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497(c) File Nos. 333-15119 and 811-07893
PROSPECTUS
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May 1, 1997
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CITISELECT(SM) VIP FOLIO 200 CITISELECT(SM) VIP FOLIO 300 CITISELECT(SM) VIP FOLIO 400 CITISELECT(SM) VIP FOLIO 500
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CitiSelect(SM) VIP Folio 200, CitiSelect(SM) VIP Folio 300, CitiSelect(SM)
VIP Folio 400 and CitiSelect(SM) VIP Folio 500 are investment vehicles for
variable annuity contracts and variable life insurance policies offered by the
separate accounts ("Separate Accounts") of participating life insurance
companies ("Participating Insurance Companies").
The Funds are asset allocation funds that offer investors a convenient way
to own a professionally managed portfolio tailored to specific investment goals.
Each Fund is a total return fund that allocates its investments among three
primary classes of assets - equity, fixed income and money market securities.
Each Fund's asset mix is designed to offer a different level of potential return
within a corresponding level of risk. The Funds' investment objectives are
described below. There is, of course, no assurance that any Fund will achieve
its investment objective.
CitiSelect VIP Folio 200's objective is as high a total return over time as
is consistent with a primary emphasis on a combination of fixed income and money
market securities, and a secondary emphasis on equity securities.
CitiSelect VIP Folio 300's objective is as high a total return over time as
is consistent with a balanced emphasis on equity and fixed income securities.
CitiSelect VIP Folio 400's objective is as high a total return over time as
is consistent with a primary emphasis on equity securities, and a secondary
emphasis on fixed income securities.
CitiSelect VIP Folio 500's objective is as high a total return over time as
is consistent with a dominant emphasis on equity securities and a small
allocation to fixed income securities.
Citibank, N.A. is the investment manager for each of the Funds.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SHARES OF THE FUNDS 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, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
Shares of the Funds are not offered to the general public but may only be
purchased by the Separate Accounts of Participating Insurance Companies for the
purpose of funding variable annuity contracts and variable life insurance
policies.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated May 1, 1997 (and incorporated by reference in this Prospectus)
has been filed with the Securities and Exchange Commission. Copies of the
Statement of Additional Information may be obtained without charge, and further
inquiries about the Funds may be made, by contacting the Funds' distributor at
(617) 423-1679 or a Participating Insurance Company.
TABLE OF CONTENTS
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Condensed Financial Information ......................................... 2
Investment Information .................................................. 3
Certain Risk Considerations ............................................. 8
Valuation of Shares ..................................................... 9
Purchase and Redemption of Shares ....................................... 10
Dividends and Distributions ............................................. 11
Management .............................................................. 11
Tax Matters ............................................................. 14
Performance Information ................................................. 15
General Information ..................................................... 15
Appendix -- Permitted Investments
and Investment Practices .............................................. 17
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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CONDENSED FINANCIAL INFORMATION
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The following table provides condensed financial information about the
Funds for the periods indicated. This information is unaudited and should be
read in conjunction with the financial statements and notes thereto which are
incorporated by reference in the Statement of Additional Information.
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FINANCIAL HIGHLIGHTS (UNAUDITED)
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CITISELECT CITISELECT CITISELECT CITISELECT
VIP VIP VIP VIP
FOLIO 200+ FOLIO 300+ FOLIO 400+ FOLIO 500+
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NET ASSET VALUE, BEGINNING OF PERIOD ...................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
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INCOME FROM OPERATIONS:
Net investment income ..................................... 0.04 0.04 0.03 0.03
Net realized loss on investments .......................... (0.23) (0.29) (0.30) (0.32)
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Total from operations .................................... (0.19) (0.25) (0.27) (0.29)
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Net Asset Value, end of period ............................ $ 9.81 $ 9.75 $ 9.73 $ 9.71
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) ................. $11,141 $12,948 $12,533 $10,405
Ratio of expenses to average net assets ................... 0.95%* 0.95%* 1.25%* 1.25%*
Ratio of net investment income to average net assets ...... 3.63%* 3.24%* 2.42%* 1.97%*
Total return .............................................. (1.90)%** (2.50)%** (2.70)%** (2.90)%**
Note: If agents of the Funds had not voluntarily agreed to waive a portion of
their fees, and the sub-administrator not assumed expenses for the periods
indicated, the net investment income per share and the ratios would have been as
follows:
Net investment income per share ........................... $(0.01) $(0.01) $(0.01) $(0.02)
Ratios:
Expenses to average net assets ............................ 4.16%* 3.66%* 3.86%* 4.47%*
Net investment income to average net assets ............... 0.42%* 0.53%* (0.19)%* (1.25)%*
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+For the period February 10, 1997 (commencement of operations) to March 31, 1997.
*Annualized.
**Not annualized.
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INVESTMENT INFORMATION
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INVESTMENT OBJECTIVES:
Each Fund is a total return fund that allocates its investments among three
primary classes of assets - equity, fixed income and money market securities.
Each Fund's asset mix is designed to offer a different level of potential return
within a corresponding level of risk. The investment objective of each Fund is
as follows:
The investment objective of CITISELECT VIP FOLIO 200 is as high a total
return over time as is consistent with a primary emphasis on a combination of
fixed income and money market securities, and a secondary emphasis on equity
securities.
The investment objective of CITISELECT VIP FOLIO 300 is as high a total
return over time as is consistent with a balanced emphasis on equity and fixed
income securities.
The investment objective of CITISELECT VIP FOLIO 400 is as high a total
return over time as is consistent with a primary emphasis on equity securities,
and a secondary emphasis on fixed income securities.
The investment objective of CITISELECT VIP FOLIO 500 is as high a total
return over time as is consistent with a dominant emphasis on equity securities
and a small allocation to fixed income securities.
The investment objective of each Fund may be changed without approval by
that Fund's shareholders, but shareholders will be given written notice at least
30 days before any change is implemented. Of course, there can be no assurance
that any Fund will achieve its investment objective.
INVESTMENT POLICIES:
THE FUNDS
The Funds are designed for investors seeking to reduce the risks of
investing in a single asset or asset class and to cushion the volatility of
financial markets through broad diversification of portfolio holdings and the
allocation of their assets across several classes of assets. The Funds offer a
convenient way to own a diversified professionally managed portfolio tailored to
specific investment goals and expectations of risk and return. While time
horizon is a factor, it is not necessarily the determinative factor in choosing
to invest in one of the Funds. Certain investment goals may determine the
appropriate asset allocation and amount of risk that an investor seeks. See
"Investment Information" and "Risk Considerations."
CITISELECT VIP FOLIO 200 is expected to be the least volatile of the four
Funds and is designed for the investor who is seeking relatively lower risk
provided by substantial investments in fixed income and money market securities,
but who also seeks some capital growth. CITISELECT VIP FOLIO 300 is designed for
the investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment component to temper volatility. CITISELECT VIP FOLIO 400 and
CITISELECT VIP FOLIO 500 are designed for the investor willing and able to take
higher risks in the pursuit of long-term capital appreciation. CitiSelect VIP
Folio 500 is expected to be the most volatile of the four Funds, and is designed
for investors who can withstand greater market swings to seek potential
long-term rewards. CitiSelect VIP Folio 400 is designed for investors seeking
long-term rewards, but with less volatility.
INVESTMENT STRATEGY
Each Fund is a carefully selected and professionally managed diversified mix
of equity, fixed income and money market investments. As the Funds' Investment
Manager, Citibank allocates each Fund's assets among these three classes of
investments to seek to achieve certain risk and return objectives. In making
asset allocations, Citibank considers long-term performance and valuation
measures within and between asset classes and the effects of market and economic
variables on those relationships. It uses this information to determine the
overall mix of each Fund's assets among the three general asset classes. Each
Fund's allocation or asset mix is determined by Citibank to be an optimal
combination of stocks, bonds and money market instruments that reduces risk and
maximizes potential return for that Fund's distinct investment objective.
The Funds' asset allocations generally correlate to different levels of
investment risk and return. Equity securities typically have the potential to
outperform fixed income securities over the long term. Equity securities have
the greatest potential for growth of capital, yet are generally the most
volatile of the three asset types. Fixed income and money market securities
sometimes move in the opposite direction of equity securities and may provide
investment balance to a Fund. The risks of each asset class will vary.
Citibank expects that, in general, each Fund's assets will be allocated
among the equity, fixed income and money market asset classes as provided in the
following chart. However, cash flows of a Fund or changes in market valuations
could produce different results. Citibank will review each Fund's asset
allocation quarterly and expects, in general, to rebalance the Fund's
investments, if necessary, at that time. Rebalancing may be accomplished over a
period of time and may be limited by tax and regulatory requirements.
ASSET CLASS RANGE
FIXED MONEY
EQUITY INCOME MARKET
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CITISELECT VIP FOLIO 200 25-45% 35-55% 10-30%
CITISELECT VIP FOLIO 300 40-60% 35-55% 1-10%
CITISELECT VIP FOLIO 400 55-85% 15-35% 1-10%
CITISELECT VIP FOLIO 500 70-95% 5-20 1-10%
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Each asset class includes other investments described in Appendix A or
elsewhere in this Prospectus that are deemed related to the management of that
asset class. Percentage ranges shown for the equity and fixed income classes
include investment positions that seek equivalent asset class exposure or to
enhance income for that asset class. When money market instruments are used in
connection with these positions they will be counted towards the assets of the
applicable asset class and not towards the money market class.
Citibank will diversify the equity class of each Fund by allocating the
Fund's portfolio of equity securities among large capitalization securities,
small capitalization securities and international securities. Citibank will
diversify the fixed income class of each Fund by allocating the Fund's portfolio
of fixed income securities among U.S. and foreign government and corporate
bonds. There is no requirement that Citibank allocate a Fund's assets among all
of the foregoing types of equity and fixed income securities at all times. These
types of securities have been selected because Citibank believes that this
additional level of asset diversification will provide each Fund with the
potential for higher returns with lower overall volatility.
From time to time the Funds may employ Subadvisers to perform the daily
management of a particular asset class for the Funds or of specific types of
securities within a particular asset class. Citibank will monitor and supervise
the activities of the Subadvisers and may terminate the services of any
Subadviser at any time. See "Management." In allocating each Fund's investments
among various asset classes and in supervising the Subadvisers, Citibank employs
a multi-style and multi-manager diversification strategy. Citibank believes that
there are periods when securities with particular characteristics, or an
investment style, outperform other types of securities in the same asset class.
For example, at certain times, equity securities with growth characteristics
outperform equities with income characteristics, and vice versa. Citibank will
seek to take advantage of this by blending asset classes and investment styles
on a complementary basis in an effort to maximize the consistency of returns
over longer time periods, and to reduce volatility.
In supervising the Subadvisers, Citibank will also be taking into account
the expertise they have demonstrated in particular areas and the historical
results they have achieved within selected asset classes or investment styles.
By combining these attributes with selected asset classes and styles, Citibank
will seek to increase returns.
The following Subadvisers are responsible for the daily management of the
following kinds of securities: large capitalization value securities, Miller
Anderson & Sherrerd, LLP; small capitalization value securities, Franklin
Advisory Services, Inc.; international equity securities, Hotchkis and Wiley, a
division of the Capital Management Group of Merrill Lynch Asset Management,
L.P.; and foreign government securities, Pacific Investment Management Company.
Citibank is responsible for the daily management of all other kinds of
securities of the Funds, including large capitalization growth securities, small
capitalization growth securities, fixed income securities and money market
securities.
INITIAL ASSET ALLOCATIONS
Initially one or more of the Funds may be of such a size that it is not
practicable for the Fund to invest in all of the above-mentioned asset classes
and types of securities. Until in Citibank's judgment a Fund has sufficient
assets to fully employ an investment strategy, Citibank may allocate assets
across fewer of the asset classes and fewer of the types of securities
identified above than it otherwise would. As a Fund's asset size increases,
Citibank will add asset classes and types of securities until the desired asset
allocation is reached. There may also be a delay in investing in asset classes
or types of securities due to market conditions and availability of suitable
investments.
THE EQUITY CLASS
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). While equity
securities historically have experienced a higher level of volatility risk than
fixed income securities, they also historically have produced higher levels of
total return. Long-term, investors with diversified equity portfolios have a
higher probability of achieving their investment goals with lower levels of
volatility than those who have not diversified.
Each Fund will diversify its equity portfolio by investing those assets
which are allocated to the equity class among equity securities issued by large
capitalization issuers, small capitalization issuers and international issuers.
The mix of equity securities will vary from Fund to Fund. For example, the
equity class of CitiSelect VIP Folio 400 will emphasize securities of small cap
issuers. The equity class of CitiSelect VIP Folio 300 will emphasize securities
of large cap and small cap issuers. There is no requirement that each Fund
invest in each type of equity security.
LARGE CAP ISSUERS. Large cap issuers are those with market capitalizations
typically of $1 billion or more. In the selection of equity securities of large
cap issuers, securities issued by established companies with stable operating
histories are emphasized.
SMALL CAP ISSUERS. Small cap issuers are those with market capitalizations below
the top 1,000 stocks that comprise the large and midrange capitalization sector
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.
INTERNATIONAL ISSUERS. International issuers are those based outside the United
States. In the selection of equity securities of international issuers,
securities included in the Morgan Stanley Capital International Europe,
Australia and Far East Index (called the EAFE Index) are emphasized. The EAFE
Index contains approximately 1,100 equity securities of companies located in
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, The Netherlands, Norway, Singapore, Spain,
Sweden, Switzerland and the United Kingdom. In addition, securities of issuers
located in emerging markets may be selected. The U.S. investor may benefit from
exposure to international equity securities and foreign economies, which may be
influenced by distinctly different factors impacting a country's rate of
economic growth, interest rate structure, currency, industry and local stock
market environment. In addition, investments in the non-U.S. equity markets
allow for further diversification as many countries and regions have risk/reward
characteristics and market performance that are not highly correlated to each
other or to the U.S. market. International investments, however, particularly in
emerging countries, are subject to special risks not generally present in
domestic equity investments.
See "Risk Considerations" for certain risks associated with investing in
equity securities.
THE FIXED INCOME CLASS
Fixed income securities include bonds and short-term obligations. Fixed
income securities, in general, offer a fixed stream of cash flow and may provide
good to moderate relative total return benefits over time. Most bond investments
focus on generating income, while the potential for capital appreciation is a
secondary objective. The bond markets provide diversification benefits to a
holder of equity securities depending upon the characteristics of the bonds
comprising the fixed income class of each Fund. The value of fixed income
securities generally fluctuates inversely with changes in interest rates, and
also fluctuates based on other market and credit factors as well.
Each Fund will diversify its fixed income portfolio by investing those
assets which are allocated to the fixed income class among investment grade
corporate debt obligations and securities issued by the U.S. Government and its
agencies and instrumentalities and by foreign governments. Investment grade
securities are those rated Baa or better by Moody's Investors Service, Inc. or
BBB or better by Standard & Poor's Rating Services or securities which are not
rated by these rating agencies, but which Citibank or a Subadviser believes to
be of comparable quality. Securities rated Baa or BBB and securities of
comparable quality may have speculative characteristics.
The mix of fixed income securities may vary from Fund to Fund. There is no
requirement that each Fund invest in each type of fixed income security. The
Funds may invest in securities with all maturities, including long bonds (10+
years), intermediate notes (3 to 10 years) and short-term notes (1 to 3 years).
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.
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.
See "Risk Considerations" for certain risks associated with investing in
fixed income securities.
THE MONEY MARKET CLASS
Each Fund will invest those assets which are allocated to the money market
class 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. 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.
ADDITIONAL INVESTMENT POLICIES:
FUTURES. Each of the Funds may use financial futures in order to protect the
Fund from fluctuations in interest rates (sometimes called "hedging") without
actually buying or selling debt securities, or to manage the effective maturity
or duration of fixed income securities in the Fund's portfolio in an effort to
reduce potential losses or enhance potential gain. The Funds also may purchase
stock index and 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 Funds are standardized contracts
traded on commodities exchanges or boards of trade. See Appendix A for more
information.
TEMPORARY INVESTMENTS. During periods of unusual economic or market conditions
or for temporary defensive purposes or liquidity, each Fund 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 Funds' permitted
investments and investment practices, see the Appendix -- Permitted Investments
and Investment Practices on page 17. The Funds will not necessarily invest or
engage in each of the investments and investment practices in Appendix A but
reserve the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list
of specific investment restrictions which govern the investment policies of the
Funds, including a limitation that each Fund may borrow money from banks in an
amount not to exceed 1/3 of the Fund's net assets for extraordinary or emergency
purposes (e.g., to meet redemption requests). As a matter of operating policy,
however, the Funds will not borrow money in excess of 10% of their respective
total assets (taken at cost), except that each Fund may borrow up to 25% of its
total assets when such borrowing is necessary to meet redemption requests. Also,
as a matter of operating policy, no Fund will purchase any securities at any
time at which borrowings exceed 5% of its total assets (taken at market value).
