<PAGE>
Rule 497(c) File Nos. 2-90518 and 811-4006
MAY 3, 1999
----------
PROSPECTUS
----------
CitiSelect(R) Portfolios
ASSET ALLOCATION MUTUAL FUNDS
MANAGED BY CITIBANK, N.A.
CITISELECT(R) FOLIO 100 INCOME
CITISELECT(R) FOLIO 200 CONSERVATIVE
CITISELECT(R) FOLIO 300 BALANCED
CITISELECT(R) FOLIO 400 GROWTH
CITISELECT(R) FOLIO 500 GROWTH PLUS
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
FUNDS AT A GLANCE .............................................. 3
YOUR CITISELECT ACCOUNT ........................................ 16
CHOOSING A SHARE CLASS ...................................... 16
HOW TO BUY SHARES ........................................... 20
HOW THE PRICE OF YOUR SHARES IS CALCULATED .................. 20
HOW TO SELL SHARES .......................................... 21
REINSTATING RECENTLY SOLD SHARES ............................ 22
EXCHANGES ................................................... 22
DIVIDENDS ................................................... 22
TAX MATTERS ................................................. 23
MANAGEMENT OF THE FUNDS ........................................ 24
MANAGER ..................................................... 24
MANAGEMENT FEES ............................................. 26
MORE ABOUT THE FUNDS ........................................... 27
PRINCIPAL INVESTMENT STRATEGIES ............................. 27
RISKS ....................................................... 32
FINANCIAL HIGHLIGHTS ........................................... A-1
APPENDIX ....................................................... B-1
<PAGE>
-----------------
FUNDS AT A GLANCE
-----------------
Funds at a Glance
The five diversified mutual funds described in this prospectus are
asset allocation funds. Each Fund invests in a carefully selected mix
of equity and fixed income securities that is designed by Citibank to
offer a different level of potential return with a corresponding
amount of risk. For example, CitiSelect Folio 100 Income is designed
to provide the lowest relative risk, but with the lowest level of
potential return. CitiSelect Folio 500 Growth Plus is designed to
provide the highest potential for return, but with the highest risk.
Your investment objective, your investment time frame and your comfort
level with risk will help you decide which Fund to consider.
Each Fund has its own investment goal and its own mix of investments.
Of course, there is no assurance that any Fund will achieve its goal.
This summary briefly describes each of the Funds and the principal
risks of investing. Please note that each Fund invests in securities
through several underlying mutual funds. For more information about
the Funds' investment strategies, risks, and investment structure, see
MORE ABOUT THE FUNDS on page 27.
FUND GOALS
CITISELECT FOLIO 100 INCOME
This Fund's goal is as high a level of current income as is consistent
with a dominant emphasis on fixed income securities and a small
allocation to equity securities.
CITISELECT FOLIO 200 CONSERVATIVE
This Fund's goal is as high a total return over time as is consistent
with a primary emphasis on fixed income securities and a secondary
emphasis on equity securities.
CITISELECT FOLIO 300 BALANCED
This Fund's goal is as high a total return over time as is consistent
with a balanced emphasis on equity and fixed income securities.
CITISELECT FOLIO 400 GROWTH
This Fund's goal is as high a total return over time as is consistent
with a primary emphasis on equity securities, and a secondary emphasis
on fixed income securities.
CITISELECT FOLIO 500 GROWTH PLUS
This Fund's goal is as high a total return over time as is consistent
with a dominant emphasis on equity securities and a small allocation
to fixed income securities.
MAIN INVESTMENT STRATEGIES
Each Fund invests in a mix of equity and fixed income securities that
is designed by Citibank to offer a different level of potential return
with a different amount of risk. The Funds' equity securities may
include common stocks, preferred stocks, securities convertible into
common stocks, warrants, and depositary receipts (receipts
representing the right to receive securities of foreign issuers
deposited in a U.S. bank or a local branch of a foreign bank). The
Funds' fixed income securities may include bonds, short-term notes,
mortgage-backed and asset-backed securities, certificates of deposit
and repurchase agreements. The Funds may invest in equity and fixed
income securities of both U.S. and foreign issuers.
o CITISELECT FOLIO 100 INCOME invests primarily in fixed income
securities with a small allocation to equity securities. This Fund
is expected to be the least volatile of the Funds.
o CITISELECT FOLIO 200 CONSERVATIVE invests primarily in fixed
income securities and, to a lesser extent, in equity securities to
give the potential for some capital growth.
o CITISELECT FOLIO 300 BALANCED emphasizes both equity and fixed
income securities. This balanced mix offers the growth potential
of stocks with the lower volatility of fixed income securities.
o CITISELECT FOLIO 400 GROWTH and CITISELECT FOLIO 500 GROWTH PLUS
invest primarily in equity securities. They may invest more of
their assets in international securities and small cap securities.
CitiSelect Folio 500 Growth Plus is expected to be the most
volatile of the Funds.
- --------------------------------------------------------------------------------
ASSET CLASS RANGE*
FIXED
EQUITY INCOME
.............................................................................
CitiSelect Folio 100 Income 0- 20% 80-100%
.............................................................................
CitiSelect Folio 200 Conservative 20- 40% 60- 80%
.............................................................................
CitiSelect Folio 300 Balanced 40- 60% 40- 60%
.............................................................................
CitiSelect Folio 400 Growth 60- 80% 20- 40%
.............................................................................
CitiSelect Folio 500 Growth Plus 75-100% 0- 25%
- --------------------------------------------------------------------------------
* If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income asset class,
and the cash is temporarily invested in short-term money market instruments,
those instruments will be included in the percentage limitations for that
asset class.
Each Fund's assets are allocated between the equity and fixed income
asset classes as shown in the chart above. Citibank may further
allocate assets among various sub-categories of the equity and fixed
income asset classes, seeking to minimize risk and volatility and to
maximize returns. There are no restrictions on the amount of a Fund's
assets that may be allocated to any particular sub-category and
Citibank is not required to allocate each Fund's assets among all of
these types of equity and fixed income securities at all times.
Equity securities may be allocated among:
o large cap growth securities
o large cap value securities
o small cap growth securities
o small cap value securities
o international securities
Fixed income securities may be allocated among:
o U.S. investment grade bonds
o foreign investment grade bonds
o high yield bonds (so-called "junk bonds")
While Citibank generally allocates each Fund's assets within the
percentage ranges shown in the chart above, cash flows into or out of
a Fund, or market fluctuations, could produce different results.
Citibank monitors each Fund's asset mix daily and conducts quarterly
reviews to determine whether to rebalance the Fund's investments.
Rebalancing may be accomplished over a period of time, subject to any
regulatory restrictions.
Citibank also allocates assets among different subadvisers who
specialize in managing particular kinds of securities or managing in a
particular style. This may help the Funds benefit from different
investment cycles, such as periods when equities with different
characteristics (i.e., growth or value) perform differently. Citibank
monitors and supervises all of the Funds' subadvisers and may
terminate the services of any subadviser at any time.
The Funds may use derivatives in order to protect (or "hedge") against
changes in interest rates, currency fluctuations or the prices of
securities held or to be bought. The Funds may also use a wide variety
of derivatives for non-hedging purposes, to enhance potential gains or
generate income. In addition, the Funds may use derivatives to manage
the maturity or duration of fixed income securities. Derivatives that
the Funds may use include futures (including bond, interest rate and
stock index futures), options on securities and on futures (including
options on interest rate and stock index futures), interest rate
swaps, equity swaps, and other types of available swap agreements,
including caps, collars and floors. The Funds may also enter into
forward foreign currency contracts, purchase or sell foreign currency
futures, purchase or write options on foreign currencies, or enter
into currency swaps and other similar transactions. Derivatives may be
used alone or in combination with other derivatives. The Funds'
ability to use derivatives successfully depends on a number of
factors, including derivatives being available at prices that are not
too costly, tax considerations, the availability of liquid markets,
and the Funds' portfolio managers accurately predicting movements in
interest rates, stock prices and other economic factors.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce substantial
losses or gains for a Fund, well beyond the Fund's initial investment.
The Funds may use other investment techniques, such as short sales,
which also may involve or have the same effect as leveraging, in that
a Fund's losses from short sales may be unlimited.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in these
Funds. The principal risks of investing in CitiSelect Portfolios are
described below. Please remember that the risks of investing in each
Fund depend on the securities it holds and the investment strategies
it uses. For example, Funds investing more of their assets in fixed
income securities may be more susceptible to interest rate risk and
credit risk than Funds investing more of their assets in equity
securities. Conversely, Funds investing more of their assets in equity
securities may be susceptible to greater price volatility than Funds
investing more of their assets in fixed income securities. See page 32
for more information about risks.
o MARKET RISK. This is the risk that the prices of securities will
rise or fall due to changing economic, political or market
conditions, or due to a company's individual situation. The value
of the Funds' shares will change daily as the value of their
underlying securities change. This means that your shares may be
worth more or less when you sell them than when you bought them.
It is also possible that the Funds will not perform as intended.
For example, CitiSelect Folio 100 Income is expected to be the
least volatile of the Funds. However, under certain market
conditions this Fund could be more volatile than one or more of
the other Funds.
o EQUITY SECURITIES. Equity securities are subject to market risk
that historically has resulted in greater price volatility than
exhibited by fixed income securities.
o INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise.
Longer term and lower rated obligations are usually more sensitive
to interest rate changes. A change in interest rates could cause
the Funds' share prices to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Funds, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a
security and leading to greater volatility in the price of the
security and in shares of a Fund. The prices of lower rated
securities often are more volatile than those of higher rated
securities, and there may be more difficulty in selling lower
rated securities in the market. These risks are more pronounced
with so-called "junk bonds," which are debt obligations that are
rated below investment-grade.
o FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include
expropriation of assets, confiscatory taxation, withholding taxes
on dividends and interest paid on Fund investments, fluctuations
in currency exchange rates, currency exchange controls and other
limitations on the use or transfer of assets by a Fund or issuers
of securities, and political or social instability. There may be
rapid changes in the value of foreign currencies or securities,
causing the Funds' share prices to be volatile. Also, in certain
circumstances, the Funds could realize reduced or no value in U.S.
dollars from their investments in foreign securities, causing the
Funds' share prices to go down.
Each Fund may invest in issuers located in emerging, or
developing, markets. All of the risks of investing in foreign
securities are heightened by investing in these markets.
o SMALLER COMPANIES. The securities of smaller capitalized companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns and their
prices may be more volatile, causing the Funds' share prices to be
volatile.
o PREPAYMENT RISK. The issuers of debt securities held by a Fund may
be able to prepay principal due on the securities, particularly
during periods of declining interest rates. A Fund may not be able
to reinvest that principal at attractive rates, reducing income to
the Fund, and the Fund may lose any premium paid. On the other
hand, rising interest rates may cause prepayments to occur at
slower than expected rates. This effectively lengthens the
maturities of the affected securities, making them more sensitive
to interest rate changes and a Fund's share price more volatile.
Mortgage-backed securities are particularly susceptible to
prepayment risk and their prices may be very volatile.
o CONVERTIBLE SECURITIES. Convertible securities, which are debt
securities that may be converted into stock, are subject to the
market risk of stocks, and, like other debt securities, are also
subject to interest rate risk and the credit risk of their
issuers.
o DERIVATIVES. The Funds' use of derivatives, particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets,
causing the Funds' share prices to go down. In addition, each
Fund's ability to use derivatives successfully depends on the
ability of the Fund's portfolio managers to accurately predict
movements in stock prices, interest rates, currency exchange rates
or other economic factors and the availability of liquid markets.
If these predictions are wrong or if the derivatives do not work
as anticipated, the Fund could suffer greater losses than if the
Fund had not used derivatives.
Some of the Funds' use of derivatives may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's
losses may be out of proportion to the amount invested in the
instrument -- a relatively small investment may lead to much
greater losses.
o SHORT SALES. The Funds may engage in short sales. Losses from
short sales may be unlimited.
Please note that an investment in the Funds is not a deposit of
Citibank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in CitiSelect Portfolios is
not a complete investment program.
You should consider investing in CitiSelect Portfolios if you are
seeking to reduce the risks of investing in a single asset or type of
asset, and to cushion the volatility of financial markets by investing
in diversified portfolios of several types of assets. The Funds offer
a convenient way to own a portfolio tailored to specific investment
goals.
o CITISELECT FOLIO 100 INCOME is designed for investors seeking
current income with relatively low risk but with some growth
potential, and who have an investment horizon of at least three
years.
o CITISELECT FOLIO 200 CONSERVATIVE is designed for investors
seeking relatively low risk provided by substantial investments in
fixed income securities, but who also seek some capital growth,
and who have an investment horizon of at least five years.
o CITISELECT FOLIO 300 BALANCED is designed for investors seeking a
balanced approach by emphasizing stocks for their higher capital
appreciation potential but retaining a significant fixed income
component to temper volatility and who have an investment horizon
of at least five years.
o CITISELECT FOLIO 400 GROWTH and CITISELECT FOLIO 500 GROWTH PLUS
are designed for investors willing and able to take higher risks
in the pursuit of long-term capital appreciation and who have an
investment horizon of at least five years. CitiSelect Folio 500
Growth Plus is designed for investors who can withstand greater
market swings to seek potential long-term rewards. CitiSelect
Folio 400 Growth is designed for investors seeking long-term
rewards, but with less volatility.
Don't invest in CitiSelect Portfolios if you are not prepared to
accept daily share price fluctuations and possible losses.
<PAGE>
Fund Performance
The following bar charts and tables can help you evaluate the risks of
investing in each Fund, and how its returns have varied over time.
o The bar charts show changes in the Funds' performance from year to
year. The charts and related information do not take into account
any sales charges that you may be required to pay. Any sales
charges will reduce your return.
o The tables show how the Funds' average annual returns for the
periods indicated compare, in each case, to several broad measures
of stock performance and bond performance. Please remember that,
unlike the Funds, the market indexes do not include the costs of
buying and selling securities, sales charges and other Fund
expenses.
- --------------------------------------------------------------------------------
WHAT DO THE INDEXES REPRESENT?
The S&P 500 Index, Russell 2000 Index, and MSCI-EAFE Index each
provide a broad measure of stock performance. The S&P 500 Index tracks
the stocks of 500 selected U.S. publicly-traded companies, the Russell
2000 Index tracks the stocks of 2,000 small publicly-traded U.S.
companies, and the MSCI-EAFE Index tracks the stocks of approximately
1,000 companies in Europe, Australasia, and the Far East. The Lehman
Aggregate Bond Index, the Salomon Brothers Non-Dollar World Government
Bond Index and the Salomon Brothers Currency-Hedged Non-Dollar World
Government Bond Index each provide a broad measure of bond
performance. The Lehman Aggregate Bond Index tracks more than 5,000
investment-grade corporate and government bonds, including
mortgage-backed securities. The Salomon Brothers Non-Dollar World
Government Bond Index tracks institutionally traded government bonds
with a remaining maturity of one year or longer and with amounts
outstanding of at least $25 million. The Salomon Brothers
Currency-Hedged Non-Dollar World Government Bond Index tracks these
same securities hedged against the U.S. dollar.
