<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1999
REGISTRATION NOS. 333-84345
811-9513
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. 1 [x]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 1 [x]
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SSBCITI FUNDS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 725-6666
ROBERT A. VEGLIANTE
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
GARY SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, REGISTRANT HEREBY ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES OF
REGISTRANT AND ANY SERIES THEREOF.
________________________________________________________________________________
<PAGE>
THE HUMANE EQUITY FUND
PROSPECTUS & APPLICATION
OCTOBER , 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
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CONTENTS
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Investments, risks and expenses............................. 2
More on the fund's investments.............................. 4
More on the fund's animal friendly criteria................. 4
Management.................................................. 5
Buying shares............................................... 6
Redeeming shares............................................ 8
Other things to know about share transactions............... 9
Dividends, distributions and taxes.......................... 10
</TABLE>
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YOU SHOULD KNOW
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
The Humane Equity Fund - 1
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INVESTMENTS, RISKS AND EXPENSES
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INVESTMENT The fund seeks long-term growth of capital.
OBJECTIVE
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PRINCIPAL INVESTMENT The fund follows a policy of investing in companies that
STRATEGIES meet a screening process founded upon the humane treatment
of animals as such treatment is defined and expounded by The
Humane Society of the United States ('animal friendly
investing').
KEY INVESTMENTS: The fund invests primarily (at least 65% of
its assets) in common stocks and other equity securities of
U.S. companies. Equity securities include exchange traded
and over-the-counter common stocks and preferred shares,
debt securities convertible into equity securities, and
warrants and rights relating to equity securities.
SELECTION PROCESS: The fund invests in a broad range of
companies, industries and sectors, without regard to market
capitalization. The manager selects investments for their
capital appreciation potential; any ordinary income is
incidental. The investment philosophy of the fund is
predicated on two broad market based assumptions:
First, the manager believes it is difficult to time the
market so the equity selection discipline is designed to be
indifferent to the price and valuation level of the overall
stock market -- the manager believes it can usually find
individual stocks that represent good value.
Second, the manager believes among individual securities,
market inefficiencies exist and can be identified through a
disciplined analysis process using quantitative and
qualitative techniques.
The manager evaluates stocks within a framework that
incorporates three stages of analysis:
The identification of long-term, risk-adjusted value based
on expected growth in earnings and or cash flow and yield
characteristics.
The identification of short-term, or tactical,
attractiveness based on earnings cycle analysis.
Earnings estimate revision analysis -- a volatility adjusted
analysis of changes in earnings estimates.
This style of stock selection is commonly known as 'growth
at a reasonable price.' The fund will hold a combination of
growth and value stocks with the common characteristic being
good, timely investment opportunity based on a company's
earnings growth, dividend and risk characteristics. The
benefit of this type of approach is the avoidance of
dramatic style cycle volatility.
Animal Friendly Criteria. As a component of the selection
process and as a general guiding principal, the manager will
avoid investing in companies that directly harm animals and
their habitats.
The manager will screen all investments of any type
considered by the fund using guidelines established by The
Humane Society of the United States. Under such guidelines,
among other restrictions:
The fund will not invest in pharmaceutical companies
The fund will not invest in cosmetics companies if there is
a question about such companies' use of animals for product
studies and/or testing
The fund will not invest in companies that use animals in an
end product, e.g., meat packing companies, and
The fund will not invest in companies producing products
adverse to the humane treatment of animals, e.g.,
manufacturers of hunting and trapping equipment
</TABLE>
The Humane Equity Fund - 2
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In addition, the fund will seek to identify and invest in
companies whose policies and operations affirmatively
promote the humane treatment of animals, provided these
investments meet the fund's stock selection criteria.
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PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments,
THE FUND if:
Stock prices decline generally
Animal friendly companies fail to perform as well as
companies that do not fit the fund's animal friendly
criteria
The manager's judgment about the attractiveness, value or
potential appreciation of a particular security proves to be
incorrect
The company does not meet earnings expectations or other
events depress the value of the company's stock.
Because the manager uses animal friendly criteria as a
component of its selection process, the fund's universe of
investments may be smaller than that of other funds. In some
circumstances, this could cause the fund's investment
performance to be better or worse than funds with similar
investment objectives that do not have the fund's screening
policies.
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WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
Are seeking to invest in a portfolio with an animal friendly
component
Are seeking to participate in the long term growth potential
of the stock market
Are willing to accept the risks of the stock market
The fund does not have a sufficient operating history to
depict its performance in the graphic and table form which
other funds use.
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FEE TABLE SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
This table sets forth Maximum sales charge (load) imposed on purchases (as a % of None
the fees and expenses offering price)
you will pay if you Maximum deferred sales charge (load) (as a % of the lower None
invest in fund shares. of net asset value at purchase or redemption)
The manager has
voluntarily agreed to
waive its management ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
fee and reimburse
expenses for the fiscal Management fee 0.75%
year ending
September 30, 2000 to Distribution and service (12b-1) fees 0.25
the extent necessary to
ensure that actual Other expenses 0.45
total operating
expenses for the fund
are 1.45%
Total annual fund operating expenses* 1.45%
* Based on estimated amounts for the fiscal year ending September
30, 2000.
</TABLE>
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EXAMPLE NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS
This example helps you Your costs would be $148 $459
compare the costs of The example assumes:
investing in the fund You invest $10,000 in the fund for the period shown
with the costs of Your investment has a 5% return each year
investing in other You reinvest all distributions and dividends without a sales charge
mutual funds. Your The fund's operating expenses remain the same
actual costs may be
higher or lower.
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The Humane Equity Fund - 3
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MORE ON THE FUND'S INVESTMENTS
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DERIVATIVE Although not a principal investment strategy, the fund may,
CONTRACTS but need not, use derivative contracts, such as futures and
options on securities or securities indices, options on
these futures, and interest rate futures, for any of the
following purposes:
To hedge against the economic impact of adverse changes in
the market value of portfolio securities, because of changes
in stock prices
As a substitute for buying or selling securities or as a way
of managing cash flow
A derivative contract will obligate or entitle a fund to
deliver or receive an asset or cash payment based on the
change in value of one or more securities or indices. Even a
small investment in derivative contracts can have a big
impact on a fund's interest rate or stock market exposure.
Therefore, using derivatives can disproportionately increase
losses and reduce opportunities for gains. The fund may not
fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to
changes in the value of the fund's holdings. The other
parties to certain derivative contracts present the same
types of default risk as issuers of fixed income securities.
Derivatives can also make a fund less liquid and harder to
value, especially in declining markets.
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FOREIGN Although not a principal investment strategy, the fund may
SECURITIES invest up to 10% of its assets, not more than 10%, in
securities of foreign issuers. These securities generally
include American Depositary Receipts (ADRs), Yankee Bonds
and other securities quoted in U.S. dollars, but may also
include non-U.S. dollar denominated securities. Because the
fund may invest in securities of foreign issuers, the fund
carries additional risks. The value of your investment may
decline if the U.S. and/or foreign stock markets decline,
currency rates adversely affect the value of foreign
currencies relative to the U.S. dollar, or an adverse event,
such as an unfavorable earnings report, depresses the value
of a particular company's stock. Prices of foreign
securities may go down because of foreign government
actions, political instability or the more limited
availability of accurate information about foreign
companies. These risks are greater for issuers in emerging
markets.
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DEFENSIVE The fund may depart from its principal investment strategies
INVESTING in response to adverse market, economic or political
conditions by taking temporary defensive positions in all
types of money market and short-term debt securities. If the
fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
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MASTER/FEEDER The fund may in the future seek to achieve its investment
OPTION objective by investing all of its net assets in another
investment company having the same investment objective and
substantially the same investment policies and restrictions
as those applicable to the fund. Shareholders of the fund
will be given at least 30 days prior notice of any such
investment.
</TABLE>
MORE ON THE FUND'S ANIMAL FRIENDLY CRITERIA
The fund is designed to combine both financial and animal friendly criteria in
all of its investment decisions.
The Humane Equity Fund - 4
<PAGE>
The manager will use its best efforts to assess a company's animal friendly
performance. This analysis will be based on the present activities of companies
issuing publicly traded securities, and will not preclude investment in
securities solely because of such companies' past activities or because of the
activities of such companies' parents, subsidiaries, affiliates, contractors or
suppliers. The manager will monitor the animal friendly progress or
deterioration of each company in which the fund invests. The fund will not
invest in a company that does not pass the screening process.
If securities held by the fund no longer satisfy the fund's screening policies,
the fund will seek to dispose of the securities as soon as is practicable, which
may cause the fund to sell the securities at a time not desirable from a purely
financial standpoint.
MANAGEMENT
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THE MANAGER The fund's investment adviser (the manager) is Salomon
AND ADMINISTRATOR Brothers Asset Management Inc (SBAM). The manager selects
the fund's investments and oversees its operations. The
manager's address is 7 World Trade Center, New York, New
York 10048. The fund's administrator is SSB Citi Fund
Management LLC ('SSB Citi'). SSB Citi's address is 388
Greenwich Street, New York, New York 10013. SBAM and
SSB Citi are affiliates of Salomon Smith Barney Inc. The
manager, administrator and Salomon Smith Barney are
subsidiaries of Citigroup Inc. Citigroup businesses produce
a broad range of financial services -- asset management,
banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and
trading -- and use diverse channels to make them available
to consumer and corporate customers around the world.
Charles P. Graves, an investment officer of the manager and
a managing director of Salomon Smith Barney, is responsible
for the day-to-day management of the fund's portfolio.
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MANAGEMENT AND For its services, the manager receives a fee equal to 0.65%
ADMINISTRATION FEES of the fund's average daily net assets. The administrator
receives a fee for its administrative services to the fund
equal to 0.10% of the fund's average daily net assets.
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CONSULTANT To assist the manager's determination of which investments
meet the fund's animal friendly criteria, the manager has a
consulting agreement with The Humane Society of the United
States (HSUS). From the fee paid the manager, The HSUS is
paid an annual fee equal to 0.07% of the fund's average
daily net assets. Although it has established guidelines
utilized by the manager to screen investments, the HSUS,
however, is not responsible for the specific selection of
fund investments.
The HSUS is the largest animal protection organization in
the nation with a staff of more than 250 coast to coast and
a constituency of more than 6 million. The mission of The
HSUS is to create a humane and sustainable world for all
animals, including people. Through education, advocacy and
empowerment, The HSUS seeks to forge a lasting and
comprehensive change in humane consciousness and behavior;
to relieve animal suffering; to prevent cruelty, abuse,
neglect, and exploitation; and to protect wild animals and
their environments. The HSUS has made an investment of $5
million of the fund. It will maintain its investment at
least until such time as the fund's assets reach $50
million.
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DISTRIBUTOR The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. CFBDS, Inc. is not affiliated
with the manager.
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The Humane Equity Fund - 5
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DISTRIBUTION PLAN The fund has adopted a Rule 12b-1 distribution plan for its
shares. Under the plan, the fund pays service and/or
distribution fees in an amount equal to 0.25% of the fund's
average daily net assets. Because these fees are paid out of
the fund's assets on an ongoing basis, these fees will
increase the cost of your investments and may cost you more
than other types of sales charges.
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YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and
after January 1, 2000. This situation, commonly known as the
'Year 2000' issue, could have an adverse impact on the fund.
The cost of addressing the Year 2000 issue, if substantial,
could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith
Barney are addressing the Year 2000 issue for their systems.
The fund has been informed by other service providers that
they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund
cannot guarantee that its efforts, which are limited to
requesting and receiving reports from its service providers,
or the efforts of its service providers to correct the
problem will be successful.
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BUYING SHARES
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BUYING SHARES Shares of the fund may be initially purchased through State
BY MAIL Street Bank and Trust Company, as its agent Boston Financial
Data Services Inc. ('Boston Financial' or the 'transfer agent')
You may make by completing a Purchase Application and forwarding it to the
subsequent transfer agent.
purchases
by mail or, if
you elect, by
telephone
Subsequent investments may be made by mailing a check to the
transfer agent, along with the detachable stub from your
Statement of Account (or a letter providing the account number).
If an investor's purchase check is not collected, the purchase
will be cancelled. There is a fifteen day hold on all checks and
no redemptions are allowed until the proceeds from the check
clears.
Checks should be made payable to the Humane Equity Fund or State
Street Bank & Trust. Third party checks will not be accepted and
will be returned to you via regular mail.
Write the transfer agent at the following address:
the Humane Equity Fund
c/o Boston Financial
P.O. Box 9121
Boston, MA 02205-9121
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BUYING SHARES Subsequent investments may also be made by wiring funds to the
BY WIRE transfer agent. Prior notification by telephone is not
required. You should instruct the wiring bank to transmit the
specified amount in federal funds to:
State Street Bank and Trust N.A.
ABA No. 011000028
Deposit Account #9905-4702
Attn: the Humane Equity Fund
Name of Account:
Account # (as assigned):
To ensure prompt credit to their accounts, investors should
call (877) 552-5420 with a reference number for the wire.
Shareholders should note that their bank may charge a fee in
connection with transferring money by bank wire.
</TABLE>
The Humane Equity Fund - 6
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PURCHASE IS EFFECTIVE
If order and federal funds or
check is received by fund or its On that day
agent before 4:00 p.m. Eastern
time:
Payment wired in federal If order and federal funds or On the business day following
funds or check received checkis received by fund or its receipt
agent after the close of New
York Stock Exchange:
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INVESTMENT Minimum initial investment amounts vary depending on the
MINIMUMS nature of your investment account.
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<CAPTION>
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INITIAL INVESTMENT ADDITIONAL INVESTMENTS
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General $1,000 $50
Individual Retirement Accounts, Self Employed $250 $50
Retirement Plans, Uniform Gift to Minor Accounts
Qualified Retirement Plans $25 $25
Monthly Systematic Investment Plans $25 $25
Pre-authorized Check Plan $25 $25
</TABLE>
Qualified Retirement Plans are qualified under Section 403(b)(7) or
Section 401(a) of the Internal Revenue Code, including 401(k) plans
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SYSTEMATIC You may authorize the transfer agent to automatically transfer
INVESTMENT funds on a periodic basis (monthly, alternative months,
PLAN quarterly) from a regular bank account or other financial
institution to buy shares of the fund. On or about the 10th of
the month, the fund will debit the bank account in the
specified amount (minimum of $25 per draft) and the proceeds
will be invested at the applicable offering price determined
on the date of the debit. In order to set up a plan, your bank
must be a member of the Automated Clearing House.
Amounts transferred should be at least $25 monthly.
If you do not have sufficient funds in your bank account on a
transfer date, the transfer agent may charge you a fee.
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The Humane Equity Fund - 7
<PAGE>
REDEEMING SHARES
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You may redeem some or all of your shares by sending your REDEMPTIONS BY MAIL
redemption request in proper form to:
the Humane Equity Fund
c/o Boston Financial
P.O. Box 9121
Boston, MA 02205-9121
The written request for redemption must be in good order. Generally, a properly
This means that you have provided the following completed Redemption
information. Your request will not be processed without Form with any required
this information. signature guarantee is
Name of the fund all that is required
Account number for a redemption. In
Dollar amount or number of shares to redeem some cases, however,
Signature of each owner exactly as account is registered other documents may be
Other documentation required by the transfer agent necessary.
To be in good order, your request must include a signature
guarantee if:
The proceeds of the redemption exceed $50,000
The proceeds are not paid to the record owner(s) at the
record address
The shareholder(s) has had an address change in the past
45 days
The shareholder(s) is a corporation, sole proprietor,
partnership, trust or fiduciary
You can obtain a signature guarantee from most banks,
dealers, brokers, credit unions and federal savings and
loans, but not from a notary public.
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In all cases, your redemption price is the net asset value REDEMPTION PAYMENTS
next determined after your request is received in good Any request that your
order. Redemption proceeds normally will be sent within redemption proceeds be
seven days. However, if you recently purchased your shares sent to a destination
by check, your redemption proceeds will not be sent to you other than your bank
until your original check clears which may take up to 15 account or address of
days from the purchase date. Your redemption proceeds can record must be in
be sent by check to your address of record or by wire writing and must
transfer to a bank account designated on your application. include signature
guarantees
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You may redeem shares by wire in amounts of $500 or more REDEMPTIONS BY WIRE
(but less than $50,000) if redemption by wire has been
elected on your Purchase Application. A signature
guarantee is not required on this type of redemption
request. To elect this service after opening your account,
call the transfer agent at (877) 552-5420 for more
information. To redeem by wire, you may either:
Telephone the redemption request to the transfer agent at
(877) 552-5420
Mail the request to the transfer agent at the address
listed above
Proceeds of wire redemptions of $500 or more will be wired
to the bank which is indicated on your Purchase Application
or by letter which has been properly guaranteed. Checks for
redemption proceeds of less than $500 will be mailed to
your address of record. You should note that your bank may
charge you a fee in connection with money by wire.
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The Humane Equity Fund - 8
<PAGE>
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You may redeem shares by telephone in amounts up to $50,000 REDEMPTIONS BY
if you elect the telephone redemption option on your TELEPHONE
Purchase Application, and the proceeds must be mailed to
your address of record. In addition, you must be able to
provide proper identification information. You may not
redeem by telephone if your address has changed within the
past 45 days or if your shares are in certificate form.
Telephone redemption requests may be made by calling the
transfer agent at (877) 552-5420 between 9:00 a.m. and 4:00
p.m. eastern time on any day the New York Stock Exchange is
open. If telephone redemptions are not available for any
reason, you may use the fund's regular redemption procedure
described above.
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You can arrange for the automatic redemption of a portion AUTOMATIC CASH
of your shares on a monthly or quarterly basis. To qualify, WITHDRAWAL PLAN
you must own shares of the fund with a value of at least
$10,000 for monthly withdrawals and $5,000 for quarterly
withdrawals and each automatic redemption must be at least
$250 if made monthly.
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OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
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Small account balances If your account falls below $500 due to redemption of fund
shares, the fund may ask you to bring your account up to the
minimum requirement. If your account is still below $500
after 30 days, the fund may close your account and send you
the redemption proceeds.
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Share price You may buy or redeem fund shares at their net asset value,
next determined after receipt of your request in good order.
The fund's net asset value is the value of its assets minus
its liabilities. The fund calculates its net asset value
every day the New York Stock Exchange ('NYSE') is open. This
calculation is made when regular trading closes on the
Exchange (normally 4:00 p.m., Eastern time). The fund does
not calculate its net asset value on days the NYSE is
closed. Please see the SAI for more information on the dates
the NYSE is closed.