Except as otherwise indicated, the Funds' investment objectives and policies may
be changed without shareholder 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 Fund's securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of each Fund will be sold whenever it is
appropriate to do so in light of the Fund's investment objective, without regard
to the length of time a particular security may have been held. The turnover
rates for CitiSelect VIP Folio 200 and CitiSelect VIP Folio 300 are not expected
to exceed 175% annually; the turnover rates for CitiSelect VIP Folio 400 and
CitiSelect VIP Folio 500 are not expected to exceed 100% annually. The amount of
brokerage commissions and realization of taxable capital gains will tend to
increase as the level of portfolio activity increases.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or dealers
for securities transactions for the Funds and the placing of such orders,
brokers or dealers may be selected who also provide brokerage and research
services to the Funds or the other accounts over which Citibank, the Subadvisers
or their affiliates exercise investment discretion. Citibank 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 a Fund
which is in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if Citibank 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.
STATE INSURANCE REGULATION. Each Fund provides an investment vehicle for
variable annuity contracts and variable life insurance policies to be offered by
the Separate Accounts of Participating Insurance Companies. Certain states have
regulations concerning concentration of investments and purchase and sale of
futures contracts, among other techniques. If these regulations are applied to a
Fund, the Fund may be limited in its ability to engage in such techniques and to
manage its investments with the flexibility provided herein. It is each Fund's
intention to operate in material compliance with current insurance laws and
regulations, as applied in each jurisdiction in which contracts or policies of
Separate Accounts of Participating Insurance Companies are offered.
CERTAIN RISK
CONSIDERATIONS
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The risks of investing in each Fund 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 Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. This means that an
investor's shares 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. 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 Funds. Prices at which a Fund 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 Fund.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a Fund'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 Funds 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. Shareholders
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 Fund'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 Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
SMALL CAP COMPANIES. Investors in the Funds 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. Shares
of the Funds, 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
Funds may entail certain risks. These risks are in addition to the risks
described above and are described in Appendix A. See the Appendix -- Permitted
Investments and Investment Practices on page 17.
VALUATION OF SHARES
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Net asset value per share of each Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange (normally
4:00 p.m. Eastern time) by adding the market value of all securities and other
assets attributable to a Fund, then subtracting the liabilities charged to the
Fund, and then dividing the result by the number of outstanding shares of the
Fund.
Fund securities and other assets are valued primarily on the basis of market
quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In light
of the non-U.S. nature of some of each Fund's investments, trading may take
place in securities held by the Funds on days which are not Business Days and on
which it will not be possible to purchase or redeem shares of the Funds.
PURCHASE AND
REDEMPTION OF SHARES
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Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts and variable life insurance policies offered
through the Separate Accounts of Participating Insurance Companies. Investors
should refer to the prospectus of the Participating Insurance Company's Separate
Account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds as investment
options for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.
The Separate Accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of the Funds based on, among other things, the
amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Funds are
effected on Business Days only. Orders for the purchase of shares of a Fund are
effected at the net asset value per share next calculated after an order is
received in proper form by the Fund or its designee so long as payment for the
shares is received by the end of the next Business Day. Redemptions are effected
at the net asset value per share next calculated after receipt in proper form of
a redemption request by a Fund or its designee. For purposes of the purchase and
redemption of shares of the Funds, the Separate Account of a Participating
Insurance Company shall be a designee of the Fund for receipt of requests for
purchase and redemption, and receipt by such designee shall constitute receipt
by the Fund, provided that the Fund receives notice of such requests in
accordance with applicable requirements on the next following Business Day.
Separate Accounts must transmit purchase and redemption orders promptly. Payment
for redemptions will be made by the Funds within seven days after the request is
received. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission.
The Funds do not assess any sales charges or redemption fees. Sales charges,
mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies under the variable annuity contracts or
variable life insurance policies. The Participating Insurance Companies are
required to describe these fees in the prospectuses for the contracts or
policies.
Shares of the Funds may be sold to and held by Separate Accounts that fund
variable annuity and variable life insurance contracts issued by both affiliated
and unaffiliated Participating Insurance Companies. The Funds currently do not
foresee any disadvantages to the holders of variable annuity contracts and
variable life insurance policies of affiliated and unaffiliated Participating
Insurance Companies arising from the fact that interests of the holders of
variable annuity contracts and variable life insurance policies may differ due
to differences of tax treatment or other considerations or due to conflicts
between the affiliated or unaffiliated Participating Insurance Companies.
Nevertheless, the Trustees will monitor events to seek to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response to such conflicts. Should a material
irreconcilable conflict arise between the holders of variable annuity contracts
and variable life insurance policies of affiliated or unaffiliated Participating
Insurance Companies, the Participating Insurance Companies may be required to
withdraw the assets allocable to some or all of the Separate Accounts from the
Funds. Any such withdrawal could disrupt orderly portfolio management to the
potential detriment of such holders. The variable annuity contracts and variable
life insurance policies are described in the separate prospectuses issued by the
Participating Insurance Companies. The Funds assume no responsibility for such
prospectuses.
DIVIDENDS AND
DISTRIBUTIONS
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Substantially all of each Fund's net income, if any, from dividends and
interest is distributed annually on or about the last day of December. Net
realized short-term and long-term capital gains, if any, will be distributed
annually, in December. Each Fund may also make additional distributions to the
extent necessary to avoid the application of the 4% non-deductible excise tax on
certain undistributed income and net capital gains of mutual funds.
All dividends and distributions will be automatically reinvested in
additional shares of a Fund issued at the net asset value of such shares on the
payment date of such dividends and distributions.
MANAGEMENT
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TRUSTEES AND OFFICERS: Each Fund is supervised by the Board of Trustees of
Variable Annuity Portfolios. A majority of the Trustees are not affiliated with
Citibank. More information on the Trustees and officers of the Funds appears
under "Management" in the Statement of Additional Information.
INVESTMENT MANAGER
CITIBANK. Each Fund draws on the strength and experience of Citibank.
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 $83 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 Funds' business affairs, and has a separate Management
Agreement with each Fund. Citibank also provides certain administrative services
to the Funds. These administrative services include providing general office
facilities and supervising the overall administration of the Funds. Pursuant to
sub-administrative services agreements, the distributor performs such
sub-administrative duties for the Funds as from time to time are agreed upon by
Citibank and the distributor. The distributor's compensation as
sub-administrator is paid by Citibank.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank, has been
the overall portfolio manager of the Funds 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 Funds' securities, and supervising and monitoring the performance of the
Subadvisers. Mr. Keblusek's investment experience is discussed below.
The following individuals at Citibank are responsible for the daily
management of the following kinds of securities of each Fund (and related
investments).
LARGE CAPITALIZATION GROWTH SECURITIES
Lawrence P. Keblusek, U.S. Chief Investment Officer, has been responsible for
the daily management of large cap growth securities since the Funds' inception.
Mr. Keblusek, who has 25 years experience in the investment management industry,
was most recently 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.
SMALL CAPITALIZATION GROWTH SECURITIES
Linda J. Intini, Vice President, has been responsible for the daily management
of small cap growth securities since February 1997. Ms. Intini has over nine
years of experience specializing in the management of small cap equities,
including over $300 million of Citibank's small cap portfolios for trusts and
individuals. Prior to joining Citibank in 1992, she was a Portfolio Manager and
Research Analyst with Manufacturers Hanover in the Special Equity area. She also
specialized in equity research at Eberstadt Fleming.
DOMESTIC FIXED INCOME SECURITIES
Mark Lindbloom, Vice President, has been responsible for the daily management of
domestic fixed income securities since the Funds' inception. Mr. Lindbloom has
more than 12 years of investment management experience. Prior to joining
Citibank in 1986, Mr. Lindbloom was a Fixed Income Portfolio Manager with Brown
Brothers Harriman & Co., where he managed fixed income assets for discretionary
corporate portfolios.
MONEY MARKET SECURITIES
Kevin Kennedy, Vice President, has been responsible for the daily management
of money market securities since the Funds' inception. Mr. Kennedy is
responsible for managing the Liquidity Management Unit of the U.S. Fixed
Income Department of Citibank Global Asset Management. Prior to joining
Citibank in March 1993, 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.
The following Subadvisers are responsible for the daily management of the
following kinds of securities of each Fund (and related investments).
LARGE CAPITALIZATION VALUE SECURITIES
Miller Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken,
Pennsylvania 19428. Miller Anderson has been a registered investment adviser
since 1974. Morgan Stanley Asset Management Holdings, Inc., an indirect
wholly-owned subsidiary of Morgan Stanley Group Inc., owns 95% of the
interests in Miller Anderson. On February 5. 1997, Morgan Stanley Group Inc.
and Dean Witter, Discover & Co. announced that they had entered into an
Agreement and Plan of Merger to form Morgan Stanley, Dean Witter, Discover &
Co. Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset
management. Subject to certain conditions being met, it is currently
anticipated that the transaction will close in mid-1997. Thereafter, Miller
Anderson will be a subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
Robert Marcin, CFA, Partner, has been responsible for the daily management
of large cap value securities since the Funds' inception. Mr. Marcin has been
with Miller Anderson since 1988.
SMALL CAPITALIZATION VALUE SECURITIES
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 June, 1988, has
been responsible for the daily management of small capitalization value
securities since the Funds' inception. Prior to joining Franklin Advisory
Services, Mr. Lippman was president of L.F. Rothschild Fund Management, Inc.
INTERNATIONAL EQUITY SECURITIES
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017. Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P.,
is a registered investment adviser.
Harry W. Hartford and Sarah H. Ketterer have been responsible for the daily
management of international equity securities since the Funds' inception. Mr.
Hartford and Ms. Ketterer manage international equity accounts and are also
responsible for international investment research. Each serves on the Investment
Policy Committee at Hotchkis and Wiley. Prior to joining 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 Hotchkis and Wiley in 1990, Ms. Ketterer was an associate with Bankers
Trust and an analyst at Dean Witter.
FOREIGN GOVERNMENT SECURITIES
Pacific Investment Management Company, 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, L.L.C., 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 foreign government securities since the Funds' 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.
ADVISORY FEES. For the services of Citibank under the Management Agreements and
the services of the Subadvisers, the Funds pay an aggregate fee, which is
accrued daily and paid monthly, of 0.75% of each Fund's average daily net assets
on an annualized basis for that Fund's then-current fiscal year. This fee is
higher than the management fee paid by most mutual funds. Citibank may
voluntarily agree to waive a portion of its management fee from any Fund.
The management fee is allocated among the Subadvisers at the annual rates
equal to the percentages specified below of the aggregate assets of the Funds
allocated to the particular Subadviser. Citibank retains any management fee in
excess of amounts payable to the Subadvisers. Citibank pays the Subadvisers'
fees to the extent they exceed the aggregate fee stated above. Citibank may
voluntarily agree to waive its portion of the management fee from any Fund.
Miller Anderson & Sherrerd, LLP
0.625% on first $25 million
0.375% on next $75 million
0.250% on next $400 million
0.20% on assets in excess of $500 million
Franklin Advisory Services, Inc.
0.55% on first $250 million
0.50% on remaining assets
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
PIMCO
0.35% on first $200 million
0.30% on remaining assets
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Funds, 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 Funds 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 Funds. Citibank believes that its services
under the Management Agreements and the activities performed by it as
administrator 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
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 for the
Funds. If Citibank or its affiliates were to be prevented from acting as the
Manager or administrator, the affected Funds would seek alternative means for
obtaining these services. The Funds do not expect that shareholders would suffer
any adverse financial consequences as a result of any such occurrence.
DISTRIBUTOR: Pursuant to a Distribution Agreement, LFBDS, 6 St. James Avenue,
Boston, MA 02116 (telephone: (617) 423-1679), serves as the distributor of
shares of each Fund. LFBDS receives no fee for performing distribution
services for the Funds.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for each
Fund. Securities may be held by a sub-custodian bank approved by the Trustees.
State Street also provides certain fund accounting services and calculates the
daily net asset value for the Funds. The principal business address of State
Street is 225 Franklin Street, Boston, Massachusetts 02110.
TAX MATTERS
- --------------------------------------------------------------------------------
This discussion of the federal income taxation of the Funds and their
distributions is for general information only. Purchasers of variable annuity
contracts or variable life insurance policies issued by Participating Insurance
Companies should refer to the prospectuses for those contracts or policies for
additional tax information and should consult their own tax advisers about their
particular situations.
Each Fund will be treated as a separate entity for federal income tax
purposes. Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
which would relieve a Fund of liability for Federal income and excise taxes to
the extent the Fund's earnings are distributed in accordance with the timing
requirements of the Code. In order to so qualify, a Fund must comply with
certain distribution, diversification, source of income, holding period, and
other applicable requirements. If for any taxable year a Fund does not qualify
for the special Federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event, a
Fund's distributions to segregated asset accounts holding shares of the Fund
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits. A failure of a Fund to qualify as a regulated
investment company could also have the adverse effects on investors noted below.
A segregated asset account upon which a variable annuity contract or
variable life insurance policy is based must meet certain diversification tests
set forth in U.S. Treasury regulations. If, as is intended, the Fund meets these
tests and complies with certain other conditions, a segregated asset account
investing solely in shares of a Fund will also be deemed to meet these
diversification requirements. However, a failure of the Fund to qualify as a
regulated investment company or to meet such conditions and to comply with such
tests could cause the owners of variable annuity contracts and variable life
insurance policies based on such accounts to recognize ordinary income each year
in the amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).
Provided that the Fund and a segregated asset account investing in the Fund
satisfy the above requirements, any distributions from the Fund will be exempt
from current Federal income taxation to the extent that such distributions
accumulate in a variable annuity contract or a variable life insurance contract.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus and is subject to
change by legislative or administrative action.
PERFORMANCE INFORMATION
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Each Fund's performance may be quoted in advertising, shareholder reports
and other communications in terms of yield or total rate of return. All
performance information is historical and is not intended to indicate future
performance. Yield and total rates of return fluctuate in response to market
conditions and other factors, and the value of an investor's shares when
redeemed may be more or less than their original cost.
Each Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period which was made at the maximum public
offering price and reflects any change in net asset value per share and is
compounded to include the value of any shares purchased with any dividends or
capital gains declared during such period. Period total rates of return may be
"annualized." An "annualized" total rate of return assumes that the period total
rate of return is generated over a one-year period.
Each Fund may provide annualized "yield" quotations. The "yield" of a Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one-year period and is shown as a percentage of the maximum public
offering price on the last day of that period. A "yield" quotation, unlike a
total rate of return quotation, does not reflect changes in net asset value.
Yields and total returns quoted for the Funds include the effect of
deducting the Funds' expenses, but may not include charges and expenses
attributable to a particular variable annuity contract or variable life
insurance policy. Since shares of the Funds can be purchased only through a
variable annuity contract or variable life insurance policy, a prospective
purchaser should carefully review the prospectus of the variable annuity
contract or variable life insurance policy he or she has chosen for information
on relevant charges and expenses. Including these charges in the quotations of
the Funds' yield and total return would have the effect of decreasing
performance. Performance information for the Funds must always be accompanied
by, and be reviewed with, performance information for the insurance product
which invests in the Funds. See the Statement of Additional Information for more
information concerning the calculation of yield and total rate of return
quotations for the Funds.
GENERAL INFORMATION
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ORGANIZATION: Each Fund is a newly established diversified series of Variable
Annuity Portfolios, an open-end investment company organized as a Massachusetts
business trust on October 18, 1996.
Under the 1940 Act, a diversified series or diversified investment company
must invest at least 75% of its assets in cash and cash items, U.S. Government
securities, investment company securities and other securities limited as to any
one issuer to not more than 5% of the total assets of the investment company and
not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
VOTING AND OTHER RIGHTS: The Funds may issue an unlimited number of shares
($0.00001 par value), may create new series of shares and may divide shares in
each series into classes. Each share of each Fund gives the shareholder one vote
in Trustee elections and other matters submitted to shareholders for vote. All
shares of the Funds have equal voting rights except that, in matters affecting
only a particular Fund, only shares of that particular Fund are entitled to
vote.
As series of a Massachusetts business trust, the Funds are not required to
hold annual shareholder meetings. Shareholder approval will usually be sought
only for changes in a Fund's fundamental investment restrictions and for the
election of Trustees under certain circumstances. Trustees may be removed by
shareholders under certain circumstances. Each share of each Fund is entitled to
participate equally in dividends and other distributions and the proceeds of any
liquidation of that Fund.
The rights accompanying Fund shares are legally vested in the Separate
Accounts. However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the Separate Accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in Separate Accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
Separate Account prospectus.
CERTIFICATES: The Funds' Transfer Agent maintains a share register for
shareholders of record, i.e., the Separate Accounts of the Participating
Insurance Companies. Share certificates are not issued.
