<PAGE>
Rule 497(e) File Nos. 2-90518 and 811-4006
Supplement dated August 1, 1999
to
Prospectus dated May 3, 1999
As Supplemented May 17, 1999
for
CitiFunds(SM) Balanced Portfolio
CitiFunds(SM) Balanced Portfolio now invests in securities through two
underlying mutual funds, Large Cap Value Portfolio (which invests in equity
securities) and U.S. Fixed Income Portfolio (which invests in fixed income and
money market securities). The Fund's expense ratio is not increasing as a result
of this restructuring.
Fees and Expenses
The following table presents estimated annual operating expenses for
the Fund, Large Cap Value Portfolio and U.S. Fixed Income Portfolio.
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
SHARE CLASS CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases 5.00% None
Maximum Deferred Sales Charge (Load) None(1) 5.00%(2)
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS(3)
SHARE CLASS CLASS A CLASS B
Management Fees 0.70%(4) 0.70%(4)
Distribution (12b-1) Fees (including service fees) 0.25% 1.00%
Other Expenses 0.27% 0.27%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.22% 1.97%
* After waivers and reimbursements, total operating expenses are expected to
be 1.02% for Class A shares and 1.77% for Class B shares. These fee waivers
and reimbursements may be reduced or terminated at any time.
(1) Except for investments of $500,000 or more.
(2) Class B shares have a contingent deferred sales charge (CDSC) which is
deducted from your sale proceeds if you sell your Class B shares within five
years of your original purchase of the shares. In the first year after
purchase, the CDSC is 5.00% of the price at which you purchased your shares,
or the price at which you sold your shares, whichever is less, declining to
1.00% in the fifth year after purchase.
(3) The expenses in this table reflect the expenses of the Fund, Large Cap Value
Portfolio and U.S. Fixed Income Portfolio.
(4) A combined fee for investment advisory and administrative services.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods, if you
own Class A shares.
If you own Class B shares, two numbers are given, one showing your expenses if
you sold (redeemed) all your shares at the end of each time period and one if
you held onto your shares. The example also shows the effects of the conversion
of Class B shares to Class A shares after 8 years.
The example also assumes that:
o each investment has a 5% return each year -- the assumption of a 5%
return is required by the Securities and Exchange Commission for the
purpose of this example and is not a prediction of the Fund's future
performance; and
o the Fund's operating expenses shown in the Fund Fees and Expenses
table remain the same before taking into consideration any fee
waivers or reimbursements.
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
- -------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A $618 $868 $1,137 $1,903
- -------------------------------------------------------------------------------
Class B
Assuming redemption at end of period $700 $918 $1,162 $2,060
Assuming no redemption $200 $618 $1,062 $2,060
MANAGEMENT
Citibank, N.A. is the investment manager of CitiFunds Balanced
Portfolio and each underlying portfolio in which it invests. Mark Lindbloom, a
Vice President of Citibank, will serve as the Fund's overall portfolio manager
and will be responsible for determining asset allocations, supervising and
monitoring the performance of Citibank personnel responsible for managing the
Fund's assets, and supervising and monitoring the performance of the subadviser.
Also, Mr. Lindbloom, who was a portfolio manager of Balanced Portfolio, will
continue to manage the fixed income portion of the Fund, as the portfolio
manager of U.S. Fixed Income Portfolio.
SSBC Fund Management, Inc. (SSBC), an affiliate of Citibank and an
indirect wholly-owned subsidiary of Citigroup Inc., is the sub-adviser of Large
Cap Value Portfolio. SSBC's address is 388 Greenwich Street, New York, New York
10013. In managing the Fund's stocks, SSBC uses a value-oriented approach
similar to Citibank's value style described in the Prospectus. The success of
the Fund's investment strategy depends largely on SSBC's skill in identifying
securities of companies that are in fact undervalued, but have good longer term
business prospects. SSBC's fees for managing the equity portion of the Fund are
deducted from the investment advisory fee payable to Citibank. For the fiscal
year ended December 31, 1998, Citibank's investment advisory fee was a total of
0.40% of the Fund's average daily net assets.
Frances A. Root is the portfolio manager of Large Cap Value Portfolio.
Ms. Root is a Managing Director and a Senior Equity Portfolio Manager of SSBC.
She joined Smith Barney Capital Management in 1992 as a Vice President and
Equity Portfolio Manager and in 1998 became a Managing Director of SSBC and a
Senior Equity Portfolio Manager. Formerly, she was with Shearson Lehman Advisors
as a Vice President and Portfolio Manager for seven years and prior to that,
with E.F. Hutton & Company, Inc.
<PAGE>
Rule 497(e) File Nos. 2-90518 and 811-4006
Statement of
Additional Information
May 3, 1999
As supplemented
August 1, 1999
CITIFUNDS(SM) BALANCED PORTFOLIO
CitiFunds(SM) Balanced Portfolio (the "Fund") is a series of CitiFunds Trust
I (the "Trust"). The address and telephone number of the Trust are 21 Milk
Street, Boston, Massachusetts 02109, (617) 423-1679. The Trust invests all of
the investable assets of the Fund in Large Cap Value Portfolio and U.S. Fixed
Income Portfolio (the "Portfolios"). Large Cap Value Portfolio is a separate
series of Asset Allocation Portfolios, and U.S. Fixed Income Portfolio is a
separate series of The Premium Portfolios (Asset Allocation Portfolios and The
Premium Portfolios are collectively referred to herein as the "Portfolio
Trusts"). The address of the Portfolio Trusts is Elizabethan Square, George
Town, Grand Cayman, British West Indies.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, CITIBANK,
N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND INVOLVE INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
1. The Trust ........................................................... 2
2. Investment Objective and Policies; Special Information Concerning
Investment Structure ................................................ 2
3. Description of Permitted Investments and Investment Practices ....... 3
4. Investment Restrictions ............................................. 23
5. Performance Information ............................................. 24
6. Determination of Net Asset Value; Valuation of Securities ........... 26
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs ................................................ 27
8. Management .......................................................... 33
9. Portfolio Transactions .............................................. 40
10. Description of Shares, Voting Rights and Liabilities ................ 41
11. Tax Matters ......................................................... 42
12. Certain Bank Regulatory Matters ..................................... 44
13. Financial Statements ................................................ 44
This Statement of Additional Information sets forth information which may be
of interest to investors but which is not necessarily included in the Fund's
Prospectus, dated May 3, 1999, as supplemented May 17, 1999 and August 1, 1999,
by which shares of the Fund are offered. This Statement of Additional
Information should be read in conjunction with the Prospectus. This Statement of
Additional Information incorporates by reference the financial statements
described on page 44 hereof. These financial statements can be found in the
Fund's Annual Report to Shareholders. An investor may obtain copies of the
Fund's Prospectus and Annual Report without charge by calling toll-free
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
CitiFunds Trust I (the "Trust") is an open-end management investment company
that was organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 13, 1984. Prior to March 2, 1998, the Trust was called
Landmark Funds I. This Statement of Additional Information describes CitiFunds
Balanced Portfolio (the "Fund"), a series of the Trust. Prior to March 2, 1998,
the Fund was called Landmark Balanced Fund. References in this Statement of
Additional Information to the "Prospectus" are to the Prospectus, dated May 3,
1999, as supplemented May 17, 1999 and August 1, 1999, of the Fund.
The Fund is a diversified fund. The Fund is permitted to seek its investment
objectives by investing all or a portion of its assets in one or more investment
companies to the extent not prohibited by the Investment Company Act of 1940, as
amended (the "1940 Act") the rules and regulations thereunder, and exemptive
orders granted under the 1940 Act. Currently, the equity portion of the Fund
will be invested in Large Cap Value Portfolio and the fixed income portion of
the Fund will be invested in U.S. Fixed Income Portfolio (collectively, the
"Portfolios"). Large Cap Value Portfolio is a series of Asset Allocation
Portfolios, and U.S. Fixed Income Portfolio is a series of The Premium
Portfolios. (Asset Allocation Portfolios and The Premium Portfolios are
collectively referred to herein as the "Portfolio Trusts"). Each Portfolio is an
open-end, diversified management investment company.
Under the 1940 Act, a diversified management investment company must invest
at least 75% of its assets in cash and cash items, U.S. Government securities,
investment company securities and other securities limited as to any one issuer
to not more than 5% of the total assets of the investment company and not more
than 10% of the voting securities of the issuer.
Because the Fund invests through the Portfolios, all references in this
Statement of Additional Information to the Fund include the Portfolios, unless
the context otherwise requires. In addition, references to the Trust include the
Portfolio Trusts, unless the context otherwise requires.
Citibank, N.A. ("Citibank" or the "Manager") is investment manager to the
Portfolios. The Manager manages the investments of the Portfolios from day to
day in accordance with the Portfolios' investment objectives 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.
Citibank has delegated the daily management of Large Cap Value Portfolio to SSBC
Fund Management, Inc., an affiliate of Citibank and an indirect wholly-owned
subsidiary of Citigroup Inc. ("SSBC" or the "Subadviser").
The Boards of Trustees of the Trust and the Portfolio Trusts provide broad
supervision over the affairs of the Fund and the Portfolios, respectively.
Shares of the Fund are continuously sold by CFBDS, Inc., the Fund's distributor
("CFBDS" or the "Distributor").
2. INVESTMENT OBJECTIVES
The investment objectives of the Fund are to provide high current income by
investing in a broad range of securities, to preserve capital, and to provide
growth potential with reduced risk.
The investment objectives of the Fund may be changed without approval by the
Fund's shareholders, but shareholders will be given written notice at least 30
days before any change is implemented. Of course, there can be no assurance that
the Fund will achieve its investment objectives.
The Prospectus contains a discussion of the principal investment strategies
of the Fund and the principal risks of investing in the Fund. The following
supplements the information contained in the Prospectus concerning the
investment policies and techniques of the Fund. The policies described herein
and those described below under "Description of Permitted Investments and
Investment Practices" are not fundamental and may be changed without shareholder
approval.
As noted above, the Fund does not invest directly in securities, but instead
invests the equity portion of the Fund in Large Cap Value Portfolio and the
fixed income portion of the Fund in U.S. Fixed Income Portfolio. The Trustees of
the Fund believe that the aggregate per share expenses of the Fund and the
Portfolios 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 the Portfolios.
The Trust may withdraw the investment of the Fund from the Portfolios 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 its investment objective and
policies, either directly in securities or in another mutual fund or pooled
investment vehicle. If the Fund were to withdraw, the Fund could receive
securities from the Portfolios 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.
The Portfolios may sell interests to investors in addition to the Fund.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Fund. Therefore, the investment
return for all investors in funds investing in the Portfolios 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 Fund's distributor, CFBDS.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
The Fund may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described below and in the
Prospectus. The selection of investments and the utilization of investment
techniques depend on, among other things, the Manager's and the Subadviser's
investment strategies for the Fund, conditions and trends in the economy and
financial markets and investments being available on terms that, in the
Manager's or the Subadviser's opinion, make economic sense.
The Fund's policy is to invest its assets, under normal circumstances, in a
broadly diversified portfolio of income-producing securities, including common
and preferred stocks, bonds and short-term obligations. Under normal
circumstances, at least 25% of the Fund's total assets is invested in fixed
income securities.
FUTURES CONTRACTS
The Fund may enter into interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts. These investment strategies
may be used for hedging purposes and for nonhedging purposes, subject to
applicable law.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an index
of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the United
States have been designed by exchanges which have been designated "contract
markets" by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on these
markets, and the exchanges, through their clearing organizations, guarantee that
the contracts will be performed as between the clearing members of the exchange.
Futures contracts may also be traded on markets outside the U.S.
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 the Fund purchases or sells a
futures contract. At the same time such a purchase or sale is made, the Fund
must provide cash or securities as a deposit ("initial deposit") known as
"margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant to
such a contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than the specific
security that provides the standard for the contract. In some (but not many)
cases, securities called for by a futures contract may not have been issued when
the contract was entered into. Interest rate futures, which are typically based
on shorter-term interest rates, such as overnight to six-month time periods,
settle in cash only rather than by delivery of the underlying instrument.
The Fund may purchase or sell interest rate futues contracts or bond futures
contracts to attempt to protect itself from fluctuations in interest rates, to
manage the effective maturity or duration of the Fund's portfolio in an effort
to reduce potential losses, or in an effort to enhance potential gain, without
actually buying or selling securities. For example, if the Fund owned long-term
bonds and 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.
Bond futures may be used for non-hedging purposes. For example, even if the
Fund were not trying to protect the value of any bonds held by it, if the
Manager or the Subadviser anticipates that interest rates are about to rise,
depressing future prices of bonds, the Manager or Subadviser may sell bond
futures short, closing out the position later at a lower price, if the future
prices had fallen, as expected. If the prices had not fallen, the Fund would
experience a loss and such loss may be unlimited.
Similarly, when it is expected that interest rates may decline, the Fund
might enter into futures contracts for the purchase of debt securities. Such a
purchase would be intended to have much the same effect as if the Fund purchased
bonds, or as if the Fund sold shorter-term bonds and purchased longer-term
bonds. If interest rates did decline, the value of the futures contracts would
increase.