The fund generally values its securities based on market
prices or quotations. When market prices are not available,
or when the manager believes they are unreliable or that the
value of a security has been materially affected by events
occurring after a foreign exchange closes, the fund may
price those securities at fair value. Fair value is
determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price
securities may value those securities higher or lower than
another fund that uses market quotations to price the same
securities.
In order to buy, redeem or exchange shares at that day's
price, you must place your order with the transfer agent
before the New York Stock Exchange closes. If the New York
Stock Exchange closes early, you must place your order prior
to the actual closing time. Otherwise, you will receive the
next business day's price.
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The fund has the right to:
Suspend the offering of shares
Waive or change minimum and additional investment amounts
Reject any purchase or exchange order
Change, revoke or suspend the exchange privilege
Suspend telephone transactions
Suspend or postpone redemptions of shares on any day when
trading on the New York Stock Exchange is restricted, or as
otherwise permitted by the Securities and Exchange
Commission
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Redemptions in kind The fund may make payment for fund shares wholly or in part
by distributing portfolio securities to the shareholders.
The redeeming shareholder must pay transaction costs to sell
these securities.
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The Humane Equity Fund - 9
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
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DIVIDENDS AND The fund generally makes capital gain distributions and pays
DISTRIBUTIONS dividends, if any, once a year, typically in December. The
fund may pay additional distributions and dividends at other
times if necessary for the fund to avoid a federal tax.
Capital gains distributions and dividends are reinvested in
additional fund shares. Alternatively, you can instruct the
transfer agent to have your distributions and/or dividends
paid in cash. You can change your choice at any time to be
effective as of the next distribution or dividend, except that
any change given to the transfer agent less than five days
before the payment date will not be effective until the next
distribution or dividend is made.
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TAXES In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all
taxable events.
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TRANSACTION FEDERAL INCOME TAX STATUS
Redemption or exchange of shares Usually capital gain or loss; long-term
only if shares owned more than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
Long-term capital gain distributions are taxable to you as
long-term capital gain regardless of how long you have
owned your shares. You may want to avoid buying shares when
the fund is about to declare a capital gain distribution or
a taxable dividend, because it will be taxable to you even
though it may actually be a return of a portion of your
investment.
After the end of each year, the fund will provide you with
information about the distributions and dividends that you
received and any redemptions of shares during the previous
year. If you do not provide the fund with your correct
taxpayer identification number and any required
certifications, you may be subject to back-up withholding
of 31% of your distributions, dividends and redemption
proceeds. Because each shareholder's circumstances are
different and special tax rules may apply, you should
consult your tax adviser about your investment in the fund.
The Humane Equity Fund - 10
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUND
SHAREHOLDER REPORTS. Annual and semi-annual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that significantly affected the
fund's performance during its last fiscal year.
The fund sends only one report to a household if more than one account has the
same address. Contact the transfer agent if you do not want this policy to apply
to you.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into (is legally a part of) this prospectus.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the
transfer agent, by calling 1-877-552-5420 or writing the fund at Seven World
Trade Center, New York, NY, 10048.
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. You can get copies of
these materials for a duplicating fee by writing to the Public Reference
section of the Commission, Washington, D.C. 20549-6009. Information about the
public reference room may be obtained by calling 1-800-SEC-0330. You can get
the same reports and information free from the Commission's Internet
web site--http://www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(Investment Company Act file no. 811-9513)
[SALOMON BROTHERS ASSET MANAGEMENT LOGO]
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
SBISPRO 10/99
<PAGE>
October , 1999
STATEMENT OF ADDITIONAL INFORMATION
SSBCITI FUNDS INC.
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
877-552-5420
SSBCiti Funds Inc. (the 'Company') consists of the Humane Equity Fund (the
'Fund'). The Fund is an investment portfolio of the Company, an open-end
investment company incorporated in Maryland on July 27, 1999.
The Fund is classified as a diversified fund under the Investment Company Act of
1940, as amended (the '1940 Act').
The Prospectus indicates the extent to which the Fund may purchase the
instruments or engage in the investment activities described below. References
herein to the investment manager means Salomon Brothers Asset Management Inc
('SBAM').
This Statement of Additional Information ('SAI') is not a prospectus and is
authorized for distribution only when preceded or accompanied by the Company's
current Prospectus, dated October , 1999. This SAI supplements and should be
read in conjunction with the Prospectus, a copy of which may be obtained without
charge by writing the Company at the address, or by calling the toll-free
telephone number, listed above.
CONTENTS
<TABLE>
<S> <C>
Directors and Executive Officers of the Company............. 2
Investment Objectives and Investment Policies............... 3
Risk Factors................................................
Investment Restrictions..................................... 22
Portfolio Turnover.......................................... 23
Portfolio Transactions...................................... 23
Taxes....................................................... 24
Performance Data............................................ 25
Net Asset Value............................................. 26
Additional Redemption Information........................... 27
Investment Manager.......................................... 27
Administrator............................................... 28
Distributor................................................. 29
Expenses.................................................... 29
Custodian and Transfer Agent................................ 29
Independent Accountants..................................... 30
Counsel..................................................... 30
Capital Stock............................................... 30
Financial Statements........................................
Appendix -- Ratings of Debt Obligations.....................
</TABLE>
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services to the
Fund, including agreements with the Company's distributor, administrator,
investment manager, custodian and transfer agent. The day-to-day operations of
the Company are delegated to the Company's investment manager.
The directors and executive officers of the Company are listed below. The
address of each, unless otherwise indicated, is Seven World Trade Center, New
York, New York 10048. Certain of the directors and officers are also directors
and officers of one or more other investment companies for which SBAM, the
funds' investment manager, acts as investment adviser. 'Interested persons' of
the Company (as defined in the 1940 Act) are indicated by an asterisk.
SERIES FUNDS
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held Principal Occupation(s) Past 5 Years
- --------------------- ------------- -------------------------------------
<S> <C> <C>
Andrew L. Breech ................. Director and President of Dealer Operating Control
2120 Wilshire Boulevard Chairman, Proxy Service, Inc.
Suite 400 Committee
Santa Monica, CA 90403
Age: 46
William R. Dill .................. Director and President, Boston Architectural Center;
25 Birch Lane Member of formerly, President, Anna Maria College;
Cumberland Foreside, ME 04110 Nominating Consultant.
Age: 68 Committee
Clifford M. Kirtland, Jr. ........ Director and Member of Advisory Committee, Noro-
9 North Parkway Square Member of the Moseley Partners. Formerly, Director of
4200 Northside Pkwy, N.W. Proxy Committee Oxford Industries, Shaw Industries, Inc.
Atlanta, GA 30327 and Graphic Industries, Inc. Formerly,
Age: 75 Chairman and President of Cox
Communications Inc.
Robert W. Lawless ................ Director and President and Chief Executive Officer,
2877 East 35th Street Member of Proxy University of Tulsa. Formerly, President
Tulsa, OK 74105 Committee and Chief Executive Officer of Texas Tech
Age: 62 University and Texas Tech University
Health Sciences Center.
Carol L. Colman .................. Director and President of Colman Consulting Co., Inc.
Colman Consulting Co., Inc. Audit Committee
278 Hawley Road Member
North Salem, NY 10560
Age: 53
Heath B. McLendon* ............... Director, Managing Director, Salomon Smith Barney,
Age: 64 Chairman and Inc.; President and Director, SSBCiti Fund
President Management LLC and Travelers Investment
Adviser, Inc.; Chairman of Smith Barney
Strategy Advisers Inc.
Paul G. Irwin* ................... Director Chairman of The Humane Society of the
700 Professional Drive United States of America.
Gaithersburg, MD 20879
Age:
Lewis E. Daidone ................. Executive Vice Managing Director of Salomon Smith Barney.
Age: 40 President and
Treasurer
Charles P. Graves ................ Executive Vice Managing Director of Salomon Smith Barney.
Age: 36 President
Christina T. Sydor ............... Secretary Managing Director of Salomon Smith Barney;
Age: 46 General Counsel and Secretary of SSBCiti
Fund Management LLC and Travelers
Investment Adviser, Inc.
</TABLE>
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DIRECTORS COMPENSATION
It is estimated that each Director of the Company, except those deemed
'interested persons' under the 1940 Act will receive $2,500 per year plus $125
for each meeting attended as compensation for serving as director. The Company
does not provide any pension or retirement benefits to directors. No
remuneration will be paid by the Company to Directors who are employees of SBAM
or its affiliates, and may therefore be considered interested persons under the
1940 Act.
As of the date hereof directors and officers of the Company, individually and as
a group, beneficially owned less than 1% of the outstanding shares of the Fund.
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES
The Fund seeks long-term growth of capital. The Fund follows a policy of
investing in companies that meet a screening process founded upon the humane
treatment of animals as such treatment is defined and expounded by The Humane
Society of the United States ('animal friendly investing').
The Fund will seek to achieve its objective by investing primarily in common
stocks and other equity securities of U.S. companies. The Fund may also invest
up to 25% of its assets in securities of foreign issuers. The Fund may also
employ, among others, one or more of the strategies set forth below.
EQUITY SECURITIES
COMMON STOCK. Common stock is an interest in a company, limited liability
company, or similar entity that entitles the holder to a share in the profits of
the company, in the form of dividends, and the proceeds from a sale or
liquidation of the company. The interests of common shareholders are the most
junior in a corporate structure. This means that in the event of the bankruptcy
of the company its creditors and any holders of a preferred class of equity
securities are paid before the common stockholders are entitled to receive
anything. However, any assets of the company in excess of amounts owed to
creditors or preferred shareholders are shared pro-rata among the common
stockholders. Common stockholders normally have voting control of the company
and are entitled to vote on the election of directors and certain fundamental
corporate actions.
PREFERRED STOCK. Preferred stocks are equity securities, but they have many
characteristics of fixed income securities. Their similarities to fixed income
securities generally cause preferred stocks to trade more like debt instruments
than common stocks. Thus, the value of preferred stocks reflects the credit risk
of the company and the dividend yield on the preferred stocks compared to
prevailing interest rates. Preferred shares are entitled to receive dividends
before any dividend is paid to the holders of common stock. The dividend may be
at a fixed or variable dividend payment rate, may be payable on fixed dates or
at times determined by the company and may be payable in cash, additional shares
of preferred stock or other securities. Many preferred stocks are redeemable at
the option of the company after a certain date. Holders of preferred stock are
also entitled to receive a payment upon the sale or liquidation of a company
before any payment is made to the company's common stockholders. However,
preferred stock is an equity security and, therefore, is junior in priority of
payment in the event of a bankruptcy to the company's creditors, including
holders of the company's debt securities. This junior ranking to creditors makes
preferred stock riskier in some respects than fixed income securities.
CONVERTIBLE SECURITIES. Convertible securities are preferred stocks or fixed
income securities that are convertible at the option of the holder, or in some
circumstances at the option of the issuing company, at a stated exchange rate or
formula into the company's common stock or other equity securities. At the time
a company sells the convertible securities, the conversion price is normally
higher than the market price of the common stock. A holder of convertible
securities will generally receive interest or dividends at a rate lower than
comparable debt securities, but the holder has the potential for additional gain
if the market value of the common stock exceeds the conversion price. When the
market price of the common stock is below the conversion price, convertible
securities tend to trade like fixed income securities. If the market price of
the common stock is higher than the conversion price, convertible securities
tend to trade like the common
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stock. Convertible securities rank senior to common stocks in an issuer's
capital structure and consequently may be of higher quality and entail less risk
than the issuer's common stock.
WARRANTS AND STOCK PURCHASE RIGHTS. Warrants and stock purchase rights are
securities permitting, but not obligating, their holder to purchase other
securities, normally the issuer's common stock. Stock purchase rights are
frequently issued as a dividend to a company's stockholders and represent the
right to purchase a fixed number of shares at a fixed or formula price. The
price may reflect a discount to the market price. Warrants are generally sold by
a company or issuer together with fixed income securities and represent the
right to a fixed number of shares of common stock or other securities at a fixed
or formula price. The exercise price is normally higher than the market price at
the time the company sells the warrant.
Warrants and stock purchase rights do not carry with them the right to receive
dividends on or to vote the securities that they entitle their holders to
purchase. They also do not entitle the holder to share in the assets of the
company in a liquidation. The rights to purchase common stock or other
securities conferred by a warrant or stock purchase right can only be exercised
on specific dates or for a specific period. Trading in these instruments is
affected both by the relationship of the exercise price to the current market
price of the common stock or other securities and also by the period remaining
until the right or warrant expires. An investment in warrants and stock purchase
rights may be considered more speculative than other types of equity
investments. A warrant or stock purchase right expires worthless if it is not
exercised on or prior to its expiration date.
REAL ESTATE INVESTMENT TRUSTS (REITS). REITs are pooled investment vehicles that
invest primarily in income producing real estate or real estate related loans or
interests. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest most of their
assets directly in real property and derive income primarily from the collection
of rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest most of their assets in real
estate mortgages and derive income primarily from the collection of interest
payments. REITs are not taxed on income distributed to shareholders if they
comply with the applicable requirements of the Internal Revenue Code of 1986, as
amended (the 'Code'). The Fund will indirectly bear its proportionate share of
any management and other expenses paid by REITs in which it invests in addition
to the expenses paid by the fund.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by changes in interest rates and the
ability of the issuers of its portfolio mortgages to prepay their obligations.
REITs are dependent upon the skills of the REITs' managers and are not
diversified. REITs are generally dependent upon maintaining cash flow to repay
borrowings and to make distributions to shareholders and are subject to the risk
of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with that industry.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans, yields on a
REIT's investments in such loans will gradually align themselves to reflect
changes in market interest rates. This causes the value of these investments to
fluctuate less dramatically in response to interest rate fluctuations than would
investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently and in a
limited volume and may be subject to more abrupt or erratic price movements than
larger company securities. Historically, REITs have been more volatile in price
than the larger capitalization stocks included in the S&P 500.
OTHER INVESTMENT COMPANIES. The Fund may invest in securities of other
investment companies, to the extent permitted by the fund's investment
restrictions and the Investment Company Act of
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<PAGE>
1940. The return on these investments will be reduced by the operating expenses,
including investment advisory and administration fees, of these investment
companies, which are in addition to the Fund's own expenses.
INVESTING IN SMALL AND MEDIUM CAPITALIZATION COMPANIES. Investing in the equity
securities of small and medium capitalization companies involve additional risks
compared to investing in large capitalization companies. Compared to large
companies, these companies may:
Have more limited product lines and capital resources
Have less established markets for their products
Have earnings that are more sensitive to changes in the economy,
competition and technology
Be more dependent upon key members of management.
The market value of the common stock of small and medium capitalization
companies may:
Be more volatile, particularly in response to company announcements or
industry events
Have less active trading markets
Be harder to sell at the time and prices that the investment manager
considers appropriate.
INDUSTRY CONCENTRATION. The more the Fund concentrates its investments in the
same industry or group of industries, the more the value of the Fund's portfolio
will be affected by developments related to that industry or group. You should
review the policies under 'Investment Restrictions for the concentration policy
that applies to the Fund.
FIXED INCOME SECURITIES
Although the Fund invests primarily in equity securities, it may, to a limited
extent, from time to time hold and/or invest in any of the fixed income
securities described below.
MATURITY AND DURATION OF FIXED INCOME SECURITIES. Unless otherwise indicated,
the Fund may invest in individual fixed income securities of any maturity or
duration. Maturity means the date at which a fixed rate security is due and
payable, the next interest rate reset date for a short-term floating or variable
rate security or the period until principal on a long-term floating or variable
rate security can be recovered by exercising a demand feature. Duration means
the weighted-average term to maturity of a fixed income security's cash flows,
based on their present values. Duration is a measure of the expected volatility
of a debt security that was developed as a more precise alternative to the
concept of 'term to maturity.' Duration incorporates a debt security's yield,
coupon interest payments, final maturity and call features into one measure.
Traditionally, a debt security's term to maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates. However,
term to maturity measures only the time the final payment on a debt security is
due and does not take into account the pattern of payments of interest or
principal prior to maturity. Duration measures the interval between the present
and the time when the interest and principal payments are scheduled to be
received (or in the case of a callable bond, expected to be received), weighing
them by the present value of the cash to be received at each future point in
time. In general, the lower the coupon rate of interest, the longer the maturity
or the lower the yield-to-maturity of a debt security, the longer its duration;
conversely, the higher the coupon rate of interest, the shorter the maturity or
the higher the yield-to-maturity of a debt security, the shorter its duration. A
standard duration calculation may not always properly reflect the interest rate
exposure of a security. In these situations, the manager may use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
CREDIT RATINGS. The credit quality of debt securities in which the Fund invests
may be rated by one or more nationally recognized statistical rating
organizations. These ratings reflect the perceived creditworthiness of the
issuer of a debt security. In general, debt securities with higher ratings will
have less market volatility than those with lower ratings. An upgrade in a
security's credit rating generally will have a positive impact, and a credit
rating downgrade generally will have a negative impact, on the market value of
the security. Debt securities with the same
5
<PAGE>
maturity, coupon and rating may be priced differently by the market, while debt
securities with the same maturity and coupon but different ratings may have
identical prices.
Credit ratings represent the opinions of rating organizations as to the quality
of the securities which they rate. These ratings are subjective and are not
absolute standards of quality.
INVESTMENT GRADE SECURITIES. Fixed income securities are considered 'investment
grade if they are:
rated BBB or higher by Standard & Poor's Ratings Group (S&P);
rated Baa or higher by Moody's Investors Service, Inc. (Moody's);
rated an equivalent rating by any other nationally recognized statistical
rating organization; or,
if unrated, judged by the manager to be of equivalent credit quality.
Fixed income securities rated BBB by S&P or Baa by Moody's generally are
regarded as having adequate capacity to pay interest and repay principal, but
may have some speculative characteristics. Adverse economic conditions or
changing circumstances may weaken the issuer's ability to pay interest and repay
principal. If the rating of an investment grade debt security falls below
investment grade, the investment manager will consider whether or not to dispose
of the security, consistent with the fund's investment objective and policies.
BELOW INVESTMENT GRADE SECURITIES. Below investment grade securities are
commonly known as 'high yield bonds' or 'junk bonds.' These securities may have
speculative characteristics, including the possibility of default or bankruptcy
of the issuers of these securities, market price volatility based upon interest
rate sensitivity and relative illiquidity in the secondary trading market.
