<PAGE>
497(c) File Nos. 2-90518 and 811-4006
PROSPECTUS
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MAY 1, 1997
CITISELECT(SM) FOLIO 200 CITISELECT(SM) FOLIO 300 CITISELECT(SM) 400
CITISELECT(SM) FOLIO 500
This Prospectus describes four diversified mutual funds managed by Citibank,
N.A.: CitiSelect(SM) Folio 200, CitiSelect(SM) Folio 300, CitiSelect (SM) Folio
400 and CitiSelect(SM) Folio 500. 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.
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UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, EACH FUND SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING
ALL OF ITS INVESTABLE ASSETS IN A PORTFOLIO WITH THE SAME INVESTMENT OBJECTIVE
AND POLICIES. SEE "SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE" ON PAGE
12.
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REMEMBER THAT SHARES OF THE
FUNDS:
[] ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY
[] ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES
[] ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED
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This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated May 1, 1997 (and incorporated by reference in this Prospectus)
has been filed with the Securities and Exchange Commission. Copies of the
Statement of Additional Information may be obtained without charge, and further
inquiries about the Funds may be made, by calling 1-800-625-4554.
TABLE OF CONTENTS
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Prospectus Summary ...................................................... 2
Expense Summary ......................................................... 4
Condensed Financial Information ......................................... 5
Investment Information .................................................. 6
Risk Considerations ..................................................... 10
Valuation of Shares ..................................................... 13
Purchases ............................................................... 13
Exchanges ............................................................... 13
Redemptions ............................................................. 14
Dividends and Distributions ............................................. 14
Management .............................................................. 15
Tax Matters ............................................................. 19
Performance Information ................................................. 19
General Information ..................................................... 19
Appendix -- Permitted Investments and
Investment Practices .................................................. 22
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERNCE.
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PROSPECTUS SUMMARY
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See the body of the Prospectus for more information on the topics discussed
in this summary.
THE FUNDS: This Prospectus describes four diversified mutual funds: CITISELECT
FOLIO 200, CITISELECT FOLIO 300, CITISELECT FOLIO 400 and CITISELECT FOLIO 500.
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:
Each Fund is a total return fund that allocates its investments among three
primary classes of assets -- equity, fixed income and money market securities.
Each Fund's asset mix is designed to offer a different level of potential return
within a corresponding level of risk. The investment objective of each Fund is
as follows:
CITISELECT FOLIO 200: as high a total return over time as is consistent with a
primary emphasis on a combination of fixed income and money market securities,
and a secondary emphasis on equity securities.
CITISELECT FOLIO 300: as high a total return over time as is consistent with
a balanced emphasis on equity and fixed income securities.
CITISELECT FOLIO 400: as high a total return over time as is consistent with
a primary emphasis on equity securities, and a secondary emphasis on fixed
income securities.
CITISELECT FOLIO 500: as high a total return over time as is consistent with
a dominant emphasis on equity securities and a small allocation to fixed
income securities.
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 and CITISELECT FOLIO 500 invest primarily in
equity securities. Current income is not a primary consideration for the
CitiSelect Portfolios.
INVESTMENT MANAGER: Citibank, N.A., a wholly-owned subsidiary of Citicorp, is
the investment manager. Citibank and its affiliates manage more than $81
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 the Funds are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares of each Fund 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. See "Purchases"
and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of each other Fund. See
"Exchanges."
DIVIDENDS: Dividends are declared and paid quarterly for CitiSelect Folio 200
and CitiSelect Folio 300 and annually for CitiSelect Folio 400 and CitiSelect
Folio 500. 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 at net asset value. See "Dividends and
Distributions."
WHO SHOULD INVEST: The Funds are designed for investors seeking to reduce the
risks of investing in a single asset or asset class and to cushion the
volatility of financial markets through broad diversification of portfolio
holdings and the allocation of their assets accross several classes of assets.
The Funds offer a convenient way to own a diversified professionally managed
portfolio tailored to specific investment goals and expectations of risk and
return. While time horizon is a factor, it is not necessarily the determinative
factor in choosing to invest in one of the Funds. 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 four Funds and
is designed for the investor who is seeking relatively lower risk provided by
substantial investments in fixed income and money market securities, but who
also seeks some capital growth. CITISELECT FOLIO 300 is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment component to temper volatility. CITISELECT FOLIO 400 and CITISELECT
FOLIO 500 are designed for the investor willing and able to take higher risks in
the pursuit of long-term capital appreciation. CitiSelect Folio 500 is expected
to be the most volatile of the four Funds and is designed for the investor who
can withstand greater market swings to seek potential long-term rewards.
CitiSelect Folio 400 is designed for the investor seeking long-term rewards, but
with less volatility.
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. Securities of small cap companies 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 a 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 the Appendix for more information.
EXPENSE SUMMARY
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The following table summarizes estimated shareholder transaction and annual
operating expenses for each Fund and for its corresponding Portfolio. For more
information on costs and expenses, see "Management" -- page 15 and "General
Information -- Expenses" -- page 19.*
<TABLE>
<CAPTION>
CITISELECT CITISELECT CITISELECT CITISELECT
FOLIO 200 FOLIO 300 FOLIO 400 FOLIO 500
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES ..................... None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
(AS A PERCENTAGE OF NET ASSETS):
Management Fee ....................................... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees (including service fees)(1) ............... 0.50% 0.50% 0.50% 0.50%
Other Expenses(2) .................................... 0.25% 0.25% 0.50% 0.50%
Total Fund Operating Expenses(2) ..................... 1.50% 1.50% 1.75% 1.75%
(1) Includes fees for distribution and shareholder servicing.
(2) After voluntary fee waivers and reimbursements. Absent fee waivers and reimbursements, "Other Expenses" and "Total
Fund Operating Expenses" would be 1.41% and 2.66% for CitiSelect Folio 200, 1.01% and 2.26% for CitiSelect
Folio 300, 0.95% and 2.20% for CitiSelect Folio 400 and 1.55% and 2.80% for CitiSelect Folio 500.
* 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. Other Expenses in the table are based on estimated amounts for the
current fiscal year. There can be no assurance that the fee waivers and reimbursements 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.
</TABLE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming redemption at the end of each period indicated below:
ONE YEAR THREE YEARS
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CITISELECT FOLIO 200 ................................... $15 $47
CITISELECT FOLIO 300 ................................... $15 $47
CITISELECT FOLIO 400 ................................... $18 $55
CITISELECT FOLIO 500 ................................... $18 $55
The Example assumes a 5% annual return and that all dividends are reinvested and
reflects certain voluntary fee waivers and reimbursements. If fee waivers and
reimbursements were not made, the amounts in the example would be $27 and $83
for CitiSelect Folio 200, $23 and $71 for CitiSelect Folio 300, $22 and $69 for
CitiSelect Folio 400 and $28 and $87 for CitiSelect Folio 500. Expenses are
estimated. 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>
CONDENSED FINANCIAL INFORMATION
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The following table provides condensed financial information about the Funds
for the periods indicated. This information should be read in conjunction with
the financial statements appearing in the Annual Report to Shareholders of
CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect
Folio 500, which are incorporated by reference in the Statement of Additional
Information. The financial statements and notes, as well as the table below,
have been audited by Price Waterhouse LLP, independent certified public
accountants. The accountants' reports are included in the Funds' Annual Report.