EXPENSES: In addition to amounts payable to Citibank and the Subadvisers under
the Management and Submanagement Agreements each Fund 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, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
All fee waivers are voluntary and may be reduced or terminated at any time.
COUNSEL AND INDEPENDENT AUDITOR: Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for each Fund. Price Waterhouse LLP, Boston,
Massachusetts, serves as independent auditor for each Fund.
------------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Funds, including information relating to (i)
investment policies and restrictions, (ii) the Trustees, officers and investment
manager, (iii) securities transactions, (iv) the Funds' shares, including rights
and liabilities of shareholders, (v) the method used to calculate performance
information, and (vi) the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or their distributor. This Prospectus does
not constitute an offering by the Funds or their distributor in any jurisdiction
in which such offering may not lawfully be made.
<PAGE>
APPENDIX
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PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund 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 Fund a security at one price,
subject to the Fund'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 Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund 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 Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund'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 Fund 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 Fund would not exceed 30% of the Fund's total assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or reverse repurchase agreement, a Fund 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 Fund could experience a loss.
RULE 144A SECURITIES. Each Fund 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 Fund's investment limitations. The
Trustees will review these determinations. These securities are known as "Rule
144A securities," because they are traded under SEC 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 Fund may invest up to 10% 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 Fund to sell them promptly at an
acceptable price.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
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 Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund'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 Fund 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 a Fund 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 Fund may be invested in shares of other investment
companies. Each Fund 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 Fund for the purchase or sale of non-U.S. currency to hedge
against adverse rate changes or otherwise to achieve the Fund's investment
objectives. 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 Fund. Entering into such 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 Fund 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 Fund 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 Fund 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 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.
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 Fund's securities, but would also increase the
inherent volatility of the Fund by effectively converting short term debt
instruments into long term debt instruments.
DOLLAR ROLLS. The Funds also may enter into "dollar rolls." A dollar roll is a
transaction pursuant to which a Fund 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 Fund foregoes principal and interest
paid on the mortgage-backed securities. The Fund 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 Fund establishes a segregated account with
liquid high grade debt securities equal in value to the securities subject to
repurchase by the Fund. The Funds will invest only in covered rolls.
FUTURES. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are commonly referred
to as "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 Fund 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 Fund's initial margin deposit.
None of the Funds currently intends to enter into a futures contract if, as a
result, the initial margin deposits on all of that Fund's futures contracts
would exceed approximately 5% of the Fund's net assets. Also, each Fund 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 Fund's other assets
and to segregate sufficient assets to meet its obligations under outstanding
futures contracts.
The ability of a Fund to utilize futures contracts successfully will depend
on Citibank's or a Subadviser'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 Citibank's or the Subadviser's view as to interest rate,
stock price or 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 Fund's
related portfolio position. Also, the futures markets may not be liquid in all
circumstances. As a result, in certain markets, a Fund 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 Fund 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 Fund 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 Fund
in entering into such transactions.
The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases a Fund's potential for both
gain and loss. As noted above, each of the Funds 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 Fund.
OPTIONS. Each Fund may write (sell) covered call and put options and purchase
call and put options on securities. A Fund 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 Fund writes an option which
expires unexercised or is closed out by the Fund 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 Fund's position, the option may be
exercised and the Fund 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 Fund 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 Fund
retains the risk of depreciation in value of securities on which it has written
call options.
Each of the Funds also may purchase options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
Fund 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 Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency. Each Fund also may buy and
write options on stock indices.
Each Fund may purchase and write options to buy or sell interest rate
futures contracts and options on 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
Fund in order to protect against declines in values of portfolio securities or
against increases in the cost of securities to be acquired. Purchases of options
on futures contracts may present less risk in hedging the portfolio of a Fund
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 Fund
may suffer a loss on the transaction.
Each Fund 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 Fund 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 Fund has established procedures consistent with statements of the
Securities and Exchange Commission 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 exchanges.
The securities underlying options and futures contracts traded by a Fund 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 Fund 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.
<PAGE>
497(c) File Nos. 333-15119 and 811-07893
Statement of
Additional Information
May 1, 1997
CITISELECT(SM) VIP FOLIO 200
CITISELECT(SM) VIP FOLIO 300
CITISELECT(SM) VIP FOLIO 400
CITISELECT(SM) VIP FOLIO 500
Variable Annuity Portfolios (the "Trust") is an investment company which
was organized as a business trust under the laws of the Commonwealth of
Massachusetts on October 18, 1996. The Trust offers shares of four investment
funds -- CitiSelect(SM) VIP Folio 200, CitiSelect(SM) VIP Folio 300,
CitiSelect(SM) VIP Folio 400 and CitiSelect(SM) VIP Folio 500 (each, a "Fund"
and collectively, the "Funds"), as well as the shares of one other series. The
shares of the Funds are offered only to separate accounts ("Separate Accounts")
of participating life insurance companies ("Participating Insurance Companies")
for the purpose of funding variable annuity contracts and variable life
insurance policies. The address and telephone number of the Trust are 6 St.
James Avenue, Boston, Massachusetts 02116, (617) 423-1679.
FUND SHARES 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 PRINCIPAL AMOUNT INVESTED.
Table of Contents
Page
The Trust 2
Investment Objectives 2
Description of Permitted Investments and
Investment Practices 3
Investment Restrictions 18
Performance Information 21
Determination of Net Asset Value; Valuation of
Securities; Additional Redemption Information 22
Management 23
Portfolio Transactions 29
Description of Shares, Voting Rights and Liabilities 30
Certain Additional Tax Matters 31
Financial Statements 32
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Trust's Prospectus, dated May 1, 1997, by which shares of the Funds are offered.
This Statement of Additional Information should be read in conjunction with the
Prospectus, a copy of which may be obtained by an investor without charge by
contacting the Trust's distributor at (617) 423-1679 or a Participating
Insurance Company.
<PAGE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
1. THE TRUST
Variable Annuity Portfolios, the Trust, is an investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on October 18, 1996. This Statement of Additional Information
relates to four Funds offered by the Trust -- CitiSelect(SM) VIP Folio 200,
CitiSelect(SM) VIP Folio 300, CitiSelect(SM) VIP Folio 400 and CitiSelect(SM)
VIP Folio 500. The Funds are investment vehicles for variable annuity contracts
and variable life insurance policies offered by Separate Accounts of
Participating Insurance Companies.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser to
each of the Funds. The Manager manages the investments of the Funds from day to
day in accordance with each Fund's investment objectives and policies. The
selection of investments for the Funds and the way they are managed depend on
the conditions and trends in the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by the Landmark
Funds Broker-Dealer Services, Inc., the Funds' distributor ("LFBDS or the
"Distributor"), only to Separate Accounts.
2. INVESTMENT OBJECTIVES
Each Fund is a total return fund that allocates its investments among
three primary classes of assets - equity, fixed income and money market
securities. Each Fund's asset mix is designated to offer a different level of
potential return within a corresponding level of risk. The investment objective
of each Fund is as follows:
The investment objective of CitiSelect VIP Folio 200 is as high a total
return over time as is consistent with a primary emphasis on a combination of
fixed income and money market securities, and a secondary emphasis on equity
securities.
The investment objective of CitiSelect VIP Folio 300 is as high a total
return over time as is consistent with a balanced emphasis on equity and fixed
income securities.
The investment objective of CitiSelect VIP Folio 400 is as high a total
return over time as is consistent with a primary emphasis on equity securities,
and a secondary emphasis on fixed income securities.
The investment objective of CitiSelect VIP Folio 500 is as high a total
return over time as is consistent with a dominant emphasis on equity securities
and a small allocation to fixed income securities.
The investment objective of each Fund may be changed by its Trustees
without approval by that Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that any Fund will achieve its investment objective.
The Prospectus contains a discussion of the various types of securities
in which each Fund may invest and the risks involved in such investments. The
following supplements the information contained in the Prospectus concerning the
investment objective, policies and techniques of each Fund.
The Funds are asset allocation funds. Asset allocation funds are a
basic tool of investment professionals and are differentiated by the use of
investment management strategies and techniques that range from the least
aggressive to the most aggressive. The Funds offer a convenient way to own a
diversified professionally managed portfolio tailored to specific investment
goals and expectations of risk and return. While time horizon is a factor, it is
not necessarily the determinative factor in choosing to invest in one of the
Funds. Certain investment goals may determine the appropriate asset allocation
and amount of risk that an investor seeks.
CitiSelect VIP Folio 200 is expected to be the least volatile of the
four Funds and is designed for the investor who is seeking relatively lower risk
provided by substantial investments in fixed income and money market securities,
but who also seeks some capital growth. CitiSelect VIP Folio 300 is designed for
the investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment to temper volatility. CitiSelect VIP Folio 400 and CitiSelect VIP
Folio 500 are designed for the investor willing and able to take higher risks in
the pursuit of long-term capital appreciation. CitiSelect VIP Folio 500 is
expected to be the most volatile of the four Funds, and is designed for
investors who can withstand greater market swings to seek potential long-term
rewards. CitiSelect VIP Folio 400 is designed for investors seeking long-term
rewards, but with less volatility.
The Trust has also adopted the following policies with respect to each
Fund's investments in (i) warrants and (ii) securities of issuers with less than
three years' continuous operation. The Trust's purchases of warrants for each
Fund will not exceed 5% of the Fund's net assets. Included within that amount,
but not exceeding 2% of its net assets, may be warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. Any such warrants
will be valued at their market value except that warrants which are attached to
securities at the time such securities are acquired for a Fund will be deemed to
be without value for the purpose of this restriction. The Trust will not invest
more than 5% of each Fund's assets in companies which, including their
respective predecessors, have a record of less than three years' continuous
operation.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
BANK OBLIGATIONS
Each of the Funds may invest in bank obligations, i.e., certificates of
deposit, time deposits (including 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.
MORTGAGE-BACKED SECURITIES
Each of the Funds 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 Fund 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 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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
As described in the Prospectus, the Funds 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 Fund foregoes principal and interest paid on the mortgage-backed
securities. The Fund 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 Fund may also be compensated by
receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES
Each of the Funds 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.
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 Fund
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 Funds
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 Funds invests more than 10% 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 determines, based on the
trading markets for the specific restricted security, that it is liquid. The
Trustees may adopt guidelines and delegate to the Manager or to a Subadviser the
daily function of determining and monitoring liquidity of restricted securities.
The Trustees, 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 Fund'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 Funds 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 the Fund, 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 the Fund's assets may be released prior to receipt
of payments, may expose the Fund 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.
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 Funds 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.
The Funds 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 Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund 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 Investment Company Act of
1940, as amended (the "1940 Act"), repurchase agreements may be considered to be
loans by the buyer. A Fund'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 Fund may incur certain costs in liquidating this collateral and in
certain cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Funds 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 Funds 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 at
any time on customary industry settlement notice (which will not usually exceed
three business days). During the existence of a loan, a Fund 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 the collateral (subject to a rebate payable
to the borrower). Where the borrower provides a Fund with collateral consisting
of U.S. Treasury obligations, the borrower is also obligated to pay the Fund a
fee for use of the borrowed securities. The Fund, 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, a Fund could suffer a loss if the borrower
terminates the loan and the Fund 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 Fund's total assets.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Fund would take delivery of such securities. When a Fund 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 Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the respective Fund 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 Funds 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 Fund
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 Fund 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 Fund's payment
obligation).
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because each of the Funds 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, the Funds 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 Fund 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 Funds may also enter into foreign currency hedging
transactions in an attempt to protect the value of the assets of the respective
Fund as measured in U.S. dollars from unfavorable changes in currency exchange
rates and control regulations. (Although each Fund's assets are valued daily in
terms of U.S. dollars, the Trust does not intend to convert a Fund's holdings of
other currencies into U.S. dollars on a daily basis.)
The Funds 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 Fund
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 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 Fund 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 Fund 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
Fund 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 Fund'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 Funds do not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts obligates a
Fund to deliver an amount of non-U.S. currency in excess of the value of the
Fund'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, the Manager believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interests of the Fund will be served.
The Funds generally would not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, a Fund 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 Fund retains the security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
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 Fund 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 Fund 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 Fund 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 Fund
securities at the expiration of the contract. Accordingly, it may be necessary
for a Fund 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
Fund 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 Fund is obligated to
deliver.
Each of the Funds may also purchase put options on a non-U.S. currency
in order to protect against currency rate fluctuations. If a Fund purchases a
put option on a non-U.S. currency and the value of the U.S. currency declines,
the Fund 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 Fund which otherwise would have resulted. Conversely, where a rise in the
U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund 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 the
Fund 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, the Fund could
sustain losses on transactions in foreign currency options which would require
it to forgo a portion or all of the benefits of advantageous changes in such
rates.
The Funds may write options on non-U.S. currencies for hedging purposes
or otherwise to achieve their investment objectives. For example, where a Fund
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 Fund 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 Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund 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 Fund
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 Fund 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 Fund 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 Fund'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
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs 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 Fund may employ any of the above
described foreign currency hedging techniques to protect the value of its assets
invested in depositary receipts.
Of course, a Fund is not required to enter into the transactions
described above and does 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 Fund'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 Fund 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 Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, each Fund 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.
OPTIONS
Each of the Funds may write covered call and put options and purchase
call and put options on securities. Call and put options written by a Fund may
be covered in the manner set forth below.
A call option written by a Fund is "covered" if the Fund 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 Fund 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
Fund 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
Fund is "covered" if the Fund 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 Fund 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 Fund
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 Funds may purchase options for hedging purposes or to
increase the Fund'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 Fund 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 Fund
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 Funds may purchase call options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund 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 Fund upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
Each of the Funds 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 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 Funds 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 Fund 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 Fund 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 Fund 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 Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A Fund 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 Fund 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 Fund will receive a premium from writing a put or call option, which
increases the Fund'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 Fund has written
a call option falls or remains the same, the Fund 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 securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, a Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Fund correlate with changes in the value of the index, writing covered put
options on indices will increase the Fund'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 Funds may also purchase put options on stock indices to
hedge the Fund's investments against a decline in value. By purchasing a put
option on a stock index, a Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Fund's investments does not decline as anticipated, or if the value of the
option does not increase, the Fund'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 Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund 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 Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Fund 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 Fund 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 Fund owns.
Each of the Funds 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 Funds may enter into interest rate futures contracts, stock
index futures contracts and/or foreign currency 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 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 Fund purchases or
sells a futures contract. At the same time such a purchase or sale is made, the
Fund 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 Fund 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 Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity or
duration of the Fund's 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 Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as if the Fund sold bonds that it owned, or as if the Fund sold
longer-term bonds and purchased shorter-term bonds. If interest rates did
increase, the value of the Fund's debt securities would decline, but the value
of the futures contracts would increase, thereby keeping the net asset value of
the Fund 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 Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, a Fund
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 Fund purchased
bonds, or as if the Fund sold shorter-term bonds and purchased longer-term
bonds. If interest rates did decline, the value of the futures contracts would
increase.
Each of the Funds may enter into stock index futures contracts to gain
stock market exposure while holding cash available for investments and
redemptions.
Each of the Funds 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 Fund 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 Fund 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 Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund 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
Fund sells a futures contract to protect against losses in the debt securities
held by the Fund), 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
Fund'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 Fund'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 Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by gains
on the Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund'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 Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, even
where a Fund enters into futures 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 Fund 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 Fund 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 Fund, which could require the Fund 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 Fund's overall performance may
be poorer than if any such contract had not been entered into. For example, if a
Fund hedged against the possibility of an increase in interest rates which would
adversely affect the price of the Fund's bonds and interest rates decrease
instead, part or all of the benefit of the increased value of the Fund's bonds
which were hedged will be lost because the Fund will have offsetting losses in
its futures positions. Similarly, if a Fund purchases futures contracts
expecting a decrease in interest rates and interest rates instead increased, the
Fund 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 increase in interest rates. In addition, in such situations, if
the Fund has insufficient cash, the Fund 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 Fund's hedging strategies.
CFTC regulations require compliance with certain limitations in order
to assure that a Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit a Fund 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 Fund's non-hedging futures positions would exceed 5% of that
Fund's net assets.
Each Fund will comply with this CFTC requirement, and each Fund
currently intends to adhere to the additional policies described below. First,
an amount of cash or cash equivalents will be maintained by each Fund in a
segregated account with the Fund'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 Fund's obligations under the futures contract.
The second is that a Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by a
Fund not exceed approximately 50% of the market value of the Fund'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 ability of a Fund to engage in futures transactions may be limited
by the current federal income tax requirement that less than 30% of a Fund's
gross income be derived from the sale or other disposition of stock or
securities held for less than three months. In addition, the use of futures
contracts may increase the amount of taxable income of a Fund and may affect the
amount, timing and character of a Fund's income for tax purposes, as more fully
discussed herein in the section entitled "Certain Additional Tax Matters."