Businesses and projects financed through the issuance of below investment grade
bonds are often highly leveraged. The issuer's ability to service its debt
obligations may be adversely affected by an economic downturn, a period of
rising interest rates, the issuer's inability to meet projected revenue
forecasts or a lack of needed additional financing. Therefore, an economic
downturn could disrupt the market for below investment grade securities and
adversely affect the value of outstanding securities and the ability of the
issuer to repay principal and interest.
In a declining interest rate market, issuers of below investment grade
securities may exercise redemption or call provisions, which may force the Fund
to replace those securities with lower yielding securities. This could result in
a decreased return. The market for below investment grade bonds tends to be
concentrated among a smaller number of dealers and may be less liquid than the
market for investment grade bonds.
CORPORATE DEBT OBLIGATIONS. Corporate debt obligations are fixed income
securities issued by financial institutions, corporations, trusts, partnerships
and other companies. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and also may be subject to price volatility due to factors such as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
COMMERCIAL PAPER. Commercial paper (including variable amount master demand
notes and funding agreements) consists of short-term, unsecured promissory notes
issued by corporations, partnerships, trusts, municipalities and other entities
to finance their short-term credit needs.
COMMERCIAL BANK OBLIGATIONS. Commercial bank obligations include certificates of
deposit, time deposits, bankers' acceptances and other instruments issued by
commercial banks. Certificates of deposit are negotiable obligations of
commercial banks. Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated interest rates.
Bankers' acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international transactions. Commercial bank
obligations are subject to risk of loss in the case of default or insolvency of
the bank issuing the obligation. Banks organized under federal law (and most
banks organized under state law) are subject to federal examination and to a
substantial body of federal law and regulation. Accordingly, commercial bank
obligations, especially those subordinated to the interests of bank depositors,
may be subject to heightened risk of default in the event of regulatory
intervention.
Commercial bank obligations include obligations of foreign branches of U.S.
banks and of foreign banks, and may be general obligations of the parent bank in
addition to the issuing bank. These
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obligations may be limited by their terms and by government regulation. As with
foreign securities in general, the obligations of foreign branches of U.S. banks
and of foreign banks may involve risks that are different from those of
investments in obligations of domestic banks. [Although the fund[s] typically
will acquire obligations issued and supported by the credit of U.S. or foreign
banks having total assets at the time of purchase in excess of U.S. $1 billion
(or the equivalent thereof), this U.S. $1 billion minimum is not a fundamental
investment policy or restriction of the fund[s]. For purposes of calculating
compliance with the U.S. $1 billion minimum, the assets of a bank will be deemed
to include the assets of its U.S. and foreign branches.]
U.S. GOVERNMENT SECURITIES. U.S. government securities include: bills,
certificates of indebtedness, notes, bonds, mortgage-backed securities and other
debt obligations issued by the U.S. Treasury or by agencies or instrumentalities
of the U.S. government. These agencies and instrumentalities include the Central
Bank for Cooperatives, District of Columbia Armory Board, Export-Import Bank,
Farmers Home Administration, Federal Farm Credit Banks, Federal Financing Bank,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (FHLMC), Federal
Housing Administration, Federal National Mortgage Association (FNMA), General
Services Administration, Government National Mortgage Association (GNMA),
Maritime Administration, Resolution Trust Corporation, Small Business
Administration, Student Loan Marketing Association, Tennessee Valley Authority
and various institutions that previously were or currently are part of the Farm
Credit System (which has been undergoing reorganization since 1987).
U.S. Treasury bills, notes and bonds differ only in their interest rates,
maturities and times of issuance. Treasury securities and some other U.S.
government securities are supported by the full faith and credit of the United
States. Others are supported by:
the right of the issuer to borrow from the U.S. Treasury, such as
securities of the Federal Home Loan Banks;
the discretionary authority of the U.S. Government to purchase the
agency's obligations, such as securities of FNMA; or
only the credit of the issuer, such as securities of the Student Loan
Marketing Association.
There is no guarantee that the U.S. government will provide financial support in
the future to U.S. government agencies, authorities or instrumentalities that
are not supported by the full faith and credit of the United States.
U.S. government securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity. Zero
coupon U.S. government securities include STRIPS and CUBES, which are issued by
the U.S. Treasury as component parts of U.S. Treasury bonds and represent
scheduled interest and principal payments on the bonds.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are either issued by U.S.
government agencies or instrumentalities or, if privately issued, collateralized
by mortgages that are insured, guaranteed or otherwise backed by the U.S.
government or its agencies or instrumentalities. These agencies and
instrumentalities include GNMA, FNMA and FHLMC. Privately-issued mortgage
securities are typically issued by private originators of, or investors in,
mortgage loans, including mortgage bankers, commercial banks, investment banks,
savings and loan associations and special purpose subsidiaries of the above
institutions.
Mortgage-backed securities represent participation interests in pools of
adjustable and fixed rate mortgage loans. Unlike conventional debt obligations,
mortgage-backed securities provide monthly payments derived from the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans.
The mortgage loans underlying mortgage-backed securities are generally subject
to a greater rate of principal prepayments in a declining interest rate
environment and to a lesser rate of principal prepayments in an increasing
interest rate environment. Faster or slower than expected prepayments may reduce
the value of mortgage-backed securities in a fund's portfolio. Therefore, under
certain interest and prepayment rate scenarios, a fund may fail to recover the
full amount of its investment in mortgage-backed securities, notwithstanding any
direct or indirect governmental or agency guarantee.
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Since faster than expected prepayments must usually be invested in lower
yielding securities, mortgage-backed securities are less effective than
conventional bonds at 'locking in' a specified interest rate. Conversely, in a
rising interest rate environment, a declining prepayment rate will extend the
average life of many mortgage-backed securities. This possibility is often
referred to as extension risk. Extending the average life of a mortgage-backed
security increases the risk of depreciation due to future increases in market
interest rates.
The Fund's investments in mortgage-backed securities may include conventional
mortgage passthrough securities, stripped mortgage-backed securities (SMBS) and
certain classes of multiple class collateralized mortgage obligations (CMOs).
Examples of SMBS include interest only and principal only securities. Senior CMO
classes will typically have priority over residual CMO classes as to the receipt
of principal and/or interest payments on the underlying mortgages.
The CMO classes in which the Fund may invest include sequential and parallel pay
CMOs, including planned amortization class (PAC) and target amortization class
(TAC) securities. The Fund may also invest in the floating rate mortgage-backed
securities listed under 'Structured Mortgage-Backed Securities.'
Structured Mortgage-Backed Securities. The Fund may invest in structured
mortgage-backed securities. The interest rate or, in some cases, the principal
payable at the maturity of a structured security may change positively or
inversely in relation to one or more interest rates, financial indices or other
financial indicators ('reference prices'). A structured security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on a structured security is a multiple of the change in the
reference price. Thus, structured securities may decline in value due to adverse
market changes in reference prices.
The structured securities purchased by the Fud may include interest only (IO)
and principal only (PO) securities, floating rate securities linked to the Cost
of Funds Index (COFI floaters), other 'lagging rate' floating rate securities,
floating rate securities that are subject to a maximum interest rate ('capped
floaters'), leveraged floating rate securities ('super floaters'), leveraged
inverse floating rate securities ('inverse floaters'), leveraged or super IOs
and POs, inverse IOs, dual index floaters and range floaters.
Risks of Mortgage-Backed Securities. Many mortgage-backed and structured
securities are considered to be derivative instruments. Different types of
derivative securities are subject to different combinations of prepayment,
extension, interest rate and/or other market risks. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. PACs, TACs and other senior classes of
sequential and parallel pay CMOs involve less exposure to prepayment, extension
and interest rate risk than other mortgage-backed securities, provided that
prepayment rates remain within expected prepayment ranges or 'collars.'
The risk of early prepayments is the primary risk associated with mortgage IOs,
super floaters and other leveraged floating rate mortgage-backed securities. The
primary risks associated with COFI floaters, other 'lagging rate' floaters,
capped floaters, inverse floaters, POs and leveraged inverse IOs are the
potential extension of average life and/or depreciation due to rising interest
rates. The residual classes of CMOs are subject to both prepayment and extension
risk.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates.
In addition to the interest rate, prepayment and extension risks described
above, the risks associated with transactions in these securities may include:
(1) leverage and volatility risk and (2) liquidity and valuation risk.
Derivative securities may sometimes increase or leverage the Fund's exposure to
a particular market risk. Leverage enhances the price volatility of derivative
securities held by the Fund.
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Some derivative securities are not readily marketable or may become illiquid
under adverse market conditions. For thinly traded derivative securities, the
only source of price quotations may be the selling dealer.
ASSET-BACKED SECURITIES. Asset-backed securities may be structured as undivided
fractional ownership interests in an underlying pool of assets or as debt
instruments issued by a special purpose entity organized solely for the purpose
of owning these assets and issuing such debt. Examples of assets used to back
asset-backed securities include motor vehicle installment sales contracts,
installment loans secured by motor vehicles, receivables representing amounts
owed by businesses to vendors or other trade creditors and receivables from
revolving credit (credit card) agreements.
Asset-backed securities present certain risks. Some asset-backed securities may
be subject to the prepayment and extension risks described under
'Mortgage-Backed Securities.' 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.
Trade receivables may also be unsecured.
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 these receivables. Therefore, it is possible that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
Other types of asset-backed securities will be subject to the risks associated
with the underlying assets. If a letter of credit or other form of credit
enhancement is exhausted or otherwise unavailable, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying assets are not realized.
LOAN PARTICIPATION INTERESTS AND OTHER DIRECT DEBT INSTRUMENTS. The Fund may
purchase interests in debts owed by a corporate, governmental, or other borrower
to another party. These interests may represent amounts owed to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments involve the risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the fund in the event of fraud
or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. Direct debt
instruments may also include standby financing commitments that obligate the
Fund to supply additional cash to the borrower on demand. Certain direct debt
instruments may be subject to the Fund's limitation on investments in illiquid
securities.
PAYMENT-IN-KIND SECURITIES, DELAYED INTEREST AND ZERO COUPON BONDS.
Payment-in-kind, delayed interest and zero coupon bonds are securities issued at
a discount from their face value because interest payments are typically
postponed until maturity. The amount of the discount varies depending on factors
including the time remaining until maturity, prevailing interest rates, the
security's liquidity and the issuer's credit quality. These securities also may
take the form of debt securities that have been stripped of their interest
payments. A portion of the discount with respect to stripped tax-exempt
securities or their coupons may be taxable. The market prices in
payment-in-kind, delayed interest and zero coupon bonds generally are more
volatile and sensitive to interest rate changes than the market prices of
interest-bearing securities having similar maturities and credit quality. The
Fund's investments in payment-in-kind, delayed interest and zero coupon bonds
may require the fund to sell portfolio securities to generate sufficient cash to
satisfy certain income distribution requirements.
FLOATING AND VARIABLE RATE INCOME SECURITIES. Floating and variable rate
securities and other similar securities pay interest at a rate that fluctuates
based on changes in market rates. The interest rates payable on variable rate
securities are adjusted at designated intervals (e.g., daily,
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weekly, monthly, quarterly, semi-annually). The interest rates payable on
floating rate securities are adjusted whenever there is a change in a designated
benchmark interest rate or index. The value of floating and variable rate
securities generally is more stable than that of fixed rate securities in
response to interest rate changes. The Fund may consider the maturity of a
variable or floating rate security to be shorter than its final stated maturity.
STRUCTURED OR HYBRID NOTES. The amount of interest and/or principal payable on a
structured or hybrid note is based on the performance of a benchmark asset or
market index. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the fund may experience if the market does not perform as
expected. Depending on the terms of the note, the Fund may forego all or part of
the interest and principal that would be payable on a comparable conventional
fixed income security. The Fund's loss cannot exceed the amount of this foregone
interest and/or principal.
In addition to the risks associated with a direct investment in the benchmark
asset, investments in structured and hybrid notes involve the risk that the
issuer or counterparty to the obligation will fail to perform its contractual
obligations. Certain structured or hybrid notes also may be leveraged, in that
any change in the interest rate or principal payable on the benchmark asset may
be set as a multiple of changes in the benchmark price or level. Leverage
enhances the price volatility of the security and, therefore, the volatility of
the Fund's net asset value per share. Further, certain structured or hybrid
notes may be illiquid for purposes of the Fund's limitation on investments in
illiquid securities.
FOREIGN SECURITIES
FOREIGN CURRENCY DENOMINATED SECURITIES. For purposes of the Fund's percentage
limitation on investments in foreign securities, 'foreign securities' means all
securities denominated in a foreign currency. As described below, the Fund also
may invest in U.S. dollar denominated securities of foreign issuers that involve
many of the same risks as the foreign securities in which the Fund may invest.
Depositary Receipts. American Depositary Receipts (ADRs), Global Depositary
Receipts (GDRs) and other similar instruments represent an indirect ownership
interest in other securities, normally the common stock of a foreign issuer.
Depositary receipts may be a more convenient way to own foreign securities
because the holder does not need to convert between U.S. dollars and foreign
currency in connection with settlement of transactions or dividend payments and
does not need to settle transactions in the local markets. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and GDRs and
other similar global instruments in bearer form are designed for use in foreign
securities markets.
ADRs are quoted in U.S. dollars and represent an interest in the right to
receive securities of foreign issuers deposited in a U.S. bank or a
corresponding bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers. However, by investing in ADRs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales. GDRs are not
necessarily quoted in the same currency as the securities for which they may be
exchanged. Since depositary receipts are obligations of the issuing bank,
depositary receipts involve risk of loss or delay in obtaining the underlying
securities in the event of a bankruptcy or liquidation of the issuing bank.
Unsponsored ADRs and depositary receipts also involve the risk that the Fund or
its custodian will not be able to receive timely information about corporate
actions or other events affecting the company that issued the underlying
securities.
DEBT OBLIGATIONS OF FOREIGN GOVERNMENTS. An investment in debt obligations of
foreign governments and their political subdivisions (sovereign debt) involves
special risks that are not present in corporate debt obligations. The foreign
issuer of the sovereign debt or the foreign governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due, and the Fund may have limited legal recourse in the event
of a default. During periods of economic uncertainty, the market prices of
sovereign debt may be
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more volatile than market prices of debt obligations of U.S. issuers. In the
past, certain foreign countries have encountered difficulties in making their
debt payments and declared moratoria on the payment of principal and interest on
their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of its debt payment burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from other foreign governments, multilateral agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
BRADY BONDS. Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan. The Brady Plan is an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989
as a mechanism for debtor nations to restructure their outstanding external
indebtedness to commercial banks. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank lenders
as well as multilateral institutions such as the International Bank for
Reconstruction and Development (also known as the 'World Bank) and the
International Monetary Fund. The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly issued
bonds, known as Brady Bonds. Brady Bonds may also be issued in respect of new
money being advanced by existing lenders in connection with the debt
restructuring.
Brady Bonds do not have a long payment history. They are subject to the credit
and other risks associated with investing in below investment grade debt
securities, debt securities of foreign governments and emerging market
countries.
EURODOLLAR INSTRUMENTS AND YANKEE BONDS. Eurodollar instruments are bonds of
corporate and government issuers that pay interest and principal in U.S. dollars
but are issued in markets outside the United States, primarily in Europe. Yankee
bonds are bonds of foreign governments and their agencies and foreign banks and
corporations that pay interest in U.S. dollars and are typically issued in the
U.S. The Fund may also invest in Eurodollar Certificates of Deposit (ECDs),
Eurodollar Time Deposits (ETDs) and Yankee Certificates of Deposit (Yankee CDs).
ECDs are U.S. dollar-denominated certificates of deposit issued by foreign
branches of domestic banks; ETDs are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or in a foreign bank; and Yankee CDs are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the U.S.
RISKS OF FOREIGN INVESTMENTS. Foreign investments involve considerations and
risks not typically associated with investing in the securities of U.S. issuers.
These risks are greater for investments in countries with emerging markets and
economies. The risks of investing in securities of foreign issuers or issuers
with significant exposure to foreign markets may be related, among other things,
to:
differences in size, liquidity and volatility of, and the degree and
manner of regulation of, the securities markets of certain foreign markets
compared to the securities markets in the U.S.;
economic, political and social factors; and
foreign exchange matters, such as restrictions on the repatriation of
capital, fluctuations in exchange rates between the U.S. dollar and the
currencies in which the Fund's portfolio securities are quoted or
denominated, exchange control regulations and costs associated with
currency exchange.
The political and economic structures in certain foreign countries, particularly
emerging markets, are expected to undergo significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. Unanticipated
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political or social developments may adversely affect the values of the Fund's
investments in these countries.
Economies in individual foreign countries may differ favorably or unfavorably
from the U.S. economy in growth of gross domestic product, rates of inflation,
currency valuation, capital reinvestment, resource self-sufficiency and balance
of payments positions. Many foreign countries have experienced substantial, and
in some cases extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries.
There may be less publicly available information about foreign markets and
issuers than is available with respect to U.S. securities and issuers. Foreign
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
The trading markets for many foreign securities are less liquid and subject to
greater price volatility than the markets for comparable securities in the U.S.
Even the markets for relatively widely traded securities in certain foreign
markets may not be able to absorb, without price disruptions, a significant
increase in trading volume or trades of a size customarily undertaken by
institutional investors in the U.S. Additionally, market making and arbitrage
activities are generally less extensive in such markets, which may contribute to
increased volatility and reduced liquidity. The less liquid a market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to dispose of its securities at the times determined by the manager to be
appropriate. The risks associated with reduced liquidity may be particularly
acute when the fund's operations require cash, such as in order to meet
redemptions and to pay its expenses.
In addition, foreign securities markets have settlement and clearance procedures
that differ from those in the U.S. In certain markets, settlements have at times
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct these transactions. The inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security caused by settlement problems either could result in losses to the Fund
due to a subsequent decline in value of the portfolio security or could result
in possible liability to the Fund. In addition, security settlement and
clearance procedures in some foreign countries may not fully protect the Fund
against the loss or theft of its assets.
Investing in certain foreign countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In
the event that expropriation, nationalization or other confiscation occurs, the
Fund could lose its entire investment in that country.