Copies of the Annual Report may be obtained without charge from an investor's
Service Agent or by calling 1-800-625-4554.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CITISELECT CITISELECT CITISELECT CITISELECT
FOLIO 200+ FOLIO 300+ FOLIO 400+ FOLIO 500(+)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.00 $ 10.00 $ 10.00 $ 10.00
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INCOME FROM OPERATIONS:
Net investment income ............................. 0.128 0.088 0.042 0.019
Net realized and unrealized gain (loss) on investments 0.506 0.671 0.841 0.701
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Total from operations ............................ 0.634 0.759 0.883 0.720
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LESS DISTRIBUTIONS FROM:
Net investment income ............................. (0.112) (0.075) (0.029) (0.019)
Net realized gain on investments .................. (0.022) (0.024) (0.034) --
In excess of net income ........................... -- -- -- (0.001)
In excess of realized gains on investments ........ -- -- -- (0.010)
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Total distributions .............................. (0.134) (0.099) (0.063) (0.030)
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Net Asset Value, end of period .................... $ 10.50 $ 10.66 $ 10.82 $ 10.69
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) ......... $102,775 $195,428 $253,556 $85,072
Ratio of expenses to average net assets (A) ....... 1.50%* 1.50%* 1.75%* 1.75%*
Ratio of net investment income to average net assets 2.84%* 2.38%* 1.39%* 1.09%*
Total return ...................................... 6.38%** 7.61%** 8.84%** 7.20%**
Note: If Agents of the Funds and the Agents of Asset Allocation Portfolios had not voluntarily agreed to waive a portion of their
fees, and the Sub-administrator not assumed expenses for the periods indicated, the net investment income per share and
the ratios would have been as follows:
Net investment income (loss) per share ............ $ 0.076 $ 0.060 $ 0.028 $ 0.001
Ratios:
Expenses to average net assets (A) ................ 2.66%* 2.26%* 2.20%* 2.80%*
Net investment income to average net assets ....... 1.68%* 1.62%* 0.93%* 0.04%*
(A) Includes allocated expenses for the period indicated, for the CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect
Folio 400, and CitiSelect Folio 500 share of expenses of Asset Allocation Portfolio 200, Asset Allocation Portfolio 300,
Asset Allocation Portfolio 400 and Asset Allocation Portfolio 500, respectively.
+ For the period June 17, 1996 (commencement of operations) to December 31, 1996.
(+) For the period September 3, 1996 (commencement of operations) to December 31, 1996.
* Annualized.
** Not annualized.
</TABLE>
<PAGE>
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVES:
Each Fund is a total return fund that allocates its investments among three
primary classes of assets -- equity, fixed income and money market securities.
Each Fund's asset mix is designed to offer a different level of potential return
within a corresponding level of risk. The investment objective of each Fund is
as follows:
The investment objective of CITISELECT FOLIO 200 is as high a total return
over time as is consistent with a primary emphasis on a combination of fixed
income and money market securities, and a secondary emphasis on equity
securities. This Fund invests all of its investable assets in Asset Allocation
Portfolio 200.
The investment objective of CITISELECT FOLIO 300 is as high a total return
over time as is consistent with a balanced emphasis on equity and fixed income
securities. This Fund invests all of its investable assets in Asset Allocation
Portfolio 300.
The investment objective of CITISELECT FOLIO 400 is as high a total return
over time as is consistent with a primary emphasis on equity securities, and a
secondary emphasis on fixed income securities. This Fund invests all of its
investable assets in Asset Allocation Portfolio 400.
The investment objective of CITISELECT FOLIO 500 is as high a total return
over time as is consistent with a dominant emphasis on equity securities and a
small allocation to fixed income securities. This Fund invests all of its
investable assets in Asset Allocation Portfolio 500.
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
CITISELECT FOLIO 200 is expected to be the least volatile of the four Funds and
is designed for the investor who is seeking relatively lower risk provided by
substantial investments in fixed income and money market securities, but who
also seeks some capital growth. CITISELECT FOLIO 300 is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment component to temper volatility. CITISELECT FOLIO 400 and CITISELECT
FOLIO 500 are designed for the investor willing and able to take higher risks in
the pursuit of long-term capital appreciation. CitiSelect Folio 500 is expected
to be the most volatile of the four Funds, and is designed for the investor who
can withstand greater market swings to seek potential long-term rewards.
CitiSelect Folio 400 is designed for the investor seeking long-term rewards, but
with less volatility.
INVESTMENT STRATEGY
Each Fund is a carefully selected and professionally managed diversified mix
of equity, fixed income and money market investments. As the Funds' investment
manager, Citibank allocates each Fund's assets among these three classes of
investments to seek to achieve certain risk and return objectives. In making
asset allocations, Citibank considers long-term performance and valuation
measures within and between asset classes and the effects of market and economic
variables on those relationships. It uses this information to determine the
overall mix of each Fund's assets among the three general asset classes. Each
Fund's allocation or asset mix is determined by Citibank to be an optimal
combination of stocks, bonds and money market instruments that reduces risk and
maximizes potential return for that Fund's distinct investment objective.
The Funds' asset allocations generally correlate to different levels of
investment risk and return. Equity securities typically have the potential to
outperform fixed income securities over the long term. Equity securities have
the greatest potential for growth of capital, yet are generally the most
volatile of the three asset types. Fixed income and money market securities
sometimes move in the opposite direction of equity securities and may provide
investment balance to a Fund. The risks of each asset class will vary.
Citibank expects that, in general, each Fund's assets will be allocated
among the equity, fixed income and money market asset classes as provided in the
following chart. However, cash flows of a Fund or changes in market valuations
could produce different results. Citibank will review each Fund's asset
allocation quarterly and expects, in general, to rebalance the Fund's
investments, if necessary, at that time. Rebalancing may be accomplished over a
period of time and may be limited by tax and regulatory requirements.
ASSET CLASS RANGE
--------------------------------------
FIXED MONEY
EQUITY INCOME MARKET
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CITISELECT FOLIO 200 25-45% 35-55% 10-30%
CITISELECT FOLIO 300 40-60% 35-55% 1-10%
CITISELECT FOLIO 400 55-85% 15-35% 1-10%
CITISELECT FOLIO 500 70-95% 5-20% 1-10%
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Each asset class includes other investments described in the Appendix or
elsewhere in this Prospectus that are deemed related to the management of that
asset class. Percentage ranges shown for the equity and fixed income classes
include investment positions that seek equivalent asset class exposure or to
enhance income for that asset class. When money market instruments are used in
connection with these positions they will be counted towards the assets of the
applicable asset class and not towards the money market class.
Citibank will diversify the equity class of each Fund by allocating the
Fund's portfolio of equity securities among large capitalization securities,
small capitalization securities and international securities. Citibank will
diversify the fixed income class of each Fund by allocating the Fund's portfolio
of fixed income securities among U.S. and foreign government and corporate
bonds. There is no requirement that Citibank allocate a Fund's assets among all
of the foregoing types of equity and fixed income securities at all times. These
types of securities have been selected because Citibank believes that this
additional level of asset diversification will provide a 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 complementary basis in an effort to maximize the consistency of returns
over longer time periods, and to reduce volatility.
In supervising the Subadvisers, Citibank will also be taking into account
the expertise they have demonstrated in particular areas and the historical
results they have achieved within selected asset classes or investment styles.
By combining these attributes with selected asset classes and styles, Citibank
will seek to increase returns.
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 Advisory Services, Inc.; international equity securities,
Hotchkis and 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.
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 Services or securities which are not
rated by these rating agencies, but which Citibank or a Subadviser believes to
be of comparable quality. Securities rated Baa or BBB and securities of
comparable quality may have speculative characteristics.
The mix of fixed income securities may vary from Fund to Fund. There is no
requirement that each Fund invest in each type of fixed income security. The
Funds may invest in securities with all maturities, including long bonds (10+
years), intermediate notes (3 to 10 years) and short-term notes (1 to 3 years).
GOVERNMENT SECURITIES. U.S. Government securities may provide opportunities
for income with minimal credit risk. U.S. Treasury securities are considered
the safest of all government securities. U.S. Government securities are high
quality instruments issued or guaranteed as to principal and interest by the
U.S. Government or by an agency or instrumentality of the U.S. Government.
Securities issued or guaranteed as to principal and interest by foreign
governments or agencies or instrumentalities of foreign governments (which
include securities of supranational agencies) also may provide opportunities
for income with minimal credit risk. Government securities are, however, not
immune from the market risk of principal fluctuation associated with changing
interest rates.
CORPORATE BONDS. Investment in bonds of U.S. and foreign corporate issuers may
provide relatively higher levels of current income. These bonds are used by U.S.
and foreign corporate issuers to borrow money from investors, and may have
varying maturities. Corporate bonds have varying degrees of quality and varying
degrees of sensitivity to changes in interest rates. The value of these
investments fluctuates based on changes in interest rates and in the underlying
credit quality of the bond issuers represented in the portfolio.
See "Risk Considerations" for certain risks associated with investing in
fixed income securities.
