<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
File Nos. 333-15119
811-07893
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 6
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 7
VARIABLE ANNUITY PORTFOLIOS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP, 150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on May 3, 1999
pursuant to paragraph (b) of Rule 485.
<PAGE>
MAY 3, 1999
----------
PROSPECTUS
----------
CitiSelect(R) VIP Portfolios
ASSET ALLOCATION MUTUAL FUNDS
MANAGED BY CITIBANK, N.A. AND OFFERED THROUGH
THE SEPARATE ACCOUNTS OF PARTICIPATING
LIFE INSURANCE COMPANIES
CITISELECT(R) VIP FOLIO 100 INCOME
CITISELECT(R) VIP FOLIO 200 CONSERVATIVE
CITISELECT(R) VIP FOLIO 300 BALANCED
CITISELECT(R) VIP FOLIO 400 GROWTH
CITISELECT(R) VIP FOLIO 500 GROWTH PLUS
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
FUNDS AT A GLANCE ...................................................... 3
INVESTING IN CITISELECT VIP PORTFOLIOS ................................. 19
HOW TO INVEST ....................................................... 19
HOW THE PRICE OF SHARES IS CALCULATED 20
HOW TO SELL SHARES .................................................. 21
DIVIDENDS ........................................................... 22
TAX MATTERS ......................................................... 22
MANAGEMENT OF THE FUNDS ................................................ 23
MANAGER ............................................................. 23
MANAGEMENT FEES ..................................................... 28
MORE ABOUT THE FUNDS ................................................... 29
PRINCIPAL INVESTMENT STRATEGIES ..................................... 29
RISKS ............................................................... 39
FINANCIAL HIGHLIGHTS ................................................... A-1
<PAGE>
-----------------
FUNDS AT A GLANCE
-----------------
Funds at a Glance
The five diversified mutual funds described in this prospectus are
asset allocation funds that are available for investment through
separate accounts offered by certain life insurance companies. You may
not purchase these funds directly. You may invest indirectly in the
Funds by purchasing an annuity contract or variable life insurance
policy offered by a participating life insurance company.
Each Fund invests in a carefully selected mix of equity and fixed
income securities that is designed by Citibank to offer a different
level of potential return with a corresponding amount of risk. For
example, CitiSelect VIP Folio 100 Income is designed to provide the
lowest relative risk, but with the lowest level of potential return.
CitiSelect VIP Folio 500 Growth Plus is designed to provide the
highest potential for return, but with the highest risk. Your
investment objective, your investment time frame and your comfort
level with risk will help you decide which Fund to consider.
Each Fund has its own investment goal and its own mix of investments.
Of course, there is no assurance that any Fund will achieve its goal.
This summary briefly describes each of the Funds and the principal
risks of investing. For more information, see MORE ABOUT THE FUNDS on
page 29.
FUND GOALS
CITISELECT VIP FOLIO 100 INCOME
This Fund's goal is as high a level of current income as is consistent
with a dominant emphasis on fixed income securities and a small
allocation to equity securities.
CITISELECT VIP FOLIO 200
This Fund's goal is as high a total return over time as is consistent
with a primary emphasis on fixed income securities and a secondary
emphasis on equity securities.
CITISELECT VIP FOLIO 300
This Fund's goal 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
This Fund's goal 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
This Fund's goal 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.
MAIN INVESTMENT STRATEGIES
Each Fund invests in a mix of equity and fixed income securities that
is designed by Citibank to offer a different level of potential return
with a different amount of risk. The Funds' equity securities may
include common stocks, preferred stocks, securities convertible into
common stocks, warrants and depositary receipts (receipts representing
the right to receive securities of foreign issuers deposited in a U.S.
bank or a local branch of a foreign bank). The Funds' fixed income
securities may include bonds, short-term notes, mortgage-backed and
asset-backed securities, certificates of deposit and repurchase
agreements.
o CITISELECT VIP FOLIO 100 invests primarily in fixed income
securities with a small allocation to equity securities. This Fund
is expected to be the least volatile of the Funds.
o CITISELECT VIP FOLIO 200 invests primarily in fixed income
securities and, to a lesser extent, in equity securities to give
the potential for some capital growth.
o CITISELECT VIP FOLIO 300 emphasizes both equity and fixed income
securities. This balanced mix offers the growth potential of stocks
with the lower volatility of fixed income securities.
o CITISELECT VIP FOLIO 400 and CITISELECT VIP FOLIO 500 invest
primarily in equity securities. They may invest more of their
assets in international securities and small cap securities.
CitiSelect VIP Folio 500 Growth Plus is expected to be the most
volatile of the Funds.
ASSET CLASS RANGE*
FIXED
EQUITY INCOME
..............................................................................
CitiSelect VIP Folio 100 0- 20% 80-100%
..............................................................................
CitiSelect VIP Folio 200 Conservative 20- 40% 60- 80%
..............................................................................
CitiSelect VIP Folio 300 Balanced 40- 60% 40- 60%
..............................................................................
CitiSelect VIP Folio 400 Growth 60- 80% 20- 40%
..............................................................................
CitiSelect VIP Folio 500 Growth Plus 75-100% 0- 25%
*If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income asset class, and
the cash is temporarily invested in short-term money market instruments, those
instruments will be included in the percentage limitations for that asset
class.
Each Fund's assets are allocated between the equity and fixed income
asset classes as shown in the chart above. Citibank may further
allocate assets among various sub-categories of the equity and fixed
income asset classes, seeking to minimize risk and volatility and to
maximize returns. There are no restrictions on the amount of a Fund's
assets that may be allocated to any particular sub-category and
Citibank is not required to allocate each Fund's assets among all of
these types of equity and fixed income securities at all times.
Equity securities may be allocated among:
o large cap growth securities
o large cap value securities
o small cap growth securities
o small cap value securities
o international securities.
Fixed income securities may be allocated among:
o U.S. investment grade bonds
o foreign investment grade bonds and
o high yield bonds (so-called "junk bonds")
While Citibank generally allocates each Fund's assets within the
percentage ranges shown in the chart, cash flows into or out of a
Fund, or market fluctuations, could produce different results.
Citibank monitors each Fund's asset mix daily and conducts quarterly
reviews to determine whether to rebalance the Fund's investments.
Rebalancing may be accomplished over a period of time, subject to any
regulatory restrictions.
Citibank also allocates assets among different subadvisers who
specialize in managing particular kinds of securities or managing in a
particular style. This may help the Funds benefit from different
investment cycles, such as periods when equities with different
characteristics (i.e., growth or value) perform differently. Citibank
monitors and supervises all of the Funds' subadvisers and may
terminate the services of any subadviser at any time.
The Funds may use derivatives in order to protect (or "hedge") against
changes in interest rates, currency fluctuations or the prices of
securities held or to be bought. The Funds may also use a wide variety
of derivatives for non-hedging purposes, to enhance potential gains or
generate income. In addition, the Funds may use derivatives to manage
the maturity or duration of fixed income securities. Derivatives that
the Funds may use include futures (including bond, interest rate and
stock index futures), options on securities and on futures (including
options on interest rate and stock index futures), interest rate
swaps, equity swaps, and other types of available swap agreements,
including caps, collars and floors. The Funds may also enter into
forward foreign currency contracts, purchase or sell foreign currency
futures, purchase or write options on foreign currencies, or enter
into currency swaps and other similar transactions. Derivatives may be
used alone or in combination with other derivatives. The Funds'
ability to use derivatives successfully depends on a number of
factors, including derivatives being available at prices that are not
too costly, tax considerations, the availability of liquid markets,
and the Funds' portfolio managers accurately predicting movements in
interest rates, stock prices and other economic factors.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce substantial
losses or gains for a Fund, well beyond the Fund's initial investment.
The Funds may use other investment techniques, such as short sales,
which also may involve or have the same effects as leveraging, in that
a Fund's losses from short sales may be unlimited.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in these
Funds. The principal risks of investing in CitiSelect VIP Portfolios
are described below. Please remember that the risks of investing in
each Fund depend on the securities it holds and the investment
strategies it uses. For example, Funds investing more of their assets
in fixed income securities may be more susceptible to interest rate
risk and credit risk than Funds investing more of their assets in
equity securities. Conversely, Funds investing more of their assets in
equity securities may be susceptible to greater price volatility than
Funds investing more of their assets in fixed income securities. See
page 39 for more information about risks.
o MARKET RISK. This is the risk that the prices of securities will
rise or fall due to changing economic, political or market
conditions, or due to a company's individual situation. The value
of the Funds' shares will change daily as the value of their
underlying securities change. This means that your shares may be
worth more or less when you sell them than when you bought them.
It is also possible that the Funds will not perform as intended.
For example, CitiSelect VIP Folio 100 is expected to be the least
volatile of the Funds. However, under certain market conditions
this Fund could be more volatile than one or more of the other
Funds.
o EQUITY SECURITIES. Equity securities are subject to market risk
that historically has resulted in greater price volatility than
exhibited by fixed income securities.
o INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise. Longer
term and lower rated obligations are usually more sensitive to
interest rate changes. A change in interest rates could cause the
Funds' share prices to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Funds, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a
security and leading to greater volatility in the price of the
security and in shares of a Fund. The prices of lower rated
securities often are more volatile than those of higher rated
securities, and there may be more difficulty in selling lower rated
securities in the market. These risks are more pronounced with
so-called "junk bonds," which are debt obligations that are rated
below investment-grade.
o FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments
abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are
subject. These risks may include expropriation of assets,
confiscatory taxation, withholding taxes on dividends and interest
paid on Fund investments, fluctuations in currency exchange rates,
currency exchange controls and other limitations on the use or
transfer of assets by a Fund or issuers of securities, and
political or social instability. There may be rapid changes in the
value of foreign currencies or securities, causing the Funds' share
prices to be volatile. Also, in certain circumstances, the Funds
could realize reduced or no value in U.S. dollars from their
investments in foreign securities, causing the Funds' share prices
to go down.
Each Fund may invest in issuers located in emerging, or developing,
markets. All of the risks of investing in foreign securities are
heightened by investing in these markets.
o SMALLER COMPANIES. The securities of smaller capitalized companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns and their
prices may be more volatile, causing the Funds' share prices to be
volatile.
o PREPAYMENT RISK. The issuers of debt securities held by a Fund may
be able to prepay principal due on the securities, particularly
during periods of declining interest rates. A Fund may not be able
to reinvest that principal at attractive rates, reducing income to
the Fund, and the Fund may lose any premium paid. On the other
hand, rising interest rates may cause prepayments to occur at
slower than expected rates. This effectively lengthens the
maturities of the affected securities, making them more sensitive
to interest rate changes and a Fund's share price more volatile.
Mortgage-backed securities are particularly susceptible to
prepayment risk, and their prices may be very volatile.
o CONVERTIBLE SECURITIES. Convertible securities, which are debt
securities that may be converted into stock, are subject to the
market risk of stocks, and, like other debt securities, are also
subject to interest rate risk and the credit risk of their issuers.
o DERIVATIVES. The Funds' use of derivatives, particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets,
causing the Funds' share prices to go down. In addition, each
Fund's ability to use derivatives successfully depends on the
ability of the Fund's portfolio managers to accurately predict
movements in stock prices, interest rates, currency exchange rates
or other economic factors and the availability of liquid markets.
If these predictions are wrong, or if the derivatives do not work
as anticipated, the Fund could suffer greater losses than if the
Fund had not used derivatives.
Some of the Funds' use of derivatives may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's
losses may be out of proportion to the amount invested in the
instrument -- a relatively small investment may lead to much
greater losses.
o SHORT SALES. The Funds may engage in short sales. Losses from short
sales may be unlimited.
Please note that an investment in the Funds is not a deposit of
Citibank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in CitiSelect VIP
Portfolios is not a complete investment program.
You should consider investing in CitiSelect VIP Portfolios if you are
seeking to reduce the risks of investing in a single asset or type of
asset, and to cushion the volatility of financial markets by investing
in diversified portfolios of several types of assets. The Funds offer
a convenient way to own a portfolio tailored to specific investment
goals.
o CITISELECT VIP FOLIO 100 INCOME is designed for investors seeking
current income with relatively low risk but with some growth
potential, and who have an investment horizon of at least three
years.
o CITISELECT VIP FOLIO 200 CONSERVATIVE is designed for investors
seeking relatively low risk provided by substantial investments in
fixed income securities, but who also seek some capital growth, and
who have an investment horizon of at least five years.
o CITISELECT VIP FOLIO 300 BALANCED is designed for investors seeking
a balanced approach by emphasizing stocks for their higher capital
appreciation potential but retaining a significant fixed income
component to temper volatility, and who have an investment horizon
of at least five years.
o CITISELECT VIP FOLIO 400 GROWTH and CITISELECT VIP FOLIO 500 GROWTH
PLUS are designed for investors willing and able to take higher
risks in the pursuit of long-term capital appreciation, and who
have an investment horizon of at least five years. CitiSelect VIP
Folio 500 Growth Plus is designed for investors who can withstand
greater market swings to seek potential long-term rewards.
CitiSelect VIP Folio 400 Growth is designed for investors seeking
long-term rewards, but with less volatility.
Don't invest in CitiSelect VIP Portfolios if you are not prepared to
accept daily share price fluctuations and possible losses.
<PAGE>
Fund Performance
The following bar charts and tables can help you evaluate the risks of
investing in each Fund, and how its returns have varied over time.
o The bar charts show the Funds' performance for the most recent
calendar year.
o The tables show how the Funds' average annual returns for the
periods indicated compare, in each case, to several broad measures
of stock performance and bond performance. Please remember that,
unlike the Funds, the market indexes do not include the costs of
buying and selling securities and other Fund expenses.
- --------------------------------------------------------------------------------
WHAT DO THE INDEXES REPRESENT?
The S&P 500 Index, Russell 2000 Index, and MSCI-EAFE Index each
provide a broad measure of stock performance. The S&P 500 Index tracks
the stocks of 500 selected U.S. publicly-traded companies, the Russell
2000 Index tracks the stocks of 2,000 small publicly-traded U.S.
companies, and the MSCI-EAFE Index tracks the stocks of approximately
1,000 companies in Europe, Australasia, and the Far East. The Lehman
Aggregate Bond Index, the Salomon Brothers Non-Dollar World Government
Bond Index and the Salomon Brothers Currency-Hedged Non-Dollar World
Government Bond Index each provide a broad measure of bond
performance. The Lehman Aggregate Bond Index tracks more than 5,000
investment-grade corporate and government bonds, including
mortgage-backed securities. The Salomon Brothers Non-Dollar World
Government Bond Index tracks institutionally traded government bonds
with a remaining maturity of one year or longer and with amounts
outstanding of at least $25 million. The Salomon Brothers
Currency-Hedged Non-Dollar World Government Bond Index tracks these
same securities hedged against the U.S. dollar.
- --------------------------------------------------------------------------------
o In both the charts and tables, the returns shown for the Funds do
not take into account any fees that are paid by the separate
accounts through which shares of the Funds are sold. If these fees
had been included, the returns would have been lower.
When you consider this information, please remember that the Funds'
past performance is not necessarily an indication of how they will
perform in the future.
CITISELECT VIP FOLIO 100 INCOME
The Fund is newly offered and does not have any investment returns at
the date of this prospectus. For up-to-date yield information, please
call 1-800-625-4554.
<PAGE>
CITISELECT VIP FOLIO 200 CONSERVATIVE
TOTAL RETURN
(per calendar year)
- --------------------------------------------------------------------------------
CITISELECT VIP FOLIO 200
1998 7.33%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 6.42% December 31, 1998
..............................................................................
Lowest (4.09%) September 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year February 10, 1997
..............................................................................
CitiSelect VIP Folio 200 7.33% 8.03%
..............................................................................
Lehman Aggregate Bond Index 9.47% 9.20%
..............................................................................
S&P 500 Index 28.58% 28.89%
..............................................................................
Russell 2000 Index (2.55%) 9.44%
..............................................................................
MSCI-EAFE Index 20.33% 13.07%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 9.11%
..............................................................................
Salomon Bros. Currency-Hedged Non-$ World
Gov't Bond Index 11.53% 10.96%
- --------------------------------------------------------------------------------
<PAGE>
CITISELECT VIP FOLIO 300 BALANCED
TOTAL RETURN
(per calendar year)
- --------------------------------------------------------------------------------
CITISELECT VIP FOLIO 300
1998 7.10%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 8.12% December 31, 1998
..............................................................................
Lowest (6.80%) September 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year February 10, 1997
..............................................................................
CitiSelect VIP Folio 300 7.10% 8.36%
..............................................................................
Lehman Aggregate Bond Index 9.47% 9.20%
..............................................................................
S&P 500 Index 28.58% 28.89%
..............................................................................
Russell 2000 Index (2.55%) 9.44%
..............................................................................
MSCI-EAFE Index 20.33% 13.07%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 9.11%
..............................................................................
Salomon Bros. Currency-Hedged Non-$ World
Gov't Bond Index 11.53% 10.96%
- --------------------------------------------------------------------------------
<PAGE>
CITISELECT FOLIO 400 GROWTH
TOTAL RETURN
(per calendar year)
- --------------------------------------------------------------------------------
CITISELECT VIP FOLIO 400
1998 3.42%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 11.48% December 31, 1998
..............................................................................
Lowest (12.97%) September 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year February 10, 1997
..............................................................................
CitiSelect VIP Folio 400 3.42% 6.67%
..............................................................................
Lehman Aggregate Bond Index 9.47% 9.20%
..............................................................................
S&P 500 Index 28.58% 28.89%
..............................................................................
Russell 2000 Index (2.55%) 9.44%
..............................................................................
MSCI-EAFE Index 20.33% 13.07%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 9.11%
..............................................................................
Salomon Bros. Currency-Hedged Non-$ World
Gov't Bond Index 11.53% 10.96%
- --------------------------------------------------------------------------------
<PAGE>
CITISELECT VIP FOLIO 500 GROWTH PLUS
TOTAL RETURN
(per calendar year)
- --------------------------------------------------------------------------------
CITISELECT VIP FOLIO 500
1998 1.59%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 13.31% December 31, 1998
..............................................................................
Lowest (16.70%) September 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year February 10, 1997
..............................................................................
CitiSelect VIP Folio 500 1.59% 6.45%
..............................................................................
Lehman Aggregate Bond Index 9.47% 9.20%
..............................................................................
S&P 500 Index 28.58% 28.89%
..............................................................................
Russell 2000 Index (2.55%) 9.44%
..............................................................................
MSCI-EAFE Index 20.33% 13.07%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 9.11%
..............................................................................
Salomon Bros. Currency-Hedged Non-$ World
Gov't Bond Index 11.53% 10.96%
- --------------------------------------------------------------------------------
<PAGE>
--------------------------------------
INVESTING IN CITISELECT VIP PORTFOLIOS
--------------------------------------
Investing in CitiSelect
VIP Portfolios
HOW TO INVEST
You may not buy shares directly. You can invest in the Funds by
purchasing a variable annuity contract or variable life insurance
policy offered by a participating insurance company separate account.
Variable annuity contracts and life insurance policies are issued by
insurance companies. You should read both this prospectus and the
prospectus of the participating insurance company separate account
before you invest. The separate account prospectus will tell you:
o how to purchase a variable annuity contract or variable life
insurance policy
o how to select specific Funds as investment options for the contract
or policy
o whether you can transfer money from one investment option to
another
o how to withdraw from or cancel your contract or policy
o the specific terms and provisions of the contract or policy,
including
o sales and surrender charges
o mortality and expense risk fees, and
o other fees and expenses that may be payable under the contract or
policy
The separate accounts buy Fund shares based upon available cash from
premium payments and the instructions the accounts receive from their
contract and policy holders. Shares of the CitiSelect VIP Portfolios
are offered continuously and purchases may be made Monday through
Friday, except on certain holidays. The Funds and the Funds'
distributor have the right to reject any purchase order or cease
offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is
calculated after the order is received and accepted by a Fund or the
Fund's agent. NAV is the value of a single share of a Fund. The Funds
do not have any sales charges.
HOW THE PRICE OF SHARES IS CALCULATED
Each Fund calculates its NAV every day the New York Stock Exchange is
open for trading. This calculation is made at the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
time. On days when the financial markets in which the Funds invest
close early, NAV will be calculated as of the close of those markets.
Each Fund's securities are valued primarily on the basis of market
quotations. When market quotations are not readily available, the
Funds may price securities at fair value. Fair value is determined in
accordance with procedures approved by the Funds' Board of Trustees.
When the Funds use the fair value pricing method, a security may be
priced higher or lower than if the Funds had used a market quotation
to price the same security.
For foreign securities the values are translated from the local
currency into U.S. dollars using current exchange rates. If trading in
the currency is restricted, the Funds use a rate believed to reflect
the currency's fair value in U.S. dollars. Trading may take place in
foreign securities held by a Fund on days when the Fund is not open
for business. As a result, a Fund's NAV may change on days on which it
is not possible to purchase or sell shares of the Fund. If events
materially affecting the value of foreign securities occur between the
time when the exchange in which they are traded closes and the time
when a Fund's net asset value is calculated, such securities may be
valued at fair value in accordance with procedures established by and
under the general supervision of the Board of Trustees.
HOW TO SELL SHARES
A separate account may sell Fund shares to generate cash to meet
various obligations under the contracts and policies issued by it. For
example, if you invest in a Fund through a variable annuity contract
and request a partial withdrawal or cancellation of the contract, the
separate account may sell Fund shares to pay you. You should read your
separate account prospectus carefully to find out:
o how you may withdraw from or cancel your contract or policy
o what surrender fees or expenses you may incur
o whether you may be taxed on the amount of withdrawal, including any
penalty tax
A separate account may sell (redeem) shares on any business day. The
price will be the NAV the next time it is calculated after the
redemption request in proper form has been received.
Payment from the redemption will be generally made to the separate
account within seven days after the request is made. Redemption
proceeds may be delayed, or the right to receive redemption proceeds
suspended, if the New York Stock Exchange is closed (other than on
weekends or holidays) or trading is restricted, or if an emergency
exists. Each Fund has the right to pay redemption proceeds by
distributing securities instead of cash. In that case, the separate
account may incur costs (such as brokerage commissions) converting the
securities into cash.
DIVIDENDS
Each Fund pays substantially all of its net income (if any) from
dividends and interest to its shareholders of record as a dividend on
or about the last day of December. Each Fund's net realized short-term
and long-term capital gains, if any, will also be distributed annually
in December. A Fund may also make additional distributions to
shareholders 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 from a Fund are automatically invested
in additional shares of the Fund.
TAX MATTERS
Because you do not own shares in the Funds directly, generally you are
not taxed directly on Fund distributions. However, you may be subject
to taxation when you receive distributions from your variable annuity
contract or variable life insurance policy. You should refer to the
prospectus for your contract or policy for information on the taxes
relating to your investment and the tax consequences of any withdrawal
of your investment. You may also wish to consult with your own tax
advisor about your particular situation, and the tax consequences of
your investment under state and local laws.
<PAGE>
-----------------------
MANAGEMENT OF THE FUNDS
-----------------------
Management of the Funds
MANAGER
The CitiSelect VIP Portfolios draw on the strength and experience of
Citibank. Citibank is the investment manager of each Fund, and subject
to policies set by the Funds' Trustees, Citibank makes investment
decisions. Citibank has been managing money since 1822. With its
affiliates, it currently manages more than $327 billion in assets
worldwide.
x
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of
Citicorp and Travelers Group, Inc., which was completed on
October 8, 1998. "CitiSelect" is a registered trademark of
Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the
Funds. However, in making investment decisions for the Funds, Citibank
does not obtain or use material inside information acquired by any
division, department or affiliate of Citibank in the course of those
relationships. Citibank and its affiliates may have loans outstanding
that are repaid with proceeds of securities purchased by the Funds.
Richard Goldman, a Vice President of Citibank, has been the overall
portfolio manager of the Funds since January 1999 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. Goldman's investment
experience is discussed below.
The following subadvisers currently manage the following kinds of
securities for the Funds:
SMALL CAP VALUE SECURITIES: Franklin Advisory Services, Inc., One
Parker Plaza, 9th Floor, Fort Lee, New Jersey 07024. Franklin Advisory
Services is a registered investment adviser. Together with its
affiliates, Franklin Advisory Services, Inc. managed assets totalling
$220.2 billion and advised 116 U.S. - based open-end mutual funds as
of December 31, 1998. William J. Lippman, President of Franklin
Advisory Services or its predecessor since 1988, has been responsible
for the daily management of U.S. small cap value securities since the
Funds' inception.
LARGE CAP VALUE SECURITIES: SSBC Fund Management, Inc. (formerly known
as Mutual Management Corp.) (SSBC), 388 Greenwich Street, New York,
New York 10013. SSBC, an affiliate of Citibank, is a registered
investment adviser that, as of December 31, 1998, managed
approximately $27 billion in assets. SSBC took over responsibility for
the daily management of the Funds' large cap value securities on
January 22, 1999. Prior to this date, Miller Anderson & Sherrerd, LLP,
was responsible for the daily management of large cap value
securities. SSBC is a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc., which in turn is a wholly-owned subsidiary of Citigroup
Inc. Frances A. Root, a Managing Director of SSBC and a Senior Equity
Portfolio Manager since 1994, has been responsible for the daily
management of large cap value securities since January 22, 1999. She
joined Smith Barney Capital Management in 1992 as a Vice President and
Equity Portfolio Manager and in 1994 became a Managing Director of
SSBC and a Senior Equity Portfolio Manager. Formerly, she was with
Shearson Lehman Advisors as a Vice President and Portfolio Manager for
seven years and prior to that, with E.F. Hutton & Company, Inc.
INTERNATIONAL EQUITY SECURITIES: Hotchkis and Wiley, 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017-5400.
Hotchkis and Wiley was founded in 1980 and is a division of Merrill
Lynch Asset Management, L.P., a registered investment adviser. As of
February 28, 1999, Hotchkis and Wiley managed approximately $14.3
billion in assets. Harry W. Hartford and Sarah H. Ketterer have been
responsible for the daily management of international equity
securities since the Funds' inception. Mr. Hartford joined Hotchkis
and Wiley in 1994, where he is responsible for international
investment research in the U.K. and Europe, and where he serves on the
Investment Policy Committee. Prior to joining Hotchkis and Wiley, Mr.