Although futures on individual equity securities are not available in United
States markets, futures contracts on individual equity securities may be
available in foreign markets, and may be purchased or sold by the Fund.
The Fund may buy and sell stock index futures contracts to attempt to
increase investment return, to gain stock market exposure while holding cash
available for investments and redemptions, or to protect against a decline in
the stock market.
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at the price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Fund will gain
$400 (100 units x gain of $4) reduced by transaction costs. If the Fund enters
into a futures contract to sell 100 units of the stock index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on that
future date, the Fund will lose $200 (100 units x loss of $2) increased by
transaction costs.
Positions in index futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures.
The Fund may purchase and sell foreign currency futures contracts to attempt
to protect its current or intended investments from fluctuations in currency
exchange rates, or for non-hedging purposes, in an attempt to benefit from such
fluctuations. Such fluctuations could reduce the dollar value of portfolio
securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant. The
Fund may sell futures contracts on a foreign currency, for example, where it
holds securities denominated in such currency and it anticipates a decline in
the value of such currency relative to the dollar. In the event such decline
occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. The Fund may also sell futures contracts in a foreign currency even
if it does not hold securities denominated in such currency, if it anticipates a
decline in the value of such currency.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired. The Fund could also purchase futures contracts on a currency if it
expected the currency to rise in value, even if the Fund did not anticipate
purchasing securities denominated in that currency.
Although the use of futures for hedging, if correctly used, may minimize the
risk of loss due to a decline in the value of the hedged position (e.g., if the
Fund sells a futures contract to protect against losses in the debt securities
held by the Fund), they do not eliminate the risk of loss and at the same time
the futures contract limits any potential gain which might result from an
increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of the 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 the Fund enters into
futures transactions other than for hedging purposes, the effectiveness of its
strategy may be affected by lack of correlation between changes in the value of
the futures contracts and changes in value of the underlying securities,
currencies or indices.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures contract
was originally entered into. There can be no assurance that a liquid secondary
market will exist for any particular futures contract at any specific time. In
that event, it may not be possible to close out a position held by the Fund,
which could require the Fund to purchase or sell the instrument underlying the
futures contract or to meet ongoing variation margin requirements. The inability
to close out futures positions also could have an adverse impact on the ability
effectively to use futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a futures contract during a
single trading day and prohibit trading beyond such limits once they have been
reached. Each contract market on which futures contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
The trading of futures contracts also is subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Investments in futures contracts also entail the risk that if the Manager's
or Subadviser's investment judgment about the general direction of interest
rates, equity markets or other economic factors is incorrect, the Fund's overall
performance may be poorer than if any such contract had not been entered into.
For example, if the Fund entered into a futures contract in the belief that
interest rates would increase and interest rates decreased instead, the Fund
would have offsetting losses in its futures positions. Similarly, if the Fund
purchased futures contracts expecting a decrease in interest rates and interest
rates instead increased, the Fund would have losses in its futures positions
which would increase the amount of the losses on the securities in its portfolio
which would also decline in value because of the increase in interest rates. In
addition, in such situations, if the Fund has insufficient cash, the Fund may
have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
CFTC regulations require compliance with certain limitations in order to
assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions) if,
immediately thereafter, the sum of the amount of initial margin required to
establish the Fund's non-hedging futures positions would exceed 5% of the Fund's
net assets. These limitations apply only to instruments regulated by the CFTC,
and may not apply to all of the Fund's transactions in futures contracts.
The Fund will comply with this CFTC requirement, if applicable. In addition,
an amount of cash or liquid securities will be maintained by the Fund in a
segregated account so that the amount so segregated, plus the applicable margin
held on deposit, will be approximately equal to the amount necessary to satisfy
the Fund's obligations under the futures contract, or the Fund will otherwise
"cover" its positions in accordance with applicable policies and regulations.
The use of futures contracts potentially exposes the Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases the Fund's potential for
both gain and loss.
OPTIONS
The Fund may write call and put options and purchase call and put options on
securities for hedging and non-hedging purposes. Call and put options written by
the Fund will be covered in the manner set forth below, or the Fund will
segregate cash or liquid securities equal to the value of the securities
underlying the option.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the 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 the Fund in cash or
liquid securities in a segregated account. A put option is "covered" if the Fund
maintains cash or liquid securities with a value equal to the exercise price in
a segregated account, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where the
exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by the Fund in cash or liquid securities
in a segregated account. Put and call options written by the Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations. Even if the Fund's obligation is covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise. Covering an option does not
protect the Fund from risk of loss.
When the Fund writes a call option, the Fund, in return for a fee, or
"premium", agrees to sell a security at the exercise price, if the holder
exercises the right to purchase prior to the expiration date of the call option.
If the Fund holds the security in question, the Fund gives up some or all of the
opportunity to profit from the increase in the market price of the security
during the life of the option. The Fund retains the risk of loss should the
price of the security decline. If the option expires unexercised, the Fund
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Fund realizes a gain
or loss equal to the difference between the Fund's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
The Fund may terminate a call option it has written before it expires by
entering into a closing purchase transaction. The Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from closing a purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, if the Fund holds the underlying security any
loss resulting from a closing purchase transaction is likely to be offset in
whole or in part by unrealized appreciation of the underlying security. If the
Fund does not hold the underlying security, the Fund's loss could be unlimited.
The Fund may write put options in an attempt to enhance its current return.
Such option transactions may also be used as a limited form of hedging against
an increase in the price of securities that the Fund plans to purchase. A put
option written by the Fund gives the holder the right to sell, and, in return
for a premium, obligates the Fund to buy, a security at the exercise price at
any time before the expiration date.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Fund may also
receive a return on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a loss to the
Fund, unless the security later appreciates in value. The Fund may terminate a
put option it has written before it expires by a closing purchase transaction.
Any loss from this transaction may be partially or entirely offset by the
premium received on the terminated option.
The Fund may purchase options for hedging purposes or to increase the Fund's
return. When put options are purchased as a hedge against a decline in the value
of portfolio securities, the put options may be purchased at or about the same
time that the Fund purchases the underlying security or at a later time. If such
decline occurs, the put options will permit the Fund to sell the securities at
the exercise price, or to close out the options at a profit. By using put
options in this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid for the
put option and by transaction costs. Similarly, when put options are used for
non-hedging purposes, the Fund may make a profit when the price of the
underlying security or instrument falls below the strike price. If the price of
the underlying security or instrument does not fall sufficiently, the options
may expire unexercised and the Fund would lose the premiums it paid for the
option. If the price of the underlying security or instrument falls sufficiently
and the option is exercised, the amount of any resulting profit will be offset
by the amount of premium paid.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the securities
at the exercise price, or to close out the options at a profit. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund and the premium would be lost.
Call options may also be purchased in order to increase the Fund's return at
a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a call option
may be sold by the Fund in closing sale transactions, which are sales by the
Fund, prior to the exercise of options that it has purchased, of options of the
same series. Profit or loss from the sale will depend upon whether the amount
received is more or less than the premium paid for the option plus the related
transaction costs. The purchase of call options on securities that the Fund
owns, when the 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.
The Fund may write (sell) call and put options and purchase call and put
options on securities indices. The delivery requirements of options on
securities indices differ from options on securities. Unlike a securities
option, which contemplates the right to take or make delivery of securities at a
specified price, an option on a securities index gives the holder the right to
receive a cash "exercise settlement amount" equal to (1) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (2) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the securities index
upon which the option is based being greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The Fund may cover call options on securities indices by owning securities
whose price changes, in the opinion of the Manager or the 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 the Fund covers a call option on a securities index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. The Fund may also cover call options on securities indices by holding a
call on the same index and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash or liquid
securities in a segregated account. The Fund may cover put options on securities
indices by maintaining cash or liquid securities with a value equal to the
exercise price in a segregated account or by holding a put on the same
securities index and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash or liquid securities in a segregated account. Put and call options on
securities indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. Investors
should be aware that although the Fund will only write call or put options on
securities indices that are covered, covering an option does not protect the
Fund from risk of loss.
The 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 the 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 the 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.
The Fund may purchase put options on securities indices when the Manager or
Subadviser believes that there may be a decline in the prices of the securities
covered by the index. The Fund will realize a gain if the put option appreciates
in excess of the premium paid for the option. If the option does not increase in
value, the Fund's loss will be limited to the premium paid for the option plus
related transaction costs.
The Fund may purchase call options on securities indices to take advantage
of an anticipated broad market advance, or an advance in an industry or market
segment. The Fund will bear the risk of losing all or a portion of the premium
paid if the value of the index does not rise. The purchase of call options on
securities indices when the Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. The ability
of the Fund to engage in closing purchase transactions with respect to
securities index options depends on the existence of a liquid secondary market.
However, no such secondary market may exist, or the market may cease to exist at
some future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the Manager or the Subadviser desires
that the Fund engage in such a transaction.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund
realizes a gain or loss from purchasing or writing of options on an index
depends upon movements in the level of prices in the market generally or, in the
case of certain indices, in an industry or market segment, rather than movements
in the price of a particular security. As a result, successful use by the Fund
of options on securities indices is subject to the Manager's or the Subadviser's
ability to predict correctly movements in the direction of the market generally
or of a particular industry. This ability contemplates different skills and
techniques from those used in predicting changes in the price of individual
securities. When the Fund purchases or writes securities index options as a
hedging technique, the Fund's success will depend upon the extent to which price
movements in the portion of a securities portfolio being hedged correlate with
price movements of the securities index selected.
The Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause losses,
which, in the case of call options written, are potentially unlimited.
The Fund may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options rests
solely with the writer and the holder of those options. A listed call option
writer, for example, is obligated to deliver the underlying stock to the
clearing organization if the option is exercised, and the clearing organization
is then obligated to pay the writer the exercise price of the option. If the
Fund were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, the Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer who
issued it. Similarly, when the Fund writes a dealer option, it generally will be
able to close out the option prior to the expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally sold
the option. Although the Fund will seek to enter into dealer options only with
dealers who will agree to and that are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. The inability to enter into a closing transaction may result in
material losses to the Fund. Until the Fund, as an OTC call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to sell
portfolio securities or, with respect to currency options, currencies at a time
when such sale might be advantageous. In the event of insolvency of the other
party, the Fund may be unable to liquidate a dealer option.
The Fund may purchase and write options on foreign currencies as more fully
described in "Foreign Currency Exchange Transactions". The Fund may also
purchase or write call options on futures contracts as more fully described in
"Options on Futures Contracts" below.
The Fund's use of options may involve leveraging. Leveraging adds increased
risks to the Fund, because the Fund's losses may be out of proportion to the
amount invested in the instrument -- a relatively small investment may lead to
much greater losses.
OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and write options to buy or sell futures contracts in
which the Fund may invest. Such investment strategies may be used for hedging
and non-hedging purposes.
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 the 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.
The Fund 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. The Fund
may cover the writing of put options on futures contracts (a) through sales of
the underlying futures contract, (b) through segregation of cash or liquid
securities in an amount equal to the value of the security or index underlying
the futures contract, (c) through the holding of a put on the same futures
contract and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written or where the exercise price of the put held is less than the exercise
price of the put written if the difference is maintained by the Fund in cash or
liquid securities in a segregated account. Put and call options on futures
contracts may also be covered in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call option on a futures contract written by
the 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 the Fund is exercised, the Fund will be
required to purchase the underlying futures contract which, if the Fund has
covered its obligation through the sale of such contract, will close out its
futures position.
The writing of a call option on a futures contract may be used as a partial
hedge against declining prices of the securities deliverable on exercise of the
futures contract. The Fund will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's security holdings. Similarly, the writing of a put option
on a futures contract may be used as a partial hedge against increasing prices
of the securities deliverable upon exercise of the futures contract. If the 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. The 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 the Fund to incur a loss on both the hedging instrument and the
futures contract being hedged.
The Fund 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, the
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 the 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.
The Fund may also purchase options on futures contracts for non-hedging
purposes, in order to take advantage of projected market advances or declines or
changes in interest rates or exchange rates. For example, the Fund can buy a
call option on a bond futures contract when the Manager or Subadviser believes
that the underlying futures contract will rise. If prices do rise, the Fund
could exercise the option and acquire the underlying futures contract at the
strike price or the Fund could offset the long call position with a sale and
realize a profit. Or, the Fund can sell a call option if the Manager or
Subadviser believes that futures prices will decline. If prices decline, the
call will likely not be exercised and the Fund would profit. However, if the
underlying futures contract should rise, the buyer of the option would likely
exercise the call against the Fund and acquire the underlying futures position
at the strike price; the Fund's loss in this case could be unlimited.
