497(C) FILE NOS. 2-90518 AND 811-4006
LANDMARK FUNDS I
(CITISELECT(SM) FOLIO 200, CITISELECT(SM) FOLIO 300
AND CITISELECT(SM) FOLIO 400)
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. N-1A ITEM LOCATION
- -------- --------- --------
PART A PROSPECTUS
- ------ ----------
<S> <C> <C>
Item 1. Cover Page............................................ Cover Page
Item 2. Synopsis.............................................. Not Applicable
Item 3. Condensed Financial Information....................... Not Applicable
Item 4. General Description of Registrant..................... Investment Information; General
Information; Appendix
Item 5. Management of the Fund................................ Management; Expenses
Item 5A. Management's Discussion of Fund
Performance........................................... Not Applicable
Item 6. Capital Stock and Other Securities.................... General Information; Purchases; Redemptions;
Dividends and Distributions; Tax Matters
Item 7. Purchase of Securities Being Offered.................. Purchases; Redemptions
Item 8. Redemption or Repurchase.............................. Purchases; Redemptions
Item 9 Pending Legal Proceedings............................. Not Applicable
STATEMENT OF
ADDITIONAL
PART B INFORMATION
- ------
Item 10. Cover Page............................................ Cover Page
Item 11. Table of Contents..................................... Cover Page
Item 12. General Information and History....................... The Trust
Item 13. Investment Objectives and Policies.................... Investment Objectives and Policies;
Description of Permitted Investments and
Investment Practices; Investment Restrictions
Item 14. Management of the Fund................................ Management
Item 15. Control Persons and Principal Holders of Securities... Management
Item 16. Investment Advisory and Other Services................ Management
Item 17. Brokerage Allocation and Other Practices.............. Portfolio Transactions
Item 18. Capital Stock and Other Securities.................... Description of Shares, Voting Rights and
Liabilities
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered......................................... Description of Shares, Voting Rights and
Liabilities; Determination of Net Asset
Value; Valuation of Securities; Additional
Redemption Information
Item 20. Tax Status............................................ Certain Additional Tax Matters
Item 21. Underwriters.......................................... Management
Item 22. Calculation of Performance Data....................... Performance Information and Advertising
Item 23. Financial Statements.................................. Not Applicable
</TABLE>
PART C Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this
Registration Statement.
<PAGE>
497(c) File Nos. 2-90518 and 811-4006
SUPPLEMENT DATED MAY 1, 1996 TO
PROSPECTUS DATED FEBRUARY 29, 1996
FOR
CITISELECTSM FOLIO 200
CITISELECTSM FOLIO 300
CITISELECTSM FOLIO 400
No initial or contingent deferred sales charges will be imposed on shares
of the Funds purchased through July 19, 1996.
Purchase orders will be accepted beginning June 17, 1996.
<PAGE>
497(c) File Nos. 2-90518 and 811-4006
PROSPECTUS
February 29, 1996
CITISELECT(SM) FOLIO 200
CITISELECT(SM) FOLIO 300
CITISELECT(SM) FOLIO 400
This Prospectus describes three diversified mutual funds managed by
Citibank, N.A.: CitiSelectSM Folio 200, CitiSelectSM Folio 300 and
CitiSelectSM Folio 400. Each Fund has its own investment objective and
policies. The Funds are asset allocation funds that offer investors a
convenient way to own a professionally managed portfolio tailored to specific
investment goals.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE FUNDS SEEK THEIR INVESTMENT OBJECTIVES BY
INVESTING ALL OF THEIR INVESTABLE ASSETS IN DIFFERENT SERIES OF ASSET
ALLOCATION PORTFOLIOS. EACH PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AND
POLICIES AS ITS CORRESPONDING FUND. SEE "SPECIAL INFORMATION CONCERNING
INVESTMENT STRUCTURE" ON PAGE 11.
REMEMBER THAT SHARES OF THE FUNDS:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
CITIBANK OR ANY OF ITS AFFILIATES
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated February 29, 1996 (and incorporated by reference in this
Prospectus) has been filed with the Securities and Exchange Commission. Copies
of the Statement of Additional Information may be obtained without charge, and
further inquiries about the Funds may be made, by calling 1-800-846-5200
(customers in New York City may call 212-820-2380).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 3
Expense Summary ........................................................... 5
Investment Information .................................................... 6
Risk Considerations ....................................................... 9
Valuation of Shares ....................................................... 12
Purchases ................................................................. 12
Exchanges ................................................................. 13
Redemptions ............................................................... 13
Dividends and Distributions ............................................... 14
Management ................................................................ 14
Tax Matters ............................................................... 17
Performance Information ................................................... 17
General Information ....................................................... 18
Appendix A -- Permitted Investments and Investment Practices .............. 20
Appendix B -- Sales Charge and Purchase Program Information ............... 23
<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics
discussed in this summary.
THE FUNDS: This Prospectus describes three diversified mutual funds:
CITISELECT FOLIO 200, CITISELECT FOLIO 300 and CITISELECT FOLIO 400. Each
Fund has its own investment objective and policies. There can be no assurance
that any Fund will achieve its objective. Because each Fund invests through a
Portfolio, all references in this Prospectus to a Fund include its
corresponding Portfolio, except as otherwise noted.
INVESTMENT OBJECTIVES:
CITISELECT FOLIO 200: high total return over time consistent with a
primary emphasis on income and a secondary emphasis on capital
appreciation.
CITISELECT FOLIO 300: high total return over time consistent with a
balanced emphasis on income and capital appreciation.
CITISELECT FOLIO 400: high total return over time consistent with a
primary emphasis on capital appreciation and a secondary emphasis on
income for risk reduction purposes.
PRINCIPAL INVESTMENTS: Each Fund is a carefully selected and professionally
managed diversified mix of equity, fixed income and money market investments
that are structured to achieve specific risk and return objectives. CITISELECT
FOLIO 200 invests primarily in fixed income and money market securities.
CITISELECT FOLIO 300 emphasizes both equity securities and fixed income
securities. CITISELECT FOLIO 400 invests primarily in equity securities.
Current income is not a primary consideration for this Fund.
INVESTMENT MANAGER: Citibank, N.A., a wholly-owned subsidiary of Citicorp, is
the investment manager. Citibank and its affiliates manage more than $83
billion in assets worldwide. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the
Funds through a Service Agent on any Business Day. See "Purchases" and
"Redemptions."
PRICING: Shares of each Fund are offered at net asset value plus any
applicable sales charge (the maximum is 4.00% of the public offering price),
and are subject to a fee of up to 0.50% per annum of the Fund's average daily
net assets for distribution, sales and marketing and shareholder services.
Purchases of $1,000,000 or more are not subject to an initial sales charge,
but are subject to a 1.00% contingent deferred sales charge in the event of
certain redemptions within 12 months following purchase.
The sales charge may be reduced or eliminated through the following
programs:
Letter of Intent
Right of Accumulation
Reinstatement privilege
See "Purchases" and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of each other Fund, without an
initial or contingent deferred sales charge. See "Exchanges."
DIVIDENDS: Dividends are declared and paid monthly for CitiSelect Folio 200,
quarterly for CitiSelect Folio 300 and annually for CitiSelect Folio 400. Net
capital gains, if any, are distributed annually. See "Dividends and
Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares, which are not subject to a sales charge. See
"Dividends and Distributions."
WHO SHOULD INVEST: The Funds are asset allocation funds. Asset allocation
funds are a basic tool of investment professionals and are differentiated by
the use of investment management strategies and techniques that range from the
least aggressive to the most aggressive. The Funds offer a convenient way to
own a diversified professionally managed portfolio tailored to specific
investment goals and expectations of risk and return. While time horizon is a
factor, it is not necessarily the determinative factor in choosing to invest
in one of the Funds. Investment goals, such as buying a home, educating
children or saving for retirement, all determine the appropriate asset
allocation and amount of risk that an investor seeks. "Investment Information"
and "Risk Considerations."
CITISELECT FOLIO 200 is expected to be the least volatile of the three Funds
and is designed for the investor who is seeking lower risk provided by
substantial investments in income-producing securities, but who also seeks
some capital growth. CITISELECT FOLIO 300 offers a blend of capital
appreciation and income for the investor seeking a balanced approach by
emphasizing stocks for their higher capital appreciation potential but
retaining a significant income component to temper volatility. CITISELECT
FOLIO 400 is designed for the investor willing and able to take higher risks
in the pursuit of long-term capital appreciation. CitiSelect Folio 400 is
expected to be more volatile than the other Funds and is designed for
investors who can withstand greater market swings to seek potential long-term
rewards.
RISK FACTORS: There can be no assurance that any Fund will achieve its
investment objective, and each Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. Equity
securities fluctuate in value based on many factors, including actual and
anticipated earnings, changes in management, political and economic
developments and the potential for takeovers and acquisitions. The value of
debt securities generally fluctuates based on changes in the actual and
perceived creditworthiness of issuers. Also, the value of debt securities
generally goes down when interest rates go up, and vice versa. As a result,
shares may be worth more or less at redemption than at the time of purchase.
Each Fund may invest a portion of its assets in securities of companies
with small market capitalizations, which may have more risks than the
securities of other companies. Small cap companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources. There
is often less publicly available information about small cap companies than
about more established companies. As a result of these and other factors, the
prices of securities issued by small cap companies may be volatile. Shares of
the Funds, therefore, may be subject to greater fluctuation in value than
shares of an equity fund with more of its investments in securities of larger
more established companies.
Each Fund may invest a portion of its assets in non-U.S. securities. The
special risks of investing in non-U.S. securities include possible adverse
political, social and economic developments abroad, differing regulations to
which non-U.S. issuers are subject and different characteristics of non-U.S.
economies and markets. The Funds' non-U.S. securities often will trade in non-
U.S. currencies, which can be volatile and may be subject to governmental
controls or intervention. In addition, securities of non-U.S. issuers may be
less liquid and their prices more volatile than those of comparable U.S.
issuers.
Each Fund may invest in securities of issuers in developing countries.
Investors in the Funds should be able to assume the heightened risks and
volatility associated with investment in developing countries, including
greater risks of expropriation, confiscatory taxation and nationalization and
less social, political and economic stability; smaller (and, in many cases,
new) markets resulting in price volatility and illiquidity; national policies
which may restrict investment opportunities; and the absence of developed
legal structures.
Certain investment practices, such as the use of forward non-U.S. currency
exchange contracts, also may entail special risks. See "Risk Considerations"
and Appendix A for more information.
<PAGE>
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and
annual operating expenses for shares of each Fund. Each Fund invests all of
its investable assets in its corresponding Portfolio. The Trustees of the
Funds believe the aggregate per share expenses of the Funds and their
corresponding Portfolios will be less than or approximately equal to the
expenses that the Funds would incur if their assets were invested directly in
the types of securities held by their corresponding Portfolios. For more
information on costs and expenses, see "Management" -- page 14 and "General
Information -- Expenses" -- page 18.*
CITISELECT CITISELECT CITISELECT
FOLIO 200 FOLIO 300 FOLIO 400
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on
Purchases (as a percentage
of offering price) ......... 4.00% 4.00% 4.00%
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price
or redemption proceeds,
whichever is less) ......... See below(1) See below(1) See below(1)
ANNUAL FUND OPERATING EXPENSES
AFTER FEE WAIVERS
(AS A PERCENTAGE OF NET ASSETS):
Management Fees .............. 0.75% 0.75% 0.75%
12b-1 Fees (2) ............... 0.50% 0.50% 0.50%
Other Expenses:(3) ........... 0.25% 0.25% 0.50%
----- ----- -----
Total Fund Operating
Expenses(3) ............ 1.50% 1.50% 1.75%
===== ===== =====
(1) Purchases of $1,000,000 or more are not subject to an initial sales
charge, but are subject to a contingent deferred sales charge of 1.00% in
the event of redemptions within 12 months following purchase. See
"Purchases" for more information and for exceptions to the imposition of
the contingent deferred sales charge.
(2) Includes fees for distribution and shareholder servicing.
(3) After reimbursement. Absent reimbursement, "Other Expenses" and "Total
Fund Operating Expenses" would have been 1.07% and 2.32% for CitiSelect
Folio 200, 1.08% and 2.33% for CitiSelect Folio 300 and 2.00% and 3.25%
for CitiSelect Folio 400.
* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of a Fund will bear, either directly
or indirectly. Because the Funds are newly organized, Other Expenses in the
table are based on estimated amounts for the current fiscal year. There can
be no assurance that the fee waivers reflected in the table will continue.
Long-term shareholders in a Fund could pay more in sales charges than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming, except as otherwise noted, redemption at the end of each
period indicated below:
ONE YEAR THREE YEARS
CitiSelect Folio 200 $64 $86
CitiSelect Folio 300 $64 $86
CitiSelect Folio 400 $67 $93
The Example assumes that all dividends are reinvested and reflects certain
voluntary expense reimbursements. If expense reimbursements were not made, the
amounts in the example would be $72 and $110 for CitiSelect Folio 200, $72 and
$110 for CitiSelect Folio 300 and $81 and $136 for CitiSelect Folio 400.
Expenses are estimated because the Funds are newly organized. The assumption
of a 5% annual return is required by the Securities and Exchange Commission
for all mutual funds, and is not a prediction of any Fund's future
performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURNS OF ANY FUND. ACTUAL EXPENSES AND RETURNS MAY BE
GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES:
The investment objective of CITISELECT FOLIO 200 is high total return over
time consistent with a primary emphasis on income and a secondary emphasis on
capital appreciation. This Fund invests all of its investable assets in Asset
Allocation Portfolio 200.
The investment objective of CITISELECT FOLIO 300 is high total return over
time consistent with a balanced emphasis on income and capital appreciation.
This Fund invests all of its investable assets in Asset Allocation Portfolio
300.
The investment objective of CITISELECT FOLIO 400 is high total return over
time consistent with a primary emphasis on capital appreciation and a
secondary emphasis on income for risk reduction purposes. This Fund invests
all of its investable assets in Asset Allocation Portfolio 400.
The investment objective of each Fund may be changed by its Trustees
without approval by that Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES:
THE FUNDS
The Funds are asset allocation funds. Asset allocation funds are a basic
tool of investment professionals and are differentiated by the use of
investment management strategies and techniques that range from the least
aggressive to the most aggressive. The Funds offer a convenient way to own a
diversified professionally managed portfolio tailored to specific investment
goals and expectations of risk and return. While time horizon is a factor, it
is not necessarily the determinative factor in choosing to invest in one of
the Funds. Investment goals, such as buying a home, educating children or
saving for retirement, all determine the appropriate asset allocation and
amount of risk that an investor seeks. See "Investment Information" and "Risk
Considerations."
CITISELECT FOLIO 200 is expected to be the least volatile of the three
Funds and is designed for the investor who is seeking lower risk provided by
substantial investments in income-producing securities, but who also seeks
some capital growth. CITISELECT FOLIO 300 offers a blend of capital
appreciation and income for the investor seeking a balanced approach by
emphasizing stocks for their higher capital appreciation potential but
retaining a significant income component to temper volatility. CITISELECT
FOLIO 400 is designed for the investor willing and able to take higher risks
in the pursuit of long-term capital appreciation. CitiSelect Folio 400 is
expected to be more volatile than the other Funds, and is designed for
investors who can withstand greater market swings to seek potential long-term
rewards.
INVESTMENT STRATEGY
Each Fund is a carefully selected and professionally managed diversified
mix of equity, fixed income and money market investments that are structured
to achieve certain risk and return objectives. Citibank allocates each Fund's
assets among the equity class of investments, the fixed income class of
investments and the money market class of investments. In making asset
allocations, Citibank considers long-term performance and valuation measures
within and between asset classes and the effects of market and economic
variables on those relationships. It uses this information to determine the
overall mix of each Fund's assets among the three general asset classes. Each
Fund's allocation or asset mix is determined by Citibank to be the optimal
combination of stocks, bonds and money market instruments that reduces risk
and maximizes potential return for that Fund's distinct investment objective.
The Funds' asset allocations generally correlate to different levels of
investment risk and return. Equity securities have the potential to outperform
fixed income securities over the long term. Equity securities have the
greatest potential for growth of capital, yet are generally the most volatile
of the three asset types. Fixed income and money market securities sometimes
move in the opposite direction of equity securities and may provide investment
balance to a Fund. The risks of each asset class will vary.