Hartford was with The Investment Bank of Ireland (now Bank of Ireland
Asset Management), as a Senior Manager, where he gained 10 years of
experience in both international and global equity management. Ms.
Ketterer, a Managing Director and Portfolio Manager, joined Hotchkis
and Wiley in 1990, where she is responsible for international
investment research in the Asia-Pacific, Japan and Canadian regions,
and where she serves on the Investment Policy Committee. Prior to
joining Hotchkis and Wiley in 1990, Ms. Ketterer was an associate with
Bankers Trust and an analyst at Dean Witter.
HIGH YIELD DEBT SECURITIES: Salomon Brothers Asset Management Inc
(SBAM Inc), 7 World Trade Center, New York, New York 10048. SBAM Inc,
an affiliate of Citibank, has been a registered investment adviser
since 1989. Together with SBAM affiliates in London, Frankfurt, Tokyo
and Hong Kong, SBAM manages approximately $27 billion in assets. SBAM
Inc began to manage the Funds' high yield bond securities on May 1,
1999, the date on which this asset class was added to the Funds. SBAM
Inc is an indirect wholly owned subsidiary of Citigroup Inc. Beth A.
Semmel, a Managing Director of SBAM Inc since 1996 and a member of its
Investment Policy Committee, is responsible for the daily management
of the Funds' high yield securities. Ms. Semmel is a Portfolio Manager
and Senior Analyst responsible for SBAM Inc's high yield portfolios,
for evaluating high yield securities and for covering consumer-related
industries. Ms. Semmel joined SBAM Inc in May 1993 as a Vice President
and Analyst. Formerly, Ms. Semmel was with Morgan Stanley Asset
Management as a high yield bond analyst, and prior to that, with
Kidder Peabody as an equity analyst.
FOREIGN FIXED INCOME SECURITIES: Salomon Brothers Asset Management
Limited (SBAML), Victoria Plaza, 111 Buckingham Palace Road, London
SWIS OSB, U.K. SBAML, an affiliate of Citibank, began operations in
1990 and is a U.S. registered investment adviser. Together with SBAML
affiliates in New York, Frankfurt, Tokyo and Hong Kong, SBAML manages
approximately $27 billion in assets. SBAML took over responsibility
for the daily management of the Funds' foreign fixed income securities
on March 1, 1999. Prior to that date, Pacific Investment Management
Company was responsible for the daily management of the Funds' foreign
fixed income securities. SBAML is a wholly owned indirect subsidiary
of Citigroup Inc. David Scott is the portfolio manager. Mr. Scott is a
Managing Director, Portfolio Manager and Investment Policy Committee
Member of SBAML. Mr. Scott joined SBAML in April 1994 as Director and
Head of Global Fixed Income responsible for their global bond products
and has been a Portfolio Manager for SBAML and SBAM Inc since that
time. Prior to joining SBAML, Mr. Scott worked for four years at JP
Morgan Investment Management where he had responsibility for global
and non-dollar portfolios, and prior to that, for Mercury Asset
Management.
The following individuals at Citibank are responsible for the
management of all other Fund investments:
LARGE CAP GROWTH SECURITIES: Richard Goldman, Vice President, has been
responsible first as a co-manager and then as manager, for the daily
management of large cap growth securities since the Funds' inception.
Mr. Goldman is a Senior Investment Officer and lead portfolio manager
for the Focused Growth Large Cap Funds and has been a member of the
Large Cap Growth Team since June 1994. He joined Citibank in 1985 as
an assistant portfolio manager, working on quantitative portfolio
strategies. Within the investment unit, he has had responsibilities in
both product development and portfolio management. From September 1988
through June 1994, Mr. Goldman served as Director of Institutional
Investor Relations, where his responsibilities included managing
Citicorp's relationships with its investors and rating agencies. He
currently manages, or co-manages, approximately $6 billion of total
assets at Citibank.
SMALL CAP GROWTH SECURITIES: Marguerite Wagner, Vice President and
Senior Portfolio Manager, has been responsible for the daily
management of the Funds' small cap growth securities since January
1999. Ms. Wagner joined Citibank in 1985. Since 1995, she has had
portfolio management and research analyst responsibility for an
internal mid-cap common trust fund and private equity managed
accounts. From 1992 through the end of 1994, Ms. Wagner was a member
of the small capitalization equity management group of Citibank Global
Asset Management. Prior to 1992, she managed portfolios for the
Private Banking Group of Citibank.
DOMESTIC INVESTMENT GRADE FIXED INCOME SECURITIES: Mark Lindbloom,
Vice President, has been responsible for the daily management of
domestic investment grade fixed income securities since the Funds'
inception, and has been a portfolio manager for fixed income
securities since joining Citibank in 1986. Mr. Lindbloom has more than
19 years of investment management experience. Prior to joining
Citibank, Mr. Lindbloom was a Fixed Income Portfolio Manager with
Brown Brothers Harriman & Co., where he managed fixed income assets
for discretionary corporate portfolios.
Citibank is responsible for recommending the hiring, termination or
replacement of any subadviser and for supervising and monitoring the
performance of any subadviser. Certain funds managed by Citibank have
applied for exemptive relief from the Securities and Exchange
Commission which would permit them to employ subadvisers without
shareholder approval. The requested exemptive relief also would permit
the terms of subadvisory agreements to be changed and the employment
of subadvisers to be continued after events that would otherwise cause
an automatic termination of a subadvisory agreement, in each case
without shareholder approval if those changes or continuation are
approved by the fund's Board of Trustees. There is no assurance that
the SEC will grant the requested relief. If the requested relief is
granted and the Funds obtain any necessary shareholder approval to act
pursuant to the relief, the Funds also would be permitted to employ
subadvisers without shareholder approval, subject to compliance with
certain conditions. If a Fund adds or changes a subadviser without
shareholder approval, this Prospectus would be revised and
shareholders notified.
MANAGEMENT FEES
For the services Citibank and the subadvisers provided under
management agreements for each of the Funds, other than CitiSelect VIP
Folio 100, for their fiscal years ended December 31, 1998, Citibank
and the subadvisers received a total of 0.75% of each Fund's average
daily net assets. The annual management fee for CitiSelect VIP Folio
100 is 0.50% of that Fund's average daily net assets for its then
current fiscal year.
<PAGE>
--------------------
MORE ABOUT THE FUNDS
--------------------
More About the Funds
The Funds' goals, principal investments and risks are summarized in
FUNDS AT A GLANCE. More information on investments, investment
strategies and risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Funds' principal investment strategies are the strategies that, in
the opinion of Citibank, are most likely to achieve each Fund's
investment goal. Of course, there can be no assurance that any Fund
will achieve its goal. Please note that each Fund may also use
strategies and invest in securities that are not described below but
that are described in the Statement of Additional Information. Of
course, a Fund's portfolio managers may decide, as a matter of
investment strategy, not to use the investments and investment
techniques described below and in the Statement of Additional
Information at any particular time. Each Fund's goal and strategies
may be changed without shareholder approval.
Each Fund is a diversified asset allocation mutual fund that invests
in a mix of equity and fixed income securities. Each Fund's asset mix
is designed by Citibank to offer a different level of potential return
with a corresponding amount of risk. For example, equity securities
typically have greater potential for growth of capital than fixed
income securities, and have the potential to outperform fixed income
securities over the long term. However, equity securities generally
are more volatile. Fixed income securities sometimes go up in value
when equity securities go down. As a result, a Fund investing a higher
percentage of its assets in equity securities may, over time, have the
potential to generate higher returns than a Fund investing more in
fixed income securities, but it may be more volatile and a riskier
investment. In making asset allocations, Citibank studies the long
term performance and valuation relationships between these two asset
classes and the effects of market and economic variables on those
relationships. Each Fund's asset mix is determined by Citibank to be
an optimal combination of stocks and bonds that maximizes potential
returns for the level of risk associated with the Fund's investment
goal. In seeking to achieve these individual goals, securities are
sold when a Fund needs cash to meet redemptions, or when the managers'
price objective for a security has been met, or when the managers
believe that better opportunities exist, or that a security no longer
fits within the managers' overall strategies for achieving the Fund's
goals. Of course, there can be no assurance that the Funds will
perform as intended.
- --------------------------------------------------------------------------------
ASSET CLASS RANGE*
FIXED
EQUITY INCOME
..............................................................................
CITISELECT VIP FOLIO 100 0- 20% 80- 100%
..............................................................................
CITISELECT VIP FOLIO 200 20- 40% 60- 80%
..............................................................................
CITISELECT VIP FOLIO 300 40- 60% 40- 60%
..............................................................................
CITISELECT VIP FOLIO 400 60- 80% 20- 40%
..............................................................................
CITISELECT VIP FOLIO 500 75-100% 0- 25%
- --------------------------------------------------------------------------------
*If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income asset class, and
the cash is temporarily invested in short-term money market instruments, those
instruments will be included in the percentage limitations for that asset
class.
Citibank may further allocate each Fund's equity securities among
large cap securities, small cap securities and international
securities, and each Fund's fixed income securities among U.S. and
foreign government and corporate bonds and between high yield debt
securities and investment grade debt securities. Of course, Citibank
is not required to allocate each Fund's assets among all of these
types of equity and fixed income securities at all times. These
further allocations are intended to maximize returns while managing
overall volatility. Each asset class and the types of securities in
that class are described below.
MANAGEMENT STYLE. In allocating assets while seeking to maximize
returns for a given risk level, Citibank employs a multi-style,
multi-manager strategy. Citibank believes that there are periods when
securities with particular characteristics, or selected based on a
particular investment style, outperform other kinds of securities in
the same asset class. Citibank attempts to blend asset classes and
complementary investment styles through investment cycles.
To implement this strategy, Citibank has recommended that the Funds
employ subadvisers with expertise managing specific types of
securities or managing in a particular style. The following
subadvisers currently manage the following kinds of securities:
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small cap value securities Franklin Advisory Services, Inc.
..............................................................................
large cap value securities SSBC Fund Management, Inc.
..............................................................................
international equity securities Hotchkis and Wiley
..............................................................................
foreign fixed income securities Salomon Brothers Asset Management Limited
..............................................................................
high yield debt securities Salomon Brothers Asset Management Inc
- ------------------------------------------------------------------------------
Citibank manages all other kinds of securities, including large cap
growth, small cap growth, and domestic investment grade fixed income
securities. Citibank monitors and supervises the activities of the
subadvisers and may terminate the services of any subadviser at any
time.
THE EQUITY CLASS
Each Fund generally diversifies its equity securities among large cap
issuers, small cap issuers and international issuers. Citibank
believes that longer 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. The mix of equity securities varies from Fund to Fund.
For example, CitiSelect VIP Folio 400 currently emphasizes securities
of small cap issuers and international issuers to a greater extent
than CitiSelect VIP Folios 100, 200 and 300. CitiSelect VIP Folio 500
currently emphasizes securities of small cap issuers and international
issuers to a greater extent than CitiSelect VIP Folio 400. The types
of equity securities emphasized may change over time and in different
market conditions, and there is no requirement that each Fund invest
in each type of equity security.
LARGE CAP ISSUERS. Large cap issuers are those which have market
capitalizations, at the time the securities are purchased, within the
top 1,000 stocks of the equity market. At December 31, 1998, issuers
within the top 1,000 stocks had market capitalizations of at least
$1.9 billion. In selecting large cap securities, the Funds emphasize
securities issued by established companies with stable operating
histories. Each Fund may invest in both large cap growth stocks and in
large cap value stocks.
SMALL CAP ISSUERS. Small cap issuers are those which have market
capitalizations, at the time the securities are purchased, below the
top 1,000 stocks of the equity market. At December 31, 1998, the
maximum capitalization of issuers in this category was below $1.9
billion. These stocks may include stocks in the Russell 2000 Index,
which is an index of small cap stocks. Small cap companies generally
have negligible dividend yields and extremely high levels of
volatility. They may offer more profit opportunity during certain
economic conditions than large and medium sized companies, but they
also involve special risks. Each Fund may invest in both small cap
growth stocks and small cap value stocks.
INTERNATIONAL ISSUERS. International issuers are those based outside
the United States. The Funds emphasize securities included in the
MSCI-EAFE Index, which contains securities of companies located in
Europe, Australia and the Far East. The Funds also may invest in
emerging market equity securities. There may be investment
opportunities in overseas markets not present in the U.S., and market
performance in the U.S. and abroad may not be the same or highly
correlated. However, overseas investments, particularly in emerging
markets, involve special risks.
See "Risks" for more information about the risks associated with
investing in equity securities.
- --------------------------------------------------------------------------------
WHAT ARE EQUITY SECURITIES?
EQUITY SECURITIES generally represent an ownership interest (or a
right to acquire an ownership interest) in an issuer, and 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
foreign issuers deposited in a U.S. bank or a local branch of a
foreign bank). While equity securities historically have been more
volatile than fixed income securities, they historically have produced
higher levels of total return.
- --------------------------------------------------------------------------------
THE FIXED INCOME CLASS
Each Fund generally diversifies its fixed income securities among
investment grade corporate debt obligations, securities issued by the
U.S. government and its agencies and instrumentalities, securities
issued by foreign governments, and high yield debt securities. The mix
of fixed income securities varies 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 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. U.S. government
securities have minimal credit risk. 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. Even though
government securities have minimal credit risk, they still
fluctuate in value when interest rates change.
INVESTMENT GRADE CORPORATE BONDS. Corporate bonds are used by U.S. and
foreign corporate issuers to borrow money from investors, and may have
varying maturities. Bonds also have varying degrees of quality and
varying degrees of sensitivity to changes in interest rates.
Investment grade securities are those rated Baa or better by Moody's,
BBB or better by Standard & Poor's or 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 values of lower quality bonds generally fluctuate more than higher
quality bonds. Investment in bonds of U.S. and foreign corporate
issuers may provide higher levels of current income than government
securities.
HIGH YIELD DEBT OBLIGATIONS. High yield debt obligations, also called
"junk bonds," are fixed income securities that are generally rated in
the lower rating categories, if rated, and many are rated below
investment grade. The Funds' high yield securities may include debt
securities of U.S. and non-U.S. issuers rated in medium or lower
rating categories or determined to be of comparable quality. Some of
the Funds' securities may be rated, at the time of purchase, as low as
Caa by Moody's or CCC by S&P or may be deemed to be of comparable
quality. Medium and low rated and comparable unrated securities offer
yields that fluctuate over time but that generally are superior to the
yields offered by higher rated securities. However, these securities
also involve significantly greater risks, including greater risk of
default in the payment of interest and principal and greater price
volatility, than higher rated securities. No Fund anticipates
investing more than 25% of its assets in securities rated below
investment grade.
See "Risks" for more information about the risks associated with
investing in fixed income securities.
- --------------------------------------------------------------------------------
WHAT ARE FIXED INCOME SECURITIES?
FIXED INCOME SECURITIES generally represent a debt obligation of an
issuer, and include BONDS, SHORT-TERM OBLIGATIONS and MORTGAGE-BACKED
and ASSET-BACKED SECURITIES. Fixed income securities, in general,
offer a fixed stream of cash flow. Most bond investments focus on
generating income. The potential for capital appreciation is a
secondary objective. The value of fixed income securities generally
goes up when interest rates go down, and down when rates go up. The
value of these securities also fluctuates based on other market and
credit factors.
- --------------------------------------------------------------------------------
DERIVATIVES. The Funds may use derivatives in order to protect (or
"hedge") against changes in interest rates, currency fluctuations or
the prices of securities held or to be bought. The Funds may also use
a wide variety of derivatives for non- hedging purposes, to enhance
potential gains or generate income. In addition, the Funds may use
derivatives to manage the maturity or duration of fixed income
securities. Derivatives that the Funds may use include futures
(including bond, interest rate and stock index futures), options on
securities and on futures (including options on interest rate and
stock index futures), interest rate swaps, equity swaps, and other
types of available swap agreements, including caps, collars and
floors. The Funds may also enter into forward foreign currency
contracts, purchase foreign currency futures, or purchase or write
options on foreign currencies, or enter into currency swaps and other
similar transactions. Derivatives may be used alone or in combination
with other derivatives. In some cases, the derivatives purchased by
the Funds are standardized contracts traded on commodities exchanges
or boards of trade. This means that the exchange or board of trade
guarantees counterparty performance. Over-the- counter derivatives,
however, are not guaranteed. Derivatives may not be available on terms
that make economic sense (for example, they may be too costly). The
Fund's ability to use derivatives may also be limited by tax
considerations.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce substantial
losses or gains for a Fund, well beyond the Fund's initial investment.
- --------------------------------------------------------------------------------
WHAT ARE SHORT SALES?
When a Fund's portfolio manager anticipates that the price of a
security will decline, the manager may enter into an agreement to sell
the security, even though the Fund does not own it. This technique is
called SELLING SHORT. The Fund will then borrow the same security from
a broker or other institution in order to complete the sale. The Fund
must later purchase the security in order to return the security
borrowed. If the portfolio manager has predicted accurately, the price
at which the Fund buys the security will be less than the price at
which the Fund earlier sold the security, creating a profit for the
Fund. However, if the price of the security goes up during this
period, the Fund will be forced to buy the security for more than its
sale price, causing a loss to the Fund. Non-U.S. currencies may also
be sold short.
- --------------------------------------------------------------------------------
DEFENSIVE STRATEGIES. The Funds may, from time to time, take temporary
defensive positions that are inconsistent with the Funds' principal
investment strategies in attempting to respond to adverse market,
political or other conditions. When doing so, the Funds may invest
without limit in high quality money market and other short-term
instruments, and may not be pursuing their investment goals.
NEW INVESTMENT STRUCTURE. At the date of this prospectus, the Funds,
like most mutual funds, invest directly in securities. However, the
Funds intend, in the future, to convert to a new investment structure,
sometimes called a "fund of funds." In the new investment structure,
the Funds, instead of investing directly in securities, will invest in
multiple Portfolios. Each Portfolio invests in securities in a
particular asset class, in particular types of securities or in
securities of particular maturities or duration. Each Portfolio is a
mutual fund with its own investment goals and policies. The Portfolios
buy, hold and sell securities in accordance with these goals and
policies. Of course, there can be no assurance that the Funds or the
Portfolios will achieve their goals.
The Funds expect to convert to the new investment structure during
1999, although it is possible that the conversion could be delayed.
After the new investment structure is in place, a Fund may withdraw
its investment in any Portfolio at any time, and will do so if the
Fund's Trustees believe it to be in the best interest of the Fund's
shareholders. Each Portfolio may change its investment goals and
certain of its investment policies and restrictions without approval
by its investors, but the Portfolio will notify the Fund and its other
investors at least 30 days before implementing any change in its
investment goals. A change in investment goals, policies or
restrictions may cause a Fund to withdraw its investment in a
Portfolio. If the Fund were to withdraw, the Fund could either invest
in another mutual fund or pooled investment vehicle or invest directly
in securities. Upon withdrawal, the Fund could receive securities from
a Portfolio instead of cash, causing the Fund to incur brokerage, tax
and other charges or leaving it with securities which may or may not
be readily marketable or widely diversified.
Under the new investment structure, each Fund bears its share of each
Portfolio's fees and expenses. However, the total fees of each Fund
and the underlying Portfolios are not expected to change as a result
of the new structure.
Certain investment restrictions of each Portfolio cannot be changed
without approval by the investors in that Portfolio. Of course, a Fund
could be outvoted, or otherwise adversely affected, by other investors
in a Portfolio.
Each of the Funds is actively managed. Although the portfolio managers
attempt to minimize portfolio turnover, from time to time a Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities
may produce capital gains, which, when distributed, are taxable to
investors. Active trading may also increase the amount of commissions
or mark-ups the Funds pay to brokers or dealers when they buy and sell
securities. The "Financial Highlights" section of this prospectus
shows each Fund's historical portfolio turnover rate.
Citibank and the subadvisers may use brokers or dealers for Fund
transactions who also provide brokerage and research services to the
Funds or other accounts over which Citibank, the subadvisers or their
affiliates exercise investment discretion. Each Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a broker or
dealer who provides these brokerage and research services a commission
for executing a portfolio transaction which is higher than the
commission another broker or dealer would have charged. However, the
Funds will "pay up" only if Citibank or the subadviser determines in
good faith that the higher commission is reasonable in relation to the
brokerage and research services provided, viewed in terms of either
the particular transaction or all of the accounts over which that
adviser exercises investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should
consider the risks you will assume. Certain of these risks are
described below. More information about risks appears in the Funds'
Statement of Additional Information. Remember that you may receive
little or no return on your investment in the Funds. You may lose
money if you invest in these Funds.
The risks of investing in each Fund vary depending on the securities
it holds and the investment strategies it uses. For example, Funds
investing more of their assets in fixed income securities may be more
susceptible to interest rate risk and credit risk than Funds investing
more of their assets in equity securities. Conversely, Funds investing
more of their assets in equity securities may be more susceptible to
greater price volatility than Funds investing more of their assets in
fixed income securities. Please remember that an investment in the
Funds is not a deposit of Citibank and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK. This is the risk that the prices of securities will rise
or fall due to changing economic, political or market conditions, or
due to a company's individual situation. The value of the Funds'
shares will change daily as the value of their underlying securities
change. This means that your shares of a Fund may be worth more or
less when you sell them than when you bought them.
It is also possible that the Funds will not perform as intended. For
example, CitiSelect VIP Folio 100 is expected to be the least volatile
of the Funds. However, under certain market conditions this Fund could
be more volatile than one or more of the other Funds.
EQUITY SECURITIES. Equity securities are subject to market risk that
historically has resulted in greater price volatility than exhibited
by fixed income securities.
GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the
prices of growth securities typically fall. The success of a Fund's
investment in growth securities depends largely on the portfolio
managers' skill in assessing the growth potential of companies. An
investment in growth securities may underperform certain other stock
investments during periods when growth stocks are out of favor.
VALUE INVESTING. The success of a Fund's value investment strategy
depends largely on the portfolio managers' skill in identifying
securities of companies that are in fact undervalued, but have good
longer term business prospects. A security may not achieve its
expected value because the circumstances causing it to be underpriced
worsen (causing the security's price to decline further) or do not
change or because the portfolio managers are incorrect in their
determinations. In addition, an investment in value stocks may
underperform certain other stock investments (growth stocks, for
example) during periods when value stocks are out of favor.
SMALLER COMPANIES. The securities of smaller capitalization companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns because of
limited financial or management resources. Also, there may be less
publicly available information about small cap companies. As a result,
their prices may be volatile, causing the Funds' share prices to be
volatile.
INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise.
Longer-term obligations are usually more sensitive to interest rate
changes. A change in interest rates could cause the Funds' share
prices to go down.
CREDIT RISK. Some issuers may not make payments on debt securities
held by the Funds. Or, an issuer may suffer adverse changes in its
financial condition that could lower the credit quality of a security,
leading to greater volatility in the price of the security and in
shares of a Fund. A change in the quality rating of a bond or other
security can also affect the security's liquidity and make it more
difficult for the Fund to sell. The lower quality debt securities in
which the Funds may invest are more susceptible to these problems than
higher quality obligations, and the prices of these securities may be
more volatile.
JUNK BONDS. Credit risk is more pronounced with so-called "junk bonds"
which are debt obligations that are rated below investment-grade. The
risk of default may be greater and the market for these securities may
be less active, making it more difficult to sell the securities at
reasonable prices, and also making valuation of the securities more
difficult. A Fund may incur additional expenses if an issuer defaults
and the Fund tries to recover some of its losses in a bankruptcy or
other similar proceeding.
FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o These risks may include expropriation of assets, confiscatory
taxation, withholding taxes on dividends and interest paid on fund
investments, currency exchange controls and other limitations on
the use or transfer of Fund assets and political or social
instability.
o Foreign 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.
o Foreign markets may be less liquid and more volatile than U.S.
markets. Rapid increases in money supply may result in speculative
investing, contributing to volatility. Also, equity securities may
trade at price-earnings multiples that are higher than those of
comparable U.S. companies, and that may not be sustainable. As a
result, there may be rapid changes in the value of foreign
securities.
o Foreign markets may offer less protection to investors. Enforcing
legal rights may be difficult, costly and slow. There may be
special problems enforcing claims against foreign governments.
o Since foreign securities often trade 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. An
increase in the U.S. dollar relative to these other currencies will
adversely affect the value of the Fund. In addition, some foreign
currency values may be volatile and there is the possibility of
governmental controls on currency exchanges or governmental
intervention in currency markets. Controls or intervention could
limit or prevent a Fund from realizing value in U.S. dollars from
its investment in foreign securities.
o Each Fund may invest in issuers located in emerging, or developing,
markets.
o Emerging or developing countries are generally defined as countries
in the initial stages of their industrialization cycles with low
per capita income.
o All of the risks of investing in foreign securities are heightened
by investing in developing countries.
o The markets of developing countries have been more volatile than
the markets of developed countries with more mature economies.
PREPAYMENT RISK. The issuers of debt securities held by a Fund may be
able to prepay principal due on the securities, particularly during
periods of declining interest rates. A Fund may not be able to
reinvest that principal at attractive rates, reducing income to the
Fund, and the Fund may lose any premium paid. In addition, rising
interest rates may cause prepayments to occur at slower than expected
rates. This effectively lengthens the maturities of the affected
securities, making them more sensitive to interest rate changes and
the Fund's share price more volatile. Mortgage- backed securities are
particularly susceptible to prepayment risk, and their prices may be
very volatile.
CONVERTIBLE SECURITIES. Convertible securities, which are debt
securities that may be converted into stock, are subject to the market
risk of stocks, and, like other debt securities, are also subject to
interest rate risk and the credit risk of their issuers. Call
provisions may allow the issuer to repay the debt before it matures.
DERIVATIVES. The Funds' use of derivatives, particularly when used for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets, causing
the Funds' share prices to go down. In addition, each Fund's ability
to use derivatives successfully depends on its portfolio managers'
ability to accurately predict movements in stock prices, interest
rates, currency exchange rates, or other economic factors and the
availability of liquid markets. If the portfolio managers' predictions
are wrong, or if the derivatives do not work as anticipated, the Fund
could suffer greater losses than if the Fund had not used derivatives.
When a Fund invests in over-the-counter derivatives, there is also the
risk that the counterparty may fail to honor its contract.