The Fund's use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to the Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument -- a relatively small
investment may lead to much greater losses.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements collateralized by securities in
which the Fund may otherwise invest. Repurchase agreements are agreements by
which the Fund purchases a security and simultaneously commits to resell that
security to the seller (which is usually a member bank of the U.S. Federal
Reserve System or a member firm of the New York Stock Exchange (or a subsidiary
thereof)) at an agreed-upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed-upon market rate of interest which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security, usually U.S. Government
or Government agency issues. Under the 1940 Act, repurchase agreements may be
considered to be loans by the buyer. The Fund's risk is limited to the ability
of the seller to pay the agreed-upon amount on the delivery date. If the seller
defaults, the underlying security constitutes collateral for the seller's
obligation to pay although the Fund may incur certain costs in liquidating this
collateral and in certain cases may not be permitted to liquidate this
collateral. All repurchase agreements entered into by the Fund are fully
collateralized, with such collateral being marked to market daily. In the event
of the bankruptcy of the other party to a repurchase agreement, the Fund could
experience delays in recovering the resale price. To the extent that, in the
meantime, the value of the securities purchased has decreased, the Fund could
experience a loss.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements subject to the Fund's
investment restriction on borrowing. Reverse repurchase agreements involve the
sale of securities held by the Fund and the agreement by the Fund to repurchase
the securities at an agreed-upon price, date and interest payment. When the Fund
enters into reverse repurchase transactions, securities of a dollar amount equal
in value to the securities subject to the agreement will be segregated. The
segregation of assets could impair the Fund's ability to meet its current
obligations or impede investment management if a large portion of the Fund's
assets are involved. Reverse repurchase agreements are considered to be a form
of borrowing. In the event of the bankruptcy of the other party to a reverse
repurchase agreement, the Fund could experience delays in recovering the
securities sold. To the extent that, in the meantime, the value of the
securities sold has changed, the Fund could experience a loss.
SECURITIES OF NON-U.S. ISSUERS
The Fund may invest in securities of non-U.S. issuers. The Fund does not
intend to invest more than 25% of its assets in non-U.S. securities, including
depositary receipts.
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in U.S. investments. For example, the value of such securities
fluctuates based on the relative strength of the U.S. dollar. In addition, there
is generally less publicly available information about non-U.S. issuers,
particularly those not subject to the disclosure and reporting requirements of
the U.S. securities laws. Non-U.S. issuers are generally not bound by uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to U.S. 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. securities 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. Prices at which the Fund may acquire securities may
be affected by trading by persons with material non-public information and by
securities transactions by brokers in anticipation of transactions by the
Fund. Non-U.S. securities 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, non-U.S.
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.
The Fund may invest in issuers located in developing countries. 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 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 the 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.
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 attributable to U.S. investing. As a result, the operating expense
ratios of the Fund may be higher than those of investment companies investing
exclusively in U.S. securities.
The Fund may invest up to 5% of its assets in closed-end investment
companies which primarily hold non-U.S. securities. Investments in closed-end
investment companies which primarily hold securities of non-U.S. issuers may
entail the risk that the market value of such investments may be substantially
less than their net asset value and that there would be duplication of
investment management and other fees and expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Fund to make non-U.S. investments. These securities are not usually
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs are
generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored
program. Accordingly, there may be less information available regarding issuers
of securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depositary receipts.
The Fund may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than securities of non-U.S. issuers of the same
class that are not subject to such restrictions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Fund may buy and sell securities denominated in currencies
other than the U.S. dollar, and receive interest, dividends and sale proceeds
in currencies other than the U.S. dollar, the Fund may engage in foreign
currency exchange transactions as an attempt to protect against uncertainly in
the level of future foreign currency exchange rates or as an attempt to
enhance performance. The Fund may enter into foreign currency exchange
transactions to convert U.S. currency to non-U.S. currency and non-U.S.
currency to U.S. currency, as well as convert one non-U.S. currency to another
non-U.S. currency. The Fund either enters into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the currency exchange
markets, or uses forward contracts to purchase or sell non-U.S. currencies.
The Fund may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although currency
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
currency at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades. The Fund may enter into forward
contracts for hedging and non-hedging purposes, including transactions entered
into for the purposes of profiting from anticipated changes in foreign currency
exchange rates.
Forward contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in the futures and options
contracts described herein. A forward contract entered into by the Fund may
involve the purchase or sale, for a fixed amount of U.S. currency, of another
currency. The Fund may also enter into forward contracts for the purchase or
sale, for a fixed amount of a non-U.S. currency, of another non-U.S. currency.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a non-U.S. currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of non-
U.S. currency involved in the underlying security transaction, the Fund may be
able to protect against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on
which payment is made or received.
When the Manager or Subadviser believes that the currency of a particular
country may suffer a substantial decline against the U.S. dollar, the Fund may
enter into a forward contract to sell the non-U.S. currency for a fixed amount
of U.S. dollars. If the Fund owns securities in that currency, the Manager or
Subadviser may enter into a contract to sell the non-U.S. currency in an amount
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.
At the maturity of a forward contract, the Fund will either deliver the
non-U.S. currency, or terminate its contractual obligation to deliver the non-
U.S. currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the non-U.S. currency. If the Fund engages in an offsetting transaction, the
Fund will incur a gain or a loss (as described below) to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the non-U.S. currency. Should forward prices decline during the period
between the date the Fund enters into a forward contract for the sale of the
non-U.S. currency and the date it enters into an offsetting contract for the
purchase of such currency, the Fund will realize a gain to the extent the
selling price of the currency exceeds the purchase price of the currency. Should
forward prices increase, the Fund will suffer a loss to the extent that the
purchase price of the currency exceeds the selling price of the currency.
Where the Fund enters into a forward contract with respect to securities it
holds denominated in the non-U.S. currency, it is impossible to forecast with
precision the market value of the Fund's securities at the expiration of a
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional non-U.S. currency on the spot market if the market value of the
security is less than the amount of non-U.S. currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of such
currency. Conversely, it may be necessary to sell on the spot market some of the
non-U.S. currency received upon the sale of the security if its market value
exceeds the amount of such currency the Fund is obligated to deliver.
When the Fund enters into a forward contract for non-hedging purposes, there
is a greater potential for profit but also a greater potential for loss. For
example, the Fund may purchase a given foreign currency through a forward
contract if the value of such currency is expected to rise relative to the U.S.
dollar or another foreign currency. Conversely, the Fund may sell the currency
through a forward contract if the value of the currency is expected to decline
against the dollar or another foreign currency. The Fund will profit if the
anticipated movements in foreign currency exchange rates occur, which will
increase gross income. Where exchange rates do not move in the direction or the
extent anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions should be considered speculative and could
involve significant risk of loss.
The Fund has established procedures consistent with policies of the
Securities and Exchange Commission ("SEC") concerning forward contracts. Those
policies currently require that an amount of the Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment or that the Fund covers its position in accordance with applicable
regulations and policies.
The Fund may purchase put options on a currency in an attempt to protect
against currency rate fluctuations or to seek to enhance gains. When the Fund
purchases a put option on a currency, the Fund will have the right to sell the
currency for a fixed amount in U.S. dollars, or other currency. Conversely,
where a rise in the value of one currency is projected against another, the Fund
may purchase call options on the currency, giving it the right to purchase the
currency for a fixed amount of U.S. dollars or another currency. The Fund may
purchase put or call options on currencies, even if the Fund does not currently
hold or intend to purchase securities denominated in such currencies.
The benefit to the Fund from purchases of currency options will be reduced
by the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options.
The Fund may write options on currencies for hedging purposes or otherwise
in an attempt to achieve its investment objective. For example, where the 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 may be offset by the amount
of the premium received. If the expected decline does not occur, the Fund may be
required to sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The Fund could also write call options on a currency, even if
it does not own any securities denominated in that currency, in an attempt to
enhance gains. In that case, if the expected decline does not occur, the Fund
would be required to purchase the currency and sell it at a loss, which may not
be offset by the premium received. The losses in this case could be unlimited.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because of
an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, the Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the premium.
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, the Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates. The Fund could also write put options on a currency, even if it
does not own, or intend to purchase, any securities denominated in that
currency. In that case, if the expected increase does not occur, the Fund would
be required to purchase the currency at a price that is greater than the current
exchange rate for the currency, and the losses in this case could exceed the
amount of premium received for writing the options, and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or in
the over-the-counter market. The Fund may enter into transactions in options on
foreign currencies that are traded in the over-the-counter market. These
transactions are not afforded the protections provided to traders on organized
exchanges or those regulated by the CFTC. In particular, over-the-counter
options are not cleared and guaranteed by a clearing corporation, thereby
increasing the risk of counterparty default. In addition, there may not be a
liquid market on these options, which may prevent the Fund from liquidating open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market conditions.
The purchase and sale of foreign currency options are subject to the risks
of the availability of a liquid secondary market and counterparty risk, as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible interventions by governmental authorities and the effects of other
political and economic events. In addition, the value of the Fund's positions in
foreign currency options could be adversely affected by (1) other complex
foreign political and economic factors, (2) lesser availability of data on which
to make trading decisions than in the United States, (3) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States or at a Subadviser's place of business,
and (4) imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States.
In addition, because foreign currency transactions occurring in the
interbank market generally involve substantially larger amounts than those that
may be involved in the use of foreign currency options, the Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets, or other markets used by the Manager
or the Subadviser are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that may not be reflected in the U.S. or other markets used
by the Fund.
Put and call options on non-U.S. currencies written by the Fund will be
covered by segregation of cash and liquid securities in an amount sufficient to
discharge the Fund's obligations with respect to the option, by acquisition of
the non-U.S. currency or of a right to acquire such currency (in the case of a
call option) or the acquisition of a right to dispose of the currency (in the
case of a put option), or in such other manner as may be in accordance with the
requirements of any exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Fund may engage in proxy hedges and cross hedges. For example, in a
proxy hedge, the Fund, having purchased a security, would sell a currency whose
value is believed to be closely linked to the currency in which the security is
denominated. Interest rates prevailing in the country whose currency was sold
might be expected to be closer to those in the U.S. and lower than those of
securities denominated in the currency of the original holding. This type of
hedging entails greater risk than a direct hedge because it is dependent on a
stable relationship between the two currencies paired as proxies and the
relationships can be very unstable at times. The Fund may enter into a cross
hedge if a particular currency is expected to decrease against another currency.
For example, the Fund would sell the currency expected to decrease and purchase
a currency which is expected to increase against the currency sold in an attempt
to protect against declines in value of the Fund's holdings denominated in the
currency sold.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in currency
exchange rates will affect the value of these receipts. For example, a decline
in the U.S. dollar value of another currency in which securities are primarily
traded will reduce the U.S. dollar value of such securities, even if their value
in the other non-U.S. currency remains constant, and thus will reduce the value
of the receipts covering such securities. The 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, the Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Manager or the
Subadviser. It should be realized that under certain circumstances, the Fund may
not be able to hedge against a decline in the value of a currency, even if the
Manager or the Subadviser deems it appropriate to try to do so, because doing so
would be too costly. Transactions entered into to protect the value of the
Fund's securities against a decline in the value of a currency (even when
successful) do not eliminate fluctuations in the underlying prices of the
securities. Additionally, although hedging transactions may tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain which might result should the value of such
currency increase.
Investors should also be aware of the increased risk to the Fund and its
investors when it enters into foreign currency exchange transactions for non-
hedging purposes. Non-hedging transactions in such instruments involve greater
risks and may result in losses which are not offset by increases in the value of
the Fund's other assets. Although the Fund is required to segregate assets or
otherwise cover certain types of transactions, this does not protect the Fund
against risk of loss. Furthermore, the Fund's use of foreign currency exchange
transactions may involve leveraging. Leveraging adds increased risks to the
Fund, because the Fund's losses may be out of proportion to the amount invested
in the instrument--a relatively small investment may lead to much greater
losses.
The Fund may also engage in currency swaps and other similar transactions as
more fully described under "Swaps and Related Transactions" below.
SWAPS AND RELATED TRANSACTIONS
The Fund may enter into interest rate swaps, currency swaps, equity swaps
and other types of available swap agreements, such as caps, collars and floors,
for the purpose of attempting to obtain a particular desired return at a lower
cost to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest. An equity swap is an agreement to exchange cash flows on a principal
amount based on changes in the values of the reference index. A currency swap is
an agreement to exchange cash flows on a principal amount based on changes in
the values of the currency exchange rates. In a typical cap or floor agreement,
one party agrees to make payments only under specified circumstances, usually in
return for payment of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
The Fund will maintain liquid assets with its custodian or otherwise cover
its current obligations under swap transactions in accordance with current
regulations and policies applicable to the Fund.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the arrangement.
If the Manager or Subadviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
The Fund will not enter into any swap unless the Manager or Subadviser deems the
counterparty to be creditworthy. If the counterparty's creditworthiness
declines, the value of the swap agreement would be likely to decline,
potentially resulting in losses. If the counterparty defaults, the Fund's risk
of loss consists of the net amount of payments that the Fund is contractually
entitled to receive. The Fund anticipates that it will be able to eliminate or
reduce its exposure under these arrangements by assignment or other disposition
or by entering into an offsetting agreement with the same or another
counterparty.