CURRENCY RISKS. The value of the securities quoted or denominated in
international currencies may be adversely affected by fluctuations in relative
currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are quoted or denominated. In general, the
Fund's investment performance may be affected, either positively or negatively,
by currency exchange rates because the U.S. dollar value of securities quoted or
denominated in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. Exchange rates are
generally affected by the forces of supply and demand in the international
currency markets, the relative merits of investing in different countries and
the degree of intervention by U.S. or foreign governments and central banks in
the currency markets.
CUSTODIAN SERVICES AND RELATED INVESTMENT COSTS. Custodial and similar services
needed to invest in international securities markets generally are more
expensive than in the U.S.
WITHHOLDING AND OTHER TAXES. The Fund will be subject to taxes, including
withholding taxes, on income (possibly including, in some cases, capital gains)
that are or may be imposed by certain foreign countries with respect to the
fund's investments in such countries. These taxes will reduce the return
achieved by the Fund. Treaties between the U.S. and such countries may not be
available to reduce the otherwise applicable tax rates.
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ECONOMIC AND MONETARY UNION (EMU). EMU occurred on January 1, 1999, when 11
European countries adopted a single currency -- the euro. For participating
countries, EMU means sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing. Budgetary decisions
remain in the hands of each participating country, but are now subject to each
country's commitment to avoid 'excessive deficits' and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the euro zone.
EMU is driven by the expectation of a number of economic benefits, including
lower transaction costs, reduced exchange risk, greater competition, and a
broadening and deepening of European financial markets. However, there are
several significant risks associated with EMU. Monetary and economic union on
this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets and may adversely affect the prices of securities
of European issuers in the Fund's portfolio.
INVESTING IN EMERGING MARKETS. Investing in securities of issuers in emerging
markets involves exposure to significantly higher risks than investing in
foreign countries with developed markets. Certain emerging market countries may
be subject to a greater degree of economic, political and social instability
than is present in the U.S. and Western European countries. This instability may
result from, among other things:
authoritarian governments or military involvement in political and
economic decision making;
popular unrest associated with demands for improved economic, political
and social conditions;
internal insurgencies;
hostile relations with neighboring countries; and
ethnic, religious and racial disaffection and conflict.
Such economic, political and social instability could significantly disrupt the
financial markets in such countries and the ability of the issuers in those
countries to repay their obligations.
There is also a greater risk of expropriation, nationalization or other
confiscation of assets and property in emerging market countries. Certain
emerging market countries restrict or control investment in their securities
markets. These restrictions may limit the Fund's ability to invest in those
markets and may increase the expenses of the Fund. In addition, the repatriation
of both investment income and capital from certain emerging market countries is
subject to restrictions such as the need for governmental consents. These
restrictions may affect the market price, liquidity and rights of securities
held by the Fund. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may adversely affect the Fund's
operations.
In addition, existing laws and regulations are often inconsistently applied. As
legal systems in emerging market countries develop, foreign investors may be
adversely affected by new or amended laws and regulations. Even where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
Economies in emerging market countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been, and may
continue to be, affected adversely by economic conditions in the countries with
which they trade. Settlement procedures in emerging market countries are less
developed and reliable than those in the United States and in other developed
markets. Significant delays are common in registering transfers of securities,
and the Fund may be unable to sell these securities until the registration
process is completed and may experience delays in receipt of dividends and other
entitlements. There is also less government supervision and regulation of
foreign securities exchanges, brokers and listed companies in emerging market
countries than exists in the United States and other developed foreign markets.
Brokers in emerging market countries may not be as well capitalized as those in
the United States, and are more susceptible to financial failure in times of
market, political or economic stress.
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LENDING AND BORROWING TRANSACTIONS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are arrangements under which the Fund
purchases securities and the seller agrees to repurchase the securities within a
specific time and at a specific price. The repurchase price is generally higher
than the fund's purchase price, with the difference being income to the fund.
The counterparty's obligations under the repurchase agreement are collateralized
with U.S. government securities with a market value of not less than 100% of the
counterparty's obligations, valued daily. Collateral is held by the Fund's
custodian for the benefit of the Fund.
Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. If bankruptcy or insolvency proceedings
are commenced with respect to the counterparty before repurchase of the security
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the security. If the court characterizes the
transaction as a loan and the Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured creditor,
the Fund would be at risk of losing some or all of the principal and interest
involved in the transaction.
To minimize the risk of counterparty default, the investment manager reviews and
monitors the creditworthiness of any institution which enters into a repurchase
agreement with the Fund.
PORTFOLIO SECURITIES LOANS. The Fund may lend portfolio securities to
unaffiliated brokers, dealers and financial institutions, provided that the
borrower must deposit with the Fund collateral, in the form of cash, equal to at
least 100% of the market value of the loaned securities, marked to market daily.
While the securities are on loan, the borrower must pay the Fund any income
accruing thereon. The borrower also compensates the Fund by paying a loan fee or
by allowing the Fund to retain any income earned on the investment of the cash
collateral in portfolio securities. Although investment of the collateral may
increase the Fund's potential return, it will also increase the Fund's potential
for loss.
The Fund normally will lend securities subject to termination by the Fund in the
normal settlement time or by the borrower on one day's notice. The borrower must
return the securities, and the Fund must return the collateral, when the loan is
terminated. Any gain or loss in the market price of the borrowed securities that
occurs during the term of the loan is borne by the Fund and its shareholders,
except that gains cannot be realized if the borrower defaults on its obligation
to return the borrowed securities. The Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan of securities.
SHORT SALES 'AGAINST THE BOX'. The Fund may from time to time make short sales
against the box. In a short sale, the Fund borrows from a broker or bank
securities identical to those being sold and delivers the borrowed securities to
the buying party. The Fund is said to have a short position in the securities
sold until it replaces the borrowed securities, at which time it receives the
proceeds of the sale. A short sale is 'against the box' if the Fund owns or has
the right to acquire at no added cost securities identical to those sold short.
LEVERAGE. The Fund may engage in 'leverage' by entering into reverse repurchase
agreements or by borrowing from banks, on a secured or unsecured basis and using
the proceeds of the borrowings to make additional investments. Leverage, which
involves interest costs to the Fund, creates an opportunity for increased
returns, but also creates a risk of greater losses. The Fund's use of leverage
to make additional investments for its portfolio will improve the fund's
performance only if the amount of income and appreciation from these additional
investments exceeds the Fund's leverage-related costs. These investments will
reduce the Fund's performance if the Fund's leverage-related costs exceed the
amount of the income and appreciation from the securities. If these investments
lose value, the resulting losses to the Fund will be greater than if the Fund
did not use leverage because the Fund will be obligated to repay principal and
interest on the borrowed money in addition to having investment losses. Further,
the Fund might have to liquidate securities to cover its leverage-related costs
or repay principal. Depending on market or
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other conditions, these liquidations could be disadvantageous to the Fund.
Therefore, leverage may exaggerate changes in the Fund's net asset value or
yield.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are arrangements
under which the Fund sells securities and agrees to repurchase the securities
within a specific time and at a specified price. The repurchase price is
generally higher than the Fund's sale price, with the difference representing
the cost to the Fund of borrowing the cash received on the sale. Reverse
repurchase agreements involve the risk that the market value of the securities
which the Fund is obligated to repurchase may decline below the repurchase price
or that the counterparty may default on its obligation to resell the securities.
Repurchase agreements are considered to be a form of, and are subject to the
Fund's restrictions on, borrowing.
SHORT-TERM BORROWING. The Fund may borrow cash on a short-term basis to
facilitate the settlement of securities transactions or to satisfy redemption
requests. The Fund is limited as to the amount of money it can borrow on a
short-term or temporary basis by its restriction on borrowing. See 'Fundamental
Restrictions'.
DERIVATIVE TRANSACTIONS
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCY. The Fund may purchase
and sell call and put options on any security, securities index or currency that
the Fund may invest in. (The sale of an option is also known as writing an
option.) Options may be listed on U.S. or foreign exchanges or entered into
directly with a broker, dealer or other counterparty. The Fund may enter into
options transactions to seek to increase total return, as a substitute for the
purchase or sale of securities or currency, or to protect against declines in
the value of portfolio securities and against increases in the cost of
securities to be acquired. The Fund may enter into straddles, which involves
combining the writing and purchase of options on the same underlying asset or
index.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. A securities index call or put option written by the Fund
obligates the Fund, upon exercise, to make a cash payment to the holder based on
the increase or decrease in the price of a group of securities or segment of the
securities market. Writing call options may deprive the Fund of the opportunity
to profit from an increase in the market price of the securities or foreign
currency assets in its portfolio. Writing put options may deprive the Fund of
the opportunity to profit from a decrease in the market price of the securities
or foreign currency assets to be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (1) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(2) entering into an offsetting forward commitment and/or (3) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. The Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded option that it
has written by purchasing an identical option. Obligations under an
over-the-counter option may be terminated only by entering into an offsetting
transaction with the counterparty to the option. These purchases are referred to
as 'closing purchase transactions.'
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
('protective puts'), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
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The purchase of a call option entitles the Fund, in return for the premium paid,
to purchase specified securities or currency at a specified price during the
option period. A securities index call purchased by the Fund entitles the Fund,
upon exercise, to receive a cash payment from the other party based on an
increase in the level of the index. The Fund would realize a gain on the
purchase of a call option only if the Fund exercises or sells the option at a
time when the value of the underlying securities or currency subject to the
option exceeds the sum of the exercise price, the premium paid and transaction
costs. If the option expires unexercised, the Fund will lose the premium paid
for the option and any transaction costs.
The purchase of a put option entitles the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. A securities index put option purchased by the Fund entitles the
fund, upon exercise, to receive a cash payment based on a decrease in the level
of the index. The purchase of protective puts is designed to offset or hedge
against a decline in the U.S. dollar market value of the Fund's portfolio
securities. Put options may also be purchased by the Fund for the purpose of
affirmatively benefiting from a decline in the price of securities or currencies
which it does not own. The Fund would realize a gain only if the Fund exercises
or sells the option at a time when the value of the underlying securities or
currency subject to the option declines below the exercise price sufficiently to
cover the premium and transaction costs. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of the Fund's
portfolio securities. If the option expires unexercised, the Fund will lose the
premium paid for the option and any transaction costs.
Yield Curve Options. The Fund may also enter into 'yield curve' options, which
are based on the 'spread,' or yield differential, between two fixed income
securities. In contrast to other types of options, a yield curve option is based
on the difference between the yields of designated securities, rather than the
prices of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it will have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange may include
one or more of the following:
Insufficient trading interest in certain options.
Trading halts, suspensions or other restrictions imposed by an exchange.
Unusual or unforeseen interruptions in the normal operations on an
exchange.
The facilities of an exchange or the Options Clearing Corporation may not
at all times be adequate to handle current trading volume.
An exchange discontinues the trading of options (or a particular class or
series of options).
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which
these options are traded. These limitations govern the maximum number of options
in each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the investment manager. An exchange, board of trade or other trading facility
may order the liquidation of positions found to exceed these limits, and it may
impose certain other sanctions.
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The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options. The investment manager determines the liquidity of
the Fund's over-the-counter options in accordance with guidelines adopted by the
Board. The Fund would lose the benefit of an over-the-counter option if the
counterparty is unable to fulfill its obligations.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the ability of the investment manager to predict future price
fluctuations and, for hedging transactions, the degree of correlation between
the options and securities or currency markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. government securities), securities
indices, currencies and any other financial instruments and indices. All futures
contracts and options on futures entered into by the Fund are traded on U.S. or
foreign exchanges or boards of trade that are licensed, regulated or approved by
the Commodity Futures Trading Commission (CFTC).
Futures Contracts. A futures contract is an agreement between two parties to buy
and sell particular financial instruments or currencies for an agreed price
during a designated month (or to deliver the final cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish the effective
price or rate of return on portfolio securities or securities that the Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. When interest rates are rising or
securities prices are falling, the Fund can seek to offset a decline in the
value of its current portfolio securities through the sale of futures contracts.
When interest rates are falling or securities prices are rising, the Fund,
through the purchase of futures contracts, can attempt to secure better rates or
prices than might later be available in the market when it effects anticipated
purchases. Similarly, the Fund may seek to offset anticipated changes in the
value of a currency in which its portfolio securities, or securities that it
intends to purchase, are quoted or denominated by purchasing and selling futures
contracts on these currencies.
The Fund may, for example, take a 'short' position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities.
These futures contracts may include contracts for the future delivery of
securities held by the Fund or securities with characteristics similar to those
of the Fund's portfolio securities. Similarly, the Fund may sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern of correlation between the two currencies.
If, in the opinion of the investment manager, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into these futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of these futures
contracts, the
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investment manager will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities will be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a 'long' position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option), to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that these closing transactions can be effected. The Fund's
ability to establish and close out positions in these options will be subject to
the development and maintenance of a liquid market.
Regulatory Restrictions. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of the Fund's hedging intent, on 75% or more
of the occasions on which it takes a long futures or option position (involving
the purchase of futures contracts), the Fund must have purchased, or be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for the Fund to do so, a long futures position may
be terminated or an option may expire without the corresponding purchase of
securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions may not exceed 5% of the net
asset value of the Fund's portfolio, after taking into
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account unrealized profits and losses on any such positions and excluding the
amount by which these options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the fund to
maintain a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of these contracts and options. This
account must be adjusted daily to compensate for any decline in the value of the
segregated assets.
Risks. While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail other risks. For example,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and the portfolio position to be hedged, the desired
protection may not be obtained and the Fund may be exposed to risk of loss. In
addition, it is not possible to hedge fully or protect against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of these securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
FORWARD CURRENCY TRANSACTIONS. The Fund may also enter into forward currency
exchange contracts. These contracts provide for the purchase or sale of a
specified currency at a specified settlement date. A forward contract may
provide for the exchange of two foreign currencies or the exchange of the U.S.
dollar for a foreign currency.
The Fund may enter into forward contracts to purchase foreign currencies to
offset an anticipated rise in the U.S. dollar price of securities it intends to
purchase. In addition, the Fund may enter into forward contracts to sell foreign
currencies to protect against a decline in the dollar value of its foreign
currency quoted or denominated portfolio securities, or a decline in the dollar
value of anticipated dividends from these securities. The Fund may also enter
into forward contracts as a substitute for currency transactions, to alter the
currency exposure associated with a particular investment or to gain or increase
its exposure to a particular currency.
The Fund may engage in proxy or cross hedging. This involves entering into a
contract for a different currency than the one being hedged, based on a
historical or expected correlation between price changes in the contract
currency and price changes in the hedged currency. Proxy hedging involves a risk
that this correlation will suddenly disappear, which would increase the Fund's
foreign currency risk instead of reducing it.
If the Fund enters into a forward currency exchange contract to buy currency,
the Fund will be required to maintain cash or liquid securities in a segregated
account in an amount equal to the value of the currency to be delivered by the
Fund under the forward contract. The assets in this account must be adjusted
daily to compensate for any decline in the value of the segregated assets or
increase in the value of the currency to be delivered by the Fund.
Forward currency exchange contracts are subject to the same market and
correlation risks as currency futures contracts. Contracts to purchase currency
could deprive the Fund of the benefit of a decline in the dollar value of
foreign securities that it intends to acquire. Contracts to sell currency could
limit any potential gain which might be realized by the fund if the value of the
hedged currency increased.
Forward contracts are traded over-the-counter, which provides less protection
against counterparty defaults than is available for currency futures and options
traded on an exchange. For example, a
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forward currency exchange contract is not guaranteed by an exchange or clearing
corporation. If a counterparty failed to meet its obligations under a forward
contract, the contract would not provide an effective hedge against currency
losses and the Fund would be deprived of any profits on the contract. In
addition, the Fund's ability to terminate forward contracts is more limited than
with exchange-traded futures and options.
INTEREST RATE, EQUITY AND CURRENCY SWAPS, CAPS, FLOORS AND COLLARS. The Fund may
enter into interest rate, equity and currency swaps, caps, floors and collars to
hedge assets or liabilities or to seek to increase total return. Interest rate,
equity and currency swaps involve the exchange by the Fund with another party of
their respective commitments to make or receive payments based on a notional
principal amount. The purchase of an interest rate, equity or currency cap
entitles the purchaser, to the extent that a specified benchmark rate or index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the cap. The purchase of an interest
rate, equity or currency floor entitles the purchaser, to the extent that a
specified benchmark rate or index falls below a predetermined level, to receive
payments on a contractually-based principal amount from the party selling the
floor. A collar is a combination of a cap and a floor that preserves a certain
rate of return within a predetermined range of values.
Most interest rate and equity swaps are entered into on a net basis (i.e., the
two payment streams are netted out), with the fund receiving or paying only the
net amount of the two payments. Most currency swaps do not provide for the
netting of payment streams but instead require each party to deliver the entire
(gross) payment stream to the other party.
There is no limit on the amount of swap, cap, floor and collar transactions that
the Fund may enter into. These transactions do not involve the delivery of the
underlying notional assets. Accordingly, the Fund's risk of loss is limited to
the net or gross amount of payments that the Fund is contractually obligated to
make, if any.
The Fund will maintain a segregated account consisting of cash and liquid
securities in an amount equal to the net amount of the excess, if any, of the
Fund's obligations over its entitlements under each swap entered into on a net
basis. If the Fund enters into a swap on a gross basis or sells a cap, floor or
collar, the amount of assets in the segregated account will equal the gross
amount of the Fund's delivery obligations under the swap, cap, floor or collar.
The assets in this account must be adjusted daily to compensate for any decline
in the value of the segregated assets or increase in the value of the payment
stream to be delivered by the Fund.
The Fund will enter into interest rate and equity swap, cap, floor or collar
transactions only with counterparties that meet credit quality standards
established by the Board. The investment manager will monitor the
creditworthiness of these counterparties on an ongoing basis. However, there is
a risk that a counterparty may default on its obligations under a swap, cap,
floor or collar. A counterparty default would eliminate any hedging effect of,
and the Fund would be deprived of any profits on, the swap, cap, floor or
collar.
The use of swaps, caps, floors and collars is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the investment manager
incorrectly forecasts market values, interest rates or currency exchange rates,
the Fund will perform less well than if it had not engaged in these
transactions. There is a risk that changes in the value of a swap, cap, floor or
collar may correlate imperfectly with changes in the price of the asset or
liability being hedged.
Swaps, caps, floors and collars are not traded on exchanges but instead are
entered into directly with counterparties. This may limit the Fund's ability to
dispose of or terminate these instruments, which would prevent the Fund from
avoiding future losses or locking in profits on its positions in swaps, caps,
floors and collars. The investment manager will determine the liquidity of the
Fund's positions in swaps, caps, floors and collars in accordance with
guidelines adopted by the Board.