In some instances, a Fund's use of derivatives may have the effect of
leveraging the Fund. Leveraging adds increased risks to a Fund,
because the Fund's losses may be out of proportion to the amount
invested in the instrument -- a relatively small investment may lead
to much greater losses.
SHORT SALES. The Funds may engage in short sales. Losses from
short sales may be unlimited.
STATE INSURANCE REGULATION. Each Fund provides an investment vehicle
for variable annuity contracts and variable life insurance policies
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 greatest flexibility. 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.
EURO CONVERSION. Each Fund may invest in securities of issuers in
European countries. Certain European countries have joined the
European Economic and Monetary Union (EMU). Each EMU participant's
currency began a conversion into a single European currency, called
the euro, on January 1, 1999, to be completed by July 1, 2002. The
consequences of the euro conversion for foreign exchange rates,
interest rates and the value of European securities held by the Funds
are presently unclear. European financial markets, and therefore, the
Funds could be adversely affected if the euro conversion does not
continue as planned or if a participating country chooses to withdraw
from the EMU. The Funds could also be adversely affected if the
computing, accounting and trading systems used by their service
providers are not capable of processing transactions related to the
euro. These issues may negatively affect the operations of the
companies in which the Funds invest as well.
YEAR 2000. The Funds could be adversely affected if the computer
systems used by the Funds or their service providers are not
programmed to accurately process information on or after January 1,
2000. The Funds, and their service providers, are making efforts to
resolve any potential Year 2000 problems. While it is likely these
efforts will be successful, the failure to implement any necessary
modifications could have an adverse impact on the Funds. The Funds
also could be adversely affected if the issuers of securities held by
the Funds do not solve their Year 2000 problems, or if it costs them
large amounts of money to solve these problems. Funds that invest in
foreign securities may be particularly susceptible to these potential
Year 2000 problems.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the Funds'
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Funds' financial statements, is included in
the annual report which is incorporated by reference in the Statement of
Additional Information and which is available upon request.
<TABLE>
<CAPTION>
CITISELECT(R) VIP FOLIO 200 CONSERVATIVE CITISELECT(R) VIP FOLIO 300 BALANCED
.............................................................................................................................
For the Period For the Period
Year February 10, Year February 10,
Ended 1997++ Ended 1997++
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
.............................................................................................................................
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period $10.25 $10.00 $10.38 $10.00
.............................................................................................................................
Income From Investment Operations:
Net investment income+ 0.316 0.339 0.271 0.251
Net gains or losses on securities (both
realized and unrealized) 0.427 0.436 0.458 0.609
.............................................................................................................................
Total from investment operations 0.743 0.775 0.729 0.860
.............................................................................................................................
Less Distributions:
Dividends (from net investment income) (0.281) (0.339) (0.223) (0.251)
Distributions (from capital gains) (0.219) (0.157) (0.112) (0.159)
In excess of net income (0.093) -- (0.102) --
In excess of realized gains on
investments -- (0.029) (0.002) (0.070)
.............................................................................................................................
Total distributions (0.593) (0.525) (0.439) (0.480)
.............................................................................................................................
Net Asset Value, end of period $10.40 $10.25 $10.67 $10.38
.............................................................................................................................
Total return 7.33% 7.79%** 7.10% 8.65%**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT(R) VIP FOLIO 200 CONSERVATIVE CITISELECT(R) VIP FOLIO 300 BALANCED
.............................................................................................................................
For the Period For the Period
Year February 10, Year February 10,
Ended 1997++ Ended 1997++
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
.............................................................................................................................
RATIOS/SUPPLEMENTAL DATA:
<S> <C> <C> <C> <C>
Net assets, end of period (in thousands) $13,995 $10,321 $22,713 $14,192
Ratio of expenses to average net assets 0.95% 0.95%* 0.95% 0.95%*
Ratio of net income to average net assets 3.11% 3.43%* 2.62% 3.00%*
Portfolio turnover rate 255% 231% 204% 241%
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 (loss) per share and the ratios would have been as follows:
Net investment income+ $(0.025) $(0.006) $0.036 $(0.025)
RATIOS:
Ratio of expenses to average net assets 4.30% 4.44%* 3.23% 4.25%*
Ratio of net income to average net assets (0.24)% (0.06)%* 0.34% (0.30)%*
* Annualized.
** Not annualized.
+ The per share net investment income amounts do not reflect the period's reclassification of differences between book and
tax basis net investment income.
++ Commencement of Operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT(R) VIP FOLIO 400 GROWTH CITISELECT(R) VIP FOLIO 500 GROWTH PLUS
.............................................................................................................................
For the Period For the Period
Year February 10, Year February 10,
Ended 1997++ Ended 1997++
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
.............................................................................................................................
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period $10.28 $10.00 $10.48 $10.00
.............................................................................................................................
Income From Investment Operations:
Net investment income+ 0.176 0.212 0.172 0.148
Net gains or losses on securities (both
realized and unrealized) 0.165 0.701 (0.065)# 0.917
.............................................................................................................................
Total from investment operations 0.341 0.913 0.107 1.065
.............................................................................................................................
Less Distributions:
Dividends (from net investment income) (0.082) (0.206) (0.044) (0.144)
Distributions (from capital gains) (0.193) (0.300) (1.748) (0.349)
In excess of net income (0.111) (0.065) (0.049) (0.053)
In excess of realized gains on
investments (0.005) (0.062) (0.126) (0.039)
.............................................................................................................................
Total distributions (0.391) (0.633) (1.967) (0.585)
.............................................................................................................................
Net Asset Value, end of period $10.23 $10.28 $ 8.62 $10.48
.............................................................................................................................
Total return 3.42% 9.22%** 1.59% 10.76%**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT(R) VIP FOLIO 400 GROWTH CITISELECT(R) VIP FOLIO 500 GROWTH PLUS
.............................................................................................................................
For the Period For the Period
Year February 10, Year February 10,
Ended 1997++ Ended 1997++
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
.............................................................................................................................
RATIOS/SUPPLEMENTAL DATA:
<S> <C> <C> <C> <C>
Net assets, end of period (in thousands) $13,751 $11,279 $5,704 $10,544
Ratio of expenses to average net assets 1.25% 1.25%* 1.25% 1.25%*
Ratio of net income to average net assets 1.50% 2.03%* 0.97% 1.45%*
Portfolio turnover rate 265% 230% 146% 134%
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 (loss) per share and the ratios would have been as follows:
Net investment income+ $(0.164) $(0.124) $(0.584) $(0.186)
RATIOS:
Ratio of expenses to average net assets 4.16% 4.46%* 5.53% 4.52%*
Ratio of net income to average net assets (1.41)% (1.18)%* 3.31% (1.82)%*
* Annualized.
** Not annualized.
+ The per share net investment income amounts do not reflect the period's reclassification of differences between book and
tax basis net investment income.
++ Commencement of Operations.
# The amount shown per share does not correspond with the aggregate net realized and unrealized gain (loss) on investments for
the period ended due to the timing of sales of Fund shares in relation to fluctuating market values of the investments in
the Fund.
</TABLE>
<PAGE>
The Statement of Additional Information (SAI) provides more
details about the Funds and their policies. The SAI is
incorporated by reference into this prospectus and is legally
part of it.
Additional information about each Fund's investments is
available in the Funds' Annual and Semi-Annual Reports to
Shareholders. In the Funds' Annual Report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Funds' performance.
The Annual and Semi-Annual Reports for the Funds list their
portfolio holdings and describe their performance.
To obtain free copies of the SAI and the Annual and Semi-
Annual Reports or to make other inquiries, please call toll-
free 1-800-625-4554.
The SAI is also available from the Securities and Exchange
Commission. You can find it on the SEC Internet site at http:/
/www.sec.gov. Information about the Funds (including the SAI)
can also be reviewed and copied at the SEC's Public Reference
Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You can receive copies of this information by
sending your request and a duplicating fee to the SEC's Public
Reference Section, Washington, DC 20549-6009.
SEC File Number: 811-07893
<PAGE>
----------
PROSPECTUS
----------
MAY 3, 1999
CitiFunds(SM) Small Cap
Growth VIP Portfolio
A MUTUAL FUND MANAGED BY CITIBANK, N.A.
AND OFFERED THROUGH THE SEPARATE ACCOUNTS OF
PARTICIPATING INSURANCE COMPANIES
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
FUND AT A GLANCE ...................................................... 3
INVESTING IN THE FUND ................................................. 7
HOW TO INVEST ...................................................... 7
HOW THE PRICE OF SHARES IS CALCULATED .............................. 7
HOW TO SELL SHARES ................................................. 8
DIVIDENDS .......................................................... 8
TAX MATTERS ........................................................ 8
MANAGEMENT OF THE FUND ................................................ 9
MANAGER ............................................................ 9
MANAGEMENT FEES .................................................... 9
MORE ABOUT THE FUND ................................................... 10
PRINCIPAL INVESTMENT STRATEGIES .................................... 10
RISKS .............................................................. 12
FINANCIAL HIGHLIGHTS .................................................. A-1
<PAGE>
----------------
FUND AT A GLANCE
----------------
Fund at a Glance
CitiFunds Small Cap Growth VIP Portfolio is available for investment
through separate accounts offered by certain insurance companies. You
may not purchase shares in this Fund directly. You may invest
indirectly in the Fund by purchasing a variable annuity contract or
variable life insurance policy offered by a participating life
insurance company.
This summary briefly describes CitiFunds Small Cap Growth VIP
Portfolio and the principal risks of investing in it. For more
information, see MORE ABOUT THE FUND on page 11.
CitiFunds(SM) Small Cap Growth VIP Portfolio
FUND GOAL
The Fund's goal is long-term capital growth. Dividend income, if any,
is incidental to this goal. Of course, there is no assurance that the
Fund will achieve its goal.
MAIN INVESTMENT STRATEGIES
CitiFunds Small Cap Growth VIP Portfolio invests primarily in equity
securities of U.S. small cap issuers that, at the time the securities
are purchased, have market capitalizations below the top 1,000 stocks
of the equity market. At December 31, 1998, the maximum capitalization
of issuers in this category was below $1.9 billion. Under normal
circumstances, at least 65% of the Fund's total assets is invested in
equity securities of these issuers. These securities may include the
stocks in the Russell 2000 Index, which is an index of small
capitalization stocks. The Fund's equity securities may include the
following:
o common stocks;
o securities convertible into common stocks;
o preferred stocks;
o warrants; and
o depositary receipts (receipts which represent the right to receive
the securities of foreign issuers deposited in a U.S. bank or a
local branch of a foreign bank).
In managing the Fund, Citibank uses an aggressive, growth- oriented
investment style that emphasizes companies which are believed to have
superior management teams and good prospects for growth. In addition,
the Fund may invest in companies believed to be emerging companies
relative to their potential markets. The Fund may continue to hold
securities of issuers that become mid cap or large cap issuers if, in
Citibank's judgment, these securities remain good investments for the
Fund.
The Fund may also invest in other securities that Citibank believes
provide opportunities for appreciation, such as debt securities. If
the Fund invests in debt securities, they must be investment grade
when the Fund purchases them. Investment grade securities are those
rated Baa or better by Moody's or BBB or better by Standard & Poor's,
or which Citibank believes to be of comparable quality.
The Fund may invest up to 25% of its assets in foreign equity and debt
securities, including depositary receipts. Foreign securities may be
issued by issuers in developing countries.
The Fund may, but is not obligated to, use derivatives in order to
protect (or "hedge") against changes in the prices of securities held
or to be bought or changes in the values (in U.S. dollars) of
securities of foreign issuers. The Fund may also use derivatives for
non-hedging purposes, to enhance potential gains. These derivatives
include stock index futures and forward foreign currency exchange
contracts. The Fund's ability to use derivatives successfully depends
on a number of factors, including derivatives being available at
prices that are not too costly, tax considerations, the availability
of liquid markets, and Citibank accurately predicting movements in
stock prices and currency exchange rates.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in the
Fund. The principal risks of investing in the Fund are described
below. See page 13 for more information about risks.
o MARKET RISK. This is the risk that the prices of securities will
rise or fall due to changing economic, political or market
conditions, or due to a company's individual situation. The value
of the Fund's shares will change daily as the value of its
underlying securities change. This means that your shares of the
Fund may be worth more or less when you sell them than when you
bought them.
o EQUITY SECURITIES. Equity securities are subject to market risk
that historically has resulted in greater price volatility than
exhibited by fixed income securities.
o SMALLER COMPANIES. The securities of smaller capitalized companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns because of
limited product lines, markets, distribution channels or financial
and management resources. Also, there may be less publicly
available information about small cap companies. As a result, their
prices may be more volatile, causing the Fund's share price to be
volatile. Funds that invest a higher percentage of their assets in
small cap stocks are generally more volatile than funds investing a
higher percentage of their assets in larger, more established
companies.
The Fund's aggressive, growth-oriented investment style may increase
the risks associated with investing in smaller companies. For example,
the securities of fast growing small cap companies may be more
volatile than those of other small cap companies.
o GROWTH SECURITIES. Growth securities typically are quite sensitive
to market movements because their market prices tend to reflect
future expectations. When it appears those expectations will not be
met, the prices of growth securities typically fall. The success of
the Fund's investment strategy depends largely on Citibank's skill
in assessing the growth potential of companies in which the Fund
invests. In addition, the Fund may underperform certain other stock
funds (those emphasizing value stocks, for example) during periods
when growth stocks are out of favor.
o FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments
abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are
subject. These risks may include expropriation of assets,
confiscatory taxation, withholding taxes on dividends and interest
paid on Fund investments, fluctuations in currency exchange rates,
currency exchange controls and other limitations on the use or
transfer of assets by the Fund or issuers of securities, and
political or social instability. There may be rapid changes in the
value of foreign currencies or securities, causing the Fund's share
price to be volatile. Also, in certain circumstances, the Fund
could realize reduced or no value in U.S. dollars from its
investments in foreign securities, causing the Fund's share price
to go down.
The Fund may invest in issuers located in emerging, or developing,
markets. All of the risks of investing in foreign securities are
heightened by investing in these markets.
o DERIVATIVES. The Fund's use of derivatives (such as futures
contracts and forward foreign currency contracts), particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets,
causing the Fund's share price to go down. In addition, the Fund's
ability to use derivatives successfully depends on Citibank's
ability to accurately predict movements in stock prices and
currency exchange rates and the availability of liquid markets. If
Citibank's predictions are wrong, or if the derivatives do not work
as anticipated, the Fund could suffer greater losses than if the
Fund had not used derivatives.
o INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise. Longer
term obligations are usually more sensitive to interest rate
changes. If the Fund invests in debt securities, a change in
interest rates could cause the Fund's share price to go down.
o CREDIT RISK. The Fund may, but is not obligated to, invest in
investment grade debt securities. Some issuers may not make
payments on debt securities held by the Fund, causing a loss. Or,
an issuer's financial condition may deteriorate, lowering the
credit quality of a security and leading to greater volatility in
the price of the security and in shares of the Fund. The prices of
lower rated securities often are more volatile than those of higher
rated securities.
Please note that an investment in the Fund is not a deposit of
Citibank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in CitiFunds Small Cap
Growth VIP Portfolio is not a complete investment program.
You should consider investing in CitiFunds Small Cap Growth VIP
Portfolio if:
o You want to direct a portion of your overall investment portfolio
to stocks of small cap issuers.
o You are seeking growth of principal.
o You are prepared to accept significant daily share price
fluctuations.
o Your investment horizon is longer term -- typically at least five
years.
Don't invest in CitiFunds Small Cap Growth VIP Portfolio if:
o You are not prepared to accept high volatility of the Fund's share
price and possible losses.
o Your investment horizon is shorter term (less than five years).
<PAGE>
Fund Performance
The following bar chart and table can help you evaluate the risks of
investing in the Fund, and how its returns have varied over time.
o The bar chart shows the Fund's performance for the most recent
calendar year.
o The table shows how the Fund's average annual returns for the
periods indicated compare to those of a broad measure of market
performance. Please remember that, unlike the Fund, the market
index does not include the costs of buying and selling securities
and other Fund expenses.
o In both the chart and table, and the related information, the
returns shown for the Fund do not take into account any fees that
are paid by the separate accounts through which shares of the Fund
are sold. If these fees had been included, the returns would have
been lower.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future.
TOTAL RETURN
(per calendar year)
- --------------------------------------------------------------------------------
CITIFUNDS SMALL CAP
GROWTH VIP PORTFOLIO
Calendar Year (3.80)%
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 16.71% December 31, 1998
..............................................................................
Lowest (26.02%) September 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
February 10,
1 Year 1997
..............................................................................
CitiFunds Small Cap Growth VIP Portfolio (3.80%) 4.08%
..............................................................................
Russell 2000 Growth Index 1.23% 7.55%
<PAGE>
---------------------
INVESTING IN THE FUND
---------------------
Investing in the Fund
HOW TO INVEST
You may not buy shares directly. You can invest in the Fund by
purchasing a variable annuity contract or variable life insurance
policy offered by a participating insurance company separate account.
Variable annuity contracts and life insurance policies are issued by
insurance companies. You should read both this prospectus and the
prospectus of the participating insurance company separate account
before you invest. The separate account prospectus will tell you:
o how to purchase a variable annuity contract or variable life
insurance policy
o how to select the Fund as an investment option for the contract or
policy
o whether you can transfer money from one investment option to
another
o how to withdraw from or cancel your contract or policy
o the specific terms and provisions of the contract or policy,
including
o sales and surrender charges,
o mortality and expense risk fees, and
o other fees and expenses that may be payable under the contract
or policy
The separate accounts buy Fund shares based upon available cash from
premium payments and the instructions the accounts receive from their
contract and policy holders. Shares of CitiFunds Small Cap Growth VIP
Portfolio are offered continuously and purchases may be made Monday
through Friday, except on certain holidays. The Fund and the Fund's
distributor have the right to reject any purchase order or cease
offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is
calculated after the order is received and accepted by the Fund or the
Fund's agent. NAV is the value of a single share of a Fund. The Fund
does not have any sales charges.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
The Fund calculates its NAV every day the New York Stock Exchange is
open for trading. This calculation is made at the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
time. On days when the financial markets in which the Fund invests
close early, NAV will be calculated as of the close of those markets.
The Fund's securities are valued primarily on the basis of market
quotations. When market quotations are not readily available, the Fund
may price securities at fair value. Fair value is determined in
accordance with procedures approved by the Fund's Board of Trustees.
When the Fund uses the fair value pricing method, a security may be
priced higher or lower than if the Fund had used a market quotation to
price the same security.
For foreign securities the values are translated from the local
currency into U.S. dollars using current exchange rates. If trading in
the currency is restricted, the Fund uses a rate believed to reflect
the currency's fair value in U.S. dollars. Trading may take place in
foreign securities held by the Fund on days when the Fund is not open
for business. As a result, the Fund's NAV may change on days on which
it is not possible to purchase or sell shares of the Fund. If events
materially affecting the value of foreign securities occur between the
time when the exchange in which they are traded closes and the time
when the Fund's net asset value is calculated, the securities may be
valued at fair value in accordance with procedures established by and
under the general supervision of the Board of Trustees.
HOW TO SELL SHARES
A separate account may sell Fund shares to generate cash to meet
various obligations under the contracts and policies issued by it. For
example, if you invest in the Fund through a variable annuity contract
and request a partial withdrawal or cancellation of the contract, the
separate account may sell Fund shares to pay you. You should read your
separate account prospectus carefully to find out
o how you may withdraw from or cancel your contract or policy
o what fees or expenses you may incur
o whether you may be taxed on the amount of withdrawal, including any
penalty tax
A separate account may sell (redeem) shares on any business day. The
price will be the NAV the next time it is calculated after the
redemption request in proper form has been received.
Payment from the redemption will be generally made to the separate
account within seven days after the request is made. Redemption
proceeds may be delayed, or the right to receive redemption proceeds
suspended, if the New York Stock Exchange is closed (other than on
weekends or holidays) or trading is restricted, or if an emergency
exists. The Fund has the right to pay redemption proceeds by
distributing securities instead of cash. In that case, the separate
account may incur costs (such as brokerage commissions) converting the
securities into cash.
DIVIDENDS
The Fund pays substantially all of its net income (if any) from
dividends and interest to its shareholders of record as a dividend on
or about the last day of December. The Fund's net realized short-term
and long-term capital gains, if any, will also be distributed annually
in December. The Fund may also make additional distributions to
shareholders 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 are automatically invested in
additional shares of the Fund.
TAX MATTERS
Because you do not own shares in the Fund directly, the Fund expects
that normally you will not be taxed directly on Fund distributions.
However, you may be subject to taxation when you receive distributions
from your variable annuity contract or variable life insurance policy.
You should refer to the prospectus for your contract or policy for
information on the taxes relating to your investment and the tax
consequences of any withdrawal of your investment. You may also wish
to consult with your own tax advisor about your particular situation,
and the tax consequences of your investment under state and local
laws.
<PAGE>
----------------------
MANAGEMENT OF THE FUND
----------------------
Management of the Fund
MANAGER
CitiFunds Small Cap Growth VIP Portfolio draws on the strength and
experience of Citibank. Citibank is the investment manager of the
Fund, and subject to policies set by the Fund's Trustees, Citibank
makes investment decisions. Citibank has been managing money since
1822. With its affiliates, it currently manages more than $327 billion
in assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of
Citicorp and Travelers Group, Inc., which was completed on
October 8, 1998. "CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the
Fund. However, in making investment decisions for the Fund, Citibank
does not obtain or use material inside information acquired by any
division, department or affiliate of Citibank in the course of those
relationships. Citibank and its affiliates may have loans outstanding
that are repaid with proceeds of securities purchased by the Fund.
Marguerite Wagner has been the portfolio manager for the Fund since
January 1999. Ms. Wagner joined Citibank in 1985. Since 1995, she has
had portfolio management and research analyst responsibility for an
internal mid-cap common trust fund and private equity managed
accounts. From 1992 through the end of 1994, Ms. Wagner was a member
of the small capitalization equity management group of Citibank Global
Asset Management. Prior to 1992, she managed portfolios for the
Private Banking Group of Citibank.
MANAGEMENT FEES
For the management services Citibank provides to the Fund. Citibank
receives a fee computed at an annual rate of 0.75% of the Fund's
average daily net assets. The management fee payable to Citibank for
the fiscal year ended December 31, 1998 was voluntarily waived.
<PAGE>
More About the Fund
The Fund's goal, principal investments and risks are summarized in
FUND AT A GLANCE. More information on investments, investment
strategies and risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
CitiFunds Small Cap Growth VIP Portfolio's principal investment
strategies are the strategies that, in the opinion of Citibank, are
most likely to achieve the Fund's investment goal. Of course, there
can be no assurance that the Fund will achieve its goal. Please note
that the Fund may also use strategies and invest in securities that
are not described below but that are described in the Statement of
Additional Information. Of course, Citibank may decide, as a matter of
investment strategy, not to use the investments and investment
techniques described below and in the Statement of Additional
Information at any particular time. The Fund's goal and strategies may
be changed without shareholder approval.
The Fund invests primarily in equity securities of U.S. small cap
issuers that, at the time the securities are purchased, have market
capitalizations below the top 1,000 stocks of the equity market. At
December 31, 1998, the maximum capitalization of issuers in this
category was below $1.9 billion. Under normal circumstances, at least
65% of the Fund's total assets is invested in equity securities of
these issuers. These stocks may include the stocks in the Russell 2000
Index, which is an index of small capitalization stocks.
- --------------------------------------------------------------------------------
WHAT ARE EQUITY SECURITIES?
EQUITY SECURITIES generally represent an ownership interest (or a
right to acquire an ownership interest) in an issuer, and 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
foreign issuers deposited in a U.S. bank or a local branch of a
foreign bank). While equity securities historically have been more
volatile than fixed income securities, they historically have produced
higher levels of total return.
- --------------------------------------------------------------------------------
Small cap companies are generally rapidly growing, with negligible
dividend yields and extremely high levels of volatility. They may
offer more profit opportunity during certain economic conditions than
large and medium sized companies, but they also involve special risks.
The Fund may, but is not obligated to, invest in debt securities. The
Fund's debt securities must be investment grade when the Fund
purchases them. Investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality. If the Fund does invest
in debt securities, it is expected that less than 5% of the Fund's
assets will consist of debt securities rated Baa by Moody's or BBB by
Standard & Poor's.
The Fund may, but is not obligated to, invest up to 25% of its assets
in foreign equity and debt securities, including depositary receipts.
Foreign securities may be issued by issuers in developing countries.
Citibank follows an aggressive, growth-oriented investment style that
emphasizes small U.S. companies which are believed to have superior
management teams and good prospects for growth. In selecting
investments, Citibank looks for issuers that have a predictable,
growing demand for their products or services, and issuers with a
dominant position in a niche market or whose customers are very large
companies. Citibank generally attempts to avoid issuers in businesses
where external factors like regulatory changes or rising commodity
prices may inhibit future growth.
The Fund may hold cash pending investment, and may invest in money
market instruments, repurchase agreements and reverse repurchase
agreements for cash management purposes.
See "Risks" for more information about the risks associated with
investing in equity securities.
DERIVATIVES. The Fund may, but is not obligated to, use derivatives in
order to protect (or "hedge") against declines in the value of
securities held by the Fund or increases in the cost of securities to
be purchased in the future. The Fund may also use derivatives for
non-hedging purposes, to enhance potential gains. These derivatives
include stock index futures contracts, forward foreign currency
contracts and options on foreign currencies. In some cases, the
derivatives purchased by the Fund are standardized contracts traded on
commodities exchanges or boards of trade. This means that the exchange
or board of trade guaranties counterparty performance. Over-the-
counter derivatives, however, are not guaranteed. Derivatives may not
be available on terms that make economic sense (for example, they may
be too costly). The Fund's ability to use derivatives may also be
limited by tax considerations.
DEFENSIVE STRATEGIES. The Fund may, from time to time, take temporary
defensive positions that are inconsistent with the Fund's principal
investment strategies in attempting to respond to adverse market,
political or other conditions. When doing so, the Fund may invest
without limit in high quality money market and other short-term
instruments, and may not be pursuing its investment goal.