Swap agreements are subject to the Fund's overall limit that not more than
15% of its net assets may be invested in illiquid securities.
Engaging in swap and related transactions may involve leveraging. Leveraging
adds increased risks to the Fund, because the Fund's losses may be out of
proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while forward
contracts may be entered into only in the over-the-counter market. Futures
contracts and options on futures contracts may be entered into on U.S. exchanges
regulated by the CFTC and on foreign exchanges. The securities underlying
options and futures contracts traded by the Fund may include domestic as well as
foreign securities. Investors should recognize that transactions involving
foreign securities or foreign currencies, and transactions entered into in
foreign countries, may involve considerations and risks not typically associated
with investing in U.S. markets.
Transactions in options, 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, the Fund may sell futures contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transactions will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction.
The use of certain derivatives, such as futures, forward contracts, and
written options may involve leverage for the Fund because they create an
obligation, or indebtedness, to someone other than the Fund's investors and
enable the Fund to participate in gains and losses on an amount that exceeds its
initial investment. If the Fund writes a stock put option, for example, it makes
no initial investment, but instead receives a premium in an amount equal to a
fraction of the price of the underlying stock. In return, the Fund is obligated
to purchase the underlying stock at a fixed price, thereby being subject to
losses on the full stock price.
Likewise, if the Fund purchases a futures contract, it makes an initial
margin payment that is typically a small percentage of the contract's price.
However, because of the purchase, the Fund will participate in gains or losses
on the full contract price.
Other types of derivatives provide the economic equivalent of leverage
because they display heightened price sensitivity to market fluctuations, such
as changes in stock prices or interest rates. These derivatives magnify the
Fund's gain or loss from an investment in much the same way that incurring
indebtedness does. For example, if the Fund purchases a stock call option, the
Fund pays a premium in an amount equal to a fraction of the stock price, and in
return, the Fund participates in gains on the full stock price. If there were no
gains, the Fund generally would lose the entire initial premium.
Options, futures contracts, options on futures contracts, forward contracts
and swaps may be used alone or in combinations in order to create synthetic
exposure to securities in which the Fund otherwise invests.
The use of derivatives may increase the amount of taxable income of the Fund
and may affect the amount, timing and character of the Fund's income for tax
purposes, as more fully discussed herein in the section entitled "Tax Matters."
SECURITIES RATED BAA OR BBB
The Fund may purchase securities rated Baa by Moody's Investors Service,
Inc. or BBB by Standard & Poor's Ratings Group 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.
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. Less than 5% of
the Fund's investments consist of securities rated Baa by Moody's or BBB by
Standard & Poor's.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) which may be converted at a
stated price within a specified period of time into a certain quantity of common
stock or other equity securities of the same or a different issuer. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to similar non-convertible securities. While providing
a fixed-income stream (generally higher in yield than the income derivable from
common stock but lower than that afforded by a similar non-convertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's underlying
common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
MORTGAGE-BACKED SECURITIES
The Fund 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.
A portion of the Fund's assets may be invested in collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA, or FHLMC but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multi-class pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include
multi-class pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of or
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multi-class pass-through securities.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes with different maturities. Each class of a CMO, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semiannual basis. The principal
of and interest on the Mortgage Assets may be allocated among the several
classes of a series of a CMO in various ways. In a common structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full.
Even if the U.S. government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment because the underlying mortgages are refinanced to take advantage
of the lower rates. The prices of mortgage-backed securities may not increase as
much as prices of other debt obligations when interest rates decline, and
mortgage-backed securities may not be an effective means of locking in a
particular interest rate. In addition, any premium paid for a mortgage-backed
security may be lost when it is prepaid. When interest rates go up,
mortgage-backed securities experience lower rates of prepayment. This has the
effect of lengthening the expected maturity of a mortgage-backed security. This
particular risk, referred to as "maturity extension risk," may effectively
convert a security that was considered short or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short or
intermediate-term securities. Thus, rising interest rates would not only likely
decrease the value of the Fund's fixed income securities, but would also
increase the inherent volatility of the Fund by effectively converting
short-term debt instruments into long-term debt instruments. As a result, prices
of mortgage-backed securities may decrease more than prices of other debt
obligations when interest rates go up.
The Fund may invest a portion of its assets in stripped mortgage-backed
securities, which are derivative multiclass mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
Mortgage Assets. A common type of stripped mortgage-backed security will have
one class receiving some of the interest and the remainder of the principal from
the Mortgage Assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will receive
all of the interest (an interest only security, or "IO") while the other class
will receive all of the principal (a principal only security, or "PO"). The risk
of early prepayments is the primary risk associated with IOs. In some instances
early prepayments may result in a complete loss of investment in certain of
these securities. The primary risks associated with POs are the potential
extension of average life and/or depreciation due to rising interest rates.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Fund may enter into mortgage "dollar roll" transactions pursuant to
which it sells mortgage-backed securities for delivery in the future and
simultaneously contracts to repurchase substantially similar 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 for the
lost principal and interest by the difference between the current sales price
and the lower price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale. The
Fund may also be compensated by receipt of a commitment fee. However, the Fund
takes the risk that the market price of the mortgage-backed security will drop
below the future purchase price. When the Fund uses a mortgage dollar roll, it
is also subject to the risk that the other party to the agreement will not be
able to perform. A "covered roll" is a specific type of dollar roll for which
the Fund establishes a segregated account with liquid securities equal in value
to the securities subject to repurchase by the Fund.
The Fund will invest only in covered rolls.
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, certain of the Fund's assets may be invested
in corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, including but not
limited to 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 assets backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. The underlying assets (e.g.,
loans) are also subject to prepayments which shorten the securities' weighted
average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
ZERO-COUPON AND PAYMENT-IN-KIND BONDS
The Fund may invest in zero-coupon obligations, such as zero-coupon bonds.
Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either in
cash or in additional bonds. Because zero-coupon and payment-in-kind bonds do
not pay current interest in cash, their value is subject to greater fluctuation
in response to changes in market interest rates than bonds that pay interest
currently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently in
cash. The Fund is required to accrue interest income on such investments and to
distribute such amounts at least annually to investors even though such bonds do
not pay current interest in cash. Thus, it may be necessary at times for the
Fund to liquidate investments in order to satisfy its dividend requirements.
U.S. GOVERNMENT SECURITIES
The Fund may invest in debt obligations that are backed, as to the timely
payment of interest and principal, by the full faith and credit of the U.S.
government. The Fund may also invest in other obligations issued by agencies or
instrumentalities of the U.S. government, some of which are supported by the
right of the issuer to borrow from the U.S. Treasury and some of which are
backed only by the credit of the issuer itself.
The debt obligations in which assets of the Fund may be invested include (1)
U.S. Treasury obligations, which differ only in their interest rates, maturities
and times of issuance: U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds
(generally maturities of greater than 10 years); and (2) obligations issued or
guaranteed by U.S. government agencies, authorities or instrumentalities.
When and if available, U.S. government obligations may be purchased at a
discount from face value. However, it is not intended that such securities will
be held to maturity for the purpose of achieving potential capital gains, unless
current yields on these securities remain attractive.
Although U.S. government obligations which are purchased for the Fund may
be backed, as to the timely payment of interest and principal, by the full
faith and credit of the U.S. government, interests in the Fund are neither
insured nor guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
BANK OBLIGATIONS
The Fund may invest in bank obligations, i.e., certificates of deposit, time
deposits (including Eurodollar time deposits) and bankers' acceptances and other
short-term debt obligations issued by domestic banks, foreign subsidiaries or
foreign branches of domestic banks, domestic and foreign branches of foreign
banks, domestic savings and loan associations and other banking institutions. A
bankers' acceptance is a bill of exchange or time draft drawn on and accepted by
a commercial bank. It is used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less. A certificate of deposit is a negotiable interest-bearing
instrument with a specific maturity. Certificates of deposit are issued by banks
and savings and loan institutions in exchange for the deposit of funds and
normally can be traded in the secondary market prior to maturity. A time deposit
is a non-negotiable receipt issued by a bank in exchange for the deposit of
funds. Like a certificate of deposit, it earns a specified rate of interest over
a definite period of time; however, it cannot be traded in the secondary market.
Time deposits with a withdrawal penalty are considered to be illiquid
securities.
COMMERCIAL PAPER
The Fund may invest in commercial paper, which is unsecured debt of
corporations usually maturing in 270 days or less from its date of issuance.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of the
Fund may be invested in shares of other investment companies. The Fund may
invest its assets in closed-end investment companies as permitted by applicable
law.
SHORT SALES "AGAINST THE BOX"
In a short sale, the Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The Fund, in
accordance with applicable investment restrictions, may engage in short sales
only if at the time of the short sale it owns or has the right to obtain, at no
additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
If the Fund engages in a short sale, the collateral for the short position is
maintained for the Fund by the custodian or qualified sub-custodian. While the
short sale is open, an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities are maintained in a segregated account for the Fund. These
securities constitute the Fund's long position.
The Fund does not engage in short sales against the box for investment
purposes. The Fund may, however, make a short sale against the box as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security). In such case, any future losses in the Fund's
long position should be reduced by a gain in the short position. Conversely, any
gain in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses are reduced depends upon the amount of the
security sold short relative to the amount the Fund owns. There are certain
additional transaction costs associated with short sales against the box, but
the Fund endeavors to offset these costs with the income from the investment of
the cash proceeds of short sales.
The Manager does not expect that more than 40% of the Fund's total assets
would be involved in short sales against the box. The Manager does not currently
intend to engage in such sales.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to generate
income, the Fund may lend its securities to broker-dealers and other
institutional borrowers. Such loans will usually be made only to member banks of
the U.S. Federal Reserve System and to member firms of the New York Stock
Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. Either party has the right to terminate a
loan at any time on customary industry settlement notice (which will not usually
exceed three business days). During the existence of a loan, the Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and with respect to cash collateral would also
receive compensation based on investment of the collateral (subject to a rebate
payable to the borrower) or a fee from the borrower in the event the collateral
consists of securities. Where the borrower provides the Fund with collateral
consisting of U.S. Treasury obligations, the borrower is also obligated to pay
the Fund a fee for use of the borrowed securities. The Fund would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to entities deemed by the Manager or Subadviser to be of good
standing. In addition, the Fund could suffer loss if the borrower terminates the
loan and the Fund is forced to liquidate investments in order to return the cash
collateral to the buyer. The Manager or Subadviser will make loans only when, in
its judgment, the consideration which can be earned currently from loans of this
type justifies the attendant risk. If the Manager or Subadviser determines to
make loans, it is not intended that the value of the securities loaned by the
Fund would exceed 30% of the market value of its total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis, meaning that delivery of the securities occurs beyond customary
settlement time. In general, the Fund does not pay for the securities until
received and does not start earning interest until the contractual settlement
date. It is expected that, under normal circumstances, the Fund would take
delivery of such securities but the Fund may sell them before the settlement
date. When the Fund commits to purchase a security on a "when-issued" or on a
"forward delivery" basis, it sets up procedures consistent with SEC policies.
Since those policies currently require that an amount of the Fund's assets equal
to the amount of the purchase be held aside or segregated to be used to pay for
the commitment, the Fund expects always to have cash or liquid securities
sufficient to cover any commitments or to limit any potential risk. However,
even though the Fund intends to adhere to the provisions of SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. The when-issued securities are subject to market fluctuations, and no
interest accrues on the security to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case,
there could be an unrealized loss at the time of delivery. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued basis may increase the volatility of its net asset value.
RULE 144A SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933 (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act ("Rule
144A securities"). However, the Fund does not invest more than 15% of its net
assets (taken at market value) in illiquid investments, which include securities
for which there is no readily available market, securities subject to
contractual restrictions on resale and Rule 144A securities, unless, in the case
of Rule 144A securities, the Board of Trustees of the Trust determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Trustees have adopted guidelines and, subject to oversight by the Trustees, have
delegated to the Manager the daily function of determining and monitoring
liquidity of Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
The Fund may invest up to 15% of its net assets in securities for which
there is no readily available market. These illiquid securities may include
privately placed restricted securities for which no institutional market exists.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price.
ADDITIONAL INFORMATION
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other funds and
accounts managed by Citibank and its affiliates, holds all or a major portion.
Although Citibank generally considers such securities to be liquid because of
the availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Fund could find it more
difficult to sell these securities when Citibank believes it advisable to do so
or may be able to sell the securities only at prices lower than if they were
more widely held. Under these circumstances, it may also be more difficult to
determine the fair value of such securities for purposes of computing the Fund's
net asset value. In order to enforce its rights in the event of a default under
such securities, the Fund may be required to participate in various legal
proceedings or take possession of and manage assets securing the issuer's
obligations on such securities. This could increase the Fund's operating
expenses and adversely affect the Fund's net asset value.
DEFENSIVE STRATEGIES
During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, the Fund may invest without limit in cash and
in U.S. dollar-denominated high quality money market and short-term instruments.