Citibank expects that, in general, each Fund's assets will be allocated
among the equity, fixed income and money market classes as provided in the
following chart. However, cash flows of a Fund or changes in market valuations
could produce different results. Citibank will review each Fund's asset
allocation quarterly and expects, in general, to rebalance the Fund's
investments, if necessary, at that time. Rebalancing may be accomplished over
a period of time and may be limited by tax and regulatory requirements.
CITISELECT CITISELECT CITISELECT
FOLIO FOLIO FOLIO
200 300 400
ASSET CLASS RANGE RANGE RANGE
- ----------- ---------- ---------- ----------
Equity 25-45% 40-60% 55-85%
Fixed Income 35-55 35-55 15-35
Money Market 10-30 1-10 1-10
Citibank will diversify the equity class of each Fund by allocating the
Fund's portfolio of equity securities among large capitalization securities,
small capitalization securities and international securities. Citibank will
diversify the fixed income class of each Fund by allocating the Fund's
portfolio of fixed income securities among U.S. and foreign government and
corporate bonds. There is no requirement that Citibank allocate a Fund's
assets among all of the foregoing types of equity and fixed income securities
at all times. These types of securities have been selected because Citibank
believes that this additional level of asset diversification will provide each
Fund with the potential for higher returns with lower overall volatility.
From time to time Citibank may employ Subadvisers to perform the daily
management of a particular asset class for the Funds or of specific types of
securities within a particular asset class. Citibank will monitor and
supervise the activities of the Subadvisers and may terminate the services of
any Subadviser at any time. See "Management." In allocating each Fund's
investments among various asset classes and in supervising the Subadvisers,
Citibank employs a multi-style and multi-manager diversification strategy.
Citibank believes that there are periods when securities with particular
characteristics, or an investment style, outperform other types of securities
in the same asset class. For example, at certain times, equity securities with
growth characteristics outperform equities with income characteristics, and
vice versa. Citibank will seek to take advantage of this by blending asset
classes and investment styles on a complimentary basis in an effort to
maximize the consistency of returns over longer time periods, and to reduce
volatility.
In supervising the Subadvisers, Citibank will also be taking into account
the expertise they have demonstrated in particular areas and the historical
results they have achieved within selected asset classes or investment styles.
By combining these attributes with selected asset classes and styles, Citibank
will seek to increase returns.
Citibank has delegated the responsibility for the daily management of the
following kinds of securities to the following Subadvisers: large
capitalization value securities, Miller Anderson & Sherrerd LLP; small
capitalization value securities, Franklin Advisers, Inc.; international equity
securities, Hotchkis & Wiley; and foreign government securities, Pacific
Investment Management Company. Citibank is responsible for the daily
management of all other kinds of securities of the Funds, including large
capitalization growth securities, small capitalization growth securities,
fixed income securities and money market securities.
INITIAL ASSET ALLOCATIONS
Initially one or more of the Funds may be of such a size that it is not
practicable for the Fund to invest in all of the above-mentioned asset classes
and types of securities. Until in Citibank's judgment a Fund has sufficient
assets to fully employ an investment strategy, Citibank may allocate assets
across fewer of the asset classes and fewer of the types of securities
identified above than it otherwise would. As a Fund's asset size increases,
Citibank will add asset classes and types of securities until the desired
asset allocation is reached. There may also be a delay in investing in asset
classes or types of securities due to market conditions and availability of
suitable investments.
THE EQUITY CLASS
Equity securities include common stocks, securities convertible into
common stocks, preferred stocks, warrants for the purchase of stock and
depositary receipts (receipts which represent the right to receive the
securities of non-U.S. issuers deposited in a U.S. or correspondent bank).
While equity securities historically have experienced a higher level of
volatility risk than fixed income securities, they also historically have
produced higher levels of total return. Longer term, investors with
diversified equity portfolios have a higher probability of achieving their
investment goals with lower levels of volatility than those who have not
diversified.
Each Fund will diversify its equity portfolio by investing those assets
which are allocated to the equity class among equity securities issued by
large capitalization issuers, small capitalization issuers and international
issuers. The mix of equity securities will vary from Fund to Fund. For
example, the equity class of CitiSelect Folio 400 will emphasize securities of
small cap issuers. The equity class of CitiSelect Folio 300 will emphasize
securities of large cap and small cap issuers. There is no requirement that
each Fund invest in each type of equity security.
Large Cap Issuers. Large cap issuers are those with market capitalizations
typically of $1 billion or more. In the selection of equity securities of
large cap issuers, securities issued by established companies with stable
operating histories are emphasized.
Small Cap Issuers. Small cap issuers are those with market capitalizations
below the top 1,000 stocks that comprise the large and midrange capitalization
sector of the equity market. These stocks are comparable to, but not limited
to, the stocks comprising the Russell 2000 Index, an index of small
capitalization stocks. Small cap companies are generally represented in new or
rapidly changing industries. They may offer more profit opportunity in growing
industries and during certain economic conditions than do large and medium
sized companies. However, small cap companies also involve special risks.
Often, liquidity and overall business stability of a small cap company may be
less than that associated with larger capitalized companies. Small cap stocks
frequently involve smaller, rapidly growing companies with high growth rates,
negligible dividend yields and extremely high levels of volatility.
International Issuers. International issuers are those based outside the
United States. In the selection of equity securities of international issuers,
securities included in the Morgan Stanley Capital International Europe,
Australia and Far East Index (called the EAFE Index) are emphasized. The EAFE
Index contains approximately 1,100 equity securities of companies located in
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, The Netherlands, Norway, Singapore, Spain,
Sweden, Switzerland and the United Kingdom. In addition, securities of issuers
located in emerging markets may be selected. The U.S. investor may benefit
from exposure to international equity securities and foreign economies, which
may be influenced by distinctly different factors impacting a country's rate
of economic growth, interest rate structure, currency, industry and local
stock market environment. In addition, investments in the non-U.S. equity
markets allow for further diversification as many countries and regions have
risk/reward characteristics and market performance that are not highly
correlated to each other or to the U.S. market. International investments,
however, particularly in emerging countries, are subject to special risks not
generally present in domestic equity investments.
See "Risk Considerations" for certain risks associated with investing in
equity securities.
THE FIXED INCOME CLASS
Fixed income securities include bonds and short-term obligations. Fixed
income securities, in general, offer a fixed stream of cash flow and may
provide good to moderate relative total return benefits over time. Most bond
investments focus on generating income, while the potential for capital
appreciation is a secondary objective. The bond markets provide
diversification benefits to a holder of equity securities depending upon the
characteristics of the bonds comprising the fixed income class of each Fund.
The value of fixed income securities generally fluctuates inversely with
changes in interest rates, and also fluctuates based on other market and
credit factors as well.
Each Fund will diversify its fixed income portfolio by investing those
assets which are allocated to the fixed income class among investment grade
corporate debt obligations and securities issued by the U.S. Government and
its agencies and instrumentalities and by foreign governments. Investment
grade securities are those rated Baa or better by Moody's Investors Service,
Inc. or BBB or better by Standard & Poor's Rating Group or securities which
are not rated by these rating agencies, but which Citibank or a Subadviser
believes to be of comparable quality. Securities rated Baa or BBB and
securities of comparable quality may have speculative characteristics.
The mix of fixed income securities may vary from Fund to Fund. There is no
requirement that each Fund invest in each type of fixed income security. The
Funds may invest in securities with all maturities, including long bonds (10+
years), intermediate notes (3 to 10 years) and short-term notes (1 to 3 years).
Government Securities. U.S. Government securities may provide
opportunities for income with minimal credit risk. U.S. Treasury securities
are considered the safest of all government securities. U.S. Government
securities are high quality instruments issued or guaranteed as to principal
and interest by the U.S. Government or by an agency or instrumentality of the
U.S. Government. Securities issued or guaranteed as to principal and interest
by foreign governments or agencies or instrumentalities of foreign governments
(which include securities of supranational agencies) also may provide
opportunities for income with minimal credit risk. Government securities are,
however, not immune from the market risk of principal fluctuation associated
with changing interest rates.
Corporate Bonds. Investment in bonds of U.S. and foreign corporate issuers
may provide relatively higher levels of current income. These bonds are used
by U.S. and foreign corporate issuers to borrow money from investors, and may
have varying maturities. Corporate bonds have varying degrees of quality and
varying degrees of sensitivity to changes in interest rates. The value of
these investments fluctuates based on changes in interest rates and in the
underlying credit quality of the bond issuers represented in the portfolio.
See "Risk Considerations" for certain risks associated with investing in
fixed income securities.
THE MONEY MARKET CLASS
Each Fund will invest those assets which are allocated to the money market
class in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These instruments include short-term obligations of
the U.S. Government and repurchase agreements covering these obligations,
commercial paper of U.S. and foreign issuers, bank obligations (such as
certificates of deposit, bankers' acceptances and fixed time deposits) of U.S.
and non-U.S. banks and obligations issued or guaranteed by the governments of
Western Europe, Scandinavia, Australia, Japan and Canada. These investments
provide opportunities for income with low credit risk, and may result in a
lower yield than would be available from investments with a lower quality or a
longer term.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
FUTURES. Each of the Funds may use financial futures in order to protect
the Fund from fluctuations in interest rates (sometimes called "hedging")
without actually buying or selling debt securities, or to manage the effective
maturity or duration of fixed income securities in the Fund's portfolio in an
effort to reduce potential losses or enhance potential gain. The Funds also
may purchase stock index and foreign currency futures in order to protect
against declines in the value of portfolio securities or increases in the cost
of securities or other assets to be acquired and, subject to applicable law,
to enhance potential gain. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a security at
a specified future time and price, or for making payment of a cash settlement
based on changes in the value of a security, an index of securities or other
assets. In many cases, the futures contracts that may be purchased by the
Funds are standardized contracts traded on commodities exchanges or boards of
trade. See Appendix A for more information.
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, each Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Funds'
permitted investments and investment practices, see Appendix A -- Permitted
Investments and Investment Practices on page 20. The Funds will not
necessarily invest or engage in each of the investments and investment
practices in Appendix A but reserve the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains
a list of specific investment restrictions which govern the investment
policies of the Funds, including a limitation that each Fund may borrow money
from banks in an amount not to exceed 1/3 of the Fund's net assets for
extraordinary or emergency purposes (e.g., to meet redemption requests).
Except as otherwise indicated, the Funds' investment objectives and policies
may be changed without shareholder approval. If a percentage or rating
restriction (other than a restriction as to borrowing) is adhered to at the
time an investment is made, a later change in percentage or rating resulting
from changes in a Fund's securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of each Fund will be sold whenever it is
appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. The
turnover rates for CitiSelect Folio 200 and CitiSelect Folio 300 are not
expected to exceed 175% annually; the turnover rate for CitiSelect Folio 400
is not expected to exceed 100% annually. The amount of brokerage commissions
and realization of taxable capital gains will tend to increase as the level of
portfolio activity increases.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or
dealers for securities transactions for the Funds and the placing of such
orders, brokers or dealers may be selected who also provide brokerage and
research services to the Funds or the other accounts over which Citibank, the
Subadvisers or their affiliates exercise investment discretion. Citibank and
the Subadvisers are authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if Citibank
or the applicable Subadviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer.
RISK CONSIDERATIONS
The risks of investing in each Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. Each Fund's net asset value will fluctuate
based on changes in the values of the underlying portfolio securities. This
means that an investor's shares may be worth more or less at redemption than
at the time of purchase. Equity securities fluctuate in response to general
market and economic conditions and other factors, including actual and
anticipated earnings, changes in management, political developments and the
potential for takeovers and acquisitions. During periods of rising interest
rates the value of debt securities generally declines, and during periods of
falling rates the value of these securities generally increases. Changes by
recognized rating agencies in the rating of any debt security, and actual or
perceived changes in an issuer's ability to make principal or interest
payments, also affect the value of these investments.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's or BBB by S&P and equivalent securities may
have speculative characteristics. Adverse economic or changing circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade obligations.
NON-U.S. SECURITIES. Investments in non-U.S. securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S. and
non-U.S. issuers and markets are subject. These risks may include
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets and political
or social instability. Enforcing legal rights may be difficult, costly and
slow in non-U.S. countries, and there may be special problems enforcing claims
against non-U.S. governments. In addition, non-U.S. companies may not be
subject to accounting standards or governmental supervision comparable to U.S.
companies, and there may be less public information about their operations.
Non-U.S. markets may be less liquid and more volatile than U.S. markets, and
may offer less protection to investors such as the Funds. Prices at which a
Fund may acquire securities may be affected by trading by persons with
material non-public information and by securities transactions by brokers in
anticipation of transactions by the Fund.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a Fund's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. In addition, some non-U.S. currency values
may be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
The Funds may invest in issuers located in developing countries, which are
generally defined as countries in the initial stages of their
industrialization cycles with low per capita income. All of the risks of
investing in non-U.S. securities are heightened by investing in developing
countries. Shareholders should be aware that investing in the equity and fixed
income markets of developing countries involves exposure to economic
structures that are generally less diverse and mature, and to political
systems which can be expected to have less stability, than those of developed
countries. Historical experience indicates that the markets of developing
countries have been more volatile than the markets of developed countries with
more mature economies; such markets often have provided higher rates of
return, and greater risks, to investors. These heightened risks include (i)
greater risks of expropriation, confiscatory taxation and nationalization, and
less social, political and economic stability; (ii) the small current size of
markets for securities of issuers based in developing countries and the
currently low or non-existent volume of trading, resulting in a lack of
liquidity and in price volatility; (iii) certain national policies which may
restrict a Fund's investment opportunities including restrictions on investing
in issuers or industries deemed sensitive to relevant national interests; and
(iv) the absence of developed legal structures. Such characteristics can be
expected to continue in the future.
Equity securities traded in certain foreign countries may trade at price-
earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
SMALL CAP COMPANIES. Investors in the Funds should be aware that the
securities of companies with small market capitalizations may have more risks
than the securities of other companies. Small cap companies may be more
susceptible to market downturns or setbacks because they may have limited
product lines, markets, distribution channels, and financial and management
resources. Further, there is often less publicly available information about
small cap companies than about more established companies. As a result of
these and other factors, the prices of securities issued by small cap
companies may be volatile. Shares of the Funds, therefore, may be subject to
greater fluctuation in value than shares of an equity fund with more of its
investments in securities of larger, more established companies.
INVESTMENT PRACTICES. Certain of the investment practices employed for
the Funds may entail certain risks. These risks are in addition to the risks
described above and are described in Appendix A. See Appendix A -- Permitted
Investments and Investment Practices on page 20.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE. Unlike other mutual
funds which directly acquire and manage their own portfolio securities, each
of the Funds seeks its investment objective by investing all of its investable
assets in its corresponding Portfolio, a registered investment company. Each
of the Portfolios has the same investment objective and policies as its
corresponding Fund. In addition to selling a beneficial interest to a Fund, a
Portfolio may sell beneficial interests to other mutual funds, collective
investment vehicles, or institutional investors. Such investors will invest in
the Portfolio on the same terms and conditions and will pay a proportionate
share of the Portfolio's expenses. However, the other investors investing in
the Portfolio are not required to sell their shares at the same public
offering price as the Fund due to variations in sales commissions and other
operating expenses. Therefore, investors in a Fund should be aware that these
differences may result in differences in returns experienced by investors in
the different funds that invest in that Portfolio. Such differences in returns
are also present in other mutual fund structures. Information concerning other
holders of interests in the Portfolios is available from the Funds'
distributor. See "Management."
The investment objective of each of the Funds may be changed by its
Trustees without the approval of the Fund's shareholders, but shareholders
will be given written notice at least 30 days before any change is
implemented. If there is a change in a Fund's investment objective,
shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs. The
investment objective of each of the Portfolios may also be changed without the
approval of the investors in the Portfolio, but not without written notice
thereof to the investors in the Portfolio (and, if a Fund is then invested in
the Portfolio, notice to Fund shareholders) at least 30 days prior to
implementing the change. There can, of course, be no assurance that the
investment objective of either a Fund or its Portfolio will be achieved. See
"Investment Restrictions" in the Statement of Additional Information for a
description of the fundamental policies of each Fund and its Portfolio that
cannot be changed without approval by the holders of a "majority of the
outstanding voting securities" (as defined in the Investment Company Act of
1940) of the Fund or Portfolio. Except as stated otherwise, all investment
guidelines, policies and restrictions described herein and in the Statement of
Additional Information are non-fundamental.