- --------------------------------------------------------------------------------
o In both the charts and tables, the returns shown for the Funds are
for periods before the creation of share classes on January 4,
1999. All existing Fund shares were designated Class A shares on
that date. Prior to that date, there were no sales charges on the
purchase or sale of Fund shares. The returns for Class A in the
tables, but not the bar charts, have been adjusted to reflect the
maximum front-end sales charge currently applicable to the Class A
shares.
o The Class B shares are newly offered commencing January 4, 1999.
Class B performance would have been lower than that shown for
Class A shares, because of higher fund expenses and the effects of
the contingent deferred sales charge.
When you consider this information, please remember that the Funds'
past performance is not necessarily an indication of how they will
perform in the future.
CITISELECT FOLIO 100 INCOME
The Fund is newly offered and does not have any investment returns at
the date of this prospectus. For up-to-date yield information, please
call 1-800-625-4554.
CITISELECT FOLIO 200 CONSERVATIVE
TOTAL RETURN (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200
1997 8.03%
1998 6.94%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 6.71% June 30, 1997
..............................................................................
Lowest (4.27%) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
.................................................................................................................................
Life of Fund
Since
1 Year June 17, 1996
.................................................................................................................................
<S> <C> <C>
Class A (with maximum sales charge) 2.13% 3.57%
.................................................................................................................................
Class B N/A N/A
.................................................................................................................................
Lehman Aggregate Bond Index 9.47% 9.78%
.................................................................................................................................
S&P 500 Index 28.58% 29.58%
.................................................................................................................................
Russell 2000 Index (2.55%) 8.59%
.................................................................................................................................
MSCI-EAFE Index 20.33% 9.31%
.................................................................................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
.................................................................................................................................
Salomon Bros. Currency-Hedged Non-$ World Gov't Bond Index 11.53% 12.51%
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</TABLE>
CITISELECT FOLIO 300 BALANCED
TOTAL RETURN (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 300
1997 9.86%
1998 6.59%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 8.71% December 31, 1998
..............................................................................
Lowest (7.51%) September 30, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
.................................................................................................................................
Life of Fund
Since
1 Year June 17, 1996
.................................................................................................................................
<S> <C> <C>
Class A (with maximum sales charge) 1.79% 4.60%
.................................................................................................................................
Class B N/A N/A
.................................................................................................................................
Lehman Aggregate Bond Index 9.47% 9.78%
.................................................................................................................................
S&P 500 Index 28.58% 29.58%
.................................................................................................................................
Russell 2000 Index (2.55%) 8.59%
.................................................................................................................................
MSCI-EAFE Index 20.33% 9.31%
.................................................................................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
.................................................................................................................................
Salomon Bros. Currency-Hedged Non-$ World Gov't Bond Index 11.53% 12.51%
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</TABLE>
CITISELECT FOLIO 400 GROWTH
TOTAL RETURN (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400
1997 10.25%
1998 4.54%
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 11.99% December 31, 1998
..............................................................................
Lowest (12.76%) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
.................................................................................................................................
Life of Fund
Since
1 Year June 17, 1996
.................................................................................................................................
<S> <C> <C>
Class A (with maximum sales charge) (0.69%) 3.86%
.................................................................................................................................
Class B N/A N/A
.................................................................................................................................
S&P 500 Index 28.58% 29.58%
.................................................................................................................................
Lehman Aggregate Bond Index 9.47% 9.78%
.................................................................................................................................
Russell 2000 Index (2.55%) 8.59%
.................................................................................................................................
MSCI-EAFE Index 20.33% 9.31%
.................................................................................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
.................................................................................................................................
Salomon Bros. Currency-Hedged Non-$ World Gov't Bond Index 11.53% 12.51%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CITISELECT FOLIO 500 GROWTH PLUS
TOTAL RETURN (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 500
1997 11.99%
1998 1.59%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 13.92% December 31, 1998
..............................................................................
Lowest (17.57%) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
.................................................................................................................................
Life of Fund
Since
1 Year September 3, 1996
.................................................................................................................................
<S> <C> <C>
Class A (with maximum sales charge) (3.49%) 3.46%
.................................................................................................................................
Class B N/A N/A
.................................................................................................................................
S&P 500 Index 28.58% 33.76%
.................................................................................................................................
Lehman Aggregate Bond Index 9.47% 9.95%
.................................................................................................................................
Russell 2000 Index (2.55%) 12.17%
.................................................................................................................................
MSCI-EAFE Index 20.33% 11.49%
.................................................................................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 6.39%
.................................................................................................................................
Salomon Bros. Currency-Hedged Non-$ World Gov't Bond Index 11.53% 12.35%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Fund Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy
and hold shares of the Funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES CITISELECT CITISELECT CITISELECT
FEES PAID DIRECTLY FROM YOUR INVESTMENT FOLIO 100 FOLIO 200 FOLIO 300
..................................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
SHARE CLASS (Class descriptions begin on page 16) Class A Class B Class A Class B Class A Class B
..................................................................................................................................
Maximum Sales Charge (Load) Imposed on Purchases 4.50% None 4.50% None 4.50% None
..................................................................................................................................
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2) None(1) 4.50%(2) None(1) 4.50%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
..................................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.75% 0.75% 0.75% 0.75%
..................................................................................................................................
Distribution (12b-1) Fees 0.50% 0.75% 0.50% 0.75% 0.50% 0.75%
..................................................................................................................................
Other Expenses (administrative, shareholder servicing and
other expenses) 0.25%(4) 0.25%(4) 0.25% 0.25% 0.25% 0.25%
..................................................................................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES 1.25% 1.50% 1.50% 1.75% 1.50% 1.75%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Except for investment 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 4.50% 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) Each Fund invests in multiple underlying mutual funds. This table reflects the expenses of each Fund and the underlying funds
in which it invests.
(4) "Other Expenses" for CitiSelect Folio 100 is based on estimated amounts for the current fiscal year. If "Other Expenses" of
CitiSelect Folio 100 were to exceed this amount, Citibank has agreed to waive its Management Fee to the extent necessary to
keep Total Annual Fund Operating Expenses for Class A shares from exceeding 1.25% and for Class B shares from exceeding 1.50%.
However, this fee waiver is voluntary and may be terminated at any time.
</TABLE>
<TABLE>
<CAPTION>
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SHAREHOLDER FEES CITISELECT CITISELECT
FEES PAID DIRECTLY FROM YOUR INVESTMENT FOLIO 400 FOLIO 500
..................................................................................................................................
SHARE CLASS (Class descriptions begin on page 16) Class A Class B Class A Class B
..................................................................................................................................
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases 5.00% None 5.00% None
..................................................................................................................................
Maximum Deferred Sales Charge (Load) None(1) 5.00%(2) None(1) 5.00%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
..................................................................................................................................
<S> <C> <C> <C> <C>
Management Fees 0.75% 0.75% 0.75% 0.75%
..................................................................................................................................
Distribution (12b-1) Fees 0.50% 1.00% 0.50% 1.00%
..................................................................................................................................
Other Expenses (administrative, shareholder servicing and other expenses) 0.25% 0.25% 0.25% 0.25%
..................................................................................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES 1.50% 2.00% 1.50% 2.00%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Except for investment 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) Each Fund invests in multiple underlying mutual funds. This table reflects the expenses of each Fund and the underlying funds
in which it invests.
</TABLE>
EXAMPLE
These examples are intended to help you compare the cost of investing
in a Fund to the cost of investing in other mutual funds. The examples
assume that:
o you invest $10,000 in a 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 examples also
show the effects of the conversion of Class B shares to Class A shares
after 8 years.
The examples also assume that:
o each investment has a 5% return each year -- the assumption of a
5% return is required by the SEC for the purpose of these examples
and is not a prediction of any Fund's future performance; and
o the Funds' operating expenses shown in the Fund Fees and Expenses
table remain the same.
<PAGE>
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
.................................................................................................................
<S> <C> <C> <C> <C>
CITISELECT FOLIO 100
.................................................................................................................
Class A $572 $829 -- --
.................................................................................................................
Class B
.................................................................................................................
Assuming redemption at end of period $603 $774 -- --
.................................................................................................................
Assuming no redemption $153 $474 -- --
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 200
.................................................................................................................
Class A $596 $903 $1,232 $2,160
.................................................................................................................
Class B
.................................................................................................................
Assuming redemption at end of period $628 $851 $1,049 $1,997
.................................................................................................................
Assuming no redemption $178 $551 $ 949 $1,997
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 300
.................................................................................................................
Class A $596 $903 $1,232 $2,160
.................................................................................................................
Class B
.................................................................................................................
Assuming redemption at end of period $628 $851 $1,049 $1,997
.................................................................................................................
Assuming no redemption $178 $551 $ 949 $1,997
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 400
.................................................................................................................
Class A $645 $950 $1,278 $2,201
.................................................................................................................
Class B
.................................................................................................................
Assuming redemption at end of period $703 $927 $1,178 $2,199
.................................................................................................................
Assuming no redemption $203 $627 $1,078 $2,199
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 500
.................................................................................................................
Class A $645 $950 $1,278 $2,201
.................................................................................................................
Class B
.................................................................................................................
Assuming redemption at end of period $703 $927 $1,178 $2,199
.................................................................................................................
Assuming no redemption $203 $627 $1,078 $2,199
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-----------------------
YOUR CITISELECT ACCOUNT
-----------------------
Your CitiSelect Account
CHOOSING A SHARE CLASS
Each Fund offers two share classes, Class A and Class B. Each class
has its own sales charge and expense structure. Please read the
information below carefully to help you decide which share class is
best for you.
CLASS A AT A GLANCE
o Front-end load -- there is an initial sales charge of 4.50% or
less (5.00% or less in the case of CitiSelect Folio 400 and
CitiSelect Folio 500)
o Lower sales charge rates for larger investments
o Annual distribution/service fee of up to 0.50%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE
o No initial sales charge
o The deferred sales charge declines from 4.50% (5.00% in the case
of CitiSelect Folio 400 and CitiSelect Folio 500) to 1.00% over
five years, and is eliminated if you hold your shares for six
years or more
o Annual distribution/service fee of up to 0.75% (1.00% in the case
of CitiSelect Folio 400 and CitiSelect Folio 500)
o Automatic conversion to Class A shares after 8 years
WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/ SERVICE FEES
that are paid under a 12B-1 PLAN. These are fees, also called
12B-1 FEES, that are deducted from Fund assets and are used to
compensate those financial professionals who sell fund shares and
provide ongoing services to shareholders and to pay other marketing
and advertising expenses. Because you pay these fees during the whole
period that you own the shares, over time you may pay more than if you
had paid other types of sales charges. For this reason, you should
consider the effects of 12b-1 fees as well as sales loads when
choosing a share class.
SALES CHARGES -- CLASS A SHARES
o Class A shares are sold at net asset value plus a front-end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The tables below show
the rate of sales charge that you pay, depending on the amount
that you purchase.
o The tables below also show the amount of broker/dealer
compensation that is paid out of the sales charge. This
compensation includes commissions and other fees that financial
professionals who sell shares of the Funds receive. The
distributor keeps up to approximately 10% of the sales charge
imposed on Class A shares. Financial professionals that sell Class
A shares will also receive the service fee payable on Class A
shares at an annual rate equal to 0.50% of the average daily net
assets represented by the Class A shares sold by them.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 100, CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
- ------------------------------------------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
OFFERING YOUR AS A % OF
AMOUNT OF YOUR INVESTMENT PRICE INVESTMENT OFFERING PRICE
..................................................................................................................
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.05%
..................................................................................................................
$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 2.50% 2.56% 2.25%
..................................................................................................................
$250,000 to less than $500,000 1.50% 1.52% 1.35%
..................................................................................................................
$500,000 or more none* none* up to 1.00%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
- -----------------------------------------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
OFFERING YOUR AS A % OF
AMOUNT OF YOUR INVESTMENT 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 below.
</TABLE>
o After the initial sales charge is deducted from your investment,
the balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain
circumstances, as described in "Sales Charge Waivers or
Reductions" below. 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.
o If you invest at least $500,000 in a Fund, you do not pay any
initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) of 1% of the purchase price, or the
sale price, whichever is less, if you sell within the first year.
Under certain circumstances, waivers may apply. Other policies
regarding the application of the CDSC are the same as for Class B
shares. Please read the discussion below on Class B shares for
more information.
PLEASE NOTE: If you owned Fund shares prior to January 4, 1999, you
may exchange those shares into Class A shares of other CitiFunds and
other mutual funds managed by Citibank without paying any sales
charge, subject to verification. Shares subject to the waiver include
shares purchased prior to January 4, 1999, and any shares that
represent capital appreciation or reinvestment of dividends or capital
gains distributions on those shares.
SALES CHARGES -- CLASS B SHARES
o 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 tables
below show the rates that you pay, as a percentage of your
original purchase price (or the sale price, whichever is less),
depending upon when you sell your shares.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 100, CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
- --------------------------------------------------------------------------------
SALE DURING CDSC ON SHARES BEING SOLD
................................................................................
1st year since purchase 4.50%
................................................................................
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
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
o Financial professionals selling Class B shares receive a
commission based upon the purchase price of the Class B shares
that they sell, except for sales exempt from the CDSC. The
commission is 4.00% of the purchase price of Folio 100, Folio 200
and Folio 300 Class B shares, and 4.50% of the purchase price of
Folio 400 and Folio 500 Class B shares. Financial professionals
also receive a service fee at an annual rate equal to 0.25% of the
average daily net assets represented by the Class B shares that
they have sold.
o When you sell your shares, the CDSC will be based on either your
original purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of
dividends and capital gain distributions or on shares representing
capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Funds will
always use the Class B shares with the lowest CDSC to fill your
sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares
for Class B shares of certain CitiFunds -- any payment will be
deferred until your Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from
another Fund or from another fund managed or advised by Citibank,
the date of your initial investment will be used as the basis of
the CDSC calculations. If the rate of CDSC on the shares exchanged
was higher than the rate of CDSC on your Fund shares, you will be
charged the higher rate when you sell your Fund shares.
From time to time, the Fund's distributor or Citibank may provide
additional promotional bonuses, incentives or payments to dealers that
sell shares of the Funds. These may include payments for travel
expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and their guests to locations
within and outside the United States for meetings or seminars of a
business nature. In some instances, these bonuses, incentives or
payments may be offered only to dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
The Funds' distributor may make payments for distribution and/ or
shareholder servicing activities out of its past profits and other
available sources. The distributor may also make payments for
marketing, promotional or related expenses to dealers. The amount of
these payments is determined by the distributor and may vary. Citibank
may make similar payments under similar arrangements.
