portfolio may also cover call options on stock indices by holding a
call on the same index and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash,
short-term money market instruments or high quality debt securities in a
segregated account with its custodian. A Portfolio may cover put options on
stock indices by maintaining cash, short-term money market instruments or high
quality debt securities with a value equal to the exercise price in a
segregated account with its custodian, or by holding a put on the same stock
index and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written or where the exercise price of the put held is less than the exercise
price of the put written if the difference is maintained by the Portfolio in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options on stock indices
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
A Portfolio will receive a premium from writing a put or call option,
which increases the Portfolio's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which a
Portfolio has written a call option falls or remains the same, the Portfolio
will realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
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securities it owns. If the value of the index rises, however, the Portfolio
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the Portfolio's stock investments. By writing
a put option, a Portfolio assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by a Portfolio correlate with
changes in the value of the index, writing covered put options on indices will
increase the Portfolio's losses in the event of a market decline, although such
losses will be offset in part by the premium received for writing the option.
Each of the Portfolios may also purchase put options on stock indices to
hedge the Portfolio's investments against a decline in value. By purchasing a
put option on a stock index, a Portfolio will seek to offset a decline in the
value of securities it owns through appreciation of the put option. If the
value of the Portfolio's investments does not decline as anticipated, or if the
value of the option does not increase, the Portfolio's loss will be limited to
the premium paid for the option plus related transaction costs. The success of
this strategy will largely depend on the accuracy of the correlation between
the changes in value of the index and the changes in value of the Portfolio's
security holdings.
The purchase of call options on stock indices may be used by a Portfolio
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Portfolio holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, a Portfolio will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when a Portfolio is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Portfolio owns.
Each of the Portfolios (other than Small Cap Value Portfolio) may
purchase and write options on foreign currencies in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will be
utilized.
FUTURES CONTRACTS
Each of the Portfolios (other than the Small Cap Value Portfolio) may
enter into interest rate futures contracts and/or foreign currency futures
contracts. Each of the Portfolios (including the Small Cap Value Portfolio) may
enter into stock index futures contracts. Such investment strategies will be
used for hedging purposes and for nonhedging purposes, subject to applicable
law.
A futures contract is an agreement between two parties for the purchase
or sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
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a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Portfolio
purchases or sells a futures contract. At the same time such a purchase or sale
is made, the Portfolio must provide cash or securities as a deposit ("initial
deposit") known as "margin." The initial deposit required will vary, but may be
as low as 1% or less of a contract's face value. Daily thereafter, the futures
contract is valued through a process known as "marking to market," and the
Portfolio may receive or be required to pay additional "variation margin" as
the futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into.
A Portfolio may purchase or sell futures contracts to attempt to protect
the Portfolio from fluctuations in interest rates, or to manage the effective
maturity or duration of the Portfolio's investment portfolio in an effort to
reduce potential losses or enhance potential gain, without actually buying or
selling debt securities. For example, if interest rates were expected to
increase, the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as if the Portfolio
sold bonds that it owned, or as if the Portfolio sold longer-term bonds and
purchased shorter-term bonds. If interest rates did increase, the value of the
Portfolio's debt securities would decline, but the value of the futures
contracts would increase, thereby keeping the net asset value of the Portfolio
from declining as much as it otherwise would have. Similar results could be
accomplished by selling bonds, or by selling bonds with longer maturities and
investing in bonds with shorter maturities. However, by using futures
contracts, the Portfolio avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, a
Portfolio might enter into futures contracts for the purchase of debt
securities. Such a purchase would be intended to have much the same effect as
if the Portfolio purchased bonds, or as if the Portfolio sold shorter-term
bonds and purchased longer-term bonds. If interest rates did decline, the value
of the futures contracts would increase.
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Each of the Portfolios may enter into stock index futures contracts to
gain stock market exposure while holding cash available for investments and
redemptions.
Each of the Portfolios (other than the Small Cap Value Portfolio) may
purchase and sell foreign currency futures contracts to attempt to protect its
current or intended investments from fluctuations in currency exchange rates.
Such fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities in the
currencies in which they are denominated remains constant. A Portfolio may sell
futures contracts on a foreign currency, for example, where it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the
resulting adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the futures contracts.
Conversely, the Portfolio could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part,
the increased cost of such securities resulting from a rise in the dollar value
of the underlying currencies. Where the Portfolio purchases futures contracts
under such circumstances, however, and the prices of securities to be acquired
instead decline, the Portfolio will sustain losses on its futures position
which could reduce or eliminate the benefits of the reduced cost of portfolio
securities to be acquired.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if a
Portfolio sells a futures contract to protect against losses in the debt
securities held by the Portfolio), at the same time the futures contract limits
any potential gain which might result from an increase in value of a hedged
position.
In addition, the ability effectively to hedge all or a portion of a
Portfolio's investments through transactions in futures contracts depends on
the degree to which movements in the value of the debt securities underlying
such contracts correlate with movements in the value of the Portfolio's
securities. If the security underlying a futures contract is different than the
security being hedged, they may not move to the same extent or in the same
direction. In that event, the Portfolio's hedging strategy might not be
successful and the Portfolio could sustain losses on these hedging transactions
which would not be offset by gains on the Portfolio's other investments or,
alternatively, the gains on the hedging transaction might not be sufficient to
offset losses on the Portfolio's other investments. It is also possible that
there may be a negative correlation between the security underlying a futures
contract and the securities being hedged, which could result in losses both on
the hedging transaction and the securities. In these and other instances, the
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Similarly, even where a Portfolio enters into futures
<PAGE>
transactions other than for hedging purposes, the effectiveness of its strategy
may be affected by lack of correlation between changes in the value of the
futures contracts and changes in value of the securities which the Portfolio
would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, there is the potential that the liquidity of
the futures market may be lacking. Prior to expiration, a futures contract may
be terminated only by entering into a closing purchase or sale transaction,
which requires a secondary market on the contract market on which the futures
contract was originally entered into. While a Portfolio will establish a
futures position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures contract at any specific time. In that event, it may not be
possible to close out a position held by the Portfolio, which could require the
Portfolio to purchase or sell the instrument underlying the futures contract or
to meet ongoing variation margin requirements. The inability to close out
futures positions also could have an adverse impact on the ability effectively
to use futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a futures
contract during a single trading day and prohibit trading beyond such limits
once they have been reached. The trading of futures contracts also is subject
to the risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or a Subadviser's investment judgment about the general direction of
interest rates or stock prices is incorrect, the Portfolio's overall
performance may be poorer than if any such contract had not been entered into.
For example, if a Portfolio hedged against the possibility of an increase in
interest rates which would adversely affect the price of the Portfolio's bonds
and interest rates decrease instead, part or all of the benefit of the
increased value of the Portfolio's bonds which were hedged will be lost because
the Portfolio will have offsetting losses in its futures positions. Similarly,
if a Portfolio purchases futures contracts expecting a decrease in interest
rates and interest rates instead increased, the Portfolio will have losses in
its futures positions which will increase the amount of the losses on the
securities in its portfolio which will also decline in value because of the
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increase in interest rates. In addition, in such situations, if the Portfolio
has insufficient cash, the Portfolio may have to sell bonds from its
investments to meet daily variation margin requirements, possibly at a time
when it may be disadvantageous to do so.
Each contract market on which futures contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
The Manager does not believe that these trading and position limits would have
an adverse impact on a Portfolio's hedging strategies.
CFTC regulations require compliance with certain limitations in order to
assure that a Portfolio is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit a Portfolio from
purchasing or selling futures contracts (other than for bona fide hedging
transactions) if, immediately thereafter, the sum of the amount of initial
margin required to establish that Portfolio's non-hedging futures positions
would exceed 5% of that Portfolio's net assets.
Each Portfolio will comply with this CFTC requirement and currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by each Portfolio in a
segregated account with the Portfolio's custodian so that the amount so
segregated, plus the initial margin held on deposit, will be approximately
equal to the amount necessary to satisfy the Portfolio's obligations under the
futures contract. The second is that a Portfolio will not enter into a futures
contract if immediately thereafter the amount of initial margin deposits on all
the futures contracts held by the Portfolio would exceed approximately 5% of
the net assets of the Portfolio. The third is that the aggregate market value
of the futures contracts held by a Portfolio not exceed approximately 50% of
the market value of the Portfolio's total assets other than its futures
contracts. For purposes of this third policy, "market value" of a futures
contract is deemed to be the amount obtained by multiplying the number of units
covered by the futures contract times the per unit price of the securities
covered by that contract.
The use of futures contracts may increase the amount of taxable income of
a Portfolio and may affect the amount, timing and character of a Portfolio's
income for tax purposes, as more fully discussed herein in the section entitled
"Tax Status."
OPTIONS ON FUTURES CONTRACTS
Each of the Portfolios may purchase and write options to buy or sell
futures contracts in which the Portfolio may invest. Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
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An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case of
a call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series, (i.e., the same exercise
price and expiration date), as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profits or loss on the transaction.
Options on futures contracts that are written or purchased by a Portfolio
on U.S. exchanges are traded on the same contract market as the underlying
futures contract, and, like futures contracts, are subject to regulation by the
CFTC and the performance guarantee of the exchange clearinghouse. In addition,
options on futures contracts may be traded on foreign exchanges.
Each of the Portfolios may cover the writing of call options on futures
contracts (a) through purchases of the underlying futures contract, (b) through
ownership of the instrument, or instruments included in the index underlying
the futures contract, or (c) through the holding of a call on the same futures
contract and in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash or securities
in a segregated account with its custodian. A Portfolio may cover the writing
of put options on futures contracts (a) through sales of the underlying futures
contract, (b) through segregation of cash, short-term money market instruments
or high quality debt securities in an amount equal to the value of the security
or index underlying the futures contract, (c) through the holding of a put on
the same futures contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by a Portfolio in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. Put and
call options on futures contracts may also be covered in such other manner as
may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call option
on a futures contract written by a Portfolio, the Portfolio will be required to
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sell the underlying futures contract which, if the Portfolio has covered its
obligation through the purchase of such contract, will serve to liquidate its
futures position. Similarly, where a put option on a futures contract written
by a Portfolio is exercised, the Portfolio will be required to purchase the
underlying futures contract which, if the Portfolio has covered its obligation
through the sale of such contract, will close out its futures position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities deliverable on exercise of the
futures contract. A Portfolio will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Portfolio will retain the full amount of
this option premium, which provides a partial hedge against any decline that
may have occurred in the Portfolio's security holdings. Similarly, the writing
of a put option on a futures contract constitutes a partial hedge against
increasing prices of the securities deliverable upon exercise of the futures
contract. If a Portfolio writes an option on a futures contract and that option
is exercised, the Portfolio may incur a loss, which loss will be reduced by the
amount of the option premium received, less related transaction costs. A
Portfolio's ability to hedge effectively through transactions in options on
futures contracts depends on, among other factors, the degree of correlation
between changes in the value of securities held by the Portfolio and changes in
the value of its futures positions. This correlation cannot be expected to be
exact, and the Portfolio bears a risk that the value of the futures contract
being hedged will not move in the same amount, or even in the same direction,
as the hedging instrument. Thus it may be possible for a Portfolio to incur a
loss on both the hedging instrument and the futures contract being hedged.
Each of the Portfolios may purchase options on futures contracts for
hedging purposes instead of purchasing or selling the underlying futures
contracts. For example, where a decrease in the value of portfolio securities
is anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, a Portfolio could, in lieu of selling futures
contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the option.
Conversely, where it is projected that the value of securities to be acquired
by a Portfolio will increase prior to acquisition, due to a market advance or
changes in interest or exchange rates, the Portfolio could purchase call
options on futures contracts, rather than purchasing the underlying futures
contracts.
CONVERTIBLE SECURITIES
Each Portfolio may invest in convertible securities. A convertible
security is a fixed-income security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time into a certain
quantity of common stock or other equity securities of the same or a different
issuer. Convertible securities rank senior to common stock in a corporation's
<PAGE>
capital structure but are usually subordinated to similar non-convertible
securities. While providing a fixed-income stream (generally higher in yield
than the income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities are not subject to
the ratings requirements applicable to a Portfolio's purchase of fixed income
investments.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
SWAPS AND RELATED TRANSACTIONS
Each Portfolio (other than Small Cap Value Portfolio) may enter into
interest rate swaps, currency swaps, equity swaps and other types of available
swap agreements, such as caps, collars and floors, for the purpose of
attempting to obtain a particular desired return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
yielded that desired return. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest. An equity swap is an agreement to exchange cash flows on a principal
amount based on changes in the values of the reference index. A currency swap
is an agreement to exchange cash flows on a principal amount based on changes
in the values of the currency exchange rates. In a typical cap or floor
agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. A
collar arrangement combines elements of buying and selling a floor.
A Portfolio will maintain liquid assets with its custodian to cover its
current obligations under swap transactions. If the Portfolio enters into a
swap agreement on a net basis (i.e., the two payments streams are netted out,
with the Portfolio receiving or paying, as the case may be, only the net amount
of the two payments), the Portfolio will maintain liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If the
Portfolio enters into a swap agreement on other than a net basis, it will
maintain liquid assets with a value equal to the full amount of the Portfolio's
accrued obligations under the agreement.
<PAGE>
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the arrangement.
If the Manager or a Subadviser is incorrect in its forecasts of such factors,
the investment performance of the Portfolio would be less than what it would
have been if these investment techniques had not been used. If a swap agreement
calls for payments by the Portfolio, the Portfolio must be prepared to make
such payments when due. No Portfolio will enter into any swap unless the
Manager or Subadviser deems the counterparty to be creditworthy. If the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Portfolio's risk of loss consists of the net amount of payments
that the Portfolio is contractually entitled to receive. Each Portfolio
anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The Trust, on behalf of the Portfolios, has adopted the following
policies which may not be changed with respect to any Portfolio without
approval by holders of a majority of the outstanding voting securities of that
Portfolio, which as used in this Part B means the vote of the lesser of (i) 67%
or more of the outstanding voting securities of the Portfolio present at a
meeting at which the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding voting securities of the Portfolio. The term
"voting securities" as used in this paragraph has the same meaning as in the
1940 Act.
None of the Portfolios may:
(1) Borrow money, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed 1/3 of the current
value of its net assets, including the amount borrowed, or purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Portfolio, taken at market value. It is intended that a Portfolio would borrow
money only from banks and only to accommodate requests for the repurchase of
beneficial interests in the Portfolio while effecting an orderly liquidation of
portfolio securities.
(2) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of the
Portfolio's total assets (taken at market value), (b) through the use of
repurchase agreements, fixed time deposits or the purchase of short-term
obligations or (c) by purchasing all or a portion of an issue of debt
<PAGE>
securities of types commonly distributed privately to financial institutions.
The purchase of short-term commercial paper or a portion of an issue of debt
securities which is part of an issue to the public shall not be considered the
making of a loan.
(3) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Portfolio
more than 10% of the voting securities of such issuer to be held by the
Portfolio, provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the security
or securities underlying such contract; and provided further that each
Portfolio may invest all or any portion of its assets in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act.