OPTIONS ON FUTURES CONTRACTS
Each of the Funds may purchase and write options to buy or sell futures
contracts in which the Fund may invest. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
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 Fund 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 Funds 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 Fund in cash or securities in a segregated
account with its custodian. A Fund 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 Fund 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 Fund, the Fund will be required to sell the underlying futures contract which,
if the Fund 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 Fund is exercised, the Fund will be required to
purchase the underlying futures contract which, if the Fund 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 Fund 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 Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund'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 Fund
writes an option on a futures contract and that option is exercised, the Fund
may incur a loss, which loss will be reduced by the amount of the option premium
received, less related transaction costs. A Fund'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 Fund and changes in the value of its futures positions. This
correlation cannot be expected to be exact, and the Fund 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 Fund to incur a loss on both the hedging instrument and the futures
contract being hedged.
Each of the Funds 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 Fund 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 Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, the Fund could
purchase call options on futures contracts, rather than purchasing the
underlying futures contracts.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following policies
which may not be changed with respect to any Fund without approval by holders of
a majority of the outstanding voting securities of that Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding voting securities of the Fund present at a meeting at
which the holders of more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund. The term "voting securities" as used
in this paragraph has the same meaning as in the 1940 Act.
None of the Funds 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 (nor purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Fund, taken at market value). It is intended that a Fund would borrow money only
from banks and only to accommodate requests for the repurchase of shares of the
Fund 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
Fund's total assets (taken at market value), (b) through the use of repurchase
agreements or the purchase of short-term obligations or (c) by purchasing all or
a portion of an issue of debt 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 Fund more
than 10% of the voting securities of such issuer to be held by the Fund, except
that a Fund may invest all or substantially all of its investable assets in
another registered investment company having the same investment objectives and
policies and substantially the same investment restrictions as those with
respect to the Fund (a "Qualifying Portfolio").
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's total assets more than 5% of the
Fund'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), except that, with
respect to each Fund, the Fund may invest all or substantially all of its
investable assets in a Qualifying Portfolio.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's investment objectives,
up to 25% of its assets, at market value at the time of each investment, may be
invested in any one industry.
(6) Underwrite securities issued by other persons, except that all the
assets of the Fund may be invested in a Qualifying Portfolio and except in so
far as the Fund 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 (each Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of securities
by the Fund).
(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, provided that collateral arrangements with
respect to options, futures contracts, and options on futures contracts,
including deposits of initial and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction and except as
appropriate to evidence a debt incurred without violating Investment Restriction
(1) above.
NON-FUNDAMENTAL RESTRICTIONS
Each Fund does not as a matter of operating policy:
(i) borrow money in excess of 10% of the total assets of the Fund
(taken at cost), except that such Fund may borrow up to 25% of its total assets
when such borrowing is necessary to meet redemption requests (moreover, the Fund
will not purchase any securities for the Fund at any time at which borrowings
exceed 5% of the total assets of the Fund (taken at market value)),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the net assets of the Fund (taken at market value),
(iii) sell any security which the Fund does not own unless by virtue of
the ownership of other securities there is at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions (provided that this limitation shall not
prevent the Fund from entering into futures contracts or options thereon),
(iv) invest for the purpose of exercising control or management, except
that all of the assets of the Fund may be invested in a Qualifying Portfolio,
(v) purchase securities issued by any registered investment company,
except that all of the assets of the Fund may be invested in a Qualifying
Portfolio and except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase the securities of any registered
investment company if such purchase at the time thereof would cause more than
10% of the total assets of the Fund (taken in each case at the greater of cost
or market value) to be invested in the securities of such issuers or would cause
more than 3% of the outstanding voting securities of any such issuer to be held
for the Fund (for purposes of this clause (v) securities of non-U.S. banks shall
be treated as investment company securities, except that debt securities and
non-voting preferred stock of non-U.S. banks are not subject to the 10%
limitation described herein),
(vi) invest more than 15% of the net assets of the Fund in securities
that are not readily marketable, including debt securities for which there is no
established market and fixed time deposits and repurchase agreements maturing in
more than seven days, except that all the assets of the Fund may be invested in
a Qualifying Portfolio,
(vii) purchase or retain any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is an officer or director of the Manager, if after the purchase
of the securities of such issuer by the Fund, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value,
(viii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 10% of the net
assets of the Fund (taken at market value) is held as collateral for such sales
at any one time (the Funds do not presently intend to make such short sales for
investment purposes), or
(ix) invest more than 20% of is total assets in the securities of
issuers located in any one foreign country, except that the Fund may have an
additional 15% of its total assets in the securities of issuers located in any
one of the following countries: Australia, Canada, France, Japan, the United
Kingdom, or Germany.
These policies are not fundamental and may be changed by each Fund
without the approval of its shareholders.
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 Fund will not be considered
a violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for a Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized total
rate of return quotation is calculated by (x) adding 1 to the period total rate
of return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. Total rates of return may also be calculated on investments at
various sales charge levels or at net asset value. Any performance data which is
based on a reduced sales charge or net asset value would be reduced if the
maximum sales charge were taken into account.
Any current yield quotation for a Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a) raising
to the sixth power the sum of 1 plus the quotient obtained by dividing the
Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the maximum public offering price per share on the last
day of the period, (b) subtracting 1 from the result, and (c) multiplying the
result by 2.
Yields and total returns quoted for a Fund include the effect of
deducting the Fund's expenses, but may not include charges and expenses
attributable to a particular variable annuity contract or variable life
insurance policy. Since shares of the Funds can be purchased only through a
variable annuity contract or variable life insurance policy, a purchaser of such
contract or policy should carefully review the prospectus for the applicable
variable annuity contract or variable life insurance policy for information on
relevant charges and expenses. Including these charges in the quotations of a
Fund's yield and total return would have the effect of decreasing performance.
Performance information for the Funds must always be accompanied by, and be
reviewed with, performance information for the insurance product which invests
in the Funds.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL REDEMPTION INFORMATION
The net asset value of each share of each Fund is determined each day
during which the New York Stock Exchange is open for trading. As of the date of
this Statement of Additional Information, such Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of net asset value of shares of a Fund is made once each day as of
the close of regular trading on such Exchange by dividing the value of the
Fund's net assets (i.e., the value of its assets less its liabilities, including
expenses payable or accrued) by the number of shares of the Fund outstanding at
the time the determination is made. A share's net asset value is effective for
orders received by the Trust prior to its calculation and received by the
Distributor prior to the close of the business day on which such net asset value
is determined.
For purposes of calculating net asset value per share, 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 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 which 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 of the Trust. 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 of the Trust.
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
Fund's net asset value is calculated, such securities will be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund 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 plus amortization of premium.
Subject to compliance with applicable regulations, the Trust has
reserved the right to pay the redemption or repurchase price of shares of the
Funds, 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 shares or beneficial interests being sold. If a holder of shares
or 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 shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the Securities and Exchange
Commission (the "SEC"), exists making disposal of a Fund's investments or
determination of its net asset value not reasonably practicable; (b) the New
York Stock Exchange is closed (other than customary weekend and holiday
closings); or (c) the SEC has by order permitted such suspension.
7. MANAGEMENT
TRUSTEES
The Trustees and officers of the Trust, their ages 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.
TRUSTEES OF THE TRUST
H.B. ALVORD (aged 74) -- Treasurer-Tax Collector, County of Los Angeles
(retired, March, 1984); Chairman, certain registered investment companies in the
59 Wall Street funds group. His address is 1450 Oleada Road, Pebble Beach,
California. Mr. Alvord has announced that he intends to retire as a Trustee on
May 31, 1997.
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.
PHILIP W. COOLIDGE* (aged 45) -- President of the Trust; Chairman, Chief
Executive Officer, and President, Signature Financial Group, Inc. and The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN (aged 53) -- 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.
RILEY C. GILLEY (aged 70) -- Vice President and General Counsel, Corporate
Property Investors (November, 1988 to December, 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December, 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 57) -- Professor, Babson College (since September,
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September, 1992 to September, 1993); Professor, Darden Graduate
School of Business, University of Virginia (September, 1978 to September, 1993);
Trustee, The Highland Family of Funds (since March, 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 45) -- President, Global Research Associates, Inc.
(Investment Research) (since August, 1990); Adviser, Rockefeller & Co. (March,
1988 to July, 1990); Trustee, Mainstay Institutional Funds (since December,
1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 62) -- 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; Director, MAS Funds. His address is 1385 Outlook Drive
West, Mountainside, New Jersey.
WALTER E. ROBB, III (aged 70) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (corporate financial advisers) (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.
E. KIRBY WARREN (aged 62) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 76) -- Vice President-Investments, Sun Company, Inc.
(retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE* (aged 45) -- President of the Trust; Chairman, Chief
Executive Officer and President, Signature Financial Group, Inc. and The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
SAMANTHA M. BURGESS* (aged 27) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
November, 1995); Graduate Student, Loyola University (prior to August, 1995).
CHRISTINE A. DRAPEAU* (aged 26) -- 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).
JOHN R. ELDER* (aged 48) -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Treasurer, Phoenix Family of Mutual
Funds (Phoenix Home Life Mutual Insurance Company) (1983 to March, 1995).
LINDA T. GIBSON* (aged 31) -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May, 1992); Assistant Secretary, The Landmark Funds
Broker-Dealer Services, Inc. (since October, 1992); Law Student, Boston
University School of Law (September, 1989 to May, 1992).
JOAN R. GULINELLO* (aged 41) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc. (since October,
1993); Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since
October, 1995); Vice President and Assistant General Counsel, Massachusetts
Financial Services Company (prior to October, 1993).
JAMES E. HOOLAHAN* (aged 49) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Senior Vice President, Signature Financial
Group, Inc. His address is 437 Madison Avenue, 39th Floor, New York, New York.
SUSAN JAKUBOSKI* (aged 33) -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Manager, Signature Financial Group (Cayman) Ltd. (since
August, 1994); Senior Fund Administrator, Signature Financial Group, Inc. (since
August, 1994); Assistant Treasurer, Signature Broker-Dealer Services, Inc.
(since September, 1994); Fund Compliance Administrator, Concord Financial Group
(November, 1990 to August, 1994). Her address is Elizabethan Square, George
Town, Grand Cayman, Cayman Islands, BWI.
MOLLY S. MUGLER* (aged 45) -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary, The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
KARYN A. NOKE* (aged 26) - Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Vice President, Signature Financial Group (Cayman) Ltd.
(since September, 1996); Assistant Vice President, Signature Financial Group,
Inc. (May, 1993 to August, 1996); Student, University of Massachusetts (prior to
May, 1993).
SHARON M. WHITSON* (aged 48) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
November, 1992); Associate Trader, Massachusetts Financial Services Company
(prior to November, 1992).
JULIE J. WYETZNER* (aged 37) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group,
Inc. Her address is 437 Madison Avenue, 39th Floor, New York, New York.
The Trustees and officers of the Trust also hold comparable positions
with certain other funds for which The Landmark Funds Broker-Dealer Services,
Inc., Signature Financial Group, Inc. or their affiliates serve as the
distributor or administrator.
As of April 28, 1997, all Trustees and officers as a group owned less
than 1% of the outstanding shares of each Fund. As of the same date, Citicorp
Life Insurance Company owned of record 85.5%, 75.72%, 79.32% and 93.08% of the
shares of CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400 and CitiSelect VIP Folio 500, respectively.
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.
The Trustees of the Trust (with the exception of Mr. Coolidge, who will
receive no remuneration from the Trust) are expected to receive the following
remuneration from the Trust during its fiscal year ending December 31, 1997:
<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 REGISTRANT (1) EXPENSES RETIREMENT TO TRUSTEES (1)
------------------ ------------------ ------------------ -------------- -----------------
<S> <C> <C>
H.B. ALVORD $1,500 NONE NONE $44,000
ELLIOTT J. BERV $1,500 NONE NONE $49,000
MARK T. FINN $1,500 NONE NONE $44,000
RILEY C. GILLEY $1,500 NONE NONE $44,000
DIANA R. HARRINGTON $1,500 NONE NONE $49,000
SUSAN B. KERLEY $1,500 NONE NONE $49,000
C. OSCAR MORONG, JR. $1,500 NONE NONE $64,000
WALTER E. ROBB, III $1,500 NONE NONE $44,000
E. KIRBY WARREN $1,500 NONE NONE $44,000
WILLIAM S. WOODS, JR. $1,500 NONE NONE $44,000
</TABLE>
(1) Information is estimated with respect to the fiscal year ending December
31, 1997. Messrs. Alvord, Berv, Coolidge, Finn, Gilley, Morong, Robb, Warren
and Woods and Mses. Harrington and Kerley are trustees of 23, 24, 46, 26,
25, 23, 24 23, 25, 23 and 23 funds, respectively, of the Landmark Family of
Funds.
MANAGER
Citibank manages the assets of each Fund and provides certain
administrative services to the Trust pursuant to separate management agreements
(the "Management Agreements"). Citibank furnishes at its own expense all
services, facilities and personnel necessary in connection with managing each
Fund's investments and effecting securities transactions for each Fund. The
Management Agreements provide that Citibank may delegate the daily management of
securities of each Fund to one or more subadvisers and that the Funds may employ
one or more subadvisers to be responsible for the daily management of securities
of each Fund. The Management Agreements provide that in each case Citibank will
supervise and monitor the performance of the subadvisers. The Management
Agreements will continue in effect until November 8, 1998 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 Fund, and, in either case, by a majority of the
Trustees of the Trust who are not parties to the Management Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Management Agreement.
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 Fund 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 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 securities
transactions for the applicable Fund, 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 under the Management Agreement.
The Prospectus contains a description of the aggregate fees payable to
Citibank for services under each of the Management Agreements and to the
Subadvisers for services under each of the Submanagement Agreements described
below. Citibank and the Subadvisers, if required by state law, will reimburse
the Funds or waive all or a portion of their management fees to the extent that
the expenses of a Fund exceed the expense limitation prescribed by any state in
which that Fund is qualified for offer or sale.
Pursuant to a sub-administrative services agreement with Citibank,
LFBDS performs such sub-administrative duties for the Trust as from time to time
are agreed upon by Citibank and LFBDS. For performing such sub-administrative
services, LFBDS receives compensation as from time to time is agreed upon by
Citibank. All such compensation is paid by Citibank.
The Funds have entered into separate Submanagement Agreements with the
Subadvisers listed below for the kinds of assets of each Fund noted opposite the
Subadvisers' names. Each Subadviser's compensation is described in the
Prospectus.
Large cap value securities Miller Anderson & Sherrerd, LLP
Small cap value securities Franklin Advisory Services, Inc.
International equity securities Hotchkis and Wiley, a division of the
Capital Management Group of Merrill
Lynch Asset Management, L.P.
Foreign government securities Pacific Investment Management Company
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for their allocated assets of the Funds, 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 Funds allocated to it and effecting
securities transactions concerning those assets.
Each Submanagement Agreement will continue in effect as to each
applicable Fund until November 8, 1998 and thereafter as long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Trust as to that Fund or by a vote of a majority of the outstanding
voting securities of that Fund, 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 Fund 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 Fund 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 to the
Trust and to Citibank. 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 Fund, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Submanagement Agreement.
DISTRIBUTOR
LFBDS serves as the Distributor of the Trust's shares pursuant to a
Distribution Agreement with the Trust. Unless otherwise terminated, the
Distribution Agreement continues in effect from year to year upon annual
approval by the Trust's Board of Trustees, or by the vote of a majority of the
outstanding shares of the Trust and by the vote of a majority of the Board of
Trustees of the Trust who are not parties to the Agreement or interested persons
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The Agreement will terminate in the event of its assignment,
as defined in the 1940 Act. LFBDS is not currently paid a fee for the provision
of distribution services with respect to shares of the Funds.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
each Fund. See "Custodian, Transfer Agent and Fund Accountant" in the Prospectus
for additional information. The principal business address of State Street is
225 Franklin Street, Boston, Massachusetts 02110.
AUDITORS
Price Waterhouse LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Price Waterhouse LLP is 160
Federal Street, Boston, Massachusetts 02110.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Fund's investment objective. Changes in the Fund'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 Fund are made by a portfolio manager who is
an employee of Citibank and who is appointed and supervised by its senior
officers or by a Subadviser. The portfolio manager or Subadviser may serve other
clients of Citibank 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 a Fund 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 Fund 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 Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits to the Fund.
The investment advisory fee that each Fund pays to Citibank will not be
reduced as a consequence of Citibank's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of
Citibank, Citibank 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 certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or a Subadviser's
other clients. Investment decisions for each Fund and for Citibank's and the
Subadvisers' 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 Fund.