Certain changes in a Portfolio's investment objectives, policies or
restrictions or a failure by a Fund's shareholders to approve a change in the
Portfolio's investment objectives or restrictions, may preclude the Fund from
investing its investable assets in the Portfolio or require the Fund to
withdraw its interest in the Portfolio. Any such withdrawal could result in an
"in kind" distribution of securities (as opposed to a cash distribution) from
the Portfolio which may or may not be readily marketable. If securities are
distributed, the Fund could incur brokerage, tax or other charges in
converting the securities to cash. The in kind distribution may result in the
Fund having a less diversified portfolio of investments or adversely affect
the liquidity of the Fund. Notwithstanding the above, there are other means
for meeting shareholder redemption requests, such as borrowing. The absence of
substantial experience with this investment structure could have an adverse
effect on an investment in the Funds.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower
returns. Additionally, because the Portfolio would become smaller, it may
become less diversified, resulting in increased portfolio risk; however, these
possibilities exist for traditionally structured funds which have large or
institutional investors who may withdraw from a fund. Also, funds with a
greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. If a Fund is requested to vote on
matters pertaining to its Portfolio (other than a vote by the Fund to continue
the operation of the Portfolio upon the withdrawal of another investor in the
Portfolio), the Fund will hold a meeting of its shareholders and will cast all
of its votes proportionately as instructed by its shareholders who vote at the
meeting. Shareholders of the Fund who do not vote will have no effect on the
outcome of such matters.
Each of the Funds may withdraw its investment from its Portfolio at any
time, if the Fund's Board of Trustees determines that it is in the best
interest of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all of
the investable assets of the Fund in another pooled investment entity having
the same investment objective as the Fund or the retaining of an investment
adviser to manage the Fund's assets in accordance with the investment policies
described above. In the event the Fund's Trustees were unable to find a
substitute investment company in which to invest the Fund's assets or were
unable to secure directly the services of an investment adviser, the Trustees
would determine the best course of action.
For a description of the management of the Portfolios, see "Management" --
page 14. For descriptions of the expenses of the Portfolios, see "Management"
and "General Information -- Expenses" -- page 18. For a description of the
investment objectives, policies and restrictions of the Portfolios, see
"Investment Information" -- page 6.
VALUATION OF SHARES
Net asset value per share of each Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange
(normally 4:00 p.m. Eastern time) by adding the market value of all securities
and other assets of a Fund (including the Fund's interest in its Portfolio),
then subtracting the liabilities of the Fund, and then dividing the result by
the number of outstanding shares of the Fund. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In
light of the non-U.S. nature of some of each Fund's investments, trading may
take place in securities held by the Funds on days which are not Business Days
and on which it will not be possible to purchase or redeem shares of the
Funds.
PURCHASES
General. Shares of the Funds are offered continuously and may be
purchased on any Business Day at the public offering price. Shares may be
purchased through certain financial institutions (which may include banks),
securities dealers and other industry professionals (called Service Agents)
that have entered into service agreements with the Distributor. Customers of
Citicorp Investment Services (CIS), a Service Agent, will purchase shares
through an account with CIS and should contact CIS at 1-800-846-5200
(customers in New York City may call 212-820-2380) for details. Customers of
other Service Agents should contact those Service Agents for information on
purchases. Each Service Agent may establish its own terms, conditions and
charges with respect to services it offers to its customers. Charges for these
services may include fixed annual fees and account maintenance fees. The
effect of any such fees will be to reduce the net return on the investment of
customers of that Service Agent. Each Service Agent has agreed to transmit to
its customers who are shareholders of a Fund appropriate prior written
disclosure of any fees that it may charge them directly.
The public offering price of shares of each Fund is the net asset value
next determined after an order in proper form is received and accepted by the
Transfer Agent, plus any applicable sales charge as provided below. Each Fund
and the Transfer Agent reserve the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time. Each Service Agent
is responsible for transmitting promptly orders of its customers.
Initial Sales Charge. The public offering price of shares of each Fund is
the next determined net asset value, plus any applicable sales charge, which
will vary with the size of the purchase as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS PERCENTAGE OF THE
--------------------------------------------------------------
SERVICE AGENT
COMMISSION
PUBLIC NET AS PERCENTAGE
AMOUNT OF PURCHASE AT OFFERING AMOUNT OF THE PUBLIC
PUBLIC OFFERING PRICE PRICE INVESTED OFFERING PRICE
--------------------- ----- -------- --------------
<S> <C> <C> <C>
Less than $100,000 ........................... 4.00% 4.17% 3.56%
$100,000 to less than $250,000 ............... 3.50% 3.63% 3.12%
$250,000 to less than $500,000 ............... 2.50% 2.56% 2.23%
$500,000 to less than $1,000,000 ............. 2.00% 2.04% 1.78%
$1,000,000 or more ........................... none* none* 0.50%
- ----------
* A contingent deferred sales charge may apply in certain instances.
</TABLE>
Elimination of Initial Sales Charge. Shares of the Funds are available
without an initial sales charge through exchanges for shares of the other
Funds. See "Exchanges." The initial sales charge does not apply to shares
acquired through the reinvestment of dividends and capital gains
distributions. Also, shares may be purchased without an initial sales charge
in certain circumstances. See Appendix B.
Reduced Sales Charge Programs. Shares of the Funds may be purchased at
reduced initial sales charges in certain circumstances. See Appendix B.
Waivers of Contingent Deferred Sales Charge. The contingent deferred sales
charge may be waived in certain circumstances. See Appendix B.
Service Agents which are banks or financial institutions will receive
transaction fees that are equal to the commissions paid to securities brokers.
The Distributor, at its expense, may from time to time provide additional
promotional incentives to brokers who sell shares of a Fund. In some
instances, these incentives may be offered to certain brokers who have sold or
may sell significant numbers of shares of a Fund. From time to time the
Distributor may make payments for distribution and/or shareholder servicing
activities out of its past profits and any other sources available to it.
EXCHANGES
Shares of each Fund may be exchanged for shares of each other Fund without
charge. Shareholders may place exchange orders through the Transfer Agent or,
if they are customers of a Service Agent, through their Service Agent, and may
do so by telephone if their account applications so permit. For more
information on telephone transactions see "Redemptions." All exchanges will be
effected based on the relative net asset values per share next determined
after the exchange order in proper form is received by the Transfer Agent. See
"Valuation of Shares." Shares of the Funds may be exchanged only after payment
in federal funds for the shares has been received by the Transfer Agent. This
exchange privilege may be modified or terminated at any time, upon at least 60
days' notice when such notice is required by SEC rules, and is available only
in those jurisdictions where such exchanges legally may be made. See the
Statement of Additional Information for further details. An exchange is
treated as a sale of the shares exchanged and could result in taxable gain or
loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after
a redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the Funds on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. Investors should
consult their Service Agents for details. A redemption is treated as a sale of
the shares redeemed and could result in taxable gain or loss to the
shareholder making the redemption.
Redemptions by Mail. Shareholders may redeem Fund shares by sending
written instructions in proper form (as determined by the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. Shareholders are
responsible for ensuring that a request for redemption is in proper form.
Redemptions by Telephone. Shareholders may redeem or exchange Fund shares
by telephone, if their account applications so permit, by calling the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent.
During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone exchange or redemption. In such an event, another method of
instruction, such as a written request sent via an overnight delivery service,
should be considered. The Funds, the Transfer Agent and each Service Agent
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for his or her
name, address, telephone number, Social Security number, and account number.
If these or other reasonable procedures are not followed, the Fund, the
Transfer Agent or the Service Agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholder will bear all risk of loss relating to a redemption or exchange by
telephone.
Payment of Redemptions. The proceeds of a redemption are paid in federal
funds normally on the next Business Day, but in any event within seven days.
If a shareholder requests redemption of shares which were purchased recently,
a Fund may delay payment until it is assured that good payment has been
received. In the case of purchases by check, this can take up to ten days. See
"Determination of Net Asset Value; Valuation of Securities; Additional
Purchase and Redemption Information" in the Statement of Additional
Information regarding the Funds' right to pay the redemption price in kind
with securities (instead of cash).
Reinstatement Privilege. Shareholders who have redeemed shares may
reinstate their Fund account without a sales charge up to the dollar amount
redeemed (with a credit for any contingent deferred sales charge paid) by
purchasing shares of the same Fund within 30 days after the redemption. To
take advantage of this reinstatement privilege, shareholders must notify the
Transfer Agent or, if they are customers of a Service Agent, their Service
Agent in writing at the time the privilege is exercised.
Questions about redemption requirements should be referred to the Transfer
Agent or, for customers of a Service Agent, their Service Agent. The right of
any shareholder to receive payment with respect to any redemption may be
suspended or the payment of the redemption price postponed during any period
in which the New York Stock Exchange is closed (other than weekends or
holidays) or trading on the Exchange is restricted or if an emergency exists.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of each Fund's net income from dividends and interest is
paid to its shareholders of record as a dividend as follows:
For CITISELECT FOLIO 200, monthly on or about the last day of each MONTH.
For CITISELECT FOLIO 300, quarterly on or about the last day of each
MARCH, JUNE, SEPTEMBER and DECEMBER.
For CITISELECT FOLIO 400, annually on or about the last day of each
DECEMBER.
Each Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually, in December.
Each Fund may also make additional distributions to its shareholders to the
extent necessary to avoid the application of the 4% non-deductible excise tax
on certain undistributed income and net capital gains of mutual funds.
A shareholder may elect to receive dividends and capital gains
distributions in either cash or additional shares of the same Fund issued at
net asset value.
MANAGEMENT
TRUSTEES AND OFFICERS: Each Fund is supervised by the Board of Trustees
of Landmark Funds I. The Portfolios are supervised by the Board of Trustees of
Asset Allocation Portfolios. In each case, a majority of the Trustees are not
affiliated with Citibank. In addition, a majority of the disinterested
Trustees of the Funds are different from a majority of the disinterested
Trustees of the Portfolios. More information on the Trustees and officers of
the Funds and the Portfolios appears under "Management" in the Statement of
Additional Information.
INVESTMENT MANAGER: Each Fund draws on the strength and experience of
Citibank. Citibank offers a wide range of banking and investment services to
customers across the United States and throughout the world, and has been
managing money since 1822. Its portfolio managers are responsible for
investing in money market, equity and fixed income securities. Citibank and
its affiliates manage more than $83 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank also serves as investment
adviser to other registered investment companies. Citibank's address is 153
East 53rd Street, New York, New York 10043.
Subject to policies set by the Trustees, Citibank is responsible for
overall management of the Funds' business affairs, and has a separate
Management Agreement with each Fund. Citibank also provides certain
administrative services to the Funds. These administrative services include
providing general office facilities and supervising the overall administration
of the Funds. Pursuant to sub-administrative services agreements, the
Distributor performs such sub-administrative duties for the Funds as from time
to time are agreed upon by Citibank and the Distributor. The Distributor's
compensation as sub-administrator is paid by Citibank.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank, has been
the overall portfolio manager of the Funds since their inception and is
responsible for determining asset allocations, supervising and monitoring the
performance of the Citibank personnel described below who are responsible for
the Funds' securities, and supervising and monitoring the performance of the
Subadvisers. Mr. Keblusek's investment experience is discussed below.
The following individuals at Citibank are responsible for daily management
of the following kinds of securities of each Fund.
<TABLE>
<S> <C>
Large capitalization growth securities Lawrence P. Keblusek, U.S. Chief Investment Officer, has been
responsible for the daily management of large cap growth securities
since the Funds' inception. Mr. Keblusek, who has 25 years experience
in the investment management industry, was most recently Senior Vice
President and Director of Portfolio Management for The Northern Trust
Company with responsibility for investment performance in the
organization's High Net Worth, Corporate and Institutional and Mutual
Fund Group. Earlier in his career, Mr. Keblusek held senior investment
positions with Maryland National Bank and the National Bank of
Washington.
Small capitalization growth securities David N. Pearl, Vice President, has been responsible for the daily
management of small cap growth securities since the Funds' inception.
Mr. Pearl is a portfolio manager of U.S. equity assets for
institutional clients, and joined Citibank in 1994. Prior to joining
Citibank he worked as a portfolio manager at Fleming Capital
Management and Bankers Trust Company.
Domestic fixed income securities Mark Lindbloom, Vice President, has been responsible for the daily
management of domestic fixed income securities since the Funds'
inception. Mr. Lindbloom has more than 12 years of investment
management experience. Prior to joining Citibank in 1986, Mr.
Lindbloom was a Fixed Income Portfolio Manager with Brown Brothers
Harriman & Co., where he managed fixed income assets for discretionary
corporate portfolios.
Money market securities Kevin Kennedy, Vice President, has been responsible for the daily
management of money market securities since the Funds' inception. Mr.
Kennedy is responsible for managing the Liquidity Management Unit of
the U.S. Fixed Income Department of Citibank Global Asset Management.
Prior to joining Citibank in March 1993, Mr. Kennedy was with the
Metropolitan Life Insurance Company as the Managing Trader of the
Treasurer's Division. He was responsible for the management of more
than $9 billion in short duration fixed income assets. Mr. Kennedy has
more than 15 years of fixed income management experience.
Citibank has delegated the daily management of the following kinds of securities of each Fund to the following
Subadvisers. Citibank pays all Subadviser compensation.
Large capitalization value securities Miller Anderson & Sherrerd LLP, One Tower Bridge, West Conshohocken,
Pennsylvania 19428. Miller Anderson has been a registered investment
adviser since 1974. Robert Marcin, CFA, Partner, has been responsible
for the daily management of large cap value securities since the
Funds' inception. Mr. Marcin has been with Miller Anderson since 1988.
Small capitalization value securities Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo,
California 94404. Franklin Advisers, a wholly-owned subsidiary of
Franklin Resources, Inc., is a registered investment adviser. William
P. Lippman, senior vice president of Franklin Advisers since June,
1988, has been responsible for the daily management of small
capitalization value securities since the Funds' inception. Prior to
joining Franklin Advisers, Mr. Lippman was president of L.F.
Rothschild Fund Management, Inc.
International equity securities Hotchkis & Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles,
California 90017. Hotchkis is a registered investment adviser founded
in 1980. Susan Ketterer, Vice President has been responsible for the
daily management of international equity securities since the Funds'
inception. Ms. Ketterer manages international equity accounts and is
also responsible for international investment research. She serves on
the Investment Policy Committee at Hotchkis. Prior to joining
Hotchkis, Ms. Ketterer was an associate with Bankers Trust and an
analyst at Dean Witter.
Foreign government securities Pacific Investment Management Company, 840 Newport Center Drive, Suite
360, P.O. Box 6430, Newport Beach, California 92658-9030. PIMCO is a
registered investment adviser. Lee R. Thomas, III, Senior
International Portfolio Manager, has been responsible for the daily
management of foreign government securities since the Funds'
inception. He joined PIMCO in 1995. Previously he was a member of
Investcorp's Management Committee, where he was responsible for global
securities and foreign exchange trading. Prior to Investcorp, he was
associated with Goldman Sachs, where he was an Executive Director in
the fixed income division of the London office.
</TABLE>
Management Fees. For its services under the Management Agreements,
Citibank receives a fee, which is accrued daily and paid monthly, of 0.75% of
each Fund's average daily net assets on an annualized basis for that Fund's
then-current fiscal year. This fee is higher than the management fee paid by
most mutual funds. Citibank may voluntarily agree to waive a portion of its
management fee from any Fund.
For their services to the Funds, Citibank pays the Subadvisers the
following fees, which are accrued daily and payable monthly and are at the
annual rates equal to the percentages specified below of the aggregate assets
of the Funds allocated to the particular Subadviser:
Miller Anderson & Sherrerd LLP 0.625% on first $25 million
0.375% on next $75 million
0.250% on next $400 million
0.20% on assets in excess of $500 million
Franklin Advisers, Inc. 0.55% on first $250 million
0.50% on remaining assets
Hotchkis & Wiley 0.60% on first $10 million
0.55% on next $40 million
0.45% on next $100 million
0.35% on next $150 million
0.30% on remaining assets
PIMCO 0.35% on first $200 million
0.30% on remaining assets
Banking Relationships. Citibank and its affiliates may have deposit, loan
and other relationships with the issuers of securities purchased on behalf of
the Funds, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Citibank has
informed the Funds that, in making its investment decisions, it does not
obtain or use material inside information in the possession of any division or
department of Citibank or in the possession of any affiliate of Citibank.