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Portfolio's total assets more than 5% of
the Portfolio's assets (taken at market value) to be invested in the securities
of such issuer (other than securities or obligations issued or guaranteed by
the United States, any state or political subdivision thereof, or any political
subdivision of any such state, or any agency or instrumentality of the United
States or of any state or of any political subdivision of any state), provided
that, for purposes of this restriction, the issuer of an option or futures
contract shall not be deemed to be the issuer of the security or securities
underlying such contract; and provided further that each Portfolio may invest
all or any portion of its assets in one or more investment companies, to the
extent not prohibited by the 1940 Act, the rules and regulations thereunder,
and exemptive orders granted under such Act.
(5) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Portfolio's investment objective,
up to 25% of its assets, at market value at the time of each investment, may be
invested in any one industry, except that positions in futures contracts shall
not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that each
Portfolio may invest all or any portion of its assets in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act, and except
in so far as the Portfolio may technically be deemed an underwriter under the
Securities Act in selling a security.
(7) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts in
the ordinary course of business (the foregoing shall not be deemed to preclude
a Portfolio from purchasing or selling futures contracts or options thereon,
and the Portfolio reserves the freedom of action to hold and to sell real
estate acquired as a result of the ownership of securities by the Portfolio).
<PAGE>
(8) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
NON-FUNDAMENTAL RESTRICTIONS
Each Portfolio does not as a matter of operating policy:
(i) purchase any securities for the Portfolio at any time at which
borrowings exceed 5% of the total assets of the Portfolio (taken at market
value), or
(ii) purchase securities issued by any registered investment company in
reliance on the provisions of Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940
Act and the rules and regulations thereunder except to the extent not
prohibited by the 1940 Act, rules and regulations thereunder and exemptive
orders granted thereunder.
These policies are not fundamental and may be changed by each Portfolio
without the approval of its holders of beneficial interests.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in this Registration Statement is adhered
to at the time an investment is made or assets are so utilized, a later change
in percentage resulting from changes in the value of the securities or a later
change in the rating of the securities held for the Portfolio will not be
considered a violation of policy.
Item 14. Management of the Trust.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate that those Trustees and officers are
"interested persons" (as defined in the 1940 Act) of the Trust. Unless
otherwise indicated below, the address of each Trustee and officer is 6 St.
James Avenue, Boston, Massachusetts. The address of the Trust is Elizabethan
Square, George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
ELLIOTT J. BERV (aged 54) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June, 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June, 1991 to
June, 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
<PAGE>
PHILIP W. COOLIDGE* (aged 46) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS, Inc.
("CFBDS").
MARK T. FINN (aged 54) -- President and Director, Delta Financial, Inc. (since
June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage
Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
C. OSCAR MORONG, JR. (aged 62) -- Chairman of the Board of Trustees of the
Trust; Managing Director, Morong Capital Management (since February, 1993);
Senior Vice President and Investment Manager, CREF Investments, Teachers
Insurance & Annuity Association (retired, January, 1993); Director, Indonesia
Fund; Trustee, MAS Funds (since 1993). His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
WALTER E. ROBB, III (aged 71) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE* (aged 46) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU* (aged 27) -- Assistant Secretary and Assistant Treasurer
of the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
January, 1996); Paralegal and Compliance Officer, various financial companies
(July, 1992 to January, 1996); Graduate Student, Bentley College (prior to
December, 1994).
TAMIE EBANKS-CUNNINGHAM* (aged 25) -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April, 1995);
Administrator, Cayman Islands Primary School (prior to April, 1995). Her
address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I.
JOHN R. ELDER* (aged 49) -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Treasurer, CFBDS (since April,
1995); Treasurer of the Phoenix Family of Mutual Funds, Phoenix Home Life
Mutual Insurance Company (1983 to March, 1995).
<PAGE>
LINDA T. GIBSON* (aged 32) -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May, 1992); Assistant Secretary, CFBDS (since
October, 1992).
JOAN R. GULINELLO* (aged 42) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc. (since October,
1993); Secretary, CFBDS (since October, 1995); Vice President and Assistant
General Counsel, Massachusetts Financial Services Company (prior to October,
1993).
JAMES E. HOOLAHAN* (aged 51) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Senior Vice President, Signature Financial
Group, Inc.
SUSAN JAKUBOSKI* (aged 33) -- Vice President, Assistant Secretary, and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group
(Cayman) Ltd. (since August, 1994); Fund Compliance Administrator, Concord
Financial Group (November, 1990 to August, 1994). Her address is Suite 193, 12
Church Street, Hamilton HM 11, Bermuda.
MOLLY S. MUGLER* (aged 46) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc.; Assistant
Secretary, CFBDS.
CLAIR TOMALIN* (aged 29) -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited (since 1993). Her address is 117
Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON* (aged 49) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
November, 1992).
The Trustees and officers of the Trust also hold comparable positions
with certain other funds for which Signature Financial Group (Cayman) Ltd. or
an affiliate serves as the administrator.
The Trustees of the Trust (with the exception of Mr. Coolidge, who
received no remuneration from the Trust) received the following remuneration
from the Trust during its fiscal year ended October 31, 1997:
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement Estimated from Registrant
Compensation Benefits Accrued Annual and Fund
Name of Person, from as Part of Fund Benefits Upon Complex Paid
Position(1) Registrant(2) Expenses Retirement to Trustees(2)
-------------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Elliott J. Berv $7,333 None None $57,000
Mark T. Finn $6,887 None None $54,000
Walter E. Robb, III $7,511 None None $56,000
</TABLE>
(1) Mr. Morong did not serve as a Trustee of the Trust during the fiscal year
ended October 31, 1997.
(2) Information relates to the fiscal year ended October 31, 1997. Messrs.
Coolidge, Berv, Finn and Robb are trustees of 31, 55, 26 and 24 funds,
respectively, in the family of open-end registered investment companies
advised or managed by Citibank.
The Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust unless, as to liability to the Trust or its investors,
it is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless with respect to any other matter it is finally adjudicated that they
did not act in good faith in the reasonable belief that their actions were in
the best interests of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees of the Trust, or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Item 15. Control Persons and Principal Holders of Securities.
As of February 23, 1998, the ownership interests in the Portfolios were
as follows:
<TABLE>
<CAPTION>
CitiSelect CitiSelect CitiSelect CitiSelect
CitiSelect(R) CitiSelect(R) CitiSelect(R) CitiSelect(R) Ltd Folio Ltd Folio Ltd Folio Ltd Folio
Folio 200 Folio 300 Folio 400 Folio 500 200 200 200 200
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Large Cap
Value
Portfolio 11.31% 27.52% 34.88% 15.29% 3.00% 4.70% 2.42% 0.88%
Small Cap
Value
Portfolio 8.50% 20.68% 40.31% 20.83% 2.26% 3.52% 2.72% 1.18%
<PAGE>
International
Portfolio 4.67% 16.59% 42.59% 27.71% 1.17% 2.82% 2.87% 1.58%
Foreign
Bond
Portfolio 15.31% 27.77% 36.99% 8.07% 4.04% 4.84% 2.51% 0.47%
Short-Term
Portfolio 37.55% 17.14% 21.61% 8.78% 10.00% 2.92% 1.50% 0.50%
Intermediate
Income
Portfolio 25.63% 46.34% 12.26% 0.00% 6.73% 8.21% 0.83% 0.00
</TABLE>
As of February 23, 1998, CitiSelect(R) Folio 200, CitiSelect(R) Folio 300,
CitiSelect(R) Folio 400 and CitiSelect(R) Folio 500 (collectively, the "Funds")
control the Portfolios by virtue of owning a majority of the value of the
outstanding interests in the Portfolios.
Because the Funds currently control the Portfolios, the Funds could take
actions without the approval of any other investor in those Portfolios. The
Funds have informed the Trust that whenever they are requested to vote on
matters pertaining to the fundamental policies of a Portfolio, each Fund will
hold a meeting of its shareholders and will cast its vote as instructed by its
shareholders. It is anticipated that any other investor in any Portfolio which
is an investment company registered under the 1940 Act would follow the same or
a similar practice. The Funds are series of CitiFunds Trust I (formerly known
as Landmark Funds I), a Massachusetts business trust organized on April 13,
1984 and registered under the 1940 Act as an investment company.
Item 16. Investment Advisory and Other Services.
Citibank manages the assets of each Portfolio and provides certain
administrative services to the Trust pursuant to separate management agreements
relating to each Portfolio ("Management Agreements"). Subject to such policies
as the Board of Trustees of the Trust may determine, Citibank manages the
securities of each Portfolio and makes investment decisions for each Portfolio.
Citibank furnishes at its own expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and
effecting securities transactions for each Portfolio. Each Management Agreement
with the Trust provides that Citibank may delegate the daily management of the
securities of each Portfolio to one or more Subadvisers. Each Management
Agreement will continue in effect until May 9, 1999 and thereafter as long as
such continuance is specifically approved at least annually by the Board of
Trustees of the Trust or by a vote of a majority of the outstanding voting
securities of the applicable Portfolio, and, in either case, by a majority of
the Trustees of the Trust who are not parties to a Management Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on a Management Agreement.
<PAGE>
Citibank provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's independent contractors
and agents; the preparation and filing of all documents required for compliance
by the Trust with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trust. Trustees, officers, and
investors in the Trust are or may be or may become interested in Citibank, as
directors, officers, employees, or otherwise and directors, officers and
employees of Citibank are or may become similarly interested in the Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the Trust when
authorized either by a vote of a majority of the outstanding voting securities
of the applicable Portfolio or by a vote of a majority of the Board of Trustees
of the Trust, or by Citibank on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its
assignment. Each Management Agreement with the Trust provides that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution of security transactions for the applicable Portfolio, except
for willful misfeasance, bad faith or gross negligence or reckless disregard of
its or their obligations and duties under the Management Agreement with the
Trust.
Part A to this Registration Statement contains a description of the fees
payable to Citibank for services under each of the Management Agreements.
Citibank may reimburse any Portfolio or waive all or a portion of its
management fees. The Portfolios are newly organized and had no operations
during the fiscal year ended October 31, 1997.
The Trust has entered into separate Submanagement Agreements with the
Subadvisers listed below for the Portfolios. Each Subadviser's compensation is
described in Part A to this Registration Statement and is payable by the
applicable Portfolio (with a corresponding reduction in Citibank's management
fee).
Large Cap Value Portfolio Miller Anderson & Sherrerd, LLP
Small cap value securities of the Small Franklin Advisory Services, Inc.
Cap Value Portfolio
International Portfolio Hotchkis and Wiley
Foreign Bond Portfolio Pacific Investment Management Company
<PAGE>
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for their allocated assets of the Portfolios, and to place
the purchase and sales orders for securities transactions concerning those
assets, subject in all cases to the general supervision of Citibank. Each
Subadviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the assets of the Portfolios allocated to
it and effecting securities transactions concerning those assets.
Each Submanagement Agreement will continue in effect as to each
applicable Portfolio until May 9, 1999 and thereafter as long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Trust as to that Portfolio or by a vote of a majority of the outstanding
voting securities of that Portfolio, and, in either case, by a majority of the
Trustees of the Trust who are not parties to the Submanagement Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Submanagement Agreement.
Each Submanagement Agreement provides that the applicable Subadviser may
render services to others. Each Submanagement Agreement is terminable as to any
Portfolio without penalty on not more than 60 days' nor less than 30 days'
written notice by the Trust, when authorized either by a vote of a majority of
the outstanding voting securities of the applicable Portfolio or by a vote of a
majority of the Board of Trustees of the Trust, or by Citibank on not more than
60 days' nor less than 30 days' written notice, and will automatically
terminate in the event of its assignment. Each Submanagement Agreement may be
terminated by the applicable Subadviser on not less than 90 days' written
notice. Each Submanagement Agreement provides that neither the Subadviser nor
its personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution of security transactions for any Portfolio, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or
their obligations and duties under the Submanagement Agreement.
The Portfolios are newly organized and had no operations during the
fiscal year ended October 31, 1997.
Pursuant to a sub-administrative services agreement with Citibank,
Signature Financial Group (Cayman) Ltd. ("SFG") performs such
sub-administrative duties for the Trust as from time to time are agreed upon by
Citibank and SFG. For performing such sub-administrative services, SFG receives
compensation as from time to time is agreed upon by Citibank, not in excess of
the amount paid to Citibank for its services under the Management Agreements
with the Trust. All such compensation is paid by Citibank.
The Trust, on behalf of the Portfolios, has entered into Custodian
Agreements with State Street Bank and Trust Company ("State Street") pursuant
to which State Street acts as custodian for each Portfolio. The Trust, on
behalf of the Portfolios, also has entered into a Fund Accounting Agreement
<PAGE>
with State Street Cayman Trust Company, Ltd. ("State Street Cayman") pursuant
to which State Street Cayman provides fund accounting services for each
Portfolio. State Street Cayman also provides transfer agency services to the
Portfolios.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
Price Waterhouse are the chartered accountants for the Trust. The address
of Price Waterhouse is Suite 3000, Box 82, Royal Trust Towers, Toronto Dominion
Center, Toronto, Ontario, Canada M5K 1G8.
Item 17. Brokerage Allocation and Other Practices.
The Trust trades securities for a Portfolio if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Portfolio's investment objective. Changes in the Portfolio's investments are
made without regard to the length of time a security has been held, or whether
a sale would result in the recognition of a profit or loss. Therefore, the rate
of turnover is not a limiting factor when changes are appropriate. Specific
decisions to purchase or sell securities for each Portfolio are made by a
portfolio manager who is an employee of Citibank or a Subadviser and who is
appointed and supervised by senior officers of Citibank or by a Subadviser. The
portfolio manager or Subadviser may serve other clients in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or the other
accounts over which the Manager, the Subadvisers or their affiliates exercise
investment discretion. The Manager and the Subadvisers are authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Portfolio which is in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction if the Manager or the applicable Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Manager, the
Subadvisers and their affiliates have with respect to accounts over which they
exercise investment discretion. The Trustees of the Trust shall periodically
review the commissions paid by the Portfolio to determine if the commissions
paid over representative periods of time were reasonable in relation to the
benefits to the Portfolio.
The investment advisory fee that each Portfolio pays to Citibank or a
Subadviser will not be reduced as a consequence of Citibank's or the
<PAGE>
Subadviser's receipt of brokerage and research services. While such services
are not expected to reduce the expenses of Citibank or the Subadviser, Citibank
or the Subadviser would, through the use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff or obtain such services independently.
In making purchases or sales of securities and other property for the
account of a Portfolio, a Subadviser may deal with itself or with the Trustees
of the Trust, to the extent permitted by the 1940 Act.
In certain instances there may be securities that are suitable as an
investment for a Portfolio as well as for one or more of Citibank's or a
Subadviser's other clients. Investment decisions for each Portfolio and for
Citibank's and the Subadviser's other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could adversely affect the price of or the size of the position
obtainable in a security for a Portfolio. When purchases or sales of the same
security for a Portfolio and for other portfolios managed by Citibank or a
Subadviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large volume
purchases or sales.
The Portfolios are newly organized and had no operations during the
fiscal year ended October 31, 1997.