THE MONEY MARKET CLASS
Each Fund will invest those assets which are allocated to the money market
class in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These instruments include short-term obligations of the
U.S. Government and repurchase agreements covering these obligations, commercial
paper of U.S. and foreign issuers, bank obligations (such as certificates of
deposit, bankers' acceptances and fixed time deposits) of U.S. and non-U.S.
banks and obligations issued or guaranteed by the governments of Western Europe,
Scandinavia, Australia, Japan and Canada. These investments provide
opportunities for income with low credit risk, and may result in a lower yield
than would be available from investments with a lower quality or a longer term.
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 the Appendix for more
information.
TEMPORARY INVESTMENTS. During periods of unusual economic or market conditions
or for temporary defensive purposes or liquidity, each Fund may invest without
limit in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These investments may result in a lower yield than would
be available from investments with a lower quality or longer term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Funds' permitted
investments and investment practices, see the Appendix -- Permitted Investments
and Investment Practices on page 22. The Funds will not necessarily invest or
engage in each of the investments and investment practices in the Appendix 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. For the period
June 17, 1996 (commencement of operations) through December 31, 1996, the
portfolio turnover rates for CitiSelect Folio 200, CitiSelect Folio 300 and
CitiSelect Folio 400 were 147%, 132% and 130%, respectively. For the period
September 3, 1996 (commencement of operations) through December 31, 1996, the
portfolio turnover rate for CitiSelect Folio 500 was 27%. 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
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The risks of investing in each Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. Each Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. This means that an
investor's shares may be worth more or less at redemption than at the time of
purchase. Equity securities fluctuate in response to general market and economic
conditions and other factors, including actual and anticipated earnings, changes
in management, political developments and the potential for takeovers and
acquisitions. During periods of rising interest rates the value of debt
securities generally declines, and during periods of falling rates the value of
these securities generally increases. Changes by recognized rating agencies in
the rating of any debt security, and actual or perceived changes in an issuer's
ability to make principal or interest payments, also affect the value of these
investments.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's or BBB by S&P and equivalent securities may have
speculative characteristics. Adverse economic or changing circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case for higher grade obligations.
NON-U.S. SECURITIES. Investments in non-U.S. securities involve risks relating
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and non-
U.S. issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets and political or social
instability. Enforcing legal rights may be difficult, costly and slow in non-
U.S. countries, and there may be special problems enforcing claims against
non-U.S. governments. In addition, non-U.S. companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Non-U.S.
markets may be less liquid and more volatile than U.S. markets, and may offer
less protection to investors such as the Funds. Prices at which a Fund may
acquire securities may be affected by trading by persons with material non-
public information and by securities transactions by brokers in anticipation
of transactions by the Fund.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a Fund's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. In addition, some non-U.S. currency values
may be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
The Funds may invest in issuers located in developing countries, which are
generally defined as countries in the initial stages of their industrialization
cycles with low per capita income. All of the risks of investing in non-U.S.
securities are heightened by investing in developing countries. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries with more mature economies; such markets
often have provided higher rates of return, and greater risks, to investors.
These heightened risks include (i) greater risks of expropriation, confiscatory
taxation and nationalization, and less social, political and economic stability;
(ii) the small current size of markets for securities of issuers based in
developing countries and the currently low or non-existent volume of trading,
resulting in a lack of liquidity and in price volatility; (iii) certain national
policies which may restrict a Fund's investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to relevant
national interests; and (iv) the absence of developed legal structures. Such
characteristics can be expected to continue in the future.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
SMALL CAP COMPANIES. Investors in the Funds should be aware that the securities
of companies with small market capitalizations may have more risks than the
securities of other companies. Small cap companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources. Further,
there is often less publicly available information about small cap companies
than about more established companies. As a result of these and other factors,
the prices of securities issued by small cap companies may be volatile. Shares
of the Funds, therefore, may be subject to greater fluctuation in value than
shares of a fund with more of its investments in securities of larger, more
established companies.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Funds
may entail certain risks. These risks are in addition to the risks described
above and are described in the Appendix. See the Appendix -- Permitted
Investments and Investment Practices on page 22.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE. The Funds do not invest
directly in securities. Instead, the Funds invest all of their investable assets
in their corresponding Portfolios, which are mutual funds having the same
investment objectives and policies as the Funds. The Portfolios, in turn, buy,
hold and sell securities in accordance with these objectives and policies. Of
course, there can be no assurance that the Funds or the Portfolios will achieve
their objectives. The Trustees of the Funds believe that the aggregate per share
expenses of each Fund and its corresponding Portfolio will be less than or
approximately equal to the expenses that the Fund would incur if the assets of
the Fund were invested directly in the types of securities held by its
Portfolio. Each Fund may withdraw its investment in its Portfolio at any time,
and will do so if the Trustees believe it to be in the best interest of the
Fund's shareholders. If a Fund were to withdraw its investment in its Portfolio,
the Fund could either invest directly in securities in accordance with the
investment policies described above or invest in another mutual fund or pooled
investment vehicle having the same investment objectives and policies. If a Fund
were to withdraw, the Fund could receive securities from the Portfolio instead
of cash, causing the Fund to incur brokerage, tax and other charges or leaving
it with securities which may or may not be readily marketable or widely
diversified.
Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but the
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause a Fund to withdraw its investment in its Portfolio.
Certain investment restrictions of each Portfolio cannot be changed without
approval by the investors in that Portfolio. These policies are described in the
Statement of Additional Information. When a Fund is asked to vote on matters
concerning its Portfolio the Fund will hold a shareholder meeting and vote in
accordance with shareholder instructions. Of course, the Fund could be outvoted,
or otherwise adversely affected, by other investors in its Portfolio.
The Portfolios may sell interests to investors in addition to the Funds.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Funds. Therefore, the investment
returns for all investors in funds investing in a Portfolio may not be the same.
These differences in returns are also present in other mutual fund structures.
Information about other holders of interests in the Portfolios is
available from the Funds' distributor (telephone: (617) 423-1679).
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 charged to that 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
- --------------------------------------------------------------------------------
Shares of the Funds are offered continuously and may be purchased on any
Business Day without a sales load at the shares' net asset value next determined
after an order in proper form is received and accepted by the Transfer Agent.
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.
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.
Service Agents may receive certain fees from the Distributor and/ or the Funds.
See "Management -- Distribution Arrangements." Customers should contact their
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. Each
Service Agent is responsible for transmitting promptly orders of its customers.
From time to time the Distributor may make payments for distribution and/ or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Funds. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
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).
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, if any, from dividends and
interest is paid to its shareholders of record as a dividend as follows:
For CITISELECT FOLIO 200 and CITISELECT FOLIO 300, quarterly on or about the
last day of MARCH, JUNE, SEPTEMBER and DECEMBER.
For CITISELECT FOLIO 400 and CITISELECT FOLIO 500, annually on or about the
last day of 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. Each Portfolio is 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 $81 billion in assets worldwide. Citibank is a wholly-owned subsidiary
of Citicorp. Citibank also serves as investment adviser to other registered
investment companies. Citibank's address is 153 East 53rd Street, New York, New
York 10043.
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 the Funds (and related investments).
LARGE CAPITALIZATION GROWTH SECURITIES
Lawrence P. Keblusek, U.S. Chief Investment Officer, has been responsible for
the daily management of large cap growth securities since the Funds' inception.
Prior to joining Citibank in 1995, Mr. Keblusek, who has 25 years experience in
the investment management industry, was Senior Vice President and Director of
Portfolio Management for The Northern Trust Company with responsibility for
investment performance in the organization's High Net Worth, Corporate and
Institutional and Mutual Fund Group. Earlier in his career, Mr. Keblusek held
senior investment positions with Maryland National Bank and the National Bank of
Washington.
SMALL CAPITALIZATION GROWTH SECURITIES
Linda J. Intini, Vice President, has been responsible for the daily management
of small cap growth securities since February 1997. Ms. Intini has over nine
years of experience specializing in the management of small cap equities,
including over $300 million of Citibank's small cap portfolios for trusts and
individuals. Prior to joining Citibank in 1992, she was a Portfolio Manager and
Research Analyst with Manufacturers Hanover in the Special Equity area. She also
specialized in equity research at Eberstadt Fleming.