OTHER TRANSACTIONS, POLICIES AND RISKS
'WHEN-ISSUED', 'DELAYED DELIVERY' AND 'FORWARD COMMITMENT' SECURITIES. The Fund
may purchase or sell securities in a transaction where the payment obligation
and interest rate on the securities are fixed at the time the Fund enters into
the commitment, but interest will not accrue to the Fund until delivery of and
payment for the securities. Securities purchased or sold in this
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way, alternatively referred to as 'when issued', 'delayed delivery' or 'forward
commitment' securities, may have a market value on delivery which is less than
the amount paid by the Fund. Although the Fund will only make commitments to
purchase securities on a forward commitment basis with the intention of actually
acquiring the securities, the Fund may sell the securities before the settlement
date if deemed advisable by the investment manager. Unless the Fund has entered
into an offsetting agreement to sell the securities purchased on a forward
commitment basis, it will maintain a segregated account consisting of cash or
liquid securities with a value equal to the Fund's purchase commitment. The
assets in this account must be adjusted daily to compensate for any decline in
the value of the segregated assets.
TEMPORARY INVESTMENTS. Under unusual economic or market conditions as determined
by the investment manager, the Fund may depart from its investment goal and
invest without limitation in all types of money market instruments and
short-term debt securities, including U.S. government securities; certificates
of deposit, time deposits and bankers' acceptances issued by domestic banks
(including their branches located outside the United States and subsidiaries
located in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and
repurchase agreements. To the extent the Fund is investing in short-term
investments as a temporary defensive strategy, the Fund's investment objective
may not be achieved.
PORTFOLIO TURNOVER AND SHORT TERM TRADING. The Fund may purchase or sell
securities without regard to the length of time the security has been held and
thus may experience a high rate of portfolio turnover. A 100% turnover rate
would occur, for example, if all the securities in a portfolio were replaced in
a period of one year. High portfolio turnover may involve correspondingly
greater transaction costs, including any brokerage commissions, which are borne
directly by the Fund. These costs may increase the recognition of short-term,
rather than long-term, capital gains if securities are held for one year or
less, and may thus subject the Fund and/or shareholders to greater tax
liability. The investment manager expects the Fund's portfolio turnover rate to
be between 25%-30%.
Restricted and Illiquid Securities. The Fund may purchase securities that are
not registered under the Securities Act of 1933 (1933 Act) or that are subject
to other restrictions on their resale ('restricted securities'). These
securities may be resold only in privately negotiated transactions and may not
be publicly offered and sold until they are registered under the 1933 Act.
Restricted securities tend to sell at a lower price than would be available if
they were not restricted. Although it may be possible to eliminate restrictions
on resale by registering securities under the 1933 Act, this would involve an
extra cost to the Fund and the possibility that the securities might go down in
value before the Fund was able to sell them. Restricted securities can also be
difficult to value accurately.
Restricted securities are subject to the Fund's investment restriction on
illiquid investments, unless they are commercial paper offered in accordance
with Section 4(2) of the 1933 Act or securities eligible for resale in reliance
on Rule 144A under the 1933 Act. Section 4(2) commercial paper and Rule 144A
securities will not be subject to the Fund's investment restriction on illiquid
investments if the investment manager determines, in accordance with policies
and procedures adopted by the Board, that these securities are in fact liquid.
These policies and procedures require the manager to consider, among other
things, (1) the frequency of trades and quotes for the security, (2) the number
of dealers willing to sell the security, (3) the number of potential purchasers,
(4) dealer undertakings to make a market in the security, (5) the nature of the
security and (6) the time needed to dispose of the security. The Board
periodically reviews purchases and sales of Section 4(2) commercial paper and
Rule 144A securities by the Fund. To the extent that liquid Section 4(2)
commercial paper or Rule 144A securities held by the Fund become temporarily
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of assets invested in illiquid assets would
increase.
Any security that was liquid when acquired by a Fund may later become illiquid,
especially during adverse market conditions for that type of security. A
perceived loss of liquidity may further reduce the value of securities in
declining markets. The Fund may be forced to sell less liquid securities at a
substantial loss if it receives a high volume of redemption requests.
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INVESTMENT RESTRICTIONS
The Company has adopted investment restrictions 1 through 7 below as fundamental
policies with respect to the Fund. Under the terms of the 1940 Act, these
fundamental policies may not be changed with respect to the Fund without the
vote of a majority of the outstanding voting securities of the Fund. A
'majority' is defined in the 1940 Act as the lesser of (a) 67% or more of the
shares present at a shareholder meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (b) more
than 50% of the outstanding shares. Set forth below are the investment policies
of the Company.
The investment policies adopted by the Company prohibit the Company from:
1. Investing in a manner that would cause it to fail to be a 'diversified
company' under the 1940 Act and the rules, regulations and orders
thereunder.
2. Issuing 'senior securities' as defined in the 1940 Act and the rules,
regulations and orders thereunder except as permitted under the 1940
Act and the rules, regulations and orders thereunder.
3. Investing more than 25% of its total assets in securities, the issuers
of which conduct their principal business activities in the same
industry. For purposes of this limitation, securities of the U.S.
government (including its agencies and instrumentalities) and
securities of state or municipal governments and their political
subdivisions are not considered to be issued by members of any
industry.
4. Borrowing money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the meeting
of redemption requests which might otherwise require the untimely
disposition of securities, and (b) the Fund may to the extent
consistent with its investment policies, enter into reverse purchase
agreements, forward roll transactions and similar investment strategies
and techniques. To the extent that it engages in transactions described
in (a) and (b), the Fund will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not including
the amount borrowed), is derived from such transactions.
5. Making Loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Fund may invest consistent with its
investment objective and policies; (b) repurchase agreements; and
(c) loans of its portfolio securities, to the fullest extent permitted
under the 1940 Act.
6. Underwriting securities issued by other persons, except to the extent
that the Fund may technically be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of portfolio
securities.
7. Purchasing or selling real estate, real estate mortgages, commodities
or commodity contracts, but this restriction shall not prevent the Fund
from (a) investing in securities of issuers engaged in the real estate
business or the business of investing in real estate (including
interests in limited partnerships owning or otherwise engaging in the
real estate business or the business of investment in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts and
options on futures contracts (including options on currencies to the
extent consistent with the Fund's investment objective and policies) or
(d) investing in real estate investment trust securities.
8. Purchasing securities on margin (except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except 'against the box').
For purposes of this restriction the deposit or payment by the Fund of
underlying securities and other assets in escrow and collateral
agreements with respect to initial or maintenance margin in connection
with futures contracts and related options and options on securities,
indexes or similar items is not considered to be the purchase of a
security on margin.
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9. Investing in oil, gas or other mineral exploration or development
programs, except that the Fund may invest in the securities of
companies that invest in or sponsor those programs.
10. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be
acquired as part of a merger, consolidation, reorganization,
acquisition of assets or an offer of exchange.
11. Purchasing or otherwise acquiring any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid.
12. Making investments for the purposes of exercising control or
management.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered advisable
by the investment manager in the best interests of the shareholders. Although
the Fund's portfolio turnover rate may vary from year to year, as well as within
a year, the investment manager anticipates that the Fund's portfolio turnover
rate will be within 25%-30%. Short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. In addition, higher
portfolio turnover rates can result in corresponding increases in portfolio
transaction costs for a fund. See 'Portfolio Transactions.'
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment manager
is primarily responsible for the Fund's portfolio decisions and the placing of
the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally will
be purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions. Equity securities may also be purchased or sold
through brokers who will be paid a commission.
The general policy of the Fund in selecting brokers and dealers is to obtain the
best results taking into account factors such as the general execution and
operational facilities of the broker or dealer, the type and size of the
transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, the Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the Securities
Exchange Act of 1934, the investment manager may select brokers who charge a
commission in excess of that charged by other brokers, if the investment manager
determines in good faith that the commission to be charged is reasonable in
relation to the brokerage and research services provided to the investment
manager by such brokers. Research services generally consist of research or
statistical reports or oral advice from brokers and dealers regarding particular
companies, industries or general economic conditions. The investment manager may
also have arrangements with brokers pursuant to which such brokers provide
research services to the investment manager in exchange for a certain volume of
brokerage transactions to be executed by such broker. While the payment of
higher commissions increases the Fund's costs, the investment manager does not
believe that the receipt of such brokerage and research services significantly
reduces its expenses as the Fund's investment manager. Arrangements for the
receipt of research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for the Fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts
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which the investment manager manages may be used by the investment manager in
servicing a fund. Not all of these research services are used by the investment
manager in managing any particular account, including the Fund.
Under the 1940 Act, 'affiliated persons' of a fund are prohibited from dealing
with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
the Fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
The Fund contemplates that, consistent with the policy of obtaining the best net
results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. The Board of Directors has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
TAXES
TAXATION OF THE FUND
The following discussion is a brief summary of certain additional tax
considerations affecting the Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
The Fund intends to elect to be treated as a regulated investment company (a
'RIC') under Subchapter M of the Internal Revenue Code of 1986, as amended (the
'Code'). Qualification as a RIC requires, among other things, that the Fund:
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of each
taxable year: (i) at least 50% of the market value of the Fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
RICs and other securities with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of the Fund's assets
and 10% of the outstanding voting securities of such issuer; and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. government securities or the securities of other RICs).
As a RIC, the Fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the Fund's net realized long-term
capital gain over net realized short-term capital loss), if any, that it
distributes in each taxable year to its shareholders, provided that it
distributes 90% of its net investment income for such taxable year. However, the
Fund would be subject to corporate income tax (currently at a maximum rate of
35%) on any undistributed net investment income and net capital gain.
The Fund will be subject to a non-deductible 4% excise tax to the extent that
the Fund does not distribute by the end of each calendar year: (a) at least 98%
of its ordinary income for such calendar year; (b) at least 98% of its capital
gain net income for the one-year period ending, as a general rule, on
October 31 of each year; and (c) 100% of the undistributed ordinary income and
capital gain net income from the preceding calendar years (if any) pursuant to
the calculations in (a) and (b). For this purpose, any income or gain retained
by the Fund that is subject to corporate tax will be considered to have been
distributed by year-end. The Fund intends to make sufficient distributions to
avoid imposition of both the corporate level tax and the excise tax.
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The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. The
Fund may engage in hedging or derivatives transactions involving foreign
currencies, forward contracts, options and futures contracts (including options,
futures and forward contracts on foreign currencies) and short sales that may
require the inclusion of income in advance of cash receipts. In addition, income
may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
the Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, such Fund may be required to borrow money or dispose
of other securities to be able to make distributions to its investors. In
addition, if an election is not made to currently accrue market discount with
respect to a market discount bond, all or a portion of any deduction for any
interest expense incurred to purchase or hold such bond may be deferred until
such bond is sold or otherwise disposed.
If the Fund purchases shares in a 'passive foreign investment company' (a
'PFIC'), the Fund may be subject to U.S. federal income tax on a portion of any
'excess distribution' or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If the Fund
were to invest in a PFIC and elected to treat the PFIC as a 'qualified electing
fund' under the Code (a 'QEF'), in lieu of the foregoing requirements, the Fund
would be required to include in income each year a portion of the ordinary
earnings and net capital gain of the QEF, even if not distributed to the fund.
Alternatively, under recently enacted legislation, the Fund can elect to
mark-to-market at the end of each taxable year its shares in a PFIC; in this
case, the Fund would recognize as ordinary income any increase in the value of
such shares, and as ordinary loss any decrease in such value to the extent it
did not exceed prior increases included in income. Under either election, the
Fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
that year, and such income would nevertheless be subject to the 90% distribution
requirement and would be taken into account for purposes of the 4% excise tax.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, the Fund may quote its
'yield,' 'tax-equivalent yield,' 'effective yield,' 'average annual total
return' and/or 'aggregate total return' in advertisements or in reports and
other communications to shareholders and compare its performance figures to
those of other funds or accounts with similar objectives and to relevant
indices.
AVERAGE ANNUAL TOTAL RETURN
The Fund's 'average annual total return' figures, as described and shown in each
Prospectus, are computed according to a formula prescribed by the Commission.
The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
25
<PAGE>
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for the Fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares of the Fund for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN = ERV-P
-----
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
THIRTY DAY YIELD
The Fund may advertise the yields for such funds based on a 30-day (or one
month) period according to the following formula:
a-b = 2[(cd + 1)'pp'6 - 1]
-----
Yield
Any quotation of performance stated in terms of yield (whether or not based on a
30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Advertisements and communications may compare the Fund's performance with that
of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect the Fund's performance over time utilizing, comparisons to indices.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing the
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the National Association of
Securities Dealers Automated Quotation System ('Nasdaq') National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are valued
at the closing price of such securities on their respective exchanges, except
that if the investment manager is of the
26
<PAGE>
opinion that such price would result in an inappropriate value for a security,
including as a result of an occurrence subsequent to the time a value was so
established then the fair value of those securities may be determined by
consideration of other factors by or under the direction of the Board of
Directors or its delegates. In valuing assets, prices denominated in foreign
currencies are converted to U.S. dollar equivalents at the current exchange
rate. Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics. Short-term
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board of Directors. Amortized
cost involves valuing an instrument at its original cost to a fund and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. All other securities and other assets of the Fund for
which market quotations are not readily available will be valued at fair value
as determined in good faith pursuant to procedures adopted by the Board of
Directors of each fund.
ADDITIONAL REDEMPTION INFORMATION
If the Board of Directors shall determine that it is in the best interests of
the remaining shareholders of the Fund, such fund may pay the redemption price
in whole, or in part, by a distribution in kind from the portfolio of the Fund,
in lieu of cash, taking such securities at their value employed for determining
such redemption price, and selecting the securities in such manner as the Board
of Directors may deem fair and equitable.
Under the 1940 Act, the Fund may suspend the right of redemption or postpone the
date of payment upon redemption for any period during which the NYSE is closed,
other than customary weekend and holiday closings, or during which trading on
said Exchange is restricted, or during which (as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (The Fund may also suspend or postpone the recordation of
the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
INVESTMENT MANAGER
The Fund retains SBAM to act as its investment manager. SBAM, a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, which is wholly-owned by
Salomon Smith Barney Holdings Inc, which is in turn wholly-owned by Citigroup
Inc. ('Citigroup'), SBAM serves as the investment manager to numerous
individuals and institutions and other investment companies.
The management contract between SBAM and the Fund provides that SBAM shall
manage the operations of the Fund, subject to policy established by the Board of
Directors. Pursuant to the applicable management contract, SBAM manages the
Fund's investment portfolio, directs purchases and sales of portfolio securities
and reports thereon to the Fund's officers and directors regularly. SBAM also
provides the office space, facilities, equipment and personnel necessary to
perform the following services for the Fund: Commission compliance, including
record keeping, reporting requirements and registration statements and proxies;
supervision of Fund operations, including coordination of functions of
administrator, transfer agent, custodian, accountants, counsel and other parties
performing services or operational functions for the Fund; certain
administrative and clerical services, including certain accounting services,
facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to the Fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
Investment decisions for the Fund are made independently from those of other
funds or accounts managed by SBAM. Such other funds or accounts may also invest
in the same securities as the Fund. If those funds or accounts are prepared to
invest in, or desire to dispose of, the same security at the same time as the
Fund, however, transactions in such securities will be made,
27
<PAGE>
insofar as feasible, for the respective funds and accounts in a manner deemed
equitable to all. In some cases, this procedure may adversely affect the size of
the position obtained for or disposed of by the Fund or the price paid or
received by the Fund. In addition, because of different investment objectives, a
particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security.
As compensation for its services, SBAM receives, on behalf of the Fund, as
described below, a monthly management fee, at an annual rate based upon the
average daily net assets of the Fund %.
The management contract for the Fund provides that it will continue for an
initial two year period and thereafter for successive annual periods; provided
that such continuance is specifically approved at least annually: (a) by the
vote of a majority of the directors not parties to the management contract or
'interested persons' of such parties, as defined in the 1940 Act, cast in person
at a meeting called for the specific purpose of voting on such management
contract and (b) either by the Board of Directors or a majority of the
outstanding voting securities. The management contract may be terminated on 60
days' written notice by either party and will terminate automatically if
assigned.
Under the terms of the management contract between the Fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
Fund, unless such losses or damages are attributable to the willful misfeasance,
bad faith or gross negligence on either the part of SBAM or its affiliate or
from reckless disregard by it of its obligations and duties under the Management
Contract ('disabling conduct').
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. The Board of Directors for the Company has adopted a code of
ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of the Fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the fund. In
addition, the Fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of the investment manager, which
policies serve as investment manager's code of ethics (the 'Adviser Code'). The
Fund and Adviser Codes have been designed to address potential conflict of
interests that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for
the Fund. In addition, the adviser code contains specified prohibitions and
blackout periods for certain categories of securities and transactions,
including a prohibition on short-term trading and purchasing securities during
an initial public offering. The Adviser Code, with certain exceptions, also
requires that access persons obtain preclearance to engage in personal
securities transactions. Finally, the Fund and Adviser Codes require access
persons to report all personal securities transactions periodically.
ADMINISTRATOR
SSB Citi Fund Management LLC, an affiliate of SBAM (the 'Administrator')
provides certain administrative services to the Fund. The services provided by
the Administrator under the applicable administration agreement include certain
accounting, clerical and bookkeeping services, Blue Sky compliance, corporate
secretarial services and assistance in the preparation and filing of tax returns
and reports to shareholders and the Commission. The Fund pays the Administrator
a fee, calculated daily and payable monthly, at an annual rate of 0.10% of the
Fund's average daily net assets.
28
<PAGE>
DISTRIBUTOR
CFBDS, located at 21 Milk Street, Boston, Massachusetts 02109, serves as the
Fund's distributor pursuant to a distribution contract. CFBDS is a wholly owned
subsidiary of Signature Financial Group, Inc.
Rule 12b-1 promulgated under the 1940 Act (the 'Rule') provides, among other
things, that an investment company may bear expenses of distributing its shares
only pursuant to a plan adopted in accordance with the Rule. The Board of
Directors of the Fund has adopted a services and distribution plan with respect
to its shares pursuant to the Rule (the 'Plan'). The Board of Directors of the
Fund has determined that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders.