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you qualify
for certain waivers or elect to participate in certain programs. These
include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers,
including certain tax-exempt organizations, certain employee
benefit plans, certain entities or persons with a qualifying
affiliation or relationship with Citibank, and, under certain
circumstances, investors using the proceeds of a redemption from
another mutual fund for their purchase of Class A shares. Further
information about eligible purchasers may be found in the Appendix
to this prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other
retirement accounts.
o Redemptions made under a Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or reduction and
how the programs work by requesting a copy of the Funds' Statement of
Additional Information, or by consulting with your account
representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares approximately
eight years after purchase. If you acquired your shares through an
exchange, the date of your initial investment will be used to
determine your conversion date. You will receive the same dollar
amount of Class A shares as the Class B shares converted. The price of
Class A shares may be higher than Class B shares at the time of
conversion, because of the lower expenses of Class A shares.
Therefore, you may receive fewer Class A shares than the number of
Class B shares converted.
HOW TO BUY SHARES
Shares of the CitiSelect Portfolios are offered continuously and
purchases may be made Monday through Friday, except on certain
holidays. Shares may be purchased from the Funds' distributor or a
broker-dealer or financial institution (called a Service Agent) that
has entered into a service agreement with the distributor concerning
the Funds. Please specify whether you are purchasing Class A or Class
B shares. If you fail to specify, Class A shares will be purchased for
your account. The Funds and the distributor have the right to reject
any purchase order or cease offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is
calculated after your order is received and accepted by the Funds'
transfer agent. NAV is the value of a single share of a Fund. If you
are purchasing Class A shares, the applicable sales charge will be
added to the cost of your shares.
Your Service Agent will not transmit your purchase order for Fund
shares until it receives the purchase price in federal or other
immediately available funds. If you pay by check, the Service Agent
transmits the order when the check clears, usually within two business
days.
If you are a customer of a Service Agent, your Service Agent will
establish and maintain your account and be the shareholder of record.
If you wish to transfer your account, you may only transfer it to
another financial institution that acts as a Service Agent, or you may
set up an account directly with the Fund's transfer agent.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
Each Fund calculates its NAV every day the New York Stock Exchange is
open for trading. This calculation is made at the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
time. NAV is calculated separately for each class of shares. NAV may
be higher for Class A shares because Class A shares bear lower
expenses. On days when the financial markets in which the Funds invest
close early, NAV will be calculated as of the close of those markets.
Each Fund's securities are valued primarily on the basis of market
quotations. When market quotations are not readily available, the
Funds may price securities at fair value. Fair value is determined in
accordance with procedures approved by the Funds' Board of Trustees.
When the Funds use the fair value pricing method, a security may be
priced higher or lower than if the Funds had used a market quotation
to price the same security.
For foreign securities the values are translated from the local
currency into U.S. dollars using current exchange rates. If trading in
the currency is restricted, the Funds use a rate believed to reflect
the currency's fair value in U.S. dollars. Trading may take place in
foreign securities held by a Fund on days when the Fund is not open
for business. As a result, a Fund's NAV may change on days on which it
is not possible to purchase or sell shares of the Fund. If events
materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time
when a Fund's NAV is calculated, the securities may be valued at fair
value in accordance with procedures established by and under the
general supervision of the Board of Trustees.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The price will
be the NAV the next time it is calculated after your redemption
request in proper form has been received by the Funds' transfer agent.
If your shares are subject to a CDSC, the applicable charge will be
deducted from your sale proceeds.
You may make redemption requests in writing through the Funds'
transfer agent or, if you are a customer of a Service Agent, through
your Service Agent. If your account application permits, you may also
make redemption requests by calling the Funds' transfer agent or, if
you are a customer of a Service Agent, your Service Agent. Each
Service Agent is responsible for promptly submitting redemption
requests to the Funds' transfer agent. You are responsible for making
sure that your redemption request is in proper form.
Each Fund has a Systematic Withdrawal Plan which allows you to
automatically withdraw a specific dollar amount from your account on a
regular basis. You must have at least $10,000 in your account to
participate in this program. Under the Plan, if your shares are
subject to a CDSC, you may only withdraw up to 10% of the value of
your account in any year, but you will not be subject to a CDSC on the
shares withdrawn under the Plan. For more information, please contact
the Funds' transfer agent or, if you are a customer of a Service
Agent, your Service Agent.
If you own both Class A and Class B shares, and want to sell shares,
you should specify which class of shares you wish to sell. If you fail
to specify, Class A shares will be redeemed first.
When you sell your Class B shares, they will be redeemed so as to
minimize your CDSC. Shares on which the CDSC is not payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions
will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds normally on
the business day after you sell your shares but generally within seven
days. Your redemption proceeds may be delayed for up to ten days if
your purchase was made by check. Your redemption proceeds may also be
delayed, or your right to receive redemption proceeds suspended, if
the New York Stock Exchange is closed (other than on weekends or
holidays) or trading is restricted, or if an emergency exists. Each
Fund has the right to pay your redemption proceeds by giving you
securities instead of cash. In that case, you may incur costs (such as
brokerage commissions) converting the securities into cash. You should
be aware that you may have to pay taxes on your redemption proceeds.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Funds permit you
to repurchase Class A shares in the same Fund, up to the dollar amount
of the shares redeemed, without paying any sales charges. To take
advantage of this reinstatement privilege, you must notify the Fund in
writing at the time you wish to repurchase the shares.
EXCHANGES
You may exchange Fund shares for shares of the same class of each
other Fund and certain CitiFunds. You may also be able to exchange
your Class A shares for shares of certain CitiFunds that offer only a
single class of shares, unless your Class A shares are subject to a
CDSC. You may not exchange Class B shares for shares of CitiFunds that
offer only a single class of shares. You may acquire Fund shares
through an exchange from another fund managed by Citibank.
You may place exchange orders through the transfer agent or, if you
are a customer of a Service Agent, through your Service Agent. You may
place exchange orders by telephone if your account application
permits. The transfer agent or your Service Agent can provide you with
more information, including a prospectus for any fund that may be
acquired through an exchange.
The exchange will be based on the relative NAVs of both funds when
they are next determined after your order is accepted by the Funds'
transfer agent, subject to any applicable sales charge. You cannot
exchange shares until a Fund has received payment in federal funds for
your shares.
When you exchange your Class A shares, you generally will be required
to pay the difference, if any, between the sales charge payable on the
shares to be acquired in the exchange and the sales charge paid in
connection with your original purchase of Class A shares. However, if
your Fund shares were purchased prior to January 4, 1999, you will not
have to pay a sales charge when you exchange those shares for Class A
shares, subject to confirmation through a check of appropriate records
and documentation.
When you exchange your Class B shares, you will not pay any initial
sales charge, and no CDSC is imposed when your Class B shares are
exchanged for Class B shares of certain CitiFunds that are made
available by your Service Agent. However, you may be required to pay a
CDSC when you sell those shares. The length of time that you owned
Fund shares will be included in the holding period of your new Class B
shares.
The exchange privilege may be changed or terminated at any time. You
should be aware that you may have to pay taxes on your exchange.
DIVIDENDS
Each Fund pays substantially all of its net income (if any) from
dividends and interest to its shareholders of record as a dividend on
the following schedule:
For CITISELECT FOLIO 100, monthly.
For CITISELECT FOLIO 200 and CITISELECT FOLIO 300, quarterly during
the months of March, June, September and December.
For CITISELECT FOLIO 400 and CITISELECT FOLIO 500, annually during the
month of December.
Each Fund's net realized short-term and long-term capital gains, if
any, will be distributed to the Fund's shareholders at least annually,
in December. Each Fund may also make additional distributions to
shareholders to the extent necessary to avoid the application of the
4% non-deductible excise tax on certain undistributed income and net
capital gains of mutual funds.
Unless you choose to receive your dividends in cash, you will receive
them as full and fractional additional shares of the applicable class.
There is no sales charge on these shares.
TAX MATTERS
This discussion of taxes is for general information only. You should
consult your own tax adviser about your particular situation, and the
status of your account under state and local laws.
TAXABILITY OF DISTRIBUTIONS. You will normally have to pay federal
income taxes on the distributions you receive from a Fund, whether you
take the distributions in cash or reinvest them in additional shares.
Distributions designated by a Fund as capital gain dividends are
taxable as long-term capital gains. Other distributions are generally
taxable as ordinary income. Some distributions paid in January may be
taxable to you as if they had been paid the previous December. Each
year each Fund will mail you a report of your distributions for the
prior year and how they are treated for federal tax purposes.
Fund distributions will reduce the distributing Fund's net asset value
per share. As a result, if you buy shares just before a Fund makes a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
BACKUP WITHHOLDING. The account application asks each new investor to
certify that the investor'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. A Fund may
be required to withhold (and pay over to the IRS for your credit) 31%
of certain distributions and proceeds it pays you if you fail to
provide this information or otherwise violate IRS regulations.
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of
the U.S., each Fund will withhold U.S. federal income tax
payments at the rate of 30% (or any lower applicable treaty
rate) on taxable dividends and other payments subject to
withholding taxes. Distributions received from a Fund by non-
U.S. persons also may be subject to tax under the laws of
their own jurisdictions.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it
is considered a taxable event for you. Depending on the purchase price
and the sale price of the shares you sell or exchange, you may have a
gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transactions.
<PAGE>
-----------------------
MANAGEMENT OF THE FUNDS
-----------------------
Management of the Funds
MANAGER
The CitiSelect Portfolios draw on the strength and experience of
Citibank. Citibank is the investment manager of each Fund, and subject
to policies set by the Funds' Trustees, Citibank makes investment
decisions. Citibank has been managing money since 1822. With its
affiliates, it currently manages more than $327 billion in assets
worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of
Citicorp and Travelers Group, Inc., which was completed on
October 8, 1998. "CitiSelect" is a registered trademark of
Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the
Funds. However, in making investment decisions for the Funds, Citibank
does not obtain or use material inside information acquired by any
division, department or affiliate of Citibank in the course of those
relationships. Citibank and its affiliates may have loans outstanding
that are repaid with proceeds of securities purchased by the Funds.
Richard Goldman, a Vice President of Citibank, has been the overall
portfolio manager of the Funds since January 1999 and is responsible
for determining asset allocations, supervising and monitoring the
performance of the Citibank personnel described below who are
responsible for the Funds' securities, and supervising and monitoring
the performance of the subadvisers. Mr. Goldman's investment
experience is discussed below.
The following subadvisers currently manage the following kinds of
securities for the Funds:
SMALL CAP VALUE SECURITIES: Franklin Advisory Services, Inc.,
One Parker Plaza, 9th Floor, Fort Lee, New Jersey 07024.
Franklin Advisory Services is a registered investment adviser.
Together with its affiliates, Franklin Advisory Services, Inc.
managed assets totalling $220.2 billion and advised 116 U.S.-
based open-end mutual funds as of December 31, 1998. William
J. Lippman, President of Franklin Advisory Services or its
predecessor since 1988, has been responsible for the daily
management of U.S. small cap value securities since the Funds'
inception.
LARGE CAP VALUE SECURITIES: SSBC Fund Management, Inc. (formerly known
as Mutual Management Corp.) (SSBC), 388 Greenwich Street, New York,
New York 10013. SSBC, an affiliate of Citibank, is a registered
investment adviser that, as of December 31, 1998, managed
approximately $27 billion in assets. SSBC took over responsibility for
the daily management of the Funds' large cap value securities on
January 22, 1999. Prior to this date, Miller Anderson & Sherrerd, LLP,
was responsible for the daily management of large cap value
securities. SSBC is a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc., which in turn is a wholly-owned subsidiary of Citigroup
Inc. Frances A. Root, a Managing Director of SSBC and a Senior Equity
Portfolio Manager since 1994, has been responsible for the daily
management of large cap value securities since January 22, 1999. She
joined Smith Barney Capital Management in 1992 as a Vice President and
Equity Portfolio Manager and in 1994 became a Managing Director of
SSBC and a Senior Equity Portfolio Manager. Formerly, she was with
Shearson Lehman Advisors as a Vice President and Portfolio Manager for
seven years and prior to that, with E.F. Hutton & Company, Inc.
INTERNATIONAL EQUITY SECURITIES: Hotchkis and Wiley, 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017-5400.
Hotchkis and Wiley was founded in 1980 and is a division of Merrill
Lynch Asset Management, L.P., a registered investment adviser. As of
February 28, 1999, Hotchkis and Wiley managed approximately $14.3
billion in assets. Harry W. Hartford and Sarah H. Ketterer have been
responsible for the daily management of international equity
securities since the Funds' inception. Mr. Hartford joined Hotchkis
and Wiley in 1994, where he has been responsible for international
investment research in the U.K. and Europe, and where he has served on
the Investment Policy Committee. Prior to joining Hotchkis and Wiley,
Mr. Hartford was with The Investment Bank of Ireland (now Bank of
Ireland Asset Management), as a Senior Manager, where he gained 10
years of experience in both international and global equity
management. Ms. Ketterer, a Managing Director and Portfolio Manager,
joined Hotchkis and Wiley in 1990, where she has been responsible for
international investment research in the Asia-Pacific, Japan and
Canadian regions, and where she has served on the Investment Policy
Committee. Prior to joining Hotchkis and Wiley in 1990, Ms. Ketterer
was an associate with Bankers Trust and an analyst at Dean Witter.
HIGH YIELD DEBT SECURITIES: Salomon Brothers Asset Management Inc
(SBAM Inc), 7 World Trade Center, New York, New York 10048. SBAM Inc,
an affiliate of Citibank, has been a registered investment adviser
since 1989. Together with SBAM affiliates in London, Frankfurt, Tokyo
and Hong Kong, SBAM manages approximately $27 billion in assets. SBAM
Inc began to manage the Funds' high yield bond securities on May 1,
1999, the date on which this asset class was added to the Funds. SBAM
Inc is an indirect wholly owned subsidiary of Citigroup Inc. Beth A.
Semmel, a Managing Director of SBAM Inc since 1996 and a member of its
Investment Policy Committee, is responsible for the daily management
of the Fund's high yield securities. Ms. Semmel is a Portfolio Manager
and Senior Analyst responsible for SBAM Inc's high yield portfolios,
for evaluating high yield securities and for covering consumer-related
industries. Ms. Semmel joined SBAM Inc in May 1993 as a Vice President
and Analyst. Formerly, Ms. Semmel was with Morgan Stanley Asset
Management as a high yield bond analyst, and prior to that, with
Kidder Peabody as an equity analyst.
FOREIGN FIXED INCOME SECURITIES: Salomon Brothers Asset Management
Limited (SBAML), Victoria Plaza, 111 Buckingham Palace Road, London
SWIS OSB, U.K. SBAML, an affiliate of Citibank, began operations in
1990 and is a U.S. registered investment adviser. Together with SBAML
affiliates in New York, Frankfurt, Tokyo and Hong Kong, SBAM manages
approximately $27 billion in assets. SBAML took over responsibility
for the daily management of the Funds' foreign fixed income securities
on March 1, 1999. Prior to that date, Pacific Investment Management
Company was responsible for the daily management of the Funds' foreign
fixed income securities. SBAML is a wholly owned indirect subsidiary
of Citigroup Inc. David Scott is the portfolio manager. Mr. Scott is a
Managing Director, Portfolio Manager and Investment Policy Committee
Member of SBAML. Mr. Scott joined SBAML in April 1994 as Director and
Head of Global Fixed Income responsible for their global bond products
and has been a Portfolio Manager for SBAML and SBAM Inc since that
time. Prior to joining SBAML, Mr. Scott worked for four years at JP
Morgan Investment Management where he had responsibility for global
and non-dollar portfolios, and prior to that, for Mercury Asset
Management.