These investments may result in a lower yield than would be available from
investments in a lower quality or longer term.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, has adopted the following policies which
may not be changed without approval by holders of a majority of the outstanding
voting securities of the Fund, which as used in this Statement of Additional
Information means the vote of the lesser of (i) 67% or more of the outstanding
voting securities of the Fund present at a meeting at which the holders of more
than 50% of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund. The term "voting securities" as used in this paragraph has the same
meaning as in the 1940 Act.
The Fund may not:
(1) Borrow money if such borrowing is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder.
(2) Make loans to other persons if such loans are specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
(3) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Fund more
than 10% of the voting securities of such issuer to be held by the Fund;
provided that, for purposes of this restriction, the issuer of an option or
futures contract shall not be deemed to be the issuer of the security or
securities underlying such contract; and provided further that the Fund may
invest all or any portion of its assets in one or more investment companies,
to the extent not prohibited by the 1940 Act, the rules and regulations
thereunder, and exemptive orders granted under such Act.
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's total assets more than 5% of the
Fund's assets (taken at market value) to be invested in the securities of
such issuer (other than securities or obligations issued or guaranteed by
the United States, any state or political subdivision thereof, or any
political subdivision of any such state, or any agency or instrumentality of
the United States or of any state or of any political subdivision of any
state); provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
the Fund may invest all or any portion of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(5) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Fund's investment objective,
up to 25% of its assets, at market value at the time of each investment, may
be invested in any one industry, except that positions in futures contracts
shall not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except in so far as the Fund may technically be deemed an
underwriter under the Securities Act in selling a security.
(7) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein) or interests in oil, gas or mineral leases in the ordinary course
of business (the foregoing shall not be deemed to preclude the Fund from
purchasing or selling futures contracts or options thereon, and the Fund
reserves the freedom of action to hold and to sell real estate acquired as a
result of the ownership of securities by the Fund).
(8) Purchase or sell commodities or commodity contracts in the ordinary
course of business (the foregoing shall not be deemed to preclude the Fund
from purchasing or selling futures contracts or options thereon).
(9) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
For purposes of restriction (1) above, covered dollar rolls and
arrangements with respect to securities lending are not treated as borrowing.
As an operating policy, the Fund will not invest more than 15% of its net
assets (taken at market value) in securities for which there is no readily
available market. This policy is not fundamental and may be changed without
shareholder approval.
If a percentage or rating restriction on investment or utilization of assets
set forth above or referred to in the Prospectus 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 is not considered a violation of
policy. If the value of the Fund's holdings of illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
5. PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and other
communications in terms of yield, effective yield or total rate of return. All
performance information is historical and is not intended to indicate future
performance. Yield and total rates of return fluctuate in response to market
conditions and other factors, and the value of the Fund's shares when redeemed
may be more or less than their original cost.
The Fund may provide its period, annualized, cumulative, and average annual
"total rates of return." The "total rate of return" refers to the change in the
value of an investment in the Fund over a stated period, 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. Average annual total return figures represent the average annual
percentage change over the specified period. Cumulative total return figures are
not annualized and represent the aggregate percentage or dollar value change
over a stated period of time.
A total rate of return quotation for the Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such period
and with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share on the first day of
such period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result.
Average annual total return is a measure of the Fund's performance over
time. It is determined by taking the Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by SEC
rules. The average annual total return for a specific period is found by taking
a hypothetical $1,000 initial investment in Fund shares on the first day of the
period, reducing the amount to reflect the maximum sales charge, and computing
the redeemable value of that investment at the end of the period. The redeemable
value is then divided by the initial investment, and this quotient is taken to
the Nth root (N representing the number of years in the period) and 1 is
subtracted from the result, which is then expressed as a percentage. The
calculation assumes that all income and capital gains distributions have been
reinvested in Fund shares at net asset value on the reinvestment dates during
the period.
The Fund may provide annualized "yield" and "effective yield" quotations.
The "yield" of the Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period (which period is stated in any such
advertisement or communication). This income is then annualized, that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of the
public offering price on the last day of that period. The "effective yield" is
calculated similarly, but when annualized the income earned by the investment
during that 30-day or one-month period is assumed to be reinvested. The
effective yield is slightly higher than the yield because of the compounding
effect of this assumed reinvestment. A "yield" quotation, unlike a total rate of
return quotation, does not reflect changes in net asset value.
Any current yield quotation for the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a) raising
to the sixth power the sum of 1 plus the quotient obtained by dividing the
Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the public offering price per share on the last day of
the period, (b) subtracting 1 from the result, and (c) multiplying the result by
2.
Set forth below is average annual total rate of return information for Class
A shares of the Fund for the periods indicated, assuming that dividends and
capital gains distributions, if any, were reinvested. All outstanding shares
were designated Class A shares on January 4, 1999. The return information
relates to periods prior to January 4, 1999, when there were no sales charges on
the purchase or sale of the Fund's shares. The Class A performance for past
periods has therefore been adjusted to reflect the maximum sales charge
currently in effect. The Class B shares were newly offered on January 4, 1999.
Performance results include any applicable fee waivers or expense subsidies in
place during the time period, which may cause the results to be more favorable
than they would otherwise have been.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A HYPOTHETICAL
AVERAGE ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
-------------- ------------------
<S> <C> <C>
October 19, 1990 (commencement of operations) to December 31, 1998 .. 12.08% $2,550
Five Years Ended December 31, 1998 .................................. 9.86% $1,600
One Year Ended December 31, 1998 .................................... 2.44% $1,024
</TABLE>
The annualized yield of the shares of the Fund for the 30-day period ended
on December 31, 1998 was 2.65%.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical Services,
Inc. and other industry sources and publications. From time to time the Fund may
compare its performance against inflation with the performance of other
instruments against inflation, such as FDIC-insured bank money market accounts.
In addition, advertising for the Fund may indicate that investors should
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for the Fund may refer to or discuss current or past economic or
financial conditions, developments and events. The Fund's advertising materials
also may refer to the integration of the world's securities markets, discuss the
investment opportunities available worldwide and mention the increasing
importance of an investment strategy including non-U.S. investments.
For advertising and sales purposes, the Fund will generally use the
performance of Class A shares. All outstanding Fund shares were designated Class
A shares on January 4, 1999. Performance prior to that date will be adjusted to
include the sales charges currently in effect. Class A shares are sold at net
asset value plus a current maximum sales charge of 5.00%. Performance will
typically include this maximum sales charge for the purposes of calculating
performance figures. If the performance of Class B shares is used for
advertising and sales purposes, performance after class inception on January 4,
1999 will be actual performance, while performance prior to that date will be
Class A performance, adjusted to reflect the differences in sales charges (but
not the differences in fees and expenses) between the classes. For these
purposes, it will be assumed that the maximum contingent deferred sales charge
applicable to the Class B shares is deducted at the times, in the amount, and
under the terms stated in the Prospectus. Class B share performance generally
would have been lower than Class A performance, had the Class B shares been
offered for the entire period, because the expenses attributable to Class B
shares are higher than the expenses attributable to the Class A shares. Fund
performance may also be presented in advertising and sales literature without
the inclusion of sales charges.
6. DETERMINATION OF NET ASSET VALUE;
VALUATION OF SECURITIES
The net asset value per share of the Fund is determined for each class on
each day during which the New York Stock Exchange is open for trading (a
"Business Day"). As of the date of this Statement of Additional Information, the
Exchange is open for trading every weekday except for the following holidays (or
the days on which they are observed): New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. This determination is made once each day as
of the close of regular trading on the Exchange (normally 4:00 p.m. Eastern
time) by adding the market value of all securities and other assets attributable
to the class (including its interest in the Portfolios), then subtracting the
liabilities attributable to that class, and then dividing the result by the
number of outstanding shares of the class. The net asset value per share is
effective for orders received and accepted by the Distributor prior to its
calculation.
The value of each Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. The net asset value of the Fund's investment in
a Portfolio is equal to the Fund's pro rata share of the net assets of the
Portfolio.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates or if there are no market rates, at
fair value, at the time of valuation. Equity securities are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the time when
net assets are valued. Bonds and other fixed income securities (other than
short-term obligations) are valued on the basis of valuations furnished by a
pricing service, use of which has been approved by the Board of Trustees of the
Trust. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that 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 New York Stock
Exchange and may also take place on days on which the Exchange is closed. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when the
Fund's net asset value is calculated, such securities may be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for the Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premium.
7. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE
OF FUND SHARES AND SHAREHOLDER PROGRAMS
As described in the Prospectus, the Fund provides you with alternative ways
of purchasing shares based upon your individual investment needs.
Each class of shares of the Fund represents an interest in the same
portfolio of investments. Each class is identical in all respects except that
each class bears its own class expenses, including distribution and service
fees, and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per share,
dividends per share and net asset value per share will vary for each class of
shares. There are no conversion, preemptive or other subscription rights, except
that Class B shares automatically convert to Class A shares in eight years as
more fully described below.
Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares will
bear only those expenses that are directly attributable to that class, where the
type or amount of services received by a class varies from one class to another.
The expenses that may be borne by specific classes of shares may include (i)
transfer agency fees attributable to a specific class of shares, (ii) printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific class of shares, (iii) SEC and state securities registration fees
incurred by a specific class, (iv) the expense of administrative personnel and
services required to support the shareholders of a specific class of shares, (v)
litigation or other legal expenses relating to a specific class of shares, (vi)
accounting expenses relating to a specific class of shares and (vii) any
additional incremental expenses subsequently identified and determined to be
properly allocated to one or more classes of shares.
CLASS A SHARES
You may purchase Class A shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the Prospectus. You may qualify for a
reduced sales charge depending upon the amount of your purchase, or the sales
charge may be waived in its entirety, as described below under "Sales Charge
Waivers." If you qualify to purchase Class A shares without a sales load, you
should purchase Class A shares rather than Class B shares because Class A shares
pay lower fees. Class A shares are also subject to an annual
distribution/service fee of up to 0.25%. See "Distributor." Set forth below is
an example of the method of computing the offering price of the Class A shares
of the Fund. The example assumes a purchase on December 31, 1998 of Class A
shares from the Fund aggregating less than $25,000 subject to the schedule of
sales charges set forth below.
<TABLE>
<CAPTION>
CITIFUNDS BALANCED PORTFOLIO
----------------------------
<S> <C>
Net Asset Value per share ............................................. $14.24
Per Share Sales Charge -- 5.00% of public offering price
(5.26% of net asset value per share) ................................ $ 0.75
Per Share Offering Price to the Public ................................ $14.99
</TABLE>
The Fund receives the entire net asset value of all Class A shares that are
sold. The Distributor retains the full applicable sales charge from which it
pays the uniform reallowances shown in the table below.
The front-end sales charge for Class A shares expressed as a percentage of
offering price and net asset value, and the dealer reallowance expressed as a
percentage of the offering price is set forth in the table below. The Fund has
established certain shareholder programs that may permit you to take advantage
of the lower rates available for larger purchases, as described under
"Shareholder Programs" below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER REALLOWANCE
AMOUNT OF AS A % OF AS A % OF AS A % OF
INVESTMENT OFFERING PRICE INVESTMENT OFFERING PRICE
- ---------- -------------- ------------ -------------------
<S> <C> <C> <C>
Less than $25,000 ................................ 5.00% 5.26% 4.50%
$25,000 to less than $50,000 ..................... 4.00% 4.17% 3.60%
$50,000 to less than $100,000 .................... 3.50% 3.63% 3.15%
$100,000 to less than $250,000 ................... 3.00% 3.09% 2.70%
$250,000 to less than $500,000 ................... 2.00% 2.04% 1.80%
$500,000 or more ................................. none* none* up to 1.00%
- ----------
*A contingent deferred sales charge may apply in certain instances. See "Sales Charge Waivers -- Class A" below.
</TABLE>
CLASS B SHARES
Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a contingent deferred sales charge (CDSC) when you sell shares
within five years of purchase. The rate of CDSC goes down the longer you hold
your shares. The table below shows the rates that you pay, as a percentage of
the purchase price (or the sale price, whichever is less), depending upon when
you sell your shares.
SALE DURING CDSC ON SHARES BEING SOLD
- ----------- -------------------------
1st year since purchase 5.00%
2nd year since purchase 4.00%
3rd year since purchase 3.00%
4th year since purchase 2.00%
5th year since purchase 1.00%
6th year (or later) since purchase None
Class B shares pay distribution/service fees of up to 1.00% of the average
daily net assets of the Fund represented by the Class B shares. The Distributor
pays commissions to brokers, dealers and other institutions of 4.50% of the
offering price of Class B shares sold by these entities. These commissions are
not paid on exchanges from other CitiFunds or on sales of Class B shares to
investors exempt from the CDSC. The Distributor is compensated for these
payments through the receipt of the ongoing distribution fees from the Fund, and
through the CDSC, if any. The Distributor will also advance the first year
service fee to dealers at an annual rate equal to 0.25% of the average daily net
assets represented by Class B shares sold by them. As a result, the total amount
paid to a dealer upon the purchase of Class B shares may be a maximum of 4.75%
of the purchase price of the Class B shares.