NEW INVESTMENT STRUCTURE. At the date of this prospectus the Fund,
like most mutual funds, invests directly in securities. However, the
Fund intends, in the future, to convert to a new investment structure.
In the new investment structure, the Fund will invest in securities
through an underlying mutual fund having the same investment goals and
policies.
The Fund expects to convert to the new investment structure during
1999, although it is possible that the conversion could be delayed.
After the new investment structure is in place, the Fund may stop
investing in its underlying mutual fund at any time, and will do so if
the Fund's Trustees believe it to be in the best interest of the
Fund's shareholders. The Fund could then invest in another mutual fund
or pooled investment vehicle or invest directly in securities.
Under the new investment structure, the Fund bears its share of the
underlying mutual fund's expenses. However, the total fees of the Fund
and the underlying fund are not expected to change as a result of the
new structure.
MANAGEMENT STYLE. Managers of mutual funds use different styles when
selecting securities to purchase. Portfolio managers for Citibank
generally use a "bottom-up" approach when selecting securities for
purchase by the Fund. This means that they look primarily at
individual companies against the context of broader market forces. The
portfolio managers use this same approach when deciding which
securities to sell. Securities are sold when the Fund needs cash to
meet redemptions, or when the managers believe that better
opportunities exist or that the security no longer fits within the
managers' overall strategies for achieving the Fund's goals. However,
the Fund may continue to hold securities of issuers that become mid
cap or large cap issuers if, in Citibank's judgment, these securities
remain good investments for the Fund. For more information about the
portfolio managers, see "Manager" on page 13.
The Fund is actively managed. Although the portfolio managers attempt
to minimize portfolio turnover, from time to time the Fund's annual
portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to
investors. Active trading may also increase the amount of commissions
or mark-ups the Fund pays to broker or dealers when it buys and sells
securities. The "Financial Highlights" section of this prospectus
shows the Fund's historical portfolio turnover rate.
Citibank may use brokers or dealers for Fund transactions who also
provide brokerage and research services to the Fund or other accounts
over which Citibank exercises investment discretion. The Fund may "pay
up" for brokerage services, meaning that it is authorized to pay a
broker or dealer who provides these brokerage and research services a
commission for executing a portfolio transaction which is higher than
the commission another broker or dealer would have charged. However,
the Fund will "pay up" only if Citibank determines in good faith that
the higher commission is reasonable in relation to the brokerage and
research services provided, viewed in terms of either the particular
transaction or all of the accounts over which Citibank exercises
investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should
consider the risks you will assume. Certain of these risks are
described below. More information about risks appears in the Fund's
Statement of Additional Information. Remember that you may receive
little or no return on your investment in the Fund. You may lose money
if you invest in this Fund.
Please remember that an investment in the Fund is not a deposit of
Citibank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
MARKET RISK. This is the risk that the prices of securities will rise
or fall due to changing economic, political or market conditions, or
due to a company's individual situation. The value of the Fund's
shares will change daily as the value of its underlying securities
change. This means that your shares of the Fund may be worth more or
less when you sell them than when you bought them.
EQUITY SECURITIES. Equity securities are subject to market risk that
historically has resulted in greater price volatility than exhibited
by fixed income securities.
SMALLER COMPANIES. The securities of smaller capitalization companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns because of
limited product lines, markets, distribution channels or financial and
management resources. Also, there may be less publicly available
information about small cap companies. Investments in small cap
companies may be in anticipation of future products or services to be
provided by such companies. If those products or services are delayed,
the prices of the securities of such companies may drop. Sometimes,
the prices of the securities of smaller capitalized companies rise and
fall based on investor perception rather than economics. Securities of
small cap companies may be thinly traded, making their disposition
more difficult. For all these reasons, the prices of the securities of
small cap companies may be more volatile, causing the Fund's share
price to be volatile. Funds that invest a higher percentage of their
assets in small cap stocks are generally more volatile than funds
investing a higher percentage of their assets in larger, more
established companies.
The Fund's aggressive, growth-oriented investment style may increase
the risks already associated with investing in smaller companies. For
example, fast growing small cap companies may be more volatile than
other small cap companies.
GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the
prices of growth securities typically fall. Growth securities may also
be more volatile than other investments because they generally do not
pay dividends. The success of the Fund's investment strategy depends
largely on Citibank's skill in assessing the growth potential of
companies in which the Fund invests.
FOREIGN SECURITIES. Investments in foreign 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 foreign issuers and
markets are subject.
o These risks may include expropriation of assets, confiscatory
taxation, withholding taxes on dividends and interest paid on fund
investments, currency exchange controls and other limitations on
the use or transfer of Fund assets and political or social
instability.
o Foreign 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.
o Foreign markets may be less liquid and more volatile than U.S.
markets. Rapid increases in money supply may result in speculative
investing, contributing to volatility. Also, equity securities may
trade at price-earnings multiples that are higher than those of
comparable U.S. companies, and that may not be sustainable. As a
result, there may be rapid changes in the value of foreign
securities.
o Foreign markets may offer less protection to investors. Enforcing
legal rights may be difficult, costly and slow. There may be
special problems enforcing claims against foreign governments.
o Since foreign securities often trade 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.
An increase in the U.S. dollar relative to these other currencies
will adversely affect the value of the Fund. In addition, some
foreign currency values may be volatile and there is the
possibility of governmental controls on currency exchanges or
governmental intervention in currency markets. Controls or
intervention could limit or prevent the Fund from realizing value
in U.S. dollars from its investment in foreign securities. The
Fund may also be adversely affected by the introduction of the
Euro.
o The Fund may invest in issuers located in emerging, or developing,
markets.
o Emerging or developing countries are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income.
o All of the risks of investing in foreign securities are heightened
by investing in developing countries.
o The markets of developing countries have been more volatile than
the markets of developed countries with more mature economies.
INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise. Longer
term obligations are usually more sensitive to interest rate changes.
If the Fund invests in debt securities, a change in interest rates
could cause the Fund's share price to go down.
CREDIT RISK. The Fund may, but is not obligated to, invest in
investment grade debt securities. It is possible that some issuers
will not make payments on debt securities held by the Fund, causing a
loss. Or, an issuer may suffer adverse changes in its financial
condition that could lower the credit quality of a security, leading
to greater volatility in the price of the security and in shares of
the Fund. A change in the quality rating of a bond or other security
can also affect the security's liquidity and make it more difficult
for the Fund to sell. The lower quality debt securities in which the
Fund may invest are more susceptible to these problems than higher
quality obligations.
CONVERTIBLE SECURITIES. Convertible securities, which are debt
securities that may be converted into stock, are subject to the market
risk of stocks, and, like other debt securities, are also subject to
interest rate risk and the credit risk of their issuers. Call
provisions may allow the issuer to repay the debt before it matures.
DERIVATIVES. The Fund's use of derivatives (such as futures contracts
and forward foreign currency contracts), particularly when used for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets, causing
the Fund's share price to go down. In addition, the Fund's ability to
use derivatives successfully depends on Citibank's ability to
accurately predict movements in stock prices or currency exchange
rates and the availability of liquid markets. If Citibank's
predictions are wrong, or if the derivatives do not work as
anticipated, the Fund could suffer greater losses than if the Fund had
not used derivatives. If the Fund invests in over-the-counter
derivatives, there is also the risk that a counterparty may fail to
honor its contract.
STATE INSURANCE REGULATION. The Fund provides an investment vehicle
for variable annuity contracts and variable life insurance policies
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 greatest flexibility. 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.
YEAR 2000. The Fund could be adversely affected if the computer
systems used by the Fund or its service providers are not programmed
to accurately process information on or after January 1, 2000. The
Fund, and its service providers, are making efforts to resolve any
potential Year 2000 problems. While it is likely these efforts will be
successful, the failure to implement any necessary modifications could
have an adverse impact on the Fund. The Fund also could be adversely
affected if the issuers of securities held by the Fund do not solve
their Year 2000 problems, or if it costs them large amounts of money
to solve these problems. Funds that invest in foreign securities may
be particularly susceptible to these potential Year 2000 problems.
<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is incorporated by reference in the Statement of Additional
Information and which is available upon request.
February 10, 1997
(Commencement
of Operations) to
Year Ended December 31,
December 31, 1998 1997
..............................................................................
Net Asset Value, beginning of period $ 11.21 $ 10.00
Income From Investment Operations:
Net investment loss (0.08)+ (0.05)+
Net gains or losses on securities
(both realized and unrealized) (0.42)# 1.26
..............................................................................
Total from investment operations (0.50) 1.21
..............................................................................
Less Distributions:
Distributions (from capital gains) (1.11) 0
..............................................................................
Net Asset Value, end of period $ 9.60 $ 11.21
..............................................................................
Total return (3.80)% 12.10%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 2,006 $ 3,091
Ratio of expenses to average net assets 0.90% 0.90%*
Ratio of net loss to average net assets (0.72)% (0.49)%*
Portfolio turnover rate 94% 113%
Note: If agents of the Fund had not voluntarily waived a portion of their fees,
and assumed Fund expenses for the periods indicated, the net investment loss per
share and the ratios would have been as follows:
Net investment loss $ (0.64)+ $ (0.52)+
RATIOS:
Ratio of expenses to average net assets 5.74% 5.50%*
Ratio of net loss to average net assets (5.53)% (5.09%)*
..............................................................................
* Annualized
** Not Annualized
+ The per share amounts were computed using a monthly average number of shares
outstanding during the year.
# The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended due to the timing of sales of Fund shares in relation to
fluctuating market values of the investments in the Fund.
<PAGE>
The Statement of Additional Information (SAI) provides more details about the
Fund and its policies. The SAI is incorporated by reference into this prospectus
and is legally part of it.
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance.
The Annual and Semi-Annual Reports for the Fund list its portfolio holdings and
describe its performance.
To obtain free copies of the SAI and the Annual and Semi-Annual Reports or to
make other inquiries, please call toll-free 1-800-625-4554.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can receive
copies of this information by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
SEC Number: 811-07893
<PAGE>
Statement of
Additional Information
May 3, 1999
CITISELECT(R) VIP FOLIO 100 INCOME
CITISELECT(R) VIP FOLIO 200 CONSERVATIVE
CITISELECT(R) VIP FOLIO 300 BALANCED
CITISELECT(R) VIP FOLIO 400 GROWTH
CITISELECT(R) VIP FOLIO 500 GROWTH PLUS
Variable Annuity Portfolios (the "Trust") is an open-end investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on October 18, 1996. The Trust has six series
and currently offers shares of five investment funds -- CitiSelect(R) VIP
Folio 100 Income, CitiSelect(R) VIP Folio 200 Conservative. CitiSelect(R) VIP
Folio 300 Balanced, CitiSelect(R) VIP Folio 400 Growth and CitiSelect(R) VIP
Folio 500 Growth Plus (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 21 Milk Street, Boston, Massachusetts
02109, (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 GOVERNMENT AGENCY, AND ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
1. The Trust ............................................................ 2
2. Investment Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 3
4. Investment Restrictions .............................................. 23
5. Performance Information and Advertising .............................. 24
6. Determination of Net Asset Value; Valuation of Securities; Additional
Purchase and Redemption Information .................................. 26
7. Management ........................................................... 27
8. Portfolio Transactions ............................................... 33
9. Description of Shares, Voting Rights and Liabilities ................. 34
10. Tax Matters .......................................................... 35
11. Certain Bank Regulatory Matters ...................................... 37
12. Financial Statements ................................................. 37
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 3, 1999, by which shares of the Funds are
offered. This Statement of Additional Information should be read in
conjunction with the Prospectus. This Statement of Additional Information
incorporates by reference the financial statements described on page 37
hereof. These financial statements can be found in the Funds' Annual Report to
Shareholders. An investor may obtain copies of the Prospectus and Annual
Report without charge by calling 1-800-625-4554 or by contacting 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 open-end 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 five Funds offered by the Trust -- CitiSelect(R) VIP Folio 100
Income, CitiSelect(R) VIP Folio 200 Conservative, CitiSelect(R) VIP Folio 300
Balanced, CitiSelect(R) VIP Folio 400 Growth and CitiSelect(R) VIP Folio 500
Growth Plus. The Funds are investment vehicles for variable annuity contracts
and variable life insurance policies offered by Separate Accounts of
Participating Insurance Companies.
Each Fund is a diversified series of the Trust. Under the Investment
Company Act of 1940, as amended (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.
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 CFBDS,
Inc., the Funds' distributor ("CFBDS" or the "Distributor"), only to Separate
Accounts.
PROPOSED RESTRUCTURING
At the date of this Statement of Additional Information, the Funds, like
most mutual funds, invest directly in securities. However, the Funds intend,
in the future, to convert to a new investment structure, sometimes called a
"fund of funds." In the new investment structure, the Funds, instead of
investing directly in securities, will invest in multiple Portfolios. Each
Portfolio is a mutual fund with its own investment goals and policies. The
Portfolios buy, hold and sell securities in accordance with these goals and
policies. Of course, there can be no assurance that the Funds or the
Portfolios will achieve their goals. Each Portfolio invests in securities in a
particular asset class, in particular types of securities or in securities of
particular maturities or duration.
The Funds expect to convert to the new investment structure during 1999,
although it is possible that the conversion could be delayed.
Following the restructuring, the Trust will seek the investment objective
of each Fund by investing all of its investable assets in multiple underlying
investment companies or series thereof. Currently, the Trust intends to invest
in VAP Large Cap Growth Portfolio, VAP Large Cap Value Portfolio, VAP Small
Cap Value Portfolio, VAP U.S. Fixed Income Portfolio, VAP International
Portfolio, VAP Foreign Bond Portfolio, VAP High Yield Portfolio, and VAP Small
Cap Growth Portfolio (collectively, the "Portfolios"). The Portfolios are
series of VAP Master Portfolios (the "Portfolio Trust"). The Portfolio Trust
is an open end, diversified management investment company organized as a New
York trust.
Following the restructuring, all references in this Statement of
Additional Information to a Fund will include that Fund's underlying
Portfolios, unless the context otherwise requires. In addition, references to
the Trust will include the Portfolio Trust, unless the context otherwise
requires.
2. INVESTMENT OBJECTIVES AND POLICIES
Each Fund invests in a mix of equity and fixed income securities that is
designed by Citibank to offer a different level of potential return with a
different amount of risk. The investment objective (or goal) of each Fund is
as follows:
The investment objective of CitiSelect VIP Folio 100 Income is as high
a level of current income as is consistent with a dominant emphasis on
fixed income securities and a small allocation to equity securities.
The investment objective of CitiSelect VIP Folio 200 Conservative is
as high a total return over time as is consistent with a primary emphasis
on fixed income securities, and a secondary emphasis on equity securities.
The investment objective of CitiSelect Folio VIP 300 Balanced 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 Folio VIP 400 Growth 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 Folio VIP 500 Growth Plus 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 principal investment
strategies of each Fund and the principal risks of investing in each Fund. The
following supplements the information contained in the Prospectus concerning
the investment policies and techniques of each Fund.
CitiSelect VIP Folio 100 Income is expected to be the least volatile of
the five Funds and is designed for the investor who is seeking current income
with relatively low risk but with some growth potential. CitiSelect Folio 200
Conservative is designed for the investor who is seeking relatively low risk
provided by substantial investments in fixed income securities, but who also
seeks some capital growth. CitiSelect VIP Folio 300 Balanced 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 Growth and
CitiSelect VIP Folio 500 Growth Plus are designed for the investor willing and
able to take higher risks in the pursuit of long-term capital appreciation.
CitiSelect VIP Folio 500 Growth Plus is expected to be the most volatile of
the five Funds, and is designed for investors who can withstand greater market
swings to seek potential long-term rewards. CitiSelect VIP Folio 400 Growth is
designed for investors seeking long-term rewards, but with less volatility.
Except as otherwise expressly noted, the policies described above and
those described below are not fundamental and may be changed without
shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
The Funds may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described below and in the
Prospectus. The selection of investments and the utilization of investment
techniques depend on, among other things, the Manager's and, as applicable,
the subadvisers' investment strategies for the Funds, conditions and trends in
the economy and financial markets and investments being available on terms
that, in the Manager's or a subadviser's opinion, make economic sense.
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.
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.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of each
Fund may be invested in shares of other investment companies.
SECURITIES RATED BAA OR BBB
Each Fund may purchase securities rated Baa by Moody's Investor's Service,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("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.
LOWER RATED DEBT SECURITIES
The Funds may invest in lower rated fixed income securities (commonly
known as "junk bonds"), to the extent described in the Prospectus. The lower
ratings of certain securities held by the Funds reflect a greater possibility
that adverse changes in the financial condition of the issuer or in general
economic conditions, or both, or an unanticipated rise in interest rates, may
impair the ability of the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely payment of
interest and principal would likely make the values of such securities held by
the Funds more volatile and could limit the Fund's ability to sell its
securities at prices approximating the values the Funds had placed on such
securities. In the absence of a liquid trading market for securities held by
it, a Fund at times may be unable to establish the fair value of such
securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which
may be better or worse than the rating would indicate. In addition, the rating
assigned to a security by Moody's or S&P (or by any other nationally
recognized securities rating organization) does not reflect an assessment of
the volatility of the security's market value or the liquidity of an
investment in the security.
Like those of other fixed-income securities, the values of lower rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of fixed
income securities. Conversely, during periods of rising interest rates, the
value of a Fund's fixed-income securities will generally decline. The values
of lower rated securities may often be affected to a greater extent by changes
in general economic conditions and business conditions affecting the issuers
of such securities and their industries. Negative publicity or investor
perceptions may also adversely affect the values of lower rated securities.
Changes by recognized rating services in their ratings of any fixed-income
security and changes in the ability of an issuer to make payments of interest
and principal may also affect the value of these investments. Changes in the
value of portfolio securities generally will not affect income derived from
these securities, but will affect a Fund's net asset value. The Funds will not
necessarily dispose of a security when its rating is reduced below its rating
at the time of purchase. However, the Manager will monitor the investment to
determine whether its retention will assist in meeting the Fund's investment
objective.
Issuers of lower rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such
issuers may not have more traditional methods of financing available to them
and may be unable to repay outstanding obligations at maturity by refinancing.
The risk of loss due to default in payment of interest or repayment of
principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
CALL FEATURES
Certain securities held by a Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by a Fund during a time of declining interest rates, the Fund may not be able
to reinvest the proceeds in securities providing the same investment return as
the securities redeemed.
ZERO-COUPON BONDS AND "PAYMENT-IN-KIND" BONDS
The Funds may invest in "zero-coupon" bonds and "payment-in-kind" bonds.
Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow
the issuer, at its option, to make current interest payments on the bonds
either in cash or in additional bonds. Because zero-coupon and payment-in kind
bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that
pay interest currently. Both zero-coupon and payment-in-kind bonds allow an
issuer to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds paying
interest currently in cash. The Funds are required to accrue interest income
on such investments and to distribute such amounts at least annually to
shareholders even though such bonds do not pay current interest in cash. Thus,
it may be necessary at times for the Funds to liquidate investments in order
to satisfy its dividend requirements.
MORTGAGE-BACKED SECURITIES
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 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.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The prices of mortgage-backed securities
may not increase as much as prices of other debt obligations when interest
rates decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates
go up, mortgage-backed securities experience lower rates of prepayment. This
has the effect of lengthening the expected maturity of a mortgage-backed
security. This particular risk, referred to as "maturity extension 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, rising interest rates would not
only likely decrease the value of a Fund's fixed income securities, but would
also increase the inherent volatility of the Fund by effectively converting
short-term debt instruments into long-term debt instruments. As a result,
prices of mortgage-backed securities may decrease more than prices of other
debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
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 forgoes 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.
However, a Fund takes the risk that the market price of the mortgage-backed
security will drop below the future purchase price. When a Fund uses a
mortgage dollar roll, it is also subject to the risk that the other party to
the agreement will not be able to perform. A "covered roll" is a specific type
of dollar roll for which a Fund establishes a segregated account with liquid
securities equal in value to the securities subject to repurchase by the Fund.
The Funds will invest only in covered rolls.
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. 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 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 ("Rule 144A
securities"). However, none of
the Funds invests more than 15% of its net assets (taken at market value) in
illiquid investments, which include securities for which there is no readily
available market, securities subject to contractual restrictions on resale and
Rule 144A securities, unless, in the case of Rule 144A securities, the Board
of Trustees of the Trust determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Trustees have adopted
guidelines and, subject to oversight by the Trustees, have delegated to the
Manager and to each Subadviser the daily function of determining and
monitoring liquidity of Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
Each 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 a Fund to sell them promptly at an acceptable price.
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 of 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.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of
a sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
depositary receipts.
The 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 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. In the event of the bankruptcy of the other party to a
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 purchased has decreased, the Fund could experience a loss.
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 segregated. 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. In the event of the
bankruptcy of the other party to a reverse repurchase agreement, a Fund could
experience delays in recovering the securities sold. To the extent that, in
the meantime, the value of the securities sold has changed, the Fund could
experience a loss.
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. Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested
in high quality short-term instruments. Either party has the right to
terminate a loan at any time on customary industry settlement notice (which
will not usually exceed three business days). During the existence of a loan,
a 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 cash
collateral (subject to a rebate payable to the borrower) or a fee from the
borrower in the event the collateral consists of securities. Where the
borrower provides 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. In addition, a Fund could suffer 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. The Manager or a Subadviser will make loans only
when, in the judgment of the Manager or Subadviser, the consideration which
can be earned currently from loans of this type justifies the attendant risk.
WHEN-ISSUED SECURITIES
Each of the Funds 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. It is expected
that, under normal circumstances, the applicable Fund would take delivery of
such securities, but the Fund may sell them before the settlement date. In
general, the Fund does not pay for the securities until received and does not
start earning interest until the contractual settlement date. 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 Funds expect always to
have cash or liquid securities sufficient to cover any commitments or to limit
any potential risk. However, even though the Funds 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.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that
case, there could be an unrealized loss at the time of delivery. 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.
SHORT SALES
The Funds may seek to hedge investments or realize additional gains
through short sales. Short sales are transactions in which a Fund sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, a Fund must borrow the security
to make delivery to the buyer. A Fund then is obligated to replace the
security borrowed by purchasing it at the market price at or prior to the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by a Fund. Until the security is replaced, a Fund
is required to repay the lender any dividends or interest that accrue during
the period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. A portion
of the net proceeds of the short sale may be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to
meet margin requirements, until the short position is closed out. A Fund will
also incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the
premiums, dividends, interest or expenses a Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold
short by a Fund over the price at which it was sold short will result in a
loss to the Fund, and there can be no assurance that a Fund will be able to
close out the position at any particular time or at an acceptable price. Thus
a Fund's losses on short sales are potentially unlimited. The Funds may also
engage in short sales of non-U.S. currencies. See "Foreign Currency Exchange
Transactions" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds may engage in foreign currency exchange transactions as an
attempt to protect against uncertainty in the level of future foreign currency
exchange rates or as an attempt to enhance performance.
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 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. A Fund may enter into
forward contracts for hedging and non-hedging purposes, including transactions
entered into for the purposes of profiting from anticipated changes in foreign
currency exchange rates.
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. A forward contract entered into by a Fund
may involve the purchase or sale, for a fixed amount of U.S. currency, of
another currency. Each of the Funds may also enter into forward contracts for
the purchase or sale, for a fixed amount of a non-U.S. currency, of another
non-U.S. currency.
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 may 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 the non-U.S. currency, for a
fixed amount of U.S. dollars. If a Fund owns securities in that currency, the
Manager or Subadviser may enter into a contract to sell the non-U.S. currency
in an amount 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.
At the maturity of a forward contract, a Fund will either deliver the non-
U.S. currency or 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 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.
Where a Fund enters into a forward contract with respect to securities it
holds denominated in the non-U.S. 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.
When a Fund enters into a forward contract for non-hedging purposes, there
is a greater potential for profit but also a greater potential for loss. For
example, a Fund may purchase a given foreign currency through a forward
contract if the value of such currency is expected to rise relative to the
U.S. dollar or another foreign currency. Conversely, a Fund may sell the
currency through a forward contract if the value of the currency is expected
to decline against the dollar or another foreign currency. The Fund will
profit if the anticipated movements in foreign currency exchange rates occur,
which will increase gross income. Where exchange rates do not move in the
direction or the extent anticipated, however, the Fund may sustain losses
which will reduce its gross income. Such transactions should be considered
speculative and could involve significant risk of loss.
Each of the Funds may also engage in short sales of non-U.S. currencies in
which a Fund would sell a currency that it did not own in anticipation of a
fall in the value of that currency relative to U.S. dollars or another foreign
currency. A Fund may do this even if it does not hold any securities or other
assets denominated in the non-U.S. currency being sold short. In order for the
Fund to deliver the currency sold short, it would be required to purchase the
currency. If the expected decline occurs, the Fund would gain the difference
between the price at which it sold the currency, and the price it paid for the
currency. However, if the price of the currency increases, the Fund would
suffer a loss to the extent that the purchase price of the currency exceeds
the price of the currency it sold short. A Fund's losses on such short sales
are potentially unlimited.
Each Fund has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts and short
sales. 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 or that the Fund otherwise covers its position in
accordance with applicable regulations and policies.
Each of the Funds may purchase put options on a currency in an attempt to
protect against currency rate fluctuations or to seek to enhance gains. When a
Fund purchases a put option on a currency, the Fund will have the right to
sell the currency for a fixed amount in U.S. dollars, or other currency.
Conversely, where a rise in the value of one currency is projected against
another, the Fund may purchase call options on the currency, giving it the
right to purchase the currency for a fixed amount of U.S. dollars or another
currency. Each Fund may purchase put or call options on currencies, even if
the Fund does not currently hold or intend to purchase securities denominated
in such currencies.
The benefit to the Fund from purchases of 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.
The Funds may write options on currencies for hedging purposes or
otherwise in an attempt to achieve their investment objectives. For example,
where a Fund anticipates a decline in 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 may be offset by the
amount of the premium received. If the expected decline does not occur, the
Fund may be required to sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. A Fund could also write call options on a
currency, even if it does not own any securities denominated in that currency,
in an attempt to enhance gains. In that case, if the expected decline does not
occur, the Fund would be required to purchase the currency and sell it at a
loss, which may not be offset by the premium received. As with a short sale of
a security or a currency, the losses in this case could be unlimited.