The following individuals at Citibank are responsible for the
management of all other Fund investments:
LARGE CAP GROWTH SECURITIES: Richard Goldman, Vice President, has been
responsible first as a co-manager and then as manager, for the daily
management of large cap growth securities since the Funds' inception.
Mr. Goldman is a Senior Investment Officer and lead portfolio manager
for the Focused Growth Large Cap Funds and has been a member of the
Large Cap Growth Team since June 1994. He joined Citibank in 1985 as
an assistant portfolio manager, working on quantitative portfolio
strategies. Within the investment unit, he has had responsibilities in
both product development and portfolio management. From September 1988
through June 1994, Mr. Goldman served as Director of Institutional
Investor Relations, where his responsibilities included managing
Citicorp's relationships with its investors and rating agencies. He
currently manages, or co-manages, approximately $6 billion of total
assets at Citibank.
SMALL CAP GROWTH SECURITIES: Marguerite Wagner, Vice President and
Senior Portfolio Manager, has been responsible for the daily
management of the Funds' small cap growth securities since January
1999. Ms. Wagner joined Citibank in 1985. Since 1995, she has had
portfolio management and research analyst responsibility for an
internal mid-cap common trust fund and private equity managed
accounts. From 1992 through the end of 1994, Ms. Wagner was a member
of the small capitalization equity management group of Citibank Global
Asset Management. Prior to 1992, she managed portfolios for the
Private Banking Group of Citibank.
DOMESTIC INVESTMENT GRADE FIXED INCOME SECURITIES: Mark Lindbloom,
Vice President, has been responsible for the daily management of
domestic investment grade fixed income securities since the Funds'
inception, and has been a portfolio manager for fixed income
securities since joining Citibank in 1986. Mr. Lindbloom has more than
19 years of investment management experience. Prior to joining
Citibank, Mr. Lindbloom was a Fixed Income Portfolio Manager with
Brown Brothers Harriman & Co., where he managed fixed income assets
for discretionary corporate portfolios.
Citibank is responsible for recommending the hiring, termination or
replacement of any subadviser and for supervising and monitoring the
performance of any subadviser. Certain of the Funds' underlying mutual
funds have applied for exemptive relief from the Securities and
Exchange Commission which would permit those funds to employ other or
additional subadvisers without shareholder approval. The requested
exemptive relief also would permit the terms of existing subadvisory
agreements to be changed and the employment of existing subadvisers to
be continued after events that would otherwise cause an automatic
termination of a subadvisory agreement, in each case without
shareholder approval if those changes or continuation are approved by
the underlying funds' Board of Trustees. There is no assurance that
the SEC will grant the requested relief. This prospectus will be
revised and shareholders notified if a Subadviser is changed or added.
MANAGEMENT FEES
For the services Citibank and the subadvisers provided under
management agreements for each of the Funds (other than CitiSelect
Folio 100) and their underlying mutual funds for their fiscal years
ended October 31, 1998, Citibank and the subadvisers received a total
of 0.75% of each Fund's average daily net assets. The annual
management fee for CitiSelect Folio 100 is 0.50% of that Fund's
average daily net assets for its then current fiscal year.
<PAGE>
--------------------
MORE ABOUT THE FUNDS
--------------------
More About the Funds
The Funds' goals, principal investments and risks are summarized in
FUNDS AT A GLANCE. More information on investments, investment
strategies and risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Funds' principal investment strategies are the strategies that, in
the opinion of Citibank, are most likely to achieve each Fund's
investment goal. Of course, there can be no assurance that any Fund
will achieve its goal. Please note that each Fund may also use
strategies and invest in securities that are not described below but
that are described in the Statement of Additional Information. Of
course, a Fund's portfolio managers may decide, as a matter of
investment strategy, not to use the investments and investment
techniques described below and in the Statement of Additional
Information at any particular time. Each Fund's goal and strategies
may be changed without shareholder approval.
Each Fund is a diversified asset allocation mutual fund that invests
in a mix of equity and fixed income securities. Each Fund's asset mix
is designed by Citibank to offer a different level of potential return
with a corresponding amount of risk. For example, equity securities
typically have greater potential for growth of capital than fixed
income securities, and have the potential to outperform fixed income
securities over the long term. However, equity securities generally
are more volatile. Fixed income securities sometimes go up in value
when equity securities go down. As a result, a Fund investing a higher
percentage of its assets in equity securities may, over time, have the
potential to generate higher returns than a Fund investing more in
fixed income securities, but it may be more volatile and a riskier
investment. In making asset allocations, Citibank studies the long
term performance and relationships between these asset classes. Each
Fund's asset mix is determined by Citibank to be an optimal
combination of stocks and bonds that maximizes potential returns for
the level of risk associated with the Fund's investment goal. Of
course, there can be no assurance that the Funds will perform as
intended.
- ----------------------------------------------------------------------------
ASSET CLASS RANGE*
FIXED
EQUITY INCOME
............................................................................
CITISELECT FOLIO 100 0- 20% 80- 100%
............................................................................
CITISELECT FOLIO 200 20- 40% 60- 80%
............................................................................
CITISELECT FOLIO 300 40- 60% 40- 60%
............................................................................
CITISELECT FOLIO 400 60- 80% 20- 40%
............................................................................
CITISELECT FOLIO 500 75-100% 0- 25%
- ----------------------------------------------------------------------------
* If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income asset class,
and the cash is temporarily invested in short-term money market instruments,
those instruments will be included in the percentage limitations for that
asset class.
Citibank allocates each Fund's assets between equity and fixed income
securities (each of these types of securities is referred to as an
asset class) generally within the percentage ranges provided in the
chart above. However, cash flows into or out of a Fund, or changes in
market valuations, could produce different results. Citibank monitors
each Fund's asset mix daily and conducts quarterly reviews to
determine whether to rebalance the Fund's investments. Rebalancing may
be accomplished over a period of time, subject to any regulatory
restrictions. In seeking to achieve these individual goals, securities
are sold when a Fund needs cash to meet redemptions, or when the
managers' price objective for a security has been met, or when the
managers believe that better opportunities exist, or that a security
no longer fits within the managers' overall strategies for achieving
the Fund's goals.
Citibank may further allocate each Fund's equity securities among
large cap securities, small cap securities and international
securities, and each Fund's fixed income securities among U.S. and
foreign government and corporate bonds and between high yield debt
securities and investment grade debt securities. Of course, Citibank
is not required to allocate each Fund's assets among all of these
types of equity and fixed income securities at all times. These
further allocations are intended to maximize returns while managing
overall volatility. Each asset class and the types of securities in
that class are described below.
MANAGEMENT STYLE. In allocating assets while seeking to maximize
returns for a given risk level, Citibank employs a multi-style,
multi-manager strategy. Citibank believes that there are investment
cycles when securities with particular characteristics, or those
selected based on a particular investment style, outperform other
securities in the same broad asset class.
To implement this strategy, Citibank has recommended that the Funds
employ subadvisers with expertise managing specific types of
securities or managing in a particular style. The following
subadvisers currently manage the following kinds of securities:
- --------------------------------------------------------------------------------
small cap value securities Franklin Advisory Services, Inc.
................................................................................
large cap value securities SSBC Fund Management, Inc.
................................................................................
international equity securities Hotchkis and Wiley
................................................................................
foreign fixed income securities Salomon Brothers Asset Management Limited
................................................................................
high yield debt securities Salomon Brothers Asset Management Inc
- --------------------------------------------------------------------------------
Citibank manages all other kinds of securities, including large cap
growth, small cap growth and domestic investment grade fixed income
securities. Citibank monitors and supervises the activities of the
subadvisers and may terminate the services of any subadviser at any
time.
Each Fund invests in multiple underlying mutual funds, or Portfolios.
Each Portfolio invests directly in securities in a particular type,
such as large cap growth securities and related investments, or
foreign fixed income securities and related investments. See
"Investment Structure" on page 31.
THE EQUITY CLASS
Each Fund generally diversifies its equity securities among large cap
issuers, small cap issuers and international issuers. Citibank
believes that longer term investors with diversified equity portfolios
have a higher probability of achieving their investment goals with
lower levels of volatility than those who have not diversified. The
mix of equity securities varies from Fund to Fund. For example,
CitiSelect Folio 400 currently emphasizes securities of small cap
issuers and international issuers to a greater extent than CitiSelect
Folios 200 and 300. CitiSelect Folio 500 currently emphasizes
securities of small cap issuers and international issuers to a greater
extent than CitiSelect Folio 400. The types of equity securities
emphasized may change over time and in different market conditions,
and there is no requirement that each Fund invest in each type of
equity security.
LARGE CAP ISSUERS. Large cap issuers are those which have market
capitalizations, at the time the securities are purchased, within the
top 1,000 stocks of the equity market. At December 31, 1998, issuers
within the top 1,000 stocks had market capitalizations of at least
$1.9 billion. In selecting large cap securities, the Funds emphasize
securities issued by established companies with stable operating
histories. Each Fund may invest in both large cap growth stocks and in
large cap value stocks.
SMALL CAP ISSUERS. Small cap issuers are those which have market
capitalizations, at the time the securities are purchased, below the
top 1,000 stocks of the equity market. At December 31, 1998, the
maximum capitalization of issuers in this category was below $1.9
billion. These stocks may include stocks in the Russell 2000 Index,
which is an index of small cap stocks. Small cap companies generally
have negligible dividend yields and high levels of volatility. They
may offer more profit opportunity during certain economic conditions
than large and medium sized companies, but they also involve special
risks. Each Fund may invest in both small cap growth stocks and small
cap value stocks.
INTERNATIONAL ISSUERS. International issuers are those based outside
the United States. The Funds emphasize securities included in the MSCI
EAFE Index, which contains securities of companies located in Europe,
Australia and the Far East. The Funds also may invest in emerging
market equity securities. There may be investment opportunities in
overseas markets not present in the U.S., and market performance in
the U.S. and abroad may not be the same or highly correlated. However,
overseas investments, particularly in emerging markets, involve
special risks.
See "Risks" for more information about the risks associated with
investing in equity securities.
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WHAT ARE EQUITY SECURITIES?
EQUITY SECURITIES generally represent an ownership interest (or a
right to acquire an ownership interest) in an issuer, and include
COMMON STOCKS, SECURITIES CONVERTIBLE INTO COMMON STOCKS, PREFERRED
STOCKS, WARRANTS for the purchase of stock and DEPOSITARY RECEIPTS
(receipts which represent the right to receive the securities of
foreign issuers deposited in a U.S. bank or a local branch of a
foreign bank). While equity securities historically have been more
volatile than fixed income securities, they historically have produced
higher levels of total return.
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THE FIXED INCOME CLASS
Each Fund generally diversifies its fixed income securities
among U.S. and non-U.S. investment grade corporate debt
obligations, securities issued by the U.S. government and its
agencies and instrumentalities, investment grade securities
issued by foreign governments, and U.S. and non-U.S. high
yield debt securities. The mix of fixed income securities
varies from Fund to Fund. There is no requirement that each
Fund invest in each type of fixed income security.
The Funds may invest in securities with all maturities, including long
bonds (10+ years), intermediate notes (3 to 10 years) and short-term
notes (1 to 3 years).
GOVERNMENT SECURITIES. U.S. government securities are high
quality instruments issued or guaranteed as to principal and
interest by the U.S. government or by an agency or
instrumentality of the U.S. government. U.S. government
securities have minimal credit risk. Securities issued or
guaranteed as to principal and interest by foreign governments
or agencies or instrumentalities of foreign governments (which
include securities of supranational agencies) also may provide
opportunities for income with minimal credit risk. Even though
government securities have minimal credit risk, they still
fluctuate in value when interest rates change.
INVESTMENT GRADE CORPORATE BONDS. Corporate bonds are used by U.S. and
foreign corporate issuers to borrow money from investors, and may have
varying maturities. Bonds also have varying degrees of quality and
varying degrees of sensitivity to changes in interest rates.
Investment grade securities are those rated Baa or better by Moody's,
BBB or better by Standard & Poor's or which Citibank or a subadviser
believes to be of comparable quality. Securities rated Baa or BBB and
securities of comparable quality may have speculative characteristics.
The values of lower quality bonds generally fluctuate more than higher
quality bonds. Investment in bonds of U.S. and foreign corporate
issuers may provide higher levels of current income than government
securities.
HIGH YIELD DEBT OBLIGATIONS. High yield debt obligations, also called
"junk bonds," are fixed income securities that are generally rated in
the lower rating categories, if rated, and many are rated below
investment grade. The Funds' high yield securities may include debt
securities of U.S. and non-U.S. issuers rated in medium or lower
rating categories or determined to be of comparable quality. Some of
the Funds' securities may be rated, at the time of purchase, as low as
Caa by Moody's or CCC by S&P or may be deemed to be of comparable
quality. Medium and low rated and comparable unrated securities offer
yields that fluctuate over time but that generally are superior to the
yields offered by higher rated securities. However, these securities
also involve significantly greater risks, including greater risk of
default in the payment of interest and principal and greater price
volatility, than higher rated securities. No Fund anticipates
investing more than 25% of its assets in securities rated below
investment grade.
See "Risks" for more information about the risks associated with
investing in fixed income securities.
-----------------------------------------------------------------------
WHAT ARE FIXED INCOME SECURITIES?
FIXED INCOME SECURITIES generally represent a debt obligation of an
issuer, and include BONDS, SHORT-TERM OBLIGATIONS and MORTGAGE-BACKED
and ASSET-BACKED SECURITIES. Fixed income securities, in general,
offer a fixed stream of cash flow. Most bond investments focus on
generating income. The potential for capital appreciation is normally
a secondary objective. The value of fixed income securities generally
goes up when interest rates go down, and down when rates go up. The
value of these securities also fluctuates based on other market and
credit factors.
-----------------------------------------------------------------------
DERIVATIVES. The Funds may use derivatives in order to protect (or
"hedge") against changes in interest rates, currency fluctuations or
the prices of securities held or to be bought. The Funds may also use
a wide variety of derivatives for non-hedging purposes, to enhance
potential gains or generate income. In addition, the Funds may use
derivatives to manage the maturity or duration of fixed income
securities. Derivatives that the Funds may use include futures
(including bond, interest rate and stock index futures), options on
securities and on futures (including options on interest rate and
stock index futures), interest rate swaps, equity swaps, and other
types of available swap agreements, including caps, collars and
floors. The Funds may also enter into forward foreign currency
contracts, purchase foreign currency futures, or purchase or write
options on foreign currencies, or enter into currency swaps and other
similar transactions. Derivatives may be used alone or in combination
with other derivatives. In some cases, the derivatives purchased by
the Funds are standardized contracts traded on commodities exchanges
or boards of trade. This means that the exchange or board of trade
guarantees counterparty performance. Over-the-counter derivatives,
however, are not guaranteed. Derivatives may not be available on terms
that make economic sense (for example, they may be too costly). The
Fund's ability to use derivatives may also be limited by tax
considerations.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce substantial
losses or gains for a Fund, well beyond the Fund's initial investment.