Bank Regulatory Matters. The Glass-Steagall Act prohibits certain
financial institutions, such as Citibank, from underwriting securities of
open-end investment companies, such as the Funds. Citibank believes that its
services under the Management Agreements and the activities performed by it or
its affiliates as Service Agents are not underwriting and are consistent with
the Glass-Steagall Act and other relevant federal and state laws. However,
there is no controlling precedent regarding the performance of the combination
of investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the investment manager or a
Service Agent, the Funds would seek alternative means for obtaining these
services. The Funds do not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and
Trust Company acts as transfer agent, dividend disbursing agent and custodian
for each Fund. Securities may be held by a sub-custodian bank approved by the
Trustees. State Street also provides certain fund accounting services and
calculates the daily net asset value for the Funds. The principal business
address of State Street is 225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: The Landmark Funds Broker-Dealer Services,
Inc., 6 St. James Avenue, Boston, MA 02116 (telephone: (617) 423-1679), is the
distributor of shares of each Fund. Under a Service Plan which has been
adopted in accordance with Rule 12b-1 under the 1940 Act, the Funds may pay
monthly fees at an annual rate not to exceed 0.50% of the average daily net
assets of each Fund. Such fees may be used to make payments to the Distributor
for distribution services, and to Service Agents and others in respect of the
sale of shares of the Funds, and to make payments for advertising, marketing
or other promotional activity, and payments for preparation, printing, and
distribution of prospectuses, statements of additional information and reports
for recipients other than regulators and existing shareholders. The Funds also
may make payments to the Distributor, Service Agents and others for providing
personal service or the maintenance of shareholder accounts. The Funds and the
Distributor provide to the Trustees quarterly a written report of amounts
expended pursuant to the Plan and the purposes for which the expenditures were
made.
During the period they are in effect, the Service Plan and related
Distribution Agreement obligate the Funds to pay fees to the Distributor,
Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if their expenses
exceed the fees provided for under the Service Plan for any Fund, the Fund
will not be obligated to pay more than those fees and, if their expenses are
less than the fees paid to them, they will realize a profit. Each Fund will
pay the fees to the Distributor, Service Agents and others until the Service
Plan or Distribution Agreement, as applicable, is terminated or not renewed.
In that event, the Distributor's or Service Agent's expenses in excess of fees
received or accrued through the termination date will be the Distributor's or
Service Agent's sole responsibility and not obligations of the Fund. In their
annual consideration of the continuation of the Plan for each Fund, the
Trustees will review the Plan and the expenses for each Fund separately.
TAX MATTERS
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
Each Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes. Each Fund may pay withholding or other
taxes to foreign governments during the year, however, and these taxes will
reduce those Funds' dividends.
Fund dividends and capital gains distributions are subject to federal
income tax and may also be subject to state and local taxes. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Generally, distributions from a
Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of distributions from net investment income may be
eligible for the dividends-received deduction available to corporations.
Distributions of long-term net capital gains will be taxed as such regardless
of how long the shares of a Fund have been held.
Fund distributions will reduce the distributing Fund's net asset value per
share. Shareholders who buy shares just before a Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
Early each year, each Fund will notify its shareholders of the amount and
tax status of distributions paid to shareholders for the preceding year.
Investors should consult their own tax advisers regarding the status of their
accounts under state and local laws.
PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of total rate of return. All performance
information is historical and is not intended to indicate future performance.
Total rates of return fluctuate in response to market conditions and other
factors, and the value of a Fund's shares when redeemed may be more or less
than their original cost.
Each Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period and reflects any change in net
asset value per share and is compounded to include the value of any shares
purchased with any dividends or capital gains declared during such period.
Period total rates of return may be "annualized." An "annualized" total rate
of return assumes that the period total rate of return is generated over a
one-year period.
Of course, any fees charged by a shareholder's Service Agent will reduce
that shareholder's net return on investment. See the Statement of Additional
Information for more information concerning the calculation of total rate of
return quotations for the Funds.
GENERAL INFORMATION
ORGANIZATION: Each Fund is a series of Landmark Funds I. Landmark Funds I
is a Massachusetts business trust which was organized on April 13,1984; it
also is an open-end management investment company registered under the 1940
Act. Landmark Funds I currently has five active series.
Each Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must invest at least 75% of its assets in cash and cash items,
U.S. Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
mutual fund and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
Each Portfolio is a series of Asset Allocation Portfolios, a New York
trust. The Declaration of Trust of Asset Allocation Portfolios provides that a
Fund and other entities investing in a Portfolio are each liable for all
obligations of that Portfolio. It is not expected that the liabilities of a
Portfolio would ever exceed its assets.
VOTING AND OTHER RIGHTS: Landmark Funds I may issue an unlimited number
of shares, may create new series of shares and may divide shares in each
series into classes. Each share of each Fund gives the shareholder one vote in
Trustee elections and other matters submitted to shareholders for vote. All
shares of each series of Landmark Funds I have equal voting rights except
that, in matters affecting only a particular Fund, only shares of that
particular Fund are entitled to vote.
At any meeting of shareholders of any Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with the instructions it
receives for all other shares of which that Service Agent is the holder of
record.
Each Fund's activities are supervised by Landmark Funds I's Board of
Trustees. Because Landmark Funds I is a Massachusetts business trust, the
Funds are not required to hold annual shareholder meetings. Shareholder
approval will usually be sought only for changes in a Fund's or Portfolio's
fundamental investment restrictions and for the election of Trustees under
certain circumstances. Trustees may be removed by shareholders under certain
circumstances. Each share of each Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation of that
Fund.
CERTIFICATES: The Funds' Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in a
Fund under one of several tax-sheltered plans. Such plans include IRAs, Keogh
or Corporate Profit-Sharing and Money-Purchase Plans, 403(b) Custodian
Accounts, and certain other qualified pension and profit-sharing plans.
Investors should consult with their Service Agent and their tax and retirement
advisers.
EXPENSES: In addition to amounts payable under its Management Agreement
and the Service Plan, each Fund is responsible for its own expenses,
including, among other things, the costs of securities transactions, the
compensation of Trustees that are not affiliated with Citibank, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
All fee waivers are voluntary and may be reduced or terminated at any
time.
COUNSEL AND INDEPENDENT AUDITORS: Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for each Fund. Price Waterhouse LLP, Boston,
Massachusetts, serves as independent auditor for each Fund.
------------------------
The Statement of Additional Information dated the date hereof contains
more detailed information about the Funds and the Portfolios, including
information relating to (i) investment policies and restrictions, (ii) the
Trustees, officers and investment manager, (iii) securities transactions, (iv)
the Funds' shares, including rights and liabilities of shareholders, (v) the
method used to calculate performance information, (vi) programs for the
purchase of shares, and (vii) the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of
Additional Information in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Funds or their distributor. This
Prospectus does not constitute an offering by the Funds or their distributor
in any jurisdiction in which such offering may not lawfully be made.
<PAGE>
APPENDIX A
PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in
order to earn a return on temporarily available cash. Repurchase agreements
are transactions in which an institution sells the Fund a security at one
price, subject to the Fund's obligation to resell and the selling
institution's obligation to repurchase that security at a higher price
normally within a seven day period. There may be delays and risks of loss if
the seller is unable to meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Fund and the agreement by the Fund to repurchase the
securities at an agreed-upon price, date and interest payment. When a Fund
enters into reverse repurchase transactions, securities of a dollar amount
equal in value to the securities subject to the agreement will be maintained
in a segregated account with the Fund's custodian. The segregation of assets
could impair the Fund's ability to meet its current obligations or impede
investment management if a large portion of the Fund's assets are involved.
Reverse repurchase agreements are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, each Fund may lend
its portfolio securities to broker-dealers and other institutional borrowers.
Such loans must be callable at any time and continuously secured by collateral
(cash or U.S. Government securities) in an amount not less than the market
value, determined daily, of the securities loaned. It is intended that the
value of securities loaned by a Fund would not exceed 30% of the Fund's total
assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or a reverse repurchase agreement, a Fund could
experience delays in recovering either the securities lent or cash. To the
extent that, in the meantime, the value of the securities lent has increased
or the value of the securities purchased has decreased, the Fund could
experience a loss.
RULE 144A SECURITIES. Each Fund may purchase restricted securities that
are not registered for sale to the general public if it is determined that
there is a dealer or institutional market in the securities. In that case, the
securities will not be treated as illiquid for purposes of the Fund's
investment limitations. The Trustees will review these determinations. These
securities are known as "Rule 144A securities," because they are traded under
SEC Rule 144A among qualified institutional buyers. Institutional trading in
Rule 144A securities is relatively new, and the liquidity of these investments
could be impaired if trading in Rule 144A securities does not develop or if
qualified institutional buyers become, for a time, uninterested in purchasing
Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. Each Fund may invest up to
10% of its net assets in securities for which there is no readily available
market. These illiquid securities may include privately placed restricted
securities for which no institutional market exists. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for a
Fund to sell them promptly at an acceptable price.
''WHEN-ISSUED'' SECURITIES. In order to ensure the availability of
suitable securities, each Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis, which means that the securities would be
delivered to the Fund at a future date beyond customary settlement time. Under
normal circumstances, the Fund takes delivery of the securities. In general,
the Fund does not pay for the securities until received and does not start
earning interest until the contractual settlement date. While awaiting
delivery of the securities, the Fund establishes a segregated account
consisting of cash, cash equivalents or high quality debt securities equal to
the amount of the Fund's commitments to purchase "when-issued" securities. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a "when-issued" basis may increase the volatility of its net
asset value.
COMMERCIAL PAPER. Each Fund may invest in commercial paper, which is
unsecured debt of corporations usually maturing in 270 days or less from its
date of issuance.
DEPOSITARY RECEIPTS FOR SECURITIES. American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") and other forms of depositary receipts for securities of non-U.S.
issuers provide an alternative method for a Fund to make non-U.S. investments.
These securities are not usually traded in the same currency as the securities
into which they may be converted. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and GDRs, in bearer form,
are designed for use in European and global securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs and GDRs are European and global receipts,
respectively, evidencing a similar arrangement.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and
regulatory limitations, assets of each Fund may be invested in shares of other
investment companies. Each Fund may invest up to 5% of its assets in closed-
end investment companies which primarily hold securities of non-U.S. issuers.
CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts may be
entered into for each Fund for the purchase or sale of non-U.S. currency to
hedge against adverse rate changes or otherwise to achieve the Fund's
investment objectives. A currency exchange contract allows a definite price in
dollars to be fixed for securities of non-U.S. issuers that have been
purchased or sold (but not settled) for the Fund. Entering into such exchange
contracts may result in the loss of all or a portion of the benefits which
otherwise could have been obtained from favorable movements in exchange rates.
In addition, entering into such contracts means incurring certain transaction
costs and bearing the risk of incurring losses if rates do not move in the
direction anticipated.
SECURITIES RATED Baa or BBB. Each Fund may purchase securities rated Baa
by Moody's or BBB by S&P, which may have poor protection of payment of
principal and interest. These securities are often considered to be
speculative and involve greater risk of default or price changes than
securities assigned a higher quality rating due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more
than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
ASSET-BACKED SECURITIES. Each Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or
automobile loan receivables, representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Each Fund also may purchase mortgage-backed securities issued or
guaranteed as to payment of principal and interest by the U.S. Government or
one of its agencies and backed by the full faith and credit of the U.S.
Government, including direct pass-through certificates of GNMA, as well as
mortgage-backed securities for which principal and interest payments are
backed by the credit of particular agencies of the U.S. Government. Mortgage-
backed securities are generally backed or collateralized by a pool of
mortgages. These securities are sometimes called collateralized mortgage
obligations or CMOs.
Even if the U.S. Government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment, because the underlying mortgages are refinanced to
take advantage of the lower rates. Thus the prices of mortgage-backed
securities may not increase as much as prices of other debt obligations when
interest rates decline, and mortgage-backed securities may not be an effective
means of locking in a particular interest rate. In addition, any premium paid
for a mortgage-backed security may be lost when it is prepaid.
FUTURES. Because the value of a futures contract changes based on the
price of the underlying security or other asset, futures contracts are
commonly referred to as "derivatives". Futures contracts are a generally
accepted part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. When a Fund purchases or
sells a futures contract, it is required to make an initial margin deposit.
Although the amount may vary, initial margin can be as low as 1% or less of
the face amount of the contract. Additional margin may be required as the
contract fluctuates in value. Since the amount of margin is relatively small
compared to the value of the securities covered by a futures contract, the
potential for gain or loss on a futures contract is much greater then the
amount of a Fund's initial margin deposit. None of the Funds currently intends
to enter into a futures contract if, as a result, the initial margin deposits
on all of that Fund's futures contracts would exceed approximately 5% of the
Fund's net assets. Also, each Fund intends to limit its futures contracts so
that the value of the securities covered by its futures contracts would not
generally exceed 50% of the Fund's other assets and to segregate sufficient
assets to meet its obligations under outstanding futures contracts.
The ability of a Fund to utilize futures contracts successfully will
depend on Citibank's or a Subadviser's ability to predict interest rate, stock
price or currency movements, which cannot be assured. In addition to general
risks associated with any investment, the use of futures contracts entails the
risk that, to the extent Citibank's or the Subadviser's view as to interest
rate, stock price or currency movements is incorrect, the use of futures
contracts, even for hedging purposes, could result in losses greater than if
they had not been used. This could happen, for example, if there is a poor
correlation between price movements of futures contracts and price movements
in a Fund's related portfolio position. Also, the futures markets may not be
liquid in all circumstances. As a result, in certain markets, a Fund might not
be able to close out a transaction without incurring substantial losses, if at
all. When futures contracts are used for hedging, even if they are successful
in minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result
from an increase in value of such position. As noted, each Fund may also enter
into transactions in futures contracts for other than hedging purposes
(subject to applicable law), including speculative transactions, which involve
greater risk. In particular, in entering into such transactions, a Fund may
experience losses which are not offset by gains on other portfolio positions,
thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, which could increase
the risks incurred by the Fund in entering into such transactions.
The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases a Fund's
potential for both gain and loss. As noted above, each of the Funds intends to
adhere to certain policies relating to the use of futures contracts, which
should have the effect of limiting the amount of leverage by the Fund.
OPTIONS. Each Fund may write (sell) covered call and put options and
purchase call and put options on securities. A Fund will write options on
securities for the purpose of increasing its return on such securities and/or
to protect the values of its portfolio. In particular, where the Fund writes
an option which expires unexercised or is closed out by the Fund at a profit,
it will retain the premium paid for the option which will increase its gross
income and will offset in part the reduced value of the portfolio security
underlying the option, or the increased cost of portfolio securities to be
acquired. If the price of the underlying security moves adversely to the
Fund's position, the option may be exercised and the Fund will be required to
purchase or sell the underlying security at a disadvantageous price, which may
only be partially offset by the amount of the premium.
By writing a call option on a security, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has
written call options.
Each of the Funds also may purchase options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect
on the Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency. Each Fund also may buy and
write options on stock indices.
Each Fund may purchase and write options to buy or sell interest rate
futures contracts and options on stock index futures contracts. Such
investment strategies will be used for hedging and non-hedging purposes,
subject to applicable law. Put and call options on futures contracts may be
traded by a Fund in order to protect against declines in values of portfolio
securities or against increases in the cost of securities to be acquired.
Purchase of options on futures contracts may present less risk in hedging the
portfolio of a Fund than the purchase or sale of the underlying futures
contracts since the potential loss is limited to the amount of the premium
plus related transaction costs. The writing of such options, however, does not
present less risk than the trading of futures contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition,
if an option is exercised, the Fund may suffer a loss on the transaction.
Each Fund may enter into forward foreign currency contracts for the
purchase or sale of a fixed quantity of a foreign currency at a future date at
a price set at the time of the contract. A Fund may enter into forward
contracts for hedging and non-hedging purposes including transactions entered
into for the purpose of profiting from anticipated changes in foreign currency
exchange rates. Each Fund has established procedures consistent with
statements of the Securities and Exchange Commission and its staff regarding
the use of forward contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase
and sale of such contracts.