When purchases or sales of the same security for a Fund 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.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest ($0.00001
par value per share) of each series and to divide or combine the shares of any
series into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series. The Funds and
Small Cap Equity VIP Fund are the only current series of shares of the Trust and
the Trust has reserved the right to create and issue additional series of
shares. Each share of each Fund represents an equal proportionate interest in
the Fund with each other share. Shares of each series participate equally in the
earnings, dividends and distribution of net assets of the particular series upon
liquidation or dissolution. Shares of each series are entitled to vote
separately to approve advisory agreements or changes in investment policy, but
shares of all series may vote together in the election or selection of Trustees
and accountants for the Trust.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required and has no present
intention to hold annual meetings of shareholders but the Trust will hold
special meetings of shareholders when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances (e.g., upon the application and submission of
certain specified documents to the Trustees by a specified number of
shareholders), the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's outstanding
shares would be sufficient. The Trust or any series of the Trust, as the case
may be, may be terminated (i) by a vote of a majority of the outstanding voting
securities of the Trust or the affected series or (ii) by the Trustees by
written notice to the shareholders of the Trust or the affected series. If not
so terminated, the Trust will continue indefinitely.
The rights accompanying Fund shares are legally vested in the Separate
Accounts. However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the Separate Accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in Separate Accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
Separate Account prospectus.
Share certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust may maintain
appropriate insurance (for example, 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 liabilities. Thus, the
risk of an investor 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.
10. CERTAIN ADDITIONAL TAX MATTERS
Any investment in zero coupon bonds, certain stripped securities, and
certain securities purchased at a market discount will cause a Fund to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund. A Fund's transactions in options, futures contracts, and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. Certain
positions held by a Fund 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 Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. A Fund will limit its
activities in options, futures contracts, and forward contracts to the extent
necessary to meet the requirements of Subchapter M of the Internal Revenue Code.
Special tax considerations apply with respect to foreign investments.
Use of foreign currencies for non-hedging purposes may be limited in order to
avoid a tax on a Fund. Investment by a Fund in certain "passive foreign
investments companies" may also be limited in order to avoid a tax on the Fund.
Investment income received by a Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle a Fund to a reduced
rate of tax or an exemption from tax on such income; each of the Funds intends
to qualify for treaty reduced rates where available. It is not possible,
however, to determine a Fund's effective rate of foreign tax in advance since
the amount of a Fund's assets to be invested within various countries is not
known.
11. FINANCIAL STATEMENTS
The attached unaudited financial information for the Funds for the
period from February 10, 1997 (commencement of operations) to March 31, 1997 has
been provided by management of the Funds.
<PAGE>
CitiSelect VIP Folio 200
- -------------------------------------------------------------------------------
Statement Of Asset and Liabilities March 31, 1997 (unaudited)
Assets
------
Investment (cost : $12,254,277) 12,036,853
Cash (domestic and foreign) 5,989
Receivable for securities Sold 2,939,306
Receivable for Capital Stock sold 35,910
Dividend receivable 5,812
Interest receivable 148,550
Other receivable 2,579,101
Other assets 35,747
----------
Total Assets 17,787,268
----------
Liabilities
-----------
Payable for Securities Purchased 4,019,725
Other payables 2,614,021
Other Liabilities 12,627
----------
Total Liabilities 6,646,373
----------
Net Assets 11,140,895
----------
Capital Section
---------------
Paid-in Capital 11,350,733
Undistributed Net Realized gain (loss) on Investments (54,021)
Unrealized appreciation (depreciation) of investments and
foreign currency translations (217,425)
Undistributed net investment income 61,608
----------
Total Capital 11,140,895
----------
<PAGE>
CitiSelect VIP Folio 200
- -------------------------------------------------------------------------------
Statement Of Operations (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Investment Income
-----------------
Interest Income 56,572
Dividend Income 7,818
Other Income
-------
Total Income 64,390
-------
Expenses
--------
Investment advisory fees 10,546
Interest expense -
Other expenses 10,626
-------
Gross expenses 21,172
Less: Waivers and Subsidies (7,796)
-------
Net expenses 13,376
======
Net investment income 51,014
-------
Net Realized and Unrealized Gain/(Loss) on Investments
Net realized gain/(loss) form investment transactions (43,427)
Net change in unrealized appreciation/(depreciation) (217,425)
-------
Net realized and unrealized gain/(loss) on investments (260,852)
-------
Net Increase/(Decrease) in Net Assets resulting
from Operations (209,838)
-------
<PAGE>
CitiSelect VIP Folio 200
- -------------------------------------------------------------------------------
Statement Of Changes in Net Assets (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Increase/(Decrease) in Net Assets from:
Operations
----------
Net investment income 51,014
Net realized gain/(loss) on investments (43,427)
Net change in unrealized appreciation/(depreciation)
of investments (217,425)
Net increase/(decrease) in net assets resulting from
operations -------
(209,838)
-------
Distribution to Shareholders
----------------------------
Net Investment Income -
Capital gains -
Return of Capital (Income) -
Return of Capital (Capital) -
-------
Total Distribution to Shareholders -
-------
Capital Stock Transactions
--------------------------
Net proceeds from sale of shares 11,353,558
Cost of shares repurchased (2,825)
Dividend and/or Distribution -
----------
11,350,733
----------
Net Increase/(decrease) in Net Assets 11,140,895
----------
Net Assets
Beginning of Period -
----------
End of Period 11,140,895
----------
<PAGE>
CitiSelect VIP Folio 200
- -------------------------------------------------------------------------------
Financial Highlights (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Net Asset Value, Beginning of period 10.00
-----
Income from Operations
Net Investment Income 0.04
Net realized and unrealized gain/(loss) on
investments (0.23)
----
Total from operations (0.19)
----
Less distribution from:
Net investment income -
Net realized gain on investments -
Return of Capital -
----
Total distributions -
----
Net Asset Value, end of period 9.81
----
Expense Ratio 0.95
----
<PAGE>
CITISELECT VIP FOLIO 300
- -------------------------------------------------------------------------------
Statement of Asset and Liabilities March 31, 1997 (unaudited)
Assets
------
Investment (cost : $14,321,385) 14,008,630
Cash (domestic and foreign) 3,305
Receivable for securities Sold 3,472,005
Receivable for Capital Stock sold 34,888
Dividend receivable 10,757
Interest receivable 172,255
Other receivable 3,470,510
Other assets 165,691
----------
Total Assets 21,338,041
----------
Liabilities
-----------
Payable for Securities Purchased 4,737,752
Other payables 3,635,793
Other Liabilities 15,308
----------
Total Liabilities 8,388,853
----------
Net Assets 12,949,188
----------
Capital Section
---------------
Paid-in Capital 13,268,403
Undistributed Net Realized gain (loss) on Investments (69,468)
Unrealized appreciation (depreciation) of investments and
foreign currency translations (312,754)
Undistributed net investment income 63,007
----------
Total Capital 12,949,188
----------
<PAGE>
CITISELECT VIP FOLIO 300
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Investment Income
-----------------
Interest Income 52,586
Dividend Income 13,537
Other Income -
------
Total Income 66,123
------
Expenses
--------
Investment advisory fees 11,825
Interest expense -
Other expenses 10,973
------
Gross expenses 22,798
Less: Waivers and Subsidies (7,818)
------
Net expenses 14,980
======
Net investment income 51,143
------
Net Realized and Unrealized Gain/(Loss) on Investments
- ------------------------------------------------------
Net realized gain/(loss) form investment transactions (57,604)
Net change in unrealized appreciation/(depreciation) (312,754)
-------
Net realized and unrealized gain/(loss) on investments (370,358)
-------
Net Increase/(Decrease) in Net Assets resulting
from Operations (319,215)
-------
<PAGE>
CITISELECT VIP FOLIO 300
- -------------------------------------------------------------------------------
Statement Of Changes In Net Assets (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Increase/(Decrease) in Net Assets from:
Operations
----------
Net investment income 51,143
Net realized gain/(loss) on investments (57,604)
Net change in unrealized appreciation/(depreciation)
of investments (312,754)
Net increase/(decrease) in net assets resulting from
operations -------
(319,215)
-------
Distribution to Shareholders
----------------------------
Net Investment Income -
Capital gains -
Return of Capital (Income) -
Return of Capital (Capital) -
-------
Total Distribution to Shareholders -
-------
Capital Stock Transactions
--------------------------
Net proceeds from sale of shares 13,303,132
Cost of shares repurchased (34,729)
Dividend and/or Distribution -
----------
13,268,403
----------
Net Increase/(decrease) in Net Assets 12,949,188
----------
Net Assets
Beginning of Period -
----------
End of Period 12,949,188
----------
<PAGE>
CITISELECT VIP FOLIO 300
- -------------------------------------------------------------------------------
Financial Highlights (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Net Asset Value, Beginning of period 10.00
-----
Income from Operations
Net Investment Income 0.04
Net realized and unrealized gain/(loss) on
investments (0.29)
-----
Total from operations (0.25)
-----
Less distribution from:
Net investment income -
Net realized gain on investments -
Return of Capital -
-----
Total distributions -
=====
Net Asset Value, end of period 9.75
-----
Expense Ratio 0.95
------------- -----
<PAGE>
CitiSelect VIP Folio 400
- ------------------------------------------------------------------------------
Statement Of Assets and Liabilities March 31, 1997 (unaudited)
Assets
------
Investment (cost :$13,797,853) 3,507,012
Cash (domestic and foreign) 900
Receivable for securities Sold 3,202,682
Receivable for Capital Stock sold 75,147
Dividend receivable 17,008
Interest receivable 119,365
Other receivable 2,744,827
Other assets 156,706
-----------
Total Assets 19,823,647
----------
Liabilities
-----------
Payable for Securities Purchased 4,372,077
Other payables 2,900,519
Other Liabilities 18,297
----------
Total Liabilities 7,290,893
----------
Net Assets 12,532,754
----------
Capital Section
---------------
Paid-in Capital 12,863,004
Undistributed Net Realized gain (loss) on Investments (89,834)
Unrealized appreciation (depreciation) of investments and
foreign currency translations (290,841)
Undistributed net investment income 50,425
----------
Total Capital 12,532,754
----------
<PAGE>
CitiSelect VIP Folio 400
- -------------------------------------------------------------------------------
Statement Of Operations (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Investment Income
-----------------
Interest Income 35,430
Dividend Income 19,583
Other Income
------
Total Income 55,013
------
Expenses
--------
Investment advisory fees 11,245
Interest expense -
Other expenses 13,491
------
Gross expenses 24,736
Less: Waivers and Subsidies (6,009)
------
Net expenses 18,727
------
Net investment income 36,286
------
Net Realized and Unrealized Gain/(Loss) on Investments
- ------------------------------------------------------
Net realized gain/(loss) form investment transactions (75,696)
Net change in unrealized appreciation/(depreciation) (290,841)
-------
Net realized and unrealized gain/(loss) on investments (366,537)
-------
Net Increase/(Decrease) in Net Assets resulting
from Operations (330,251)
-------
<PAGE>
CitiSelect VIP Folio 400
- -------------------------------------------------------------------------------
Statement Of Changes In Net Assets (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Increase/(Decrease) in Net Assets from:
Operations
----------
Net investment income 36,286
Net realized gain/(loss) on investments (75,696)
Net change in unrealized appreciation/(depreciation)
of investments (290,841)
Net increase/(decrease) in net assets resulting from
operations -------
(330,251)
-------
Distribution to Shareholders
----------------------------
Net Investment Income -
Capital gains -
Return of Capital (Income) -
Return of Capital (Capital) -
-------
Total Distribution to Shareholders -
-------
Capital Stock Transactions
Net proceeds from sale of shares 12,863,917
Cost of shares repurchased (912)
Dividend and/or Distribution -
----------
12,863,005
----------
Net Increase/(decrease) in Net Assets 12,532,754
----------
Net Assets
Beginning of Period -
----------
End of Period 12,532,754
----------
<PAGE>
CitiSelect VIP Folio 400
- -------------------------------------------------------------------------------
Financial Highlights (unaudited)
For the Period February 10, 1997 (Commencement of Operations) to March 31, 1997
Financial Highlights
Net Asset Value, Beginning of period 10.00
-----
Income from Operations
Net Investment Income 0.03
Net realized and unrealized gain/(loss) on
investments (0.30)
-----
Total from operations (0.27)
-----
Less distribution from:
Net investment income -
Net realized gain on investments -
Return of Capital -
-----
Total distributions -
Net Asset Value, end of period 9.73
-----
Expense Ratio 1.25
-----
<PAGE>
CitiSelect VIP Folio 500
- -------------------------------------------------------------------------------
Statement Of Asset and Liabilities March 31, 1997 (unaudited)
Assets
------
Investment (cost : $11,152,374) 10,907,360
Cash (domestic and foreign) 1,454
Receivable for securities Sold 1,441,652
Receivable for Capital Stock sold 9,555
Dividend receivable 20,743
Interest receivable 54,519
Other receivable 1,289,768
Other assets 67,228
----------
Total Assets 13,792,279
----------
Liabilities
-----------
Payable for Securities Purchased 2,013,576
Other payables 1,356,673
Other Liabilities 17,010
----------
Total Liabilities 3,387,259
----------
Net Assets 10,405,020
----------
Capital Section
---------------
Paid-in Capital 10,704,742
Undistributed Net Realized gain (loss) on Investments (92,861)
Unrealized appreciation (depreciation) of investments and
foreign currency translations (245,014)
Undistributed net investment income 38,153
----------
Total Capital 10,405,020
----------
<PAGE>
CitiSelect VIP Folio 500
- --------------------------------------------------------------------------------
Statement Of Operations (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Investment Income
-----------------
Interest Income 20,874
Dividend Income 23,522
Other Income -
-------
Total Income 44,396
-------
Expenses
--------
Investment advisory fees 10,354
Interest expense -
Other expenses 11,861
------
Gross expenses 22,215
Less: Waivers and Subsidies (4,960)
------
Net expenses 17,255
======
Net investment income 27,141
------
Net Realized and Unrealized Gain/(Loss) on Investments
- ------------------------------------------------------
Net realized gain/(loss) from investment transactions (81,849)
Net change in unrealized appreciation/(depreciation) (245,014)
-------
Net realized and unrealized gain/(loss) on investments (326,863)
-------
Net Increase/(Decrease) in Net Assets resulting
from Operations (299,722)
-------
<PAGE>
CitiSelect VIP Folio 500
- -------------------------------------------------------------------------------
Statement Of Changes In Net Assets (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1977
Increase/(Decrease) in Net Assets from:
Operations
Net investment income 27,141
Net realized gain/(loss) on investments (81,849)
Net change in unrealized appreciation/(depreciation)
of investments (245,014)
Net increase/(decrease) in net assets resulting from
-------
operations (299,722)
-------
Distribution to Shareholders
Net Investment Income -
Capital gains -
Return of Capital (Income) -
Return of Capital (Capital) -
-------
Total Distribution to Shareholders -
-------
Capital Stock Transactions
Net proceeds from sale of shares 10,705,066
Cost of shares repurchased (324)
Dividend and/or Distribution -
----------
10,704,742
----------
Net Increase/(decrease) in Net Assets 10,405,020
----------
Net Assets
Beginning of Period -
----------
End of Period 10,405,020
----------
<PAGE>
CitiSelect VIP Folio 500
- -------------------------------------------------------------------------------
Financial Highlights (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Net Asset Value, Beginning of period 10.00
-----
Income from Operations
Net Investment Income 0.03
Net realized and unrealized gain/(loss) on
investments (0.32)
----
Total from operations (0.29)
----
Less distribution from:
Net investment income -
Net realized gain on investments -
Return of Capital -
----
Total distributions -
====
Net Asset Value, end of period 9.71
----
Expense Ratio 1.25
----
<PAGE>
497(c) File Nos. 333-15119 and 811-07893
PROSPECTUS
- --------------------------------------------------------------------------------
May 1, 1997
LANDMARK SMALL CAP EQUITY VIP FUND
Landmark Small Cap Equity VIP Fund (the "Fund") is an investment vehicle for
variable annuity contracts and variable life insurance policies offered by the
separate accounts ("Separate Accounts") of participating life insurance
companies ("Participating Insurance Companies").
The Fund's objective is long-term capital growth; dividend income, if any,
is incidental to this investment objective. The Fund invests primarily in stocks
of U.S. issuers that have small market capitalizations (i.e., $750 million or
less). In addition, the Fund may invest in companies that are believed to be
emerging companies relative to their potential markets. There is, of course, no
assurance that the Fund will achieve its investment objective.
Citibank, N.A. is the investment manager for the Fund.
- --------------------------------------------------------------------------------
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SHARES OF THE FUND 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, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOAN LOSS OF
PRINCIPAL AMOUNTS INVESTED.
- --------------------------------------------------------------------------------
Shares of the Fund are not offered to the general public but may only be
purchased by the Separate Accounts of Participating Insurance Companies for
the purpose of funding variable annuity contracts and variable life insurance
policies.