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. A Fund could also write
put options on a currency, even if it does not own, or intend to purchase, any
securities denominated in that currency. In that case, if the expected
increase does not occur, the Fund would be required to purchase the currency
at a price that is greater than the current exchange rate for the currency,
and the losses in this case could exceed the amount of premium received for
writing the options, and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or
in the over-the-counter market. Each of the Funds may enter into transactions
in options on foreign currencies that are traded in the over-the-counter
market. These transactions are not afforded the protections provided to
traders on organized exchanges or those regulated by the CFTC. In particular,
over-the-counter options are not cleared and guaranteed by a clearing
corporation, thereby increasing the risk of counterparty default. In addition,
there may not be a liquid market on these options, which may prevent a Fund
from liquidating open positions at a profit prior to exercise or expiration,
or to limit losses in the event of adverse market conditions.
The purchase and sale of foreign currency options are subject to the risks
of the availability of a liquid secondary market and counterparty risk, as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible interventions by governmental authorities and the effects of other
political and economic events. In addition, the value of a Fund's positions in
foreign currency options could be adversely affected by (1) other complex
foreign political and economic factors, (2) lesser availability of data on
which to make trading decisions than in the United States, (3) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States or at the applicable Subadviser's
place of business, and (4) imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States.
In addition, because foreign currency transactions occurring in the
interbank market generally involve substantially larger amounts than those
that may be involved in the use of foreign currency options, the Funds may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets, or other markets used by
the Manager or a Subadviser are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that may not be reflected in the U.S. or other markets
used by the Funds.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash and liquid securities 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.
The Funds may engage in proxy hedges and cross hedges. For example, in a
proxy hedge, a Fund, having purchased a security, would sell a currency whose
value is believed to be closely linked to the currency in which the security
is denominated. Interest rates prevailing in the country whose currency was
sold might be expected to be closer to those in the U.S. and lower than those
of securities denominated in the currency of the original holding. This type
of hedging entails greater risk than a direct hedge because it is dependent on
a stable relationship between the two currencies paired as proxies and the
relationships can be very unstable at times. A Fund may enter into a cross
hedge if a particular currency is expected to decrease against another
currency. For example, the Fund would sell the currency expected to decrease
and purchase a currency which is expected to increase against the currency
sold in an attempt to protect against declines in value of the Fund's holdings
denominated in the currency sold.
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,
a 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.
Each of the Funds may also purchase and sell foreign currency futures
contracts as more fully discussed under "Futures Contracts" below, and engage
in currency swaps and other similar transactions as more fully discussed under
"Swaps and Related Transactions" below.
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 be realized that under certain circumstances, the Funds
may not be able to hedge against a decline in the value of a currency, even if
the Manager or a Subadviser deems it appropriate to try to do so, because
doing so would be too costly. It should also be realized that transactions
entered into to protect the value of a Fund's securities against a decline in
the value of a currency (even when successful) do not eliminate fluctuations
in the underlying prices of the securities. Additionally, although hedging
transactions may 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.
Investors should also be aware of the increased risk to a Fund and its
shareholders when it enters into foreign currency exchange transactions for
non-hedging purposes. Non-hedging transactions in such instruments involve
greater risks and may result in losses which are not offset by increases in
the value of a Fund's other assets. Although a Fund is required to segregate
assets or otherwise cover certain types of transactions, this does not protect
the Fund against risk of loss. Furthermore, the Funds' use of foreign currency
exchange transactions may involve leveraging. Leveraging adds increased risks
to a Fund, because the Fund's losses may be out of proportion to the amount
invested in the instrument--a relatively small investment may lead to much
greater losses.
OPTIONS
Each of the Funds may write call and put options and purchase call and put
options on securities for hedging and nonhedging purposes. Call and put
options written by a Fund will be covered in the manner set forth below, or
the Fund will segregate cash or liquid securities equal to the value of the
securities underlying the option.
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) 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 or liquid securities in a segregated account. A put option written by
a Fund is "covered" if the Fund maintains cash or liquid securities with a
value equal to the exercise price in a segregated account 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 or liquid securities in a segregated account. 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
counterparty with which, the option is traded, and applicable laws and
regulations. Even if the Fund's obligation is 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. Covering an option does not protect the Fund
from risk of loss.
When a Fund writes a call option, the Fund, in return for a fee, or
"premium", agrees to sell a security at the exercise price, if the holder
exercises the right to purchase prior to the expiration date of the call
option. If the Fund holds the security in question, the Fund gives up some or
all of the opportunity to profit from the increase in the market price of the
security during the life of the option. The Fund retains the risk of loss
should the price of the security decline. If the option expires unexercised,
the Fund realizes a gain equal to the premium, which may be offset by a
decline in price of the underlying security. If the option is exercised, the
Fund realizes a gain or loss equal to the difference between the fund's cost
for the underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Fund may terminate a call option it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security
or to write another call on the security, realize a profit on a previously
written call option, or protect a security from being called in an unexpected
market rise. Any profits from closing a purchase transaction may be offset by
a decline in the value of the underlying security. Conversely, because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, if the Fund holds
the underlying security any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by unrealized appreciation of the
underlying security. If the Fund does not hold the underlying security, the
Fund's loss could be unlimited.
A Fund may write put options in an attempt to enhance its current return.
Such option transactions may also be used as a limited form of hedging against
an increase in the price of securities that a Fund plans to purchase. A put
option written by the Fund gives the holder the right to sell, and, in return
for a premium, obligates the Fund to buy, a security at the exercise price at
any time before the expiration date.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Fund may also
receive a return on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a loss
to the Fund, unless the security later appreciates in value. A Fund may
terminate a put option it has written before it expires by a closing purchase
transaction. Any loss from this transaction may be partially or entirely
offset by the premium received on the terminated option.
Each of the Funds may purchase options for hedging purposes or to increase
the Fund's return. When put options are purchased as a hedge against a decline
in the value of portfolio securities, the put options may be purchased at or
about the same time that the Fund purchases the underlying security or at a
later time. 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. Similarly, when put
options are used for non-hedging purposes, the Fund may make a profit when the
price of the underlying security or instrument falls below the strike price.
If the price of the underlying security or instrument does not fall
sufficiently, the options may expire unexercised and the Fund would lose the
premiums it paid for the option. If the price of the underlying security or
instrument falls sufficiently and the option is exercised, the amount of any
resulting profit will be offset by the amount of premium paid.
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 and the premium would be lost.
Call options may also be purchased in order to increase a Fund's return at
a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a call
option may be sold by a Fund in closing sale transactions, which are sales by
the Fund, prior to the exercise of options that it has purchased, of options
of the same series. Profit or loss from the sale will depend upon whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs. The purchase of call options on securities that a
Fund owns, 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.
Each of the Funds may write (sell) call and put options and purchase call
and put options on securities indices. The delivery requirements of options on
securities indices differ from options on securities. Unlike a securities
option, which contemplates the right to take or make delivery of securities at
a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (1) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (2) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in securities index options prior to expiration by entering into a closing
transaction on an exchange or it may allow the option to expire unexercised.
Each of the Funds may cover call options on securities 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) upon conversion or exchange of other securities in its portfolio.
Where a Fund covers a call option on a securities 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 securities 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 or liquid securities in a
segregated account. A Fund may cover put options on securities indices by
maintaining cash or liquid securities with a value equal to the exercise price
in a segregated account or by holding a put on the same securities 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 or liquid
securities in a segregated account. Put and call options on securities 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. Investors should be aware that
although a Fund will only write call or put options on securities indices that
are covered, covering an option does not protect the Fund from risk of loss.
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 purchase put options on securities indices when the
Manager or Subadviser believes that there may be a decline in the prices of
the securities covered by the index. The Fund will realize a gain if the put
option appreciates in excess of the premium paid for the option. If the option
does not increase in value, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs.
A Fund may purchase call options on securities indices to take advantage
of an anticipated broad market advance, or an advance in an industry or market
segment. A Fund will 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
securities 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.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. The
ability of a Fund to engage in closing purchase transactions with respect to
securities index options depends on the existence of a liquid secondary
market. However, no such secondary market may exist, or the market may cease
to exist at some future date, for some options. No assurance can be given that
a closing purchase transaction can be effected when the Manager or a
Subadviser desires that a Fund engage in such a transaction.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether a Fund
realizes a gain or loss from purchasing or writing of options on an index
depends upon movements in the level of prices in the market generally or, in
the case of certain indices, in an industry or market segment, rather than
movements in the price of a particular security. As a result, successful use
by a Fund of options on securities indices is subject to the Manager's or a
Subadviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual securities. When a Fund purchases or writes securities
index options as a hedging technique, the Fund's success will depend upon the
extent to which price movements in the portion of a securities portfolio being
hedged correlate with price movements of the securities index selected.
A Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause
losses, which, in the case of call options written, are potentially unlimited.
The Funds may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call
option writer, for example, is obligated to deliver the underlying stock to
the clearing organization if the option is exercised, and the clearing
organization is then obligated to pay the writer the exercise price of the
option. If a Fund were to purchase a dealer option, however, it would rely on
the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the
Fund, the Fund would lose the premium it paid for the option and the expected
benefit of the transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, a Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when a Fund writes a dealer option, it generally
will be able to close out the option prior to the expiration only by entering
into a closing purchase transaction with the dealer to which the Fund
originally sold the option. Although the Funds will seek to enter into dealer
options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Funds, there can be no
assurance that a Fund will be able to liquidate a dealer option at a favorable
price at any time prior to expiration. The inability to enter into a closing
transaction may result in material losses to a Fund. Until a Fund, as an OTC
call option writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used to cover the
written option until the option expires or is exercised. This requirement may
impair a Fund's ability to sell portfolio securities or, with respect to
currency options, currencies at a time when such sale might be advantageous.
In the event of insolvency of the other party, the Fund may be unable to
liquidate a dealer option.
Each of the Funds may purchase and write options on foreign currencies as
more fully described in "Foreign Currency Exchange Transactions" above. Each
of the Funds may also purchase or write call options on futures contracts as
more fully described in "Options on Futures Contracts" below.
The Funds' use of options may involve leveraging. Leveraging adds
increased risks to a Fund, because the Fund's losses may be out of proportion
to the amount invested in the instrument--a relatively small investment may
lead to much greater losses.
FUTURES CONTRACTS
Each of the Funds may enter into futures contracts, including bond futures
contracts, interest rate futures contracts, stock index futures contracts and/
or foreign currency futures contracts. Such investment strategies may 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 in the
United States 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. Futures contracts may also be traded on markets outside the
U.S.
Futures contracts based on debt securities provide for the delivery and
acceptance of securities, although 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. Interest
rate futures, which are typically based on shorter-term interest rates, such
as overnight to six-month time periods, settle in cash only rather than by
delivery of the underlying instrument.
A Fund may purchase or sell interest rate futures contracts or bond
futures contracts to attempt to protect the Fund from fluctuations in interest
rates, to manage the effective maturity or duration of the Fund's portfolio in
an effort to reduce potential losses, or in an effort to enhance potential
gain, without actually buying or selling debt securities. For example, if the
Fund owned long-term bonds and interest rates were expected to increase, the
Fund might enter into interest rate 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.
Bond futures may be used for nonhedging purposes. For example, even if the
Fund were not trying to protect the value of any bonds held by it, if the
Manager or a Subadviser anticipates that interest rates are about to rise,
depressing future prices of bonds, the Manager or Subadviser may sell bond
futures short, closing out the position later at a lower price, if the future
prices had fallen, as expected. If the prices had not fallen, the Fund would
experience a loss and such loss may be unlimited.
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.
Although futures on individual equity securities are not available in
United States markets, futures contracts on individual equity securities may
be available in foreign markets, and may be purchased or sold by the Funds.
Each of the Funds may buy and sell stock index futures contracts to
attempt to increase investment return, to gain stock market exposure while
holding cash available for investments and redemptions, or to protect against
a decline in the stock market.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at the price agreed upon when the
contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100
Index were $180, one contract would be worth $18,000 (100 units x $180). The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if a Fund enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date,
the Fund will gain $400 (100 units x gain of $4) reduced by transaction costs.
If the Fund enters into a futures contract to sell 100 units of the stock
index at a specified future date at a contract price of $180 and the S&P 100
Index is at $182 on that future date, the Fund will lose $200 (100 units x
loss of $2) increased by transaction costs.
Positions in index futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures.
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 or, for non-hedging purposes, in an attempt to benefit
from such fluctuations. 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. A Fund may also sell futures contracts in a foreign currency even
if it does not hold securities denominated in such currency, if it anticipates
a decline in the value of such currency.
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. The Fund could also purchase futures contracts on a
currency if it expected the currency to rise in value, even if the Fund did
not anticipate purchasing securities denominated in that currency.
Although the use of futures for hedging, if correctly used, may 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), they do not eliminate the risk of loss and 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 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 underlying securities, currencies or
indices.
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. There can be no assurance
that a liquid secondary 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. 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 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, equity markets, or other economic factors 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 entered into a futures contract in
the belief that interest rates would increase, and interest rates decrease
instead, 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.
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. Generally speaking, 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 and the
premiums required to establish positions in options on futures, would exceed
5% of that Fund's net assets. These limitations apply only to instruments
regulated by the CFTC, and may not apply to all of the Funds' transactions in
futures contracts.
Each Fund will comply with this CFTC requirement if applicable. In
addition, an amount of cash or liquid securities will be maintained by each
Fund in a segregated account so that the amount so segregated, plus the
applicable margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract, or a
Fund will otherwise "cover" its positions in accordance with applicable
policies and regulations.
The use of futures contracts may expose 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.
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 may 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. 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 or liquid 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 or liquid securities
in a segregated account. 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 may be used as 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 may be used as 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.
Each of the Funds may also purchase options on futures contracts for non-
hedging purposes, in order to take advantage of projected market advances or
declines or changes in interest rates or exchange rates. For example, a Fund
can buy a call option on a bond futures contract when the Manager or
Subadviser believes that the underlying futures contract will rise. If prices
do rise, the Fund could exercise the option and acquire the underlying futures
contract at the strike price or the Fund could offset the long call position
with a sale and realize a profit. Or, a Fund can sell a call option if the
Manager or Subadviser believes that futures prices will decline. If prices
decline, the call will likely not be exercised and the Fund would profit.
However, if the underlying futures contract should rise, the buyer of the
option would likely exercise the call against the Fund and acquire the
underlying futures position at the strike price; the Fund's loss in this case
could be unlimited.
The Funds' use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is
a fixed-income security (a bond or preferred stock) which may be converted at
a stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities purchased are not
subject to the ratings requirements applicable to the Funds' purchase of fixed
income investments.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase
in market value when interest rates decline and tends to decrease in value
when interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
SWAPS AND RELATED TRANSACTIONS
Each Fund may enter into interest rate swaps, currency swaps, equity swaps
and other types of available swap agreements, such as caps, collars and
floors, for the purpose of attempting to obtain a particular desired return at
a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest. An equity swap is an agreement to exchange cash flows on
a principal amount based on changes in the values of the reference index. A
currency swap is an agreement to exchange cash flows on a principal amount
based on changes in the values of the currency exchange rates. In a typical
cap or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
A Fund will maintain liquid assets with its custodian or otherwise cover
its current obligations under swap transactions in accordance with current
regulations and policies applicable to the Fund.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the
arrangement. If the Manager or a Subadviser is incorrect in its forecasts of
such factors, the investment performance of the Fund would be less than what
it would have been if these investment techniques had not been used. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. No Fund will enter into any swap unless the Manager or
Subadviser deems the counterparty to be creditworthy. If the counterparty's
creditworthiness declined, the value of the swap agreement would be likely to
decline, potentially resulting in losses. If the counterparty defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. Each Fund anticipates that it will be able
to eliminate or reduce its exposure under these arrangements by assignment or
other disposition or by entering into an offsetting agreement with the same or
another counterparty.
Swap agreements are subject to each Fund's overall limit that not more
than 15% of its net assets may be invested in illiquid securities.
Engaging in swap and related transactions may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument - a relatively
small investment may lead to much greater losses.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
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 CFTC 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.
The use of certain derivatives, such as futures, forward contracts, and
written options may involve leverage for the Funds because they create an
obligation, or indebtedness, to someone other than the Funds' shareholders and
enable a Fund to participate in gains and losses on an amount that exceeds its
initial investment. If a Fund writes a stock put option, for example, it makes
no initial investment, but instead receives a premium in an amount equal to a
fraction of the price of the underlying stock. In return, the Fund is
obligated to purchase the underlying stock at a fixed price, thereby being
subject to losses on the full stock price.
Likewise, if a Fund purchases a futures contract, it makes an initial
margin payment that is typically a small percentage of the contract's price.
However, because of the purchase, the Fund will participate in gains or losses
on the full contract price.
Other types of derivatives provide the economic equivalent of leverage
because they display heightened price sensitivity to market fluctuations, such
as changes in stock prices or interest rates. These derivatives magnify a
Fund's gain or loss from an investment in much the same way that incurring
indebtedness does. For example, if a Fund purchases a stock call option, the
Fund pays a premium in an amount equal to a fraction of the stock price, and
in return, the Fund participates in gains on the full stock price. If there
were no gains, the Fund generally would lose the entire initial premium.
Options, futures contracts, options on futures contracts, forward
contracts and swaps may be used alone or in combinations in order to create
synthetic exposure to securities in which a Fund otherwise invests, such as
non-U.S. government securities.
The use of derivatives 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 "Tax
Matters."
ADDITIONAL INFORMATION
At times, a substantial portion of a Fund's assets may be invested in
securities as to which a Fund, by itself or together with other funds and
accounts managed by Citibank and its affiliates, holds all or a major portion.
Although Citibank generally considers such securities to be liquid because of
the availability of an institutional market for such securities, it is
possible that, under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, a Fund could find it
more difficult to sell these securities when Citibank believes it advisable to
do so or may be able to sell the securities only at prices lower than if they
were more widely held. Under these circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, a Fund may be required to
participate in various legal proceedings or take possession of and manage
assets securing the issuer's obligations on such securities. This could
increase the Fund's operating expenses and adversely affect a Fund's net asset
value. In addition, a Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code may limit the extent to which the
Fund may exercise its rights by taking possession of such assets.
DEFENSIVE STRATEGIES
The Funds may, from time to time, take temporary defensive positions that
are inconsistent with the Funds' principal investment strategies in attempting
to respond to adverse market, political or other conditions. When doing so,
the Funds may invest without limit in high quality money market and other
short-term instruments, and may not be pursuing their investment goals.
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, if such borrowing is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder.
(2) Make loans to other persons if such loans are specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
(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; provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
a Fund may invest all or any portion of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the 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); provided that for purposes of this restriction, the issuer of
an option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
each of the Funds may invest all or any portion of its assets in one or
more investment companies, to the extent not prohibited by the 1940 Act,
the rules and regulations thereunder, and exemptive orders granted under
such Act.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the 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, except that positions in
futures contracts shall not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar 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 foregoing
shall not be deemed to preclude any Fund from purchasing or selling
futures contracts or options thereon, and 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.
For purposes of restriction (1) above, covered mortgage dollar rolls and
arrangements with respect to securities lending are not treated as borrowing.
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) invest more than 20% of its 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 AND ADVERTISING
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of total rate of return. All performance
information is historical and is not intended to indicate future performance.
Total rates of return fluctuate in response to market conditions and other
factors, and the value of a Fund's shares when redeemed may be worth more or
less than their original cost.
Each Fund may provide its period, annualized, cumulative and average
annual "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 rate of return is generated over a one-year
period. Average annual total return figures represent the average annual
percentage change over the specified period. Cumulative total return figures
are not annualized and represent the aggregate percentage or dollar value
change over a stated period of time.
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.
Average annual total return is a measure of a Fund's performance over
time. It is determined by taking a Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of the investment at the end of the period.
The redeemable value is then divided by the initial investment, and this
quotient is taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
distributions have been reinvested in Fund shares at net asset value on the
reinvestment dates during the 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.
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 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 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.
Set forth below is average annual total rate of return information for the
shares of each Fund for the periods indicated, assuming that dividends and
capital gains distributions, if any, were reinvested. CitiSelect VIP Folio 100
Income is newly organized and had no operations at December 31, 1998.
REDEEMABLE VALUE
OF A HYPOTHETICAL
AVERAGE ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
CITISELECT VIP FOLIO 200 CONSERVATIVE OF RETURN THE PERIOD
--------- ----------
February 10, 1997
(commencement of operations) to
December 31, 1998 8.03% $ 1,157
One year ended December 31, 1998 .......... 7.33% $ 1,073
CITISELECT VIP FOLIO 300 BALANCED
February 10, 1997
(commencement of operations) to
December 31, 1998 8.36% $ 1,164
One year ended December 31, 1998 .......... 7.10% $ 1,071
CITISELECT VIP FOLIO 400 GROWTH
February 10, 1997
(commencement of operations) to
December 31, 1998 6.67% $ 1,130
One year ended December 31, 1998 .......... 3.42% $ 1,034
CITISELECT VIP FOLIO 500 GROWTH PLUS
February 10, 1997
(commencement of operations) to
December 31, 1998 6.45% $ 1,125
One year ended December 31, 1998 .......... 1.59% $ 1,016
From time to time, advertising and marketing material of any of the Funds
may include charts showing the historical performance of hypothetical
portfolios comprised of classes of assets similar to those in which the Funds
invest. The classes of assets will be represented by the historical
performance of specific unmanaged indices. The information contained in such
charts should not be viewed as a projection of results of any
of the Funds or as the historical performance of any of the Funds. In
addition, the past performance illustrated by such charts should not be viewed
as a guarantee of future results.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL PURCHASE AND 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, the Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination of net asset value of 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, or if there are no market rates,
at fair value, 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. In certain instances, securities are valued on the basis of
valuations received from a single dealer, which is usually an established
market maker in the security. In these instances, additional dealer valuations
are obtained monthly. 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 may 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.
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 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 separate prospectuses issued by the Participating Insurance Companies. The
Funds assume no responsibility for such prospectuses.
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
21 Milk Street, Boston, Massachusetts.
TRUSTEES OF THE TRUST
ELLIOTT J. BERV (aged 56) -- 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 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN (aged 55) -- 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); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); 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 72) -- 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 59) -- 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 (March, 1997 to March, 1998). Her
address is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 47) -- 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.
HEATH B. MCLENDON* (aged 65) - Chairman, President, and Chief Executive
Officer of SSBC Fund Management, Inc. (formerly known as Mutual Management
Corp.) (since March 1996); Managing Director of Salomon Smith Barney (since
August 1993); and Chairman, President, and Chief Executive Officer of fifty-
eight investment companies sponsored by Salomon Smith Barney. His address is
388 Greenwich Street, New York, New York.
C. OSCAR MORONG, JR. (aged 64) - Chairman of the Board of the Trust; Managing
Director, Morong Capital Management (since February, 1993); Senior Vice
President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired January, 1993); Director, Indonesia Fund;
Trustee, MAS Funds (since 1993). His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
WALTER E. ROBB, III (aged 72) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN (aged 64) -- 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 78) -- 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 47) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU* (aged 28) -- 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).
TAMIE EBANKS-CUNNINGHAM* (aged 26) -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her
address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman,
Cayman Islands, British West Indies.
JOHN R. ELDER* (aged 50) -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Assistant Treasurer, CFBDS (since
April, 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life
Mutual Insurance Company) (1983 to March, 1995).
LINDA T. GIBSON* (aged 33) -- Secretary of the Trust; Senior Vice President,
Signature Financial Group, Inc. (since May, 1992); Assistant Secretary, CFBDS
(since October, 1992).
JAMES E. HOOLAHAN* (aged 52) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Senior Vice President, Signature Financial
Group, Inc.
SUSAN JAKUBOSKI* (aged 35) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group
(Cayman) Ltd. (since August, 1994); Fund Compliance Administrator, Concord
Financial Group (November, 1990 to August, 1994).
MOLLY S. MUGLER* (aged 47) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc.; Assistant
Secretary, CFBDS.
CLAIR TOMALIN* (aged 30) -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited. Her address is 117 Charterhouse
Street, London ECIM 6AA.
SHARON M. WHITSON* (aged 50) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER* (aged 39) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group,
Inc.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which CFBDS, Signature Financial Group, Inc. or their
affiliates serve as the distributor or administrator.
The Trustees of the Trust received the following remuneration from the Trust
during its fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM TRUST AND
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FUND COMPLEX
TRUSTEE FROM REGISTRANT(1) OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
------- --------------- ---------------- --------------- -------------------
<S> <C> <C> <C> <C>
Elliott J. Berv ................. $2,738 None None $53,750.00
Philip W. Coolidge .............. None None None None
Mark T. Finn .................... $2,720 None None $52,000.00
Riley C. Gilley ................. $2,714 None None $41,500.00
Diana R. Harrington ............. $2,867 None None $59,000.00
Susan B. Kerley ................. $2,837 None None $55,000.00
Heath B. McLendon (2) ........... None None None None
C. Oscar Morong, Jr. ............ $2,983 None None $71,000.00
Walter E. Robb, III ............. $2,725 None None $50,000.00
E. Kirby Warren ................. $2,808 None None $49,000.00
William S. Woods, Jr. ........... $2,810 None None $54,000.00
- ------------
(1) Information relates to the fiscal year ended December 31, 1998. Messrs. Berv, Coolidge, Finn, Gilley, McLendon,
Morong, Robb, Warren and Woods and Mses. Harrington and Kerley are trustees of 27, 50, 26, 34, 22, 41, 30, 41,
27, 29 and 29 funds, respectively, of the family of open-end registered investment companies advised or managed
by Citibank.
(2) Mr. McLendon was appointed as a Trustee in February 1999.
</TABLE>
As of April 9, 1999, all Trustees and officers as a group owned less than
1% of the outstanding shares of each Fund. As of the same date, First Citicorp
Life Insurance Company owned of record 70.12%, 69.91%, 75.44% and 68.30% of
the shares of CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect
VIP Folio 400 and CitiSelect VIP Folio 500, respectively; and Citicorp Life
Insurance Company owned of record 29.88%, 30.99%, 24.56% and 31.70% 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.
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 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.