DOMESTIC FIXED INCOME SECURITIES
Mark Lindbloom, Vice President, has been responsible
for the daily management of domestic fixed income securities since the Funds'
inception. Mr. Lindbloom has more than 12 years of investment management
experience. Prior to joining Citibank in 1986, Mr. Lindbloom was a Fixed Income
Portfolio Manager with Brown Brothers Harriman & Co., where he managed fixed
income assets for discretionary corporate portfolios.
MONEY MARKET SECURITIES
Kevin Kennedy, Vice President, has been responsible for the daily management
of money market securities since the Funds' inception. Mr. Kennedy is
responsible for managing the Liquidity Management Unit of the U.S. Fixed
Income Department of Citibank Global Asset Management. Prior to joining
Citibank in March 1993, Mr. Kennedy was with the Metropolitan Life Insurance
Company as the Managing Trader of the Treasurer's Division. He was responsible
for the management of more than $9 billion in short duration fixed income
assets. Mr. Kennedy has more than 15 years of fixed income management
experience.
Citibank has delegated the daily management of the following kinds of
securities of the Funds (and related investments) 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. Morgan Stanley Asset Management Holdings, Inc., an indirect
wholly-owned subsidiary of Morgan Stanley Group Inc., owns 95% of the interests
in Miller Anderson. On February 5, 1997, Morgan Stanley Group Inc. and Dean
Witter, Discover & Co. announced that they had entered into an Agreement and
Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Dean Witter,
Discover & Co. is a financial services company with three major businesses: full
service brokerage, credit services and asset management. Subject to certain
conditions being met, it is currently anticipated that the transaction will
close in mid-1997. Thereafter, Miller Anderson will be a subsidiary of Morgan
Stanley, Dean Witter, Discover & Co.
Robert Marcin, CFA, Partner, has been responsible for the daily management
of large cap value securities since the Fund's inception. Mr. Marcin has been
with Miller Anderson since 1988.
SMALL CAPITALIZATION VALUE SECURITIES
Franklin Advisory Services, Inc., One Parker Plaza, 16th Floor, Fort Lee, New
Jersey 07024. Franklin Advisory Services, a wholly-owned subsidiary of Franklin
Resources, Inc., is a registered investment adviser. William P. Lippman,
president of Franklin Advisory Services or its predecessor since June, 1988, has
been responsible for the daily management of small capitalization value
securities since the Funds' inception. Prior to joining Franklin Advisory
Services, Mr. Lippman was president of L.F. Rothschild Fund Management, Inc.
INTERNATIONAL EQUITY SECURITIES
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017. Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P.,
is a registered investment adviser. Harry W. Hartford and Sarah H. Ketterer have
been responsible for the daily management of international equity securities
since the Funds' inception. Mr. Hartford and Ms. Ketterer manage international
equity accounts and are also responsible for international investment research.
Each serves on the Investment Policy Committee at Hotchkis and Wiley. Prior to
joining the predecessor of Hotchkis and Wiley in 1994, Mr. Hartford was with The
Investment Bank of Ireland, where he gained 10 years of experience in both
international and global equity management. Prior to joining the predecessor of
Hotchkis and Wiley in 1990, Ms. Ketterer was an associate with Bankers Trust and
an analyst at Dean Witter.
FOREIGN GOVERNMENT SECURITIES
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360, P.O.
Box 6430, Newport Beach, California 92658-9030. PIMCO is a registered investment
adviser and is a subsidiary partnership of PIMCO Advisors L.P. A majority
interest of PIMCO Advisors L.P. is held by PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Company, a California
corporation and indirect wholly-owned subsidiary of Pacific Mutual Life
Insurance Company, and PIMCO Partners, L.L.C., a limited liability company
controlled by the Managing Directors of PIMCO. Lee R. Thomas, III, Senior
International Portfolio Manager, has been responsible for the daily management
of foreign government securities since the Funds' inception. He joined PIMCO in
1995. Previously he was a member of Investcorp's Management Committee, where he
was responsible for global securities and foreign exchange trading. Prior to
Investcorp, he was associated with Goldman Sachs, where he was an Executive
Director in the fixed income division of the London office.
Management's discussion of each Fund's performance is included in the Funds'
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
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 Advisory Services, Inc.
0.55% on first $250 million
0.50% on remaining assets
Hotchkis and Wiley 0.60% on first $10 million 0.55% on next $40 million
0.45% on next $100 million 0.35% on next $150 million 0.30% on remaining
assets
PIMCO
0.35% on first $200 million
0.30% on remaining assets
For the period from June 17, 1996, commencement of operations of CitiSelect
Folio 400, through December 31, 1996, the management fee paid to Citibank by
CitiSelect Folio 400 was 0.18% of the Fund's average daily net assets for that
period. Citibank voluntarily waived all management fees payable by CitiSelect
Folio 200, CitiSelect Folio 300 and CitiSelect Folio 500 during the period from
commencement of their operations through December 31, 1996.
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. These fees may be used to make payments to the Distributor for
distribution services, and to Service Agents and others as compensation for 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.
Pursuant to the Service Plan, the Funds may pay monthly fees to the
Distributor at the rate of 0.50% of the average daily net assets of each Fund.
The Distributor may make payments equal to all or a portion of this amount to
Service Agents as compensation for the sale of Fund shares and/or shareholder
services and the maintenance of shareholder accounts. The amounts paid by the
Distributor to each Service Agent may vary based upon certain factors,
including, among other things, the levels of sales of Fund shares and/or
shareholder services provided by the Service Agent.
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.
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 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 Service 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.
PROPOSED RESTRUCTURING: In order to achieve certain economies of scale and
increased flexibility in the management of assets, the Funds may decide to
convert to a "fund of funds" structure. In connection with this conversion, each
of the Funds would no longer invest in its corresponding Portfolio and instead
would invest in multiple newly organized registered investment companies. The
new investment companies would correspond to the asset classes of securities
(e.g., large capitalization growth securities or domestic fixed income
securities) in which each Fund currently invests. Changes to investment policies
and certain other Fund documents necessary to permit the restructuring would
require approval by the shareholders of each of the Funds.
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.
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
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 or the Fund's distributor, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
For the period from June 17, 1996 (September 3, 1996, for CitiSelect Folio
500), commencement of operations of the Funds, through December 31, 1996, the
annualized expenses of each Fund were 150% for CitiSelect Folio 200 and
CitiSelect Folio 300; and 175% for CitiSelect Folio 400 and CitiSelect Folio
500, of each Fund's average daily net assets for that period.
All fee waivers are voluntary and may be reduced or terminated at any time.
COUNSEL AND INDEPENDENT AUDITOR: Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for each Fund. Price Waterhouse LLP, Boston,
Massachusetts, serves as independent auditor for each Fund.
------------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Funds 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, and (vi) the determination of net asset
value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or their distributor. This Prospectus does
not constitute an offering by the Funds or their distributor in any jurisdiction
in which such offering may not lawfully be made.
<PAGE>
APPENDIX
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PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. Repurchase agreements are
transactions in which an institution sells the Fund a security at one price,
subject to the Fund's obligation to resell and the selling institution's
obligation to repurchase that security at a higher price normally within a seven
day period. There may be delays and risks of loss if the seller is unable to
meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, each Fund may lend its
portfolio securities to broker-dealers and other institutional borrowers. Such
loans must be callable at any time and continuously secured by collateral (cash
or U.S. Government securities) in an amount not less than the market value,
determined daily, of the securities loaned. It is intended that the value of
securities loaned by a Fund would not exceed 30% of the Fund's total assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or reverse repurchase agreement, a Fund could experience
delays in recovering either the securities or cash. To the extent that, in the
meantime, the value of the securities loaned or sold has increased or the value
of the securities purchased has decreased, the Fund could experience a loss.
RULE 144A SECURITIES. Each Fund may purchase restricted securities that are not
registered for sale to the general public. If it is determined that there is a
dealer or institutional market in the securities, the securities will not be
treated as illiquid for purposes of the Fund's investment limitations. The
Trustees will review these determinations. These securities are known as "Rule
144A securities," because they are traded under SEC Rule 144A among qualified
institutional buyers. Institutional trading in Rule 144A securities is
relatively new, and the liquidity of these investments could be impaired if
trading in Rule 144A securities does not develop or if qualified institutional
buyers become, for a time, uninterested in purchasing Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. Each Fund may invest up to 10% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities for
which no institutional market exists. The absence of a trading market can make
it difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for a Fund to sell them promptly at an
acceptable price.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
COMMERCIAL PAPER. Each Fund may invest in commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
DEPOSITARY RECEIPTS FOR SECURITIES. American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other forms of depositary receipts for securities of non-U.S. issuers provide an
alternative method for a Fund to make non-U.S. investments. These securities are
not usually traded in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and regulatory
limitations, assets of each Fund may be invested in shares of other investment
companies. Each Fund may invest up to 5% of its assets in closed-end
investment companies which primarily hold securities of non-U.S. issuers.
CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts may be entered
into for each Fund for the purchase or sale of non-U.S. currency to hedge
against adverse rate changes or otherwise to achieve the Fund's investment
objectives. A currency exchange contract allows a definite price in dollars to
be fixed for securities of non-U.S. issuers that have been purchased or sold
(but not settled) for the Fund. Entering into such exchange contracts may result
in the loss of all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. In addition, entering into
such contracts means incurring certain transaction costs and bearing the risk of
incurring losses if rates do not move in the direction anticipated.
SECURITIES RATED BAA OR BBB. Each Fund may purchase securities rated Baa by
Moody's or BBB by S&P and securities of comparable quality, which may have poor
protection of payment of principal and interest. These securities are often
considered to be speculative and involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. The market prices of these securities may fluctuate
more than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
ASSET-BACKED SECURITIES. Each Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral.
Each Fund also may purchase mortgage-backed securities issued or guaranteed
as to payment of principal and interest by the U.S. Government or one of its
agencies and backed by the full faith and credit of the U.S. Government,
including direct pass-through certificates of GNMA, as well as mortgage-backed
securities for which principal and interest payments are backed by the credit of
particular agencies of the U.S. Government. Mortgage- backed securities are
generally backed or collateralized by a pool of mortgages. These securities are
sometimes called collateralized mortgage obligations or CMOs.
Even if the U.S. Government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment, because the underlying mortgages are refinanced to take advantage
of the lower rates. Thus the prices of mortgage-backed securities may not
increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of locking
in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
DOLLAR ROLLS. The Funds also may enter into "dollar rolls." A dollar roll is a
transaction pursuant to which a Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the mortgage-backed securities. The Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a specific
type of dollar roll for which a Fund establishes a segregated account with
liquid high grade debt securities equal in value to the securities subject to
repurchase by the Fund. The Funds will invest only in covered rolls.
FUTURES. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are commonly referred
to as "derivatives." Futures contracts are a generally accepted part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. When a Fund purchases or sells a futures contract, it
is required to make an initial margin deposit. Although the amount may vary,
initial margin can be as low as 1% or less of the face amount of the contract.
Additional margin may be required as the contract fluctuates in value. Since the
amount of margin is relatively small compared to the value of the securities
covered by a futures contract, the potential for gain or loss on a futures
contract is much greater than the amount of a Fund's initial margin deposit.
None of the Funds currently intends to enter into a futures contract if, as a
result, the initial margin deposits on all of that Fund's futures contracts
would exceed approximately 5% of the Fund's net assets. Also, each Fund intends
to limit its futures contracts so that the value of the securities covered by
its futures contracts would not generally exceed 50% of the Fund's other assets
and to segregate sufficient assets to meet its obligations under outstanding
futures contracts.
The ability of a Fund to utilize futures contracts successfully will depend
on Citibank's or a Subadviser's ability to predict interest rate, stock price or
currency movements, which cannot be assured. In addition to general risks
associated with any investment, the use of futures contracts entails the risk
that, to the extent Citibank's or the Subadviser's view as to interest rate,
stock price or currency movements is incorrect, the use of futures contracts,
even for hedging purposes, could result in losses greater than if they had not
been used. This could happen, for example, if there is a poor correlation
between price movements of futures contracts and price movements in a Fund's
related portfolio position. Also, the futures markets may not be liquid in all
circumstances. As a result, in certain markets, a Fund might not be able to
close out a transaction without incurring substantial losses, if at all. When
futures contracts are used for hedging, even if they are successful in
minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result from
an increase in value of such position. As noted, each Fund may also enter into
transactions in futures contracts for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater risk.
In particular, in entering into such transactions, a Fund may experience losses
which are not offset by gains on other portfolio positions, thereby reducing its
gross income. In addition, the markets for such instruments may be extremely
volatile from time to time, which could increase the risks incurred by the Fund
in entering into such transactions.
The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases a Fund's potential for both
gain and loss. As noted above, each of the Funds intends to adhere to certain
policies relating to the use of futures contracts, which should have the effect
of limiting the amount of leverage by the Fund.
OPTIONS. Each Fund may write (sell) covered call and put options and purchase
call and put options on securities. A Fund will write options on securities for
the purpose of increasing its return on such securities and/or to protect the
values of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option which will increase its gross income and will offset
in part the reduced value of the portfolio security underlying the option, or
the increased cost of portfolio securities to be acquired. If the price of the
underlying security moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium.
By writing a call option on a security, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
Each of the Funds also may purchase options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect
on the Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency. Each Fund also may buy and
write options on stock indices.
Each Fund may purchase and write options to buy or sell interest rate
futures contracts and options on stock index futures contracts. Such investment
strategies will be used for hedging and non-hedging purposes, subject to
applicable law. Put and call options on futures contracts may be traded by a
Fund in order to protect against declines in values of portfolio securities or
against increases in the cost of securities to be acquired. Purchases of options
on futures contracts may present less risk in hedging the portfolio of a Fund
than the purchase or sale of the underlying futures contracts since the
potential loss is limited to the amount of the premium plus related transaction
costs. The writing of such options, however, does not present less risk than the
trading of futures contracts and will constitute only a partial hedge, up to the
amount of the premium received. In addition, if an option is exercised, the Fund
may suffer a loss on the transaction.
Each Fund may enter into forward foreign currency contracts for the purchase
or sale of a fixed quantity of a foreign currency at a future date at a price
set at the time of the contract. A Fund may enter into forward contracts for
hedging and non-hedging purposes including transactions entered into for the
purpose of profiting from anticipated changes in foreign currency exchange
rates. Each Fund has established procedures consistent with statements of the
Securities and Exchange Commission and its staff regarding the use of forward
contracts by registered investment companies, which requires use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
Forward contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in the futures and options
contracts described herein.
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while forward
contracts may be entered into only in the over-the-counter market. Futures
contracts and options on futures contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission and on foreign exchanges.
The securities underlying options and futures contracts traded by a Fund may
include domestic as well as foreign securities. Investors should recognize that
transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S.
markets.
Transactions in options, futures contracts, options on futures contracts and
forward contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, a Fund may sell futures contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transactions will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction.
<PAGE>
497(c) File Nos. 2-90518 and 811-4006
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1997
CITISELECT(SM) FOLIO 200
CITISELECT(SM) FOLIO 300
CITISELECT(SM) FOLIO 400
CITISELECT(SM) FOLIO 500
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 CitiSelect(SM) Folio 200, CitiSelect(SM)
Folio 300, CitiSelect(SM) Folio 400 and CitiSelect (SM) Folio 500 (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, Asset Allocation
Portfolio 400 and Asset Allocation Portfolio 500 (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 ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
The Trust ............................................................... B-2
Investment Objectives and Policies ...................................... B-2
Description of Permitted Investments and Investment Practices ........... B-3
Investment Restrictions ................................................. B-13
Performance Information and Advertising ................................. B-15
Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information ...................................... B-16
Management .............................................................. B-16
Portfolio Transactions .................................................. B-22
Description of Shares, Voting Rights and Liabilities .................... B-23
Certain Additional Tax Matters .......................................... B-24
Financial Statements .................................................... B-25
This Statement of Additional Information sets forth information which may be
of interest to investors but which is not necessarily included in the Funds'
Prospectus, dated May 1, 1997. 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 1-800-625-4554.
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 four funds offered by
the Trust -- CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400
and CitiSelect Folio 500 (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, Asset Allocation Portfolio 400 and Asset Allocation
Portfolio 500 (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 a Fund include that Fund's corresponding Portfolio,
except as otherwise noted. In addition, references to the Trust 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. LFBDS receives a distribution fee from
each Fund pursuant to a Service Plan adopted in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a total return fund that allocates its investments among three
primary classes of assets -- equity, fixed income and money market securities.