Forward contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the futures and
options contracts described herein.
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while
forward contracts may be entered into only in the over-the-counter market.
Futures contracts and options on futures contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission and on foreign
exchanges. The securities underlying options and futures contracts traded by a
Fund may include domestic as well as foreign securities. Investors should
recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, futures contracts, options on futures contracts
and forward contracts entered into for non-hedging purposes involve greater
risk and could result in losses which are not offset by gains on other
portfolio assets. For example, a Fund may sell futures contracts on an index
of securities in order to profit from any anticipated decline in the value of
the securities comprising the underlying index. In such instances, any losses
on the futures transactions will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction.
APPENDIX B
SALES CHARGE AND PURCHASE PROGRAM INFORMATION
Elimination of Initial Sales Charge. Shares of each Fund may be purchased
without an initial sales charge by:
(i) tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code (the "Code"),
(ii) trust accounts for which Citibank or any subsidiary or affiliate
of Citibank (a "Citibank Affiliate") acts as trustee and exercises
discretionary investment management authority,
(iii) accounts purchasing shares through the Private Client Division
of Citicorp Investment Services (CIS) or through other programs accessed
through the Private Client Division of CIS, or the private banking
division of either Citibank, N.A., Citibank FSB or Citicorp Trust, N.A.,
(iv) accounts for which Citibank or any Citibank Affiliate performs
investment advisory services,
(v) accounts for which Citibank or any Citibank Affiliate charges fees
for acting as custodian,
(vi) trustees of any investment company for which Citibank or any
Citibank Affiliate serves as the manager, investment adviser or as a
shareholder servicing agent,
(vii) any affiliated person of a Fund, Citibank, the Distributor or
any Service Agent,
(viii) shareholder accounts established through a reorganization or
similar form of business combination approved by a Fund's Board of
Trustees or by the Board of Trustees of any other mutual fund advised or
managed by Citibank the terms of which entitle those shareholders to
purchase shares of a Fund at net asset value without a sales charge,
(ix) employee benefit plans qualified under Section 401 of the Code,
including salary reduction plans qualified under Section 401(k) of the
Code, subject to such minimum requirements as may be established by the
Distributor with respect to the number of employees or amount of purchase;
currently, these criteria require that (a) the employer establishing the
qualified plan have at least 25 eligible employees or (b) the amount
invested by such qualified plan in a Fund or in any combination of Funds
totals a minimum of $500,000,
(x) investors purchasing $1,000,000 or more of shares. However, a
contingent deferred sales charge will be imposed on such investments in
the event of certain share redemptions within 12 months following the
share purchase, at the rate of 1.00% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gains
distributions) or the total cost of such shares. In determining whether a
contingent deferred sales charge on shares is payable, and if so, the
amount of the charge, it is assumed that shares not subject to the
contingent deferred sales charge are the first redeemed followed by other
shares held for the longest period of time. All investments made during a
calendar month will age one month on the last day of the month and each
subsequent month. Any applicable contingent deferred sales charge will be
deferred upon an exchange of shares for shares of another Fund and
deducted from the redemption proceeds when such exchanged shares are
subsequently redeemed (assuming the contingent deferred sales charge is
then payable). The holding period of shares so acquired through an
exchange will be aggregated with the period during which the original
shares were held. The contingent deferred sales charge will be waived
under certain circumstances as provided below. Any applicable contingent
deferred sales charges will be paid to the Distributor,
(xi) subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund (other than a
Fund) if: (i) the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed); and (ii)
such redemption has occurred no more than 90 days prior to the purchase of
shares of the Fund, or
(xii) an investor who has a business relationship with an investment
consultant or other registered representative who joined a broker-dealer
which has a sales agreement with the Distributor from another investment
firm within six months prior to the date of purchase by such investor, if
(a) the investor redeems shares of another mutual fund sold through the
investment firm that previously employed that investment consultant or
other registered representative, and either paid an initial sales charge
or was at some time subject to, but did not actually pay, a deferred sales
charge or redemption fee with respect to the redemption proceeds, (b) the
redemption is made within 60 days prior to the investment in a Fund, and
(c) the net asset value of the shares of the Fund sold to that investor
without a sales charge does not exceed the proceeds of such redemption.
Reduced Sales Charge Programs. An individual who is a member of a
qualified group may purchase shares of a Fund at the reduced initial sales
charge applicable to the group as a whole. The sales charge is based upon the
aggregate dollar value of shares previously purchased and still owned by the
group, plus the amount of the purchase. A "qualified group" is one which (i)
has been in existence for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount, and (iii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its costs of
distributing shares. A qualified group must have more than ten members, must
be available to arrange for group meetings between representatives of the Fund
and the members, must agree to include sales and other materials related to
the Fund in its publications and mailings to members at reduced or no cost to
the Distributor, and must seek to arrange for payroll deduction or other bulk
transmission of investments to the Fund.
Reduced initial sales charges on shares also may be achieved through a
RIGHT OF ACCUMULATION or a LETTER OF INTENT. Under a RIGHT OF ACCUMULATION
eligible investors are permitted to purchase shares of a Fund at the public
offering price applicable to the total of (a) the dollar amount then being
purchased, plus (b) an amount equal to the then-current net asset value or
cost (whichever is higher) of the purchaser's combined holdings in the Funds.
The Right of Accumulation may be amended or terminated at any time.
If an investor anticipates purchasing $25,000 or more of shares of a Fund
alone or in combination with shares of the other Funds within a 13-month
period, the investor may obtain such shares at the same reduced sales charge
as though the total quantity were invested in one lump sum, subject to the
appointment of an attorney for redemptions of shares if the intended purchases
are not completed, by completing a LETTER OF INTENT. Investors should consult
"Determination of Net Asset Value; Valuation of Securities; Additional
Purchase and Redemption Information" in the Statement of Additional
Information and their Service Agents for more information about Rights of
Accumulation and Letters of Intent.
Waivers of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived for a total or partial redemption made within one year
of the death of the shareholder. This waiver is available where the deceased
shareholder is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship, and applies only to
redemption of shares held at the time of death. The contingent deferred sales
charge also will be waived in connection with:
(i) a lump sum or other distribution in the case of an Individual
Retirement Account ("IRA"), a self-employed individual retirement plan
(so-called "Keogh Plan") or a custodian account under Section 403(b) of
the Code, in each case following attainment of age 59 1/2,
(ii) a total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement plan, and
(iii) a redemption resulting from a tax-free return of an excess
contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation of the shareholder's status or holdings, as the case may be.
<PAGE>
497(c) File Nos. 2-90518 and 811-4006
Statement of
Additional Information
February 29, 1996
CITISELECTSM FOLIO 200
CITISELECTSM FOLIO 300
CITISELECTSM FOLIO 400
Landmark Funds I (the "Trust") is an investment company which was
organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 13, 1984. The Trust offers shares of CitiSelectSM Folio
200, CitiSelectSM Folio 300 and CitiSelectSM Folio 400 (collectively, the
"Funds"), to which this Statement of Additional Information relates, as well as
shares of one other series. The address and telephone number of the Trust are 6
St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679. The Trust invests
all of the investable assets of the Funds in, respectively, Asset Allocation
Portfolio 200, Asset Allocation Portfolio 300 and Asset Allocation Portfolio 400
(the "Portfolios"), which are separate series of Asset Allocation Portfolios
(the "Portfolio Trust"). The address of the Portfolio Trust is Elizabethan
Square, George Town, Grand Cayman, British West Indies.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Table of Contents Page
The Trust B-3
Investment Objectives and Policies B-3
Description of Permitted Investments and
Investment Practices B-4
Investment Restrictions B-18
Performance Information and Advertising B-20
Determination of Net Asset Value; Valuation of
Securities; Additional Redemption Information B-21
Management B-22
Portfolio Transactions B-29
Description of Shares, Voting Rights and Liabilities B-30
Certain Additional Tax Matters B-32
Financial Statements B-34
<PAGE>
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Trust's Prospectus, dated February 29, 1996. This Statement of Additional
Information should be read in conjunction with the Prospectus, a copy of which
may be obtained by an investor without charge by calling 1-800-________.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
Landmark Funds I (the "Trust") is an investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on April 13,
1984. This Statement of Additional Information relates to three funds offered by
the Trust -- CitiSelect Folio 200, CitiSelect Folio 300 and CitiSelect Folio 400
(collectively, the "Funds").
The Trust seeks the investment objectives of the Funds by investing all
of their investable assets in, respectively, Asset Allocation Portfolio 200,
Asset Allocation Portfolio 300 and Asset Allocation Portfolio 400 (the
"Portfolios"). The Portfolios are series of Asset Allocation Portfolios (the
"Portfolio Trust") and are open-end, diversified management investment
companies. Each Portfolio has the same investment objective and policies as the
Fund that invests in it. Because each of the Funds invests through its
corresponding Portfolio, all references in this Statement of Additional
Information to each Fund include such Fund's corresponding Portfolio, except as
otherwise noted. In addition, references to the Trust also include the Portfolio
Trust, except as otherwise noted.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser and
also provides certain administrative services to each of the Portfolios and the
Trust. Citibank manages the investments of the Portfolios from day to day in
accordance with each Portfolio's investment objective and policies. The
selection of investments for the Portfolios and the way they are managed depend
on the conditions and trends in the economy and the financial marketplaces.
The Boards of Trustees of the Trust and the Portfolio Trust provide
broad supervision over the affairs of the Funds and the Portfolios,
respectively. Shares of the Funds are continuously sold by The Landmark Funds
Broker-Dealer Services, Inc., the Funds' distributor ("LFBDS" or the
"Distributor"). Shares of each Fund are sold at net asset value plus a sales
charge that may be reduced on purchases involving substantial amounts and that
may be eliminated in certain circumstances. LFBDS receives a distribution fee
from each Fund pursuant to a Service Plan adopted with respect to shares of the
Funds in accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act").
2. INVESTMENT OBJECTIVES AND POLICIES
The investment objective of CitiSelect Folio 200 is high total return
over time consistent with a primary emphasis on income and a secondary emphasis
on capital appreciation.
The investment objective of CitiSelect Folio 300 is high total return
over time consistent with a balanced emphasis on income and capital
appreciation.
The investment objective of CitiSelect Folio 400 is high total return
over time consistent with a primary emphasis on capital appreciation and a
secondary emphasis on income for risk reduction purposes.
The investment objective of each Fund may be changed by its Trustees
without approval by that Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that any Fund will achieve its investment objective.
The Prospectus contains a discussion of the various types of securities
in which each Fund may invest and the risks involved in such investments. The
following supplements the information contained in the Prospectus concerning the
investment objective, policies and techniques of each Fund.
The Funds are asset allocation funds. Asset allocation funds are a
basic tool of investment professionals and are differentiated by the use of
investment management strategies and techniques that range from the least
aggressive to the most aggressive. The Funds offer a convenient way to own a
diversified professionally managed portfolio tailored to specific investment
goals and expectations of risk and return. While time horizon is a factor, it is
not necessarily the determinative factor in choosing to invest in one of the
Funds. Investment goals, such as buying a home, educating children or saving for
retirement all determine the appropriate asset allocation and amount of risk
that an investor seeks.
CitiSelect Folio 200 is expected to be the least volatile of the three
Funds and is designed for the investor who is seeking lower risk provided by
substantial investments in income-producing securities, but who also seeks some
capital growth. CitiSelect Folio 300 offers a blend of capital appreciation and
income for the investor seeking a balanced approach by emphasizing stocks for
their higher capital appreciation potential but retaining a significant income
component to temper volatility. CitiSelect Folio 400 is designed for the
investor willing and able to take higher risks in the pursuit of long-term
capital appreciation. CitiSelect Folio 400 is expected to be more volatile than
the other Funds, and is designed for investors who can withstand greater market
swings to seek potential long-term rewards.
The Trust has also adopted the following policies with respect to each
Fund's investments in (i) warrants and (ii) securities of issuers with less than
three years' continuous operation. The Trust's purchases of warrants for each
Fund will not exceed 5% of the Fund's net assets. Included within that amount,
but not exceeding 2% of its net assets, may be warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. Any such warrants
will be valued at their market value except that warrants which are attached to
securities at the time such securities are acquired for a Fund will be deemed to
be without value for the purpose of this restriction. The Trust will not invest
more than 5% of each Fund's assets in companies which, including their
respective predecessors, have a record of less than three years' continuous
operation.
The Trust may withdraw the investment of any Fund from its
corresponding Portfolio at any time if the Board of Trustees of the Trust
determines that it is in the best interests of the Fund to do so. Upon any such
withdrawal, the Fund's assets would continue to be invested in accordance with
the investment policies described herein with respect to that Fund. The policies
described above and those described below are not fundamental and may be changed
without shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
BANK OBLIGATIONS
Each of the Funds may invest in bank obligations, i.e., certificates of
deposit, time deposits (including Eurodollar time deposits) and bankers'
acceptances and other short-term debt obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. A bankers' acceptance is a bill of exchange or time draft
drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less. A certificate of deposit is a
negotiable interest-bearing instrument with a specific maturity. Certificates of
deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market prior to
maturity. A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
MORTGAGE-BACKED SECURITIES
Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in pools
of mortgage-related securities differ from other forms of debt securities which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only. Although GNMA certificates may offer
yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
Each Fund may also invest a portion of its assets in collateralized
mortgage obligations or "CMOs," a type of mortgage-backed security. CMOs are
securities collateralized by mortgages, mortgage pass-through certificates,
mortgage pay-through bonds (bonds representing an interest in a pool of
mortgages where the cash flow generated from the mortgage collateral pool is
dedicated to bond repayment), and mortgage-backed bonds (general obligations of
the issuers payable out of the issuers' general funds and additionally secured
by a first lien on a pool of single family detached properties). Many CMOs are
issued with a number of classes or series which have different maturities and
are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or
are credited with their pro rata portion of the scheduled payments of interest
and principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed by
U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
CORPORATE ASSET-BACKED SECURITIES
Each of the Funds may invest in corporate asset-backed securities.
These securities, issued by trusts and special purpose corporations, are backed
by a pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, each of the Funds
may purchase securities that are not registered ("restricted securities") under
the Securities Act of 1933 (the "Securities Act"), but can be offered and sold
to "qualified institutional buyers" under Rule 144A under the Securities Act.
However, none of the Funds invests more than 15% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and restricted
securities, unless the Board of Trustees of the Trust determine, based on the
trading markets for the specific restricted security, that it is liquid. The
Trustees may adopt guidelines and delegate to the Manager or to a Subadviser the
daily function of determining and monitoring liquidity of restricted securities.
The Trustees, however, retain sufficient oversight and are ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how the
market for restricted securities sold and offered under Rule 144A will develop,
the Trust's Trustees will carefully monitor each Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information.
SECURITIES OF NON-U.S. ISSUERS
Each of the Funds may invest in securities of non-U.S. issuers.
Investing in securities of foreign issuers may involve significant risks not
present in domestic investments. For example, the value of such securities
fluctuates based on the relative strength on the U.S. dollar. In addition, there
is generally less publicly available information about foreign issuers,
particularly those not subject to the disclosure and reporting requirements of
the U.S. securities laws. Non-U.S. issuers are generally not bound by uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to domestic issuers. Investments in securities of non-U.S. issuers
also involve the risk of possible adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation, limitation on the
removal of funds or other assets of the Fund, political or financial instability
or diplomatic and other developments which would affect such investments.
Further, economies of other countries or areas of the world may differ favorably
or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. stock markets, while growing in volume
and sophistication, are generally not as developed as those in the U.S., and
securities of some non-U.S. issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. Non-U.S. security trading practices, including those involving
securities settlement where the Fund's assets may be released prior to receipt
of payments, may expose the Fund to increased risk in the event of a failed
trade or the insolvency of a non-U.S. broker-dealer. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the U.S. and may be non-negotiable. In general, there is less overall
governmental supervision and regulation of non-U.S. securities exchanges,
brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of such
investments may be substantially less than their net asset value and that there
would be duplication of investment management and other fees and expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Funds to make non-U.S. investments. These securities are not usually
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement.