For the period from February 10, 1997, commencement of operations, to
December 31, 1997, the fees payable to Citibank under the Management
Agreements were as follows: CitiSelect VIP Folio 200 $70,961 (of which $51,585
was voluntarily waived), CitiSelect VIP Folio 300 $79,571 (of which $51,799
was voluntarily waived), CitiSelect VIP Folio 400 $75,204 (of which $39,271
was voluntarily waived) and CitiSelect VIP Folio 500 $69,516 (of which $32,727
was voluntarily waived). For the year from January 1, 1998 to December 31,
1998, the fees payable to Citibank under the Management Agreements were as
follows: CitiSelect VIP Folio 200 $93,713 (of which $69,874 was voluntarily
waived), CitiSelect VIP Folio 300 $147,435 (of which $99,660 was voluntarily
waived), CitiSelect VIP Folio 400 $101,729 (of which $56,202 was voluntarily
waived) and CitiSelect VIP Folio 500 $63,903 (of which $31,720 was voluntarily
waived).
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust as from time to time are
agreed upon by Citibank and CFBDS. For performing such sub-administrative
services, CFBDS 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.
Small cap value securities -- Franklin Advisory Services, Inc.
Large cap value securities -- SSBC Fund Management, Inc. (formerly known
as Mutual Management Corp.)
International equity securities -- Hotchkis and Wiley
Foreign fixed income securities -- Salomon Brothers Asset Management
Limited
High yield debt securities -- Salomon Brothers Asset Management Inc
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.
The Submanagement Agreements with Franklin Advisory Services, Inc. and
Hotchkis and Wiley will continue in effect as to each applicable Fund
indefinitely 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.
The Submanagement Agreement with SSBC Fund Management, Inc. will continue
in effect until January 22, 2001, and thereafter indefinitely 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.
The Submanagement Agreement with Salomon Brothers Asset Management Limited
will continue in effect until March 1, 2001, and thereafter indefinitely 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.
The Submanagement Agreement with Salomon Brothers Asset Management Inc
will continue in effect until May 1, 2001, and thereafter indefinitely 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.
The management fee is allocated among the Subadvisers at the annual rates
equal to the percentages specified below of the aggregate assets managed by
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 of 0.50% of CitiSelect VIP Folio 100's
average daily net assets or 0.75% of each of the other Fund's average daily net
assets.
Franklin Advisory Services, Inc.
0.55% on first $250 million
0.50% on remaining assets
SSBC Fund Management, Inc.
0.65% on the first $10 million
0.50% on the next $10 million
0.40% on the next $10 million
0.30% 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
Salomon Brothers Asset Management Limited
0.30% on the first $200 million
0.25% on assets in excess of $200 million
Salomon Brothers Asset Management Inc
0.45% on the first $100 million
0.40% on assets in excess of $100 million
The aggregate fees paid to each of the Subadvisers under prior
Submanagement Agreements in effect for the prior fiscal year were as follows:
FEBRUARY 10, 1997
(COMMENCEMENT OF
OPERATIONS) TO JANUARY 1, 1998 TO
SUBADVISER: DECEMBER 31, 1997: DECEMBER 31, 1998:
- ----------- ------------------ ------------------
Franklin Advisory Services, Inc. $28,471 $32,298
Hotchkis and Wiley $47,955 $49,560
Pacific Investment Management Company(1) $23,368 $36,239
Miller Anderson & Sherrerd, LLP(2) $20,075 $31,227
SSBC Fund Management, Inc. (formerly
known as Mutual Management Corp.) (2) N/A N/A
Salomon Brothers Asset Management
Limited (1) N/A N/A
Salomon Brothers Asset Management
Inc (3) N/A N/A
(1) Pacific Investment Management Company ("PIMCO") served as subadviser
for the foreign government securities of the Funds from the Funds' inception
through February 28, 1999. Since March 1, 1999, Salomon Brothers Asset
Management Limited, also an affiliate of Citibank, has managed the foreign
fixed income securities of the Funds that were previously managed by PIMCO.
(2) Miller Anderson & Sherrerd, LLP ("MAS"), served as a subadviser for
the large cap value securities from the Funds' inception through January 21,
1999. Since January 22, 1999. SSBC Fund Management, Inc., an affiliate of
Citibank, has managed the large cap value securities of the Funds that were
previously managed by MAS.
(3) Salomon Brothers Asset Management Inc has served as the subadviser for
the high yield securities, a new asset class of the Funds, since May 1, 1999.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, Massachusetts 02109 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 party to the
Agreement, 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. CFBDS is not currently paid a fee for the provision
of distribution services with respect to shares of the Funds.
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.
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. Among other things, State Street calculates the daily
net asset value for the Funds. The principal business address of State Street
is 225 Franklin Street, Boston, Massachusetts 02110.
AUDITORS
PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, is the
counsel for each Fund.
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 or a Subadviser and who is appointed and supervised
by senior officers of Citibank or by a Subadviser. The portfolio manager may
serve other clients in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to 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 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.
For the period from February 10, 1997, commencement of operations, to
December 31, 1997, the Funds paid brokerage commissions in the following
amounts: CitiSelect VIP Folio 200 $11,009, CitiSelect VIP Folio 300 $19,855,
CitiSelect VIP Folio 400 $27,008 and CitiSelect VIP Folio 500 $23,314. For the
period from January 1, 1998 to December 31, 1998, the Funds paid brokerage
commissions in the following amounts: CitiSelect VIP Folio 200 $9,966,
CitiSelect VIP Folio 300 $21,517, CitiSelect VIP Folio 400 $29,777 and
CitiSelect VIP Folio 500 $21,164. CitiSelect VIP Folio 100 is newly offered
and had no operations at December 31, 1998.
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 Trust has created six 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.
The Funds' Transfer Agent maintains a share register for shareholders of
record, i.e., the Separate Accounts of the Participating Insurance Companies.
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. TAX MATTERS
The discussion below concerning the taxability of shareholders relates to
an actual holder of Fund shares; purchasers of variable annuity contracts and
variable life insurance policies funded with Fund shares should refer to the
prospectus and other information provided by their Participating Insurance
Company for information on the taxability of their investment. The following
discussion is general in nature and does not take account of any special
treatment afforded Separate Accounts under applicable federal or state law.
TAXATION OF THE FUNDS
FEDERAL TAXES. Each Fund is treated as a separate entity for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund has elected to be treated, and intends to qualify each
year, as a "regulated investment company" under Subchapter M of the Code by
meeting all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of Fund distributions,
and the composition of the Fund's portfolio assets. Provided all such
requirements are met, no U.S. federal income or excise taxes generally will be
required to be paid by the Funds. If a Fund should fail to qualify as a
"regulated investment company" for any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary income to shareholders.
FOREIGN TAXES. Investment income and gains received by a Fund from non-
U.S. securities may be subject to non-U.S. taxes. The U.S. has entered into
tax treaties with many other countries that may entitle a Fund to a reduced
rate of tax or an exemption from tax on such income. Each Fund intends to
qualify for treaty reduced rates where applicable. It is not possible,
however, to determine a Fund's effective rate of non-U.S. tax in advance since
the amount of the Fund's assets to be invested within various countries is not
known.
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If the Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by the Fund and thus includable in their gross income for federal income
tax purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction for such amounts will be permitted to
individuals in computing their alternative minimum tax liability. If a Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of a Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the
length of time the shareholders have held their shares.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION. The portion of each Fund's ordinary income
dividends attributable to dividends received in respect of equity securities
of U.S. issuers is normally eligible for the dividends received deduction for
corporations subject to U.S. federal income taxes. Availability of the
deduction for particular shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax and result in
certain basis adjustments.
SPECIAL CONSIDERATIONS FOR NON-U.S. PERSONS. The Funds will withhold tax
payments at a rate of 30% (or any lower applicable tax treaty rate) on taxable
dividends and other payments subject to withholding taxes that are made to
persons who are not citizens or residents of the United States. Distributions
received from the Funds by non-U.S. persons also may be subject to tax under
the laws of their own jurisdiction.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification
number is correct and that the shareholder is not subject to 31% backup
withholding for failing to report income to the IRS. The Funds may be required
to withhold (and pay over to the IRS for the shareholder's credit) 31% of
certain distributions and redemption proceeds paid to shareholders who fail to
provide this information or who otherwise violate IRS regulations.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such
shares as a capital asset will be treated as a long-term capital gain or loss
if the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a disposition
of shares in a Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a disposition of shares may
also be disallowed under rules relating to wash sales.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
CERTAIN DEBT INVESTMENTS. Any investment by a Fund in zero coupon bonds,
deferred interest bonds, payment-in-kind 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. An investment by a Fund in residual interests of a
CMO that has elected to be treated as a real estate mortgage investment
conduit, or "REMIC," can create complex tax problems, especially if the Fund
has state or local governments or other tax-exempt organizations as
shareholders.
OPTIONS, ETC. Each Fund's transactions in options, futures and forward
contracts and swap and related transactions will be subject to special tax
rules that may affect the amount, timing and character of Fund income and
distributions to shareholders. For example, certain positions held by each
Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held 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. Each Fund
intends to limit its activities in options, futures and forward contracts to
the extent necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS. The Funds may make non-U.S. investments. Special tax
considerations apply with respect to such investments. Foreign exchange gains
and losses realized by a Fund will generally be treated as ordinary income and
loss. Use of non-U.S. currencies for non-hedging purposes and investment by a
Fund in certain "passive foreign investment companies" may have to be limited
in order to avoid a tax on a Fund. A Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of each
taxable year. This election may cause the Fund to recognize ordinary income
prior to the receipt of cash payments with respect to those investments; 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.
11. CERTAIN 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. If
Citibank or its affiliates were to be prevented from acting as the Manager or
administrator, the 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.
12. FINANCIAL STATEMENTS
The audited financial statements of each of the Funds (Portfolio of
Investments at December 31, 1998, Statement of Assets and Liabilities at
December 31, 1998, Statement of Operations for the year ended December 31,
1998, Statement of Changes in Net Assets for the year ended December 31, 1998
and for the period February 10, 1997 to December 31, 1997, Financial
Highlights for the year ended December 31, 1998 and for the period February
10, 1997 to December 31, 1997, Notes to Financial Statements and Report of
Independent Accountants), each of which is included in the Annual Report to
Shareholders of the Funds, are incorporated by reference into this Statement
of Additional Information and have been so incorporated in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, on behalf of
the Funds. CitiSelect VIP Folio 100 is newly offered and had no operations at
December 31, 1998.
A copy of the Annual Report for the Funds accompanies this Statement of
Additional Information.
<PAGE>
Statement of
Additional Information
May 3, 1999
CITIFUNDS(SM) SMALL CAP GROWTH VIP PORTFOLIO
Variable Annuity Portfolios (the "Trust") is an open-end 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
CitiFunds(SM) Small Cap Growth VIP Portfolio (the "Fund"), as well as the
shares of five 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 21 Milk Street, Boston, Massachusetts
02109, (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 ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
1. The Trust ............................................................ 2
2. Investment Objective and Policies .................................... 2
3. Description of Permitted Investments and Investment Practices ........ 3
4. Investment Restrictions .............................................. 11
5. Performance Information and Advertising .............................. 12
6. Determination of Net Asset Value; Valuation of Securities; Additional
Purchase and Redemption Information ................................. 14
7. Management ........................................................... 15
8. Portfolio Transactions ............................................... 19
9. Description of Shares, Voting Rights and Liabilities ................. 19
10. Tax Matters .......................................................... 20
11. Certain Bank Regulatory Matters ...................................... 22
12. Financial Statements ................................................. 23
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 3, 1999, by which shares of the Fund are
offered. This Statement of Additional Information should be read in
conjunction with the Prospectus. This Statement of Additional Information
incorporates by reference the financial statements described on page 23
hereof. These financial statements can be found in the Fund's Annual Report to
Shareholders. An investor may obtain copies of the Prospectus and Annual
Report without charge by calling 1-800-625-4554 or by contacting 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 open-end 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 CitiFunds Small Cap Growth VIP Portfolio, a series of the Trust.
Prior to March 2, 1998 the Fund was called Landmark Small Cap Equity VIP Fund.
The Fund is an investment vehicle for variable annuity contracts and variable
life insurance policies offered by Separate Accounts of Participating
Insurance Companies.
The Fund is a diversified series of the Trust. Under the Investment
Company Act of 1940, as amended (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.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser to the
Fund. The Manager manages the investments of the Fund from day to day in
accordance with the Fund's investment objectives 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 CFBDS, Inc.,
the Fund's distributor ("CFBDS" or the "Distributor"), only to Separate
Accounts.
PROPOSED RESTRUCTURING
At the date of this Statement of Additional Information, the Fund, like
most mutual funds, invests directly in securities. However, the Fund intends,
in the future, to convert to a new investment structure, sometimes called a
"master feeder structure." In the new investment structure, the Fund, instead
of investing directly in securities, may invest in a Portfolio which is a
mutual fund with the same investment goals and policies. The Portfolio buys,
holds and sells securities in accordance with these goals and policies. Of
course, there can be no assurance that the Fund or the Portfolio will achieve
their goals.
The Fund expects to convert to the new investment structure during 1999,
although it is possible that the conversion could be delayed.
Following the restructuring, the Trust intends to invest in VAP Small Cap
Growth Portfolio (the "Portfolio"). The Portfolio is a series of VAP Master
Portfolios (the "Portfolio Trust"). The Portfolio Trust is an open end,
diversified management investment company organized as a New York trust.
Following the restructuring, all references in this Statement of
Additional Information to the Fund will include the Fund's underlying
Portfolio unless the context otherwise requires. In addition, references to
the Trust will include the Portfolio Trust, unless the context otherwise
requires.
2. INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital growth. Dividend
income, if any, is incidental to the investment objective.
The policies described herein and those described below under "Description
of Permitted Investments and Investment Practices" are not fundamental and may
be changed without shareholder approval.
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
FUTURES CONTRACTS
The Fund may enter into stock index futures contracts and/or foreign
currency futures contracts. Such investment strategies may 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 in the
United States 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. Futures contracts may also be traded on markets outside the
U.S.
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.
Positions in index futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures.
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, if correctly used, 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), they do not eliminate risk of loss and at the
same time the futures contract may limit 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 liquid securities will be maintained by the Fund in a segregated
account 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 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 then 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, the Fund 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 the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed herein in the section entitled "Tax
Matters."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Fund 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 Fund may enter into currency
exchange transactions to convert U.S. currency to non-U.S. currency and non-
U.S. currency to U.S. currency, as well as convert one non-U.S. currency to
another non-U.S. currency. The Fund either enters into these transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange markets, or uses forward contracts to purchase or sell non-U.S.
currencies. The Fund also may, but is not required to, enter into currency
hedging transactions in an attempt to protect the value of its assets as
measured in U.S. dollars from unfavorable changes in currency exchange rates
and control regulations. (Although the Fund's assets are valued daily in terms
of U.S. dollars, the Trust does not intend to convert the Fund's holdings of
non-U.S. currencies into U.S. dollars on a daily basis.) It is not currently
intended that the Fund speculate in currency exchange rates or forward
contracts.
The Fund 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 the 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 may 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 believes that the currency of a particular country may
suffer a substantial decline against the U.S. dollar, the 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 projection of a short-
term hedging strategy is highly uncertain. 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 Fund generally would not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, the 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 the 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 the 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 the 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 the Fund's
securities at the expiration of the contract. Accordingly, it may be necessary
for the 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.
The Fund has established procedures consistent with policies of the
Securities and Exchange Commission (the "SEC") concerning forward contracts.
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, or that the Fund otherwise covers its position in accordance
with applicable regulations and policies.
The Fund may also purchase put options on a non-U.S. currency in order to
protect against currency rate fluctuations. If the 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 adverse movements in exchange rates. However, the benefit to the Fund from
purchases of non-U.S. 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 non-U.S. currency options which would
require it to forgo a portion or all of the benefits of advantageous changes
in such rates.
The Fund may write options on non-U.S. currencies for hedging purposes or
otherwise to achieve its investment objectives. For example, where the Fund
anticipates a decline in the value of the U.S. dollar value of a non-U.S.
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 non-U.S. 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, the 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.
The writing of put or call options on non-U.S. currencies by the Fund 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, the 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 the Fund will be
covered by segregation of cash or liquid securities 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
denominated in currencies other than the U.S. dollar. Because the securities
underlying these receipts are traded primarily in non-U.S. currencies, changes
in currency exchange rates will affect the value of these receipts. For
example, a 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 currency remains constant, and
thus will reduce the value of the receipts covering such securities. The Fund
may employ any of the above described non-U.S. currency hedging techniques to
protect the value of its assets invested in depositary receipts.
Of course, the Fund is not required to enter into such transactions and
does not do so unless deemed appropriate by the Manager. It should also be
realized that these methods of protecting the value of the Fund's securities
against a decline in the value of a currency do not eliminate fluctuations in
the underlying prices of the securities. Additionally, although such
contracts, if correctly used, may minimize the risk of loss due to a decline
in the value of the hedged currency, they do not eliminate risk of loss and
they also tend to limit any potential gain which might result should the value
of such currency increase.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
Transactions in options on foreign currencies 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 may be entered into on U.S. exchanges
regulated by the CFTC and on foreign exchanges. The securities underlying
futures contracts traded by the 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 on foreign currencies, 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, the 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.
Options on foreign currencies, futures contracts, and forward contracts
may be used alone or in combinations in order to create synthetic exposure to
securities in which the Fund otherwise invests, such as non-U.S. government
securities.
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 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.
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 segregated. 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. In the event of the
bankruptcy of the other party to a reverse repurchase agreement, the Fund
could experience delays in recovering the securities sold. To the extent that,
in the meantime, the value of the securities sold has changed, the Fund could
experience a loss.
SECURITIES OF NON-U.S. ISSUERS
The Fund may invest in securities of non-U.S. issuers. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, the value of such securities fluctuates based on the
relative strength of the U.S. dollar. In addition, there is generally less
publicly available information about non-U.S. 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.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of
a sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there may
not be a correlation between such information and the market value of the
depositary receipts.
The 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.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased to the extent that the Fund
invests in issuers located in less developed and developing nations, whose
securities markets are sometimes referred to as "emerging securities markets."
Investments in securities located in such countries are speculative and
subject to certain special risks. Political and economic structures in many of
these countries may be in their infancy and developing rapidly, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of these countries have in the past
failed to recognize private property rights and have at times nationalized and
expropriated the assets of private companies.
In addition, unanticipated political or social developments may affect the
value of the Fund's investments in these countries and the availability to the
Fund of additional investments in these countries. The small size, limited
trading volume and relative inexperience of the securities markets in these
countries may make the Fund's investment in such countries illiquid and more
volatile than investments in more developed countries, and the Fund may be
required to establish special custodial or other arrangements before making
investments in these countries. There may be little financial or accounting
information available with respect to issuers located in these countries, and
it may be difficult as a result to assess the value or prospects of an
investment in such issuers.
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). 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. 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. The Manager will make loans only
when, in the judgment of the Manager, the consideration which can be earned
currently from loans of this type justifies the attendant risk.
WHEN-ISSUED 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. It is expected that,
under normal circumstances, the Fund would take delivery of such securities,
but the Fund may sell them before the settlement date. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. 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 or liquid
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. The when-issued securities
are subject to market fluctuations, and no interest accrues on the security to
the purchaser during this period. The payment obligation and the interest rate
that will be received on the securities are each fixed at the time the
purchaser enters into the commitment. Purchasing obligations on a when-issued
basis is a form of leveraging and can involve a risk that the yields available
in the market when the delivery takes place may actually be higher than those
obtained in the transaction itself. In that case, there could be an unrealized
loss at the time of delivery. 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.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) which may be converted at a
stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities purchased are not
subject to the rating requirements applicable to the Fund's purchase of fixed
income investments.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase
in market value when interest rates decline and tends to decrease in value
when interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
SECURITIES RATED BAA OR BBB
The Fund may purchase lower-rated securities (those rated Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's Ratings Group) 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.
COMMERCIAL PAPER
The Fund may invest in commercial paper, which is unsecured debt of
corporations usually maturing in 270 days or less from its date of issuance.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, the Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the "Securities Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act ("Rule 144A securities").
However, the Fund will not invest more than 15% of its net assets (taken at
market value) in illiquid investments, which include securities for which there
is no readily available market, securities subject to contractual restrictions
on resale and Rule 144A securities, unless, in the case of Rule 144A securities,
the Board of Trustees of the Trust determines, based on the trading markets for
the specific Rule 144A security, that it is liquid. The Trustees have adopted
guidelines and, subject to oversight by the Trustees, have delegated to the
Manager the daily function of determining and monitoring liquidity of 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.
DEFENSIVE STRATEGIES
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.
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, if such borrowing is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder.
(2) Make loans to other persons if such loans are specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
(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; provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
the Fund may invest all or substantially all of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the 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); provided that for purposes of this restriction, the issuer of
an option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
the Fund may invest all or any portion of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the 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, except that positions in
futures contracts shall not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar 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 foregoing
shall not be deemed to preclude the Fund from purchasing or selling
futures contracts or options thereon, and 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.
For purposes of restriction (1) above, arrangements with respect to
securities lending are not treated as borrowing.
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) 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.
If the value of the Fund's holdings of illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
5. PERFORMANCE INFORMATION AND ADVERTISING
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of total rate of return. All performance
information is historical and is not intended to indicate future performance.
Total rates of return fluctuate in response to market conditions and other
factors, and the value of the Fund's shares when redeemed may be worth more or
less than their original cost.
The Fund may provide its period, annualized, cumulative and average
annual "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 rate of return is generated over a one-year
period. Average annual total return figures represent the average annual
percentage change over the specified period. Cumulative total return figures
are not annualized and represent the aggregate percentage or dollar value
change over a stated period of time.
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.
Average annual total return is a measure of the Fund's performance over
time. It is determined by taking the Fund's performance over a given period
and expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of that investment at the end of the
period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
distributions have been reinvested in Fund shares at net asset value on the
reinvestment dates during the 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.
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 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 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.
Set forth below is average annual total rate of return information for the
shares of the Fund for the periods indicated, assuming that dividends and
capital gains distributions, if any, were reinvested.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A HYPOTHETICAL
AVERAGE ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
-------------- -----------------
<S> <C> <C>
CITIFUNDS SMALL CAP GROWTH VIP PORTFOLIO
February 10, 1997 (commencement of operations)
to December 31, 1998 ........................................................... 4.08% $1,078
One year ended December 31, 1998 ................................................. (3.80%) $ 962
</TABLE>
From time to time, advertising and marketing material of the Fund may
include charts showing the historical performance of hypothetical portfolios
comprised of classes of assets similar to those in which the Fund invests. The
classes of assets will be represented by the historical performance of
specific unmanaged indices. The information contained in such charts should
not be viewed as a projection of results of the Fund or as the historical
performance of the Fund. In addition, the past performance illustrated by such
charts should not be viewed as a guarantee of future results.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES; ADDITIONAL
PURCHASE AND 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, the Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination of net asset value of shares of the 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. In certain instances, securities are valued
on the basis of valuations received from a single dealer, which is usually an
established market maker in the security. In these instances, additional
dealer valuations are obtained monthly. 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 may 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 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.
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 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 separate prospectuses issued by the
Participating Insurance Companies. The Fund assumes no responsibility for such
prospectuses.
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
21 Milk Street, Boston, Massachusetts.
TRUSTEES OF THE TRUST
ELLIOTT J. BERV (aged 56) -- 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 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN (aged 55) -- 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); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); 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 72) -- 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 59) -- 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 (March, 1997 to March, 1998). Her
address is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 47) -- 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.
HEATH B. MCLENDON* (aged 65) - Chairman, President and Chief Executive Officer
of SSBC Fund Management, Inc. (formerly known as Mutual Management Corp.)
(since March 1996); Managing Director of Salomon Smith Barney (since August
1993); and Chairman, President and Chief Executive Officer of fifty-eight
investment companies sponsored by Salomon Smith Barney. His address is 388
Greenwich Street, New York, New York.
C. OSCAR MORONG, JR. (aged 64) - Chairman of the Board of the Trust; Managing
Director, Morong Capital Management (since February, 1993); Senior Vice
President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired January, 1993); Director, Indonesia Fund;
Trustee, MAS Funds (since 1993). His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
WALTER E. ROBB, III (aged 72) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN (aged 64) -- 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 78) -- 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 47) -- President of the Trust; Chief Executive
Officer and President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU* (aged 28) -- 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).
TAMIE EBANKS-CUNNINGHAM* (aged 26) -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her
address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman,
Cayman Islands, British West Indies.
JOHN R. ELDER* (aged 50) -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Treasurer, CFBDS (since April,
1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual
Insurance Company) (1983 to March, 1995).
LINDA T. GIBSON* (aged 33) -- Secretary of the Trust; Senior Vice President,
Signature Financial Group, Inc. (since May, 1992); Assistant Secretary, CFBDS
(since October, 1992).
JAMES E. HOOLAHAN* (aged 52) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Senior Vice President, Signature Financial
Group, Inc.
SUSAN JAKUBOSKI* (aged 35) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group
(Cayman) Ltd. (since August, 1994); Fund Compliance Administrator, Concord
Financial Group (November, 1990 to August, 1994).
MOLLY S. MUGLER* (aged 47) -- Assistant Secretary and Assistant Treasurer of
the Trust; Vice President, Signature Financial Group, Inc.; Assistant
Secretary, CFBDS.
CLAIR TOMALIN* (aged 30) -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited. Her address is 117 Charterhouse
Street, London ECIM 6AA.
SHARON M. WHITSON* (aged 50) -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER* (aged 39) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust; Vice President, Signature Financial Group,
Inc.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which CFBDS, Signature Financial Group, Inc. or their
affiliates serve as the distributor or administrator.