<PAGE>
Item 18. Capital Stock and Other Securities.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Trust and to establish series, each of which shall
be a subtrust, the beneficial interests in which shall be separate and distinct
from the beneficial interests in any other series. Each Portfolio is a series
of the Trust. Investors in each Portfolio are entitled to participate pro rata
in distributions of taxable income, loss, gain and credit of that Portfolio.
Upon liquidation or dissolution of a Portfolio, investors in that Portfolio are
entitled to share pro rata in the Portfolio's net assets available for
distribution to its investors. Interests in a Portfolio have no preference,
pre-emptive, conversion or similar rights and are fully paid and
non-assessable, except as set forth below. Interests in a Portfolio may not be
transferred.
Each investor is entitled to a vote in proportion to its percentage of
the aggregate beneficial interests in a Portfolio. Investors in a Portfolio do
not have cumulative voting rights, and investors holding more than 50% of the
aggregate beneficial interests in the Trust may elect all of the Trustees if
they choose to do so and in such event the other investors in the Trust would
not be able to elect any Trustee. The Trust is not required to hold, and has no
present intention of holding, annual meetings of investors but the Trust will
hold special meetings of investors when in the judgment of the Trustees it is
necessary or desirable to submit matters for an investor vote.
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by a vote of a majority, as
defined in the 1940 Act, of the holders of the Trust's outstanding voting
securities voting as a single class, or of the affected series of the Trust, as
the case may be, or if authorized by an instrument in writing without a
meeting, consented to by holders of not less than a majority of the interests
of the affected series. However, if the Trust or the affected series is the
surviving entity of the merger, consolidation or sale of assets, no vote of
interest holders is required. Any series of the Trust may be dissolved (i) by
the affirmative vote of not less than two-thirds of the outstanding beneficial
interests in such series at any meeting of holders of beneficial interests or
by an instrument in writing signed by a majority of the Trustees and consented
to by not less than two-thirds of the outstanding beneficial interests, (ii) by
the Trustees by written notice to holders of the beneficial interests in the
series or (iii) upon the bankruptcy or expulsion of a holder of a beneficial
interest in the series, unless the remaining holders of beneficial interests,
by majority vote, agree to continue the series. The Trust may be dissolved by
action of the Trustees upon the dissolution of the last remaining series.
Each Portfolio is a series of the Trust, organized as a trust under the
laws of the State of New York. The Declaration of Trust of the Trust provides
that the Trust may maintain appropriate insurance (e.g., fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its investors,
Trustees, officers, employees and agents covering possible tort and other
<PAGE>
liabilities. Thus, the risk of an investor in these Portfolios incurring
financial loss on account of investor liability is limited to circumstances in
which both inadequate insurance existed and the Trust itself was unable to meet
its obligations. It is not expected that the liabilities of a Portfolio would
ever exceed its assets.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually and that the Trustees will not
be liable for any action or failure to act, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Item 19. Purchase, Redemption and Pricing of Securities.
Beneficial interests in each Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in each Portfolio may only
be made by investment companies, common or commingled trust funds or similar
organizations or entities which are "accredited investors" within the meaning
of Regulation D under the 1933 Act. This Registration Statement does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The net asset value of each Portfolio (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued)
is determined each day during which the New York Stock Exchange (the
"Exchange") is open for trading ("Business Day"). As of the date of this
Registration Statement, the Exchange is open for trading every weekday except
for the following holidays (or the days on which they are observed): New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of net asset value of each Portfolio is made once each day as of
the close of regular trading on the Exchange (normally 4:00 p.m. Eastern time).
As set forth in more detail below, purchases and withdrawals will be effected
at the time of determination of net asset value next following the receipt of
any purchase or withdrawal order.
For the purpose of calculating a Portfolio's net asset value, all assets
and liabilities initially expressed in non-U.S. currencies will be converted
into U.S. dollars at the prevailing market rates at the time of valuation.
Equity securities are valued at the last sale price on the exchange on which
they are primarily traded or on the NASDAQ system for unlisted national market
issues, or at the last quoted bid price for securities in which there were no
sales during the day or for unlisted securities not reported on the NASDAQ
system. Securities listed on a foreign exchange are valued at the last quoted
sale price available before the time when net assets are valued. Bonds and
<PAGE>
other fixed income securities (other than short-term obligations) are valued on
the basis of valuations furnished by a pricing service, use of which has been
approved by the Board of Trustees of the Trust. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques that take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations (maturing
in 60 days or less) are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Futures contracts are normally valued
at the settlement price on the exchange on which they are traded. Securities
for which there are no such valuations are valued at fair value as determined
in good faith by or at the direction of the Board of Trustees.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the
Exchange and may also take place on days on which the Exchange is closed. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities may be valued at
fair value in accordance with procedures established by and under the general
supervision of the Board of Trustees.
Interest income on long-term obligations held for a Portfolio is
determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued less amortization of
premium.
Each investor in a Portfolio may add to or withdraw from its investment
in the applicable Portfolio on each Business Day. As of the close of regular
trading on the Exchange, on each Business Day, the value of each investor's
beneficial interest in a Portfolio is determined by multiplying the net asset
value of the Portfolio by the percentage, effective for that day, that
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, that are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then re-computed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
the same time on such day plus or minus, as the case may be, the amount of the
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined is then applied
<PAGE>
to determine the value of the investor's interest in the Portfolio as of the
close of regular trading on the following Business Day of the Portfolio.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption price of beneficial interests in a Portfolio,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the beneficial interests being sold. If a holder of beneficial interests
received a distribution in kind, such holder could incur brokerage or other
charges in converting the securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for beneficial interests in a Portfolio more than seven days during any
period when (a) trading in the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the
SEC, exists making disposal of the Portfolio's investments or determination of
its net asset value not reasonably practicable; (b) the Exchange is closed
(other than customary weekend and holiday closings); or (c) the SEC has by
order permitted such suspension.
Item 20. Tax Status.
The Trust is organized as a trust under New York law. The Trust has
determined that each Portfolio is properly treated as a separate partnership
for U.S. federal and New York State income tax purposes. Accordingly, under
those tax laws, the Portfolios are not subject to any income tax, but each
investor in a Portfolio must take into account its share of that Portfolio's
ordinary income, expenses, capital gains and losses, credits and other items in
determining its income tax liability. The determination of such share is made
in accordance with the governing instruments of the Trust and the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), and regulations promulgated
thereunder.
The Portfolios' taxable years end October 31. Although, as described
above, the Portfolios are not subject to U.S. federal income tax, they file
appropriate U.S. federal income tax returns.
The Trust believes that, in the case of an investor in a Portfolio that
seeks to qualify as a regulated investment company ("RIC") under the Code, the
investor should be treated for U.S. federal income tax purposes as an owner of
an undivided interest in the assets and operations of the Portfolio, and
accordingly should be deemed to own a proportionate share of each of the assets
of the Portfolio and be entitled to treat as earned by it the portion of the
Portfolio's gross income attributable to that share. The Trust also believes
that each such investor should be deemed to hold its proportionate share of a
Portfolio's assets for the period the Portfolio has held the assets or for the
<PAGE>
period the investor has been a partner in the Portfolio, whichever is shorter.
Each investor should consult its tax advisers regarding whether, in light of
its particular tax status and any special tax rules applicable to it, this
approach applies to its investment in a Portfolio, or whether the Portfolio
should be treated, as to it, as a separate entity as to which the investor has
no direct interest in Portfolio assets or operations.
In order to enable an investor in a Portfolio that is otherwise eligible
to qualify as a RIC under the Code to so qualify, the Trust intends that each
Portfolio will satisfy the requirements of Subchapter M of the Code relating to
the nature of each Portfolio's gross income and the composition
(diversification) of a Portfolio's assets as if those requirements were
directly applicable to such Portfolio and to allocate and permit withdrawals of
its net investment income and any net realized capital gains in a manner that
will enable an investor that is a RIC to comply with the qualification
requirements imposed by Subchapter M of the Code.
The Trust will allocate at least annually among each Portfolio's
investors each investor's distributive share of the respective Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction, or credit in a manner intended to comply with the Code
and applicable U.S. Treasury regulations.
To the extent the cash proceeds of any withdrawal or distribution exceed
an investor's adjusted tax basis in its partnership interest in a Portfolio,
the investor in that Portfolio will generally realize gain for U.S. federal
income tax purposes. If, upon a complete withdrawal (i.e., a redemption of its
entire interest in the Portfolio), the investor's adjusted tax basis in its
partnership interest in the Portfolio exceeds the proceeds of the withdrawal,
the investor will generally realize a loss for federal income tax purposes. An
investor's adjusted tax basis in its partnership interest in the Portfolio will
generally be the aggregate price paid therefor, increased by the amounts of its
distributive shares of items of realized net income and gain (including income,
if any, exempt from U.S. Federal income tax), and reduced, but not below zero,
by the amounts of its distributive shares of items of net loss and the amounts
of any distributions received by the investor. This discussion does not address
any distributions by the Portfolios in kind (i.e., any distributions of readily
marketable securities or other non-cash property), which will be subject to
special tax rules and may have consequences different from those described in
this paragraph.
Each Portfolio may be subject to foreign withholding and other taxes with
respect to income on certain securities of non-U.S. issuers. These taxes may be
reduced or eliminated under the terms of an applicable U.S. income tax treaty.
Foreign exchange gains and losses realized by a Portfolio will generally be
treated as ordinary income and losses for federal income tax purposes. Certain
uses of foreign currency and foreign currency forward contracts and investment
by a Portfolio in certain "passive foreign investment companies" may be limited
in order to enable an investor that is a RIC to avoid imposition of a tax. A
Portfolio may elect to mark to market any investments in "passive foreign
<PAGE>
investment companies" on the last day of each year. This election may cause the
Portfolio to recognize income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a
tax on any RICs investing in the Portfolio, the Portfolio may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
Each Portfolio's transactions in options, foreign currency forward
contracts, futures contracts and swaps and related transactions will be subject
to special tax rules that may affect the amount, timing, and character of
Portfolio income. For example, certain positions held for a Portfolio on the
last business day of each taxable year will be marked to market (i.e., treated
as if sold) on that day, and any gain or loss associated with the positions
will be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held for a Portfolio that substantially diminish its risk of
loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Portfolio losses and adjustments in the holding periods of Portfolio
securities. Certain tax elections exist for straddles that may alter the
effects of these rules. Each Portfolio intends to limit its activities in
options, foreign currency forward contracts, futures contracts and swaps and
related transactions to the extent necessary to enable any investor that is a
RIC to meet the requirements of Subchapter M of the Code.
There are certain tax issues which will be relevant to only certain
investors, specifically, investors which are segregated asset accounts and
investors who contribute assets other than cash to a Portfolio. It is intended
that such segregated asset accounts will be able to satisfy diversification
requirements applicable to them and that such contributions of assets will not
be taxable provided certain requirements are met. Such investors are advised to
consult their own tax advisers as to the tax consequences of an investment in a
Portfolio.
The Trust intends to conduct its activities and those of the Portfolios
so that they will not be deemed to be engaged in the conduct of a U.S. trade or
business for U.S. federal income tax purposes. Therefore, it is not anticipated
that an investor in a Portfolio, other than an investor which would be deemed a
"U.S. person" for U.S. federal income tax purposes, will be subject to U.S.
federal income taxation (other than a 30% withholding tax on dividends and
certain interest income) solely by reason of its investment in a Portfolio.
There can be no assurance that the U.S. Internal Revenue Service may not
challenge the above conclusions or take other positions that, if successful,
might result in the payment of U.S. federal income taxes by investors in a
Portfolio.
The above discussion does not address the special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions, or the state, local, or foreign tax laws that may
be applicable to certain investors. Investors should consult their own tax
<PAGE>
advisers with respect to the special tax rules that may apply in their
particular situations, as well as the state, local, or foreign tax consequences
to them of investing in a Portfolio.
Item 21. Underwriters.
CFBDS, exclusive placement agent for each of the Portfolios, receives no
compensation for serving in this capacity. Investment companies, insurance
company separate accounts, common and commingled trust funds and similar
organizations and entities may continuously invest in each Portfolio.
Item 22. Calculations of Performance Data.
Not applicable.
Item 23. Financial Statements.
The Portfolios are newly organized and had no operations during the
fiscal year ended October 31, 1997.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
Financial Statements Included in Part A:
Not applicable.
Financial Statements Included in Part B:
Not applicable.
(b) Exhibits
* 1(a) Declaration of Trust of the Trust
**** 1(b) Amendment to Declaration of Trust of the Trust
**,***, 1(c) Amended and Restated Designation of Series of
**** and Beneficial Interests of the Trust
filed
herewith
** 2 By-laws of the Trust
**** 5(a) Management Agreements between the Registrant
and Citibank, N.A., as investment adviser
5(b) Sub-Management Agreements
**** 6(a) Placement Agency Agreement between the
Registrant and CFBDS, Inc., as exclusive
placement agent
6(b) Letter Agreement adding Large Cap Value Portfolio,
Small Cap Value Portfolio, Intermediate Income
Portfolio, International Portfolio, Foreign
Bond Portfolio and Short-Term Portfolio
(collectively, the "New Portfolios") to the
Placement Agency Agreement
*** 8(a) Custodian Contract between the Registrant and
State Street Bank and Trust Company ("State
Street"), as custodian
8(b) Letter Agreement adding the New Portfolios to the
Custodian Contract between the Registrant and
State Street, as custodian
*** 9(a) Accounting Services Agreement between The Premium
Portfolios and State Street Cayman Trust Company,
Ltd. ("State Street Cayman")
<PAGE>
9(b) Letter Agreement adding the New Portfolios to the
Accounting Services Agreement between the Registrant
and State Street Cayman
9(c) Sub-Administrative Services Agreement between
Citibank, N.A. and Signature Financial Group
(Cayman) Ltd.
* Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A (File No. 811-7459) as filed with the Securities and
Exchange Commission on December 20, 1995.
**Incorporated herein by reference to Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No. 811-7459) as filed with
the Securities and Exchange Commission on February 28, 1996.
***Incorporated herein by reference to Amendment No. 2 to Registrant's
Registration Statement on Form N-1A (File No. 811-7459) as filed with
the Securities and Exchange Commission on May 1, 1997.
****Incorporated herein by reference to Amendment No. 3 to Registrant's
Registration Statement on Form N-1A (File No. 811-7459) as filed with
the Securities and Exchange Commission on October 31, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities.
(1) (2)
Title of Class Number of Record Holders
Beneficial Interests (as of February 20,1998)
Large Cap Value Portfolio 9
Small Cap Value Portfolio 10
International Portfolio 10
Foreign Bond Portfolio 9
Short-Term Portfolio 9
Intermediate Income Portfolio 9
Item 27. Indemnification.
Reference is hereby made to Article V of the Declaration of Trust of the
Registrant, as incorporated herein by reference.