When you sell your shares, the CDSC will be based on either your purchase
price, or the sale price, whichever is less. You do not pay a CDSC on shares
acquired through reinvestment of dividends, capital gain distributions or on
shares representing capital appreciation. The Fund will assume that a redemption
of Class B shares is made:
[] first, of Class B shares representing capital appreciation
[] next, of shares representing the reinvestment of dividends and capital
gains distributions
[] finally, of other shares held by the investor for the longest period of
time.
Under certain circumstances, as set forth below in "Sales Charge Waivers," the
CDSC will be waived.
The holding period of Class B shares of the Fund acquired through an
exchange with another CitiFund will be calculated from the date that the Class B
shares were initially acquired in the other CitiFund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gains distribution reinvestments in the other fund. When
determining the amount of the CDSC, the Fund will use the CDSC schedule of any
fund from which you have exchanged shares that would result in you paying the
highest CDSC.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares, and the CDSC imposed upon sales of Class A or Class B shares,
are waived. Waivers are generally instituted in order to promote good will with
persons or entities with which Citibank or the Distributor or their affiliates
have business relationships, or because the sales effort, if any, involved in
making such sales is negligible, or, in the case of certain CDSC waivers,
because the circumstances surrounding the sale of Fund shares were not
foreseeable or voluntary. These sales charge waivers may be modified or
discontinued at any time.
CLASS A--FRONT-END SALES CHARGE
o Reinvestment. The sales charge does not apply to Class A shares acquired
through the reinvestment of dividends and capital gains distributions.
o Eligible Purchasers. Class A shares may be purchased without a sales charge
by:
[] tax exempt organizations under Section 501(c)(3-13) of the Internal
Revenue Code
[] trust accounts for which Citibank or any subsidiary or affiliate of
Citibank acts as trustee and exercises discretionary investment
management authority
[] accounts for which Citibank or any subsidiary or affiliate of Citibank
performs investment advisory services or charges fees for acting as
custodian
[] directors or trustees (and their immediate families), and retired
directors or trustees (and their immediate families), of any investment
company for which Citibank or any subsidiary or affiliate of Citibank
serves as the investment adviser or as a service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its affiliates
or any Service Agent and its affiliates (including immediate families of
any of the foregoing), and retired employees of Citibank and its
affiliates or CFBDS, Inc. and its affiliates (including immediate
families of the foregoing)
[] investors participating in a fee-based or promotional arrangement
sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund shares as
an investment option based on an investor's balances in selected
Citigroup Inc. products and services
[] employees of members of the National Association of Securities Dealers,
Inc., provided that such sales are made upon the assurance of the
purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable annuity
contracts
[] direct rollovers by plan participants from a 401(k) plan offered to
Citigroup employees
[] shareholder accounts established through a reorganization or similar form
of business combination approved by the Fund's Board of Trustees or by
the Board of Trustees of any other CitiFund or mutual fund managed or
advised by Citibank (all of such funds being referred to herein as
CitiFunds) the terms of which entitle those shareholders to purchase
shares of the Fund or any other CitiFund at net asset value without a
sales charge
[] employee benefit plans qualified under Section 401(k) of the Internal
Revenue Code with accounts outstanding on January 4, 1999
[] employee benefit plans qualified under Section 401 of the Internal
Revenue Code, including salary reduction plans qualified under Section
401(k) of the Code, subject to minimum requirements as may be established
by CFBDS with respect to the amount of purchase; currently, the amount
invested by the qualified plan in the Fund or in any combination of
CitiFunds must total a minimum of $1 million
[] accounts associated with Copeland Retirement Systems
[] investors purchasing $500,000 or more of Class A shares; however, a
contingent deferred sales charge will be imposed on the investments in
the event of certain share redemptions within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the
shares redeemed (not including reinvested dividends and capital gains
distributions) or the total cost of the shares; the contingent deferred
sales charge on Class A shares will be waived under the same
circumstances as the contingent deferred sales charge on Class B shares
will be waived; in determining whether a contingent deferred sales charge
on Class A shares is payable, and if so, the amount of the charge:
+ it is assumed that shares not subject to the contingent deferred sales
charge are the first redeemed followed by other shares held for the
longest period of time
+ all investments made during a calendar month will age one month on the
last day of the month and each subsequent month
+ any applicable contingent deferred sales charge will be deferred upon
an exchange of Class A shares for Class A shares of another CitiFund
and deducted from the redemption proceeds when the exchanged shares
are subsequently redeemed (assuming the contingent deferred sales
charge is then payable)
+ the holding period of Class A shares so acquired through an exchange
will be aggregated with the period during which the original Class A
shares were held
[] subject to appropriate documentation, investors where the amount invested
represents redemption proceeds from a mutual fund (other than a
CitiFund), if:
+ the redeemed shares were subject to an initial sales charge or a
deferred sales charge (whether or not actually imposed), and
+ the redemption has occurred no more than 60 days prior to the purchase
of Class A shares of the Fund
[] an investor who has a business relationship with an investment consultant
or other registered representative who joined a broker-dealer which has a
sales agreement with CFBDS from another investment firm within six months
prior to the date of purchase by the investor, if:
+ the investor redeems shares of another mutual fund sold through the
investment firm that previously employed that investment consultant or
other registered representative, and either paid an initial sales
charge or was at some time subject to, but did not actually pay, a
deferred sales charge or redemption fee with respect to the redemption
proceeds
+ the redemption is made within 60 days prior to the investment in the
Fund, and
+ the net asset value of the shares of the Fund sold to that investor
without a sales charge does not exceed the proceeds of the redemption
CONTINGENT DEFERRED SALES CHARGE:
o Reinvestment. There is no CDSC on shares representing capital appreciation
or on shares acquired through reinvestment of dividends or capital gains
distributions.
o Waivers. The CDSC will be waived in connection with:
[] a total or partial redemption made within one year of the death of the
shareholder; this waiver is available where the deceased shareholder is
either the sole shareholder or owns the shares with his or her spouse as
a joint tenant with right of survivorship, and applies only to redemption
of shares held at the time of death
[] a lump sum or other distribution in the case of an Individual Retirement
Account (IRA), a self-employed individual retirement plan (Keogh Plan) or
a custodian account under Section 403(b) of the Internal Revenue Code, in
each case following attainment of age 59 1/2
[] a total or partial redemption resulting from any distribution following
retirement in the case of a tax-qualified retirement plan
[] a redemption resulting from a tax-free return of an excess contribution
to an IRA
[] redemptions made under the Fund's Systematic Withdrawal Plan
AUTOMATIC CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
in the Fund approximately eight years after the date of issuance. At the same
time, a portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares will be converted in accordance
with procedures from time to time approved by the Fund's Trustees. The
conversion will be effected at the relative net asset values per share of the
two classes on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs. If a shareholder
effects one or more exchanges among Class B shares of the CitiFunds during the
eight-year period, the holding periods for the shares so exchanged will be
counted toward the eight-year period. Because the per share net asset value of
the Class A shares may be higher than that of the Class B shares at the time of
conversion, a shareholder may receive fewer Class A shares than the number of
Class B shares converted, although the dollar value will be the same.
SHAREHOLDER PROGRAMS
The Fund makes the following programs available to shareholders to enable
them to reduce or eliminate the front-end sales charges on Class A shares, to
exchange Fund shares for shares of other CitiFunds, without, in many cases, the
payment of a sales charge or to provide for the automatic withdrawal of cash.
These programs may be changed or discontinued at any time. For more information,
please contact your Service Agent.
REDUCED SALES CHARGE PLAN
A qualified group may purchase shares as a single purchaser under the
reduced sales charge plan. The purchases by the group are lumped together and
the sales charge is based on the lump sum. A qualified group must:
[] have been in existence for more than six months
[] have a purpose other than acquiring Fund shares at a discount
[] satisfy uniform criteria that enable CFBDS to realize economies of
scale in its costs of distributing shares
[] have more than ten members
[] be available to arrange for group meetings between representatives
of the Fund and the members
[] agree to include sales and other materials related to the Fund in
its publications and mailings to members at reduced or no cost to
the distributor
[] seek to arrange for payroll deduction or other bulk transmission of
investments to the Fund
LETTER OF INTENT
If an investor anticipates purchasing $25,000 or more of Class A shares of
the Fund alone or in combination with Class B shares of the Fund or any of the
classes of other CitiFunds or of any other mutual fund managed or advised by
Citibank (all of such funds being referred to herein as CitiFunds) within a
13-month period, the investor may obtain the shares at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
a letter of intent on the terms described below. Subject to acceptance by CFBDS,
Inc., the Fund's distributor, and the conditions mentioned below, each purchase
will be made at a public offering price applicable to a single transaction of
the dollar amount specified in the letter of intent.
[] The shareholder or, if the shareholder is a customer of a Service
Agent, his or her Service Agent must inform CFBDS that the letter
of intent is in effect each time shares are purchased.
[] The shareholder makes no commitment to purchase additional shares,
but if his or her purchases within 13 months plus the value of
shares credited toward completion of the letter of intent do not
total the sum specified, an increased sales charge will apply as
described below.
[] A purchase not originally made pursuant to a letter of intent may
be included under a subsequent letter of intent executed within 90
days of the purchase if CFBDS is informed in writing of this intent
within the 90-day period.
[] The value of shares of the Fund presently held, at cost or maximum
offering price (whichever is higher), on the date of the first
purchase under the letter of intent, may be included as a credit
toward the completion of the letter, but the reduced sales charge
applicable to the amount covered by the letter is applied only to
new purchases.
[] Instructions for issuance of shares in the name of a person other
than the person signing the letter of intent must be accompanied by
a written statement from the Transfer Agent or a Service Agent
stating that the shares were paid for by the person signing the
letter.
[] Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of
intent.
[] The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the letter of
intent are deducted from the total purchases made under the letter
of intent.
If the investment specified in the letter of intent is not completed (either
prior to or by the end of the 13-month period), the Transfer Agent will redeem,
within 20 days of the expiration of the letter of intent, an appropriate number
of the shares in order to realize the difference between the reduced sales
charge that would apply if the investment under the letter of intent had been
completed and the sales charge that would normally apply to the number of shares
actually purchased. By completing and signing the letter of intent, the
shareholder irrevocably grants a power of attorney to the Transfer Agent to
redeem any or all shares purchased under the letter of intent, with full power
of substitution.
RIGHT OF ACCUMULATION
A shareholder qualifies for cumulative quantity discounts on the purchase of
Class A shares when his or her new investment, together with the current
offering price value of all holdings of that shareholder in the CitiFunds,
reaches a discount level. For example, if a Fund shareholder owns shares valued
at $50,000 and purchases an additional $50,000 of Class A shares of the Fund,
the sales charge for the $50,000 purchase would be at the rate of 3.00% (the
rate applicable to single transactions from $100,000 to less than $250,000). A
shareholder must provide the Service Agent with information to verify that the
quantity sales charge discount is applicable at the time the investment is made.
SYSTEMATIC WITHDRAWAL PLAN
The Fund's Systematic Withdrawal Plan permits you to have a specified dollar
amount (minimum of $100 per withdrawal) automatically withdrawn from your
account on a regular basis if you have at least $10,000 in your Fund account at
the time of enrollment. You are limited to one withdrawal per month under the
Plan.
If you redeem Class A or Class B shares under the Plan that are subject to a
CDSC, you are not subject to any CDSC applicable to the shares redeemed, but the
maximum amount that you can redeem under the Plan in any year is limited to 10%
of the average daily balance in your account.
You may receive your withdrawals by check, or have the monies transferred
directly into your bank account. Or you may direct that payments be made
directly to a third party.
To participate in the Plan, you must complete the appropriate forms provided
by the Transfer Agent or your Service Agent.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed (with a credit
for any contingent deferred sales charge paid) by purchasing Class A shares of
the Fund within 90 days after the redemption. To take advantage of this
reinstatement privilege, shareholders must notify their Service Agents in
writing at the time the privilege is exercised.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the same class of certain
other CitiFunds that are made available by the Transfer Agent or your Service
Agent, or may be acquired through an exchange of shares of the same class of
those funds. Class A shares also may be exchanged for shares of certain
CitiFunds that offer only a single class of shares, unless the Class A shares
are subject to a contingent deferred sales charge. Class B shares may not be
exchanged for shares of CitiFunds that offer only a single class of shares.
No initial sales charge is imposed on shares being acquired through an
exchange unless Class A shares are being acquired and the sales charge for Class
A of the fund being exchanged into is greater than the current sales charge of
the Fund (in which case an initial sales charge will be imposed at a rate equal
to the difference). Investors whose shares are outstanding on January 4, 1999
will be able to exchange those Class A shares, and any shares acquired through
capital appreciation and the reinvestment of dividends and capital gains
distributions on those shares, into Class A shares of the other funds without
paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged for
Class B shares of certain other CitiFunds that are made available by your
Service Agent. However, you may be required to pay a CDSC when you sell those
shares. When determining the amount of the CDSC, the Fund will use the CDSC
schedule of any fund from which you have exchanged shares that would result in
you paying the highest CDSC.