The Funds may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than securities of non-U.S. issuers of the same
class that are not subject to such restrictions.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security, usually
U.S. Government or Government agency issues. Under the 1940 Act repurchase
agreements may be considered to be loans by the buyer. A Fund's risk is limited
to the ability of the seller to pay the agreed-upon amount on the delivery date.
If the seller defaults, the underlying security constitutes collateral for the
seller's obligation to pay although that Fund may incur certain costs in
liquidating this collateral and in certain cases may not be permitted to
liquidate this collateral. All repurchase agreements entered into by the Funds
are fully collateralized, with such collateral being marked to market daily.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers and
other institutional borrowers. Such loans will usually be made only to member
banks of the U.S. Federal Reserve System and to member firms of the New York
Stock Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. A Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will not usually exceed three business days). During the existence
of a loan, a Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral or a fee from the borrower
in the event the collateral consists of securities. The Fund, would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially. However, the
loans would be made only to entities deemed by the Manager or a Subadviser to be
of good standing, and when, in the judgment of the Manager or a Subadviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. If the Manager or a Subadviser determines to make loans, it
is not intended that the value of the securities loaned would exceed 30% of the
value of the respective Fund's total assets.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Fund would take delivery of such securities. When a Fund commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, it sets
up procedures consistent with Securities and Exchange Commission policies. Since
those policies currently require that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the respective Fund expects always to have cash, cash equivalents,
or high quality debt securities sufficient to cover any commitments or to limit
any potential risk. However, even though the Funds do not intend to make such
purchases for speculative purposes and intend to adhere to the provisions of
Securities and Exchange Commission policies, purchases of securities on such
bases may involve more risk than other types of purchases. For example, a Fund
may have to sell assets which have been set aside in order to meet redemptions.
Also, if the Manager or a Subadviser determines it is advisable as a matter of
investment strategy to sell the "when-issued" or "forward delivery" securities,
the Fund would be required to meet its obligations from the then available cash
flow or the sale of securities, or, although it would not normally expect to do
so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Fund's payment
obligation).
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because each of the Funds may buy and sell securities denominated in
currencies other than the U.S. dollar, and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Funds may enter into
foreign currency exchange transactions to convert United States currency to
foreign currency and foreign currency to United States currency, as well as
convert foreign currency to other foreign currencies. A Fund either enters into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or uses forward contracts to purchase or
sell foreign currencies. The Funds may also enter into foreign currency hedging
transactions in an attempt to protect the value of the assets of the respective
Fund as measured in U.S. dollars from unfavorable changes in currency exchange
rates and control regulations. (Although each Fund's assets are valued daily in
terms of U.S. dollars, the Trust does not intend to convert a Fund's holdings of
other currencies into U.S. dollars on a daily basis.)
The Funds may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although currency
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
currency at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract, agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no fees
or commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a
security denominated in a non-U.S. currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of non-U.S.
currency involved in the underlying security transaction, the Fund will be able
to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
When the Manager or a Subadviser believes that the currency of a
particular country may suffer a substantial decline against the U.S. dollar, a
Fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of non-U.S. currency approximating the value of some or all
of the Fund's securities denominated in such non-U.S. currency. The precise
matching of the forward contract amounts and the value of the securities
involved is not generally possible since the future value of such securities in
non-U.S. currencies changes as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of a short-term hedging strategy is highly
uncertain. The Funds do not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts obligates a
Fund to deliver an amount of non-U.S. currency in excess of the value of the
Fund's securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated in the investment decisions made with regard to overall
diversification strategies. However, the Manager believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interests of the Fund will be served.
The Funds generally would not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, a Fund will either
sell the security and make delivery of the non-U.S. currency, or retain the
security and terminate its contractual obligation to deliver the non-U.S.
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
non-U.S. currency. If a Fund retains the security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the non-U.S. currency. Should forward prices decline
during the period between the date a Fund enters into a forward contract for the
sale of the non-U.S. currency and the date it enters into an offsetting contract
for the purchase of such currency, the Fund will realize a gain to the extent
the selling price of the currency exceeds the purchase price of the currency.
Should forward prices increase, the Fund will suffer a loss to the extent that
the purchase price of the currency exceeds the selling price of the currency.
It is impossible to forecast with precision the market value of Fund
securities at the expiration of the contract. Accordingly, it may be necessary
for a Fund to purchase additional non-U.S. currency on the spot market if the
market value of the security is less than the amount of non-U.S. currency the
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of such currency. Conversely, it may be necessary to sell on the
spot market some of the non-U.S. currency received upon the sale of the security
if its market value exceeds the amount of such currency the Fund is obligated to
deliver.
Each of the Funds may also purchase put options on a non-U.S. currency
in order to protect against currency rate fluctuations. If a Fund purchases a
put option on a non-U.S. currency and the value of the U.S. currency declines,
the Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect on
the Fund which otherwise would have resulted. Conversely, where a rise in the
U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency.
The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. However, the benefit to the
Fund from purchases of foreign currency options will be reduced by the amount of
the premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would require
it to forgo a portion or all of the benefits of advantageous changes in such
rates.
The Funds may write options on non-U.S. currencies for hedging purposes
or otherwise to achieve their investment objectives. For example, where a Fund
anticipates a decline in the value of the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund will be offset by the
amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because of
an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the premium.
However, the writing of a currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash, short-term money market instruments or high
quality debt securities in an account with the custodian in an amount sufficient
to discharge the Fund's obligations with respect to the option, by acquisition
of the non-U.S. currency or of a right to acquire such currency (in the case of
a call option) or the acquisition of a right to dispose of the currency (in the
case of a put option), or in such other manner as may be in accordance with the
requirements of any exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
Investing in ADRs and other depositary receipts presents many of the
same risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in currency
exchange rates will affect the value of these receipts. For example, decline in
the U.S. dollar value of another currency in which securities are primarily
traded will reduce the U.S. dollar value of such securities, even if their value
in the other non-U.S. currency remains constant, and thus will reduce the value
of the receipts covering such securities. A Fund may employ any of the above
described foreign currency hedging techniques to protect the value of its assets
invested in depositary receipts.
Of course, a Fund is not required to enter into the transactions
described above and does not do so unless deemed appropriate by the Manager or a
Subadviser. It should also be realized that this method of protecting the value
of a Fund's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase.
Each Fund has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts. Since those
policies currently recommend that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, each Fund expects to always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk.
OPTIONS
Each of the Funds may write covered call and put options and purchase
call and put options on securities. Call and put options written by a Fund may
be covered in the manner set forth below.
A call option written by a Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by a
Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by a
Fund is "covered" if the Fund maintains cash, short term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options written by a Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Each of the Funds may purchase options for hedging purposes or to
increase the Fund's return. Put options may be purchased to hedge against a
decline in the value of portfolio securities. If such decline occurs, the put
options will permit a Fund to sell the securities at the exercise price, or to
close out the options at a profit. By using put options in this way, the Fund
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by transaction
costs.
Each of the Funds may purchase call options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
Each of the Funds may write (sell) covered call and put options and
purchase call and put options on stock indices. In contrast to an option on a
security, an option on a stock index provides the holder with the right, but not
the obligation, to make or receive a cash settlement upon exercise of the
option, rather than the right to purchase or sell a security. The amount of this
settlement is equal to (i) the amount, if any, by which the fixed exercise price
of the option exceeds (in the case of a call) or is below (in the case of a put)
the closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier."
Each of the Funds may cover call options on stock indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio. Where a Fund covers a call option on a stock index through ownership
of securities, such securities may not match the composition of the index and,
in that event, the Fund will not be fully covered and could be subject to risk
of loss in the event of adverse changes in the value of the index. A Fund may
also cover call options on stock indices by holding a call on the same index and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A Fund may
cover put options on stock indices by maintaining cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or by holding a put on the
same stock index and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which a Fund has written
a call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, a Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Fund correlate with changes in the value of the index, writing covered put
options on indices will increase the Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium received for
writing the option.
Each of the Funds may also purchase put options on stock indices to
hedge the Fund's investments against a decline in value. By purchasing a put
option on a stock index, a Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Fund's investments does not decline as anticipated, or if the value of the
option does not increase, the Fund's loss will be limited to the premium paid
for the option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
Each of the Funds may purchase and write options on foreign currencies
in a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized.
FUTURES CONTRACTS
Each of the Funds may enter into interest rate futures contracts, stock
index futures contracts and/or foreign currency futures contracts. Such
investment strategies will be used for hedging purposes and for nonhedging
purposes, subject to applicable law.
A futures contract is an agreement between two parties for the purchase
or sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an index
of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases or
sells a futures contract. At the same time such a purchase or sale is made, the
Fund must provide cash or securities as a deposit ("initial deposit") known as
"margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant to
such a contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than the specific
security that provides the standard for the contract. In some (but not many)
cases, securities called for by a futures contract may not have been issued when
the contract was entered into.
A Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity or
duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as if the Fund sold bonds that it owned, or as if the Fund sold
longer-term bonds and purchased shorter-term bonds. If interest rates did
increase, the value of the Fund's debt securities would decline, but the value
of the futures contracts would increase, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Similar results
could be accomplished by selling bonds, or by selling bonds with longer
maturities and investing in bonds with shorter maturities. However, by using
futures contracts, the Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
purchase would be intended to have much the same effect as if the Fund purchased
bonds, or as if the Fund sold shorter-term bonds and purchased longer-term
bonds. If interest rates did decline, the value of the futures contracts would
increase.
Each of the Funds may purchase and sell foreign currency futures
contracts to attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if the
value of such securities in the currencies in which they are denominated remains
constant. A Fund may sell futures contracts on a foreign currency, for example,
where it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In the event such
decline occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
Although the use of futures for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position (e.g., if a
Fund sells a futures contract to protect against losses in the debt securities
held by the Fund), at the same time the futures contract limits any potential
gain which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the debt securities underlying such
contracts correlate with movements in the value of the Fund's securities. If the
security underlying a futures contract is different than the security being
hedged, they may not move to the same extent or in the same direction. In that
event, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by gains
on the Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund's other
investments. It is also possible that there may be a negative correlation
between the security underlying a futures contract and the securities being
hedged, which could result in losses both on the hedging transaction and the
securities. In these and other instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, even
where a Fund enters into futures transactions other than for hedging purposes,
the effectiveness of its strategy may be affected by lack of correlation between
changes in the value of the futures contracts and changes in value of the
securities which the Fund would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures contract
was originally entered into. While a Fund will establish a futures position only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures contract at
any specific time. In that event, it may not be possible to close out a position
held by the Fund, which could require the Fund to purchase or sell the
instrument underlying the futures contract or to meet ongoing variation margin
requirements. The inability to close out futures positions also could have an
adverse impact on the ability effectively to use futures transactions for
hedging or other purposes.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a futures
contract during a single trading day and prohibit trading beyond such limits
once they have been reached. The trading of futures contracts also is subject to
the risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times make
it difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or a Subadviser's investment judgment about the general direction of
interest rates is incorrect, the Fund's overall performance may be poorer than
if any such contract had not been entered into. For example, if a Fund hedged
against the possibility of an increase in interest rates which would adversely
affect the price of the Fund's bonds and interest rates decrease instead, part
or all of the benefit of the increased value of the Fund's bonds which were
hedged will be lost because the Fund will have offsetting losses in its futures
positions. Similarly, if a Fund purchases futures contracts expecting a decrease
in interest rates and interest rates instead increased, the Fund will have
losses in its futures positions which will increase the amount of the losses on
the securities in its portfolio which will also decline in value because of the
increase in interest rates. In addition, in such situations, if the Fund has
insufficient cash, the Fund may have to sell bonds from its investments to meet
daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so.
Each contract market on which futures contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
The Manager does not believe that these trading and position limits would have
an adverse impact on a Fund's hedging strategies.
CFTC regulations require compliance with certain limitations in order
to assure that a Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit a Fund from purchasing or
selling futures contracts (other than for bona fide hedging transactions) if,
immediately thereafter, the sum of the amount of initial margin required to
establish that Fund's non-hedging futures positions would exceed 5% of that
Fund's net assets.
Each Fund will comply with this CFTC requirement, and each Fund
currently intends to adhere to the additional policies described below. First,
an amount of cash or cash equivalents will be maintained by each Fund in a
segregated account with the Fund's custodian so that the amount so segregated,
plus the initial margin held on deposit, will be approximately equal to the
amount necessary to satisfy the Fund's obligations under the futures contract.
The second is that a Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by a
Fund not exceed approximately 50% of the market value of the Fund's total assets
other than its futures contracts. For purposes of this third policy, "market
value" of a futures contract is deemed to be the amount obtained by multiplying
the number of units covered by the futures contract times the per unit price of
the securities covered by that contract.
The ability of a Fund to engage in futures transactions may be limited
by the current federal income tax requirement that less than 30% of a Fund's
gross income be derived from the sale or other disposition of stock or
securities held for less than three months. In addition, the use of futures
contracts may increase the amount of taxable income of a Fund and may affect the
amount, timing and character of a Fund's income for tax purposes, as more fully
discussed herein in the section entitled "Certain Additional Tax Matters."
OPTIONS ON FUTURES CONTRACTS
Each of the Funds may purchase and write options to buy or sell futures
contracts in which the Fund may invest. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case of
a call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option by
the holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series, (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profits or loss on the transaction.
Options on futures contracts that are written or purchased by a Fund on
U.S. exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the CFTC and
the performance guarantee of the exchange clearinghouse. In addition, options on
futures contracts may be traded on foreign exchanges.
Each of the Funds may cover the writing of call options on futures
contracts (a) through purchases of the underlying futures contract, (b) through
ownership of the instrument, or instruments included in the index, underlying
the futures contract, or (c) through the holding of a call on the same futures
contract and in the same principal amount as the call written where the exercise
price of the call held (i) is equal to or less than the exercise price of the
call written or (ii) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. A Fund may cover the writing of put options on
futures contracts (a) through sales of the underlying futures contract, (b)
through segregation of cash, short-term money market instruments or high quality
debt securities in an amount equal to the value of the security or index
underlying the futures contract, (c) through the holding of a put on the same
futures contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by a Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options on futures contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call option on a futures contract written by
a Fund, the Fund will be required to sell the underlying futures contract which,
if the Fund has covered its obligation through the purchase of such contract,
will serve to liquidate its futures position. Similarly, where a put option on a
futures contract written by a Fund is exercised, the Fund will be required to
purchase the underlying futures contract which, if the Fund has covered its
obligation through the sale of such contract, will close out its futures
position.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities deliverable on exercise
of the futures contract. A Fund will receive an option premium when it writes
the call, and, if the price of the futures contract at expiration of the option
is below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's security holdings. Similarly, the writing of a put option
on a futures contract constitutes a partial hedge against increasing prices of
the securities deliverable upon exercise of the futures contract. If a Fund
writes an option on a futures contract and that option is exercised, the Fund
may incur a loss, which loss will be reduced by the amount of the option premium
received, less related transaction costs. A Fund's ability to hedge effectively
through transactions in options on futures contracts depends on, among other
factors, the degree of correlation between changes in the value of securities
held by the Fund and changes in the value of its futures positions. This
correlation cannot be expected to be exact, and the Fund bears a risk that the
value of the futures contract being hedged will not move in the same amount, or
even in the same direction, as the hedging instrument. Thus it may be possible
for a Fund to incur a loss on both the hedging instrument and the futures
contract being hedged.
Each of the Funds may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest or exchange
rates, a Fund could, in lieu of selling futures contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, the Fund could
purchase call options on futures contracts, rather than purchasing the
underlying futures contracts.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trust, on behalf
of the Portfolios, have each adopted the following policies which may not be
changed with respect to any Fund or Portfolio without approval by holders of a
majority of the outstanding voting securities of that Fund or Portfolio, which
as used in this Statement of Additional Information means the vote of the lesser
of (i) 67% or more of the outstanding voting securities of the Fund or Portfolio
present at a meeting at which the holders of more than 50% of the outstanding
voting securities of the Fund or Portfolio are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund or
Portfolio. The term "voting securities" as used in this paragraph has the same
meaning as in the 1940 Act.