The Trustees and officers of the Trust are insured under an errors and
omissions liability insurance policy. The Registrant and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Item 28. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, a
registered bank holding company. Citibank also serves as investment adviser to
the following registered investment companies (or series thereof): The Premium
Portfolios (Growth & Income Portfolio, Balanced Portfolio, Large Cap Growth
Portfolio, International Equity Portfolio, Government Income Portfolio,
Emerging Asian Markets Equity Portfolio and Small Cap Growth Portfolio), Tax
Free Reserves Portfolio, U.S. Treasury Reserves Portfolio, Cash Reserves
Portfolio, CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM New York Tax
Free Reserves, CitiFundsSM Connecticut Tax Free Reserves and CitiFundsSM
California Tax Free Reserves), CitiFundsSM Tax Free Income Trust (CitiFundsSM
National Tax Free Income Portfolio and CitiFundsSM New York Tax Free Income
Portfolio), CitiFundsSM Institutional Trust (CitiFundsSM Institutional Cash
Reserves) and Variable Annuity Portfolios (CitiSelect(R) VIP Folio 200,
CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400, CitiSelect(R) VIP
Folio 500 and CitiFundsSM Small Cap Growth VIP Portfolio). Citibank and its
affiliates manage assets in excess of $88 billion worldwide. The principal
place of business of Citibank is located at 399 Park Avenue, New York, New York
10043.
<PAGE>
John S. Reed is the Chairman of the Board and a Director of Citibank. The
following are Vice Chairmen of the Board and Directors of Citibank: Paul J.
Collins and William R. Rhodes. Other Directors of Citibank are D. Wayne
Calloway, former Chairman and Chief Executive Officer, PepsiCo, Inc.; John M.
Deutch, Institute Professor, Massachusetts Institute of Technology; Reuben
Mark, Chairman and Chief Executive Officer, Colgate-Palmolive Company; Richard
D. Parsons, President, Time Warner, Inc.; Rozanne L. Ridgway, Former Assistant
Secretary of State for Europe and Canada; Robert B. Shapiro, Chairman,
President and Chief Executive Officer, Monsanto Company; Frank A. Shrontz,
Chairman Emeritus, The Boeing Company; and Franklin A. Thomas, former
President, The Ford Foundation.
Each of the individuals named above is also a Director of Citicorp. In
addition, the following persons have the affiliations indicated:
D. Wayne Calloway Director, Exxon Corporation
Director, General Electric Company
Retired Chairman and Chief Executive Officer and
Director, PepsiCo, Inc.
Paul J. Collins Director, Kimberly-Clark Corporation
John M. Deutch Director, Ariad Pharmaceuticals, Inc.
Director, CMS Energy
Director, Palomar Medical Technologies, Inc.
Director, Cummins Engine Company, Inc.
Director, Schlumberger, Ltd.
Reuben Mark Director, Chairman and Chief Executive Officer
Colgate-Palmolive Company
Director, New York Stock Exchange
Director, Time Warner, Inc.
Non-Executive Director, Pearson, PLC
Richard D. Parsons Director, Federal National Mortgage Association
Director, Philip Morris Companies Incorporated
Member, Board of Representatives, Time Warner
Entertainment Company, L.P.
Director and President, Time Warner, Inc.
<PAGE>
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
Rozanne L. Ridgway Director, 3M
Director, Bell Atlantic Corporation
Director, Boeing Company
Director, Emerson Electric Company
Member-International Advisory Board,
New Perspective Fund, Inc.
Director, RJR Nabisco, Inc.
Director, Sara Lee Corporation
Director, Union Carbide Corporation
Robert B. Shapiro Director, Chairman and Chief Executive
Officer, Monsanto Company
Director, Silicon Graphics
Frank A. Shrontz Director, 3M
Director, Baseball of Seattle, Inc.
Director and Chairman Emeritus, Boeing Company
Director, Boise Cascade Corp.
Director, Chevron Corporation
Franklin A. Thomas Director, Aluminum Company of America
Director, Cummins Engine Company, Inc.
Director, Lucent Technologies
Director, PepsiCo, Inc.
Franklin Advisory Services, Inc. ("Franklin"), a sub-adviser of the
Registrant, maintains its principal office at One Parker Plaza, 16th Floor,
Fort Lee, New Jersey 07024. Franklin, a Delaware corporation incorporated in
1996, is a registered investment adviser under the Investment Advisers Act of
1940 and is a wholly-owned subsidiary of Franklin Resources, Inc., a publicly
owned holding company. Franklin is an investment adviser to various open-end
and closed-end investment companies.
William J. Lippman is the President and Director of Franklin Advisory
Services, Inc. Mr. Lippman holds a master of business administration degree
<PAGE>
from New York University and a bachelor of business administration degree from
City College of New York. Mr. Lippman also serves as Senior Vice President of
Franklin Resources, Inc. and Franklin Management, Inc. and has been with the
Franklin Templeton Group since 1988. Prior to joining Franklin Advisers Inc.,
Mr. Lippman was president of L.F. Rothschild Fund Management, Inc. and has been
in the securities industry for over 30 years.
Each of the individuals named below is an officer and/or Director of
Franklin and has the affiliations indicated:
Name: Affiliations:
William J. Lippman Senior Vice President, Franklin Resources, Inc.
President and Director Senior Vice President, Franklin Advisers, Inc.
Senior Vice President, Franklin Templeton
Distributors, Inc.
Senior Vice President, Franklin Management, Inc.
Mr. Lippman also serves as officer and/or
director or trustee of eight of the investment
companies in the Franklin Group of Funds.
Charles B. Johnson President, Chief Executive Officer and Director,
Chairman of the Board Franklin Resources, Inc.
and Director Chairman of the Board and Director, Franklin
Advisers, Inc.
Chairman of the Board and Director, Franklin
Investment Advisory Services, Inc.
Chairman of the Board and Director, Franklin
Templeton Distributors, Inc.
Director, Franklin/Templeton Investor Services Inc.
Director, Franklin Templeton Services, Inc.
Director, General Host Corporation
Mr. Johnson also serves as officer and/or director,
trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin
Resources, Inc. and of 60 of the investment
companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. Executive Vice President and Director, Franklin
Senior Vice President Resources, Inc.
and Director Executive Vice President and Director, Franklin
Templeton Distributors, Inc.
<PAGE>
President and Director, Franklin Advisers, Inc.
Senior Vice President and Director, Franklin
Investment Advisory Services, Inc.
Director, Franklin/Templeton Investor Services, Inc.
Mr. Johnson also serves as officer and/or director,
trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin
Resources, Inc. and of 60 of the investment
companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek Senior Vice President and General Counsel, Franklin
Vice President and Resources Inc.
Assistant Secretary Senior Vice President, Franklin Templeton
Distributors, Inc.
Vice President, Franklin Advisers, Inc.
Vice President, Franklin Investment Advisory
Services, Inc.
Ms. Gatzek also serves as officer of the
investment companies in in the Franklin Templeton
Group of Funds.
Martin L. Flanagan Senior Vice President, Chief Financial Officer and
Treasurer Treasurer, Franklin Resources, Inc.
Executive Vice President, Templeton Worldwide,
Inc.
Senior Vice President and Treasurer, Franklin
Advisers, Inc.
Senior Vice President and Treasurer, Franklin
Templeton Distributors, Inc.
Senior Vice President, Franklin/Templeton Investor
Services, Inc.
Treasurer, Franklin Investment Advisory Services,
Inc.
Mr. Flanagan also serves as officer of most other
subsidiaries of Franklin Resources, Inc. and
officer, director and/or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
<PAGE>
Leslie M. Kratter Vice President, Franklin Resources, Inc.
Secretary Vice President, Franklin Institutional Services
Corporation
President and Director, Franklin/Templeton Travel,
Inc.
Pacific Investment Management Company ("PIMCO"), a sub-adviser of the
Registrant, maintains its principal office at 840 Newport Center Drive, Suite
360, P.O. Box 6480, Newport Beach, California 92658-9030. PIMCO is a registered
investment adviser under the Investment Advisers Act of 1940.
Lee R. Thomas, III joined PIMCO in 1995 and is the Senior International
Portfolio Manager at PIMCO, as well as a Managing Director of PIMCO. Previously
he was a member of Investcorp's Management Committee, where he was responsible
for global securities and foreign exchange trading. Prior to Investcorp, he was
associated with Goldman Sachs, where he was an Executive Director in the fixed
income division of their London office.
Each of the individuals named below is a Managing Director of PIMCO and
has the affiliations indicated:
Name and Position: Other Affiliations:
William H. Gross, CFA None
Senior Fixed Income Portfolio
Manager
David H. Edington None
Senior Fixed Income Portfolio
Manager
John L. Hague None
Senior Fixed Income Portfolio
Manager
Brent R. Harris, CFA None
Director of Marketing
Dean S. Meiling, CFA None
Account Manager
James F. Muzzy, CFA None
Account Manager
<PAGE>
William F. Podlich, III None
William C. Powers None
Senior Fixed Income Portfolio
Manager
Frank B. Rabinovitch None
Senior Fixed Income Portfolio
Manager
Lee R. Thomas, III None
Senior International Porfolio
Manager
William S. Thompson Director, Spieker Properties Inc.
Chief Executive Officer
Hotchkis and Wiley, a division of the Capital Management Group of Merrill
Lynch Asset Management, L.P. ("Hotchkis"), a sub-adviser of the Registrant,
maintains its principal office at 800 West Sixth Street, Fifth Floor, Los
Angeles, California 90017. Harry Hartford and Sarah Ketterer manage
international equity accounts and are also responsible for international
investment research. Each serves on the Investment Policy Committee at
Hotchkis. Prior to joining Hotchkis, Mr. Hartford was with the Investment Bank
of Ireland, where he gained 10 years of experience in both international and
global equity management. Prior to joining Hotchkis, Ms. Ketterer was an
associate with Bankers Trust and an analyst at Dean Witter.
Hotchkis became a division of the Capital Management Group of Merrill
Lynch Asset Management, L.P. upon the completion of the sale by Hotchkis and
Wiley, a Delaware Limited Liability Company and the general partner of Hotchkis
& Wiley, a California limited partnership, of all of the partnership interests
in Hotchkis & Wiley to Merrill Lynch & Co., Inc., a Delaware corporation, in
November of 1996.
<PAGE>
Following are the managing personnel of Hotchkis:
Name and Position: Other Affiliations:
John F. Hotchkis Trustee, Hotchkis and Wiley Funds
Portfolio Manager Board of Governors, The Music Center
Chairman Director, The Music Center Foundation
Director, Los Angeles Philharmonic Orchestra
Director, Big Brothers of Greater Los Angeles
Director, Executive Service Corps of Southern
California
Director, KCET
Director, Teach for America
Trustee, The Lawrenceville School
Trustee, Robert Louis Stevenson School
Director, Fountainhead Water Company, Inc.
Michael L. Quinn Head of Merrill Lynch Capital Management Group
Chief Executive
Officer
Miller Anderson & Sherrerd, LLP ("MAS"), a sub-adviser of the Registrant,
maintains its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS has been a registered investment adviser under the
Investment Advisers Act of 1940 since 1974. MAS serves as the Investment
Adviser and Fund Administrator for the MAS Funds and is also the parent company
of MAS Fund Distribution, Inc. ("MASDI"), a registered limited purpose
broker-dealer that was formed in 1992 solely to distribute shares of the MAS
Funds. All registered representatives of MASDI are also employees of MAS. MAS
Fixed Income Partnership I, L.P. ("MAS I") and MAS Fixed Income Partnership II,
L.P. ("MAS II") are investment partnerships established by MAS. MAS has
established MAS Fixed Income I, L.L.C., MAS Fixed Income II, L.L.C., MAS
Management, Inc., and MAS Investors I, LLP to administer and manage the
investment partnerships. MAS also participates in a joint venture with LTCB
Capital Markets, Inc. that owns LTCB-MAS Investment Management, Inc., a
registered investment adviser.
MAS is a Pennsylvania limited liability partnership and became an
indirect wholly-owned subsidiary of Morgan Stanley Group Inc., the global
financial services firm, upon the completion of Morgan Stanley Asset
Management's acquisition of MAS in January of 1996. MAS's general partner and
the owner of 95% of the MAS partnership interests is Morgan Stanley Asset
Management Holdings, Inc. ("MSAMH"), a direct wholly-owned subsidiary of Morgan
Stanley Asset Management Inc. MSAMH is also one of MAS's three limited
partners. The other two limited partners of MAS are MSL Incorporated and MS
Holdings Incorporated, which are both holding companies within Morgan Stanley's
corporate structure and own the remaining 3% and 2% of MAS's partnership
interests, respectively.
<PAGE>
Following are the officers and directors of Morgan Stanley Asset Management
Holdings, Inc.
Name and Position: Affiliations:
James M. Allwin Director and Managing Director of Morgan
President and Director Stanley Asset Management Inc. since 1993
and President since 1995;
Employee of Morgan Stanley & Co.
Incorporated since 1976 and Managing
Director since 1985;
President of Morgan Stanley Realty, Inc.
since 1988;
Member of the Board of Overseers,
Dartmouth College;
Member of the Executive Board, The National
Realty Committee;
Trustee, The Urban Land Institute;
Chairman, Cities in Schools, Inc.
Barton M. Biggs Chairman and Director of Morgan Stanley
Chairman of the Board Asset Management Inc. since 1980;
and Director Chairman and Director of Morgan Stanley
Asset Management Limited;
Managing Director of Morgan Stanley & Co.
Incorporated since 1973;
Director of Morgan Stanley Group Inc. since
1991;
Member of the Investment Advisory Council
of The Thailand Fund;
Director, The Rand McNally Company;
Member, Yale Development Board;
Director and officer of various investment
companies managed by Morgan Stanley
Asset Management Inc.
Harold J. Schaaff, Jr. Principal of Morgan Stanley & Co.
Secretary and Director Incorporated;
General Counsel and Secretary of Morgan
Stanley Asset Management Inc. since 1989;
Officer of various investment companies
managed by Morgan Stanley Asset
Management Inc.
<PAGE>
Debra M. Aaron Employee of Morgan Stanley & Co.
Vice President Incorporated since 1984, Vice President
since 1986 and a Principal since 1989
Bruce R. Sandberg Employee of Morgan Stanley & Co.
Vice President Incorporated since 1981, Vice President
since 1988 and a Principal since 1992
Eileen Murray Employee of Morgan Stanley & Co.
Treasurer Incorporated since 1984;
Treasurer and Managing Director of Morgan
Stanley Asset Management Inc. and Morgan
Stanley & Co. Incorporated since June of
1996
Madeline D. Barkhorn Employee of Morgan Stanley & Co.
Assistant Secretary Incorporated since 1994 and of Morgan
Stanley Asset Management Inc. since 1988
Charlene R. Herzer Employee of Morgan Stanley & Co.
Assistant Secretary Incorporated since 1990 and Vice President
since 1995
The primary portfolio managers for MAS's Value Portfolio are Robert J.
Marcin, CFA, Richard M. Behler, PhD, and Nicholas J. Kovich, CFA. All other
members of the MAS equity investment management department serve as analyst
resources for the value team in the management of the portfolio while
maintaining responsibility for other MAS equity related portfolios.