-----------------------------------------------------------------------
WHAT ARE SHORT SALES?
When a Fund's portfolio manager anticipates that the price of a
security will decline, the manager may enter into an agreement to sell
the security even though the Fund does not own it. This technique is
called SELLING SHORT. The Fund will then borrow the same security from
a broker or other institution in order to complete the sale. The Fund
must later purchase the security in order to return the security
borrowed. If the portfolio manager has predicted accurately, the price
at which the Fund buys the security will be less than the price at
which the Fund earlier sold the security, creating a profit for the
Fund. However, if the price of the security goes up during this
period, the Fund will be forced to buy the security for more than its
sale price, causing a loss to the Fund. Non-U.S. currencies may also
be sold short.
-----------------------------------------------------------------------
DEFENSIVE STRATEGIES. The Funds may, from time to time, take temporary
defensive positions that are inconsistent with the Funds' principal
investment strategies in attempting to respond to adverse market,
political or other conditions. When doing so, the Funds may invest
without limit in high quality money market and other short-term
instruments, and may not be pursuing their investment goals.
INVESTMENT STRUCTURE. The Funds do not invest directly in securities.
Instead, each Fund invests in multiple Portfolios. Each Portfolio
invests in securities in a particular asset class, in particular types
of securities or in securities of particular maturities or duration.
Currently the CitiSelect Portfolios invest in Large Cap Growth
Portfolio, Large Cap Value Portfolio, Small Cap Growth Portfolio,
Small Cap Value Portfolio, U.S. Fixed Income Portfolio, High Yield
Portfolio, International Portfolio and Foreign Bond Portfolio. Each
Portfolio is a mutual fund with its own investment goals and policies.
The Portfolios buy, hold and sell securities in accordance with these
goals and policies. Of course, there can be no assurance that the
Funds or the Portfolios will achieve their goals.
Each Fund may withdraw its investment in any Portfolio at any time,
and will do so if the Fund's Trustees believe it to be in the best
interest of the Fund's shareholders. Each Portfolio may change its
investment goals and certain of its investment policies and
restrictions without approval by its investors, but the Portfolio will
notify the Fund and its other investors at least 30 days before
implementing any change in its investment goals. A change in
investment goals, policies or restrictions may cause a Fund to
withdraw its investment in a Portfolio. If the Fund were to withdraw,
the Fund could either invest in another mutual fund or pooled
investment vehicle or invest directly in securities. Upon withdrawal,
the Fund could receive securities from a Portfolio instead of cash,
causing the Fund to incur brokerage, tax and other charges or leaving
it with securities which may or may not be readily marketable or
widely diversified.
Each Fund bears its share of each Portfolio's fees and expenses. The
total fees of each Fund and the underlying Portfolios are reflected in
the fee tables in "Funds at a Glance".
Certain investment restrictions of each Portfolio cannot be changed
without approval by the investors in that Portfolio. Of course, a Fund
could be outvoted, or otherwise adversely affected, by other investors
in a Portfolio.
Each of the Funds is actively managed. Although the portfolio managers
attempt to minimize portfolio turnover, from time to time a Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities
may produce capital gains, which, when distributed, are taxable to
investors. Active trading may also increase the amount of commissions
or mark-ups the Funds pay to brokers or dealers when they buy and sell
securities. The "Financial Highlights" section of this prospectus
shows the portfolio turnover rate of each Fund and for the past fiscal
year, of each underlying portfolio in which the Funds invest.
Citibank and the subadvisers may use brokers or dealers for Fund
transactions who also provide brokerage and research services to the
Funds or other accounts over which Citibank, the subadvisers or their
affiliates exercise investment discretion. Each Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a broker or
dealer who provides these brokerage and research services a commission
for executing a portfolio transaction which is higher than the
commission another broker or dealer would have charged. However, the
Funds will "pay up" only if Citibank or the subadviser determines in
good faith that the higher commission is reasonable in relation to the
brokerage and research services provided, viewed in terms of either
the particular transaction or all of the accounts over which that
adviser exercises investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should
consider the risks you will assume. Certain of these risks are
described below. More information about risks appears in the Funds'
Statement of Additional Information. Remember that you may receive
little or no return on your investment in the Funds. You may lose
money if you invest in these Funds.
The risks of investing in each Fund vary depending on the securities
it holds and the investment strategies it uses. For example, Funds
investing more of their assets in fixed income securities may be more
susceptible to interest rate risk and credit risk than Funds investing
more of their assets in equity securities. Conversely, Funds investing
more of their assets in equity securities may be more susceptible to
greater price volatility than Funds investing more of their assets in
fixed income securities. Please remember that an investment in the
Funds is not a deposit of Citibank and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK. This is the risk that the prices of securities will rise
or fall due to changing economic, political or market conditions, or
due to a company's individual situation. The value of the Funds'
shares will change daily as the value of their underlying securities
change. This means that your shares of a Fund may be worth more or
less when you sell them than when you bought them.
It is also possible that the Funds will not perform as intended. For
example, CitiSelect Folio 100 is expected to be the least volatile of
the Funds. However, under certain market conditions this Fund could be
more volatile than one or more of the other Funds.
EQUITY SECURITIES. Equity securities are subject to market risk that
historically has resulted in greater price volatility than exhibited
by fixed income securities.
GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the
prices of growth securities typically fall. The success of a Fund's
investment in growth securities depends largely on the portfolio
managers' skill in assessing the growth potential of companies. An
investment in growth securities may underperform certain other stock
investments during periods when growth stocks are out of favor.
VALUE INVESTING. The success of a Fund's value investment strategy
depends largely on the portfolio managers' skill in identifying
securities of companies that are in fact undervalued, but have good
longer term business prospects. A security may not achieve its
expected value because the circumstances causing it to be underpriced
worsen (causing the security's price to decline further) or do not
change or because the portfolio managers are incorrect in their
determinations. In addition, an investment in value stocks may
underperform certain other stock investments (growth stocks, for
example) during periods when value stocks are out of favor.
SMALLER COMPANIES. The securities of smaller capitalization companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns because of
limited financial or management resources. Also, there may be less
publicly available information about small cap companies. As a result,
their prices may be volatile, causing the Funds' share prices to be
volatile.
INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise. Longer
term obligations are usually more sensitive to interest rate changes.
A change in interest rates could cause the Funds' share prices to go
down.
CREDIT RISK. Some issuers may not make payments on debt securities
held by the Funds. Or, an issuer may suffer adverse changes in its
financial condition that could lower the credit quality of a security,
leading to greater volatility in the price of the security and in
shares of a Fund. A change in the quality rating of a bond or other
security can also affect the security's liquidity and make it more
difficult for the Fund to sell. The lower quality debt securities in
which the Funds may invest are more susceptible to these problems than
higher quality obligations, and the prices of these securities may be
more volatile.
JUNK BONDS. Credit risk is more pronounced with so-called "junk bonds"
which are debt obligations that are rated below investment-grade. The
risk of default may be greater and the market for these securities may
be less active, making it more difficult to sell the securities at
reasonable prices, and also making valuation of the securities more
difficult. A Fund may incur additional expenses if an issuer defaults
and the Fund tries to recover some of its losses in a bankruptcy or
other similar proceeding.
FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o These risks may include expropriation of assets, confiscatory
taxation, withholding taxes on dividends and interest paid on fund
investments, currency exchange controls and other limitations on
the use or transfer of Fund assets and political or social
instability.
o Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S.
markets. Rapid increases in money supply may result in speculative
investing, contributing to volatility. Also, equity securities may
trade at price-earnings multiples that are higher than those of
comparable U.S. companies, and that may not be sustainable. As a
result, there may be rapid changes in the value of foreign
securities.
o Foreign markets may offer less protection to investors. Enforcing
legal rights may be difficult, costly and slow. There may be
special problems enforcing claims against foreign governments.
o Since foreign securities often trade in currencies other than the
U.S. dollar, changes in currency exchange rates will affect a
Fund's net asset value, the value of dividends and interest
earned, and gains and losses realized on the sale of securities.
An increase in the U.S. dollar relative to these other currencies
will adversely affect the value of the Fund. In addition, some
foreign currency values may be volatile and there is the
possibility of governmental controls on currency exchanges or
governmental intervention in currency markets. Controls or
intervention could limit or prevent a Fund from realizing value in
U.S. dollars from its investment in foreign securities.
o Each Fund may invest in issuers located in emerging, or
developing, markets.
o Emerging or developing countries are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income.
o All of the risks of investing in foreign securities are heightened
by investing in developing countries.
o The markets of developing countries have been more volatile than
the markets of developed countries with more mature economies.
PREPAYMENT RISK. The issuers of debt securities held by a Fund may be
able to prepay principal due on the securities, particularly during
periods of declining interest rates. A Fund may not be able to
reinvest that principal at attractive rates, reducing income to the
Fund, and the Fund may lose any premium paid. In addition, rising
interest rates may cause prepayments to occur at slower than expected
rates. This effectively lengthens the maturities of the affected
securities, making them more sensitive to interest rate changes and
the Fund's share price more volatile. Mortgage-backed securities are
particularly susceptible to prepayment risk, and their prices may be
very volatile.
CONVERTIBLE SECURITIES. Convertible securities, which are debt
securities that may be converted into stock, are subject to the market
risk of stocks, and, like other debt securities, are also subject to
interest rate risk and the credit risk of their issuers. Call
provisions may allow the issuer to repay the debt before it matures.
DERIVATIVES. The Funds' use of derivatives, particularly when used for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets; causing
the Funds' share prices to go down. In addition, each Fund's ability
to use derivatives successfully depends on its portfolio managers'
ability to accurately predict movements in stock prices, interest
rates, currency exchange rates or other economic factors and the
availability of liquid markets. If the portfolio managers' predictions
are wrong, or if the derivatives do not work as anticipated, the Fund
could suffer greater losses than if the Fund had not used derivatives.
When the Fund invests in over-the-counter derivatives, there is also
the risk that a counterparty may fail to honor its contract.
In some instances, a Fund's use of derivatives may have the effect of
leveraging the Fund. Leveraging adds increased risks to a Fund,
because the Fund's losses may be out of proportion to the amount
invested in the instrument -- a relatively small investment may lead
to much greater losses.
SHORT SALES. The Funds may engage in short sales. Losses from
short sales may be unlimited.
EURO CONVERSION. Each Fund may invest in securities of issuers in
European countries. Certain European countries have joined the
European Economic and Monetary Union (EMU). Each EMU participant's
currency began a conversion into a single European currency, called
the euro, on January 1, 1999, to be completed by July 1, 2002. The
consequences of the euro conversion for foreign exchange rates,
interest rates and the value of European securities held by the Funds
are presently unclear. European financial markets, and therefore, the
Funds could be adversely affected if the euro conversion does not
continue as planned or if a participating country chooses to withdraw
from the EMU. The Funds could also be adversely affected if the
computing, accounting and trading systems used by their service
providers are not capable of processing transactions related to the
euro. These issues may negatively affect the operations of the
companies in which the Funds invest as well.
YEAR 2000. The Funds could be adversely affected if the computer
systems used by the Funds or their service providers are not
programmed to accurately process information on or after January 1,
2000. The Funds, and their service providers, are making efforts to
resolve any potential Year 2000 problems. While it is likely these
efforts will be successful, the failure to implement any necessary
modifications could have an adverse impact on the Funds. The Funds
also could be adversely affected if the issuers of securities held by
the Funds do not solve their Year 2000 problems, or if it costs them
large amounts of money to solve these problems. Funds that invest in
foreign securities may be particularly susceptible to these potential
Year 2000 problems.
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Financial Highlights
The financial highlights table is intended to help you understand the Funds'
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single Class A Fund share. The total returns in
the table represent the rate that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Funds' financial statements, is included in the annual report
which is incorporated by reference into the Statement of Additional Information
and which is available upon request.
<TABLE>
<CAPTION>
CITISELECT FOLIO 200 CONSERVATIVE CITISELECT FOLIO 300 BALANCED
...........................................................................................................................
Year Ten Months June 17, Year Ten Months June 17,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $11.33 $10.50 $10.00 $11.71 $10.66 $10.00
...........................................................................................................................
Income From Operations:
Net investment income 0.240 0.138 0.128 0.187 0.101 0.088
Net realized and
unrealized gain
(loss) on investments 0.068++ 0.722 0.506 (0.036) 0.974 0.671
...........................................................................................................................
Total from operations 0.308 0.860 0.634 0.151 1.075 0.759
...........................................................................................................................
Less Distributions From:
Net investment income (0.172) (0.007) (0.112) (0.138) (0.002) (0.075)
Net realized gain on
investments (0.186) (0.023) (0.022) (0.243) (0.023) (0.024)
In excess of net income -- -- -- -- -- --
In excess of realized
gains on investments -- -- -- -- -- --
...........................................................................................................................
Total from distributions (0.358) (0.030) (0.134) (0.381) (0.025) (0.099)
...........................................................................................................................
Net Asset Value, end of
period $11.28 $11.33 $10.50 $11.48 $11.71 $10.66
...........................................................................................................................
Total return 2.84% 8.21%** 6.38%** 1.38% 10.09%** 7.61%**
...........................................................................................................................
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $206,313 $166,203 $102,775 $340,455 $325,193 $195,428
Ratio of expenses to
average net assets (A) 1.50% 1.50%* 1.50%* 1.50% 1.50%* 1.50%*
Ratio of net investment
income to average net
assets 2.70% 2.88%* 2.84%* 2.09% 2.30%* 2.38%*
Portfolio turnover (B) 121%+++ 177% 147% 132%+++ 154% 132%
Note: If agents of the Funds and the agents of respective Portfolios had not voluntarily agreed to waive a portion of their
fees, and the Sub-administrator not assumed expenses for the periods indicated, the net investment income per share and the
ratios would have been as follows:
Net investment income
per share $0.238 $0.126 $0.076 $0.187 $0.100 $0.060
RATIOS:
Expenses to average net
assets (A) 1.52% 1.75%* 2.66%* 1.50% 1.52%* 2.26%*
Net investment income
to average net assets 2.68% 2.63%* 1.68%* 2.09% 2.28%* 1.62%*
(A) Includes allocated expenses for the periods indicated from the respective portfolios.
(B) Portfolio turnover represents, for CitiSelect Folios 200 and 300, the rates of portfolio activity of Asset Allocation
Portfolios 200 and 300, respectively, the underlying portfolios through which the Funds invested until October 31, 1997.