You must notify your Service Agent at the time of exchange if you believe
that you qualify for share prices which do not include the sales charge or which
reflect a reduced sales charge, because the Fund shares you are exchanging were:
(a) purchased with a sales charge, (b) acquired through a previous exchange from
shares purchased with a sales charge, (c) outstanding as of January 4, 1999, or
(d) acquired through capital appreciation or the reinvestment of dividends and
capital gains distributions on those shares. Any such qualification may be
subject to confirmation, through a check of appropriate records and
documentation, of your existing share balances and any sales charges paid on
prior share purchases.
This exchange privilege may be modified or terminated at any time, and is
available only in those jurisdictions where such exchanges legally may be made.
Before making any exchange, shareholders should contact their Service Agents to
obtain more information and prospectuses of the funds to be acquired through the
exchange. 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.
ADDITIONAL PURCHASE AND SALE INFORMATION
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate written disclosure of any fees that it may
charge them directly. Each Service Agent is responsible for transmitting
promptly orders of its customers. Your Service Agent is the shareholder of
record for the shares of the Fund that you own.
Investors may be able to establish new accounts in the 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.
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 Fund, 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, 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.
Subject to compliance with applicable regulations, the Trust and the
Portfolio Trust have each reserved the right to pay the redemption price of
shares of the Fund or beneficial interests in the Portfolio, 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 or the Portfolio Trust may suspend the right of redemption or
postpone the date of payment for shares of the Fund or beneficial interests in
the Portfolio more than seven days during any period when (a) trading in the
markets the Fund or Portfolio normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the SEC, exists making disposal of
the Fund's or Portfolio's investments or determination of its net asset value
not reasonably practicable; (b) the New York Stock Exchange is closed (other
than customary weekend and holiday closings); or (c) the SEC has by order
permitted such suspension.
8. MANAGEMENT
The Trustees and officers of the Trust and the Portfolio Trusts, their ages
and their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust or the Portfolio Trusts. Unless otherwise indicated below, the address
of each Trustee and officer is 21 Milk Street, Boston, Massachusetts. The
address of the Portfolio Trusts is Elizabethan Square, George Town, Grand
Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE*; 47 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
RILEY C. GILLEY; 73 -- 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; 59 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate School
of Business, University of Virginia (September 1978 to September 1993); Trustee,
The Highland Family of Funds (March 1997 to March 1998). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 47 -- 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.
HEATH B. MCLENDON*; 65 -- Chairman, President, and Chief Executive Officer of
SSBC Fund Management, Inc. (formerly known as Mutual Management Corp.) (since
March 1996); Managing Director of Salomon Smith Barney (since August 1993);
and Chairman, President and Chief Executive Officer of fifty-eight investment
companies sponsored by Salomon Smith Barney. His address is 388 Greenwich
Street, New York, New York.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Senior Vice President and Investment Manager, CREF Investments,
Teachers Insurance & Annuity Association (retired, January 1993); Director,
Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385 Outlook
Drive West, Mountainside, New Jersey.
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 79 -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV; 56 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE*; 47 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
MARK T. FINN; 56 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Director, Vantage Consulting Group, Inc.
(since October 1988). His address is 3500 Pacific Avenue, P.O. Box 539,
Virginia Beach, Virginia.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Senior Vice President and Investment Manager, CREF Investments,
Teachers Insurance & Annuity Association (retired, January 1993); Director,
Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385 Outlook
Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUSTS
PHILIP W. COOLIDGE*; 47 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
CHRISTINE A. DRAPEAU*; 28 -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc. (since January 1996); Paralegal and Compliance Officer, various financial
companies (July 1992 to January 1996).
TAMIE EBANKS-CUNNINGHAM*; 26 -- Assistant Secretary of the Trust and the
Portfolio Trusts; Office Manager, Signature Financial Group (Cayman) Ltd.
(since April 1995); Administrator, Cayman Islands Primary School (prior to
April 1995). Her address is P.O. Box 2494, Elizabethan Square, George Town,
Grand Cayman, Cayman Islands, B.W.I.
JOHN R. ELDER*; 50 -- Treasurer of the Trust and the Portfolio Trusts; Vice
President, Signature Financial Group, Inc. (since April 1995); Assistant
Treasurer, CFBDS (since April 1995); Treasurer, Phoenix Family of Mutual Funds
(Phoenix Home Life Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON*; 34 -- Secretary of the Trust and the Portfolio Trusts;
Senior Vice President, Signature Financial Group, Inc.; Secretary, CFBDS.
JAMES E. HOOLAHAN*; 52 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Senior Vice President,
Signature Financial Group, Inc.
SUSAN JAKUBOSKI*; 35 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group (Cayman) Ltd. (since August 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994).
MOLLY S. MUGLER*; 47 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
CLAIR TOMALIN*; 30 -- Assistant Secretary of the Trust and the Portfolio Trusts;
Office Manager, Signature Financial Group (Europe) Limited. Her address is 117
Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON*; 50 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Assistant Vice President, Signature Financial
Group, Inc.
JULIE J. WYETZNER*; 40 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group, Inc.
The Trustees and officers of the Trust and the Portfolio Trusts also hold
comparable positions with certain other funds for which CFBDS, Signature
Financial Group, Inc. or their affiliates serve as the distributor or
administrator.
The following table shows Trustee compensation for the periods indicated.
TRUSTEE COMPENSATION TABLE
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM TRUST
TRUSTEE FUND(1) AND COMPLEX(1)(2)
------- ------------ ------------------
Philip W. Coolidge $ 0 $ 0
Riley C. Gilley 1,899 41,500
Diana R. Harrington 2,560 59,000
Susan B. Kerley 2,431 55,000
Heath B. McLendon(3) 0 0
C. Oscar Morong, Jr. 3,096 71,000
E. Kirby Warren 2,301 49,000
William S. Woods, Jr. 2,307 54,000
- ------------
(1) For the fiscal year ended December 31, 1998.
(2) Messrs. Coolidge, Gilley, McLendon, Morong, Warren and Woods, and Mses.
Harrington and Kerley are Trustees of 50, 34, 22, 41, 41, 27, 29 and 29
funds and portfolios, respectively, in the family of open-end registered
investment companies advised or managed by Citibank.
(3) Mr. McLendon was appointed as Trustee in February, 1999.
As of April 9, 1999, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund. As of the same date, more than 95% of the
outstanding shares of the 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 each of the Trust and the Portfolio Trusts
provides that each of the Trust and the Portfolio Trusts, as the case may be,
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 Trusts, as the case may be,
unless, as to liability to the Trust, the Portfolio Trusts 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 Trusts,
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 Trusts, 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
Beginning August 1, 1999, the Fund will no longer invest in Balanced
Portfolio. Instead, the equity portion of the Fund will be invested in Large Cap
Value Portfolio, and the fixed income portion of the Fund will be invested in
U.S. Fixed Income Portfolio.
Citibank manages the assets of the Fund and each Portfolio and provides
certain administrative services to the Fund and the Portfolios pursuant to
separate management agreements (the "Management Agreements"). Subject to such
policies as the Board of Trustees of Asset Allocation Portfolios, with respect
to Large Cap Value Portfolio, and The Premium Portfolios, with respect to U.S.
Fixed Income Portfolio 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 Agreements with the Portfolio
Trusts provide that Citibank may delegate the daily management of the securities
of each Portfolio to one or more subadvisers.
Unless otherwise terminated, the Management Agreement with the Trust
relating to the Fund will continue in effect indefinitely as long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Trust or by a vote of a majority of the outstanding voting securities of
the Fund, and, in either case, by a majority of the Trustees of the Trust who
are not parties to the Management Agreement or interested persons of any such
party, at a meeting called for the purpose of voting on the Management
Agreement. Unless otherwise terminated, the Management Agreement with Asset
Allocation Portfolios relating to Large Cap Value Portfolio will continue in
effect indefinitely as long as such continuance is specifically approved at
least annually by the Board of Trustees of Asset Allocation Portfolios or by a
vote of a majority of the outstanding voting securities of Large Cap Value
Portfolio, and, in either case, by a majority of the Trustees of Asset
Allocation Portfolios 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. Unless otherwise terminated, the Management
Agreement with The Premium Portfolios relating to U.S. Fixed Income Portfolio
will continue in effect indefinitely as long as such continuance is specifically
approved at least annually by the Board of Trustees of The Premium Portfolios or
by a vote of a majority of the outstanding voting securities of U.S. Fixed
Income Portfolio, and, in either case, by a majority of the Trustees of The
Premium Portfolios 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 Fund and the Portfolios with general office facilities
and supervises the overall administration of the Fund and the Portfolios,
including, among other responsibilities, the negotiation of contracts and fees
with, and the monitoring of performance and billings of, the Fund's or the
Portfolios' independent contractors and agents; the preparation and filing of
all documents required for compliance by the Fund and the Portfolios with
applicable laws and regulations; and arranging for the maintenance of books and
records of the Fund or the Portfolios. Trustees, officers, and investors in the
Trust and the Portfolio Trusts 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 Trusts. 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 a
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 a
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 each 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 such 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.
Under the Management Agreement with the Trust, aggregate management fees
paid to Citibank, including the Fund's share of management fees paid by Large
Cap Value Portfolio and U.S. Fixed Income Portfolio, will not exceed 0.70% of
the Fund's average daily net assets for the Fund's then-current fiscal year.
Citibank may reimburse the Fund or Portfolios or waive all or a portion of its
management fees.
For the fiscal years ended December 31, 1996, 1997 and 1998, the fees paid
to Citibank under a prior investment advisory agreement with respect to Balanced
Portfolio were $996,840, $998,042 and $1,030,889, respectively.
Large Cap Value Portfolio has entered into a Submanagement Agreement with
SSBC Fund Management, Inc., an affiliate of Citibank and an indirect
wholly-owned subsidiary of Citigroup Inc. Under the Submanagement Agreement, it
is SSBC's responsibility to make the day-to-day investment decisions for assets
of the Portfolio allocated to it, and to place the purchase and sales orders for
securities transactions concerning those assets, subject in all cases to the
general supervision of Citibank. SSBC furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the assets of the
Portfolio allocated to it and effecting securities transactions concerning those
assets.
The Submanagement Agreement will continue in effect indefinitely as long as
such continuance is specifically approved at least annually by the Board of
Trustees of Large Cap Value Portfolio or by a vote of a majority of the
outstanding voting securities of the Portfolio, and, in either case, by a
majority of the Trustees of Large Cap Value Portfolio 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. Notwithstanding
the foregoing, the Submanagement Agreement will automatically terminate 120 days
after its date if at such time it has not been approved by "vote of a majority
of the outstanding voting securities" of the Portfolio.
The Submanagement Agreement provides that SSBC may render services to
others. The Submanagement Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by Large Cap Value
Portfolio, when authorized either by a vote of a majority of the outstanding
voting securities of the Portfolio or by a vote of a majority of the Board of
Trustees of Large Cap Value Portfolio, 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 Submanagement Agreement may be terminated by SSBC
on not less than 90 days' written notice. Upon termination of the Submanagement
Agreement, Citibank will maintain responsibility for managing those assets
formerly managed by SSBC. The Submanagement Agreement provides that neither SSBC
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 Portfolio, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or their
obligations and duties under the Submanagement Agreement.
SSBC's compensation is payable by Large Cap Value Portfolio from the assets
of the Portfolio. The Portfolio pays SSBC 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 Portfolio allocated to SSBC:
0.65% on the first $10 million;
0.50% on the next $10 million;
0.40% on the next $10 million; and
0.30% on remaining assets.
Pursuant to separate sub-administrative services agreements with Citibank,
CFBDS and Signature Financial Group (Cayman) Ltd. ("SFG") perform such sub-
administrative duties for the Trust and the Portfolio Trusts, respectively, as
from time to time are agreed upon by Citibank, CFBDS and SFG, as appropriate.
For performing such sub-administrative services, CFBDS and SFG receive
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 Trusts, respectively. All such compensation is
paid by Citibank.
For the fiscal years ended December 31, 1996, 1997 and 1998, the fees
payable by the Fund to CFBDS under a prior administrative services agreement
with respect to the Fund were $592,565 (of which $237,026 was voluntarily
waived), $570,130 (of which $228,507 was voluntarily waived) and $577,968 (of
which $231,585 was voluntarily waived), respectively.
For the fiscal years ended December 31, 1996, 1997 and 1998, The Premium
Portfolios paid SFG $124,605, $124,755 and $128,861, respectively, with respect
to Balanced Portfolio under a prior administrative services agreement.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, MA 02109, serves as the Distributor of the
Fund's shares pursuant to a Distribution Agreement with the Trust with respect
to each class of shares of the Fund (each, a "Distribution Agreement"). In those
states where CFBDS is not a registered broker-dealer, shares of the Fund are
sold through Signature Broker-Dealer Services, Inc., as dealer. Under the
Distribution Agreements, CFBDS is obligated to use its best efforts to sell
shares of each class of the Fund.