Each of the individuals named below is a former partner of MAS and has
the affiliations indicated:
Name: Other Affiliations:
Richard B. Worley University of Pennsylvania, Trustee
Medical Center of the University of Pennsylvania,
Trustee
Pennsylvania Academy of Fine Arts, Trustee
Thomas L. Bennett, CFA MAS Funds, Chairman
MAS Fund Distribution, Inc., Director
Robert L. Hagin, PhD Society of Quantitative Analysts, Advisory Board
<PAGE>
John D. Connolly, CFA Financial Analysts of Philadelphia, President,
1994-95
Kenneth B. Dunn, PhD Journal of Fixed Income, Associate Editor
Institute for the Study of Security Markets, Board
of Directors
Ellen D. Harvey, CFA St. Timothy's School, Trustee, 1985-94
Investment Chairman, 1994-present
Bryn Mawr Rehabilitation Hospital, Trustee
Main Line Health System, Trustee
Owosso Corporation, Director
Gary G. Schlarbaum, Coe College, Trustee
CFA, PhD MAS Funds Distribution, Inc., Director
James D. Schmid MAS Funds, President
Head of Mutual Funds MAS Fund Distribution, Inc., Director
The Minerva Fund, Inc., Chairman of the Board of
Directors
Arden C. Armstrong, CFA American Friends Service Committee, Investment
Committee
Wharton Fellow's Fund, Board of Overseers
Stephen F. Esser, CFA None
J. David Germany, PhD None
Nicholas J. Kovich, CFA None
Robert J. Marcin, CFA None
Mary Ann Milias California Pacific Medical Center Foundation,
Trustee
Schools of the Sacred Heart, Trustee
Sisters of the Presentation - Investment Advisory
Committee
Marin Community Foundation - Investment Advisory
Committee
Scott F. Richard, DBA Journal of Fixed Income, Associate Editor
<PAGE>
Horacio A. Valeiras, CFA None
Glenn E. Becker Germantown Academy, Education Committee
The Salvation Army Advisory Board of Greater
Philadelphia
Philadelphia Leadership Foundation, Director
Steven K. Kreider, CFA Lehigh University, Investment Committee
Marna C. Whittington, Phd Rohm & Haas Company, Director
Tower Hill School, Trustee
Upland Country Day School, Trustee
The Philadelphia Contributionship, Director
Federated Department Stores, Inc., Director
Berwind Group, Director
Item 29. Principal Underwriters.
(a) CFBDS, Inc., the placement agent for the Registrant's series, is also
the distributor for CitiFundsSM International Growth & Income Portfolio,
CitiFundsSM International Equity Portfolio, CitiFundsSM Emerging Asian Markets
Equity Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash
Reserves, CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium
Liquid Reserves, CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM
Institutional Liquid Reserves, CitiFundsSM Institutional Cash Reserves,
CitiFundsSM Tax Free Reserves, CitiFundsSM Institutional Tax Free Reserves,
CitiFundsSM California Tax Free Reserves, CitiFundsSM Connecticut Tax Free
Reserves, CitiFundsSM New York Tax Free Reserves, CitiFundsSM U.S. Government
Income Portfolio, CitiFundsSM Balanced Portfolio, CitiFundsSM Intermediate
Income Portfolio, CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth &
Income Portfolio, CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM Small Cap
Growth Portfolio, CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM
New York Tax Free Income Portfolio, CitiSelect(R) VIP Folio 200, CitiSelect(R)
VIP Folio 300, CitiSelect(R) VIP Folio 400, CitiSelect[ ] VIP Folio 500,
CitiFundsSM Small Cap Growth VIP Portfolio, CitiSelect(R) Folio 200,
CitiSelect(R) Folio 300, CitiSelect(R) Folio 400, and CitiSelect(R) Folio 500.
CFBDS is also the placement agent for Growth & Income Portfolio, Large Cap
Growth Portfolio, Small Cap Growth Portfolio, International Equity Portfolio,
Balanced Portfolio, Government Income Portfolio, Emerging Asian Markets Equity
Portfolio, Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
(b) The information required by this Item 29 with respect to each director
and officer of CFBDS, Inc. is incorporated by reference to Schedule A of Form
<PAGE>
BD filed by CFBDS, Inc. pursuant to the Securities and Exchange Act of 1934
(File No. 8-32417).
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Name Address
State Street Bank and Trust Company 225 Franklin Street
(custodian) Boston, MA 02110
State Street Cayman Trust Company, Ltd. P.O. Box 2508 GT
(accounting services agent) Grand Cayman, Cayman Islands
Citibank, N.A. 153 East 53rd Street
(investment manager and administrator) New York, NY 10043
CFBDS, Inc. c/o Signature Financial Group
(placement agent) (Cayman) Ltd.
Elizabethan Square
George Town, Grand Cayman
Cayman Islands BWI
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
The Registrant undertakes to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereunto duly authorized,
in Southampton, Bermuda, on the 27th day of February, 1998.
ASSET ALLOCATION PORTFOLIOS
By: Philip W. Coolidge
Philip W. Coolidge
President of
Asset Allocation Portfolios
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
1(c) Amended and Restated Designation of Series of
Beneficial Interests of the Trust
5(b) Sub-Management Agreements
6(b) Letter Agreement adding Large Cap Value Portfolio,
Small Cap Value Portfolio, Intermediate Portfolio,
International Portfolio, Foreign Bond Portfolio and
Short-Term Portfolio (collectively, the "New
Portfolios") to the Placement Agency Agreement
8(b) Letter Agreement adding the New Portfolios to
the Custodian Contract between the Registrant
and State Street, as custodian
9(b) Letter Agreement adding the New Portfolios to
the Accounting Services Agreement between the
Registrant and State Street Cayman
9(c) Sub-Administrative Services Agreement
between Citibank, N.A. and Signature Financial
Group (Cayman) Ltd.
Exhibit 1(c)
ASSET ALLOCATION PORTFOLIOS
AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF
BENEFICIAL INTERESTS (WITHOUT PAR VALUE)
Pursuant to Section 6.2 of the Declaration of Trust, dated as of
December 14, 1995, as amended (the "Declaration of Trust"), of Asset Allocation
Portfolios (the "Trust"), the undersigned, being a majority of the Trustees of
the Trust, do hereby amend and restate the Trust's existing Establishment and
Designation of Series of Beneficial Interests (without par value) in order to
eliminate the establishment and designation of four series of Interests which
were previously established and designated. No other changes to the special and
relative rights of the existing series are intended by this amendment and
restatement. This amendment and restatement shall become effective on the date
set forth below.
1. The series shall be as follows:
The series previously designated as Asset Allocation Portfolio
200, no Interests therein being outstanding, is hereby eliminated.
The series previously designated as Asset Allocation Portfolio
300, no Interests therein being outstanding, is hereby eliminated.
The series previously designated as Asset Allocation Portfolio
400, no Interests therein being outstanding, is hereby eliminated.
The series previously designated as Asset Allocation Portfolio
500, no Interests therein being outstanding, is hereby eliminated.
The remaining series are as follows:
Asset Allocation Portfolio 100;
Large Cap Value Portfolio;
Small Cap Value Portfolio;
Intermediate Income Portfolio;
<PAGE>
Short-Term Portfolio;
International Portfolio; and
Foreign Bond Portfolio.
2. Each series shall be authorized to hold cash, invest in securities,
instruments and other property and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Investment Company Act of 1940, as amended, to the extent pertaining
to the offering of Interests of such series. Each Interest of each series shall
have such redemption, voting and liquidation rights and shall represent such
proportionate ownership in the series as provided generally in the Declaration
of Trust. The proceeds of sales of Interests of each series, together with any
income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to such series, unless otherwise required by law.
3. Investors in each series shall vote separately as a class on any matter
to the extent required by, and any matter shall have been deemed effectively
acted upon with respect to such series as provided in, Rule 18f-2, as from time
to time in effect, under the Investment Company Act of 1940, as amended, or any
successor rule, and the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each series
as set forth in Section 6.2 of the Declaration of Trust.
5. Subject to the provisions of Section 6.2 and Article X of the Declaration
of Trust, the Trustees (including any successor Trustees) shall have the right
at any time and from time to time to change the designation of any series now
or hereafter created, or to otherwise change the special and relative rights of
any series.
IN WITNESS WHEREOF, the undersigned have executed this instrument at
Southampton, Bermuda as of the 6th day of February, 1998.
Elliott J. Berv Philip W. Coolidge
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually
<PAGE>
Mark T. Finn C. Oscar Morong, Jr.
MARK T. FINN C. OSCAR MORONG, JR.
As Trustee and Not Individually As Trustee and Not Individually
WALTER E. ROBB, III
As Trustee and Not Individually
Exhibit 5(b)
SUB-MANAGEMENT AGREEMENT
ASSET ALLOCATION PORTFOLIOS
Large Cap Value Portfolio
SUB-MANAGEMENT AGREEMENT, dated November 1, 1997, by and between Asset
Allocation Portfolios, a New York trust (the "Trust"), and Miller Anderson &
Sherrerd, LLP, a limited liability partnership (the "Subadviser").
W I T N E S S E T H:
WHEREAS, Citibank, N.A. (the "Adviser") has been retained by the Trust to
act as investment adviser to the Trust with respect to the series of the Trust
designated as Large Cap Value Portfolio (the "Portfolio"), and
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"), and
WHEREAS, the Adviser has requested that the Trust engage the Subadviser
to provide certain investment advisory services for the Portfolio, and the
Subadviser is willing to provide such investment advisory services for the
Portfolio on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Appointment of the Subadviser. In accordance with and subject to the
Management Agreement between the Trust and the Adviser (the "Management
Agreement"), the Trust hereby appoints the Subadviser to act as subadviser with
respect to the Portfolio for the period and on the terms set forth in this
Agreement. The Subadviser accepts such appointment and agrees to provide an
investment program with respect to the Portfolio for the compensation provided
by this Agreement.
<PAGE>
2. Duties of the Subadviser. The Subadviser shall provide the Portfolio
and the Adviser with such investment advice and supervision as the Adviser may
from time to time consider necessary for the proper supervision of such portion
of the Portfolio's investment assets as the Adviser may designate from time to
time. Notwithstanding any provision of this Agreement, the Adviser shall retain
all rights and ultimate responsibilities to supervise and, in its discretion,
conduct investment advisory activities relating to the Trust. The Subadviser
shall furnish continuously an investment program and shall determine from time
to time what securities shall be purchased, sold or exchanged and what portion
of the assets of the Portfolio allocated by the Adviser to the Subadviser shall
be held uninvested, subject always to the restrictions of the Trust's
Declaration of Trust, dated December 14, 1995, and By-laws, as each may be
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
the provisions of the 1940 Act, the then-current Registration Statement of the
Trust with respect to the Portfolio, and subject, further, to the Subadviser
notifying the Adviser in advance of the Subadviser's intention to purchase any
securities except insofar as the requirement for such notification may be
waived or limited by the Adviser, it being understood that the Subadviser shall
be responsible for compliance with any restrictions imposed in writing by the
Adviser from time to time in order to facilitate compliance with the
above-mentioned restrictions and such other restrictions as the Adviser may
determine. Further, the Adviser or the Trustees of the Trust may at any time,
upon written notice to the Subadviser, suspend or restrict the right of the
Subadviser to determine what securities shall be purchased or sold on behalf of
the Portfolio and what portion, if any, of the assets of the Portfolio
allocated by the Adviser to the Subadviser shall be held uninvested. The
Subadviser shall also, as requested, make recommendations to the Adviser as to
the manner in which proxies, voting rights, rights to consent to corporate
action and any other rights pertaining to the Portfolio's portfolio securities
shall be exercised. Should the Board of Trustees of the Trust or the Adviser at
any time, however, make any definite determination as to investment policy
applicable to the Portfolio and notify the Subadviser thereof in writing, the
Subadviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked.
The Subadviser shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
<PAGE>
securities for the Portfolio's account with the brokers or dealers selected by
it, and to that end the Subadviser is authorized as the agent of the Trust to
give instructions to the custodian and any subcustodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
The Subadviser will advise the Adviser on the same day it gives any such
instructions. In connection with the selection of such brokers or dealers and
the placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Subadviser or its affiliates exercise investment discretion. The
Subadviser is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Subadviser and
its affiliates have with respect to accounts over which they exercise
investment discretion. In making purchases or sales of securities or other
property for the account of the Portfolio, the Subadviser may deal with itself
or with the Trustees of the Trust or the Trust's underwriter or distributor, to
the extent such actions are permitted by the 1940 Act. The Board of Trustees of
the Trust, in its discretion, may instruct the Subadviser to effect all or a
portion of its securities transactions with one or more brokers and/or dealers
selected by the Board of Trustees, if it determines that the use of such
brokers and/or dealers is in the best interest of the Trust.
3. Allocation of Charges and Expenses. The Subadviser shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 2 above. Except as provided in the
foregoing sentence, it is understood that the Trust will pay from the assets of
the Portfolio all of its own expenses allocable to the Portfolio including,
without limitation, organization costs of the Portfolio; compensation of
Trustees who are not "interested persons" of the Trust; governmental fees;
interest charges; loan commitment fees; taxes; membership dues in industry
associations allocable to the Trust; fees and expenses of independent auditors,
legal counsel and any transfer agent, distributor, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming beneficial
interests and servicing investor accounts; expenses of preparing, typesetting,
printing and mailing investor reports, notices, proxy statements and reports to
<PAGE>
governmental officers and commissions and to investors in the Portfolio;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Portfolio (including but not limited to the fees of independent
pricing services); expenses of meetings of the Portfolio's investors; expenses
relating to the issuance of beneficial interests in the Portfolio; and such
non-recurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Portfolio
may be a party and the legal obligation which the Trust may have to indemnify
its Trustees and officers with respect thereto.
4. Compensation of the Subadviser. For the services to be rendered by the
Subadviser hereunder, the Trust shall pay to the Subadviser from the assets of
the Portfolio an investment subadvisory fee, accrued daily and paid monthly, at
an annual rate equal to the percentages specified below of the aggregate assets
of the Portfolio allocated to the Subadviser:
0.625% on the first $25 million;
0.375% on the next $75 million;
0.250% on the next $400 million; and
0.20% on assets in excess of $500 million.
If the Subadviser serves as investment subadviser for less than the whole
of any period specified in this Section 4, the compensation to the Subadviser
shall be prorated.
5. Covenants of the Subadviser. The Subadviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of the Portfolio, except as
permitted by the 1940 Act, will not take a long or short position in beneficial
interests of the Portfolio except as permitted by the Declaration, and will
comply with all other provisions of the Declaration and By-Laws and the
then-current Registration Statement applicable to the Portfolio relative to the
Subadviser and its partners, directors and officers.
6. Limitation of Liability of the Subadviser. The Subadviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
<PAGE>
of any investment or for any act or omission in the execution of securities
transactions for the Portfolio, except for willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder. As used in this Section 6,
the term "Subadviser" shall include directors, officers, partners and employees
of the Subadviser as well as the Subadviser itself. The Adviser is expressly
made a third party beneficiary of this Agreement, and may enforce any
obligations of the Subadviser under this Agreement and recover directly from
the Subadviser for any liability the Subadviser may have hereunder.