Each Fund's asset mix is designed to offer a different level of potential return
within a corresponding level of risk. The investment objective of each Fund is
as follows:
The investment objective of CitiSelect Folio 200 is as high a total return
over time as is consistent with a primary emphasis on a combination of fixed
income and money market securities, and a secondary emphasis on equity
securities.
The investment objective of CitiSelect Folio 300 is as high a total return
over time as is consistent with a balanced emphasis on equity and fixed income
securities.
The investment objective of CitiSelect Folio 400 is as high a total return
over time as is consistent with a primary emphasis on equity securities, and a
secondary emphasis on fixed income securities.
The investment objective of CitiSelect Folio 500 is as high a total return
over time as is consistent with a dominant emphasis on equity securities and a
small allocation to fixed income securities.
The investment objective of each Fund may be changed by its Trustees without
approval by that Fund's shareholders, but shareholders will be given written
notice at least 30 days before any change is implemented. Of course, there can
be no assurance that any Fund will achieve its investment objective.
The Prospectus contains a discussion of the various types of securities in
which each Fund may invest and the risks involved in such investments. The
following supplements the information contained in the Prospectus concerning the
investment objective, policies and techniques of each Fund.
The Funds are asset allocation funds. Asset allocation funds are a basic
tool of investment professionals and are differentiated by the use of investment
management strategies and techniques that range from the least aggressive to the
most aggressive. The Funds offer a convenient way to own a diversified
professionally managed portfolio tailored to specific investment goals and
expectations of risk and return. While time horizon is a factor, it is not
necessarily the determinative factor in choosing to invest in one of the Funds.
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 four Funds
and is designed for the investor who is seeking relatively lower risk provided
by substantial investments in fixed income and money market securities, but who
also seeks some capital growth. CitiSelect Folio 300 is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment component to temper volatility. CitiSelect Folio 400 and CitiSelect
Folio 500 are designed for the investor willing and able to take higher risks in
the pursuit of long-term capital appreciation. CitiSelect Folio 500 is expected
to be the most volatile of the four Funds, and is designed for investors who can
withstand greater market swings to seek potential long-term rewards. CitiSelect
Folio 400 is designed for investors seeking long-term rewards, but with less
volatility.
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.
Even if the U.S. government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment because the underlying mortgages are refinanced to take advantage
of the lower rates. The prices of mortgage-backed securities may not increase as
much as prices of other debt obligations when interest rates decline, and
mortgage-backed securities may not be an effective means of locking in a
particular interest rate. In addition, any premium paid for a mortgage-backed
security may be lost when it is prepaid. When interest rates go up,
mortgage-backed securities experience lower rates of prepayment. This has the
effect of lengthening the expected maturity of a mortgage-backed security. As a
result, prices of mortgage-backed securities may decrease more than prices of
other debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
As described in the Prospectus, the Funds may enter into mortgage "dollar
roll" transactions pursuant to which they sell mortgage-backed securities for
delivery in the future and simultaneously contract to repurchase substantially
similar securities on a specified future date. During the roll period, a Fund
forgoes principal and interest paid on the mortgage-backed securities. The Fund
is compensated for the lost principal and interest by the difference between the
current sales price and the lower price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES
Each of the Funds may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, each of the Funds may
purchase securities that are not registered ("restricted securities") under the
Securities Act of 1933 (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act.
However, none of the Funds invests more than 10% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and restricted
securities, unless the Board of Trustees of the Trust 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. Either party has the right to terminate a
loan at any time on customary industry settlement notice (which will not usually
exceed three business days). During the existence of a loan, a Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and with respect to cash collateral, would also
receive compensation based on investment of cash collateral (subject to a rebate
payable to the borrower) or a fee from the borrower in the event the collateral
consists of securities. Where the borrower provides a Fund with collateral
consisting of U.S. Treasury obligations, the borrower is also obligated to pay
the Fund a fee for use of the borrowed securities. The Fund, would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to entities deemed by the Manager or a Subadviser to be of good
standing, and when, in the judgment of the Manager or a Subadviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. In addition, a Fund could suffer loss if the borrower
terminates the loan and the Fund is forced to liquidate investments in order to
return the cash collateral to the buyer. If the Manager or a Subadviser
determines to make loans, it is not intended that the value of the securities
loaned would exceed 30% of the value of the respective Fund's total assets.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Fund would take delivery of such securities. When a Fund commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, it sets
up procedures consistent with Securities and Exchange Commission policies. Since
those policies currently require that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the Funds expect 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 their assets as measured in
U.S. dollars from unfavorable changes in currency exchange rates and control
regulations. (Although each Fund's assets are valued daily in terms of U.S.
dollars, the Trust does not intend to convert a Fund's holdings of other
currencies into U.S. dollars on a daily basis.)
The Funds may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although currency
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
currency at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency
involved in the underlying security transaction, the Fund will be able to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on
which payment is made or received.
When the Manager or a Subadviser believes that the currency of a particular
country may suffer a substantial decline against the U.S. dollar, a Fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of non-U.S. currency approximating the value of some or all of the Fund's
securities denominated in such non-U.S. currency. The precise matching of the
forward contract amounts and the value of the securities involved is not
generally possible since the future value of such securities in non-U.S.
currencies changes as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date it
matures. The projection of a short-term hedging strategy is highly uncertain.
The Funds do not enter into such forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts obligates a Fund to
deliver an amount of non-U.S. currency in excess of the value of the Fund's
securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated in the investment decisions made with regard to overall
diversification strategies. However, the Manager believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interests of the Fund will be served.
The Funds generally would not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, a Fund will either
sell the security and make delivery of the non-U.S. currency, or retain the
security and terminate its contractual obligation to deliver the non-U.S.
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
non-U.S. currency. If a Fund retains the security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the non-U.S. currency. Should forward prices decline
during the period between the date a Fund enters into a forward contract for the
sale of the non-U.S. currency and the date it enters into an offsetting contract
for the purchase of such currency, the Fund will realize a gain to the extent
the selling price of the currency exceeds the purchase price of the currency.
Should forward prices increase, the Fund will suffer a loss to the extent that
the purchase price of the currency exceeds the selling price of the currency.
It is impossible to forecast with precision the market value of Fund
securities at the expiration of the contract. Accordingly, it may be necessary
for a Fund to purchase additional non-U.S. currency on the spot market if the
market value of the security is less than the amount of non-U.S. currency the
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of such currency. Conversely, it may be necessary to sell on the
spot market some of the non-U.S. currency received upon the sale of the security
if its market value exceeds the amount of such currency the Fund is obligated to
deliver.
Each of the Funds may also purchase put options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect
on the Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency.
The purchase of such options could offset, at least partially, the effects
of the adverse movements in exchange rates. However, the benefit to the Fund
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would require
it to forgo a portion or all of the benefits of advantageous changes in such
rates.
The Funds may write options on non-U.S. currencies for hedging purposes or
otherwise to achieve their investment objectives. For example, where a Fund
anticipates a decline in the value of the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund will be offset by the
amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because of
an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the premium.
However, the writing of a currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash, short-term money market instruments or high
quality debt securities in an account with the custodian in an amount sufficient
to discharge the Fund's obligations with respect to the option, by acquisition
of the non-U.S. currency or of a right to acquire such currency (in the case of
a call option) or the acquisition of a right to dispose of the currency (in the
case of a put option), or in such other manner as may be in accordance with the
requirements of any exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in currency
exchange rates will affect the value of these receipts. For example, decline in
the U.S. dollar value of another currency in which securities are primarily
traded will reduce the U.S. dollar value of such securities, even if their value
in the other non-U.S. currency remains constant, and thus will reduce the value
of the receipts covering such securities. A Fund may employ any of the above
described foreign currency hedging techniques to protect the value of its assets
invested in depositary receipts.
Of course, a Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Manager or a
Subadviser. It should also be realized that this method of protecting the value
of a Fund's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase.
Each Fund has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts. Since those
policies currently recommend that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, each Fund expects to always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk.