* Annualized.
** Not annualized.
+ Commencement of Operations.
++ The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss)
on investments for the period ended due to the timing of sales of Fund shares in relation to fluctuating market value of
the investments.
+++ For the fiscal year ended October 31, 1998, the Funds invested all of their investable assets in Large Cap Growth
Portfolio, Large Cap Value Portfolio, Small Cap Growth Portfolio, Small Cap Value Portfolio, International Portfolio,
Intermediate Income Portfolio, Foreign Bond Portfolio and Short-Term Portfolio, whose portfolio turnover rates were 50%,
61%, 51%, 47%, 43%, 98%, 693% and 0%, respectively at October 31, 1998. The Funds currently invest in High Yield
Portfolio and U.S. Fixed Income Portfolio, and no longer invest in Short-Term Portfolio and Intermediate Income
Portfolio.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT FOLIO 400 GROWTH CITISELECT FOLIO 500 GROWTH PLUS
...........................................................................................................................
Year Ten Months June 17, Year Ten Months September 3,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $12.01 $10.82 $10.00 $12.08 $10.69 $10.00
...........................................................................................................................
Income From Operations:
Net investment income 0.090 0.037 0.042 0.053 0.044 0.019
Net realized and
unrealized gain
(loss) on investments (0.417) 1.183 0.841 (0.786) 1.346 0.701
...........................................................................................................................
Total from operations (0.327) 1.220 0.883 (0.733) 1.390 0.720
...........................................................................................................................
Less Distributions From:
Net investment income (0.079) (0.003) (0.029) (0.083) -- (0.019)
Net realized gain on
investments (0.244) (0.027) 0.034) (0.154) -- --
In excess of net income -- -- -- -- -- (0.001)
In excess of realized
gains on investments -- -- -- -- -- (0.010)
...........................................................................................................................
Total from
distributions (0.323) (0.030) (0.063) (0.237) -- (0.030)
...........................................................................................................................
Net Asset Value, end of
period $11.36 $12.01 $10.82 $11.11 $12.08 $10.69
...........................................................................................................................
Total return (2.73)% 11.28%** 8.84%** (6.14)% 13.00%** 7.20%**
...........................................................................................................................
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $410,350 $455,747 $253,556 $163,540 $202,823 $85,072
Ratio of expenses to
average net assets (A) 1.47% 1.65%* 1.75%* 1.48% 1.72%* 1.75%*
Ratio of net investment
income to average net
assets 1.26% 1.39%* 1.39%* 0.72% 0.88%* 1.09%*
Portfolio turnover (B) 62%++ 151% 130% 171%++ 92% 27%
Note: If agents of the Funds and the agents of respective Portfolios had not voluntarily agreed to waive a portion of their
fees, and the Sub-administrator not assumed expenses for the periods indicated, the net investment income per share and the
ratios would have been as follows:
Net investment income
per share $0.090 $0.037 $0.028 $0.053 $0.040 $0.001
RATIOS:
Expenses to average net
assets (A) 1.47% 1.65%* 2.20%* 1.48% 1.80%* 2.80%*
Net investment income
to average net assets 1.26% 1.39%* 0.93%* 0.72% 0.80%* 0.04%*
(A) Includes allocated expenses for the periods indicated from the respective portfolios.
(B) Portfolio turnover represents, for CitiSelect Folios 400 and 500, the rates of portfolio activity of Asset Allocation
Portfolios 400 and 500, respectively, the underlying portfolios through which the Funds invested until October 31, 1997.
* Annualized.
** Not annualized.
+ Commencement of Operations.
++ For the fiscal year ended October 31, 1998, the Funds invest all of their investable assets in Large Cap Growth
Portfolio, Large Cap Value Portfolio, Small Cap Growth Portfolio, Small Cap Value Portfolio, International Portfolio,
Intermediate Income Portfolio, Foreign Bond Portfolio and Short-Term Portfolio, whose portfolio turnover rates were 50%,
61%, 51%, 47%, 43%, 98%, 693% and 0%, respectively at October 31, 1998. The Funds currently invest in High Yield
Portfolio and U.S. Fixed Income Portfolio, and no longer invest in Short-Term Portfolio and Intermediate Income
Portfolio.
</TABLE>
<PAGE>
--------
Appendix
--------
Appendix
CLASS A SHARES -- ELIGIBLE PURCHASERS
Class A shares may be purchased without a sales charge by the
following eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A 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 and its
affiliates (including immediate families of any 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 a Fund's
Board of Trustees or by the Board of Trustees of any CitiFund
the terms of which entitle those shareholders to purchase
shares of a Fund or any 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 a Fund or in any combination of the Funds
and CitiFunds must total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] 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:
o 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
o all investments made during a calendar month will age one
month on the last day of the month and each subsequent
month
o any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another Fund or any CitiFund and deducted from the
redemption proceeds when the exchanged shares are
subsequently redeemed (assuming the contingent deferred
sales charge is then payable)
o 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 Fund or a CitiFund), if:
o the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually
imposed), and
o 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 a financial
executive 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:
o the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
financial executive 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
o the redemption is made within 60 days prior to the
investment in a Fund, and
o 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
The Statement of Additional Information (SAI) provides more details
about the Funds and their policies. The SAI is incorporated by
reference into this prospectus and is legally part of it.
Additional information about each Fund's investments is available in
the Funds' Annual and Semi-Annual Reports to Shareholders. In the
Funds' Annual Report, you will find a discussion of the market
conditions and investment strategies that significantly affected each
Fund's performance.
The Annual and Semi-Annual Reports for the Funds list their portfolio
holdings and describe their performance.
To obtain free copies of the SAI and the Annual and SemiAnnual Reports
or to make other inquiries, please call toll-free 1-800-625-4554.
The SAI is also available from the Securities and Exchange Commission.
You can find it on the SEC Internet site at http://www.sec.gov.
Information about the Funds (including the SAI) can also be reviewed
and copied at the SEC's Public Reference Room in Washington, DC. You
can get information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. You can receive copies of this
information by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
SEC File Number: 811-4006 CSP599
<PAGE>
Rule 497(c) File Nos. 2-90518 and 811-4006
Statement of
Additional Information
May 3, 1999
CITISELECT(R) FOLIO 100 INCOME
CITISELECT(R) FOLIO 200 CONSERVATIVE
CITISELECT(R) FOLIO 300 BALANCED
CITISELECT(R) FOLIO 400 GROWTH
CITISELECT(R) FOLIO 500 GROWTH PLUS
CitiFunds Trust I (formerly known as "Landmark Funds I") (the "Trust") is an
open-end management investment company which was organized as a business trust
under the laws of the Commonwealth of Massachusetts on April 13, 1984. The Trust
offers shares of CitiSelect(R) Folio 100 Income, CitiSelect(R) Folio 200
Conservative, CitiSelect(R) Folio 300 Balanced, CitiSelect(R) Folio 400 Growth
and CitiSelect(R) Folio 500 Growth Plus (collectively, the "Funds"), to which
this Statement of Additional Information relates, as well as shares of one other
series. The address and telephone number of the Trust are 21 Milk Street,
Boston, Massachusetts 02109, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
1. The Trust ............................................................ 2
2. Investment Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 3
4. Investment Restrictions .............................................. 23
5. Performance Information and Advertising .............................. 24
6. Determination of Net Asset Value; Valuation of Securities ............ 26
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs ................................................. 27
8. Management ........................................................... 34
9. Portfolio Transactions ............................................... 42
10. Description of Shares, Voting Rights and Liabilities ................. 43
11. Tax Matters .......................................................... 45
12. Certain Bank Regulatory Matters ...................................... 46
13. Financial Statements ................................................. 47
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Funds' Prospectus, dated May 3, 1999, by which shares of the Funds are
offered. This Statement of Additional Information should be read in
conjunction with the Prospectus. This Statement of Additional Information
incorporates by reference the financial statements described on page 47
hereof. These financial statements can be found in the Funds' Annual Report to
Shareholders. An investor may obtain copies of the Funds' Prospectus and
Annual Report without charge by calling 1-800-625-4554.
THE 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
organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 13, 1984. The Trust was called Landmark Funds I until its
name was changed effective March 2, 1998. This Statement of Additional
Information relates to five funds offered by the Trust -- CitiSelect Folio 100
Income, CitiSelect Folio 200 Conservative, CitiSelect Folio 300 Balanced,
CitiSelect Folio 400 Growth and CitiSelect Folio 500 Growth Plus (collectively,
the "Funds"). Prior to May 3, 1999 the Funds were known as CitiSelect Folio 100,
CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400, and CitiSelect
Folio 500.
The Trust seeks the investment objective of each Fund by investing all of
its investable assets in multiple underlying investment companies or series
thereof. Currently, these investment companies are Large Cap Value Portfolio,
Small Cap Value Portfolio, U.S. Fixed Income Portfolio, International
Portfolio, Foreign Bond Portfolio, High Yield Portfolio, Large Cap Growth
Portfolio and Small Cap Growth Portfolio (collectively, the "Portfolios"). The
Portfolios (other than Large Cap Growth Portfolio, High Yield Portfolio and
Small Cap Growth Portfolio, which are series of The Premium Portfolios) are
series of Asset Allocation Portfolios (collectively, with The Premium
Portfolios, the "Portfolio Trusts"). The Portfolio Trusts are open-end,
diversified management investment companies organized as New York trusts.
Under the Investment Company Act of 1940, as amended (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.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser and
also provides certain administrative services to each of the Funds. Citibank
manages the investments of the Funds from day to day in accordance with each
Fund's investment objective and policies. The selection of investments for the
Funds and the way they are managed depend on the conditions and trends in the
economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by CFBDS,
Inc., the Funds' distributor ("CFBDS" or the "Distributor").
2. INVESTMENT OBJECTIVES AND POLICIES
Each Fund invests in a mix of equity and fixed income securities that is
designed by Citibank to offer a different level of potential return with a
different amount of risk. The investment objective (or goal) of each Fund is
as follows:
The investment objective of CitiSelect Folio 100 Income is as high a level
of current income as is consistent with a dominant emphasis on fixed income
securities and a small allocation to equity securities.
The investment objective of CitiSelect Folio 200 Conservative is as high a
total return over time as is consistent with a primary emphasis on fixed income
securities, and a secondary emphasis on equity securities.
The investment objective of CitiSelect Folio 300 Balanced is as high a total
return over time as is consistent with a balanced emphasis on equity and fixed
income securities.
The investment objective of CitiSelect Folio 400 Growth is as high a total
return over time as is consistent with a primary emphasis on equity securities,
and a secondary emphasis on fixed income securities.
The investment objective of CitiSelect Folio 500 Growth Plus is as high a
total return over time as is consistent with a dominant emphasis on equity
securities and a small allocation to fixed income securities.
The investment objective of each Fund may be changed by its Trustees
without approval by that Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that any Fund will achieve its investment objective.
The Prospectus contains a discussion of the principal investment
strategies of each Fund and the principal risks of investing in each Fund. The
following supplements the information contained in the Prospectus concerning
the investment policies and techniques of each Fund.
CitiSelect Folio 100 Income is expected to be the least volatile of the five
Funds and is designed for the investor who is seeking current income with
relatively low risk but with some growth potential. CitiSelect Folio 200
Conservative is designed for the investor who is seeking relatively low risk
provided by substantial investments in fixed income securities, but who also
seeks some capital growth. CitiSelect Folio 300 Balanced is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment component to temper volatility. CitiSelect Folio 400 Growth and
CitiSelect Folio 500 Growth Plus are designed for the investor willing and able
to take higher risks in the pursuit of long- term capital appreciation.
CitiSelect Folio 500 Growth Plus is expected to be the most volatile of the five
Funds, and is designed for investors who can withstand greater market swings to
seek potential long-term rewards. CitiSelect Folio 400 Growth is designed for
investors seeking long-term rewards, but with less volatility.
The Trust may withdraw the investment of any Fund from one or more of its
underlying 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 policies. Except as otherwise expressly noted, the
policies described above and those described below are not fundamental and may
be changed without shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
The Funds may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described below and in the
Prospectus. The selection of investments and the utilization of investment
techniques depend on, among other things, the Manager's and, as applicable,
the Subadvisers' investment strategies for the Funds, conditions and trends in
the economy and financial markets and investments being available on terms
that, in the Manager's or a Subadviser's opinion, make economic sense.
BANK OBLIGATIONS
Each of the Funds may invest in bank obligations, i.e., certificates of
deposit, time deposits (including Eurodollar time deposits) and bankers'
acceptances and other short-term debt obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and
foreign branches of foreign banks, domestic savings and loan associations and
other banking institutions. A bankers' acceptance is a bill of exchange or
time draft drawn on and accepted by a commercial bank. It is used by
corporations to finance the shipment and storage of goods and to furnish
dollar exchange. Maturities are generally six months or less. A certificate of
deposit is a negotiable interest-bearing instrument with a specific maturity.
Certificates of deposit are issued by banks and savings and loan institutions
in exchange for the deposit of funds and normally can be traded in the
secondary market prior to maturity. A time deposit is a non-negotiable receipt
issued by a bank in exchange for the deposit of funds. Like a certificate of
deposit, it earns a specified rate of interest over a definite period of time;
however, it cannot be traded in the secondary market. Time deposits with a
withdrawal penalty are considered to be illiquid securities.
COMMERCIAL PAPER
Each Fund may invest in commercial paper, which is unsecured debt of
corporations usually maturing in 270 days or less from its date of issuance.
OTHER INVESTMENT COMPANIES
Each Fund invests in shares of underlying investment companies or
Portfolios in accordance with Section 12(d)(1)(G) of the 1940 Act. Each
Portfolio may invest its assets in closed-end investment companies as
permitted by applicable law.
SECURITIES RATED BAA OR BBB
Each Fund may purchase securities rated Baa by Moody's Investor's Service,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") and
securities of comparable quality, which may have poor protection of payment of
principal and interest. These securities are often considered to be
speculative and involve greater risk of default or price changes than
securities assigned a higher quality rating due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more
than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
LOWER RATED DEBT SECURITIES
The Funds may invest in lower rated fixed income securities (commonly
known as "junk bonds"), to the extent described in the Prospectus. The lower
ratings of certain securities held by the Funds reflect a greater possibility
that adverse changes in the financial condition of the issuer or in general
economic conditions, or both, or an unanticipated rise in interest rates, may
impair the ability of the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely payment of
interest and principal would likely make the values of such securities held by
the Funds more volatile and could limit the Fund's ability to sell its
securities at prices approximating the values the Funds had placed on such
securities. In the absence of a liquid trading market for securities held by
it, a Fund at times may be unable to establish the fair value of such
securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which
may be better or worse than the rating would indicate. In addition, the rating
assigned to a security by Moody's or S&P (or by any other nationally
recognized securities rating organization) does not reflect an assessment of
the volatility of the security's market value or the liquidity of an
investment in the security.