7. Activities of the Subadviser. The services of the Subadviser to the
Portfolio are not to be deemed to be exclusive, the Subadviser being free to
render investment advisory and/or other services to others, including accounts
or investment management companies with similar or identical investment
objectives to the Portfolio. It is understood that Trustees, officers, and
investors of the Trust or the Adviser are or may be or may become interested in
the Subadviser, as directors, officers, partners, employees, or otherwise and
that directors, officers, partners and employees of the Subadviser are or may
become similarly interested in the Trust or the Adviser and that the Subadviser
may be or may become interested in the Trust as an investor or otherwise.
8. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written, and shall
govern the relations between the parties hereto thereafter and shall remain in
force until May 9, 1999 on which date it will terminate unless its continuance
after May 9, 1999 is "specifically approved at least annually" (a) by the vote
of a majority of the Trustees of the Trust who are not "interested persons" of
the Trust or of the Adviser or of the Subadviser at a meeting specifically
called for the purpose of voting on such approval, and (b) by the Board of
Trustees of the Trust or by "vote of a majority of the outstanding voting
securities" of the Portfolio.
This Agreement may be terminated at any time without the payment of any
penalty by (i) the Trustees, (ii) the "vote of a majority of the outstanding
voting securities" of the Portfolio, or (iii) the Adviser, in each case on not
more than 60 days' nor less than 30 days' written notice to the other party.
This Agreement may be terminated at any time without the payment of any penalty
by the Subadviser on not less than 90 days' written notice to the Adviser. This
Agreement shall automatically terminate in the event of its "assignment."
<PAGE>
This Agreement constitutes the entire agreement between the parties and
may be amended only if such amendment is approved by the Subadviser and the
"vote of a majority of the outstanding voting securities" of the Portfolio
(except for any such amendment as may be effected in the absence of such
approval without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Portfolio; that any
liability of the Trust under this Agreement, or in connection with the
transactions contemplated herein, shall be discharged only out of the assets of
the Portfolio; and that no other series of the Trust shall be liable with
respect to this Agreement or in connection with the transactions contemplated
herein.
The undersigned officer of the Trust has executed this Agreement not
individually but in his capacity as an officer of the Trust under the
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees, officers or holders of beneficial interests in the Trust
individually.
9. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts provided, however, that nothing herein will be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940 or
any rules or regulations of the Securities and Exchange Commission thereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
ASSET ALLOCATION MILLER ANDERSON &
PORTFOLIOS SHERRERD, LLP
on behalf of Large Cap
Value Portfolio
By: Susan Jakuboski By: Robert Marcin
Title: Assistant Secretary Title: Managing Director
The foregoing is acknowledged:
Citibank, N.A.
By: Lawrence P. Keblusek
Title: U.S. CIO
<PAGE>
SUB-MANAGEMENT AGREEMENT
ASSET ALLOCATION PORTFOLIOS
Small Cap Value Portfolio
SUB-MANAGEMENT AGREEMENT, dated November 1, 1997, by and between Asset
Allocation Portfolios, a New York trust (the "Trust"), and Franklin Advisory
Services, Inc., a Delaware corporation (the "Subadviser").
W I T N E S S E T H:
WHEREAS, Citibank, N.A. (the "Adviser") has been retained by the Trust to
act as investment adviser to the Trust with respect to the series of the Trust
designated as Small Cap Value Portfolio (the "Portfolio"), and
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"), and
WHEREAS, the Adviser has requested that the Trust engage the Subadviser
to provide certain investment advisory services for the Portfolio, and the
Subadviser is willing to provide such investment advisory services for the
Portfolio on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Appointment of the Subadviser. In accordance with and subject to the
Management Agreement between the Trust and the Adviser (the "Management
Agreement"), the Trust hereby appoints the Subadviser to act as subadviser with
respect to the Portfolio for the period and on the terms set forth in this
Agreement. The Subadviser accepts such appointment and agrees to manage the
Portfolio assets as are allocated to it by the Adviser for the compensation
provided by this Agreement.
2. Duties of the Subadviser. The Subadviser shall manage the Portfolio
assets as are allocated to it by the Adviser, except that the Subadviser shall
not be responsible for managing cash. Notwithstanding any provision of this
<PAGE>
Agreement, the Adviser shall retain all rights and ultimate responsibilities to
supervise and, in its discretion, conduct investment advisory activities
relating to the Trust. The Subadviser shall determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the assets
of the Portfolio allocated by the Adviser to the Subadviser shall be held
uninvested, subject always to the restrictions of the Trust's Declaration of
Trust, dated December 14, 1995, and By-laws, as each may be amended from time
to time (respectively, the "Declaration" and the "By-Laws"), the provisions of
the 1940 Act, the then-current Registration Statement of the Trust with respect
to the Portfolio, it being understood that the Subadviser shall be responsible
for compliance with any restrictions imposed in writing by the Adviser from
time to time in order to facilitate compliance with the above-mentioned
restrictions and such other restrictions as the Adviser may determine. Further,
the Adviser or the Trustees of the Trust may at any time, upon written notice
to the Subadviser, suspend or restrict the right of the Subadviser to determine
what securities shall be purchased or sold on behalf of the Portfolio and what
portion, if any, of the assets of the Portfolio allocated by the Adviser to the
Subadviser shall be held uninvested. The Subadviser shall also, as requested,
make recommendations to the Adviser as to the manner in which proxies, voting
rights, rights to consent to corporate action and any other rights pertaining
to the Portfolio's portfolio securities shall be exercised. However, in no
event shall the Subadviser have the power to exercise proxies or voting rights
or be responsible for record-keeping relating to such items. Should the Board
of Trustees of the Trust or the Adviser at any time, however, make any definite
determination as to investment policy applicable to the Portfolio and notify
the Subadviser thereof in writing, the Subadviser shall be bound by such
determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked.
The Subadviser shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
securities for the Portfolio's account with the brokers or dealers selected by
it, and to that end the Subadviser is authorized as the agent of the Trust to
give instructions to the custodian and any subcustodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
The Subadviser will advise the Adviser on the same day it gives any such
instructions. In connection with the selection of such brokers or dealers and
the placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
<PAGE>
the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Subadviser or its affiliates exercise investment discretion. The
Subadviser is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Subadviser and
its affiliates have with respect to accounts over which they exercise
investment discretion. In making purchases or sales of securities or other
property for the account of the Portfolio, the Subadviser may deal with
affiliated brokers and/or dealers as defined by the 1940 Act and to the extent
such actions are permitted by the 1940 Act. The Board of Trustees of the Trust,
in its discretion, may instruct the Subadviser to effect all or a portion of
its securities transactions with one or more brokers and/or dealers selected by
the Board of Trustees, if it determines that the use of such brokers and/or
dealers is in the best interest of the Trust. The Subadviser shall not be
responsible for and shall be held harmless with respect to any execution costs
incurred by the Trust relating to securities transactions conducted with
brokers and/or dealers in accordance with instructions given to the Subadviser
by the Trust's Board of Trustees. In particular, the Trust acknowledges that,
to the extent the Subadviser is directed to use a specific broker and/or
dealer, it may not be able to obtain best execution on all trades executed
through that broker and/or dealer.
Nothing herein shall preclude the "bunching" of orders for the sale or
purchase of securities in the Portfolio with other accounts managed by the
Subadviser. With respect to the allocation of trades, purchase or sale orders
executed contemporaneously shall be allocated in a manner it deems equitable
among the accounts involved and at a price which is approximately averaged.
However, the Subadviser or its affiliates may, based upon their trading
strategies or their accounts' investment objectives or investment restrictions,
restrict to certain accounts purchases and sales of securities acquired in
initial public offerings, including those that trade or are expected to trade
at a premium in the secondary market.
3. Allocation of Charges and Expenses. The Subadviser shall furnish at
its own expense all necessary services, facilities and personnel in connection
<PAGE>
with its responsibilities under Section 2 above. Except as provided in the
foregoing sentence, it is understood that the Trust will pay from the assets of
the Portfolio all of its own expenses allocable to the Portfolio including,
without limitation, organization costs of the Portfolio; compensation of
Trustees who are not "interested persons" of the Trust; governmental fees;
interest charges; loan commitment fees; taxes; membership dues in industry
associations allocable to the Trust; fees and expenses of independent auditors,
legal counsel and any transfer agent, distributor, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming beneficial
interests and servicing investor accounts; expenses of preparing, typesetting,
printing and mailing investor reports, notices, proxy statements and reports to
governmental officers and commissions and to investors in the Portfolio;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Portfolio (including but not limited to the fees of independent
pricing services); expenses of meetings of the Portfolio's investors; expenses
relating to the issuance of beneficial interests in the Portfolio; and such
non-recurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Portfolio
may be a party and the legal obligation which the Trust may have to indemnify
its Trustees and officers with respect thereto.
4. Compensation of the Subadviser. For the services to be rendered by the
Subadviser hereunder, the Trust shall pay to the Subadviser from the assets of
the Portfolio an investment subadvisory fee, accrued daily and paid monthly, at
an annual rate equal to the percentages specified below of the aggregate assets
of the Portfolio allocated to the Subadviser:
0.55% on the first $250 million; and
0.50% on remaining assets.
If the Subadviser serves as investment subadviser for less than the whole
of any period specified in this Section 4, the compensation to the Subadviser
shall be prorated.
5. Covenants of the Subadviser. The Subadviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
<PAGE>
securities or other property for the account of the Portfolio, except as
permitted by the 1940 Act, will not take a long or short position in beneficial
interests of the Portfolio except as permitted by the Declaration, and will
comply with all other provisions of the Declaration and By-Laws and the
then-current Registration Statement applicable to the Portfolio relative to the
Subadviser and its directors and officers.
6. Representations Regarding the Subadviser. Neither the Trust nor its
employees are authorized to make any representations concerning the Subadviser
without its prior written consent, except those contained in the then-current
prospectus and statement of additional information of the Trust or the
Portfolio. Any materials which contain the name "Franklin" will be subject to
review and approval by the Subadviser prior to their use, such approval not to
be unreasonably withheld.
7. Limitation of Liability of the Subadviser. The Subadviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Portfolio, except for willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder. As used in this Section 6,
the term "Subadviser" shall include directors, officers and employees of the
Subadviser as well as the Subadviser itself. The Adviser is expressly made a
third party beneficiary of this Agreement, and may enforce any obligations of
the Subadviser under this Agreement and recover directly from the Subadviser
for any liability the Subadviser may have hereunder.
8. Indemnification. The Trust and the Adviser agree to indemnify and hold
harmless the Subadviser against any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees) arising out of or
based upon any untrue statement or alleged untrue statement of any material
fact contained in the registration statement, prospectus or statement of
additional information for the Trust or contained in the sales literature or
other promotional material for the Trust (or any statement or supplement to any
of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading provided that this
agreement to indemnify shall not apply as to the Subadviser if such statement
or omission or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished to the Trust or the
Adviser by or on behalf of the Subadviser for use in the registration
<PAGE>
statement, prospectus or statement of additional information for the Portfolio
or sales literature or other promotional material (or any amendment or
supplement) or otherwise for use in connection with the sale of shares of the
Trust.
The Subadviser agrees to indemnify and hold harmless the Trust and the
Adviser against any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees) arising out of or based upon any untrue
statement or alleged untrue statement of any material fact contained in the
registration statement for the Trust or contained in the sales literature or
other promotional material for the Trust (or any statement or supplement to any
of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, provided that this
agreement to indemnify shall apply as to the Trust and/or the Adviser only if
such statement or omission or such alleged statement or omission was made in
reasonable reliance upon and in conformity with information furnished to the
Trust or the Adviser by or on behalf of the Subadviser for use in the
registration statement for the Portfolio or sales literature or other
promotional material (or any amendment or supplement) or otherwise for use in
connection with the sale of beneficial interests in the Trust.
9. Activities of the Subadviser. The services of the Subadviser to the
Portfolio are not to be deemed to be exclusive, the Subadviser being free to
render investment advisory and/or other services to others, including accounts
or investment management companies with similar or identical investment
objectives to the Portfolio. The Subadviser may give advice and take action
with respect to any of its other clients or for its own account which may
differ from the timing or nature of action taken by the Subadviser with respect
to the Portfolio. Nothing in this Sub-Management Agreement shall impose upon
the Subadviser any obligation to purchase or sell or to recommend for purchase
or sale, with respect to the Portfolio, any security which the Subadviser, or
its shareholders, directors, officers, employees or affiliates may purchase or
sell for its or their own account(s) or for the account of any other client. It
is understood that Trustees, officers, and investors of the Trust or the
Adviser are or may be or may become interested in the Subadviser, as directors,
officers, employees, or otherwise and that directors, officers, and employees
of the Subadviser are or may become similarly interested in the Trust or the
Adviser and that the Subadviser may be or may become interested in the Trust as
an investor or otherwise.
<PAGE>
10. Duration, Termination and Amendments of this Agreement. This
Agreement shall become effective as of the day and year first above written,
and shall govern the relations between the parties hereto thereafter and shall
remain in force until May 9, 1999, on which date it will terminate unless its
continuance after May 9, 1999 is "specifically approved at least annually" (a)
by the vote of a majority of the Trustees of the Trust who are not "interested
persons" of the Trust or of the Adviser or of the Subadviser at a meeting
specifically called for the purpose of voting on such approval, and (b) by the
Board of Trustees of the Trust or by "vote of a majority of the outstanding
voting securities" of the Portfolio.
This Agreement may be terminated at any time without the payment of any
penalty by (i) the Trustees, (ii) the "vote of a majority of the outstanding
voting securities" of the Portfolio, or (iii) the Adviser, in each case on not
more than 60 days' nor less than 30 days' written notice to the other party.
This Agreement may be terminated at any time without the payment of any penalty
by the Subadviser on not less than 90 days' written notice to the Adviser. This
Agreement shall automatically terminate in the event of its "assignment."
This Agreement constitutes the entire agreement between the parties and
may be amended only if such amendment is approved by the Subadviser and the
"vote of a majority of the outstanding voting securities" of the Portfolio
(except for any such amendment as may be effected in the absence of such
approval without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Portfolio; that any
liability of the Trust under this Agreement, or in connection with the
transactions contemplated herein, shall be discharged only out of the assets of
the Portfolio; and that no other series of the Trust shall be liable with
respect to this Agreement or in connection with the transactions contemplated
herein.
<PAGE>
The undersigned officer of the Trust has executed this Agreement not
individually but in his capacity as an officer of the Trust under the
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees, officers or holders of beneficial interests in the Trust
individually.
11. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts provided, however, that nothing herein will be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940 or
any rules or regulations of the Securities and Exchange Commission thereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
ASSET ALLOCATION FRANKLIN ADVISORY
PORTFOLIOS SERVICES, INC.
on behalf of Small Cap
Value Portfolio
By: Susan Jakuboski By: William J. Lippman
Title: Assistant Treasurer Title: President
The foregoing is acknowledged:
Citibank, N.A.
By: Lawrence P. Keblusek
Title: U.S. CIO
<PAGE>
SUB-MANAGEMENT AGREEMENT
ASSET ALLOCATION PORTFOLIOS
International Portfolio
SUB-MANAGEMENT AGREEMENT, dated November 1, 1997, by and between Asset
Allocation Portfolios, a New York trust (the "Trust"), and Hotchkis and Wiley,
a division of the Capital Management Group of Merrill Lynch Asset Management,
L.P. (the "Subadviser").