OPTIONS
Each of the Funds may write covered call and put options and purchase call
and put options on securities. Call and put options written by a Fund may be
covered in the manner set forth below.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by a
Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by a
Fund is "covered" if the Fund maintains cash, short term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options written by a Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Each of the Funds may purchase options for hedging purposes or to increase
the Fund's return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put options will
permit a Fund to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
Each of the Funds may purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future. If
such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
Each of the Funds may write (sell) covered call and put options and purchase
call and put options on stock indices. In contrast to an option on a security,
an option on a stock index provides the holder with the right, but not the
obligation, to make or receive a cash settlement upon exercise of the option,
rather than the right to purchase or sell a security. The amount of this
settlement is equal to (i) the amount, if any, by which the fixed exercise price
of the option exceeds (in the case of a call) or is below (in the case of a put)
the closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier."
Each of the Funds may cover call options on stock indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio. Where a Fund covers a call option on a stock index through ownership
of securities, such securities may not match the composition of the index and,
in that event, the Fund will not be fully covered and could be subject to risk
of loss in the event of adverse changes in the value of the index. A Fund may
also cover call options on stock indices by holding a call on the same index and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A Fund may
cover put options on stock indices by maintaining cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or by holding a put on the
same stock index and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which a Fund has written
a call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, a Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Fund correlate with changes in the value of the index, writing covered put
options on indices will increase the Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium received for
writing the option.
Each of the Funds may also purchase put options on stock indices to hedge
the Fund's investments against a decline in value. By purchasing a put option on
a stock index, a Fund will seek to offset a decline in the value of securities
it owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option does
not increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely depend
on the accuracy of the correlation between the changes in value of the index and
the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
Each of the Funds may purchase and write options on foreign currencies in a
manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized.
FUTURES CONTRACTS
Each of the Funds may enter into interest rate futures contracts, stock
index futures contracts and/or foreign currency futures contracts. Such
investment strategies will be used for hedging purposes and for nonhedging
purposes, subject to applicable law.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an index
of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are very seldom
made. Generally, a futures contract is terminated by entering into an offsetting
transaction. Brokerage fees will be incurred when a Fund purchases or sells a
futures contract. At the same time such a purchase or sale is made, the Fund
must provide cash or securities as a deposit ("initial deposit") known as
"margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant to
such a contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than the specific
security that provides the standard for the contract. In some (but not many)
cases, securities called for by a futures contract may not have been issued when
the contract was entered into.
A Fund may purchase or sell futures contracts to attempt to protect the Fund
from fluctuations in interest rates, or to manage the effective maturity or
duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as if the Fund sold bonds that it owned, or as if the Fund sold
longer-term bonds and purchased shorter-term bonds. If interest rates did
increase, the value of the Fund's debt securities would decline, but the value
of the futures contracts would increase, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Similar results
could be accomplished by selling bonds, or by selling bonds with longer
maturities and investing in bonds with shorter maturities. However, by using
futures contracts, the Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, a Fund might
enter into futures contracts for the purchase of debt securities. Such a
purchase would be intended to have much the same effect as if the Fund purchased
bonds, or as if the Fund sold shorter-term bonds and purchased longer-term
bonds. If interest rates did decline, the value of the futures contracts would
increase.
Each of the Funds may enter into stock index futures contracts to gain stock
market exposure while holding cash available for investments and redemptions.
Each of the Funds may purchase and sell foreign currency futures contracts
to attempt to protect its current or intended investments from fluctuations in
currency exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant. A
Fund may sell futures contracts on a foreign currency, for example, where it
holds securities denominated in such currency and it anticipates a decline in
the value of such currency relative to the dollar. In the event such decline
occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
Although the use of futures for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position (e.g., if a Fund sells
a futures contract to protect against losses in the debt securities held by the
Fund), at the same time the futures contract limits any potential gain which
might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a Fund's
investments through transactions in futures contracts depends on the degree to
which movements in the value of the debt securities underlying such contracts
correlate with movements in the value of the Fund's securities. If the security
underlying a futures contract is different than the security being hedged, they
may not move to the same extent or in the same direction. In that event, the
Fund's hedging strategy might not be successful and the Fund could sustain
losses on these hedging transactions which would not be offset by gains on the
Fund's other investments or, alternatively, the gains on the hedging transaction
might not be sufficient to offset losses on the Fund's other investments. It is
also possible that there may be a negative correlation between the security
underlying a futures contract and the securities being hedged, which could
result in losses both on the hedging transaction and the securities. In these
and other instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken. Similarly, even where a Fund enters into
futures transactions other than for hedging purposes, the effectiveness of its
strategy may be affected by lack of correlation between changes in the value of
the futures contracts and changes in value of the securities which the Fund
would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures contract
was originally entered into. While a Fund will establish a futures position only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures contract at
any specific time. In that event, it may not be possible to close out a position
held by the Fund, which could require the Fund to purchase or sell the
instrument underlying the futures contract or to meet ongoing variation margin
requirements. The inability to close out futures positions also could have an
adverse impact on the ability effectively to use futures transactions for
hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a futures contract during a
single trading day and prohibit trading beyond such limits once they have been
reached. The trading of futures contracts also is subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Investments in futures contracts also entail the risk that if the Manager's
or a Subadviser's investment judgment about the general direction of interest
rates 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 of the foregoing Funds or Portfolios 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 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 is 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 net asset value.
Set forth below is total rate of return information for the shares of each
Fund for the periods indicated, assuming that dividends and capital gains
distributions, if any, were reinvested.
CITISELECT FOLIO 200
REDEEMABLE VALUE
OF A HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------- ------------- -----------------
June 17, 1996 6.38% $1,064
(commencement of operations)
to December 31, 1996
CITISELECT FOLIO 300
REDEEMABLE VALUE
OF A HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------- ------------- -----------------
June 17, 1996 7.61% $1,076
(commencement of operations)
to December 31, 1996
CITISELECT FOLIO 400
REDEEMABLE VALUE
OF A HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------- ------------- -----------------
June 17, 1996 8.84% $1,088
(commencement of operations)
to December 31, 1996
CITISELECT FOLIO 500
REDEEMABLE VALUE
OF A HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------- ------------- -----------------
September 3, 1996 7.20% $1,072
(commencement of operations)
to December 31, 1996
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 per 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 that 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.
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
Exchange is closed (other than customary weekend and holiday closings); or (c)
the SEC has by order permitted such suspension.
7. MANAGEMENT
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 74) -- Treasurer-Tax Collector, County of Los Angeles
(retired, March 1984); Chairman, certain registered investment companies in
the 59 Wall Street funds group. His address is 1450 Oleada Road, Pebble Beach,
California. Mr. Alvord has announced that he intends to retire as a Trustee on
May 31, 1997.
PHILIP W. COOLIDGE* (aged 45) -- 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 70) -- Vice President and General Counsel, Corporate
Property Investors (November, 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 57) -- Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate School
of Business, University of Virginia (September 1978 to September 1993); Trustee,
the Highland Family of Funds (since March 1997). Her address is 120 Goulding
Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 45) -- President, Global Research Associates, Inc.
(Investment Research) (since August 1990); 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 62) -- Managing Director, Morong Capital Management
(since February 1993); Senior Vice President and Investment Manager, CREF
Investments, Teachers Insurance & Annuity Association (retired January 1993);
Director, Indonesia Fund; Director, MAS Funds. His address is 1385 Outlook
Drive West, Mountainside, New Jersey.
E. KIRBY WARREN (aged 62) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 76) -- Vice President-Investments, Sun Company,
Inc. (retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUST
ELLIOTT J. BERV (aged 54) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* (aged 45) -- 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 53) -- President and Director, Delta Financial, Inc. (since
June 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); Director, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
WALTER E. ROBB, III (aged 70) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (corporate financial advisers) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
SAMANTHA M. BURGESS* (aged 27) -- Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc. (since November 1995); Graduate Student, Loyola
University (prior to August 1995).
PHILIP W. COOLIDGE* (aged 45) -- 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).
CHRISTINE A. DRAPEAU* (aged 26) -- Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc. (since January 1996); Paralegal and Compliance Officer,
various financial companies (July 1992 to January 1996); Graduate Student,
Bentley College (prior to December 1994).
JOHN R. ELDER* (aged 48) -- Treasurer of the Trust 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 31) -- Secretary of the Trust and the Portfolio Trust;
Vice President, Signature Financial Group, Inc. (since May 1992); Assistant
Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since October
1992); law student, Boston University School of Law (September 1989 to May
1992).