The Trustees of the Trust received the following remuneration from the Trust
during its fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM TRUST AND
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FUND COMPLEX
TRUSTEE FROM THE FUND(1) OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
------- ---------------- ------------------- --------------- --------------------
<S> <C> <C>
Elliott J. Berv ................. $670 None None $53,750.00
Philip W. Coolidge .............. None None None None
Mark T. Finn .................... $670 None None $52,000.00
Riley C. Gilley ................. $670 None None $41,500.00
Diana R. Harrington ............. $678 None None $59,000.00
Susan B. Kerley ................. $677 None None $55,000.00
Heath B. McLendon (2) ........... None None None None
C. Oscar Morong, Jr. ............ $685 None None $71,000.00
Walter E. Robb, III ............. $670 None None $50,000.00
E. Kirby Warren ................. $675 None None $49,000.00
William S. Woods, Jr. ........... $675 None None $54,000.00
- ------------------
(1) Information relates to the fiscal year ended December 31, 1998. Messrs. Berv, Coolidge, Finn, Gilley, McLendon,
Morong, Robb, Warren and Woods and Mses. Harrington and Kerley are trustees of 27, 50, 26, 34, 22, 41, 30, 41, 27,
29 and 29 funds, respectively, of the family of open-end registered investment companies advised or managed by
Citibank.
(2) Mr. McLendon was appointed as a Trustee in February 1999.
</TABLE>
As of April 9, 1999, all Trustees and officers as a group owned less than
1% of the outstanding shares of the Fund. As of the same date, First Citicorp
Life Insurance Company owned of record 76.64% of the shares of the Fund and
Citicorp Life Insurance Company owned 23.36% 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.
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 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.
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.
For the period from February 10, 1997, commencement of operations, to
December 31, 1997, the fees payable to Citibank under the Management Agreement
were $21,036 (all of which was voluntarily waived). For the period from
January 1, 1998 to December 31, 1998, the fees payable to Citibank under the
Management Agreement were $19,462 (all of which was voluntarily waived).
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust as from time to time are
agreed upon by Citibank and CFBDS. For performing such sub-administrative
services, CFBDS 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.
CFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, Massachusetts 02109 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 party to the
Agreement, 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. CFBDS is not currently paid a fee for the provision
of distribution services with respect to shares of the Fund.
EXPENSES
In addition to amounts payable to Citibank under the Management Agreement,
the 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.
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 a Fund Accounting Agreement with State Street,
pursuant to which custodial and fund accounting services, respectively, are
provided for the Fund. Among other things, State Street calculates the daily
net asset value for the Fund. The principal business address of State Street
is 225 Franklin Street, Boston, Massachusetts 02110.
AUDITORS
PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, is the
counsel for the Fund.
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 Citibank and who is appointed and supervised by senior
officers of Citibank. The portfolio manager may serve other clients in a
similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which the Manager, or its affiliates exercise investment
discretion. The Manager is 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 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, and its affiliates have with respect to accounts over which they
exercise investment discretion.
The investment advisory fee that the 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 the Fund as well as for one or more of Citibank's other
clients. Investment decisions for the Fund and for Citibank'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 Citibank occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large volume purchases or sales.
For the period from February 10, 1997, commencement of operations, to
December 31, 1997, the Fund paid $8,928 in brokerage commissions. For the
period from January 1, 1998 to December 31, 1998, the Fund paid $4,497 in
brokerage commissions.
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 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.
The Fund's Transfer Agent maintains a share register for shareholders of
record, i.e., the Separate Accounts of the Participating Insurance Companies.
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. TAX MATTERS
The discussion below concerning the taxability of shareholders relates to
an actual holder of Fund shares; purchasers of variable annuity contracts and
variable life insurance policies funded with Fund shares should refer to the
prospectus and other information provided by their Participating Insurance
Company for information on the taxability of their investment. The following
discussion is general in nature and does not take account of any special
treatment afforded Separate Accounts under applicable federal or state law.
TAXATION OF THE FUND
FEDERAL TAXES. The Fund is treated as a separate entity for federal income
tax purposes under the Internal Revenue Code of 1986, as amended (the "Code").
The Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Provided all such requirements are
met, no U.S. federal income or excise taxes generally will be required to be
paid by the Fund. If the Fund should fail to qualify as a "regulated
investment company" for any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary income to shareholders.
FOREIGN TAXES. Investment income and gains received by the Fund from non-
U.S. securities may be subject to non-U.S. taxes. The U.S. has entered into
tax treaties with many other 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 applicable. It is not possible,
however, to determine the Fund's effective rate of non-U.S. tax in advance
since the amount of the Fund's assets to be invested within various countries
is not known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If the Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by the Fund and thus includable in their gross income for federal income
tax purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction for such amounts will be permitted to
individuals in computing their alternative minimum tax liability. If the Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of the Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the
length of time the shareholders have held their shares. Any Fund dividend that
is declared in October, November, or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January, will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION. The portion of the Fund's ordinary income
dividends attributable to dividends received in respect of equity securities
of U.S. issuers is normally eligible for the dividends received deduction for
corporations subject to U.S. federal income taxes. Availability of the
deduction for particular shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax and result in
certain basis adjustments.
SPECIAL CONSIDERATIONS FOR NON-U.S. PERSONS. The Fund will withhold tax
payments at a rate of 30% (or any lower applicable tax treaty rate) on taxable
dividends and other payments subject to withholding taxes that are made to
persons who are not citizens or residents of the United States. Distributions
received from the Fund by non-U.S. persons also may be subject to tax under
the laws of their own jurisdiction.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification
number is correct and that the shareholder is not subject to 31% backup
withholding for failing to report income to the IRS. The Fund may be required
to withhold (and pay over to the IRS for the shareholder's credit) 31% of
certain distributions and redemption proceeds paid to shareholders who fail to
provide this information or who otherwise violate IRS regulations.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of the Fund by a shareholder that holds such
shares as a capital asset will be treated as a long-term capital gain or loss
if the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a disposition
of shares in the Fund held for six months or less will be treated as a long-
term capital loss to the extent of any distributions of net capital gain made
with respect to those shares. Any loss realized upon a disposition of shares
may also be disallowed under rules relating to wash sales.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
CERTAIN DEBT INVESTMENTS. Any investment by the Fund in zero coupon bonds,
deferred interest bonds, payment-in-kind 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. An investment by the Fund in residual interests of a
CMO that has elected to be treated as a real estate mortgage investment
conduit, or "REMIC," can create complex tax problems, especially if the Fund
has state or local governments or other tax-exempt organizations as
shareholders.
OPTIONS, ETC. The Fund's transactions in options, futures, short sales
"against the box" 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. For example, certain positions held by the Fund
on the last business day of each taxable year will be marked to market (i.e.,
treated as if closed out) on that day, and any gain or loss associated with
the positions will be treated as 60% long-term and 40% short-term capital gain
or loss. Certain positions held 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
intends to limit its activities in options, futures and forward contracts to
the extent necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS.
The Fund may make non-U.S. investments. Special tax considerations apply
with respect to such investments. Foreign exchange gains and losses realized
by the Fund will generally be treated as ordinary income and loss. Use of non-
U.S. currencies for non-hedging purposes and investment by the Fund in certain
"passive foreign investment companies" may have to be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any investments
in "passive foreign investment companies" on the last day of each taxable
year. This election may cause the Fund to recognize ordinary income prior to
the receipt of cash payments with respect to those investments; 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.
11. CERTAIN 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. 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.
12. FINANCIAL STATEMENTS
The audited financial statements of the Fund (Portfolio of Investments at
December 31, 1998, Statement of Assets and Liabilities at December 31, 1998,
Statement of Operations for the year ended December 31, 1998, Statement of
Changes in Net Assets for the period from February 10, 1997 (commencement of
operations) to December 31, 1997 and the year ended December 31, 1998,
Financial Highlights for the period from February 10, 1997 (commencement of
operations) to December 31, 1997 and the year ended December 31, 1998, Notes
to Financial Statements and Report of Independent Accountants), each of which
is included in the Annual Report to Shareholders of the Fund, are incorporated
by reference into this Statement of Additional Information and have been so
incorporated in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, on behalf of the Fund.
A copy of the Annual Report for the Fund accompanies this Statement of
Additional Information.
<PAGE>
PART C
Item 23. Exhibits.
* a(1) Amended and Restated Declaration of Trust of the
Registrant
**** a(2) Amended and Restated Designation of Series of the
Registrant
a(3) Amended and Restated Designation of Series of the
Registrant
a(4) Amended and Restated Designation of Series of the
Registrant
* b(1) By-Laws of the Registrant
*** b(2) Amendment to the By-Laws of the Registrant
*** d(1) Management Agreements between the Registrant and
Citibank, N.A., as investment manager and
administrator
***** d(2) Form of Management Agreement between the
Registrant and Citibank, N.A., as investment
manager and administrator to CitiSelect VIP Folio
100 Income ("CitiSelect VIP Folio 100")
*** d(3) Sub-Management Agreements with Franklin Advisory
Services, Inc.
***** d(4) Form of Sub-Management Agreement with Franklin
Advisory Services, Inc. with respect to
CitiSelect VIP Folio 100
*** d(5) Sub-Management Agreements with Hotchkis & Wiley
***** d(6) Form of Sub-Management Agreement with Hotchkis &
Wiley with respect to CitiSelect VIP Folio 100
***** d(7) Sub-Management Agreement with SSBC Fund Management,
Inc. (formerly known as Mutual Management Corp.)
***** d(8) Form of Sub-Management Agreement with SSBC Fund
Management, Inc. with respect to CitiSelect VIP
Folio 100
***** d(9) Form of Sub-Management Agreement with Salomon
Brothers Asset Management Limited
***** d(10) Form of Sub-Management Agreement with Salomon
Brothers Asset Management Limited with respect to
CitiSelect VIP Folio 100
d(11) Form of Sub-Management Agreement with Salomon
Brothers Asset Management Inc
*** e(1) Distribution Agreement between the Registrant and
CFBDS, Inc. (formerly known as The Landmark Funds
Broker-Dealer Services, Inc.) ("CFBDS"), as
distributor
***** e(2) Form of Letter Agreement adding CitiSelect VIP
Folio 100 to the Distribution Agreement between
the Registrant and CFBDS
*** g(1) Custodian Contract between the Registrant, on
behalf of the Funds, and State Street Bank and
Trust Company ("State Street"), as custodian
***** g(2) Form of Letter Agreement adding CitiSelect VIP
Folio 100 to the Custodian Contract between the
Registrant and State Street, as custodian
*** h(1) Transfer Agency and Service Agreement between the
Registrant and State Street, as transfer agent
***** h(2) Form of Letter Agreement adding CitiSelect VIP
Folio 100 to the Transfer Agency and Service
Agreement between the Registrant and State Street,
as transfer agent
** i Opinion of Bingham Dana LLP
and filed
herewith
j Independent auditors' consent
n Financial data schedules
*** and ****** p Powers of Attorney
- ------------------
* Incorporated by reference to the Registrant's Initial Registration
Statement on Form N-1A (File No. 333-15119) as filed with the Securities
and Exchange Commission on October 30, 1996.
** Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File No. 333-15119) as
filed with the Securities and Exchange Commission on November 15, 1996.
*** Incorporated by reference to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A (File No. 333-15119) as
filed with the Securities and Exchange Commission on February 26, 1998.
**** Incorporated by reference to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-1A (File No. 333-15119) as
filed with the Securities and Exchange Commission on April 29, 1998.
***** Incorporated by reference to Post-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-1A (File No. 333-15119) as
filed with the Securities and Exchange Commission on February 12, 1999.
****** Incorporated by reference to Post-Effective Amendment No. 5 to the
Registrant's Registration Statement on Form N-1A (File No. 333-15119) as
filed with the Securities and Exchange Commission on April 27, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, filed as an Exhibit to the Registrant's Initial Registration Statement
on Form N-1A; (b) Section 6 of the Distribution Agreement between the Registrant
and CFBDS, Inc., filed as an Exhibit to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A; and (c) the undertaking of the
Registrant regarding indemnification set forth in its Registration Statement on
Form N-1A.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 26. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and around
the world. Citibank is a wholly-owned subsidiary of Citicorp, which is, in turn,
a wholly-owned subsidiary of Citigroup Inc. Citibank also serves as investment
adviser to the following registered investment companies (or series thereof):
Asset Allocation Portfolios (Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio and Short-Term Portfolio), The Premium Portfolios (U.S. Fixed Income
Portfolio, High Yield Portfolio, Growth & Income Portfolio, Balanced Portfolio,
Large Cap Growth Portfolio, International Equity Portfolio, Government Income
Portfolio and Small Cap Growth Portfolio), Tax Free Reserves Portfolio, U.S.
Treasury Reserves Portfolio, Cash Reserves Portfolio, CitiFundsSM Tax Free
Income Trust (CitiFundsSM New York Tax Free Income Portfolio, CitiFundsSM
National Tax Free Income Portfolio and CitiFundsSM California Tax Free Income
Portfolio), CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM California Tax
Free Reserves, CitiFundsSM New York Tax Free Reserves and CitiFundsSM
Connecticut Tax Free Reserves), and CitiFundsSM Institutional Trust (CitiFundsSM
Institutional Cash Reserves). Citibank and its affiliates manage assets in
excess of $327 billion worldwide. The principal place of business of Citibank is
located at 399 Park Avenue, New York, New York 10043.
John S. Reed is the Chairman and a Director of Citibank. Victor J.
Menezes is the President and a Director of Citibank. William R. Rhodes and
H. Onno Ruding are Vice Chairmen and Directors of Citibank. The other
Directors of Citibank are Paul J. Collins, Vice Chairman of Citigroup Inc.
and Robert I. Lipp, Chairman and Chief Executive Officer of The Travelers
Insurance Group Inc. and of Travelers Property Casualty Corp.
Each of the individuals named above is also a Director of Citigroup Inc.
In addition, the following persons have the affiliations indicated:
Paul J. Collins Director, Kimberly-Clark Corporation
Robert I. Lipp Chairman, Chief Executive Officer and
President, Travelers Property Casualty Co.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding Corporation
H. Onno Ruding Supervisory Director, Amsterdamsch Trustees
Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated
Franklin Advisory Services, LLC ("Franklin"), which was recently
reorganized as a limited liability company, serves as a sub-adviser with respect
to the small cap value securities of Small Cap Value Portfolio, a series of
Asset Allocation Portfolios, Franklin maintains its principal office at One
Parker Plaza, 16th Floor, Fort Lee, New Jersey 07024. Franklin, a Delaware
limited liability company formed in [**1996**], is a registered investment
adviser under the Investment Advisers Act of 1940 (the "Advisers Act") and is an
indirect wholly-owned subsidiary of Franklin Resources, Inc., a publicly owned
holding company. Franklin is an investment adviser to various open-end and
closed-end investment companies.
William J. Lippman is the President of Franklin. Mr. Lippman holds a
master of business administration degree from New York University and a
bachelor of business administration degree from City College of New York.
Mr. Lippman also serves as Senior Vice President of Franklin Resources, Inc.
and Franklin Management, Inc. and has been with the Franklin Templeton Group
since 1988. Prior to joining Franklin Advisers Inc., Mr. Lippman was
president of L.F. Rothschild Fund Management, Inc. and has been in the
securities industry for over 30 years.
Each of the individuals named below is an officer of Franklin and has the
affiliations indicated:
Name: Affiliations:
William J. Lippman Senior Vice President, Franklin Resources, Inc.
President Senior Vice President, Franklin Management, Inc.
Mr. Lippman also serves as officer and/or
director or trustee of six of the investment
companies in the Franklin Group of Funds.
Rupert H. Johnson, Jr. Executive Vice President and Director,
Senior Vice President Franklin Resources, Inc.
Executive Vice President and Director,
Franklin Templeton Distributors, Inc.
President and Director, Franklin Advisers, Inc.
President and Director, Franklin Investment
Advisory Services, Inc.
Director, Franklin/Templeton Investor
Services, Inc.
Mr. Johnson also serves as officer and/or
director, trustee or managing general
partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek Senior Vice President and General Counsel,
Vice President and Franklin Resources, Inc.
Assistant Secretary Senior Vice President, Franklin Templeton
Services, Inc.
Senior Vice President, Franklin Templeton
Distributors, Inc.
Executive Vice President, Franklin
Advisers, Inc.
Vice President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.
Vice President, Franklin Mutual Advisers, LLC
Ms. Gatzek also serves as officer of 54 of
the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan Senior Vice President and Chief Financial
Chief Financial Officer Officer, Franklin Resources, Inc.
Senior Vice President and Chief Financial
Officer, Franklin/Templeton Investor
Services, Inc.
Senior Vice President and Chief Financial
Officer, Franklin Mutual Advisers, LLC
Executive Vice President, Chief Financial
Officer and Director, Templeton Worldwide, Inc.
Executive Vice President, Chief Operating
Officer and Director, Templeton
Investment Counsel, Inc.
Executive Vice President and Chief
Financial Officer, Franklin Advisers, Inc.
Chief Financial Officer, Franklin
Investment Advisory Services, Inc.
President and Director, Franklin Templeton
Services, Inc.
Mr. Flanagan also serves as officer and/or director
of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 53 of the
investment companies in the Franklin Templeton
Group of Funds.
Leslie M. Kratter Vice President and Secretary, Franklin
Secretary Resources, Inc.
President and Director, Franklin/Templeton
Travel, Inc.
Vice President and Secretary, Franklin
Templeton Corporate Services, Inc.
Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P.
("Hotchkis"), a sub-adviser to International Portfolio, a series of Asset
Allocation Portfolios, maintains its principal office at 725 South Figueroa
Street, Suite 4000, Los Angeles, California 90017-5400. Harry Hartford and Sarah
Ketterer manage international equity accounts and are also responsible for
international investment research. Each serves on the Investment Policy
Committee at Hotchkis. Prior to joining Hotchkis, Mr. Hartford was with the
Investment Bank of Ireland, where he gained 10 years of experience in both
international and global equity management. Prior to joining Hotchkis, Ms.
Ketterer was an associate with Bankers Trust and an analyst at Dean Witter.
Following are the managing personnel of Hotchkis:
Name and Position: Other Affiliations:
Nigel Hurst-Brown
Co-Head
Michael F. Baxter Director of Camden Fruit
Co-Head
For information as to the business, profession, vocation or employment of
a substantial nature of each of the officers and directors of SSBC Fund
Management, Inc. (formerly known as Mutual Management Corp.) ("SSBC"), a
subadviser of the Registrant, reference is made to SSBC's current Form ADV (File
No. 801-8314) filed under the Advisers Act, incorporated herein by reference.
For information as to the business, profession, vocation or employment of
a substantial nature of each of the officers and directors of Salomon Brothers
Asset Management Inc ("SBAM"), a subadviser of the Registrant, reference is made
to SBAM's current Form ADV (File No. 801-32046) filed under the Advisers Act,
incorporated herein by reference.
For information as to the business, profession, vocation or employment of
a substantial nature of each of the officers and directors of Salomon Brothers
Asset Management Limited ("SBAML"), a subadviser of the Registrant, reference is
made to SBAML's current Form ADV (File No. 801-43335) filed under the Advisers
Act, incorporated herein by reference.
Item 27. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Growth Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves,
CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium Liquid Reserves,
CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM Institutional
Liquid Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM
Short-Term U.S. Government Income Portfolio, CitiFundsSM New York Tax Free
Income Portfolio, CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM
California Tax Free Income Portfolio, CitiFundsSM Small Cap Value Portfolio,
CitiFundsSM Growth & Income Portfolio, CitiFundsSM Large Cap Growth Portfolio,
CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM Balanced Portfolio,
CitiSelect(R) Folio 100, CitiSelect(R) Folio 200, CitiSelect(R) Folio 300,
CitiSelect(R) Folio 400, and CitiSelect(R) Folio 500. CFBDS is also the
placement agent for Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio,
Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income Portfolio,
High Yield Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio,
International Equity Portfolio, Balanced Portfolio, Government Income Portfolio,
Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio. CFBDS also serves as the distributor for the following funds: The
Travelers Fund U for Variable Annuities, The Travelers Fund VA for Variable
Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD
II for Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Variable Life Insurance, The Travelers Fund UL II for Variable Life
Insurance, The Travelers Fund UL III for Variable Life Insurance, The Travelers
Variable Life Insurance Separate Account One, The Travelers Variable Life
Insurance Separate Account Two, The Travelers Variable Life Insurance Separate
Account Three, The Travelers Variable Life Insurance Separate Account Four, The
Travelers Separate Account MGA, The Travelers Separate Account MGA II, The
Travelers Growth and Income Stock Account for Variable Annuities, The Travelers
Quality Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock Account for
Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable Annuities,
The Travelers Timed Bond Account for Variable Annuities, Emerging Growth Fund,
Government Fund, Growth and Income Fund, International Equity Fund, Municipal
Fund, Balanced Investments, Emerging Markets Equity Investments, Government
Money Investments, High Yield Investments, Intermediate Fixed Income
Investments, International Equity Investments, International Fixed Income
Investments, Large Capitalization Growth Investments, Large Capitalization Value
Equity Investments, Long-Term Bond Investments, Mortgage Backed Investments,
Municipal Bond Investments, Small Capitalization Growth Investments, Small
Capitalization Value Equity Investments, Appreciation Portfolio, Diversified
Strategic Income Portfolio, Emerging Growth Portfolio, Equity Income Portfolio,
Equity Index Portfolio, Growth & Income Portfolio, Intermediate High Grade
Portfolio, International Equity Portfolio, Money Market Portfolio, Total Return
Portfolio, Smith Barney Adjustable Rate Government Income Fund, Smith Barney
Aggressive Growth Fund Inc., Smith Barney Appreciation Fund, Smith Barney
Arizona Municipals Fund Inc., Smith Barney California Municipals Fund Inc.,
Balanced Portfolio, Conservative Portfolio, Growth Portfolio, High Growth
Portfolio, Income Portfolio, Global Portfolio, Select Balanced Portfolio, Select
Conservative Portfolio, Select Growth Portfolio, Select High Growth Portfolio,
Select Income Portfolio, Concert Social Awareness Fund, Smith Barney Large Cap
Blend Fund, Smith Barney Fundamental Value Fund Inc., Large Cap Value Fund,
Short-Term High Grade Bond Fund, U.S. Government Securities Fund, Smith Barney
Balanced Fund, Smith Barney Convertible Fund, Smith Barney Diversified Strategic
Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney High Income Fund,
Smith Barney Municipal High Income Fund, Smith Barney Premium Total Return Fund,
Smith Barney Total Return Bond Fund, Cash Portfolio, Government Portfolio,
Municipal Portfolio, Concert Peachtree Growth Fund, Smith Barney Contrarian
Fund, Smith Barney Government Securities Fund, Smith Barney Hansberger Global
Small Cap Value Fund, Smith Barney Hansberger Global Value Fund, Smith Barney
Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney
Intermediate Maturity California Municipals Fund, Smith Barney Intermediate
Maturity New York Municipals Fund, Smith Barney Large Capitalization Growth
Fund, Smith Barney S&P 500 Index Fund, Smith Barney Mid Cap Blend Fund, Smith
Barney Managed Governments Fund Inc., Smith Barney Managed Municipals Fund Inc.,
Smith Barney Massachusetts Municipals Fund, Cash Portfolio, Government
Portfolio, Retirement Portfolio, California Money Market Portfolio, Florida
Portfolio, Georgia Portfolio, Limited Term Portfolio, New York Money Market
Portfolio, New York Portfolio, Pennsylvania Portfolio, Smith Barney Municipal
Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc., Smith Barney
New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals Fund, Zeros Plus
Emerging Growth Series 2000, Smith Barney Security and Growth Fund, Smith Barney
Small Cap Blend Fund, Inc., Smith Barney Telecommunications Income Fund, Income
and Growth Portfolio, Reserve Account Portfolio, U.S. Government/High Quality
Securities Portfolio, Emerging Markets Portfolio, European Portfolio, Global
Government Bond Portfolio, International Balanced Portfolio, International
Equity Portfolio, Pacific Portfolio, AIM Capital Appreciation Portfolio,
Alliance Growth Portfolio, GT Global Strategic Income Portfolio, MFS Total
Return Portfolio, Putnam Diversified Income Portfolio, Smith Barney High Income
Portfolio, Smith Barney Large Cap Value Portfolio, Smith Barney International
Equity Portfolio, Smith Barney Large Capitalization Growth Portfolio, Smith
Barney Money Market Portfolio, Smith Barney Pacific Basin Portfolio, TBC Managed
Income Portfolio, Van Kampen American Capital Enterprise Portfolio, Centurion
Tax-Managed U.S. Equity Fund, Centurion Tax-Managed International Equity Fund,
Centurion U.S. Protection Fund, Centurion International Protection Fund, Global
High-Yield Bond Fund, International Equity Fund, Emerging Opportunities Fund,
Core Equity Fund, Long-Term Bond Fund, Global Dimensions Fund L.P., Citicorp
Private Equity L.P., AIM V.I. Capital Appreciation Fund, AIM V.I. Government
Series Fund, AIM V.I. Growth Fund, AIM V.I. International Equity Fund, AIM V.I.
Value Fund, Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio,
Fidelity VIP Equity Income Portfolio, Fidelity VIP Overseas Portfolio, Fidelity
VIP II Contrafund Portfolio, Fidelity VIP II Index 500 Portfolio, MFS World
Government Series, MFS Money Market Series, MFS Bond Series, MFS Total Return
Series, MFS Research Series, MFS Emerging Growth Series, Salomon Brothers
Institutional Money Market Fund, Salomon Brothers Cash Management Fund, Salomon
Brothers New York Municipal Money Market Fund, Salomon Brothers National
Intermediate Municipal Fund, Salomon Brothers U.S. Government Income Fund,
Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic Bond Fund,
Salomon Brothers Total Return Fund, Salomon Brothers Asia Growth Fund, Salomon
Brothers Capital Fund Inc, Salomon Brothers Investors Fund Inc, Salomon Brothers
Opportunity Fund Inc, Salomon Brothers Institutional High Yield Bond Fund,
Salomon Brothers Institutional Emerging Markets Debt Fund, Salomon Brothers
Variable Investors Fund, Salomon Brothers Variable Capital Fund, Salomon
Brothers Variable Total Return Fund, Salomon Brothers Variable High Yield Bond
Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable
U.S. Government Income Fund, and Salomon Brothers Variable Asia Growth Fund.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
Item 28. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
CFBDS, Inc. 21 Milk Street
(distributor) Boston, MA 02109
State Street Bank and Trust Company 1776 Heritage Drive
(transfer agent and custodian) North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment manager) New York, NY 10043
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boston and
Commonwealth of Massachusetts on the 29th day of April, 1999.
VARIABLE ANNUITY PORTFOLIOS
By Philip W. Coolidge
---------------------------
Philip W. Coolidge
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated below on April 29, 1999.