Like those of other fixed-income securities, the values of lower rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of fixed
income securities. Conversely, during periods of rising interest rates, the
value of a Fund's fixed-income securities will generally decline. The values
of lower rated securities may often be affected to a greater extent by changes
in general economic conditions and business conditions affecting the issuers
of such securities and their industries. Negative publicity or investor
perceptions may also adversely affect the values of lower rated securities.
Changes by recognized rating services in their ratings of any fixed-income
security and changes in the ability of an issuer to make payments of interest
and principal may also affect the value of these investments. Changes in the
value of portfolio securities generally will not affect income derived from
these securities, but will affect a Fund's net asset value. The Funds will not
necessarily dispose of a security when its rating is reduced below its rating
at the time of purchase. However, the Manager will monitor the investment to
determine whether its retention will assist in meeting the Fund's investment
objective.
Issuers of lower rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such
issuers may not have more traditional methods of financing available to them
and may be unable to repay outstanding obligations at maturity by refinancing.
The risk of loss due to default in payment of interest or repayment of
principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
CALL FEATURES
Certain securities held by a Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by a Fund during a time of declining interest rates, the Fund may not be able
to reinvest the proceeds in securities providing the same investment return as
the securities redeemed.
ZERO-COUPON BONDS AND "PAYMENT-IN-KIND" BONDS
The Funds may invest in "zero-coupon" bonds and "payment-in-kind" bonds.
Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow
the issuer, at its option, to make current interest payments on the bonds
either in cash or in additional bonds. Because zero-coupon and payment-in kind
bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that
pay interest currently. Both zero-coupon and payment-in-kind bonds allow an
issuer to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds paying
interest currently in cash. The Funds are required to accrue interest income
on such investments and to distribute such amounts at least annually to
shareholders even though such bonds do not pay current interest in cash. Thus,
it may be necessary at times for the Funds to liquidate investments in order
to satisfy its dividend requirements.
MORTGAGE-BACKED SECURITIES
Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in
pools of mortgage-related securities differ from other forms of debt
securities which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these
instruments can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only. Although GNMA certificates may offer
yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of
the prepayment feature. For instance, when interest rates decline, the value
of a GNMA certificate likely will not rise as much as comparable debt
securities due to the prepayment feature. In addition, these prepayments can
cause the price of a GNMA certificate originally purchased at a premium to
decline in price to its par value, which may result in a loss.
Each Fund may also invest in collateralized mortgage obligations or
"CMOs," a type of mortgage-backed security. CMOs are securities collateralized
by mortgages, mortgage pass-through certificates, mortgage pay-through bonds
(bonds representing an interest in a pool of mortgages where the cash flow
generated from the mortgage collateral pool is dedicated to bond repayment),
and mortgage-backed bonds (general obligations of the issuers payable out of
the issuers' general funds and additionally secured by a first lien on a pool
of single family detached properties). Many CMOs are issued with a number of
classes or series which have different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until
that portion of such CMO obligations is repaid, investors in the longer
maturities receive interest only. Accordingly, the CMOs in the longer maturity
series are less likely than other mortgage pass-through certificates to be
prepaid prior to their stated maturity. Although some of the mortgages
underlying CMOs may be supported by various types of insurance, and some CMOs
may be backed by GNMA certificates or other mortgage pass-through certificates
issued or guaranteed by U.S. Government agencies or instrumentalities, the
CMOs themselves are not generally guaranteed.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The prices of mortgage-backed securities
may not increase as much as prices of other debt obligations when interest
rates decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates
go up, mortgage-backed securities experience lower rates of prepayment. This
has the effect of lengthening the expected maturity of a mortgage-backed
security. This particular risk, referred to as "maturity extension risk," may
effectively convert a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities. Thus, rising interest rates would not
only likely decrease the value of a Fund's fixed income securities, but would
also increase the inherent volatility of the Fund by effectively converting
short-term debt instruments into long-term debt instruments. As a result,
prices of mortgage-backed securities may decrease more than prices of other
debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Funds may enter into mortgage "dollar roll" transactions pursuant to
which they sell mortgage-backed securities for delivery in the future and
simultaneously contract to repurchase substantially similar securities on a
specified future date. During the roll period, a Fund forgoes principal and
interest paid on the mortgage-backed securities. The Fund is compensated for
the lost principal and interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
However, a Fund takes the risk that the market price of the mortgage-backed
security will drop below the future purchase price. When a Fund uses a
mortgage dollar roll, it is also subject to the risk that the other party to
the agreement will not be able to perform. A "covered roll" is a specific type
of dollar roll for which a Fund establishes a segregated account with liquid
securities equal in value to the securities subject to repurchase by the Fund.
The Funds will invest only in covered rolls.
CORPORATE ASSET-BACKED SECURITIES
Each of the Funds may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receiv-
ables are generally unsecured and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, each of the Funds may
purchase securities that are not registered under the Securities Act of 1933
(the "Securities Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act ("Rule 144A
securities"). However, none of the Funds invests more than 15% of its net
assets (taken at market value) in illiquid investments, which include
securities for which there is no readily available market, securities subject
to contractual restrictions on resale and Rule 144A securities, unless, in the
case of Rule 144A securities, the Board of Trustees of the Trust determines,
based on the trading markets for the specific Rule 144A security, that it is
liquid. The Trustees have adopted guidelines and, subject to oversight by the
Trustees, have delegated to the Manager and to each Subadviser the daily
function of determining and monitoring liquidity of Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in securities for which
there is no readily available market. These illiquid securities may include
privately placed restricted securities for which no institutional market
exists. The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for a Fund to sell them promptly at an acceptable price.
SECURITIES OF NON-U.S. ISSUERS
Each of the Funds may invest in securities of non-U.S. issuers. Investing
in securities of foreign issuers may involve significant risks not present in
domestic investments. For example, the value of such securities fluctuates
based on the relative strength of the U.S. dollar. In addition, there is
generally less publicly available information about foreign issuers,
particularly those not subject to the disclosure and reporting requirements of
the U.S. securities laws. Non-U.S. issuers are generally not bound by uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to domestic issuers. Investments in securities of non-U.S. issuers
also involve the risk of possible adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation, limitation on the
removal of funds or other assets of the Fund, political or financial
instability or diplomatic and other developments which would affect such
investments. Further, economies of other countries or areas of the world may
differ favorably or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. stock markets, while growing in
volume and sophistication, are generally not as developed as those in the
U.S., and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. security trading practices, including
those involving securities settlement where the Fund's assets may be released
prior to receipt of payments, may expose the Fund to increased risk in the
event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, foreign brokerage commissions are generally higher than commissions
on securities traded in the U.S. and may be non-negotiable. In general, there
is less overall governmental supervision and regulation of non-U.S. securities
exchanges, brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of
such investments may be substantially less than their net asset value and that
there would be duplication of investment management and other fees and
expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Funds to make non-U.S. investments. These securities are not usually
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by
a U.S. bank or trust company evidencing ownership of the underlying
securities. EDRs and GDRs are European and global receipts, respectively,
evidencing a similar arrangement.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of
a sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
depositary receipts.
The Funds may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than securities of non-U.S. issuers of the
same class that are not subject to such restrictions.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed upon date within a number of days (usually
not more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or Government agency issues. Under the 1940 Act
repurchase agreements may be considered to be loans by the buyer. A Fund's
risk is limited to the ability of the seller to pay the agreed-upon amount on
the delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although that Fund may incur
certain costs in liquidating this collateral and in certain cases may not be
permitted to liquidate this collateral. All repurchase agreements entered into
by the Funds are fully collateralized, with such collateral being marked to
market daily. In the event of the bankruptcy of the other party to a
repurchase agreement, a Fund could experience delays in recovering either the
securities or cash. To the extent that, in the meantime, the value of the
securities purchased has decreased, the Fund could experience a loss.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by the Fund and the agreement
by the Fund to repurchase the securities at an agreed-upon price, date and
interest payment. When a Fund enters into reverse repurchase transactions,
securities of a dollar amount equal in value to the securities subject to the
agreement will be segregated. The segregation of assets could impair the
Fund's ability to meet its current obligations or impede investment management
if a large portion of the Fund's assets are involved. Reverse repurchase
agreements are considered to be a form of borrowing. In the event of the
bankruptcy of the other party to a reverse repurchase agreement, a Fund could
experience delays in recovering the securities sold. To the extent that, in
the meantime, the value of the securities sold has changed, the Fund could
experience a loss.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers
and other institutional borrowers. Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested
in high quality short-term instruments. Either party has the right to
terminate a loan at any time on customary industry settlement notice (which
will not usually exceed three business days). During the existence of a loan,
a Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and with respect to cash
collateral, would also receive compensation based on investment of cash
collateral (subject to a rebate payable to the borrower) or a fee from the
borrower in the event the collateral consists of securities. Where the
borrower provides a Fund with collateral consisting of U.S. Treasury
obligations, the borrower is also obligated to pay the Fund a fee for use of
the borrowed securities. The Fund, would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to entities deemed by the Manager or a Subadviser to be of good
standing. In addition, a Fund could suffer loss if the borrower terminates the
loan and the Fund is forced to liquidate investments in order to return the
cash collateral to the buyer. The Manager or a Subadviser will make loans only
when, in the judgment of the Manager or Subadviser, the consideration which
can be earned currently from loans of this type justifies the attendant risk.
If the Manager or a Subadviser determines to make loans, it is not intended
that the value of the securities loaned would exceed 30% of the market value
of the respective Fund's total assets.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered
to the Fund at a future date beyond customary settlement time. It is expected
that, under normal circumstances, the applicable Fund would take delivery of
such securities, but the Fund may sell them before the settlement date. In
general, the Fund does not pay for the securities until received and does not
start earning interest until the contractual settlement date. When a Fund
commits to purchase a security on a "when-issued" or on a "forward delivery"
basis, it sets up procedures consistent with Securities and Exchange
Commission policies. Since those policies currently require that an amount of
a Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Funds expect always to
have cash or liquid securities sufficient to cover any commitments or to limit
any potential risk. However, even though the Funds intend to adhere to the
provisions of Securities and Exchange Commission policies, purchases of
securities on such bases may involve more risk than other types of purchases.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that
case, there could be an unrealized loss at the time of delivery. An increase
in the percentage of the Fund's assets committed to the purchase of securities
on a "when-issued" basis may increase the volatility of its net asset value.
SHORT SALES
The Funds may seek to hedge investments or realize additional gains
through short sales. Short sales are transactions in which a Fund sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, a Fund must borrow the security
to make delivery to the buyer. A Fund then is obligated to replace the
security borrowed by purchasing it at the market price at or prior to the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by a Fund. Until the security is replaced, a Fund
is required to repay the lender any dividends or interest that accrue during
the period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. A portion
of the net proceeds of the short sale may be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to
meet margin requirements, until the short position is closed out. A Fund will
also incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the
premiums, dividends, interest or expenses a Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold
short by a Fund over the price at which it was sold short will result in a
loss to the Fund, and there can be no assurance that a Fund will be able to
close out the position at any particular time or at an acceptable price. Thus
a Fund's losses on short sales are potentially unlimited. The Funds may also
engage in short sales of non-U.S. currencies. See "Foreign Currency Exchange
Transactions" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds may engage in foreign currency exchange transactions as an
attempt to protect against uncertainty in the level of future foreign currency
exchange rates or as an attempt to enhance performance.
The Funds may enter into foreign currency exchange transactions to convert
United States currency to foreign currency and foreign currency to United
States currency, as well as convert foreign currency to other foreign
currencies. A Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or uses forward contracts to purchase or sell foreign currencies.
The Funds may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
currency exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a currency at one rate, while offering a lesser rate of exchange should
the Fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
fees or commissions are charged at any stage for trades. A Fund may enter into
forward contracts for hedging and non-hedging purposes, including transactions
entered into for the purposes of profiting from anticipated changes in foreign
currency exchange rates.
Forward contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the futures and
options contracts described herein. A forward contract entered into by a Fund
may involve the purchase or sale, for a fixed amount of U.S. currency, of
another currency. Each of the Funds may also enter into forward contracts for
the purchase or sale, for a fixed amount of a non-U.S. currency, of another
non-U.S. currency.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency
involved in the underlying security transaction, the Fund may be able to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on
which payment is made or received.
When the Manager or a Subadviser believes that the currency of a
particular country may suffer a substantial decline against the U.S. dollar, a
Fund may enter into a forward contract to sell the non-U.S. currency, for a
fixed amount of U.S. dollars. If a Fund owns securities in that currency, the
Manager or Subadviser may enter into a contract to sell the non-U.S. currency
in an amount approximating the value of some or all of the Fund's securities
denominated in such non-U.S. currency. The precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible since the future value of such securities in non-U.S. currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
At the maturity of a forward contract, a Fund will either deliver the non-
U.S. currency or terminate its contractual obligation to deliver the non-U.S.
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
non-U.S. currency. If a Fund engages in an offsetting transaction, the Fund
will incur a gain or a loss (as described below) to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
non-U.S. currency. Should forward prices decline during the period between the
date a Fund enters into a forward contract for the sale of the non-U.S.
currency and the date it enters into an offsetting contract for the purchase
of such currency, the Fund will realize a gain to the extent the selling price
of the currency exceeds the purchase price of the currency. Should forward
prices increase, the Fund will suffer a loss to the extent that the purchase
price of the currency exceeds the selling price of the currency.
Where a Fund enters into a forward contract with respect to securities it
holds denominated in the non-U.S. currency, it is impossible to forecast with
precision the market value of Fund securities at the expiration of the
contract. Accordingly, it may be necessary for a Fund to purchase additional
non-U.S. currency on the spot market if the market value of the security is
less than the amount of non-U.S. currency the Fund is obligated to deliver and
if a decision is made to sell the security and make delivery of such currency.
Conversely, it may be necessary to sell on the spot market some of the non-
U.S. currency received upon the sale of the security if its market value
exceeds the amount of such currency the Fund is obligated to deliver.
When a Fund enters into a forward contract for non-hedging purposes, there
is a greater potential for profit but also a greater potential for loss. For
example, a Fund may purchase a given foreign currency through a forward
contract if the value of such currency is expected to rise relative to the
U.S. dollar or another foreign currency. Conversely, a Fund may sell the
currency through a forward contract if the value of the currency is expected
to decline against the dollar or another foreign currency. The Fund will
profit if the anticipated movements in foreign currency exchange rates occur,
which will increase gross income. Where exchange rates do not move in the
direction or the extent anticipated, however, the Fund may sustain losses
which will reduce its gross income. Such transactions should be considered
speculative and could involve significant risk of loss.
Each of the Funds may also engage in short sales of non-U.S. currencies in
which a Fund would sell a currency that it did not own in anticipation of a
fall in the value of that currency relative to U.S. dollars or another foreign
currency. A Fund may do this even if it does not hold any securities or other
assets denominated in the non-U.S. currency being sold short. In order for the
Fund to deliver the currency sold short, it would be required to purchase the
currency. If the expected decline occurs, the Fund would gain the difference
between the price at which it sold the currency, and the price it paid for the
currency. However, if the price of the currency increases, the Fund would
suffer a loss to the extent that the purchase price of the currency exceeds
the price of the currency it sold short. A Fund's losses on such short sales
are potentially unlimited.