JOAN R. GULINELLO* (aged 41) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Vice President, Signature Financial Group,
Inc. (since October 1993); Secretary, The Landmark Funds Broker-Dealer
Services, Inc. (since October 1995); Vice President and Assistant General
Counsel, Massachusetts Financial Services Company (prior to October 1993).
JAMES E. HOOLAHAN* (aged 49) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trust; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 33) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Vice President, Signature Financial Group
(Cayman), Ltd. (since August 1994); Senior Fund Administrator, Signature
Financial Group, Inc. (since August 1994); Assistant Treasurer, Signature
Broker-Dealer Services, Inc. (since September 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994). Her
address is Elizabethan Square, George Town, Grand Cayman, Cayman Islands, BWI.
MOLLY S. MUGLER* (aged 45) -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trust; Vice President, Signature Financial Group, Inc.;
Assistant Secretary, The Landmark Funds Broker-Dealer Services, Inc.
(since December 1988).
KARYN A. NOKE* (aged 26) -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trust; Vice President, Signature
Financial Group (Cayman), Ltd. (since September 1996); Assistant Vice
President, Signature Financial Group, Inc. (May 1993 to August 1996); Student,
University of Massachusetts (prior to May 1993).
SHARON M. WHITSON* (aged 48) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc. (since November 1992); Associate Trader, Massachusetts
Financial Services Company (prior to November 1992).
JULIE J. WYETZNER* (aged 37) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trust; Vice President,
Signature Financial Group, Inc.
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.
The Trustees of the Trust received the following remuneration from the Trust
during its fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
FROM AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT TO TRUSTEES (1)
------------------------ ------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
H.B. Alvord .......................... $1,245.99 None None $44,000
Philip W. Coolidge ................... $ 0.00 None None $ 0
Riley C. Gilley ...................... $1,234.79 None None $46,000
Diana R. Harrington .................. $1,359.73 None None $47,250
Susan B. Kerley ...................... $1,359.73 None None $45,250
C. Oscar Morong, Jr. ................. $1,453.47 None None $58,875
Donald B. Otis(2) .................... $ 0.00 None None $38,000
E. Kirby Warren ...................... $1,245.98 None None $47,375
William S. Woods, Jr. ................ $1,257.65 None None $47,000
(1) Information relates to the fiscal year ended December 31, 1996. As of that date, Messrs. Alvord, Coolidge, Gilley,
Morong, Warren and Woods and Mses. Harrington and Kerley were trustees of 23, 46, 25, 23, 23, 25, 23 and 23
funds, respectively, of the Landmark Family of Funds.
(2) Mr. Otis retired as a Trustee as of August 31, 1996.
</TABLE>
As of April 9, 1997 all Trustees and officers as a group owned less than 1%
of each Fund's outstanding shares. As of the same date, more than 95% of the
outstanding shares of each Fund were held of record by Citibank, N.A. or its
affiliates as Service Agents of the Fund for the accounts of their respective
clients.
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. For the period from June 17, 1996
(September 3, 1996 for CitiSelect Folio 500), commencement of operations of the
Funds, to December 31, 1996, the fees payable to Citibank under the Management
Agreements with the Trust were as follows: CitiSelect Folio 200, $31,604 (all of
which was voluntarily waived); CitiSelect Folio 300, $61,408 (all of which was
voluntarily waived); CitiSelect Folio 400, $78,821; and CitiSelect Folio 500,
$16,855 (all of which was voluntarily waived). For the period from June 17, 1996
(September 3, 1996 for Asset Allocation Portfolio 500), commencement of
operations of the Funds, to December 31, 1996, the fees payable to Citibank
under the Management Agreements with the Portfolio Trust were as follows: Asset
Allocation Portfolio 200, $197,989 (all of which was voluntrily waived); Asset
Allocation Portfolio 300, $385,745 (all of which was voluntarily waived); Asset
Allocation Portfolio 400, $495,484 (of which $361,792 was voluntarily waived);
and Asset Alloctaion Portfolio 500, $103,638 (all of which was voluntarily
waived).
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 the Funds 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 Advisory Services, Inc.
INTERNATIONAL EQUITY SECURITIES -- Hotchkis and 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 supervision of Citibank. Each Subadviser furnishes at its
own expense all services, facilities and personnel necessary in connection with
managing the assets of the Funds allocated to it and effecting securities
transactions concerning those assets.
Each Submanagement Agreement will continue in effect as to each applicable
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.
For the period from June 17, 1996 (September 3, 1996 for Asset Allocation
Portfolio 500), commencement of operations of the Funds, to December 31, 1996,
the aggregate fees paid by Citibank to each of the Subadvisers were as follows:
Miller Anderson & Sherrerd, LLP -- $90,990
Franklin Advisory Services, Inc. -- $123,189
Hotchkis and Wiley -- $160,913
Pacific Investment Management Company -- $123,950
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 for
shares of the Funds (the "Distribution Agreement"). Unless otherwise terminated
the Distribution Agreement 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 particular Fund 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 for shares of the Funds (the "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% (0.40% for CitiSelect Folio
100) 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 Service Plan and the purposes for which the expenditures
were made.
The Service Plan 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 by 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 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 Service Plan for each Fund, the Trustees will review the
Service 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 the 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. For the period from June 17, 1996 (September 3, 1996 for CitiSelect
Folio 500), commencement of operations of the Funds, to December 31, 1996, the
fees paid to LFBDS under the Distribution Agreement were as follows: CitiSelect
Folio 200, $158,021; CitiSelect Folio 300, $307,039; CitiSelect Folio 400,
$394,103; and CitiSelect Folio 500, $83,802.
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 or any other source available to it.
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 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. 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 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.
For the period from June 17, 1996 (September 3, 1996 for Asset Allocation
Portfolio 500), commencement of operations for the Portfolio to December 31,
1996, the Portfolio Trust paid brokerage commissions in the following amounts:
Asset Allocation Portfolio 200, $89,479; Asset Allocation Portfolio 300,
$241,111; Asset Allocation Portfolio 400, $453,048; and Asset Allocation
Portfolio 500, $185,397.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of the Trust permits the Trust 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 or class, only shares of
that particular Fund or class 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. taxes. 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.
11. FINANCIAL STATEMENTS
Price Waterhouse LLP are the independent accountants for the Funds,
providing audit services and assistance and consultation with respect to the
preparation of filings with the Securities and Exchange Commission. Price
Waterhouse are the chartered accountants for the Portfolio Trust.
The audited financial statements of the Funds (Statement of Assets and
Liabilities at December 31, 1996, Statement of Operations for the period June
17, 1996 (commencement of operations) (September 3, 1996 for CitiSelect(SM)
Folio 500) through December 31, 1996, Statement of Changes in Net Assets for the
period June 17, 1996 (commencement of operations) (September 3, 1996 for
CitiSelect(SM) Folio 500) through December 31, 1996, Financial Highlights for
the period June 17, 1996 (commencement of operations) (September 3, 1996 for
CitiSelect(SM) Folio 500) through December 31, 1996, Notes to Financial
Statements) and Independent Auditors' Report, each of which is included in the
Annual Report to Shareholders, are incorporated by reference into this Statement
of Additional Information and have been so incorporated in reliance upon the
reports of Price Waterhouse LLP, independent accountants, on behalf of the
Funds.
The audited financial statements of the Portfolios (Portfolio of Investments
at December 31, 1996, Statement of Assets and Liabilities at December 31, 1996,
Statement of Operations for the period June 17, 1996 (commencement of
operations) (September 3, 1996 for Asset Allocation Portfolio 500) through
December 31, 1996, Statement of Changes in Net Assets for the period June 17,
1996 (commencement of operations) (September 3, 1996 for Asset Allocation
Portfolio 500) through December 31, 1996, Financial Highlights for the period
June 17, 1996 (commencement of operations) (September 3, 1996 for Asset
Allocation Portfolio 500) through December 31, 1996, Notes to Financial
Statements) and Independent Auditors' Report, each of which is included in the
Annual Report to Shareholders, are incorporated by reference into this Statement
of Additional Information and have been so incorporated in reliance upon the
reports of Price Waterhouse, chartered accountants, on behalf of the Portfolios.
Copies of the Annual Report for the Funds accompany this Statement of
Additional Information.