Signature Title
--------- -----
Philip W. Coolidge President, Principal Executive
- ---------------------------- Officer and Trustee
Philip W. Coolidge
John R. Elder Principal Financial Officer and
- ---------------------------- Principal Accounting Officer
John R. Elder
Elliott J. Berv* Trustee
- ----------------------------
Elliott J. Berv
Mark T. Finn* Trustee
- ----------------------------
Mark T. Finn
Riley C. Gilley* Trustee
- ----------------------------
Riley C. Gilley
Diana R. Harrington* Trustee
- ----------------------------
Diana R. Harrington
Susan B. Kerley* Trustee
- ----------------------------
Susan B. Kerley
Heath B. McLendon* Trustee
- ----------------------------
Heath B. McLendon
C. Oscar Morong, Jr.* Trustee
- ----------------------------
C. Oscar Morong, Jr.
Walter E. Robb, III* Trustee
- ----------------------------
Walter E. Robb, III
E. Kirby Warren* Trustee
- ----------------------------
E. Kirby Warren
William S. Woods, Jr.* Trustee
- ----------------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
----------------------
Philip W. Coolidge
Executed by Philip W. Coolidge
on behalf of those indicated
pursuant to Powers of Attorney.
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
------- ------------
a(3) Amended and Restated Designation of
Series of the Registrant
a(4) Amended and Restated Designation of
Series of the Registrant
d(11) Form of Sub-Management Agreement with
Salomon Brothers Asset Management Inc
i Opinion of Bingham Dana LLP
j Independent auditors' consent
n Financial data schedules
<PAGE>
EXHIBIT a(3)
VARIABLE ANNUITY PORTFOLIOS
Amended and Restated
Establishment and Designation of Series of
Shares of Beneficial Interest ($0.00001 par value per share)
Pursuant to Section 6.9 of the Declaration of Trust dated October 18,
1996, as amended and restated (the "Declaration of Trust"), of Variable Annuity
Portfolios (the "Trust"), the undersigned, being a majority of the Trustees of
the Trust, do hereby amend and restate the Trust's existing Establishment and
Designation of Series of Shares of Beneficial Interest ($0.00001 par value per
share) in order to establish an additional series of Shares (as defined in the
Declaration of Trust). No other changes to the special and relative rights of
the existing series are intended by this amendment and restatement.
1. The presently existing series are as follows:
"CitiSelect(R) VIP Folio 200"
"CitiSelect(R) VIP Folio 300"
"CitiSelect(R) VIP Folio 400"
"CitiSelect(R) VIP Folio 500"
"CitiFunds(SM) Small Cap Growth VIP Portfolio"
The new series of the Trust shall be designated as "CitiSelect(R) VIP
Folio 100".
2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of 1933
to the extent pertaining to the offering of Shares of each series. Each Share of
each series shall be redeemable, shall be entitled to one vote or fraction
thereof in respect of a fractional share on matters on which shares of that
series shall be entitled to vote, shall represent a pro rata beneficial interest
in the assets allocated or belonging to such series, and shall be entitled to
receive its pro rata share of the net assets of such series upon liquidation of
the series, all as provided in Section 6.9 of the Declaration of Trust.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each series as provided in, Rule 18f-2,
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each
series as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall have
the right at any time and from time to time to reallocate assets and expenses or
to change the designation of any series now or hereafter created or otherwise to
change the special and relative rights of any such series.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Establishment and
Designation of Series on separate counterparts this 5th day of February, 1999.
/s/ Elliott J. Berv /s/ Philip W. Coolidge
- ------------------------------------ ------------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As trustee and not individually As trustee and not individually
/s/ Mark T. Finn /s/ Riley C. Gilley
- ------------------------------------ ------------------------------------
MARK T. FINN RILEY C. GILLEY
As trustee and not individually As trustee and not individually
/s/ Diana R.Harrington /s/ Susan B. Kerley
- ------------------------------------ ------------------------------------
DIANA R. HARRINGTON SUSAN B. KERLEY
As trustee and not individually As trustee and not individually
/s/ Heath B. McLendon /s/ C. Oscar Morong, Jr.
- ------------------------------------ ------------------------------------
HEATH B. McLENDON C. OSCAR MORONG, JR.
As trustee and not individually As trustee and not individually
/s/ Walter E. Robb, III /s/ E. Kirby Warren
- ------------------------------------ ------------------------------------
WALTER E. ROBB, III E. KIRBY WARREN
As trustee and not individually As trustee and not individually
/s/ William S. Woods, Jr.
- ------------------------------------
WILLIAM S. WOODS, JR.
As trustee and not individually
<PAGE>
EXHIBIT a(4)
VARIABLE ANNUITY PORTFOLIOS
Amended and Restated
Establishment and Designation of Series of
Shares of Beneficial Interest ($0. 00001 par value per share)
Pursuant to Section 6.9 of the Amended and Restated Declaration of Trust
dated October 18, 1996, as amended and restated (the "Declaration of Trust"), of
Variable Annuity Portfolios (the "Trust"), the undersigned, being a majority of
the Trustees of the Trust, do hereby amend and restate the Trust's existing
Establishment and Designation of Series of Shares of Beneficial Interest
($0.00001 par value per share) in order to change the names of certain of the
series of Shares (as defined in the Declaration of Trust). No other changes to
the special and relative rights of the existing series are intended by this
amendment and restatement.
1. Effective as of that date selected by an officer of the Trust by
written notice to the Trust, the following series of the Trust shall be renamed
as set forth in the right column below.
Series
Currently Named: Renamed:
- ------------------------ ----------------------------------------
CitiSelect(R) VIP Folio 100 CitiSelect(R) VIP Folio 100 Income
CitiSelect(R) VIP Folio 200 CitiSelect(R) VIP Folio 200 Conservative
CitiSelect(R) VIP Folio 300 CitiSelect(R) VIP Folio 300 Balanced
CitiSelect(R) VIP Folio 400 CitiSelect(R) VIP Folio 400 Growth
CitiSelect(R) VIP Folio 500 CitiSelect(R) VIP Folio 500 Growth Plus
The other existing series of the Trust is CitiFundsSM Small Cap Growth VIP
Portfolio.
2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of 1933
to the extent pertaining to the offering of Shares of each series. Each Share of
each series shall be redeemable, shall be entitled to one vote or fraction
thereof in respect of a fractional share on matters on which shares of that
series shall be entitled to vote, shall represent a pro rata beneficial interest
in the assets allocated or belonging to such series, and shall be entitled to
receive its pro rata share of the net assets of such series upon liquidation of
the series, all as provided in Section 6.9 of the Declaration of Trust.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each series as provided in, Rule 18f-2,
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each
series as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall have
the right at any time and from time to time to reallocate assets and expenses or
to change the designation of any series now or hereafter created or otherwise to
change the special and relative rights of any such series.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Establishment and
Designation of Series on separate counterparts this 30th day of April, 1999.
/s/ Elliott J. Berv
- ------------------------------------ ------------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As trustee and not individually As trustee and not individually
/s/ Mark T. Finn /s/ Riley C. Gilley
- ------------------------------------ ------------------------------------
MARK T. FINN RILEY C. GILLEY
As trustee and not individually As trustee and not individually
/s/ Diana R.Harrington /s/ Susan B. Kerley
- ------------------------------------ ------------------------------------
DIANA R. HARRINGTON SUSAN B. KERLEY
As trustee and not individually As trustee and not individually
/s/ Heath B. McLendon /s/ C. Oscar Morong
- ------------------------------------ ------------------------------------
HEATH B. McLENDON C. OSCAR MORONG, JR.
As trustee and not individually As trustee and not individually
/s/ Walter E. Robb, III /s/ E. Kirby Warren
- ------------------------------------ ------------------------------------
WALTER E. ROBB, III E. Kirby Warren
As trustee and not individually As trustee and not individually
/s/ William S. Woods, Jr.
- ------------------------------------
WILLIAM S. WOODS, JR.
As Trustee and Not Individually
<PAGE>
Linda Gibson
Secretary
Variable Annuity Portfolios
c/o Signature Financial Group Inc.
21 Milk Street, 5th Floor
Boston, MA 02109
I, Linda Gibson, hereby certify that I am the duly elected, qualified and
acting Secretary of Variable Annuity Portfolios, a Massachusetts business trust
(the "Trust"), and, pursuant to authority granted by the Board of Trustees of
the Trust on April 30, 1999, do hereby give notice that the Amendment to
Declaration of Trust of the Trust, as executed by the Trustees of the Trust on
April 30, 1999, shall become effective as of May 3, 1999.
IN WITNESS WHEREOF, I have hereunto signed my name at Boston,
Massachusetts this 30th day of April, 1999.
Linda Gibson, Secretary
<PAGE>
EXHIBIT d(11)
FORM OF
SUB-MANAGEMENT AGREEMENT
VARIABLE ANNUITY PORTFOLIOS
SUB-MANAGEMENT AGREEMENT, dated as of __________ ___, 1999, by and between
Variable Annuity Portfolios, a Massachusetts business trust (the "Trust"), and
Salomon Brothers Asset Management Inc, a Delaware corporation (the
"Subadviser").
W I T N E S S E T H:
WHEREAS, Citibank, N.A. (the "Manager") has been retained by the Trust to
act as investment adviser to the Trust with respect to the series of the Trust
designated as CitiSelect(R) VIP Folio 100, CitiSelect(R) VIP Folio 200,
CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400 and CitiSelect(R) VIP
Folio 500 (each individually a "Fund" and collectively the "Funds"), and
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"), and
WHEREAS, the Manager has requested that the Trust engage the Subadviser to
provide certain investment advisory services for the Funds, and the Subadviser
is willing to provide such investment advisory services for the Funds on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Appointment of the Subadviser. In accordance with and subject to the
Management Agreement between the Trust and the Manager (the "Management
Agreement"), the Trust hereby appoints the Subadviser to act as subadviser with
respect to each of the Funds for the period and on the terms set forth in this
Agreement. The Subadviser accepts such appointment and agrees to provide an
investment program with respect to the Funds for the compensation provided by
this Agreement.
2. Duties of the Subadviser. The Subadviser shall provide the Funds and
the Manager with such investment advice and supervision as the Manager may from
time to time consider necessary for the proper supervision of such portion of
each Fund's investment assets as the Manager may designate from time to time.
Notwithstanding any provision of this Agreement, the Manager shall retain all
rights and ultimate responsibilities to supervise and, in its discretion,
conduct investment advisory activities relating to the Trust. The Subadviser
shall furnish continuously an investment program and shall determine from time
to time what securities shall be purchased, sold or exchanged and what portion
of the assets of a Fund allocated by the Manager to the Subadviser shall be held
uninvested, subject always to the restrictions of the Trust's Declaration of
Trust, dated October 18, 1996, and By-laws, as each may be amended and restated
from time to time (respectively, the "Declaration" and the "By-Laws"), the
provisions of the 1940 Act, the then-current Registration Statement of the Trust
with respect to that Fund, and subject, further, to the Subadviser notifying the
Manager in advance of the Subadviser's intention to purchase any securities
except insofar as the requirement for such notification may be waived or limited
by the Manager, it being understood that the Subadviser shall be responsible for
compliance with any restrictions imposed in writing by the Manager from time to
time in order to facilitate compliance with the above-mentioned restrictions and
such other restrictions as the Manager may determine. Further, the Manager or
the Trustees of the Trust may at any time, upon written notice to the
Subadviser, suspend or restrict the right of the Subadviser to determine what
securities shall be purchased or sold on behalf of a Fund and what portion, if
any, of the assets of a Fund allocated by the Manager to the Subadviser shall be
held uninvested. The Subadviser shall also, as requested, make recommendations
to the Manager as to the manner in which proxies, voting rights, rights to
consent to corporate action and any other rights pertaining to a Fund's
portfolio securities shall be exercised. Should the Board of Trustees of the
Trust or the Manager at any time, however, make any definite determination as to
investment policy applicable to a Fund and notify the Subadviser thereof in
writing, the Subadviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination has been revoked.
The Subadviser shall take, on behalf of each Fund, all actions which it
deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
securities for each Fund's account with the brokers or dealers selected by it,
and to that end the Subadviser is authorized as the agent of the Trust to give
instructions to the custodian and any subcustodian of a Fund as to deliveries of
securities and payments of cash for the account of that Fund. The Subadviser
will advise the Manager on the same day it gives any such instructions. In
connection with the selection of such brokers or dealers and the placing of such
orders, brokers or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to a Fund and/or the other accounts over which the
Subadviser or its affiliates exercise investment discretion. The Subadviser is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for a Fund which is
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Subadviser determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which the Subadviser and its affiliates have with
respect to accounts over which they exercise investment discretion. In making
purchases or sales of securities or other property for the account of a Fund,
the Subadviser may deal with itself or with the Trustees of the Trust or the
Trust's underwriter or distributor, to the extent such actions are permitted by
the 1940 Act. The Board of Trustees of the Trust, in its discretion, may
instruct the Subadviser to effect all or a portion of its securities
transactions with one or more brokers and/or dealers selected by the Board of
Trustees, if it determines that the use of such brokers and/or dealers is in the
best interest of the Trust.
3. Allocation of Charges and Expenses. The Subadviser shall furnish at its
own expense all necessary services, facilities and personnel in connection with
its responsibilities under Section 2 above. Except as provided in the foregoing
sentence, it is understood that the Trust will pay from the assets of each Fund
all of its own expenses allocable to that Fund including, without limitation,
organization costs of the Fund; compensation of Trustees who are not "interested
persons" of the Trust; governmental fees; interest charges; loan commitment
fees; taxes; membership dues in industry associations allocable to the Trust;
fees and expenses of independent auditors, legal counsel and any transfer agent,
distributor, registrar or dividend disbursing agent of the Trust; expenses of
issuing and redeeming shares of beneficial interests and servicing shareholder
accounts; expenses of preparing, typesetting, printing and mailing shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to shareholders in the Fund; expenses connected with the
execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of the Fund (including but
not limited to the fees of independent pricing services); expenses of meetings
of the Fund's shareholders; expenses relating to the issuance of shares of
beneficial interests in the Fund; and such non-recurring or extraordinary
expenses as may arise, including those relating to actions, suits or proceedings
to which the Trust on behalf of the Fund may be a party and the legal obligation
which the Trust may have to indemnify its Trustees and officers with respect
thereto.
4. Compensation of the Subadviser. For the services to be rendered by the
Subadviser hereunder, the Trust shall pay to the Subadviser from the assets of
the Funds pro rata an investment subadvisory fee, accrued daily and paid
monthly, at an annual rate equal to the percentages specified below of the
aggregate assets of all Funds allocated to the Subadviser:
0.45% on the first $100 million;
0.40% on assets in excess of $100 million
If the Subadviser serves as investment subadviser for less than the whole of any
period specified in this Section 4, the compensation to the Subadviser shall be
prorated.
If in any fiscal year the aggregate expenses of a Fund and any fund
investing its assets therein (including fees pursuant to the Management
Agreement, but excluding interest, taxes, brokerage and, with the prior written
consent of the necessary state securities commissions, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over that Fund
and any fund investing its assets therein, the Trust may deduct from the fees to
be paid hereunder, or the Subadviser will bear such excess expense on a pro-rata
basis with the Manager, in the proportion that the subadvisory fee payable
pursuant to this Agreement bears to the fee payable to the Manager pursuant to
the Management Agreement, to the extent required by state law. The Subadviser's
obligation pursuant hereto will be limited to the amount of its fees hereunder.
Such deduction or payment, if any, will be estimated daily, and reconciled and
effected or paid, as the case may be, on a monthly basis.
5. Covenants of the Subadviser. The Subadviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's principal
underwriter or distributor, as principals in making purchases or sales of
securities or other property for the account of a Fund, except as permitted by
the 1940 Act, will not take a long or short position in shares of beneficial
interests of a Fund except as permitted by the Declaration, and will comply with
all other provisions of the Declaration and By-Laws and the then-current
Registration Statement applicable to each Fund relative to the Subadviser and
its directors and officers.
6. Limitation of Liability of the Subadviser. The Subadviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for a 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 hereunder. As used in this Section 6, the term
"Subadviser" shall include directors, officers and employees of the Subadviser
as well as the Subadviser itself. The Manager is expressly made a third party
beneficiary of this Agreement, and may enforce any obligations of the Subadviser
under this Agreement and recover directly from the Subadviser for any liability
the Subadviser may have hereunder.
7. Activities of the Subadviser. The services of the Subadviser to the
Funds are not to be deemed to be exclusive, the Subadviser being free to render
investment advisory and/or other services to others, including accounts or
investment management companies with similar or identical investment objectives
to the Funds. It is understood that Trustees, officers, and shareholders of the
Trust or the Manager are or may be or may become interested in the Subadviser,
as directors, officers, employees, or otherwise and that directors, officers,
and employees of the Subadviser are or may become similarly interested in the
Trust or the Manager and that the Subadviser may be or may become interested in
the Trust as a shareholder or otherwise.
8. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written, and shall
govern the relations between the parties hereto thereafter and shall remain in
force until ____________, 2001, on which date it will terminate unless its
continuance after ____________, 2001 is "specifically approved at least
annually" (a) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Manager or of the Subadviser at a
meeting specifically called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or by "vote of a majority of the
outstanding voting securities" of each Fund.
This Agreement may be terminated as to any Fund at any time without the
payment of any penalty by (i) the Trustees, (ii) the "vote of a majority of the
outstanding voting securities" of that Fund, or (iii) the Manager, in each case
on not more than 60 days' nor less than 30 days' written notice to the other
party. This Agreement may be terminated as to any Fund at any time without the
payment of any penalty by the Subadviser on not less than 90 days' written
notice to the Trust and the Manager. This Agreement shall automatically
terminate in the event of its "assignment." Termination of this Agreement as to
any Fund shall not terminate this Agreement as it applies to the remaining
Funds.
This Agreement constitutes the entire agreement between the parties and
may be amended as to any Fund only if such amendment is approved by the
Subadviser and the "vote of a majority of the outstanding voting securities" of
that Fund (except for any such amendment as may be effected in the absence of
such approval without violating the 1940 Act). Amendment of any term of this
Agreement with respect to any single Fund shall not, without more, amend such
term with respect to any other Fund.
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust under
this Agreement are binding only with respect to the particular Fund to which a
particular obligation relates; that any liability of the Trust under this
Agreement, or in connection with the transactions contemplated herein, shall be
discharged only out of the assets of the particular Fund to which a particular
obligation relates; and that no other Fund or other series of the Trust shall be
liable with respect to this Agreement or in connection with the transactions
contemplated herein.
The undersigned officer of the Trust has executed this Agreement not
individually but in his capacity as an officer of the Trust under the
Declaration, and the obligations of this Agreement are not binding upon any of
the Trustees, officers or shareholders of the Trust individually.
9. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts provided, however, that nothing herein will be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940 or
any rules or regulations of the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
VARIABLE ANNUITY PORTFOLIOS
on behalf of CitiSelect(R) VIP Folio 200, CitiSelect(R) VIP Folio 200,
CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400 and CitiSelect(R) VIP
Folio 500.
SALOMON BROTHERS ASSET MANAGEMENT INC.
By:
----------------------------------
Title:
By:
----------------------------------
Title:
The foregoing is acknowledged:
Citibank, N.A.
By:
----------------------------------
Title:
<PAGE>
EXHIBIT i
BINGHAM DANA LLP
150 Federal Street
Boston, Massachusetts 02110
April 30, 1999
Variable Annuity Portfolios
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
Ladies and Gentlemen:
We have acted as counsel to Variable Annuity Portfolios, a Massachusetts
business trust (the "Trust"), in connection with the Trust's Registration
Statement on Form N-1A and Post-Effective Amendment No. 6 thereto filed with the
Securities and Exchange Commission on April 30, 1999 (as amended, the
"Registration Statement"), with respect to an indefinite number of Shares of
Beneficial Interest ($0.00001 par value) (the "Shares") of a separate series of
the Trust designated as CitiSelect VIP Folio 100 Income (the "Fund").
In connection with this opinion, we have examined the following described
documents:
(a) the Registration Statement;
(b) a certificate of the Secretary of State of the Commonwealth of
Massachusetts as to the existence of the Trust;
(c) copies, certified by the Secretary of State of the Commonwealth of
Massachusetts, of the Trust's Declaration of Trust and of all amendments thereto
on file in the office of the Secretary of State;
(d) executed Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest ($0.0001 par value per share) of the Trust (the
"Designation of Series"); and
(e) a certificate executed by the Secretary of the Trust, certifying as
to, and attaching copies of, the Trust's By-Laws and certain votes of the
Trustees of the Trust authorizing the issuance of the Shares.
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, the authenticity and completeness of all documents reviewed by us in
original or copy form and the legal competence of each individual executing any
document.
This opinion is based entirely on our review of the documents listed
above. We have made no other review or investigation of any kind whatsoever, and
we have assumed, without independent inquiry, the accuracy of the information
set forth in such documents. We have assumed that the Designation of Series will
be duly filed with the Secretary of State of the Commonwealth of Massachusetts
and the Clerk of the City of Boston.
This opinion is limited solely to the laws of the Commonwealth of
Massachusetts (other than the Massachusetts Uniform Securities Act, as to which
we express no opinion) as applied by courts in such Commonwealth to the extent
such laws may apply to or govern the matters covered by this opinion.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is our
opinion that the Shares, when issued and sold in accordance with the
Registration Statement and the Trust's Declaration of Trust and By-laws, will be
legally issued, fully paid and non-assessable, except that, as set forth in the
Registration Statement, shareholders of the Fund may under certain circumstances
be held personally liable for the Trust's obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Bingham Dana LLP
BINGHAM DANA LLP
<PAGE>
EXHIBIT J
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 6 to the registration statement on Form N-1A (the "Registration
Statement") of Variable Annuity Portfolios of our report dated February 19,
1999, relating to the financial statements and financial highlights of
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400 and
CitiSelect VIP Folio 500 appearing in the CitiVariable Annual Report 1998, which
are also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectus and under the headings "Auditors" and "Financial Statements" in the
Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 6 to the registration statement on Form N-1A (the "Registration
Statement") of Variable Annuity Portfolios of our report dated February 12,
1999, relating to the financial statements and financial highlights of CitiFunds
Small Cap Growth VIP Portfolio appearing in the CitiVariable Annual Report 1998,
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us under the heading "Financial Highlights" in
the Prospectus and under the headings "Auditors" and "Financial Statements" in
the Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
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<PERIOD-END> DEC-31-1998
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<INVESTMENTS-AT-VALUE> 2,060,856
<RECEIVABLES> 19,752
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 389
<TOTAL-ASSETS> 2,080,997
<PAYABLE-FOR-SECURITIES> 42,650
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 42,650
<SENIOR-EQUITY> 0
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<DIVIDEND-INCOME> 4,172
<INTEREST-INCOME> 1,278
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<EXPENSES-NET> 23,397
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<APPREC-INCREASE-CURRENT> (303,546)
<NET-CHANGE-FROM-OPS> 47,247
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (211,308)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,433,019
<NUMBER-OF-SHARES-REDEEMED> (2,565,888)
<SHARES-REINVESTED> 211,308
<NET-CHANGE-IN-ASSETS> (1,085,622)
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<GROSS-ADVISORY-FEES> 19,462
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<GROSS-EXPENSE> 149,036
<AVERAGE-NET-ASSETS> 2,594,980
<PER-SHARE-NAV-BEGIN> 11.21
<PER-SHARE-NII> (0.08)
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<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 15,187,553
<INVESTMENTS-AT-VALUE> 15,577,353
<RECEIVABLES> 759,586
<ASSETS-OTHER> 683
<OTHER-ITEMS-ASSETS> 4,193
<TOTAL-ASSETS> 16,341,815
<PAYABLE-FOR-SECURITIES> 2,247,735
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<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 2,247,735
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,583,072
<SHARES-COMMON-STOCK> 1,345,064
<SHARES-COMMON-PRIOR> 1,006,823
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (8,737)
<ACCUMULATED-NET-GAINS> 36,641
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 383,870
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<OTHER-INCOME> 0
<EXPENSES-NET> 118,425
<NET-INVESTMENT-INCOME> 388,269
<REALIZED-GAINS-CURRENT> 423,601
<APPREC-INCREASE-CURRENT> 14,646
<NET-CHANGE-FROM-OPS> 826,516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (476,786)
<DISTRIBUTIONS-OF-GAINS> (278,961)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,624,696
<NUMBER-OF-SHARES-REDEEMED> (4,777,431)
<SHARES-REINVESTED> 755,747
<NET-CHANGE-IN-ASSETS> 3,673,781
<ACCUMULATED-NII-PRIOR> 79,780
<ACCUMULATED-GAINS-PRIOR> (107,999)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 93,713
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 537,150
<AVERAGE-NET-ASSETS> 12,494,995
<PER-SHARE-NAV-BEGIN> 10.25
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.37)
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<RETURNS-OF-CAPITAL> 0.00
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<EXPENSE-RATIO> 0.95
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 24,048,282
<INVESTMENTS-AT-VALUE> 24,757,524
<RECEIVABLES> 1,226,933
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<OTHER-ITEMS-ASSETS> 6,474
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<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 3,162,869
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,028,492
<SHARES-COMMON-STOCK> 2,129,027
<SHARES-COMMON-PRIOR> 1,366,989
<ACCUMULATED-NII-CURRENT> 9,442
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (40,243)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 715,589
<NET-ASSETS> 22,713,280
<DIVIDEND-INCOME> 119,218
<INTEREST-INCOME> 583,045
<OTHER-INCOME> 0
<EXPENSES-NET> 186,328
<NET-INVESTMENT-INCOME> 515,935
<REALIZED-GAINS-CURRENT> 439,754
<APPREC-INCREASE-CURRENT> 220,563
<NET-CHANGE-FROM-OPS> 1,176,252
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (664,044)
<DISTRIBUTIONS-OF-GAINS> (233,114)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,104,875
<NUMBER-OF-SHARES-REDEEMED> (2,759,510)
<SHARES-REINVESTED> 897,158
<NET-CHANGE-IN-ASSETS> 8,521,617
<ACCUMULATED-NII-PRIOR> 157,551
<ACCUMULATED-GAINS-PRIOR> (246,883)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 147,435
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 634,368
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<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.27
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