W I T N E S S E T H:
WHEREAS, Citibank, N.A. (the "Manager") has been retained by the Trust to
act as investment adviser to the Trust with respect to the series of the Trust
designated as International Portfolio (the "Portfolio"), and
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"), and
WHEREAS, the Manager has requested that the Trust engage the Subadviser
to provide certain investment advisory services for the Portfolio, and the
Subadviser is willing to provide such investment advisory services for the
Portfolio on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Appointment of the Subadviser. In accordance with and subject to the
Management Agreement between the Trust and the Manager (the "Management
Agreement"), the Trust hereby appoints the Subadviser to act as subadviser with
respect to the Portfolio for the period and on the terms set forth in this
Agreement. The Subadviser accepts such appointment and agrees to provide an
investment program with respect to the Portfolio for the compensation provided
by this Agreement.
<PAGE>
2. Duties of the Subadviser. The Subadviser shall provide the Portfolio
and the Manager with such investment advice and supervision as the Manager may
from time to time consider necessary for the proper supervision of such portion
of the Portfolio's investment assets as the Manager may designate from time to
time. Notwithstanding any provision of this Agreement, the Manager shall retain
all rights and ultimate responsibilities to supervise and, in its discretion,
conduct investment advisory activities relating to the Trust. The Subadviser
shall furnish continuously an investment program and shall determine from time
to time what securities shall be purchased, sold or exchanged and what portion
of the assets of the Portfolio allocated by the Manager to the Subadviser shall
be held uninvested, subject always to the restrictions of the Trust's
Declaration of Trust, dated December 14, 1995, and By-laws, as each may be
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
the provisions of the 1940 Act, the then-current Registration Statement of the
Trust with respect to the Portfolio, and subject, further, to the Subadviser
notifying the Manager in advance of the Subadviser's intention to purchase any
securities except insofar as the requirement for such notification may be
waived or limited by the Manager, it being understood that the Subadviser shall
be responsible for compliance with any restrictions imposed in writing by the
Manager from time to time in order to facilitate compliance with the
above-mentioned restrictions and such other restrictions as the Manager may
determine. Further, the Manager or the Trustees of the Trust may at any time,
upon written notice to the Subadviser, suspend or restrict the right of the
Subadviser to determine what securities shall be purchased or sold on behalf of
the Portfolio and what portion, if any, of the assets of the Portfolio
allocated by the Manager to the Subadviser shall be held uninvested. The
Subadviser shall also, as requested, make recommendations to the Manager as to
the manner in which proxies, voting rights, rights to consent to corporate
action and any other rights pertaining to the Portfolio's portfolio securities
shall be exercised. Should the Board of Trustees of the Trust or the Manager at
any time, however, make any definite determination as to investment policy
applicable to the Portfolio and notify the Subadviser thereof in writing, the
Subadviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked.
The Subadviser shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
securities for the Portfolio's account with the brokers or dealers selected by
<PAGE>
it, and to that end the Subadviser is authorized as the agent of the Trust to
give instructions to the custodian and any subcustodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
The Subadviser will advise the Manager on the same day it gives any such
instructions. In connection with the selection of such brokers or dealers and
the placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Subadviser or its affiliates exercise investment discretion. The
Subadviser is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Subadviser and
its affiliates have with respect to accounts over which they exercise
investment discretion. In making purchases or sales of securities or other
property for the account of the Portfolio, the Subadviser may deal with itself
or with the Trustees of the Trust or the Trust's underwriter or distributor, to
the extent such actions are permitted by the 1940 Act. The Board of Trustees of
the Trust, in its discretion, may instruct the Subadviser to effect all or a
portion of its securities transactions with one or more brokers and/or dealers
selected by the Board of Trustees, if it determines that the use of such
brokers and/or dealers is in the best interest of the Trust.
3. Allocation of Charges and Expenses. The Subadviser shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 2 above. Except as provided in the
foregoing sentence, it is understood that the Trust will pay from the assets of
the Portfolio all of its own expenses allocable to the Portfolio including,
without limitation, organization costs of the Portfolio; compensation of
Trustees who are not "interested persons" of the Trust; governmental fees;
interest charges; loan commitment fees; taxes; membership dues in industry
associations allocable to the Trust; fees and expenses of independent auditors,
legal counsel and any transfer agent, distributor, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming beneficial
interests and servicing investor accounts; expenses of preparing, typesetting,
printing and mailing investor reports, notices, proxy statements and reports to
governmental officers and commissions and to investors in the Portfolio;
<PAGE>
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Portfolio (including but not limited to the fees of independent
pricing services); expenses of meetings of the Portfolio's investors; expenses
relating to the issuance of beneficial interests in the Portfolio; and such
non-recurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Portfolio
may be a party and the legal obligation which the Trust may have to indemnify
its Trustees and officers with respect thereto.
4. Compensation of the Subadviser. For the services to be rendered by the
Subadviser hereunder, the Trust shall pay to the Subadviser from the assets of
the Portfolio an investment subadvisory fee, accrued daily and paid monthly, at
an annual rate equal to the percentages specified below of the aggregate assets
of the Portfolio allocated to the Subadviser:
0.60% on the first $10 million;
0.55% on the next $40 million;
0.45% on the next $100 million;
0.35% on the next $150 million; and
0.30% on remaining assets.
If the Subadviser serves as investment subadviser for less than the whole
of any period specified in this Section 4, the compensation to the Subadviser
shall be prorated.
If in any fiscal year the aggregate expenses of the Portfolio and any
fund investing its assets therein (including fees pursuant to the Management
Agreement, but excluding interest, taxes, brokerage and, with the prior written
consent of the necessary state securities commissions, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over the
Portfolio and any fund investing its assets therein, the Trust may deduct from
the fees to be paid hereunder, or the Subadviser will bear such excess expense
on a pro-rata basis with the Manager, in the proportion that the subadvisory
fee payable pursuant to this Agreement bears to the fee payable to the Manager
pursuant to the Management Agreement, to the extent required by state law. The
<PAGE>
Subadviser's obligation pursuant hereto will be limited to the amount of its
fees hereunder. Such deduction or payment, if any, will be estimated daily, and
reconciled and effected or paid, as the case may be, on a monthly basis.
5. Covenants of the Subadviser. The Subadviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of the Portfolio, except as
permitted by the 1940 Act, will not take a long or short position in beneficial
interests of the Portfolio except as permitted by the Declaration, and will
comply with all other provisions of the Declaration and By-Laws and the
then-current Registration Statement applicable to the Portfolio relative to the
Subadviser and its directors and officers.
6. Limitation of Liability of the Subadviser. The Subadviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Portfolio, except for willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder. As used in this Section 6,
the term "Subadviser" shall include directors, officers and employees of the
Subadviser as well as the Subadviser itself. The Manager is expressly made a
third party beneficiary of this Agreement, and may enforce any obligations of
the Subadviser under this Agreement and recover directly from the Subadviser
for any liability the Subadviser may have hereunder.
7. Activities of the Subadviser. The services of the Subadviser to the
Portfolio are not to be deemed to be exclusive, the Subadviser being free to
render investment advisory and/or other services to others, including accounts
or investment management companies with similar or identical investment
objectives to the Portfolio. It is understood that Trustees, officers, and
investors of the Trust or the Manager are or may be or may become interested in
the Subadviser, as directors, officers, employees, or otherwise and that
directors, officers, and employees of the Subadviser are or may become
similarly interested in the Trust or the Manager and that the Subadviser may be
or may become interested in the Trust as an investor or otherwise.
8. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written, and shall
govern the relations between the parties hereto thereafter and shall remain in
force until May 9, 1999, on which date it will terminate unless its continuance
<PAGE>
after May 9, 1999 is "specifically approved at least annually" (a) by the vote
of a majority of the Trustees of the Trust who are not "interested persons" of
the Trust or of the Adviser or of the Subadviser at a meeting specifically
called for the purpose of voting on such approval, and (b) by the Board of
Trustees of the Trust or by "vote of a majority of the outstanding voting
securities" of the Portfolio.
This Agreement may be terminated at any time without the payment of any
penalty by (i) the Trustees, (ii) the "vote of a majority of the outstanding
voting securities" of the Portfolio, or (iii) the Manager, in each case on not
more than 60 days' nor less than 30 days' written notice to the other party.
This Agreement may be terminated at any time without the payment of any penalty
by the Subadviser on not less than 90 days' written notice to the Manager. This
Agreement shall automatically terminate in the event of its "assignment."
This Agreement constitutes the entire agreement between the parties and
may be amended only if such amendment is approved by the Subadviser and the
"vote of a majority of the outstanding voting securities" of the Portfolio
(except for any such amendment as may be effected in the absence of such
approval without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Portfolio; that any
liability of the Trust under this Agreement, or in connection with the
transactions contemplated herein, shall be discharged only out of the assets of
the Portfolio; and that no other series of the Trust shall be liable with
respect to this Agreement or in connection with the transactions contemplated
herein.
The undersigned officer of the Trust has executed this Agreement not
individually but in his capacity as an officer of the Trust under the
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees, officers or holders of beneficial interests in the Trust
individually.
<PAGE>
9. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts provided, however, that nothing herein will be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940 or
any rules or regulations of the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
ASSET ALLOCATION HOTCHKIS AND WILEY,
PORTFOLIOS a division of the Capital Management
on behalf of International Group of Merrill Lynch Asset
Portfolio Management, L.P.
By: Susan Jakuboski By: Nancy D. Celick
Title: Assistant Secretary Title: CFO
The foregoing is acknowledged:
Citibank, N.A.
By: Lawrence P. Keblusek
Title: U.S. CIO
<PAGE>
SUB-MANAGEMENT AGREEMENT
ASSET ALLOCATION PORTFOLIOS
Foreign Bond Portfolio
SUB-MANAGEMENT AGREEMENT, dated November 1, 1997, by and between Asset
Allocation Portfolios (the "Trust"), and Pacific Investment Management Company,
a Delaware general partnership (the "Subadviser").
W I T N E S S E T H:
WHEREAS, Citibank, N.A. (the "Adviser") has been retained by the Trust to
act as investment adviser to the Trust with respect to the series of the Trust
designated as Foreign Bond Portfolio (the "Portfolio"), and
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"), and
WHEREAS, the Adviser has requested that the Trust engage the Subadviser
to provide certain investment advisory services for the Portfolio, and the
Subadviser is willing to provide such investment advisory services for the
Portfolio on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Appointment of the Subadviser. In accordance with and subject to the
Management Agreement between the Trust and the Adviser (the "Management
Agreement"), the Trust hereby appoints the Subadviser to act as subadviser with
respect to the Portfolio for the period and on the terms set forth in this
Agreement. The Subadviser accepts such appointment and agrees to provide an
investment program with respect to the Portfolio for the compensation provided
by this Agreement.
2. Duties of the Subadviser. The Subadviser shall provide the Portfolio
and the Adviser with such investment advice and supervision as the Adviser may
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from time to time consider necessary for the proper supervision of such portion
of the Portfolio's investment assets as the Adviser may designate from time to
time. Notwithstanding any provision of this Agreement, the Adviser shall retain
all rights and ultimate responsibilities to supervise and, in its discretion,
conduct investment advisory activities relating to the Trust. The Subadviser
shall furnish continuously an investment program and shall determine from time
to time what securities shall be purchased, sold or exchanged and what portion
of the assets of the Portfolio allocated by the Adviser to the Subadviser shall
be held uninvested, subject always to the restrictions of the Trust's
Declaration of Trust, dated December 14, 1995, and By-laws, as each may be
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
the provisions of the 1940 Act, the then-current Registration Statement of the
Trust with respect to the Portfolio, it being understood that the Subadviser
shall be responsible for compliance after a reasonable implementation period
with any restrictions imposed in writing by the Adviser from time to time in
order to facilitate compliance with the above-mentioned restrictions and such
other restrictions as the Adviser may determine. Further, the Adviser or the
Trustees of the Trust may at any time, upon written notice to the Subadviser,
suspend or restrict the right of the Subadviser to determine what securities
shall be purchased or sold on behalf of the Portfolio and what portion, if any,
of the assets of the Portfolio allocated by the Adviser to the Subadviser shall
be held uninvested. The Subadviser shall also, as requested, make
recommendations to the Adviser as to the manner in which proxies, voting
rights, rights to consent to corporate action and any other rights pertaining
to the Portfolio's portfolio securities shall be exercised. Should the Board of
Trustees of the Trust or the Adviser at any time, however, make any definite
determination as to investment policy applicable to the Portfolio and notify
the Subadviser thereof in writing, the Subadviser shall be bound by such
determination, following a reasonable implementation period, for the period, if
any, specified in such notice or until similarly notified that such
determination has been revoked.
The Subadviser shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
securities for the Portfolio's account with the brokers or dealers selected by
it, and to that end the Subadviser is authorized as the agent of the Trust to
give instructions to the custodian and any subcustodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
The Subadviser will advise the Adviser on the same day it gives any such
instructions. In connection with the selection of such brokers or dealers and
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the placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Subadviser or its affiliates exercise investment discretion. The
Subadviser is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Subadviser and
its affiliates have with respect to accounts over which they exercise
investment discretion. In making purchases or sales of securities or other
property for the account of the Portfolio, the Subadviser may deal with itself
or with the Trustees of the Trust or the Trust's underwriter or distributor to
the extent such actions are permitted by the 1940 Act. The Board of Trustees of
the Trust, in its discretion, may instruct the Subadviser to effect all or a
portion of its securities transactions with one or more brokers and/or dealers
selected by the Board of Trustees, if it determines that the use of such
brokers and/or dealers is in the best interest of the Trust. The Subadviser
shall not be liable for any actions or omissions of brokers and/or dealers
selected by the Board of Trustees or the Adviser.
3. Allocation of Charges and Expenses. The Subadviser shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 2 above. Except as provided in the
foregoing sentence, it is understood that the Trust will pay from the assets of
the Portfolio all of its own expenses allocable to the Portfolio including,
without limitation, organization costs of the Portfolio; compensation of
Trustees who are not "interested persons" of the Trust; governmental fees;
interest charges; loan commitment fees; taxes; membership dues in industry
associations allocable to the Trust; fees and expenses of independent auditors,
legal counsel and any transfer agent, distributor, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming beneficial
interests and servicing investor accounts; expenses of preparing, typesetting,
printing and mailing investor reports, notices, proxy statements and reports to
governmental officers and commissions and to investors in the Portfolio;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
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services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Portfolio (including but not limited to the fees of independent
pricing services); expenses of meetings of the Portfolio's investors; expenses
relating to the issuance of beneficial interests in the Portfolio; and such
non-recurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Portfolio
may be a party and the legal obligation which the Trust may have to indemnify
its Trustees and officers, its Subadvisers and their employees with respect
thereto.