- --------------------------------------------------------------------------------
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated May 1, 1997 (and incorporated by reference in this Prospectus)
has been filed with the Securities and Exchange Commission. Copies of the
Statement of Additional Information may be obtained without charge, and further
inquiries about the Fund may be made, by contacting the Fund's distributor at
(617) 423-1679 or a Participating Insurance Company.
TABLE OF CONTENTS
Condensed Financial Information .........................................2
Investment Information ..................................................3
Certain Risk Considerations .............................................4
Valuation of Shares .....................................................5
Purchase and Redemption of Shares .......................................5
Dividends and Distributions .............................................6
Management ..............................................................6
Tax Matters .............................................................7
Performance Information .................................................8
General Information .....................................................9
Appendix A -- Permitted Investments and
Investment Practices ....................................A-1
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The following table provides condensed financial information about the Fund for
the period indicated. This information is unaudited and should be read in
conjunction with the financial statements and notes thereto which are
incorporated by reference in the Statement of Additional Information.
--------------------
LANDMARK SMALL CAP
EQUITY VIP FUND
FINANCIAL HIGHLIGHTS (UNAUDITED) FOR THE PERIOD
FEBRUARY 10, 1997+
TO MARCH 31, 1997
- -----------------------------------------------------------------------------
Net Asset Value, beginning of period ...................... $10.00
------
Income from Operations:
Net investment loss ....................................... (0.01)
Net realized loss on investment ........................... (0.94)
------
Total from operations ................................. (0.95)
------
Net Asset Value, end of period ............................ $ 9.05
======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) ................. $3,130
Ratio of expenses to average net assets ................... 0.90%*
Ratio of net investment loss to average net assets ........ (0.11)%*
Total return .............................................. (9.50)%**
Note: If Agents of the Fund had not voluntarily agreed to waive a portion of
their fees and the sub-administrator not assumed expenses for the period
indicated, the net investment income per share would have been as follows:
Net income per share ...................................... $(0.02)
RATIOS:
Expenses to average net assets ............................ 2.50%*
Net investment income to average net assets ............... (1.71)%*
+Commencement of operations.
*Annualized.
**Not annualized.
<PAGE>
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The investment objective of the Fund is long-term capital
growth. Dividend income, if any, is incidental to this investment objective.
The investment objective of the Fund may be changed by its Trustees without
approval by the Fund's shareholders, but shareholders will be given written
notice at least 30 days before any change is implemented. Of course, there can
be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES: The Fund seeks its objective by investing in a diversified
portfolio consisting primarily of equity securities of U.S. companies that have
small market capitalizations. Under normal circumstances, at least 65% of the
Fund's total assets is invested in equity securities of these companies. Small
market capitalization companies are those with market capitalizations of $750
million or less at the time of the Fund's investment. In addition, the Fund may
invest in companies that are believed to be emerging companies relative to their
potential markets.
The Manager may also select other securities for the Fund that it believes
provide an opportunity for appreciation, such as fixed income securities and
convertible and non-convertible bonds. Most of the Fund's long-term
non-convertible debt investments are investment grade securities, and less than
5% of the Fund's investments consist of securities rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Rating Services
("S&P").
ADDITIONAL INVESTMENT POLICIES:
NON-U.S. SECURITIES. While the Fund emphasizes U.S. securities, the Fund
may invest a portion of its assets in non-U.S. equity and debt securities,
including depository receipts. The Fund does not intend to invest more than
25% of its assets in non-U.S. securities, including sponsored American
Depositary Receipts, which represent the right to receive securities of non-
U.S. issuers deposited in a U.S. or correspondent bank. The Fund may invest up
to 5% of its assets in closed-end investment companies which primarily hold
non-U.S. securities.
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, the Fund 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 Fund's
permitted investments and investment practices, see Appendix A -- Permitted
Investments and Investment Practices on page A-1. The Fund will not necessarily
invest or engage in each of the investments and investment practices in Appendix
A but reserves the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a
list of specific investment restrictions which govern the investment policies of
the Fund, including a limitation that the Fund may borrow money from banks in an
amount not to exceed 1/3 of the Fund's net assets for extraordinary or emergency
purposes (e.g., to meet redemption requests). As a matter of operating policy,
however, the Fund will not borrow money in excess of 10% of its total assets
(taken at cost), except that it may borrow up to 25% of its total assets when
such borrowing is necessary to meet redemption requests. Also, as a matter of
operating policy, the Fund will not purchase any securities at any time at which
borrowings exceed 5% of its total assets (taken at market value). Except as
otherwise indicated, the Fund's investment objective and policies may be changed
without shareholder 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 the Fund's
securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of the Fund will be sold whenever it is
appropriate to do so in light of the Fund's investment objective, without regard
to the length of time a particular security may have been held. The turnover
rate for the Fund is not expected to exceed 100% annually. The amount of
brokerage commissions and realization of taxable capital gains will tend to
increase as the level of portfolio activity increases.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's
security transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible.
STATE INSURANCE REGULATION. The Fund provides an investment vehicle for
variable annuity contracts and variable life insurance policies to be offered by
the Separate Accounts of Participating Insurance Companies. Certain states have
regulations concerning concentration of investments and purchase and sale of
futures contracts, among other techniques. If these regulations are applied to
the Fund, the Fund may be limited in its ability to engage in such techniques
and to manage its investments with the flexibility provided herein. It is the
Fund's intention to operate in material compliance with current insurance laws
and regulations, as applied in each jurisdiction in which contracts or policies
of Separate Accounts of Participating Insurance Companies are offered.
CERTAIN RISK CONSIDERATIONS
- --------------------------------------------------------------------------------
The risks of investing in the Fund 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. The Fund's net asset value will fluctuate based
on changes in the values of the underlying portfolio securities. This means that
an investor's shares 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.
SMALL CAP COMPANIES. Investors in the Fund 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. Shares of the Fund, therefore, may be subject to greater fluctuation
in value than shares of an equity fund with more of its investments in
securities of larger, more established companies.
NON-U.S. SECURITIES. 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 Fund. Prices at which the
Fund 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 Fund.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect the Fund'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 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
ratio of the Fund may be higher than those of investment companies investing
exclusively in U.S. securities.
The Fund may invest in securities of issuers in developing countries, and
all of these risks are increased for investments in issuers in developing
countries.
INVESTMENT PRACTICES. Certain of the investment practices employed for the
Fund may entail certain risks. These risks are in addition to the risks
described above and are described in Appendix A. See Appendix A -- Permitted
Investments and Investment Practices on page A-1.
VALUATION OF SHARES
- --------------------------------------------------------------------------------
Net asset value per share of the Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange (normally
4:00 p.m. Eastern time) by adding the market value of all securities and other
assets of the Fund, then subtracting the liabilities charged to the Fund, and
then dividing the result by the number of outstanding shares of the Fund.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In light
of the non-U.S. nature of some of the Fund's investments, trading may take place
in securities held by the Fund on days which are not Business Days and on which
it will not be possible to purchase or redeem shares of the Fund.
PURCHASE AND REDEMPTION
OF SHARES
- --------------------------------------------------------------------------------
Investors may not purchase or redeem shares of the Fund directly, but only
through variable annuity contracts and variable life insurance policies offered
through the Separate Accounts of Participating Insurance Companies. Investors
should refer to the prospectus of the Participating Insurance Company's Separate
Account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select the Fund as an investment option
for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.
The Separate Accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of the Fund based on, among other things, the
amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Fund are
effected on Business Days only. Orders for the purchase of shares of the Fund
are effected at the net asset value per share next calculated after an order is
received in proper form by the Fund or its designee so long as payment for the
shares is received by the end of the next Business Day. Redemptions are effected
at the net asset value per share next calculated after receipt in proper form of
a redemption request by the Fund or its designee. For purposes of the purchase
and redemption of shares of the Fund, the Separate Account of a Participating
Insurance Company shall be a designee of the Fund for receipt of requests for
purchase and redemption, and receipt by such designee shall constitute receipt
by the Fund, provided that the Fund receives notice of such requests in
accordance with applicable requirements on the next following Business Day.
Separate Accounts must transmit purchase and redemption orders promptly. Payment
for redemptions will be made by the Fund within seven days after the request is
received. The Fund may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission.
The Fund does not assess any sales charges or redemption fees. Sales
charges, mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies under the variable annuity contracts or
variable life insurance policies. The Participating Insurance Companies are
required to describe these fees in the prospectuses for the contracts or
policies.
Shares of the Fund may be sold to and held by Separate Accounts that fund
variable annuity and variable life insurance contracts issued by both affiliated
and unaffiliated Participating Insurance Companies. The Fund currently does not
foresee any disadvantages to the holders of variable annuity contracts and
variable life insurance policies of affiliated and unaffiliated Participating
Insurance Companies arising from the fact that interests of the holders of
variable annuity contracts and variable life insurance policies may differ due
to differences of tax treatment or other considerations or due to conflicts
between the affiliated or unaffiliated Participating Insurance Companies.
Nevertheless, the Trustees will monitor events to seek to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response to such conflicts. Should a material
irreconcilable conflict arise between the holders of variable annuity contracts
and variable life insurance policies of affiliated or unaffiliated Participating
Insurance Companies, the Participating Insurance Companies may be required to
withdraw the assets allocable to some or all of the Separate Accounts from the
Fund. Any such withdrawal could disrupt orderly portfolio management to the
potential detriment of such holders. The variable annuity contracts and variable
life insurance policies are described in the separate prospectuses issued by the
Participating Insurance Companies. The Fund assumes no responsibility for such
prospectuses.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Substantially all of the Fund's net income from dividends and interest is
distributed annually on or about the last day of December. Net realized
short-term and long-term capital gains, if any, will be distributed annually, in
December. The Fund may also make additional distributions to the extent
necessary to avoid the application of the 4% non-deductible excise tax on
certain undistributed income and net capital gains of mutual funds.
All dividends and distributions will be automatically reinvested in
additional shares of the Fund issued at the net asset value of such shares on
the payment date of such dividends and distributions.
MANAGEMENT
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
Variable Annuity Portfolios. A majority of the Trustees are not affiliated with
Citibank. More information on the Trustees and officers of the Fund appears
under "Management" in the Statement of Additional Information.
INVESTMENT MANAGER: CITIBANK. The Fund draws on the strength and experience of
Citibank. 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 $81 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.
Citibank manages the Fund's assets pursuant to a Management Agreement.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Fund's business affairs. Citibank also provides certain
administrative services to the Fund. These administrative services include
providing general office facilities and supervising the overall administration
of the Fund. Pursuant to a sub-administrative services agreement, the
Distributor performs such sub-administrative duties for the Fund as from time to
time are agreed upon by Citibank and the Distributor. The Distributor's
compensation as sub-administrator is paid by Citibank.
Linda J. Intini, Vice Presidenet, has managed the Fund since April 1997. Ms.
Intini has over nine years of experience specializing in the management of small
cap equities, including over $300 million of Citibank's small cap portfolios for
trusts and individuals. Prior to joining Citibank in 1992 she was a Portfolio
Manager and Research Analyst with Manufacturers Hanover in the Special Equity
area. She also specialized in equity research at Eberstadt Fleming.
MANAGEMENT FEES. For its services under the Management Agreement, Citibank
receives a fee, which is accrued daily and paid monthly, of 0.75% of the Fund's
average daily net assets on an annualized basis for the Fund's then-current
fiscal year. This fee is higher those those paid by most investment companies.
Citibank may voluntarily agree to waive a portion of its investment advisory
fee.
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan
and other relationships with the issuers of securities purchased on behalf of
the Fund, 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 Fund 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 Fund. Citibank believes that its services
under the Management Agreement and the activities performed by it as
administrator 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
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 for the
Fund. If Citibank or its affiliates were to be prevented from acting as the
Manager or administrator, the Fund would seek alternative means for obtaining
these services. The Fund does not expect that shareholders would suffer any
adverse financial consequences as a result of any such occurrence.
DISTRIBUTOR: The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS"), 6 St.
James Avenue, Boston, Massachusetts 02116 (telephone: (617) 423-1679), is the
distributor of shares of the Fund. LFBDS receives no fee for its distribution
services.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
"Landmark" is a service mark of LFBDS.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for the
Fund. Securities may be held by a sub-custodian bank approved by the Trustees.
State Street also provides certain fund accounting services and calculates the
daily net asset value for the Funds. The principal business address of State
Street is 225 Franklin Street, Boston, Massachusetts 02110.
TAX MATTERS
- --------------------------------------------------------------------------------
This discussion of the federal income taxation of the Fund and its
distribution is for general information only. Purchasers of variable annuity
contracts or variable life insurance policies issued by Participating Insurance
Companies should refer to the prospectuses for those contracts or policies for
additional tax information and should consult their own tax advisers about their
particular situations.
The Fund will be treated as a separate entity for federal income tax
purposes. The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
which would relieve the Fund of liability for Federal income and excise taxes to
the extent the Fund's earnings are distributed in accordance with the timing
requirements of the Code. In order to so qualify, the Fund must comply with
certain distribution, diversification, source of income, holding period, and
other applicable requirements. If for any taxable year the Fund does not qualify
for the special Federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
the Fund's distributions to segregated asset accounts holding shares of the Fund
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits. A failure of the Fund to qualify as a
regulated investment company could also have the adverse effects on investors
noted below.
A segregated asset account upon which a variable annuity contract or
variable life insurance policy is based must meet certain diversification tests
set forth in U.S. Treasury regulations. If, as is intended, the Fund meets these
tests and complies with certain other conditions, a segregated asset account
investing solely in shares of the Fund will also be deemed to meet these
diversification requirements. However, a failure of the Fund to qualify as a
regulated investment company or to meet such conditions and to comply with such
tests could cause the owners of variable annuity contracts and variable life
insurance policies based on such accounts to recognize ordinary income each year
in the amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).
Provided that the Fund and a segregated asset account investing in the Fund
satisfy the above requirements, any distributions from the Fund will be exempt
from current Federal income taxation to the extent that such distributions
accumulate in a variable annuity contract or a variable life insurance contract.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus and is subject to
change by legislative or administrative action.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Fund performance may be quoted in advertising, shareholder reports and other
communications in terms of yield or total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yield and total rates of return fluctuate in response to market conditions and
other factors, and the value of an investor's shares when redeemed may be more
or less than their original cost.
The Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period which was made at the maximum public
offering price and reflects any change in net asset value per share and is
compounded to include the value of any shares purchased with any dividends or
capital gains declared during such period. Period total rates of return may be
"annualized." An "annualized" total rate of return assumes that the period total
rate of return is generated over a one-year period.
The Fund may provide annualized "yield" quotations. The "yield" of the Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one-year period and is shown as a percentage of the maximum public
offering price on the last day of that period. A "yield" quotation, unlike a
total rate of return quotation, does not reflect changes in net asset value.
Yields and total returns quoted for the Fund include the effect of deducting
the Fund's expenses, but may not include charges and expenses attributable to a
particular variable annuity contract or variable life insurance policy. Since
shares of the Fund can be purchased only through a variable annuity contract or
variable life insurance policy, a prospective purchaser should carefully review
the prospectus of the variable annuity contract or variable life insurance
policy he or she has chosen for information on relevant charges and expenses.
Including these charges in the quotations of the Fund's yield and total return
would have the effect of decreasing performance. Performance information for the
Fund must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Fund. See the
Statement of Additional Information for more information concerning the
calculation of yield and total rate of return quotations for the Fund.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION: The Fund is a newly established series of Variable Annuity
Portfolios, an open-end investment company organized as a Massachusetts business
trust on October 18, 1996.
The Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must invest at least 75% of its assets in cash and cash items, U.S.
Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
investment company and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
VOTING AND OTHER RIGHTS: The Fund may issue an unlimited number of shares
($0.00001 par value), may create new series of shares and may divide shares in
each series into classes. Each share of the Fund gives the shareholder one vote
in Trustee elections and other matters submitted to shareholders for vote. All
shares of each series of Variable Annuity Portfolios have equal voting rights
except that, in matters affecting only a particular series, only shares of that
particular series are entitled to vote.
As a series of a Massachusetts business trust, the Fund is not required to
hold annual shareholder meetings. Shareholder approval will usually be sought
only for changes in the Fund's fundamental investment restrictions and for the
election of Trustees under certain circumstances. Trustees may be removed by
shareholders under certain circumstances. Each share of the Fund is entitled to
participate equally in dividends and other distributions and the proceeds of any
liquidation of that Fund.
The rights accompanying Fund shares are legally vested in the Separate
Accounts. However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the Separate Accounts
in a manner consistent with timely voting instructions received from the holders
of variable contracts and variable life insurance policies. Each Participating
Insurance Company will vote Fund shares held in Separate Accounts for which no
timely instructions are received from the holders of variable annuity contracts
and variable life insurance policies, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received. For a
further discussion, please refer to the insurance company's Separate Account
prospectus.
CERTIFICATES: The Funds' Transfer Agent maintains a share register for
shareholders of record, i.e., the Separate Accounts of the Participating
Insurance Companies. Share certificates are not issued.