None of the Funds or Portfolios may:
(1) Borrow money, except that as a temporary measure for extraordinary
or emergency purposes it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed (nor purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Fund or Portfolio, taken at market value). It is intended that a Fund or
Portfolio would borrow money only from banks and only to accommodate requests
for the repurchase of shares of the Fund or beneficial interests in the
Portfolio while effecting an orderly liquidation of portfolio securities.
(2) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of the
Fund's or Portfolio's total assets (taken at market value), (b) through the use
of repurchase agreements or the purchase of short-term obligations or (c) by
purchasing all or a portion of an issue of debt securities of types commonly
distributed privately to financial institutions. The purchase of short-term
commercial paper or a portion of an issue of debt securities which is part of an
issue to the public shall not be considered the making of a loan.
(3) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Fund or
Portfolio more than 10% of the voting securities of such issuer to be held by
the Fund or Portfolio, except that, with respect to each Fund, the applicable
Trust may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objectives and policies
and substantially the same investment restrictions as those with respect to the
Fund (a "Qualifying Portfolio").
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's or Portfolio's total assets more
than 5% of the Fund's or Portfolio's assets (taken at market value) to be
invested in the securities of such issuer (other than securities or obligations
issued or guaranteed by the United States, any state or political subdivision
thereof, or any political subdivision of any such state, or any agency or
instrumentality of the United States or of any state or of any political
subdivision of any state), except that, with respect to each Fund, the Trust may
invest all or substantially all of the Fund's assets in a Qualifying Portfolio.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's or Portfolio's
investment objectives, up to 25% of its assets, at market value at the time of
each investment, may be invested in any one industry.
(6) Underwrite securities issued by other persons, except that all the
assets of the Fund may be invested in a Qualifying Portfolio and except in so
far as the Fund or Portfolio may technically be deemed an underwriter under the
Securities Act in selling a security.
(7) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts in
the ordinary course of business (each of the Fund and the Portfolio reserves the
freedom of action to hold and to sell real estate acquired as a result of the
ownership of securities by the Fund or the Portfolio).
(8) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options, futures contracts, and options on futures contracts,
including deposits of initial and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction and except as
appropriate to evidence a debt incurred without violating Investment Restriction
(1) above.
NON-FUNDAMENTAL RESTRICTIONS
Each Fund and each Portfolio does not as a matter of operating policy:
(i) borrow money for any purpose in excess of 10% of the net assets of
the Fund or Portfolio (taken at cost) (moreover, the Fund or Portfolio will not
purchase any securities for the Fund or Portfolio at any time at which
borrowings exceed 5% of the total assets of the Fund or Portfolio (taken at
market value)),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the net assets of the Fund or Portfolio (taken at market value),
(iii) sell any security which the Fund or Portfolio does not own unless
by virtue of the ownership of other securities there is at the time of sale a
right to obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions (provided that this
limitation shall not prevent the Fund or Portfolio from entering into futures
contracts or options thereon),
(iv) invest for the purpose of exercising control or management, except
that all of the assets of the Fund may be invested in a Qualifying Portfolio,
(v) purchase securities issued by any registered investment company,
except that all of the assets of the Fund may be invested in a Qualifying
Portfolio and except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund or Portfolio will not purchase the securities of any
registered investment company if such purchase at the time thereof would cause
more than 10% of the total assets of the Fund or Portfolio (taken in each case
at the greater of cost or market value) to be invested in the securities of such
issuers or would cause more than 3% of the outstanding voting securities of any
such issuer to be held for the Fund or Portfolio (for purposes of this clause
(v) securities of non-U.S. banks shall be treated as investment company
securities, except that debt securities and non-voting preferred stock of
non-U.S. banks are not subject to the 10% limitation described herein),
(vi) invest more than 15% of the net assets of the Fund or Portfolio in
securities that are not readily marketable, including debt securities for which
there is no established market and fixed time deposits and repurchase agreements
maturing in more than seven days, except that all the assets of the Fund may be
invested in a Qualifying Portfolio,
(vii) purchase or retain any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust or of the Portfolio Trust, or is an officer or director of the
Manager, if after the purchase of the securities of such issuer by the Fund or
Portfolio, one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value,
(viii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 10% of the net
assets of the Fund or Portfolio (taken at market value) is held as collateral
for such sales at any one time (the Funds and Portfolios do not presently intend
to make such short sales for investment purposes).
These policies are not fundamental and may be changed by each Fund or
Portfolio without the approval of its shareholders or holders of beneficial
interests.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in this Registration Statement is adhered
to at the time an investment is made or assets are so utilized, a later change
in percentage resulting from changes in the value of the securities or a later
change in the rating of the securities held for the Fund will not be considered
a violation of policy.
5. PERFORMANCE INFORMATION AND ADVERTISING
A total rate of return quotation for a Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized total
rate of return quotation is calculated by (x) adding 1 to the period total rate
of return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. Total rates of return may also be calculated on investments at
various sales charge levels or at net asset value. Any performance data which is
based on a reduced sales charge or net asset value would be reduced if the
maximum sales charge were taken into account.
From time to time, advertising and marketing material of any of the
Funds may include charts showing the historical performance of hypothetical
portfolios comprised of classes of assets similar to those in which the Funds
invest. The classes of assets will be represented by the historical performance
of specific unmanaged indices. The information contained in such charts should
not be viewed as a projection of results of any of the Funds or as the
historical performance of any of the Funds. In addition, the past performance
illustrated by such charts should not be viewed as a guarantee of future
results.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL REDEMPTION INFORMATION
The net asset value of each share of each Fund is determined each day
during which the New York Stock Exchange is open for trading ("Business Day").
As of the date of this Statement of Additional Information, such Exchange is
open for trading every weekday except for the following holidays (or the days on
which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of net asset value of shares of a Fund is made once each day as of
the close of regular trading on such Exchange by adding the market value of all
securities and other assets of a Fund (including the Fund's interest in its
Portfolio), then subtracting the liabilities of the Fund, and then dividing the
result by the number of outstanding shares of the Fund. The net asset value per
share is effective for orders received and accepted by the Distributor prior to
its calculation.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates at the time of valuation. Equity
securities are valued at the last sale price on the exchange on which they are
primarily traded or on the NASDAQ system for unlisted national market issues, or
at the last quoted bid price for securities in which there were no sales during
the day or for unlisted securities not reported on the NASDAQ system. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time when net assets are valued. Bonds and other fixed income
securities (other than short-term obligations) are valued on the basis of
valuations furnished by a pricing service, use of which has been approved by the
Board of Trustees of the Trust. In making such valuations, the pricing service
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations (maturing
in 60 days or less) are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees of the Trust. Futures contracts are
normally valued at the settlement price on the exchange on which they are
traded. Securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees of the Trust.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the
Exchange and may also take place on days on which the Exchange is closed. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when a
Fund's net asset value is calculated, such securities will be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined
on the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued plus amortization of premiums.
Subject to compliance with applicable regulations, the Trust has
reserved the right to pay the redemption or repurchase price of shares of the
Funds, either totally or partially, by a distribution in kind of readily
marketable securities (instead of cash). The securities so distributed would be
valued at the same amount as that assigned to them in calculating the net asset
value for the shares or beneficial interests being sold. If a holder of shares
or beneficial interests received a distribution in kind, such holder could incur
brokerage or other charges in converting the securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the Securities and Exchange
Commission (the "SEC"), exists making disposal of a Fund's investments or
determination of its net asset value not reasonably practicable; (b) the New
York Stock Exchange is closed (other than customary weekend and holiday
closings); or (c) the SEC has by order permitted such suspension.
7. MANAGEMENT
TRUSTEES
The Trustees and officers of the Trust and the Portfolio Trust and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust or the Portfolio Trust. Unless otherwise indicated below, the address
of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts. The
address of the Portfolio Trust is Elizabethan Square, George Town, Grand Cayman,
British West Indies.
TRUSTEES OF THE TRUST
H.B. ALVORD (aged 73) -- Treasurer-Tax Collector, County of Los Angeles
(retired, March, 1984); Chairman, certain registered investment companies in the
59 Wall Street funds group. His address is P.O. Box 1812, Pebble Beach,
California.
PHILIP W. COOLIDGE* (aged 44) -- President of the Trust and the Portfolio Trust;
Chief Executive Officer, Signature Financial Group, Inc. and The Landmark Funds
Broker-Dealer Services, Inc. (since December, 1988).
RILEY C. GILLEY (aged 69) -- Vice President and General Counsel, Corporate
Property Investors (November, 1988 to December, 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December, 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 56) -- Professor, Babson College (since September,
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September, 1992 to September, 1993); Professor, Darden Graduate
School of Business, University of Virginia (September, 1978 to September, 1993);
Consultant to PanAgora Asset Management (since 1994). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 44) -- President, Global Research Associates, Inc.
(Investment Research) (since August, 1990); Manager, Rockefeller & Co. (March,
1988 to July, 1990); Trustee, Mainstay Institutional Funds (since December,
1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 61) -- Managing Director, Morong Capital Management
(since February, 1993); Senior Vice President and Investment Manager, CREF
Investments, Teachers Insurance & Annuity Association (retired January, 1993);
Director, Indonesia Fund; Director, MAS Funds. His address is 1385 Outlook Drive
West, Mountainside, New Jersey.
DONALD B. OTIS (aged 77) -- Director of Investor Relations, International
Business Machines Corporation (retired February, 1982). His address is 6300
Midnight Pass Road, Sarasota, Florida.
E. KIRBY WARREN (aged 61) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978-1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 75) -- Vice President-Investments, Sun Company, Inc.
(retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
TRUSTEES OF THE PORTFOLIO TRUST
ELLIOTT J. BERV (aged 53) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June, 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June, 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* (aged 44) -- President of the Trust and the Portfolio Trust;
Chairman, Chief Executive Officer and President, Signature Financial Group, Inc.
and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN (aged 52) -- President and Director, Delta Financial, Inc. (since
June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage
Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
WALTER E. ROBB, III (aged 69) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (corporate financial advisers) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE* (aged 44) -- President of the Trust and the Portfolio Trust;
Chairman, Chief Executive Officer and President, Signature Financial Group, Inc.
and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
DAVID G. DANIELSON* (aged 31) -- Assistant Treasurer of the Trust and the
Portfolio Trust; Assistant Manager, Signature Financial Group, Inc. (since May,
1991).
JOHN R. ELDER* (aged 47) -- Treasurer of the Trust and the Portfolio Trust; Vice
President, Signature Financial Group, Inc. (since April, 1995); Treasurer of the
Phoenix Family of Mutual Funds, Phoenix Home Life Mutual Insurance Company (1983
to March, 1995).
LINDA T. GIBSON* (aged 30) -- Assistant Secretary of the Trust and the Portfolio
Trust; Legal Counsel, Signature Financial Group, Inc. (since June, 1991); Law
Student, Boston University School of Law (September, 1989 to May, 1992); Product
Manager, Signature Financial Group, Inc. (January, 1989 to September, 1989).
SUSAN JAKUBOSKI* (aged 32) -- Assistant Secretary of the Trust and Vice
President, Assistant Treasurer and Assistant Secretary of the Portfolio Trust;
Manager, Signature Financial Group (Cayman) Ltd. (since August, 1994); Senior
Fund Administrator, Signature Financial Group, Inc. (since August, 1994);
Assistant Treasurer, Signature Broker-Dealer Services, Inc. (since September,
1994); Fund Compliance Administrator, Concord Financial Group (November, 1990 to
August, 1994); Senior Fund Accountant, Neuberger & Berman Management, Inc. (from
February, 1988 to November, 1990); Customer Service Representative, I.B.J.
Schroder (prior to 1988). Her address is Elizabethan Square, George Town, Grand
Cayman, Cayman Islands, BWI.
THOMAS M. LENZ* (aged 37) -- Secretary of the Trust and the Portfolio Trust;
Vice President and Associate General Counsel, Signature Financial Group, Inc.
(since November, 1989); Assistant Secretary, Signature Broker-Dealer Services,
Inc. (since February, 1991); Attorney, Ropes & Gray (September, 1984 to
November, 1989).
MOLLY S. MUGLER* (aged 44) -- Assistant Secretary of the Trust and the Portfolio
Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc.
(since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer
Services, Inc. (since December, 1988).
BARBARA M. O'DETTE* (aged 36) -- Assistant Treasurer of the Trust and the
Portfolio Trust; Assistant Treasurer, Signature Financial Group, Inc. and The
Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
ANDRES E. SALDANA* (aged 33) -- Assistant Secretary of the Trust and the
Portfolio Trust; Legal Counsel and Assistant Secretary, Signature Financial
Group, Inc. (since November, 1992); Attorney, Ropes & Gray (September, 1990 to
November, 1992).
DANIEL E. SHEA* (aged 33) -- Assistant Treasurer of the Trust and the Portfolio
Trust; Assistant Manager of Fund Administration, Signature Financial Group, Inc.
(since November, 1993); Supervisor and Senior Technical Advisor, Putnam
Investments (prior to November, 1993).
The Trustees and officers of the Trust and the Portfolio Trust also
hold comparable positions with certain other funds for which The Landmark Funds
Broker-Dealer Services, Inc., Signature Financial Group, Inc. or their
affiliates serve as the distributor or administrator.
As of the date of this Statement of Additional Information, there are
no shareholders of any of the Funds.
The Trustees of the Trust (with the exception of Mr. Coolidge, who
received no remuneration from the Trust or the Portfolio Trust) received the
following remuneration from the Trust during its fiscal year ended December 31,
1995:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
NAME OF PERSON, FROM AS PART OF FUND BENEFITS UPON COMPLEX PAID
POSITION REGISTRANT EXPENSES RETIREMENT TO TRUSTEES (1)
------------------ -------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C>
H.B. ALVORD $ 3,198.55 NONE NONE $40,000.00
RILEY C. GILLEY $ 4,352.29 NONE NONE $44,000.00
DIANA R. HARRINGTON $ 3,921.20 NONE NONE $40,000.00
SUSAN B. KERLEY $ 3,921.20 NONE NONE $40,000.00
C. OSCAR MORONG, JR. $ 3,606.47 NONE NONE $44,500.00
DONALD B. OTIS $ 7,758.16 NONE NONE $40,000.00
E. KIRBY WARREN $ 3,606.47 NONE NONE $44,500.00
WILLIAM S. WOODS, JR. $ 4,582.57 NONE NONE $44,000.00
</TABLE>
(1) Information relates to the fiscal year ended December 31, 1995. Messrs.
Alvord, Coolidge, Gilley, Morong, Otis, Warren and Woods and Mses.
Harrington and Kerley are trustees of 16, 32, 15, 16, 11, 16, 15, 15 and 15
funds, respectively, of the Landmark Family of Funds.
The Declaration of Trust of the Trust and the Portfolio Trust provide
that the Trust and the Portfolio Trust, respectively, will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust or the Portfolio Trust, as the case may be, unless, as to liability to the
Trust, the Portfolio Trust or their respective investors, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust or the Portfolio Trust, as the case may be. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees of the Trust or
the Portfolio Trust, or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
MANAGER
Citibank manages the assets of each Portfolio and provides certain
administrative services to the Trust and the Portfolio Trust pursuant to
separate management agreements (the "Management Agreements"). Subject to such
policies as the Board of Trustees of the Portfolio Trust may determine, Citibank
manages the securities of each Portfolio and makes investment decisions for each
Portfolio. Citibank furnishes at its own expense all services, facilities and
personnel necessary in connection with managing each Portfolio's investments and
effecting securities transactions for each Portfolio. The Management Agreement
with the Portfolio Trust provides that Citibank may delegate the daily
management of the securities of each Portfolio to one or more Subadvisers. The
Management Agreement with the Portfolio Trust will continue in effect until
February 9, 1998 and thereafter as long as such continuance is specifically
approved at least annually by the Board of Trustees of the Portfolio Trust or by
a vote of a majority of the outstanding voting securities of the applicable
Portfolio, and, in either case, by a majority of the Trustees of the Portfolio
Trust who are not parties to the Management Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Management
Agreement. The Management Agreement with the Trust will continue in effect until
February 9, 1998 and thereafter as long as such continuance is specifically
approved at least annually by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the applicable Fund, and, in
either case, by a majority of the Trustees of the Trust who are not parties to
the Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement.