4. Compensation of the Subadviser. For the services to be rendered by the
Subadviser hereunder, the Trust shall pay to the Subadviser from the assets of
the Portfolio an investment subadvisory fee, accrued daily and paid monthly, at
an annual rate equal to the percentages specified below of the aggregate assets
of the Portfolio allocated to the Subadviser:
0.35% on the first $200 million;
0.30% on remaining assets
If the Subadviser serves as investment subadviser for less than the whole
of any period specified in this Section 4, the compensation to the Subadviser
shall be prorated.
5. Covenants of the Subadviser. The Subadviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of the Portfolio, except as
permitted by the 1940 Act, will not take a long or short position in beneficial
interests of the Portfolio except as permitted by the Declaration, and will
comply with all other provisions of the Declaration and By-Laws and the
then-current Registration Statement applicable to the Portfolio relative to the
Subadviser and its partners, directors and officers.
6. Limitation of Liability of the Subadviser. The Subadviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Portfolio including, without limitation, acts or omissions
of any brokers, dealers and custodians, except for willful misfeasance, bad
faith or gross negligence in the performance of Subadviser's duties, or by
reason of reckless disregard of its obligations and duties hereunder. As used
in this Section 6, the term "Subadviser" shall include directors, officers,
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partners and employees of the Subadviser as well as the Subadviser itself. The
Adviser is expressly made a third party beneficiary of this Agreement, and may
enforce any obligations of the Subadviser under this Agreement and recover
directly from the Subadviser for any liability the Subadviser may have
hereunder.
7. Activities of the Subadviser. The services of the Subadviser to the
Portfolio are not to be deemed to be exclusive, the Subadviser being free to
render investment advisory and/or other services to others, including accounts
or investment management companies with similar or identical investment
objectives to the Portfolio. It is understood that Trustees, officers, and
investors of the Trust or the Adviser are or may be or may become interested in
the Subadviser, as directors, officers, partners, employees, or otherwise and
that directors, officers, partners and employees of the Subadviser are or may
become similarly interested in the Trust or the Adviser and that the Subadviser
may be or may become interested in the Trust as an investor or otherwise.
8. Aggregation of Orders. The Subadviser may aggregate sales and purchase
orders of securities with similar orders being made simultaneously for other
accounts managed by the Subadviser or with accounts of the affiliates of the
Subadviser, if in the Subadviser's reasonable judgment such aggregation shall
result in an overall economic benefit to the Portfolio, taking into
consideration the advantageous selling or purchase price, brokerage commission
and other expenses. In accounting for such aggregated order price, commission
and other expenses shall be averaged on a per bond or share basis daily.
Adviser acknowledges that the determination of such economic benefit to the
Portfolio by the Subadviser is subjective and represents the Subadviser's
evaluation that the Portfolio is benefited by relatively better purchase or
sales prices, lower commission expenses and beneficial timing of transactions
or a combination of these and other factors.
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9. All notices provided for in this Agreement shall be sent to:
If to the Subadviser:
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, CA 92660
Attention:James Muzzy and John Loftus
If to the Adviser:
Citibank Global Asset Management
Citibank, N.A.
153 E. 53rd Street, 6th Floor, Zone 6
New York, New York 10043
Attention:Andrew Shoup
If to the Trust:
Signature Financial Services, Inc.
6 St. James Avenue, 9th Floor
Boston, Massachusetts 02116
Attention:Philip Coolidge
10. Special Termination Rights. Notwithstanding anything in this
Agreement to the contrary, the Trust may terminate this Agreement without
penalty within five (5) days of its execution of this Agreement by giving
written notice to such effect to the Subadviser within such five (5) day
period.
11. Delivery of Part II of Form ADV. Concurrently with execution of this
Agreement, the Subadviser is delivering to the Trust a copy of Part II of its
Form ADV, as amended, on file with the Securities and Exchange Commission. The
Trust hereby acknowledges receipt of such copy.
12. Delivery of CFTC Disclosure Document. Upon the solicitation of the
Trust, the Subadviser delivered to the Trust a copy of its Disclosure Document,
dated July 3, 1997, on file with the Commodity Futures Trading Commission. The
Trust hereby acknowledges receipt of such copy.
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13. Duration, Termination and Amendments of this Agreement. This
Agreement shall become effective as of the day and year first above written,
and shall govern the relations between the parties hereto thereafter and shall
remain in force until May 9, 1999, on which date it will terminate unless its
continuance after May 9, 1999 is "specifically approved at least annually" (a)
by the vote of a majority of the Trustees of the Trust who are not "interested
persons" of the Trust or of the Adviser or of the Subadviser at a meeting
specifically called for the purpose of voting on such approval, and (b) by the
Board of Trustees of the Trust or by "vote of a majority of the outstanding
voting securities" of the Portfolio.
This Agreement may be terminated at any time without the payment of any
penalty by (i) the Trustees, (ii) the "vote of a majority of the outstanding
voting securities" of the Portfolio, or (iii) the Adviser, in each case on not
more than 60 days' nor less than 30 days' written notice to the other party.
This Agreement may be terminated at any time without the payment of any penalty
by the Subadviser on not less than 90 days' written notice to the Adviser. This
Agreement shall automatically terminate in the event of its "assignment."
This Agreement constitutes the entire agreement between the parties and
may be amended only if such amendment is approved by the Subadviser and the
"vote of a majority of the outstanding voting securities" of the Portfolio
(except for any such amendment as may be effected in the absence of such
approval without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Portfolio; that any
liability of the Trust under this Agreement, or in connection with the
transactions contemplated herein, shall be discharged only out of the assets of
the Portfolio; and that no other series of the Trust shall be liable with
respect to this Agreement or in connection with the transactions contemplated
herein.
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The undersigned officer of the Trust has executed this Agreement not
individually but in his capacity as an officer of the Trust under the
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees, officers or holders of beneficial interests in the Trust
individually.
14. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts provided, however, that nothing herein will be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940 or
any rules or regulations of the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
ASSET ALLOCATION PACIFIC INVESTMENT
PORTFOLIOS MANAGEMENT COMPANY
on behalf of Foreign By: PIMCO Management Inc.,
Bond Portfolio a general partner
By: Susan Jakuboski By: James F. Muzzy
Title: Assistant Secretary Title: Managing Director
The foregoing is acknowledged:
Citibank, N.A.
By: Lawrence P. Keblusek
Title: U.S. CIO
Exhibit 6(b)
Asset Allocation Portfolios
Elizabethan Square, 2nd Floor
George Town, Grand Cayman, BWI
November 1, 1997
The Landmark Funds Broker-Dealer Services, Inc.
c/o Signature Financial Group (Cayman), Ltd.
Elizabethan Square, 2nd Floor
George Town, Grand Cayman, BWI
Re: Asset Allocation Portfolios - Placement
Agency Agreement
Ladies and Gentlemen:
This letter serves as notice that Large Cap Value Portfolio, Small Cap
Value Portfolio, Intermediate Income Portfolio, Short-Term Portfolio,
International Portfolio and Foreign Bond Portfolio (collectively the
"Portfolios") are added to the list of series of Asset Allocation Portfolios
(the "Trust") to which The Landmark Funds Broker-Dealer Services, Inc.
("LFBDS") renders services as placement agent pursuant to the terms of the
Placement Agency Agreement dated as of February 9, 1996 (the "Agreement")
between the Trust and LFBDS.
Please sign below to acknowledge your receipt of this notice adding the
Portfolios as beneficiaries under the Agreement.
ASSET ALLOCATION PORTFOLIOS
By: Susan Jakuboski
Title: Assistant Secretary
Acknowledgment:
THE LANDMARK FUNDS BROKER-DEALER SERVICES, INC.
By: Philip Coolidge
Title: CEO
Exhibit 8(b)
Asset Allocation Portfolios
Elizabethan Square
George Town, Grand Cayman BWI
September 26, 1997
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: Asset Allocation Portfolios - Custodian Contract
Ladies and Gentlemen:
Pursuant to Section 17 of the Custodian Contract dated as of June 17, 1996
(the "Contract"), between Asset Allocation Portfolios (the "Trust") and State
Street Bank and Trust Company (the "Custodian"), we hereby request that Large
Cap Value Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio and Short-Term Portfolio
(collectively, the "Portfolios") be added to the list of series of the Trust to
which the Custodian renders services as custodian under the terms of the
Contract.
Please sign below to evidence your agreement to render such services as
custodian on behalf of the Portfolios and to add the Portfolios as
beneficiaries under the Contract.
ASSET ALLOCATION PORTFOLIOS
By: Susan Jakuboski
Title: Assistant Secretary
Agreed:
STATE STREET BANK AND TRUST COMPANY
By: Ronald E. Logue
Title: Vice President
Exhibit 9(b)
Asset Allocation Portfolios
Elizabethan Square
George Town, Grand Cayman BWI
September 26, 1997
State Street Cayman Trust Company, Ltd.
P.O. Box 2508 GT
Grand Cayman, Cayman Islands
Attn.: Jacqueline Henning
Re: Asset Allocation Portfolios - Accounting Services
Agreement
Ladies and Gentlemen:
Pursuant to Section 7.1 of the Accounting Services Agreement dated as of
June 17, 1996 (the "Agreement"), between Asset Allocation Portfolios (the
"Trust") and State Street Cayman Trust Company, Ltd. (the "Accounting Agent"),
we hereby request that Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio
and Short-Term Portfolio (collectively, the "Portfolios") be added to the list
of series of the Trust to which the Accounting Agent renders services as
accounting agent under the terms of the Agreement.
Please sign below to evidence your agreement to render such services as
accounting agent on behalf of the Portfolios and to add the Portfolios as
beneficiaries under the Agreement.
ASSET ALLOCATION PORTFOLIOS
By: Susan Jakuboski
Title: Assistant Secretary
Agreed:
STATE STREET CAYMAN TRUST COMPANY, LTD.
By: Jacqueline Henning
Title: Managing Director
cc: State Street Fund Services Toronto Inc.
Exhibit 9(c)
SUB-ADMINISTRATIVE SERVICES AGREEMENT
SUB-ADMINISTRATIVE SERVICES AGREEMENT, dated as of October 31, 1997, by
and between SIGNATURE FINANCIAL GROUP (CAYMAN) LTD., a Cayman corporation (the
"Sub-Administrator"), and CITIBANK, N.A., a national banking association
("Citibank").
W I T N E S S E T H :
WHEREAS, Citibank has been retained by certain registered open-end
management investment companies under the Investment Company Act of 1940, as
amended (the "1940 Act"), as listed on Schedule A hereto (each individually a
"Trust" and collectively the "Trusts"), to provide administrative services to
its investment portfolios, as listed on Schedule A hereto (each individually a
"Fund" and collectively the "Funds"), pursuant to separate Management
Agreements (each a "Management Agreement"), and
WHEREAS, as permitted by Section 1 of each Management Agreement, Citibank
desires to subcontract some or all of the performance of its obligations
thereunder to Sub-Administrator, and Sub-Administrator desires to accept such
obligations; and
WHEREAS, Citibank wishes to engage Sub-Administrator to provided certain
administrative services on the terms and conditions hereinafter set forth, so
long as Citibank shall have found Sub-Administrator to be qualified to perform
the obligations sought to be subcontracted.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties as Sub-Administrator. Subject to the supervision and direction
of Citibank, Sub-Administrator will assist in supervising various aspects of
each Trust's administrative operations and undertakes to perform the following
specific services, from and after the effective date of this Agreement:
(a) To the extent requested by Citibank, furnish Trust secretarial
services;
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(b) To the extent requested by Citibank, furnish Trust treasury
services, including the review of financial data, tax and other
regulatory filings and audit requests;
(c) To the extent requested by Citibank, provide the services of certain
persons who may be appointed as officers or Trustees of the Trust by
the Trust's Board;
(d) To the extent requested by Citibank, participate in the preparation
of documents required for compliance by the Trust with applicable
laws and regulations, including registration statements,
prospectuses, semi-annual and annual reports to shareholders and
proxy statements;
(e) To the extent requested by Citibank, prepare agendas and supporting
documents for and minutes of meetings of the Trustees, Committees of
Trustees and shareholders;
(f) Maintain books and records of the Trust;
(g) To the extent requested by Citibank, provide advice and counsel to
the Trust with respect to regulatory matters, including monitoring
regulatory and legislative developments which may affect the Trust
and assisting the Trust in routine regulatory examinations or
investigations of the Trust, and working closely with outside
counsel to the Trust in connection with litigation in which the
Trust is involved;
(h) To the extent requested by Citibank, generally assist in all aspects
of the Trust's operations and provide general consulting services on
a day to day, as needed basis;
(i) In connection with the foregoing activities,
maintain office facilities (which may be in the
offices of Sub-Administrator or its corporate
affiliate); and
(j) In connection with the foregoing activities, furnishing clerical
services, and internal executive and administrative services,
stationery and office supplies.
Notwithstanding the foregoing, Sub-Administrator under this Agreement
shall not be deemed to have assumed any duties with respect to, and shall not
be responsible for, the management of a Trust, or the distribution of
beneficial interests in a Trust, nor shall Sub-Administrator be deemed to have
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assumed or have any responsibility with respect to functions specifically
assumed by any transfer agent or custodian of a Trust.
In performing all services under this Agreement, Sub-Administrator shall
(a) act in conformity with the Trust's charter documents and bylaws, the 1940
Act and other applicable laws, as the same may be amended from time to time,
(b) consult and coordinate with legal counsel for the Trust, as necessary or
appropriate, and (c) advise and report to the Trust and its legal counsel, as
necessary or appropriate, with respect to any material compliance or other
matters that come to its attention.
In performing its services under this Agreement, Sub-Administrator shall
cooperate and coordinate with Citibank as necessary and appropriate and shall
provide such information as is reasonably necessary or appropriate for Citibank
to perform its obligations to the Trust. Sub-Administrator shall perform its
obligations under this Agreement in a conscientious and diligent manner
consistent with prevailing industry standards.
2. Compensation of Sub-Administrator. For the services to be rendered and
the facilities to be provided by Sub-Administrator hereunder, Sub-Administrator
shall be paid an administrative fee as may from time to time be agreed to
between Citibank and Sub-Administrator.
3. Additional Terms and Conditions. The parties may amend this agreement
and include such other terms and conditions as may from time to time be agreed
to by both Citibank and Sub-Administrator.
4. Termination. This Agreement may be terminated by Citibank at any time,
in its entirety or as to one or more Funds, with or without cause. This
Agreement may be terminated by the Sub-Administrator, in its entirety or as to
one or more Funds, with or without cause, provided that Sub-Administrator has
notified Citibank of such termination in writing at least 90 days prior to the
effective date thereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunder duly authorized, all as of the day and year first above written.
SIGNATURE FINANCIAL
GROUP (CAYMAN) LTD. CITIBANK, N.A.
By: Susan Jakuboski By: Andrew B. Shoup
Title: Secretary Title: Vice President
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Schedule A
to Sub-Administrative Services Agreement
Between
Signature Financial Group (Cayman) Ltd.
and
Citibank, N.A.
Trust Series
The Premium Portfolios Equity Portfolio
Small Cap Equity Portfolio
Asset Allocation Portfolios Intermediate Income Portfolio
Short-Term Portfolio
Large Cap Value Portfolio
Small Cap Value Portfolio
International Portfolio
Foreign Bond Portfolio