EXPENSES: In addition to amounts payable under the Management Agreement, up to
0.15% of the Fund's average daily net assets on an annualized basis for the
Fund's then-current fiscal year may be paid to certain service providers and
others in order to cover Fund operating expenses. Such expenses may include,
among other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with the Manager or LFBDS, government fees,
taxes, accounting and legal fees, expenses of communicating with shareholders,
interest expense, and insurance premiums.
All fee waivers are voluntary and may be reduced or terminated at any time.
COUNSEL AND INDEPENDENT AUDITOR: Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for the Fund. Price Waterhouse LLP, located at 160
Federal Street, Boston, Massachusetts 02110, serves as independent auditor for
the Fund.
The Statement of Additional Information dated the date hereof contains more
detailed information about the Fund, including information related to (i)
investment policies and restrictions, (ii) the Trustees, officers and
Administrator, (iii) securities transactions, (iv) the Fund's shares, including
rights and liabilities of shareholders, (v) the method used to calculate
performance information, and (vi) the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. This Prospectus does not
constitute an offering by the Fund or its distributor in any jurisdiction in
which such offering may not lawfully be made.
<PAGE>
APPENDIX A
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PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. The Fund 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 Fund a security at one price,
subject to the Fund'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. The Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When the Fund 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 Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund'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, the Fund 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 Fund's total
assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or reverse repurchase agreement, the Fund 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 have increased or the value
of the securities purchased has decreased, the Fund could experience a loss.
RULE 144A SECURITIES. The Fund may purchase restricted securities that are
not registered for sale to the general public. If the Manager determines that
there is a dealer or institutional market in the securities, the securities will
not be treated as illiquid for purposes of the Fund's investment limitations.
The Trustees will review these determinations. These securities are known as
"Rule 144A securities," because they are traded under SEC 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. The Fund 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 the Fund to sell them promptly at an
acceptable price.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, the Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis, which means that the securities would be delivered to the Fund
at a future date beyond customary settlement time. Under normal circumstances,
the Fund takes delivery of the securities. In general, the Fund 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 Fund
establishes a segregated account consisting of cash, cash equivalents or high
quality debt securities equal to the amount of the Fund's commitments to
purchase "when-issued" securities. An increase in the percentage of the Fund's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
FUTURES CONTRACTS. The Fund may purchase stock index 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 Fund
are standardized contracts traded on commodities exchanges or boards of trade.
Because the value of a futures contract changes based on the price of the
underlying security or other asset, futures contracts are commonly referred to
as "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 the Fund 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 the Fund's initial margin deposit. The Fund currently does
not intend to enter into a futures contract if, as a result, the initial margin
deposits on all of the Fund's futures contracts would exceed approximately 5% of
the Fund's net assets. Also, the Fund 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 market value of its total assets other than its
futures contracts and to segregate sufficient assets to meet its obligations
under outstanding futures contracts.
The ability of the Fund to utilize futures contracts successfully will
depend on the Adviser's ability to predict interest rate or stock price
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 Adviser's view as to interest rate or stock price 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 the Fund's related portfolio position. Also,
the futures markets may not be liquid in all circumstances. As a result, in
certain markets, the Fund 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, the Fund 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, the Fund 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 Fund in entering into such
transactions.
The use of futures contracts potentially exposes the Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases the Fund's potential for
both gain and loss. As noted above, each of the Funds 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 Fund. The use of futures
contracts may increase the amount of taxable income of the Fund and may affect
in other ways the amount, timing and character of the Fund's income for tax
purposes, as more fully discussed in the section entitled "Certain Additional
Tax Matters" in the Statement of Additional Information.
The use of futures by the Fund and some of their risks are described more
fully in the Statement of Additional Information.
SECURITIES OF ISSUERS IN DEVELOPING COUNTRIES. Shareholders 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 Fund'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.
LOWER-RATED DEBT SECURITIES. The Fund may purchase lower-rated securities
(those rated Baa or better by Moody's or BBB by S&P) and equivalent securities
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.
SHORT SALES "AGAINST THE BOX." In a short sale, a fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The Fund may engage in short sales only if at the time of
the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." The Fund may make a short sale as a
hedge, when it believes that the value of a security owned by the Fund (or a
security convertible or exchangeable for such security) may decline, or when the
Fund wants to sell the security at an attractive current price but wishes to
defer recognition of gain or loss for tax purposes. Not more than 40% of the
Fund's total assets would be involved in short sales "against the box."
<PAGE>
497(c) File Nos. 333-15119 and 811-07893
Statement of
Additional Information
May 1, 1997
LANDMARK SMALL CAP EQUITY VIP FUND
Variable Annuity Portfolios (the "Trust") is an investment company
which was organized as a business trust under the laws of the Commonwealth of
Massachusetts on October 18, 1996. The Trust offers shares of Landmark Small Cap
Equity VIP Fund (the "Fund"), as well as the shares of four other series. The
shares of the Fund are offered only to separate accounts ("Separate Accounts")
of participating life insurance companies ("Participating Insurance Companies")
for the purpose of funding variable annuity contracts and variable life
insurance policies. The address and telephone number of the Trust are 6 St.
James Avenue, Boston, Massachusetts 02116, (617) 423-1679.
FUND SHARES 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 PRINCIPAL AMOUNT INVESTED.
Table of Contents Page
- ----------------- ----
The Trust 2
Investment Objective and Policies 2
Description of Permitted Investments and
Investment Practices 3
Investment Restrictions 8
Performance Information 11
Determination of Net Asset Value; Valuation of
Securities; Additional Redemption Information 12
Management 13
Portfolio Transactions 18
Description of Shares, Voting Rights and Liabilities 19
Certain Additional Tax Matters 20
Financial Statements 21
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Trust's Prospectus, dated May 1, 1997, by which shares of the Fund are offered.
This Statement of Additional Information should be read in conjunction with the
Prospectus, a copy of which may be obtained by an investor without charge by
contacting the Trust's distributor at (617) 423-1679 or a Participating
Insurance Company.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
Variable Annuity Portfolios, the Trust, is an investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on October 18, 1996. This Statement of Additional Information
relates to Landmark Small Cap Equity VIP Fund, a series of the Trust. The Fund
is an investment vehicle for variable annuity contracts and variable life
insurance policies offered by Separate Accounts of Participating Insurance
Companies.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser and
also provides certain administrative services to the Fund. The Manager manages
the investments of the Fund from day to day in accordance with the Fund's
investment objective and policies. The selection of investments for the Fund and
the way they are managed depend on the conditions and trends in the economy and
the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Fund. Shares of the Fund are continuously sold by The Landmark
Funds Broker-Dealer Services, Inc., the Funds' distributor ("LFBDS" or the
"Distributor"), only to Separate Accounts.
2. INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital growth.
Dividend income, if any, is incidental to the Fund's investment objective.
The investment objective of the Fund may be changed by its Trustees
without approval by the Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that the Fund will achieve its investment objective.
The Prospectus contains a discussion of the various types of securities
in which the Fund may invest and the risks involved in such investments. The
following supplements the information contained in the Prospectus concerning the
investment objective, policies and techniques of the Fund.
While it is the policy of the Fund to invest its assets in a broadly
diversified portfolio of equity securities consisting mainly of common stocks of
U.S. issuers, the Fund may also invest in other types of securities such as
fixed income securities and convertible and non-convertible bonds.
The Trust has also adopted the following policies with respect to the
Fund's investments in (i) warrants and (ii) securities of issuers with less than
three years' continuous operation. The Trust's purchases of warrants for the
Fund will not exceed 5% of the Fund's net assets. Included within that amount,
but not exceeding 2% of its net assets, may be warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. Any such warrants
will be valued at their market value except that warrants which are attached to
securities at the time such securities are acquired for the Fund will be deemed
to be without value for the purpose of this restriction. The Trust will not
invest more than 5% of the Fund's assets in companies which, including their
respective predecessors, have a record of less than three years' continuous
operation.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements collateralized by
securities in which the Fund may otherwise invest. Repurchase agreements are
agreements by which the Fund 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 Investment Company Act of
1940, as amended (the "1940 Act"), repurchase agreements may be considered to be
loans by the buyer. The Fund'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 the Fund may incur certain costs in liquidating this collateral and in
certain cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Fund are fully collateralized, with such
collateral being marked to market daily.
SECURITIES OF NON-U.S. ISSUERS
The Fund 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 the Fund, 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 the Fund's assets may be released prior to receipt
of payments, may expose the Fund 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.
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 Fund 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.
The Fund 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.
SHORT SALES "AGAINST THE BOX"
In a short sale, a fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
Fund, in accordance with its investment restrictions, may engage in short sales
only if at the time of the short sale it owns or has the right to obtain, at no
additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If the Fund engages in a short sale, the collateral for the short
position is maintained for the Fund by the custodian or qualified sub-custodian.
While the short sale is open, an amount of securities equal in kind and amount
to the securities sold short or securities sold convertible into or exchangeable
for such equivalent securities are maintained in a segregated account for the
Fund. These securities constitute the Fund's long position.
The Fund does not engage in short sales against the box for investment
purposes. The Fund may, however, make a short sale against the box as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when the Fund wants to sell the security at
an attractive current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes or for purposes of satisfying certain tests
applicable to regulated investment companies under the Internal Revenue Code. In
such case, any future losses in the Fund's long position should be reduced by a
gain in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced depends upon the amount of the security sold short relative
to the amount the Fund owns. There are certain additional transaction costs
associated with short sales against the box, but the Fund endeavors to offset
these costs with the income from the investment of the cash proceeds of short
sales.
The Manager does not expect that more than 40% of the Fund's total
assets would be involved in short sales against the box. The Manager does not
currently intend to engage in such sales.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, the Fund 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 at
any time on customary industry settlement notice (which will not usually exceed
three business days). During the existence of a loan, the Fund 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 the collateral (subject to a rebate payable
to the borrower). Where the borrower provides the Fund with collateral
consisting of U.S. Treasury obligations, the borrower is also obligated to pay
the Fund a fee for use of the borrowed securities. The Fund, 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 to be of good standing, and when, in
the judgment of the Manager, the consideration which can be earned currently
from loans of this type justifies the attendant risk. In addition, the Fund
could suffer a loss if the borrower terminates the loan and the Fund is forced
to liquidate investments in order to return the cash collateral to the buyer. If
the Manager determines to make loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Fund's total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Fund would
take delivery of such securities. When the Fund 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 the Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the Fund 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 Fund does not intend to make such
purchases for speculative purposes and intends 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, the Fund
may have to sell assets which have been set aside in order to meet redemptions.
Also, if the Manager determines it is advisable as a matter of investment
strategy to sell the "when-issued" or "forward delivery" securities, the Fund
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 Fund's payment obligation).
RULE 144A SECURITIES
Consistent with applicable investment restrictions, the Fund 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, the Fund will not invest 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 determines, based on the
trading markets for the specific restricted security, that it is liquid. The
Trustees may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities. The Trustees,
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 the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. The liquidity of investments in Rule 144A
securities 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.
FUTURES CONTRACTS
The Fund may enter into stock index futures contracts and/or foreign
currency 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 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 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 the Fund purchases or sells a
futures contract. At the same time such a purchase or sale is made, the Fund
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 Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable.
The Fund may enter into stock index futures contracts to gain stock
market exposure while holding cash available for investments and redemptions.
The Fund 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. The
Fund 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 Fund 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 Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund 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 the
Fund sells a futures contract to protect against losses in the securities held
by the Fund), 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 the
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the securities underlying such
contracts correlate with movements in the value of the Fund'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 Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by gains
on the Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund'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 Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, even
where the Fund enters into futures 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 Fund 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 the Fund 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 Fund, which could require the Fund 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.
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 the Fund's hedging strategies.
CFTC regulations require compliance with certain limitations in order
to assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund 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 the Fund's non-hedging futures positions would exceed 5% of the Fund's
net assets.
The Fund will comply with this CFTC requirement, and the Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by the Fund in a segregated
account with the Fund'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 Fund's obligations under the futures contract. The
second is that the Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by
the Fund not exceed approximately 50% of the market value of the Fund'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 ability of the Fund to engage in futures transactions may be
limited by the current federal income tax requirement that less than 30% of the
Fund's gross income be derived from the sale or other disposition of stock or
securities held for less than three months. In addition, the use of futures
contracts may increase the amount of taxable income of the Fund and may affect
the amount, timing and character of the Fund's income for tax purposes, as more
fully discussed herein in the section entitled "Certain Additional Tax Matters."
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, has adopted the following policies
which may not be changed with respect to the Fund without approval by holders of
a majority of the outstanding voting securities of the Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding voting securities of the Fund present at a meeting at
which the holders of more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund. The term "voting securities" as used
in this paragraph has the same meaning as in the 1940 Act.
The Fund may not:
(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 (nor purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Fund, taken at market value). It is intended that the Fund would borrow money
only from banks and only to accommodate requests for the repurchase of shares of
the Fund 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
Fund's total assets (taken at market value), (b) through the use of repurchase
agreements or the purchase of short-term obligations or (c) by purchasing all or
a portion of an issue of debt 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 Fund more
than 10% of the voting securities of such issuer to be held by the Fund, except
that the Fund may invest all or substantially all of its investable assets in
another registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to the Fund (a "Qualifying Portfolio").
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's total assets more than 5% of the
Fund'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), except that the Fund
may invest all or substantially all of its investable assets in a Qualifying
Portfolio.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund'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.
(6) Underwrite securities issued by other persons, except that all the
assets of the Fund may be invested in a Qualifying Portfolio and except in so
far as the Fund 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 Fund reserves the freedom of action to hold
and to sell real estate acquired as a result of the ownership of securities by
the Fund).
(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, except as appropriate to evidence a debt
incurred without violating Investment Restriction (1) above.
NON-FUNDAMENTAL RESTRICTIONS
The Fund does not as a matter of operating policy:
(i) borrow money in excess of 10% of the total assets of the Fund
(taken at cost), except that the Fund may borrow up to 25% of its total assets
when such borrowing is necessary to meet redemption requests (moreover, the Fund
will not purchase any securities for the Fund at any time at which borrowings
exceed 5% of the total assets of the Fund (taken at market value)),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the net assets of the Fund (taken at market value),
(iii) sell any security which the Fund does not own unless by virtue of
the ownership of other securities there is at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions,
(iv) invest for the purpose of exercising control or management, except
that all of the assets of the Fund may be invested in a Qualifying Portfolio,
(v) purchase securities issued by any registered investment company,
except that all of the assets of the Fund may be invested in a Qualifying
Portfolio and except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase the securities of any registered
investment company if such purchase at the time thereof would cause more than
10% of the total assets of the Fund (taken in each case at the greater of cost
or market value) to be invested in the securities of such issuers or would cause
more than 3% of the outstanding voting securities of any such issuer to be held
for the Fund (for purposes of this clause (v) securities of non-U.S. banks shall
be treated as investment company securities, except that debt securities and
non-voting preferred stock of non-U.S. banks are not subject to the 10%
limitation described herein),
(vi) knowingly invest in securities which are not readily marketable or
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements maturing in not more than seven days and other than
securities which may be resold pursuant to Rule 144A under the Securities Act if
the Board of Trustees of the Trust determines that a liquid market exists for
such securities) if, as a result thereof, more than 15% of the Fund's net assets
(taken at market value) would be so invested (including repurchase agreements
maturing in more than seven days), except that the Trust may invest all or
substantially all of the Fund's assets in a Qualifying Portfolio,
(vii) purchase or retain any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is an officer or director of the Manager, if after the purchase
of the securities of such issuer by the Fund, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value,
(viii) write, purchase or sell any put or call option or any
combination thereof or enter into any futures contract, except that this
restriction shall not prevent the Fund from entering into transactions involving
futures contracts and non-U.S. currencies as described in the Prospectus and
this Statement of Additional Information,
(ix) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 10% of the net
assets of the Fund (taken at market value) is held as collateral for such sales
at any one time (the Fund does not presently intend to make such short sales for
investment purposes), or
(x) invest more than 20% of is total assets in the securities of
issuers located in any one foreign country, except that the Fund may have an
additional 15% of its total assets in the securities of issuers located in any
one of the following countries: Australia, Canada, France, Japan, the United
Kingdom, or Germany.
These policies are not fundamental and may be changed by the Fund
without the approval of its shareholders.
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 Fund will not be considered
a violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for the Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized total
rate of return quotation is calculated by (x) adding 1 to the period total rate
of return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. Total rates of return may also be calculated on investments at
various sales charge levels or at net asset value. Any performance data which is
based on a reduced sales charge or net asset value would be reduced if the
maximum sales charge were taken into account.
Any current yield quotation for the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a) raising
to the sixth power the sum of 1 plus the quotient obtained by dividing the
Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the maximum public offering price per share on the last
day of the period, (b) subtracting 1 from the result, and (c) multiplying the
result by 2.