A quarterly report of the amounts expended with respect to the Fund under the
Plan, and the purposes for which such expenditures were incurred, is presented
to the Board of Directors for its review. In addition, the Plan provides that it
may not be amended to increase materially the costs which may be borne for
distribution pursuant to the Plan without the approval of shareholders, and that
other material amendments of the Plan must be approved by the Board of
Directors, and by the Directors who are neither 'interested persons,' as defined
in the 1940 Act, nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements, by vote cast in person at a
meeting called for the purpose of considering such amendments. The Plan and any
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. The Plan may be
terminated at any time by vote of a majority of the Directors who are not
'interested persons' and have no direct or indirect financial interest in the
operation of the Plan or in any related agreement or by vote of a majority of
the shares of the Fund.
EXPENSES
The Fund's expenses include taxes, interest, fees and salaries of directors and
officers who are not directors, officers or employees of the Fund's service
contractors, Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to existing shareholders, advisory and administration fees, charges of the
custodian and of the transfer and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and sale
of portfolio securities.
CUSTODIAN AND TRANSFER AGENT
Custodian. PNC Bank, N.A. (the 'Custodian'), located at Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, serves as
the Fund's custodian. The Custodian, among other things: maintains a custody
account or accounts in the name of the Fund; receives and delivers all assets
for the Fund upon purchase and upon sale or maturity; collects and receives all
income and other payments and distributions on account of the assets of the
Fund; and makes disbursements on behalf of the Fund. The Custodian neither
determines the Fund's investment policies, nor decides which securities the Fund
will buy or sell. For its services, the Custodian receives a monthly fee based
upon the daily average market value of securities held in custody and also
receives securities transaction charges, including out-of-pocket expenses. The
Fund may also periodically enter into arrangements with other qualified
custodians with respect to certain types of securities or other transactions
such as repurchase agreements or derivatives transactions.
Transfer Agent. State Street Bank & Trust Company, as its agent Boston Financial
Data Services Inc. (the 'Transfer Agent'), located at Two Heritage Drive,
Boston, Massachusetts 02171, serves as the Fund's transfer agent. The transfer
agent registers and processes transfers of the Fund's stock, processes purchase
and redemption orders, acts as dividend disbursing agent for the Fund and
maintains records and handles correspondence with respect to shareholder
accounts, pursuant to a
29
<PAGE>
transfer agency agreement. For these services, the transfer agent receives a
monthly fee computed separately for the Fund and is reimbursed for out-of-pocket
expenses.
INDEPENDENT ACCOUNTANTS
KPMG LLP ('KPMG') provides audit services, tax return preparation and assistance
and consultation in connection with review of Commission filings. KPMG's address
is, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to the Fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
Piper & Marbury L.L.P. of Baltimore, Maryland has issued an opinion regarding
the valid issuance of shares being offered for sale pursuant to the Fund's
Prospectus.
CAPITAL STOCK
The Company was incorporated in Maryland on July 27, 1999. The authorized
capital stock of the Company consists of 500,000,000 shares having a par value
of $.001 per share. Pursuant to the Company Articles of Incorporation and
Articles Supplementary, the Directors have authorized the issuance of one series
of shares, representing shares in a separate Fund; namely, Humane Fund. The
Company's Board of Directors may, in the future, authorize the issuance of
additional classes of capital stock representing shares of additional investment
portfolios.
Each shareholder is entitled to cast, at all meetings of shareholders, such
number of votes as is equal to the number of full and fractional shares held by
such shareholder. All shares of the Fund will, when issued, be fully paid and
nonassessable. Under the corporate law of Maryland, the state of incorporation
of the Company, the Investors, and the By-Laws of the Company, is not required
and does not currently intend to hold annual meetings of shareholders for the
election of directors except as required under the 1940 Act.
In the event of the liquidation or dissolution of the Company, shares of the
Fund are entitled to receive the assets attributable to it that are available
for distribution, and a proportionate distribution, based upon the relative net
assets of the Fund, of any general assets not attributable to a portfolio that
are available for distribution. Shareholders are not entitled to any preemptive
rights. All shares, when issued, will be fully paid, non-assessable, fully
transferable and redeemable at the option of the holder.
Subject to the provisions of the applicable Company's charter, determinations by
the Board of Directors as to the direct and allocable liabilities and the
allocable portion of any general assets of the Company, with respect to the Fund
are conclusive.
30
<PAGE>
THE HUMANE EQUITY FUND
STATEMENTS OF ASSETS AND LIABILITIES
October 20, 1999
<TABLE>
<S> <C>
Assets:
Cash............................................................... $100,000
--------
Total Assets.................................................. 100,000
--------
Net Assets (10,000 shares of $.001 par value shares of common stock issued and
outstanding; 100,000,000 shares
authorized)........................................................ $100,000
--------
--------
Net asset value per share.............................................. $ 10.00
--------
--------
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
NOTE 1
The Humane Equity Fund (the "Fund") was incorporated as a Maryland
corporation on July 27, 1999, and has had no operations to date other than
matters relating to its organization and registration as a diversified, open-end
management investment company under the Investment Company Act of 1940, as
amended, and the sale and issuance to Salomon Brothers Asset Management Inc
("SBAM") of 10,000 shares of its common stock for an aggregate purchase price of
$100,000. The books and records of the Fund will be maintained in U.S. dollars.
NOTE 2
Organization expenses related to the formation of the Fund will be paid
by SBAM.
NOTE 3
The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers
Holding Company Inc, which is an affiliate of Salomon Smith Barney Holdings Inc,
which is in turn wholly-owned by Travelers Group Inc., as its investment manager
under an investment management agreement (the "Advisory Agreement"). Under the
terms of the Advisory Agreement, SBAM will manage the investment of the assets
of the Fund, subject to the supervision of the Fund's Board of Directors.
<PAGE>
[LETTERHEAD OF KPMG]
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors of
The Humane Equity Fund:
We have audited the accompanying statement of assets and liabilities for The
Humane Equity Fund as of October 20, 1999. This statement of assets and
liabilities is the responsibility of the Fund's management. Our responsibility
is to express an opinion on this statement of assets and liabilities based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit of a statement of assets and liabilities
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement of assets and liabilities. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of The Humane
Equity Fund as of October 20, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
KPMG LLP
New York, New York
October 20, 1999
<PAGE>
ITEM 22. FINANCIAL STATEMENTS.
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
a -- Articles of Incorporation of Registrant**
b -- Registrant's By-Laws**
c -- None.
d -- Management Contract between Registrant and Salomon
Brothers Asset Management Inc ('SBAM') relating to Humane
Equity Fund**
(e) -- Distribution Agreement between Registrant and CFBDS,
Inc**
f -- None.
g -- Form of Custodian Agreement between Registrant and PNC
Bank, National Association**
h(1) -- Form of Administration Agreement between Registrant and
SSB Citi Fund Management LLC ('SSBC') relating to the
Humane Equity Fund**
h(2) -- Form of Transfer Agency Agreement between Registrant and
Boston Financial Data Services, Inc.*
i -- Opinion and Consent of Counsel of Piper & Marbury, LLP as
to the Legality of Securities Being Registered*
j -- Consent of Independent Accountants*
k -- None.
l -- Share Purchase Agreement**
m -- Services and Distribution Plan on behalf of Humane Equity
Fund*
n -- Not applicable.
o -- None.
</TABLE>
- ------------
* Filed herewith
** Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on August 3, 1999
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Humane Society of the United States owns 100% of the outstanding shares
of the Humane Equity Fund.
ITEM 25. INDEMNIFICATION.
Reference is made to Article Eighth of Registrant's Articles of
Incorporation, Article V of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and CFBDS, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities 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 director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, 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
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<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The list required by this Item 26 of officers and directors of SBAM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
its FORM ADV filed by SBAM pursuant to the Advisers Act (SEC File No.
801-32046).
ITEM 27. PRINCIPAL UNDERWRITER.
(a) CFBDS, Inc., ('CFBDS') the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund, Smith
Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund, Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith Barney Fundamental
Value Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Institutional Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund Inc.,
Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, 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 Inc., Smith Barney Principal Return Fund, Smith Barney Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL 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 Annuities, The Travelers Fund UL II for Variable Annuities, 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.
In addition, CFBDS, the Registrant's Distributor, is also the distributor
for CitiFunds Multi-State Tax Free Trust, CitiFunds Premium Trust, CitiFunds
Institutional Trust, CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International Trust, CitiFunds Fixed
Income Trust, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP Portfolio.
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, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio,
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<PAGE>
Balanced Portfolio, Government Income Portfolio, Tax Free Reserves Portfolio,
Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc, Salomon Brothers
Investors Fund Inc, Salomon Brothers Capital Fund Inc, Salomon Brothers Series
Funds Inc, Salomon Brothers Institutional Series Funds Inc, Salomon Brothers
Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
(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.
(1) SBAM
7 World Trade Center
New York, New York 10048
(2) Boston Financial Data Services, Inc.
Two Heritage Drive
Boston, MA 02171
(3) PNC Bank, N.A.
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Pre-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, and State of New York, on the 20 day of October, 1999.
SSBCITI FUNDS INC.
(Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ HEATH B. MCLENDON Director and President (Principal October 20, 1999
....................................... Executive Officer)
(HEATH B. MCLENDON)
Director October 20, 1999
.......................................
(PAUL G. IRWIN)
/S/ LEWIS E. DAIDONE Executive Vice President and October 20, 1999
....................................... Treasurer (Principal Financial and
(LEWIS E. DAIDONE) Accounting Officer)
/S/ CAROL L. COLMAN* Director October 20, 1999
.......................................
(CAROL L. COLMAN)
/S/ ANDREW BREECH* Director October 20, 1999
.......................................
(ANDREW BREECH)
/S/ WILLIAM R. DILL* Director October 20, 1999
.......................................
(WILLIAM R. DILL)
Director October 20, 1999
.......................................
(CLIFFORD M. KIRTLAND)
Director October 20, 1999
.......................................
(ROBERT W. LAWLESS)
*By: HEATH B. MCLENDON
.......................................
(HEATH B. MCLENDON,
ATTORNEY IN FACT)
</TABLE>
C-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
(h)(2) Transfer Agency Agreement
(i) Opinion of Piper & Marbury LLP
(j) Consent of Independent Accountants
(m) Services and Distribution Plan on behalf of Humane Equity Fund.
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
Characters normally expressed as superscript shall be preceded by...... 'pp'
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
Between
SSBCITI FUNDS INC.
And
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Terms of Appointment and Duties.................................................................1
2. Third Party Administrators for Defined Contribution Plans.......................................4
3. Fees and Expenses...............................................................................5
4. Representations and Warranties of the Transfer Agent............................................5
5. Representations and Warranties of the Fund......................................................5
6. Wire Transfer Operating Guidelines..............................................................6
7. Data Access and Proprietary Information.........................................................7
8. Indemnification.................................................................................9
9. Standard of Care...............................................................................10
10. Year 2000......................................................................................10
11. Confidentiality................................................................................11
12. Covenants of the Fund and the Transfer Agent...................................................11
13. Termination of Agreement.......................................................................12
14. Assignment and Third Party Beneficiaries.......................................................12
15. Subcontractors.................................................................................13
16. Miscellaneous .................................................................................13
17. Additional Funds...............................................................................14
</TABLE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the day of , 1999, by and between SSBCITI FUNDS
INC., a Maryland corporation, having its principal office and place of business
at 7 World Trade Center, New York, New York 10048 (the "Fund"), and STATE
STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its
principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Transfer Agent").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, such series
shall be named in the attached Schedule A which may be amended by the parties
from time to time (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Section 17, being herein referred to as a "Portfolio", and collectively as the
"Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Transfer
Agent as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities, and the
Transfer Agent desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment and Duties
1.1 Transfer Agency Services. Subject to the terms and
conditions set forth in this Agreement, the Fund, on behalf
of the Portfolios, hereby employs and appoints the Transfer
Agent to act as, and the Transfer Agent agrees to act as its
transfer agent for the Fund's authorized and issued shares
of its common stock, $ par value, ("Shares"), dividend
disbursing agent, custodian of certain retirement plans and
agent in connection with any accumulation, open-account or
similar plan provided to the shareholders of each of the
respective Portfolios of the Fund ("Shareholders") and set
out in the currently effective prospectus and statement of
additional information ("prospectus") of the Fund on behalf
of the applicable Portfolio, including without limitation
any periodic investment plan or periodic withdrawal program.
In accordance with procedures established from time to time
by agreement between the Fund on behalf of each of the
Portfolios, as applicable and the Transfer Agent, the
Transfer Agent agrees that it will perform the following
services:
<PAGE>
(a) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof to the
Custodian of the Fund authorized pursuant to the Articles of
Incorporation of the Fund (the "Custodian");
(b) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(c) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof to the
Custodian;
(d) In respect to the transactions in items (a), (b) and (c) above, the
Transfer Agent shall execute transactions directly with broker-dealers
authorized by the Fund;
(e) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to
be paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
(f) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(g) Prepare and transmit payments for dividends and distributions
declared by the Fund on behalf of the applicable Portfolio;
(h) Issue replacement certificates for those certificates alleged to
have been lost, stolen or destroyed upon receipt by the Transfer Agent
of indemnification satisfactory to the Transfer Agent and protecting
the Transfer Agent and the Fund, and the Transfer Agent at its option,
may issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such indemnity;
(i) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(j) Record the issuance of Shares of the Fund and maintain pursuant to
SEC Rule 17Ad-10(e) a record of the total number of Shares of the Fund
which are authorized, based upon data provided to it by the Fund, and
issued and outstanding. The Transfer Agent shall also provide the Fund
on a regular basis with the total number of Shares which are authorized
and issued and outstanding and shall have no obligation, when recording
the issuance of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale of such
Shares, which functions shall be the sole responsibility of the Fund.
1.2 Additional Services. In addition to, and neither in lieu nor in
contravention of, the services set forth in the above paragraph, the
Transfer Agent shall perform the following services:
(a) Other Customary Services. Perform the customary services of a
transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plan (including without
limitation any periodic investment plan or periodic withdrawal
program), including but not limited
2
<PAGE>
to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing Shareholder proxies, Shareholder reports and
prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required
with respect to dividends and distributions by federal authorities for
all Shareholders, preparing and mailing confirmation forms and
statements of account to Shareholders for all purchases and redemptions
of Shares and other confirmable transactions in Shareholder accounts,
preparing and mailing activity statements for Shareholders, and
providing Shareholder account information.
(b) Control Book (also known as "Super Sheet"). Maintain a daily record
and produce a daily report for the Fund of all transactions and
receipts and disbursements of money and securities and deliver a copy
of such report for the Fund for each business day to the Fund no later
than 9:00 AM Eastern Time, or such earlier time as the Fund may
reasonably require, on the next business day.
(c) "Blue Sky" Reporting. The Fund shall (i) identify to the Transfer
Agent in writing those transactions and assets to be treated as exempt
from blue sky reporting for each State; and (ii) verify the
establishment of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each State.
The responsibility of the Transfer Agent for the Fund's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and providing a
system which will enable the Fund to monitor the total number of Shares
sold in each State.
(d) National Securities Clearing Corporation (the "NSCC"). (i) accept
and effectuate the registration and maintenance of accounts through
Networking and the purchase, redemption, transfer and exchange of
shares in such accounts through Fund/SERV (networking and Fund/SERV
being programs operated by the NSCC on behalf of NSCC's participants,
including the Fund), in accordance with, instructions transmitted to
and received by the Transfer Agent by transmission from NSCC on behalf
of broker-dealers and banks which have been established by, or in
accordance with the instructions of authorized persons, as hereinafter
defined on the dealer file maintained by the Transfer Agent; (ii) issue
instructions to Fund's banks for the settlement of transactions between
the Fund and NSCC (acting on behalf of its broker-dealer and bank
participants); (iii) provide account and transaction information from
the affected Fund's records on DST Systems, Inc. computer system TA2000
("TA2000 System") in accordance with NSCC's Networking and Fund/SERV
rules for those broker-dealers; and (iv) maintain Shareholder accounts
on TA2000 System through Networking.
(e) New Procedures. New procedures as to who shall provide certain of
these services in Section 1 may be established in writing from time to
time by agreement between the Fund and the Transfer Agent. The Transfer
Agent may at times perform only a portion of these services and the
Fund or its agent may perform these services on the Fund's behalf.
3
<PAGE>
(f) Additional Telephone Support Services. If the parties elect to have
the Transfer Agent provide additional telephone support services under
this Agreement, the parties will agree to such services, fees and
sub-contracting as stated in Schedule 1.2(f) entitled "Telephone
Support Services" attached hereto.
2. Third Party Administrators for Defined Contribution Plans
2.1 The Fund may decide to make available to certain of its customers, a
qualified plan program (the "Program") pursuant to which the customers
("Employers") may adopt certain plans of deferred compensation ("Plan
or Plans") for the benefit of the individual Plan participant (the
"Plan Participant"), such Plan(s) being qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended ("Code") and
administered by third party administrators which may be plan
administrators as defined in the Employee Retirement Income Security
Act of 1974, as amended)(the "TPA(s)").
2.2 In accordance with the procedures established in the initial Schedule
2.1 entitled "Third Party Administrator Procedures", as may be amended
by the Transfer Agent and the Fund from time to time ("Schedule 2.1"),
the Transfer Agent shall:
(a) Treat Shareholder accounts established by the Plans in the name of
the Trustees, Plans or TPAs as the case may be as omnibus accounts;
(b) Maintain omnibus accounts on its records in the name of the TPA or
its designee as the Trustee for the benefit of the Plan; and
(c) Perform all services under Section 1 as transfer agent of the Funds
and not as a record-keeper for the Plans.
2.3 Transactions identified under Section 2 of this Agreement shall be
deemed exception services ("Exception Services") when such
transactions:
(a) Require the Transfer Agent to use methods and procedures other than
those usually employed by the Transfer Agent to perform services under
Section 1 of this Agreement;
(b) Involve the provision of information to the Transfer Agent after
the commencement of the nightly processing cycle of the TA2000 System;
or
(c) Require more manual intervention by the Transfer Agent, either in
the entry of data or in the modification or amendment of reports
generated by the TA2000 System than is usually required by
non-retirement plan and pre-nightly transactions.
3. Fees and Expenses
3.1 Fee Schedule. For the performance by the Transfer Agent pursuant to this
Agreement, the Fund agrees to pay the Transfer Agent an annual
maintenance fee for each Shareholder account as set forth in the attached
fee schedule ("Schedule 3.1"). Such fees and out-of-pocket expenses and
advances identified under Section 3.2 below may be changed from time to
time subject to mutual written agreement between the Fund and the
Transfer Agent.