Citibank provides the Trust and the Portfolio Trust with general office
facilities and supervises the overall administration of the Trust and the
Portfolio Trust, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
Trust's or the Portfolio Trust's independent contractors and agents; the
preparation and filing of all documents required for compliance by the Trust or
the Portfolio Trust with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trust or the Portfolio Trust. Trustees,
officers, and investors in the Trust and the Portfolio Trust are or may be or
may become interested in Citibank, as directors, officers, employees, or
otherwise and directors, officers and employees of Citibank are or may become
similarly interested in the Trust and the Portfolio Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the Portfolio Trust or the
Trust, as the case may be, when authorized either by a vote of a majority of the
outstanding voting securities of the applicable Portfolio or Fund or by a vote
of a majority of the Board of Trustees of the Portfolio Trust or the Trust, or
by Citibank on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. The Management
Agreement with the Portfolio Trust provides that neither Citibank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the execution
of security transactions for the applicable Portfolio, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or their
obligations and duties under the Management Agreement with the Portfolio Trust.
The Management Agreement with the Trust provides that neither Citibank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
omission in the administration or management of the Trust or the performance of
its duties under the Management Agreement, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations and
duties under the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank
for services under each of the Management Agreements. Citibank, if required by
state law, will reimburse the Funds and Portfolios or waive all or a portion of
its management fees to the extent that the expenses of a Fund and its
corresponding Portfolio exceed the expense limitation prescribed by any state in
which that Fund is qualified for offer or sale.
Pursuant to a sub-administrative services agreement with Citibank,
LFBDS performs such sub-administrative duties for the Trust and the Portfolio
Trust as from time to time are agreed upon by Citibank and LFBDS. For performing
such sub-administrative services, LFBDS receives compensation as from time to
time is agreed upon by Citibank, not in excess of the amount paid to Citibank
for its services under the Management Agreements with the Trust and the
Portfolio Trust. All such compensation is paid by Citibank.
Citibank has entered into separate Submanagement Agreements with the
Subadvisers listed below for the kinds of assets of each Fund noted opposite the
Subadvisers' names. Each Subadviser's compensation is described in the
Prospectus and is payable by Citibank.
Large cap value securities Miller Anderson & Sherrerd LLP
Small cap value securities Franklin Advisers, Inc.
International equity securities Hotchkis & Wiley
Foreign government securities Pacific Investment Management Company
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for their allocated assets of the Funds, and to place the
purchase and sales orders for securities transactions concerning those assets,
subject in all cases to the general supervisions of Citibank. Each Subadviser
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the assets of the Funds allocated to it and effecting
securities transactions concerning those assets.
Each Submanagement Agreement will continue in effect as to each
applicable Portfolio until February 9, 1998 and thereafter as long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Portfolio Trust as to that Portfolio or by a vote of a majority of the
outstanding voting securities of that Portfolio, and, in either case, by a
majority of the Trustees of the Portfolio Trust who are not parties to the
Submanagement Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Submanagement Agreement.
Each Submanagement Agreement provides that the applicable Subadviser
may render services to others. Each Submanagement Agreement is terminable as to
any Portfolio without penalty on not more than 60 days' nor less than 30 days'
written notice by the Portfolio Trust, when authorized either by a vote of a
majority of the outstanding voting securities of the applicable Portfolio or by
a vote of a majority of the Board of Trustees of the Portfolio Trust, or by
Citibank on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. Each Submanagement
Agreement may be terminated by the applicable Subadviser on not less than 90
days' written notice. Each Submanagement Agreement provides that neither the
Subadviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution of security transactions for any Portfolio, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Submanagement Agreement.
DISTRIBUTOR
LFBDS, 6 St. James Avenue, Boston, MA 02116, serves as the Distributor
of each Fund's shares pursuant to a Distribution Agreement with the Trust (the
"Distribution Agreement"). Unless otherwise terminated the Distribution
Agreement remains in effect until February 9, 1997, and thereafter will continue
from year to year upon annual approval by the Trust's Board of Trustees, or by
the vote of a majority of the outstanding voting securities of the Trust and by
the vote of a majority of the Board of Trustees of the Trust who are not parties
to the Distribution Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate in the event of its assignment, as defined
in the 1940 Act.
Under a Service Plan ("Service Plan") which has been adopted in
accordance with Rule 12b-1 under the 1940 Act, the Funds may pay monthly fees at
an annual rate not to exceed 0.50% of the average daily net assets of each Fund.
Such fees may be used to make payments to the Distributor for distribution
services, to securities dealers and other industry professionals (called Service
Agents) that have entered into service agreements with the Distributor and
others in respect of the sale of shares of the Funds, and to other parties in
respect of the sale of shares of the Funds, and to make payments for
advertising, marketing or other promotional activity, and payments for
preparation, printing, and distribution of prospectuses, statements of
additional information and reports for recipients other than regulators and
existing shareholders. The Funds also may make payments to the Distributor,
Service Agents and others for providing personal service or the maintenance of
shareholder accounts. The Funds and the Distributor provide to the Trustees
quarterly a written report of amounts expended pursuant to the Service Plan and
the purposes for which the expenditures were made.
The Distribution Agreement obligates the Funds to pay fees to the
Distributor, Service Agents and others as compensation for their services, not
as reimbursement for specific expenses incurred. Thus, even if their expenses
exceed the fees provided for under the Distribution Agreement for any Fund, the
Fund will not be obligated to pay more than those fees and, if their expenses
are less than the fees paid to them, they will realize a profit. Each Fund will
pay the fees to the Distributor, Service Agents and others until the Service
Plan or Distribution Agreement, as applicable, is terminated or not renewed. In
that event, the Distributor's or Service Agent's expenses in excess of fees
received or accrued through the termination date will be the Distributor's or
Service Agent's sole responsibility and not obligations of the Fund. In their
annual consideration of the continuation of the Plan for each Fund, the Trustees
will review the Plan and the expenses for each Fund separately.
From time to time the Distributor may make payments for distribution
out of its past profits or any other sources available to it.
The Service Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trust's Trustees and a majority of the Trustees who are not "interested persons"
of each Trust and who have no direct or indirect financial interest in the
operation of the Service Plan or in any agreement related to the Plan (for
purposes of this paragraph "Qualified Trustees"). The Service Plan requires that
the Trust and the Distributor provide to the Board of Trustees, and the Board of
Trustees review, at least quarterly, a written report of the amounts expended
(and the purposes therefor) under the Service Plan. The Service Plan further
provides that the selection and nomination of the Qualified Trustees is
committed to the discretion of the disinterested Trustees (as defined in the
1940 Act) then in office. The Service Plan may be terminated with respect to any
Fund at any time by a vote of a majority of the Trust's Qualified Trustees or by
a vote of a majority of the outstanding voting securities of that Fund. The
Service Plan may not be amended to increase materially the amount of a Fund's
permitted expenses thereunder without the approval of a majority of the
outstanding securities of that Fund and may not be materially amended in any
case without a vote of a majority of both the Trustees and Qualified Trustees.
The Distributor will preserve copies of any plan, agreement or report made
pursuant to the Service Plan for a period of not less than six years, and for
the first two years the Distributor will preserve such copies in an easily
accessible place.
As contemplated by the Service Plan, LFBDS acts as the agent of the
Trust in connection with the offering of shares of the Funds pursuant to the
Distribution Agreement. The Prospectus contains a description of fees payable to
the Distributor under the Distribution Agreement.
The Distributor may enter into agreements with Service Agents and may
pay compensation to such Service Agents for accounts for which the Service
Agents are holders of record. Payments may be made to the Service Agents out of
the distribution fees received by the Distributor and out of the Distributor's
past profits.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
each Fund. See "Transfer Agent, Custodian and Fund Accountant" in the Prospectus
for additional information.
The Portfolio Trust, on behalf of the Portfolios, has entered into
Custodian Agreements with State Street pursuant to which State Street acts as
custodian for each Portfolio. The Portfolio Trust, on behalf of the Portfolios,
also has entered into Fund Accounting Agreements with State Street pursuant to
which State Street provides fund accounting services for each Portfolio.
Pursuant to separate Transfer Agency and Service Agreements with the Portfolio
Trust, on behalf of the Portfolios, Signature Financial Services, Inc. provides
transfer agency services to each Portfolio.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of Signature
Financial Services, Inc. is 6 St. James Avenue, Boston, Massachusetts 02116.
AUDITORS
Price Waterhouse LLP are the independent certified public accountants
for the Trust, providing audit services and assistance and consultation with
respect to the preparation of filings with the SEC. The address of Price
Waterhouse LLP is 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse are the chartered accountants for the Portfolio Trust. The address of
Price Waterhouse is Suite 3300, 1 First Canadian Place, Toronto, Ontario M5X
1H7, Canada.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Fund's investment objective. Changes in the Fund's investments are made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of turnover
is not a limiting factor when changes are appropriate. The turnover rate for
each Fund is not expected to exceed 100% annually. Specific decisions to
purchase or sell securities for each Fund are made by a portfolio manager who is
an employee of Citibank and who is appointed and supervised by its senior
officers or by a Subadviser. The portfolio manager or Subadviser may serve other
clients of Citibank in a similar capacity.
In connection with the selection of brokers or dealers and the placing
of portfolio securities transactions, brokers or dealers may be selected who
also provide brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which the Manager, the Subadvisers or their affiliates exercise
investment discretion. The Manager and the Subadvisers are authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if the Manager or the applicable Subadviser determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which the Manager, the Subadvisers and their
affiliates have with respect to accounts over which they exercise investment
discretion. The Trustees of the Trust shall periodically review the commissions
paid by the Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits to the Fund.
The investment advisory fee that each Fund pays to Citibank will not be
reduced as a consequence of Citibank's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of
Citibank, Citibank would, through the use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or a Subadviser's
other clients. Investment decisions for each Fund and for Citibank's and the
Subadvisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for a Fund.
When purchases or sales of the same security for a Fund and for other portfolios
managed by Citibank or a Subadviser occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large volume purchases or sales.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of the Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value) of each series, to divide or combine the shares of any series into a
greater or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such shares into
classes. While there are at present no series of the Trust other than the Funds
and Landmark Balanced Fund, the Trust has reserved the right to create and issue
additional series and classes of shares. Each share of each Fund represents an
equal proportionate interest in that Fund with each other share of that Fund.
Shares of each series participate equally in the earnings, dividends and
distribution of net assets of the particular series upon liquidation or
dissolution. Shares of each series are entitled to vote separately to approve
management agreements or changes in investment policy, but shares of all series
may vote together in the election or selection of Trustees and accountants for
the Trust. In matters affecting only a particular Fund, only shares of that
particular Fund are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required to hold, and has no
present intention of holding, annual meetings of shareholders but the Trust will
hold special meetings of shareholders when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances (e.g., upon the application and submission of
certain specified documents to the Trustees by a specified number of
shareholders), the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's outstanding
shares would be sufficient. The Trust or any series of the Trust, as the case
may be, may be terminated (i) by a vote of a majority of the outstanding voting
securities of the Trust or the affected series or (ii) by the Trustees by
written notice to the shareholders of the Trust or the affected series. If not
so terminated, the Trust will continue indefinitely.
Share certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust of the Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Trust property for any shareholder held personally liable for the obligations
of the Trust. The Declaration of Trust of the Trust also provides that the Trust
may maintain appropriate insurance (e.g., fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of
the Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust of the Trust protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
The Portfolios are series of the Portfolio Trust, which is organized as
a New York trust. The Portfolio Trust's Declaration of Trust provides that
investors in the Portfolios (e.g., other investment companies (including the
corresponding Funds), insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of the Portfolios.
However, the risk of any Fund that invests through a Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the applicable Portfolio itself was unable
to meet its obligations. It is not expected that the liabilities of any
Portfolio would ever exceed its assets.
Each investor in a Portfolio, including the corresponding Fund, may add
to or withdraw from its investment in the applicable Portfolio on each Business
Day. As of the close of regular trading on each Business Day, the value of each
investor's beneficial interest in each Portfolio is determined by multiplying
the net asset value of the Portfolio by the percentage, effective for that day,
that represents that investor's share of the aggregate beneficial interests in
the Portfolio. Any additions or withdrawals that are to be effected on that day
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then re-computed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of the close of regular trading on the next following Business Day.
10. CERTAIN ADDITIONAL TAX MATTERS
Each Fund is treated as a separate entity for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"). Each
Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Provided all such
requirements are met, no U.S. federal income or excise taxes generally will be
required to be paid by the Funds, although non-U.S. source income earned by each
Fund may be subject to non-U.S. withholding or other taxes. If a Fund should
fail to qualify as a "regulated investment company" for any year, the Fund would
incur a regular corporate federal income tax upon its taxable income and Fund
distributions would generally be taxable as ordinary income to shareholders. The
Portfolio Trust believes the Portfolios also will not be required to pay any
U.S. federal income or excise taxes on their income.
The portion of each Fund's ordinary income dividends attributable to
dividends received in respect of equity securities of U.S. issuers is normally
eligible for the dividends received deduction for corporations subject to U.S.
federal income taxes. Availability of the deduction for particular shareholders
is subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax and result in certain basis adjustments. Any Fund
dividend that is declared in October, November or December of any calendar year,
that is payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on December
31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share
net asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of
shares of a Fund by a shareholder that holds such shares as a capital asset will
be treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in a Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of shares of a Fund within 90 days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) of shares of
that Fund or of another Landmark Fund without payment of any additional sales
charge.
Any investment by a Fund in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Fund to recognize income prior to
the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.
Each Fund's transactions in options, futures and forward contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by each Fund on the last business day of each taxable year will be marked
to market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. Each Fund intends to limit its activities in options, futures and forward
contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
An investment by a Fund in residual interests of a CMO that has elected
to be treated as a real estate mortgage investment conduit, or "REMIC," can
create complex tax problems, especially if the Fund has state or local
governments or other tax-exempt organizations as shareholders.
Special tax considerations apply with respect to non-U.S. investments
of the Funds. Use of non-U.S. currencies for non-hedging purposes may be limited
in order to avoid a tax on the Funds. Investment by a Fund in certain "passive
foreign investment companies" may also be limited in order to avoid a tax on the
Fund. Investment income received by a Fund from non-U.S. securities may be
subject to non-U.S. income taxes withheld at the source. The United States has
entered into tax treaties with many other countries that may entitle a Fund to a
reduced rate of tax or an exemption from tax on such income. The Funds intend to
qualify for treaty reduced rates where available. It is not possible, however,
to determine the Funds' effective rate of non-U.S. tax in advance since the
amount of the Funds' respective assets to be invested within various countries
is not known.
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If the Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to them
by the Fund and thus includable in their gross income for federal income tax
purposes. Shareholders who itemize deductions would then be allowed to claim a
deduction or credit (but not both) on their federal income tax returns for such
amounts, subject to certain limitations. Shareholders who do not itemize
deductions would (subject to such limitations) be able to claim a credit but not
a deduction. No deduction for such amounts will be permitted to individuals in
computing their alternative minimum tax liability. If a Fund does not qualify or
elect to "pass through" to the Fund's shareholders foreign income taxes paid by
it, shareholders will not be able to claim any deduction or credit for any part
of the foreign taxes paid by the Fund.
The Funds will withhold tax payments at a rate of 30% (or any lower
applicable tax treaty rate) on taxable dividends and other payments subject to
withholding taxes that are made to persons who are not citizens or residents of
the United States. Distributions received from the Funds by non-U.S. persons
also may be subject to tax under the laws of their own jurisdiction.
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. The Funds may be required to withhold (and pay over to
the IRS for the shareholder's credit) 31% of certain distributions and
redemption proceeds paid to shareholders who fail to provide this information or
who otherwise violate IRS regulations.
<PAGE>
11. FINANCIAL STATEMENTS
Not applicable.
<PAGE>
TRUSTEES AND OFFICERS
C. Oscar Morong, Jr., Chairman
Philip W. Coolidge*, President*
H.B. Alvord
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
Donald B. Otis
E. Kirby Warren
William S. Woods, Jr.
SECRETARY
Thomas M. Lenz*
TREASURER
John R. Elder*
*Affiliated Person of the Distributor
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INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
Price Waterhouse LLP
160 Federal Street, Boston, MA 02110
LEGAL COUNSEL
Bingham, Dana & Gould LLP
150 Federal Street, Boston, MA 02110