Yields and total returns quoted for the Fund include the effect of
deducting the Fund's expenses, but may not include charges and expenses
attributable to a particular variable annuity contract or variable life
insurance policy. Since shares of the Fund can be purchased only through a
variable annuity contract or variable life insurance policy, a purchaser of such
contract or policy should carefully review the prospectus for the applicable
variable annuity contract or variable life insurance policy for information on
relevant charges and expenses. Including these charges in the quotations of the
Fund's yield and total return would have the effect of decreasing performance.
Performance information for the Fund must always be accompanied by, and be
reviewed with, performance information for the insurance product which invests
in the Fund.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL REDEMPTION INFORMATION
The net asset value of each share of the Fund is determined each day
during which the New York Stock Exchange is open for trading. As of the date of
this Statement of Additional Information, such Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of net asset value of shares of the Fund is made once each day as
of the close of regular trading on such Exchange (normally 4:00 p.m. Eastern
time) by dividing the value of the Fund's net assets (i.e., the value of its
assets less its liabilities, including expenses payable or accrued) by the
number of shares of the Fund outstanding at the time the determination is made.
A share's net asset value is effective for orders received by the Trust prior to
its calculation and received by the Distributor prior to the close of the
business day on which such net asset value is determined.
For purposes of calculating net asset value per share, 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 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 which 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 of the Trust. 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 of the Trust.
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 the
Fund's net asset value is calculated, such securities will be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for the Fund 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 plus amortization of premium.
Subject to compliance with applicable regulations, the Trust has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, 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 shares or beneficial interests being sold. If a holder of shares
or 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 shares of the Fund more than seven days during any period when (a)
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the Securities and
Exchange Commission (the "SEC"), exists making disposal of the Fund's
investments or determination of its net asset value not reasonably practicable;
(b) the New York Stock Exchange is closed (other than customary weekend and
holiday closings); or (c) the SEC has by order permitted such suspension.
7. MANAGEMENT
TRUSTEES
The Trustees and officers of the Trust, their ages 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.
TRUSTEES OF THE TRUST
H.B. ALVORD (aged 74) -- Treasurer-Tax Collector, County of Los Angeles
(retired, March, 1984); Chairman, certain registered investment companies in the
59 Wall Street funds group. His address is 1450 Oleada Road, Pebble Beach,
California. Mr. Alvord has announced that he intends to retire as a Trustee on
May 31, 1997.
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.
PHILIP W. COOLIDGE* (aged 45) -- President of the Trust; Chairman, Chief
Executive Officer, and President, Signature Financial Group, Inc. and The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN (aged 53) -- 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.
RILEY C. GILLEY (aged 70) -- Vice President and General Counsel, Corporate
Property Investors (November, 1988 to December, 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December, 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 57) -- Professor, Babson College (since September,
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September, 1992 to September, 1993); Professor, Darden Graduate
School of Business, University of Virginia (September, 1978 to September, 1993);
Trustee, The Highland Family of Funds (since March, 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 45) -- President, Global Research Associates, Inc.
(Investment Research) (since August, 1990); Adviser, Rockefeller & Co. (March,
1988 to July, 1990); Trustee, Mainstay Institutional Funds (since December,
1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 62) -- 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; Director, MAS Funds. His address is 1385 Outlook Drive
West, Mountainside, New Jersey.
WALTER E. ROBB, III (aged 70) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (corporate financial advisers) (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.
E. KIRBY WARREN (aged 62) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 76) -- Vice President-Investments, Sun Company, Inc.
(retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE* (aged 45) -- President of the Trust; Chairman, Chief
Executive Officer and President, Signature Financial Group, Inc. and The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
SAMANTHA M. BURGESS* (aged 27) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
November, 1995); Graduate Student, Loyola University (prior to August, 1995).
CHRISTINE A. DRAPEAU* (aged 26) -- 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).
JOHN R. ELDER* (aged 48) -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Treasurer, Phoenix Family of Mutual
Funds (Phoenix Home Life Mutual Insurance Company) (1983 to March, 1995).
LINDA T. GIBSON* (aged 31) -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May, 1992); Assistant Secretary, The Landmark Funds
Broker-Dealer Services, Inc. (since October, 1992); Law Student, Boston
University School of Law (September, 1989 to May, 1992).
JOAN R. GULINELLO* (aged 41) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc. (since October,
1993); Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since
October, 1995); Vice President and Assistant General Counsel, Massachusetts
Financial Services Company (prior to October, 1993).
JAMES E. HOOLAHAN* (aged 49) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Senior Vice President, Signature Financial
Group, Inc. His address is 437 Madison Avenue, 39th Floor, New York, New York.
SUSAN JAKUBOSKI* (aged 33) -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Manager, Signature Financial Group (Cayman) Ltd. (since
August, 1994); Senior Fund Administrator, Signature Financial Group, Inc. (since
August, 1994); Assistant Treasurer, Signature Broker-Dealer Services, Inc.
(since September, 1994); Fund Compliance Administrator, Concord Financial Group
(November, 1990 to August, 1994). Her address is Elizabethan Square, George
Town, Grand Cayman, Cayman Islands, BWI.
MOLLY S. MUGLER* (aged 45) -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary, The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
KARYN A. NOKE* (aged 26) - Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Vice President, Signature Financial Group (Cayman) Ltd.
(since September, 1996); Assistant Vice President, Signature Financial Group,
Inc. (May, 1993 to August, 1996); Student, University of Massachusetts (prior to
May, 1993).
SHARON M. WHITSON* (aged 48) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
November, 1992); Associate Trader, Massachusetts Financial Services Company
(prior to November, 1992).
JULIE J. WYETZNER* (aged 37) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group,
Inc. Her address is 437 Madison Avenue, 39th Floor, New York, New York.
The Trustees and officers of the Trust also hold comparable positions
with certain other funds for which The Landmark Funds Broker-Dealer Services,
Inc., Signature Financial Group, Inc. or their affiliates serve as the
distributor or administrator.
As of April 28, 1997, all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Fund. As of the same date, Citicorp
Life Insurance Company owned 87.32% of the shares of the Fund.
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.
The Trustees of the Trust (with the exception of Mr. Coolidge, who will
receive no remuneration from the Trust) are expected to receive the following
remuneration from the Trust during its fiscal year ending December 31, 1997:
<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 REGISTRANT (1) EXPENSES RETIREMENT TO TRUSTEES (1)
------------------ ------------------ ------------------ -------------- -----------------
<S> <C> <C> <C> <C>
H.B. ALVORD $1,500 NONE NONE $44,000
ELLIOTT J. BERV $1,500 NONE NONE $49,000
MARK T. FINN $1,500 NONE NONE $44,000
RILEY C. GILLEY $1,500 NONE NONE $44,000
DIANA R. HARRINGTON $1,500 NONE NONE $49,000
SUSAN B. KERLEY $1,500 NONE NONE $49,000
C. OSCAR MORONG, JR. $1,500 NONE NONE $64,000
WALTER E. ROBB, III $1,500 NONE NONE $44,000
E. KIRBY WARREN $1,500 NONE NONE $44,000
WILLIAM S. WOODS, JR. $1,500 NONE NONE $44,000
(1) Information is estimated with respect to the fiscal year ending December 31, 1997. Messrs. Alvord, Berv,
Coolidge, Finn, Gilley, Morong, Robb, Warren and Woods and Mses. Harrington and Kerley are trustees of 23, 24,
46, 26, 25, 23, 24, 23, 25, 23 and 23 funds, respectively, of the Landmark Family of Funds.
</TABLE>
MANAGER
Citibank manages the assets of the Fund and provides certain
administrative services to the Trust pursuant to a management agreement (the
"Management Agreement") with the Trust. Citibank furnishes at its own expense
all services, facilities and personnel necessary in connection with managing the
Fund's investments and effecting securities transactions for the Fund. The
Management Agreement with the Trust will continue in effect until November 8,
1998 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 Fund, and, in either case, by a
majority of the Trustees of the Trust who are not parties to the Management
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Management Agreement.
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.
The Management Agreement provides that Citibank may render services to
others. The 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 Fund
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. The Management Agreement
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 securities transactions for the
Fund, 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 under the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank
for services under the Management Agreement. Citibank, if required by state law,
will reimburse the Fund or waive all or a portion of its management fees to the
extent that the expenses of the Fund exceed the expense limitation prescribed by
any state in which the Fund is qualified for offer or sale.
Pursuant to a sub-administrative services agreement with Citibank,
LFBDS performs such sub-administrative duties for the Trust as from time to time
are agreed upon by Citibank and LFBDS. For performing such sub-administrative
services, LFBDS 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 Agreement with the Trust. All such compensation is paid by
Citibank.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
DISTRIBUTOR
LFBDS serves as the Distributor of the Trust's shares pursuant to a
Distribution Agreement with the Trust. Unless otherwise terminated, the
Distribution Agreement continues in effect from year to year upon annual
approval by the Trust's Board of Trustees, or by the vote of a majority of the
outstanding shares of the Trust and by the vote of a majority of the Board of
Trustees of the Trust who are not parties to the Agreement or interested persons
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The Agreement will terminate in the event of its assignment,
as defined in the 1940 Act. LFBDS is not currently paid a fee for the provision
of distribution services with respect to shares of the Fund.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for the Fund. The Trust also has entered into a
Custodian Agreement and Fund Accounting Agreement with State Street, pursuant to
which custodial and fund accounting services, respectively, are provided for the
Fund. See "Custodian, Transfer Agent and Fund Accountant" in the Prospectus for
additional information. The principal business address of State Street is 225
Franklin Street, Boston, Massachusetts 02110.
AUDITORS
Price Waterhouse LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Price Waterhouse LLP is 160
Federal Street, Boston, Massachusetts 02110.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for the Fund if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Fund's investment objective. Changes in the Fund'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 the Fund are made by a portfolio manager who is
an employee of the Manager and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of the Manager in a
similar capacity.
The primary consideration in placing portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Manager attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of the Fund and other clients
of the Manager on the basis of their professional capability, the value and
quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Manager normally seeks to deal directly with the primary
market markers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Manager on the tender of the
Fund's securities in so-called tender or exchange offers. Such soliciting dealer
fees are in effect recaptured for the Fund by the Manager.
At present no other recapture arrangements are in effect.
Under the Management Agreement, in connection with the selection of
such brokers or dealers and the placing of such orders, the Manager is directed
to seek for the Fund in its best judgment, prompt execution in an effective
manner at the most favorable price. Subject to this requirement of seeking the
most favorable price, securities may be bought from or sold to broker-dealers
who have furnished statistical, research and other information or services to
the Manager or the Fund, subject to any applicable laws, rules and regulations.
The investment advisory fee that the Fund pays to the Manager will not
be reduced as a consequence of the Manager's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of the
Manager, the Manager 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 certain instances there may be securities that are suitable as an
investment for the Fund as well as for one or more of the Manager's other
clients. Investment decisions for the Fund and for the Manager'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 the Fund. When
purchases or sales of the same security for the Fund and for other portfolios
managed by the Manager occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large volume
purchases or sales.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest ($0.00001
par value per share) of each series and to divide or combine the shares of any
series into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series. The Fund,
CitiSelect(SM) VIP Folio 200, CitiSelect(SM) VIP Folio 300, CitiSelect(SM) VIP
Folio 400 and CitiSelect(SM) VIP Folio 500 are the only current series of shares
of the Trust and the Trust has reserved the right to create and issue additional
series of shares. Each share of the Fund represents an equal proportionate
interest in the Fund with each other share. Shares of each series participate
equally in the earnings, dividends and distribution of net assets of the
particular series upon liquidation or dissolution. Shares of each series are
entitled to vote separately to approve advisory agreements or changes in
investment policy, but shares of all series may vote together in the election or
selection of Trustees and accountants for the Trust.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required and has no present
intention to hold annual meetings of shareholders but the Trust will hold
special meetings of shareholders when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances (e.g., upon the application and submission of
certain specified documents to the Trustees by a specified number of
shareholders), the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's outstanding
shares would be sufficient. The Trust or any series of the Trust, as the case
may be, may be terminated (i) by a vote of a majority of the outstanding voting
securities of the Trust or the affected series or (ii) by the Trustees by
written notice to the shareholders of the Trust or the affected series. If not
so terminated, the Trust will continue indefinitely.
The rights accompanying Fund shares are legally vested in the Separate
Accounts. However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the Separate Accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in Separate Accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
Separate Account prospectus.
Share certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust may maintain
appropriate insurance (for example, 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 liabilities. Thus, the
risk of an investor 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.
The Trust's Declaration of Trust further provides that obligations of
the Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust of the 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.
10. CERTAIN ADDITIONAL TAX MATTERS
Any investment in zero coupon bonds, certain stripped securities, and
certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or loss
to the Fund. The Fund's transactions in options, futures contracts, and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. Certain
positions held by the Fund 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 Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit its
activities in options, futures contracts, and forward contracts to the extent
necessary to meet the requirements of Subchapter M of the Internal Revenue Code.
Special tax considerations apply with respect to foreign investments.
Use of foreign currencies for non-hedging purposes may be limited in order to
avoid a tax on the Fund. Investment by the Fund in certain "passive foreign
investments companies" may also be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries is not known.
11. FINANCIAL STATEMENTS
The attached unaudited financial information for the Fund for the
period from February 10, 1997 (commencement of operations) to March 31, 1997 has
been provided by the management of the Fund.
<PAGE>
Landmark Small Cap Equity VIP
- --------------------------------------------------------------------------------
Statement of Asset and Liabilities March 31, 1997 (unaudited)
Assets
Investment (cost : $3,352,745) 3,173,317
Cash (domestic and foreign) 61
Receivable for securities Sold 4,425
Receivable for Capital Stock sold 10,461
Dividend receivable 717
Interest receivable 13
Other receivable -
Other assets -
-----------------
Total Assets 3,188,994
-----------------
Liabilities
Payable for Securities Purchased 54,498
Other payables -
Other Liabilities 3,633
-----------------
Total Liabilities 58,131
-----------------
Net Assets 3,130,863
-----------------
Capital Section
Paid-in Capital 3,451,734
Undistributed Net Realized gain (loss) on Investments (140,962)
Unrealized appreciation (depreciation) of investments and
foreign currency translations (179,429)
Undistributed net investment income (480)
-----------------
Total Capital 3,130,863
-----------------
<PAGE>
Landmark Small Cap Equity VIP
- --------------------------------------------------------------------------------
Statement Of Operations (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Investment Income
Interest Income 1,684
Dividend Income 1,667
Other Income -
-----------------
Total Income 3,351
-----------------
Expenses
Investment advisory fees 3,193
Interest expense -
Other expenses 3,831
-----------------
Gross expenses 7,024
Less: Waivers and Subsidies (3,193)
-----------------
Net expenses 3,831
-----------------
Net investment income (480)
-----------------
Net Realized and Unrealized Gain/(Loss) on Investments
Net realized gain/(loss) from investment transactions (140,962)
Net change in unrealized appreciation/(depreciation) (179,429)
-----------------
Net realized and unrealized gain/(loss) on investments (320,391)
-----------------
Net Increase/(Decrease) in Net Assets resulting
from Operations (320,871)
-----------------
<PAGE>
Landmark Small Cap Equity VIP
- --------------------------------------------------------------------------------
Statement Of Changes In Net Assets (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Increase/(Decrease) in Net Assets from:
Operations
Net investment income (480)
Net realized gain/(loss) on investments (140,962)
Net change in unrealized appreciation/(depreciation)
of investments (179,429)
Net increase/(decrease) in net assets resulting from -----------------
operations (320,871)
-----------------
Distribution to Shareholders
Net Investment Income -
Capital gains -
Return of Capital (Income) -
Return of Capital (Capital) -
-----------------
Total Distribution to Shareholders -
-----------------
Capital Stock Transactions
Net proceeds from sale of shares 3,452,037
Cost of shares repurchased (303)
Dividend and/or Distribution -
-----------------
3,451,734
-----------------
Net Increase/(decrease) in Net Assets 3,130,863
-----------------
Net Assets
Beginning of Period -
-----------------
End of Period 3,130,863
-----------------
<PAGE>
Landmark Small Cap Equity VIP
- --------------------------------------------------------------------------------
Financial Highlights (unaudited)
For the Period February 10, 1997 (Commencement Of Operations) to March 31, 1997
Financial Highlights
Net Asset Value, Beginning of period 10.00
-----------------
Income from Operations
Net Investment Income (0.01)
Net realized and unrealized gain/(loss) on
investments (0.94)
-----------------
Total from operations (0.95)
-----------------
Less distribution from:
Net investment income -
Net realized gain on investments -
Return of Capital -
-----------------
Total distributions -
-----------------
Net Asset Value, end of period 9.05
-----------------
Expense Ratio 0.90
-----------------