4
<PAGE>
3.2 Out-of-Pocket Expenses. In addition to the fee paid under Section 3.1
above, the Fund agrees to reimburse the Transfer Agent for
out-of-pocket expenses, including but not limited to confirmation
production, postage, forms, telephone, microfilm, microfiche, mailing
and tabulating proxies, records storage, or advances incurred by the
Transfer Agent for the items set out in Schedule 3.1 attached hereto.
In addition, any other expenses incurred by the Transfer Agent at the
request or with the consent of the Fund, will be reimbursed by the
Fund.
3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all shareholder accounts shall be advanced to the
Transfer Agent by the Fund at least seven (7) days prior to the mailing
date of such materials.
3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses
within thirty (30) days following the receipt of the respective billing
notice, except for any fees or expenses which are subject to good faith
dispute. In the event of such a dispute, the Fund may only withhold
that portion of the fee or expense subject to the good faith dispute.
The Fund shall notify the Transfer Agent in writing within twenty-one
(21) calendar days following the receipt of each billing notice if the
Fund is disputing any amounts in good faith. If the Fund does not
provide such notice of dispute within the required time, the billing
notice will be deemed accepted by the Fund.
4. Representations and Warranties of the Transfer Agent
The Transfer Agent represents and warrants to the Fund that:
4.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
4.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
4.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
4.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
5. Representations and Warranties of the Fund
The Fund represents and warrants to the Transfer Agent that:
5.1 It is a corporation duly organized and existing and in good standing
under the laws of the State of Maryland.
5.2 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
5
<PAGE>
5.3 All corporate proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform
this Agreement.
5.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
5.5 A registration statement under the Securities Act of 1933, as amended
is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made,
with respect to all Shares of the Fund being offered for sale.
6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform
Commercial Code
6.1 The Transfer Agent is authorized to promptly debit the appropriate Fund
account(s) upon the receipt of a payment order in compliance with the
selected security procedure (the "Security Procedure") chosen for funds
transfer and in the amount of money that the Transfer Agent has been
instructed to transfer. The Transfer Agent shall execute payment orders
in compliance with the Security Procedure and with the Fund
instructions on the execution date provided that such payment order is
received by the customary deadline for processing such a request,
unless the payment order specifies a later time. All payment orders and
communications received after this the customary deadline will be
deemed to have been received the next business day.
6.2 The Fund acknowledges that the Security Procedure it has designated on
the Fund Selection Form was selected by the Fund from security
procedures offered by the Transfer Agent. The Fund shall restrict
access to confidential information relating to the Security Procedure
to authorized persons as communicated to the Transfer Agent in writing.
The Fund must notify the Transfer Agent immediately if it has reason to
believe unauthorized persons may have obtained access to such
information or of any change in the Fund's authorized personnel. The
Transfer Agent shall verify the authenticity of all Fund instructions
according to the Security Procedure.
6.3 The Transfer Agent shall process all payment orders on the basis of the
account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the
account number, the account number shall take precedence and govern.
6.4 The Transfer Agent reserves the right to decline to process or delay
the processing of a payment order which (a) is in excess of the
collected balance in the account to be charged at the time of the
Transfer Agent's receipt of such payment order; (b) if initiating such
payment order would cause the Transfer Agent, in the Transfer Agent's
sole judgement, to exceed any volume, aggregate dollar, network, time,
credit or similar limits which are applicable to the Transfer Agent; or
(c) if the Transfer Agent, in good faith, is unable to satisfy itself
that the transaction has been properly authorized.
6
<PAGE>
6.5 The Transfer Agent shall use reasonable efforts to act on all
authorized requests to cancel or amend payment orders received in
compliance with the Security Procedure provided that such requests are
received in a timely manner affording the Transfer Agent reasonable
opportunity to act. However, the Transfer Agent assumes no liability if
the request for amendment or cancellation cannot be satisfied.
6.6 The Transfer Agent shall assume no responsibility for failure to detect
any erroneous payment order provided that the Transfer Agent complies
with the payment order instructions as received and the Transfer Agent
complies with the Security Procedure. The Security Procedure is
established for the purpose of authenticating payment orders only and
not for the detection of errors in payment orders.
6.7 The Transfer Agent shall assume no responsibility for lost interest
with respect to the refundable amount of any unauthorized payment
order, unless the Transfer Agent is notified of the unauthorized
payment order within thirty (30) days of notification by the Transfer
Agent of the acceptance of such payment order. In no event (including
failure to execute a payment order) shall the Transfer Agent be liable
for special, indirect or consequential damages, even if advised of the
possibility of such damages.
6.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the
National Automated Clearing House Association and the New England
Clearing House Association, the Transfer Agent will act as an
Originating Depository Financial Institution and/or receiving
depository Financial Institution, as the case may be, with respect to
such entries. Credits given by the Transfer Agent with respect to an
ACH credit entry are provisional until the Transfer Agent receives
final settlement for such entry from the Federal Reserve Bank. If the
Transfer Agent does not receive such final settlement, the Fund agrees
that the Transfer Agent shall receive a refund of the amount credited
to the Fund in connection with such entry, and the party making payment
to the Fund via such entry shall not be deemed to have paid the amount
of the entry.
6.9 Confirmation of Transfer Agent's execution of payment orders shall
ordinarily be provided within twenty four (24) hours notice of which
may be delivered through the Transfer Agent's proprietary information
systems, or by facsimile or call-back. Fund must report any objections
to the execution of an order within thirty (30) days.
7. Data Access and Proprietary Information
7.1 The Fund acknowledges that the databases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Transfer Agent as
part of the Fund's ability to access certain Fund-related data
("Customer Data") maintained by the Transfer Agent on databases under
the control and ownership of the Transfer Agent or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of
substantial value to the Transfer Agent or other third party. In no
event shall Proprietary Information be deemed Customer Data. The Fund
agrees to treat all
7
<PAGE>
Proprietary Information as proprietary to the Transfer Agent and
further agrees that it shall not divulge any Proprietary Information to
any person or organization except as may be provided hereunder. Without
limiting the foregoing, the Fund agrees for itself and its employees
and agents to:
(a) Use such programs and databases (i) solely on the Fund's computers,
or (ii) solely from equipment at the location agreed to between the
Fund and the Transfer Agent and (iii) solely in accordance with the
Transfer Agent's applicable user documentation;
(b) Refrain from copying or duplicating in any way (other than in the
normal course of performing processing on the Fund's computer(s)), the
Proprietary Information;
(c) Refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently obtained,
to inform in a timely manner of such fact and dispose of such
information in accordance with the Transfer Agent's instructions;
(d) Refrain from causing or allowing information transmitted from the
Transfer Agent's computer to the Fund's terminal to be retransmitted to
any other computer terminal or other device except as expressly
permitted by the Transfer Agent (such permission not to be unreasonably
withheld);
(e) Allow the Fund to have access only to those authorized transactions
as agreed to between the Fund and the Transfer Agent; and
(f) Honor all reasonable written requests made by the Transfer Agent to
protect at the Transfer Agent's expense the rights of the Transfer
Agent in Proprietary Information at common law, under federal copyright
law and under other federal or state law.
7.2 Proprietary Information shall not include all or any portion of any of
the foregoing items that: (i) are or become publicly available without
breach of this Agreement; (ii) are released for general disclosure by a
written release by the Transfer Agent; or (iii) are already in the
possession of the receiving party at the time or receipt without
obligation of confidentiality or breach of this Agreement.
7.3 The Fund acknowledges that its obligation to protect the Transfer
Agent's Proprietary Information is essential to the business interest
of the Transfer Agent and that the disclosure of such Proprietary
Information in breach of this Agreement would cause the Transfer Agent
immediate, substantial and irreparable harm, the value of which would
be extremely difficult to determine. Accordingly, the parties agree
that, in addition to any other remedies that may be available in law,
equity, or otherwise for the disclosure or use of the Proprietary
Information in breach of this Agreement, the Transfer Agent shall be
entitled to seek and obtain a temporary restraining order, injunctive
relief, or other equitable relief against the continuance of such
breach.
7.4 If the Fund notifies the Transfer Agent that any of the Data Access
Services do not operate in material compliance with the most recently
issued user documentation for such services, the Transfer Agent shall
endeavor in a timely manner to correct such failure. Organizations from
which the Transfer Agent may obtain certain data included in the Data
8
<PAGE>
Access Services are solely responsible for the contents of such data
and the Fund agrees to make no claim against the Transfer Agent arising
out of the contents of such third-party data, including, but not
limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER
PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE
PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE TRANSFER AGENT EXPRESSLY
DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7.5 If the transactions available to the Fund include the ability to
originate electronic instructions to the Transfer Agent in order to:
(i) effect the transfer or movement of cash or Shares; or (ii) transmit
Shareholder information or other information, then in such event the
Transfer Agent shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further
inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Transfer Agent from time to
time.
7.6 Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Section 7. The obligations of this
Section shall survive any earlier termination of this Agreement.
8. Indemnification
8.1 The Transfer Agent shall not be responsible for, and the Fund shall
indemnify and hold the Transfer Agent harmless from and against, any
and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) All actions of the Transfer Agent or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct;
(b) The Fund's lack of good faith, negligence or willful misconduct;
(c) The reliance upon, and any subsequent use of or action taken or
omitted, by the Transfer Agent, or its agents or subcontractors on: (i)
any information, records, documents, data, stock certificates or
services, which are received by the Transfer Agent or its agents or
subcontractors by machine readable input, facsimile, CRT data entry,
electronic instructions or other similar means authorized by the Fund,
and which have been prepared, maintained or performed by the Fund or
any other person or firm on behalf of the Fund including but not
limited to any previous transfer agent or registrar; (ii) any
instructions or requests of the Fund or any of its officers; (iii) any
instructions or opinions of legal counsel with respect to any matter
arising in connection with the
9
<PAGE>
services to be performed by the Transfer Agent under this Agreement
which are provided to the Transfer Agent after consultation with such
legal counsel; or (iv) any paper or document, reasonably believed to be
genuine, authentic, or signed by the proper person or persons;
(d) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be registered
or in violation of any stop order or other determination or ruling by
any federal or any state agency with respect to the offer or sale of
such Shares;
(e) The negotiation and processing of any checks including without
limitation for deposit into the Fund's demand deposit account
maintained by the Transfer Agent; or
(f) Upon the Fund's request entering into any agreements required by
the National Securities Clearing Corporation (the "NSCC") for the
transmission of Fund or Shareholder data through the NSCC clearing
systems.
8.2 In order that the indemnification provisions contained in this Section
8 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Transfer Agent, the Transfer Agent shall
promptly notify the Fund of such assertion, and shall keep the Fund
advised with respect to all developments concerning such claim. The
Fund shall have the option to participate with the Transfer Agent in
the defense of such claim or to defend against said claim in its own
name or in the name of the Transfer Agent. The Transfer Agent shall in
no case confess any claim or make any compromise in any case in which
the Fund may be required to indemnify the Transfer Agent except with
the Fund's prior written consent.
9. Standard of Care
9.1 The Transfer Agent shall at all times act in good faith and agrees to
use its best efforts within reasonable limits to insure the accuracy of
all services performed under this Agreement, but assumes no
responsibility and shall not be liable for loss or damage due to errors
unless said errors are caused by its negligence, bad faith, or willful
misconduct or that of its employees, except as provided in Section 9.2
below.
9.2 In the case of Exception Services as defined in Section 2.3 herein, the
Transfer Agent shall be held to a standard of gross negligence and
encoding and payment processing errors shall not be deemed negligence.
10. Year 2000
The Transfer Agent will take reasonable steps to ensure that its
products (and those of its third-party suppliers) reflect the available
technology to offer products that are Year 2000 ready, including, but
not limited to, century recognition of dates, calculations that
correctly compute same century and multi century formulas and date
values, and interface
10
<PAGE>
values that reflect the date issues arising between now and the next
one-hundred years, and if any changes are required, the Transfer Agent
will make the changes to its products at a price to be agreed upon by
the parties and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
11. Confidentiality
11.1 The Transfer Agent and the Fund agree that they will not, at any time
during the term of this Agreement or after its termination, reveal,
divulge, or make known to any person, firm, corporation or other
business organization, any customers' lists, trade secrets, cost
figures and projections, profit figures and projections, or any other
secret or confidential information whatsoever, whether of the Transfer
Agent or of the Fund, used or gained by the Transfer Agent or the Fund
during performance under this Agreement. The Fund and the Transfer
Agent further covenant and agree to retain all such knowledge and
information acquired during and after the term of this Agreement
respecting such lists, trade secrets, or any secret or confidential
information whatsoever in trust for the sole benefit of the Transfer
Agent or the Fund and their successors and assigns. In the event of
breach of the foregoing by either party, the remedies provided by
Section 7.3 shall be available to the party whose confidential
information is disclosed. The above prohibition of disclosure shall not
apply to the extent that the Transfer Agent must disclose such data to
its sub-contractor or Fund agent for purposes of providing services
under this Agreement.
11.2 In the event that any requests or demands are made for the inspection
of the Shareholder records of the Fund, other than request for records
of Shareholders pursuant to standard subpoenas from state or federal
government authorities (i.e., divorce and criminal actions), the
Transfer Agent will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such
inspection. The Transfer Agent expressly reserves the right, however,
to exhibit the Shareholder records to any person whenever it is advised
by counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person or if required by law or court
order.
12. Covenants of the Fund and the Transfer Agent
12.1 The Fund shall promptly furnish to the Transfer Agent the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of the Transfer Agent and the
execution and delivery of this Agreement; and
(b) A copy of the Articles of Incorporation and By-Laws of the Fund and
all amendments thereto.
12.2 The Transfer Agent hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting
devices, if any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.
11
<PAGE>
12.3 The Transfer Agent shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable.
To the extent required by Section 31 of the Investment Company Act of
1940, as amended, and the Rules thereunder, the Transfer Agent agrees
that all such records prepared or maintained by the Transfer Agent
relating to the services to be performed by the Transfer Agent
hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such Section and
Rules, and will be surrendered promptly to the Fund on and in
accordance with its request.
13. Termination of Agreement
13.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
13.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses or costs associated with the movement of records and material
will be borne by the Fund. Additionally, the Transfer Agent reserves
the right to charge for any other reasonable expenses associated with
such termination and a charge equivalent to the average of three (3)
months' fees. Payment of such expenses or costs shall be in accordance
with Section 3.4 of this Agreement.
13.3 Upon termination of this Agreement, each party shall return to the
other party all copies of confidential or proprietary materials or
information received from such other party hereunder, other than
materials or information required to be retained by such party under
applicable laws or regulations.
14. Assignment and Third Party Beneficiaries
14.1 Except as provided in Section 15.1 below and the Additional Telephone
Support Services Schedule 1.2(f) attached, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party. Any attempt to do so in
violation of this Section shall be void. Unless specifically stated to
the contrary in any written consent to an assignment, no assignment
will release or discharge the assignor from any duty or responsibility
under this Agreement.
14.2 Except as explicitly stated elsewhere in this Agreement, nothing under
this Agreement shall be construed to give any rights or benefits in
this Agreement to anyone other than the Transfer Agent and the Fund,
and the duties and responsibilities undertaken pursuant to this
Agreement shall be for the sole and exclusive benefit of the Transfer
Agent and the Fund. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and
assigns.
14.3 This Agreement does not constitute an agreement for a partnership or
joint venture between the Transfer Agent and the Fund. Other than as
provided in Section 15.1 and Schedule 1.2(f), neither party shall make
any commitments with third parties that are binding on the other party
without the other party's prior written consent.
12
<PAGE>
15. Subcontractors
15.1 The Transfer Agent may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston Financial
Data Services, Inc., a Massachusetts corporation ("Boston Financial")
which is duly registered as a transfer agent pursuant to Section
17A(c)(2) of the Securities Exchange Act of 1934, as amended, (ii) a
Boston Financial subsidiary duly registered as a transfer agent or
(iii) a Boston Financial affiliate duly registered as a transfer agent;
provided, however, that the Transfer Agent shall be fully responsible
to the Fund for the acts and omissions of Boston Financial or its
subsidiary or affiliate as it is for its own acts and omissions.
15.2 Nothing herein shall impose any duty upon the Transfer Agent in
connection with or make the Transfer Agent liable for the actions or
omissions to act of unaffiliated third parties such as by way of
example and not limitation, Airborne Services, Federal Express, United
Parcel Service, the U.S. Mails, the NSCC and telecommunication
companies, provided, if the Transfer Agent selected such company, the
Transfer Agent shall have exercised due care in selecting the same.
16. Miscellaneous
16.1 Amendment. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a
resolution of the Board of Directors of the Fund.
16.2 Massachusetts Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of
The Commonwealth of Massachusetts.
16.3 Force Majeure. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment or transmission failure or damage reasonably beyond
its control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other for any damages resulting
from such failure to perform or otherwise from such causes.
16.4. Consequential Damages. Neither party to this Agreement shall be liable
to the other party for consequential damages under any provision of
this Agreement or for any consequential damages arising out of any act
or failure to act hereunder.
16.5 Survival. All provisions regarding indemnification, warranty,
liability, and limits thereon, and confidentiality and/or protections
of proprietary rights and trade secrets shall survive the termination
of this Agreement.
16.6 Severability. If any provision or provisions of this Agreement shall be
held invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired.
16.7 Priorities Clause. In the event of any conflict, discrepancy or
ambiguity between the terms and conditions contained in this Agreement
and any Schedules or attachments hereto, the terms and conditions
contained in this Agreement shall take precedence.
13
<PAGE>
16.8 Waiver. No waiver by either party or any breach or default of any of
the covenants or conditions herein contained and performed by the other
party shall be construed as a waiver of any succeeding breach of the
same or of any other covenant or condition.
16.9 Merger of Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
16.10 Counterparts. This Agreement may be executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
16.11 Reproduction of Documents. This Agreement and all schedules, exhibits,
attachments and amendments hereto may be reproduced by any
photographic, photostatic, microfilm, micro-card, miniature
photographic or other similar process. The parties hereto each agree
that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether
or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and
that any enlargement, facsimile or further reproduction shall likewise
be admissible in evidence.
16.12 Notices. All notices and other communications as required or permitted
hereunder shall be in writing and sent by first class mail, postage
prepaid, addressed as follows or to such other address or addresses of
which the respective party shall have notified the other.