Either party may terminate a Distribution Agreement on not less than thirty
days' nor more than sixty days' prior written notice to the other party. Unless
otherwise terminated, each Distribution Agreement will continue from year to
year upon annual approval by the Trust's Board of Trustees and by the vote of a
majority of the Board of Trustees of the Trust who are not parties to the
Agreement or interested persons of any party to the Distribution Agreement, cast
in person at a meeting called for the purpose of voting on such approval. Each
Distribution Agreement will terminate in the event of its assignment, as defined
in the 1940 Act.
Each class of the Fund has a Distribution Plan (each, a "Distribution Plan")
adopted in accordance with Rule 12b-1 under the 1940 Act. Under the Plans, the
Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average
daily net assets of the Fund attributable to that class in the case of the Plan
relating to Class A shares, and not to exceed 1.00% of the average daily net
assets of the Fund attributable to that class in the case of the Plan relating
to Class B shares. 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 Fund, and to
other parties in respect of the sale of shares of the Fund, 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 Fund also may make payments to the Distributor, Service Agents
and others for providing personal service or the maintenance of shareholder
accounts. The amounts paid by the Distributor to each recipient may vary based
upon certain factors, including, among other things, the levels of sales of Fund
shares and/or shareholder services provided. Recipients may receive different
compensation for sales for Class A and Class B shares.
The Distribution Plan with respect to Class A shares also provides that the
Distributor, broker-dealers, banks and other financial intermediaries may
receive the sales charge paid by Class A investors as partial compensation for
their services in connection with the sale of shares. The Distribution Plan with
respect to Class B shares provides that the Distributor, dealers and others may
receive all or a portion of the deferred sales charges paid by Class B
investors.
The Distribution Plans permit the Fund 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 applicable Plan, 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. The Fund will pay the fees to the
Distributor and others until the applicable Plan or Distribution Agreement is
terminated or not renewed. In that event, the Distributor's or other recipient's
expenses in excess of fees received or accrued through the termination date will
be the Distributor's or other recipient's sole responsibility and not
obligations of the Fund.
Each Distribution 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 Distribution Plan or in any agreement related to the Plan (for
purposes of this paragraph "Qualified Trustees"). Each Distribution 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 Distribution Plan. Each
Distribution Plan further provides that the selection and nomination of the
Qualified Trustees is committed to the discretion of such Qualified Trustees
then in office. A Distribution Plan may be terminated with respect to any class
of the 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
class. A Distribution Plan may not be amended to increase materially the amount
of the permitted expenses of the class thereunder without the approval of a
majority of the outstanding securities of that class 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 Distribution Plans 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 Distribution Plans, CFBDS acts as the agent of the
Trust in connection with the offering of shares of the Fund pursuant to the
Distribution Agreements. For the fiscal years ended December 31, 1996, 1997 and
1998 the fees payable to CFBDS under the Distribution Agreement with respect to
the Fund were $355,539 (of which $237,026 was voluntarily waived), $342,078 (of
which $228,204 was voluntarily waived) and $346,780 (of which $231,320 was
voluntarily waived), respectively.
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 or for other
distribution expenses out of the distribution fees received by the Distributor
and out of the Distributor's past profits or any other source available to it.
Previously, the Trust had entered into a shareholder servicing agreement
with certain shareholder servicing agents pursuant to which those shareholder
servicing agents provided shareholder services, including answering customer
inquiries, assisting in processing purchase, exchange and redemption
transactions and furnishing Fund communications to shareholders. For the fiscal
years ended December 31, 1996, 1997 and 1998, the aggregate fees paid to
shareholder servicing agents with respect to the Fund were $592,565, $570,130
and $577,968, respectively.
EXPENSES
In addition to amounts payable under the Management Agreement and its
Distribution Plans, the Fund is responsible for its own expenses, including,
among other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Fund's Distributor,
government fees, taxes, accounting and legal fees, expenses of communication
with shareholders, interest expense, and insurance premiums.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street"), pursuant to which State
Street acts as Transfer Agent for the Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
the Fund. Among other things, State Street calculates the daily net asset value
for the Fund. Securities may be held by a sub-custodian bank approved by the
Trustees.
Each Portfolio Trust, on behalf of the Portfolios, has entered into a
Custodian Agreement with State Street pursuant to which State Street acts as
custodian for each Portfolio. Each Portfolio Trust, on behalf of the Portfolios,
also has entered into a Fund Accounting Agreement with State Street Cayman Trust
Company, Ltd. ("State Street Cayman") pursuant to which State Street Cayman
provides fund accounting services for each Portfolio. State Street Cayman also
provides transfer agency services to each Portfolio Trust.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
AUDITORS
PricewaterhouseCoopers LLP are the independent accountants for the Fund,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP
(Canada) are the chartered accountants for each Portfolio Trust. The address of
PricewaterhouseCoopers LLP (Canada) is Suite 3000, Box 82, Royal Trust Towers,
Toronto Dominion Center, Toronto, Ontario, Canada M5X 1G8.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel for
the Fund.
9. PORTFOLIO TRANSACTIONS
The Trust trades securities for the Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objectives. Changes in the Fund's investments are made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of turnover is not a
limiting factor when changes are appropriate. Specific decisions to purchase or
sell securities for the Fund are made by a portfolio manager who is an employee
of the Manager or Subadviser and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of the Manager or
Subadviser 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 the Fund and/or the other
accounts over which Citibank, the Subadviser or their affiliates exercise
investment discretion. Citibank and the Subadviser 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 Citibank or the Subadviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which Citibank, the Subadviser 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 management fee that the Fund pays to the Manager or Subadviser will not
be reduced as a consequence of the Manager's or Subadviser's receipt of
brokerage and research services. While such services are not expected to reduce
the expenses of the Manager or Subadviser the Manager or Subadviser would,
through the use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for the Fund as well as for one or more of Citibank's or a
Subadviser's other clients. Investment decisions for the Fund and for the
Manager's or Subadviser's other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling the same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for the Fund.
When purchases or sales of the same security for the Fund and for other
portfolios managed by the Manager or 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 fiscal years ended December 31, 1996, 1997, and 1998 Balanced
Portfolio, the Portfolio in which the Fund previously invested, paid brokerage
commissions of $283,659, $371,439 and $666,058, respectively.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value)
of each series and to divide or combine the shares of any series into a greater
or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series. The Trust has reserved the
right to create and issue additional series and classes of shares. Each share of
each class of each series represents an equal proportionate interest in the
series with each other share of that class. Shares of each series participate
equally in the earnings, dividends and distribution of net assets of the
particular series upon liquidation or dissolution (except for any differences
among classes of shares in a series). Shares of each series are entitled to vote
separately to approve advisory agreements or changes in investment policy, and
shares of a class are entitled to vote separately to approve any distribution or
service arrangements relating to that class, 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 series or class, only shares of that
particular series 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.") At any meeting of shareholders of any series, 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 received for all other shares of which that Service Agent is
the holder of record. Shares have no preference, pre-emptive, conversion or
similar rights. Shares, when issued, are fully paid and non-assessable, except
as set forth below.
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 (or the
affected series) outstanding shares would be sufficient. The Trust or any series
of the Trust, as the case may be, may be terminated (i) by a vote of a majority
of the outstanding voting securities of the Trust or the affected series or (ii)
by the Trustees by written notice to the shareholders of the Trust or the
affected series. If not so terminated, the Trust will continue indefinitely.
The Fund's Transfer Agent maintains a share register for shareholders of
record. Share certificates are not 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.
Large Cap Value Portfolio is a series of Asset Allocation Portfolios, and
U.S. Fixed Income Portfolio is a series of The Premium Portfolios. Each
Portfolio Trust is organized as a trust under the laws of the State of New York.
Each investor in a Portfolio, including the Fund, may add to or withdraw
from its investment in the 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.
11. TAX MATTERS
TAXATION OF THE FUND AND THE PORTFOLIO TRUSTS
FEDERAL TAXES. The Fund has elected to be treated, and intends to qualify
each year, as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Provided all such requirements are
met, no U.S. federal income or excise taxes generally will be required to be
paid by the Fund. If the Fund should fail to qualify as a "regulated investment
company" for any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary income to shareholders. The Portfolio Trusts believe the Portfolios
also will not be required to pay any U.S. federal income or excise taxes on
their income.
FOREIGN TAXES. Investment income and gains received by the 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 the Fund to a
reduced rate of tax or an exemption from tax on such income. The Fund intends to
qualify for treaty reduced rates where available. It is not possible, however,
to determine the Fund's effective rate of non-U.S. tax in advance since the
amount of the Fund's respective assets to be invested within various countries
is not known. Shareholders will not be able to claim any deduction or credit for
any part of the foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of the Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, that is payable
to shareholders of record in such a month, and that is paid the following
January, will be treated as if received by the shareholders on December 31 of
the year in which the dividend is declared.
DIVIDENDS-RECEIVED DEDUCTION. The portion of the Fund's ordinary income
dividends attributable to dividends received in respect of equity securities of
U.S. issuers is normally eligible for the dividends received deduction for
corporations subject to U.S. federal income taxes. Availability of the deduction
for particular shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax and result in certain
basis adjustments.
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.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a taxable
disposition of shares of the Fund by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the shares
have been held for more than twelve months and otherwise as a short-term capital
gain or loss. However, any loss realized upon a disposition of shares in the
Fund held for six months or less will be treated as a long-term capital loss to
the extent of any distributions of net capital gain made with respect to those
shares. Any loss realized upon a disposition of shares may also be disallowed
under rules relating to wash sales. Gain may be increased (or loss reduced) upon
a redemption of Class A Fund shares held for 90 days or less followed by any
purchase of shares of the Fund or another of the CitiFunds, including purchases
by exchange or by reinvestment, without payment of a sales charge which would
otherwise apply because of any sales charge paid on the original purchase of the
Class A Fund shares.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
OPTIONS, ETC. The Fund's transactions in options, futures contracts, short
sales "against the box" and forward contracts will be subject to special tax
rules that may affect the amount, timing and character of Fund income and
distributions to shareholders. For example, certain positions held by the Fund
on the last business day of each taxable year will be marked to market (i.e.,
treated as if closed out) on that day, and any gain or loss associated with the
positions will be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by the Fund that substantially diminish its risk of
loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, futures contracts and forward contracts to the
extent necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS. Special tax considerations apply with respect to non-
U.S. investments of the Fund. Foreign exchange gains and losses realized by the
Fund will generally be treated as ordinary income and loss. Use of non-U.S.
currencies for non-hedging purposes and investment by the Fund in certain
"passive foreign investment companies" may have to be limited in order to avoid
a tax on the Fund. The Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each taxable year.
This election may cause the Fund to recognize ordinary income prior to the
receipt of cash payments with respect to those investments; in order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold
potentially resulting in additional taxable gain or loss to the Fund.
SPECIAL CONSIDERATIONS FOR NON-U.S. PERSONS. The Fund will withhold tax
payments at the rate of 30% (or any lower rate permitted under an applicable
treaty) on taxable dividends and other payments subject to withholding taxes
that are made to persons who are not citizens or residents of the United States.
Distributions received from the Fund by non-U.S. persons also may be subject to
tax under the laws of their own jurisdiction.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification number
is correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. If a shareholder fails to provide this
information, or otherwise violates IRS regulations, the Fund may be required to
withhold tax at the rate of 31% on certain distributions and redemption proceeds
paid to that shareholder.
12. CERTAIN BANK REGULATORY MATTERS
The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies, such as
the Fund. Citibank believes that its services under the Management 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 Manager or a
Service Agent, the Fund would seek alternative means for obtaining these
services. The Fund does not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
13. FINANCIAL STATEMENTS
The audited financial statements of the Fund (Statement of Assets and
Liabilities at December 31, 1998, Statement of Operations for the year ended
December 31, 1998, Statement of Changes in Net Assets for each of the years in
the two-year period ended December 31, 1998, and Financial Highlights for each
of the years in the five-year period ended December 31, 1998, Notes to Financial
Statements and Independent Auditors' Report), each of which is included in the
Annual Report to Shareholders of the Fund, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance upon the reports of PricewaterhouseCoopers LLP, independent
accountants, on behalf of the Fund.
The audited financial statements of Balanced Portfolio, the Portfolio in
which the Fund previously invested (Portfolio of Investments at December 31,
1998, Statement of Assets and Liabilities at December 31, 1998, Statement of
Operations for the fiscal year ended December 31, 1998, Statement of Changes in
Net Assets for each of the years in the two-year period ended December 31, 1998,
and Financial Highlights for each of the years in the four-year period ended
December 31, 1998 and for the period May 1, 1994 (commencement of operations) to
December 31, 1994, Notes to Financial Statements and Independent Auditors'
Report), each of which is included in the Annual Report to Shareholders of the
Fund are incorporated by reference into this Statement of Additional Information
and have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, chartered accountants, on behalf of Balanced
Portfolio.
A copy of the Annual Report to Shareholders of the Fund accompanies this
Statement of Additional Information.