(a) If to State Street Bank and Trust Company, to:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Attention: Legal Department
Facsimile: (617) 483-2287
(b) If to the Fund, to:
Attention:
14
<PAGE>
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the attached Schedule A with respect to which it desires to
have the Transfer Agent render services as transfer agent under the
terms hereof, it shall so notify the Transfer Agent in writing, and if
the Transfer Agent agrees in writing to provide such services, such
series of Shares shall become a Portfolio hereunder.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
SSBCITI FUNDS INC.
BY:
______________________________________
ATTEST:
______________________________________
STATE STREET BANK AND TRUST COMPANY
BY:
______________________________________
Vice Chairman
ATTEST:
______________________________________
16
<PAGE>
SCHEDULE A
The Humane Equity Fund
SSBCITI FUNDS INC. STATE STREET BANK AND TRUST
COMPANY
BY:_______________________________ BY:__________________________________
17
<PAGE>
SCHEDULE 1.2(f)
ADDITIONAL TELEPHONE SUPPORT FEES AND SERVICES
Dated ____________
TELEPHONE SUPPORT SERVICES
1. Answer telephone inquiries from 8 AM to 6 PM, Eastern time, Monday
through Friday from existing customers and prospective customers of the
Fund for sales literature in accordance with the telephone script
provided by the Fund.
2. Answer questions pertaining thereto the extent that such questions are
answerable based upon the information supplied to Transfer Agent by the
Fund.
3. Incorporate new information into the above referenced script upon
written instructions from the Fund.
4. Maintain prospect detail information for thirteen (13) months
thereafter, provide such information to the Fund in the form that the
Fund may reasonably request.
5. Send all literature orders for information from Transfer Agent to
(fulfillment vendor TBD) a minimum of 1 transmissions per day.
6. Provide the Fund with a daily telephone report detailing the calls
received during the day.
7. Transfer Agent to provide the Fund with monthly conversion reports as
selected by the Fund from DST's standard report package.
8. TARGET SERVICE LEVELS: Average speed of answer is fifteen (15) seconds,
abandon rate of no more than 2%, and an overall service level of 85%.
The averages will be calculated on a weekly basis.
TELEPHONE SUPPORT FEES
1. Client Implementation $7,000
These start-up costs are intended to cover system set up and training
materials. System set up includes the process of loading and testing
tailored screens and implementing a customized download. Training
expenses include the cost of preparing customer specific product
reference materials.
2. Inbound Teleservicing
Our service fees and monthly minimum rate depends on the type of
coverage required:
<TABLE>
<CAPTION>
MINIMUM PER MINUTE
------- ----------
<S> <C> <C>
Regular Business Hours (8am-6pm)Mon-Fri $5,000 $2.00
</TABLE>
3. Data Entry $1.50 per item
For all data entry of information requests that are not generated by
telephone calls (BRE, coupons, etc)
18
<PAGE>
4. Out-Of-Pocket Expenses
The following expenses will be charged directly back:
Telephone line usage charges (800 connect time)
Fax transmissions, equipment
Line charges for order transmissions to fulfillment vendor
Forms
Overnight/Express Mail packages
Travel expenses, if on-site visits are requested
$.75 per order fee for all orders place in DST's Literature
System
Holiday Rate will be billed at $25 per hour, per associate
E. Marketing Reports - per execution $200
F. Special Projects
If special programming support is required to develop a need outside of
our current scope of services, this will be billed at $175.00 per hour.
ALL FEES WILL BE SUBJECT TO AN ANNUAL COST OF LIVING ADJUSTMENT BASED ON
REGIONAL CONSUMER PRICE INDEX.
SSBCITI FUNDS INC. STATE STREET BANK AND TRUST
COMPANY
BY:_______________________________ BY:______________________________
<PAGE>
SCHEDULE 2.1
THIRD PARTY ADMINISTRATOR(S) PROCEDURES
Dated ____________
1. On each Business Day, the TPA(s) shall receive, on behalf of and as
agent of the Fund(s), Instructions (as hereinafter defined) from the
Plan. Instructions shall mean as to each Fund (i) orders by the Plan
for the purchases of Shares, and (ii) requests by the Plan for the
redemption of Shares; in each case based on the Plan's receipt of
purchase orders and redemption requests by Participants in proper form
by the time required by the term of the Plan, but not later than the
time of day at which the net asset value of a Fund is calculated, as
described from time to time in that Fund's prospectus. Each Business
Day on which the TPA receives Instructions shall be a "Trade Date".
2. The TPA(s) shall communicate the TPA(s)'s acceptance of such
Instructions, to the applicable Plan.
3. On the next succeeding Business Day following the Trade Date on which
it accepted Instructions for the purchase and redemption of Shares,
(TD+1), the TPA(s) shall notify the Transfer Agent of the net amount of
such purchases or redemptions, as the case may be, for each of the
Plans. In the case of net purchases by any Plan, the TPA(s) shall
instruct the Trustees of such Plan to transmit the aggregate purchase
price for Shares by wire transfer to the Transfer Agent on (TD+1). In
the case of net redemptions by any Plan, the TPA(s) shall instruct the
Fund's custodian to transmit the aggregate redemption proceeds for
Shares by wire transfer to the Trustees of such Plan on (TD+1). The
times at which such notification and transmission shall occur on (TD+1)
shall be as mutually agreed upon by each Fund, the TPA(s), and the
Transfer Agent.
4. The TPA(s) shall maintain separate records for each Plan, which record
shall reflect Shares purchased and redeemed, including the date and
price for all transactions, and Share balances. The TPA(s) shall
maintain on behalf of each of the Plans a single master account with
the Transfer Agent and such account shall be in the name of that Plan,
the TPA(s), or the nominee of either thereof as the record owner of
Shares owned by such Plan.
5. The TPA(s) shall maintain records of all proceeds of redemptions of
Shares and all other distributions not reinvested in Shares.
6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic
account statements showing the total number of Shares owned by that
Plan as of the statement closing date, purchases and redemptions of
Shares by the Plan during the period covered by the statement, and the
dividends and other distributions paid to the Plan on Shares during the
statement period (whether paid in cash or reinvested in Shares).
<PAGE>
7. The TPA(s) shall, at the request and expense of each Fund, transmit to
the Plans prospectuses, proxy materials, reports, and other information
provided by each Fund for delivery to its shareholders.
8. The TPA(s) shall, at the request of each Fund, prepare and transmit to
each Fund or any agent designated by it such periodic reports covering
Shares of each Plan as each Fund shall reasonably conclude are
necessary to enable the Fund to comply with state Blue Sky
requirements.
9. The TPA(s) shall transmit to the Plans confirmation of purchase orders
and redemption requests placed by the Plans; and
10. The TPA(s) shall, with respect to Shares, maintain account balance
information for the Plan(s) and daily and monthly purchase summaries
expressed in Shares and dollar amounts.
11. Plan sponsors may request, or the law may require, that prospectuses,
proxy materials, periodic reports and other materials relating to each
Fund be furnished to Participants in which event the Transfer Agent or
each Fund shall mail or cause to be mailed such materials to
Participants. With respect to any such mailing, the TPA(s) shall, at
the request of the Transfer Agent or each Fund, provide at the TPA(s)'s
expense complete and accurate set of mailing labels with the name and
address of each Participant having an interest through the Plans in
Shares.
SSBCITI FUNDS INC. STATE STREET BANK AND TRUST
COMPANY
BY:_______________________________ BY:_________________________________
<PAGE>
SCHEDULE 3.1
FEES
Dated ____________
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. There is a minimum charge of $1,500 per
month per fund. Annual maintenance charges are given below.
Base Fee - per fund, per month $1,000
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Remote
Daily Dividend Funds $6.00
Non-Daily Dividend Funds $4.00
Full Service
Daily Dividend Funds $14.00
Non-Daily Dividend Funds $10.00
Closed Account Fee (per account, per month) $0.20
The above rates are to be incremented $0.25 per dividend payment cycle (e.g.,
monthly dividend, add $3.00 to the annual maintenance fee) $0.25
The following features will each be assessed an additional $1.00 as an add-on to
the annual per account rate if they are present:
Commission Reporting $1.00 each
12B-1
Contingent Deferred Sales Charges
Checkwriting
Each check presented for payment $1.00
Set up of Checkwriting Function $5.00 per account
<PAGE>
SCHEDULE 3.1
FEES
(continued)
Other Fees
<TABLE>
<S> <C>
Manually entered share & maintenance
transactions at Boston Financial $1.00 each
Telephone calls answered by Boston Financial $1.00 each
Letters written by Boston Financial $1.00 each
Omnibus accounts (not to be included as a
manually entered transaction) $2.50 per transaction
Listbill or automated payments $1.00 per transaction
New Account Set up Charge $3.00 per new account
TIN Certification $0.15
TIN Maintenance $0.25
Investor Processing - per Investor record $1.80
IRA Recordkeeping (per account, annually
added to other maintenance fees) $10.00
</TABLE>
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
confirmation statements, stationery, postage, forms, telephone, microfilm,
microfiche, disaster backup, photocopying and expenses incurred at the specific
direction of the fund. Postage for mass mailings is due seven days in advance of
the mailing date. Outstanding bills will be charged to the Custodial account if
unpaid on the 15th business day following the date of the bill.
Additionally, the foregoing fees may be increased in the following
circumstances:
(i) for any fund or enhanced processing requirements introduced by the
Maintenance Company (whether new or currently in existence) which Fund
seeks to offer, utilize or require fund or servicing features that are
not consistent with Management Company's current processing
requirements; or
(ii) if changes in existing laws, rules or regulations;
(a) require substantial system modifications or
(b) increase cost of performance hereunder.
<PAGE>
SCHEDULE 3.1
FEES
(continued)
In the event of (i) or (ii), the parties shall confer, diligently and in good
faith, and agree upon a new fee to cover such new fund feature or the amount of
the cost of compliance with regulatory changes.
Payment - The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices.
ALL FEES WILL BE SUBJECT TO AN ANNUAL COST OF LIVING ADJUSTMENT BASED ON
REGIONAL CONSUMER PRICE INDEX.
SSBCITI FUNDS INC. STATE STREET BANK AND TRUST
COMPANY
BY:_______________________________ BY:__________________________________
<PAGE>
[LETTERHEAD OF PIPER & MARBURY L.L.P.]
October 21, 1999
SSBCiti Funds Inc.
c/o Salomon Brothers Asset Management
Seven World Trade Center
New York, New York 10048
Re: Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as special Maryland counsel to SSBCiti Funds Inc. (the
"Fund") in connection with the registration by the Fund of an indefinite amount
shares of the Common Stock of The Humane Equity Fund, a series of the Fund, par
value $.001 per share (the "Shares"), pursuant to a registration statement on
Form N-1A, as amended (the "Registration Statement") under the Securities Act of
1933, as amended.
In this capacity, we have examined the Fund's charter and by-laws, the
proceedings of the Board of Directors of the Fund authorizing the issuance of
the Shares in accordance with the Registration Statement, and such other
statutes, certificates, instruments and documents relating to the Fund and
matters of law as we have deemed necessary to the issuance of this opinion. In
such examination, we have assumed, without independent investigation, the
genuineness of all signatures, the conformity of final documents in all material
respects to the versions thereof submitted to us in draft form, the authenticity
of all documents submitted to us as originals, and the conformity with originals
of all documents submitted to us as copies. As to factual matters, we have
relied on an officer's certificate and have not independently verified the
matters stated therein.
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
<PAGE>
PIPER & MARBURY
LLP.
SSBCiti Funds Inc.
October 21, 1999
Page 2
1. The Fund has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Fund pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated in the
Registration Statement in an amount not to exceed the number of Shares
authorized by the charter but unissued, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Piper & Marbury
<PAGE>
[LETTERHEAD OF KPMG]
CONSENT OF INDEPENDENT AUDITORS
The Shareholder and Board of Directors of
The Humane Equity Fund:
We consent to the use of our report dated October 20, 1999 included in the
prospectus and the reference to our firm under the heading "Independent
Accountants" included in the Statement of Additional Information.
KPMG LLP
KPMG LLP
New York, New York
October 20, 1999
<PAGE>
SSBCITI FUNDS INC.
SERVICES AND DISTRIBUTION PLAN
This Services and Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by SSBCiti Funds Inc., a corporation
organized under the laws of the State of Maryland (the "Company"), with respect
to the Humane Fund (the "Fund"), subject to the following terms and conditions:
SECTION 1. PAYMENTS FOR DISTRIBUTION AND SERVICES.
(a) Service and Distribution Fee. The Fund will pay to Salomon Smith
Barney Inc, a corporation organized under the laws of the State of Delaware (the
"Administrative Broker"), or the person whom it directs, a service and
distribution fee under the Plan at the annual rate of 0.25% of the average daily
net assets of the Fund (the "Fee").
(b) Payment of Fees. The Fee will be calculated daily and paid monthly
by the Fund at the annual rate indicated above. The Administrative Broker may
make payments to assist in the marketing and sales of shares of the Fund out of
any portion of any fee paid to the Administrative Broker or any of its
affiliates by the Fund, its past profits or any other sources available to it.
SECTION 2. EXPENSES COVERED BY THE PLAN.
(a) The Fee payable by the Fund is used by the Administrative Broker
for servicing stockholder accounts, including payments to selected brokers and
dealers. Such administrative and stockholder services may include processing
purchase, exchange and redemption requests from customers and placing orders
with the Fund's transfer agent; processing dividend and distribution payments
from the Fund on behalf of customers; providing information periodically to
customers showing their positions in shares; responding to inquiries from
customers concerning their investment in shares; arranging for bank wires; and
providing such other similar services as may be reasonably requested. In
addition, the Fee is paid to compensate the Administrative Broker for
distribution services provided by it in connection with its sale of shares as a
broker, and related expenses incurred, including payments by the Administrative
Broker to compensate or reimburse selected brokers or dealers for providing such
distribution services. Such services and expenses may include, but are not
limited to, the following: costs of printing and distributing the Fund's
Prospectus, Statement of Additional Information and sales literature to
prospective investors; an allocation of overhead and other branch office
distribution-related expenses of the Administrative Broker; payments to and
expenses of other persons who provide support services in connection with the
marketing and sales of the shares; any other costs and expenses relating to
distribution or sales support activities; and compensation for the
Administrative Broker's initial expense of paying its investment representatives
or introducing brokers a commission upon the sale of the Fund's shares. The
Administrative Broker may retain all or a portion of the Fee. The Fee paid to
selected securities brokers and dealers is paid as a
<PAGE>
continuing fee in the manner specified in the Prospectus based upon the value of
the average daily net assets of the shares that remain invested in the Fund
with respect to accounts that such brokers and dealers continue to service.
(b) The amount of the Fee payable by the Fund under Section 1 hereof is
not related directly to expenses incurred by the Administrative Broker and this
Section 2 does not obligate the Fund to reimburse the Administrative Broker for
such expenses. The Administrative Broker may retain any excess of the fees it
receives pursuant to this Plan over its expenses incurred in connection with
providing the services described in this Section 2. The Fee set forth in Section
1 will be paid by the Fund to the Administrative Broker unless and until the
Plan is terminated or not renewed, and any distribution or service expenses
incurred by the Administrative Broker on behalf of the Fund in excess of
payments of the Fee specified in Section 1 hereof which the Administrative
Broker has accrued through the termination date are the sole responsibility and
liability of the Administrative Broker and not an obligation of the Fund. The
Administrative Broker may waive receipt of fees under the Plan for a period of
time while retaining the ability to be paid under the Plan thereafter.
SECTION 3. INDIRECT DISTRIBUTION EXPENSE.
To the extent that any payments made by the Fund to the Administrative
Broker or Salomon Brothers Asset Management Inc, in its capacity as investment
adviser to the Fund, including payment of any administrative and other service
fees or investment advisory fees, may be deemed to be indirect payment of
distribution expenses, those indirect payments shall be deemed to be authorized
by this Plan.
SECTION 4. APPROVAL OF STOCKHOLDERS.
The Plan will not take effect with respect to the Fund, and no fee will
be payable in accordance with Section 1 of the Plan, until the Plan has been
approved by a vote of at least a majority of the outstanding voting securities
of the Fund. The Plan will be deemed to have been approved so long as a majority
of the outstanding voting securities of the Fund votes for the approval of the
Plan.
SECTION 5. APPROVAL BY DIRECTORS.
Neither the Plan nor any related agreements will take effect with
respect to the Fund until approved by a majority of both: (a) the full Board of
Directors of the Fund; and (b) those Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreements related to it (the "Independent Directors"),
cast in person at a meeting called for the purpose of voting on the Plan and the
related agreements.
<PAGE>
SECTION 6. CONTINUANCE OF THE PLAN.
The Plan will continue in effect from year to year with respect to the
Fund, so long as its continuance is specifically approved at least annually by
the vote of the Fund's Board of Directors in the manner described in Section 5
above.
SECTION 7. TERMINATION.
The Plan may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities (as so defined) of the Fund or by a majority vote of the
Independent Directors.
SECTION 8. AMENDMENTS.
The Plan may not be amended so as to increase materially the amounts of
the fee described in Section 1 above, unless the amendment is approved by a vote
of the holders of at least a majority of the outstanding voting securities of
the Fund. No material amendment to the Plan may be made unless approved by the
Fund's Board of Directors in the manner described in Section 5 above.
SECTION 9. SELECTION OF CERTAIN DIRECTORS.
While the Plan is in effect, the selection and nomination of the Fund's
Directors who are not interested persons of the Fund will be committed to the
discretion of the Directors then in office who are not interested persons of the
Fund.
SECTION 10. WRITTEN REPORTS.
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Fund's Board of Directors, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
SECTION 11. PRESERVATION OF MATERIALS.
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
SECTION 12. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
<PAGE>
SECTION 13. LIMITATION OF LIABILITY.
The Articles of Incorporation of the Fund, as amended from time to time
(the "Articles of Incorporation"), which is on file with the Secretary of State
of Maryland, provides that to the fullest extent permitted by Maryland law, no
Director or officer of the Fund shall be personally liable to the Fund or its
shareholders for money damages, except to the extent such exemption from
liability or limitation thereof is not permitted by the 1940 Act.
SECTION 14. GOVERNING LAW.
This Plan shall be governed by, and construed and interpreted in
accordance with, the law of the State of New York.
SSBCITI FUNDS INC.
By:
----------------------------------
Name:
Title:
Dated: October ___, 1999