Each Fund has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts and short
sales. Those policies currently require that an amount of a Fund's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment or that the Fund otherwise covers its position in
accordance with applicable regulations and policies.
Each of the Funds may purchase put options on a currency in an attempt to
protect against currency rate fluctuations or to seek to enhance gains. When a
Fund purchases a put option on a currency, the Fund will have the right to
sell the currency for a fixed amount in U.S. dollars, or other currency.
Conversely, where a rise in the value of one currency is projected against
another, the Fund may purchase call options on the currency, giving it the
right to purchase the currency for a fixed amount of U.S. dollars or another
currency. Each Fund may purchase put or call options on currencies, even if
the Fund does not currently hold or intend to purchase securities denominated
in such currencies.
The benefit to the Fund from purchases of currency options will be reduced
by the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options.
The Funds may write options on currencies for hedging purposes or
otherwise in an attempt to achieve their investment objectives. For example,
where a Fund anticipates a decline in the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund may be offset by the
amount of the premium received. If the expected decline does not occur, the
Fund may be required to sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. A Fund could also write call options on a
currency, even if it does not own any securities denominated in that currency,
in an attempt to enhance gains. In that case, if the expected decline does not
occur, the Fund would be required to purchase the currency and sell it at a
loss, which may not be offset by the premium received. As with a short sale of
a security or a currency, the losses in this case could be unlimited.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because
of an increase in the U.S. dollar value of the currency in which the
underlying security is primarily traded, a Fund could write a put option on
the relevant currency which, if rates move in the manner projected, will
expire unexercised and allow the Fund to hedge such increased cost up to the
amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may
be exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on currencies, a Fund also may be required to
forgo all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates. A Fund could also write
put options on a currency, even if it does not own, or intend to purchase, any
securities denominated in that currency. In that case, if the expected
increase does not occur, the Fund would be required to purchase the currency
at a price that is greater than the current exchange rate for the currency,
and the losses in this case could exceed the amount of premium received for
writing the options, and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or
in the over-the-counter market. Each of the Funds may enter into transactions
in options on foreign currencies that are traded in the over-the-counter
market. These transactions are not afforded the protections provided to
traders on organized exchanges or those regulated by the CFTC. In particular,
over-the-counter options are not cleared and guaranteed by a clearing
corporation, thereby increasing the risk of counterparty default. In addition,
there may not be a liquid market on these options, which may prevent a Fund
from liquidating open positions at a profit prior to exercise or expiration,
or to limit losses in the event of adverse market conditions.
The purchase and sale of foreign currency options are subject to the risks
of the availability of a liquid secondary market and counterparty risk, as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible interventions by governmental authorities and the effects of other
political and economic events. In addition, the value of a Fund's positions in
foreign currency options could be adversely affected by (1) other complex
foreign political and economic factors, (2) lesser availability of data on
which to make trading decisions than in the United States, (3) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States or at the applicable Subadviser's
place of business, and (4) imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States.
In addition, because foreign currency transactions occurring in the
interbank market generally involve substantially larger amounts than those
that may be involved in the use of foreign currency options, the Funds may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets, or other markets used by
the Manager or a Subadviser are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that may not be reflected in the U.S. or other markets
used by the Funds.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash and liquid securities in an amount sufficient
to discharge the Fund's obligations with respect to the option, by acquisition
of the non-U.S. currency or of a right to acquire such currency (in the case
of a call option) or the acquisition of a right to dispose of the currency (in
the case of a put option), or in such other manner as may be in accordance
with the requirements of any exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
The Funds may engage in proxy hedges and cross hedges. For example, in a
proxy hedge, a Fund, having purchased a security, would sell a currency whose
value is believed to be closely linked to the currency in which the security
is denominated. Interest rates prevailing in the country whose currency was
sold might be expected to be closer to those in the U.S. and lower than those
of securities denominated in the currency of the original holding. This type
of hedging entails greater risk than a direct hedge because it is dependent on
a stable relationship between the two currencies paired as proxies and the
relationships can be very unstable at times. A Fund may enter into a cross
hedge if a particular currency is expected to decrease against another
currency. Fox example, the Fund would sell the currency expected to decrease
and purchase a currency which is expected to increase against the currency
sold in an attempt to protect against declines in value of the Fund's holdings
denominated in the currency sold.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in
currency exchange rates will affect the value of these receipts. For example,
a decline in the U.S. dollar value of another currency in which securities are
primarily traded will reduce the U.S. dollar value of such securities, even if
their value in the other non-U.S. currency remains constant, and thus will
reduce the value of the receipts covering such securities. A Fund may employ
any of the above described foreign currency hedging techniques to protect the
value of its assets invested in depositary receipts.
Each of the Funds may also purchase and sell foreign currency futures
contracts as more fully discussed under "Futures Contracts" below, and engage
in currency swaps and other similar transactions as more fully discussed under
"Swaps and Related Transactions" below.
Of course, a Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Manager or a
Subadviser. It should be realized that under certain circumstances, the Funds
may not be able to hedge against a decline in the value of a currency, even if
the Manager or a Subadviser deems it appropriate to try to do so, because
doing so would be too costly. It should also be realized that transactions
entered into to protect the value of a Fund's securities against a decline in
the value of a currency (even when successful) do not eliminate fluctuations
in the underlying prices of the securities. Additionally, although hedging
transactions may tend to minimize the risk of loss due to a decline in the
value of the hedged currency, they also tend to limit any potential gain which
might result should the value of such currency increase.
Investors should also be aware of the increased risk to a Fund and its
shareholders when it enters into foreign currency exchange transactions for
non-hedging purposes. Non-hedging transactions in such instruments involve
greater risks and may result in losses which are not offset by increases in
the value of a Fund's other assets. Although a Fund is required to segregate
assets or otherwise cover certain types of transactions, this does not protect
the Fund against risk of loss. Furthermore, the Funds' use of foreign currency
exchange transactions may involve leveraging. Leveraging adds increased risks
to a Fund, because the Fund's losses may be out of proportion to the amount
invested in the instrument--a relatively small investment may lead to much
greater losses.
OPTIONS
Each of the Funds may write call and put options and purchase call and put
options on securities for hedging and nonhedging purposes. Call and put
options written by a Fund will be covered in the manner set forth below, or
the Fund will segregate cash or liquid securities equal to the value of the
securities underlying the option.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of
other securities held in its portfolio. A call option is also covered if a
Fund holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by a Fund
in cash or liquid securities in a segregated account. A put option written by
a Fund is "covered" if the Fund maintains cash or liquid securities with a
value equal to the exercise price in a segregated account or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the difference is maintained by
the Fund in cash or liquid securities in a segregated account. Put and call
options written by a Fund may also be covered in such other manner as may be
in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded, and applicable laws and
regulations. Even if the Fund's obligation is covered, it is subject to the
risk of the full change in value of the underlying security from the time the
option is written until exercise. Covering an option does not protect the Fund
from risk of loss.
When a Fund writes a call option, the Fund, in return for a fee, or
"premium", agrees to sell a security at the exercise price, if the holder
exercises the right to purchase prior to the expiration date of the call
option. If the Fund holds the security in question, the Fund gives up some or
all of the opportunity to profit from the increase in the market price of the
security during the life of the option. The Fund retains the risk of loss
should the price of the security decline. If the option expires unexercised,
the Fund realizes a gain equal to the premium, which may be offset by a
decline in price of the underlying security. If the option is exercised, the
Fund realizes a gain or loss equal to the difference between the Fund's cost
for the underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Fund may terminate a call option it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security
or to write another call on the security, realize a profit on a previously
written call option, or protect a security from being called in an unexpected
market rise. Any profits from closing a purchase transaction may be offset by
a decline in the value of the underlying security. Conversely, because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, if the Fund holds
the underlying security any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by unrealized appreciation of the
underlying security. If the Fund does not hold the underlying security, the
Fund's loss could be unlimited.
A Fund may write put options in an attempt to enhance its current return.
Such option transactions may also be used as a limited form of hedging against
an increase in the price of securities that a Fund plans to purchase. A put
option written by the Fund gives the holder the right to sell, and, in return
for a premium, obligates the Fund to buy, a security at the exercise price at
any time before the expiration date.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Fund may also
receive a return on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a loss
to the Fund, unless the security later appreciates in value. A Fund may
terminate a put option it has written before it expires by a closing purchase
transaction. Any loss from this transaction may be partially or entirely
offset by the premium received on the terminated option.
Each of the Funds may purchase options for hedging purposes or to increase
the Fund's return. When put options are purchased as a hedge against a decline
in the value of portfolio securities, the put options may be purchased at or
about the same time that the Fund purchases the underlying security or at a
later time. If such decline occurs, the put options will permit a Fund to sell
the securities at the exercise price, or to close out the options at a profit.
By using put options in this way, the Fund will reduce any profit it might
otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs. Similarly, when put
options are used for non-hedging purposes, the Fund may make a profit when the
price of the underlying security or instrument falls below the strike price.
If the price of the underlying security or instrument does not fall
sufficiently, the options may expire unexercised and the Fund would lose the
premiums it paid for the option. If the price of the underlying security or
instrument falls sufficiently and the option is exercised, the amount of any
resulting profit will be offset by the amount of premium paid.
Each of the Funds may purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund and the premium would be lost.
Call options may also be purchased in order to increase a Fund's return at
a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a call
option may be sold by a Fund in closing sale transactions, which are sales by
the Fund, prior to the exercise of options that it has purchased, of options
of the same series. Profit or loss from the sale will depend upon whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs. The purchase of call options on securities that a
Fund owns, when a Fund is substantially fully invested, is a form of leverage,
up to the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility.
Each of the Funds may write (sell) call and put options and purchase call
and put options on securities indices. The delivery requirements of options on
securities indices differ from options on securities. Unlike a securities
option, which contemplates the right to take or make delivery of securities at
a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (1) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (2) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in securities index options prior to expiration by entering into a closing
transaction on an exchange or it may allow the option to expire unexercised.
Each of the Funds may cover call options on securities indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration held in a segregated
account) upon conversion or exchange of other securities in its portfolio.
Where a Fund covers a call option on a securities index through ownership of
securities, such securities may not match the composition of the index and, in
that event, the Fund will not be fully covered and could be subject to risk of
loss in the event of adverse changes in the value of the index. A Fund may
also cover call options on securities indices by holding a call on the same
index and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or liquid securities in a
segregated account. A Fund may cover put options on securities indices by
maintaining cash or liquid securities with a value equal to the exercise price
in a segregated account or by holding a put on the same securities index and
in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or where the exercise price of the put held is less than the exercise price of
the put written if the difference is maintained by the Fund in cash or liquid
securities in a segregated account. Put and call options on securities indices
may also be covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option is
traded, and applicable laws and regulations. Investors should be aware that
although a Fund will only write call or put options on securities indices that
are covered, covering an option does not protect the Fund from risk of loss.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Fund has
written a call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, a Fund
assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by a Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset
in part by the premium received for writing the option.
Each of the Funds may purchase put options on securities indices when the
Manager or Subadviser believes that there may be a decline in the prices of
the securities covered by the index. The Fund will realize a gain if the put
option appreciates in excess of the premium paid for the option. If the option
does not increase in value, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs.
A Fund may purchase call options on securities indices to take advantage
of an anticipated broad market advance, or an advance in an industry or market
segment. A Fund will bear the risk of losing all or a portion of the premium
paid if the value of the index does not rise. The purchase of call options on
securities indices when a Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. The
ability of a Fund to engage in closing purchase transactions with respect to
securities index options depends on the existence of a liquid secondary
market. However, no such secondary market may exist, or the market may cease
to exist at some future date, for some options. No assurance can be given that
a closing purchase transaction can be effected when the Manager or a
Subadviser desires that a Fund engage in such a transaction.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether a Fund
realizes a gain or loss from purchasing or writing of options on an index
depends upon movements in the level of prices in the market generally or, in
the case of certain indices, in an industry or market segment, rather than
movements in the price of a particular security. As a result, successful use
by a Fund of options on securities indices is subject to the Manager's or a
Subadviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual securities. When a Fund purchases or writes securities
index options as a hedging technique, the Fund's success will depend upon the
extent to which price movements in the portion of a securities portfolio being
hedged correlate with price movements of the securities index selected.
A Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause
losses, which, in the case of call options written, are potentially unlimited.
The Funds may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call
option writer, for example, is obligated to deliver the underlying stock to
the clearing organization if the option is exercised, and the clearing
organization is then obligated to pay the writer the exercise price of the
option. If a Fund were to purchase a dealer option, however, it would rely on
the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the
Fund, the Fund would lose the premium it paid for the option and the expected
benefit of the transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, a Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when a Fund writes a dealer option, it generally
will be able to close out the option prior to the expiration only by entering
into a closing purchase transaction with the dealer to which the Fund
originally sold the option. Although the Funds will seek to enter into dealer
options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Funds, there can be no
assurance that a Fund will be able to liquidate a dealer option at a favorable
price at any time prior to expiration. The inability to enter into a closing
transaction may result in material losses to a Fund. Until a Fund, as an OTC
call option writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used to cover the
written option until the option expires or is exercised. This requirement may
impair a Fund's ability to sell portfolio securities or, with respect to
currency options, currencies at a time when such sale might be advantageous.
In the event of insolvency of the other party, the Fund may be unable to
liquidate a dealer option.
Each of the Funds may purchase and write options on foreign currencies as
more fully described in "Foreign Currency Exchange Transactions" above. Each of
the Funds may also purchase or write call options on futures contracts as more
fully described in "Options on Futures Contracts" below.
The Funds' use of options may involve leveraging. Leveraging adds
increased risks to a Fund, because the Fund's losses may be out of proportion
to the amount invested in the instrument--a relatively small investment may
lead to much greater losses.
FUTURES CONTRACTS
Each of the Funds may enter into futures contracts, including bond futures
contracts, interest rate futures contracts, stock index futures contracts and/
or foreign currency futures contracts. Such investment strategies may be used
for hedging purposes and for nonhedging purposes, subject to applicable law.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the
United States have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. Futures contracts may also be traded on markets outside the
U.S.
Futures contracts based on debt securities provide for the delivery and
acceptance of securities, although such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases
or sells a futures contract. At the same time such a purchase or sale is made,
the Fund must provide cash or securities as a deposit ("initial deposit")
known as "margin." The initial deposit required will vary, but may be as low
as 1% or less of a contract's face value. Daily thereafter, the futures
contract is valued through a process known as "marking to market," and the
Fund may receive or be required to pay additional "variation margin" as the
futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into. Interest
rate futures, which are typically based on shorter-term interest rates, such
as overnight to six-month time periods, settle in cash only rather than by
delivery of the underlying instrument.
A Fund may purchase or sell interest rate futures contracts or bond
futures contracts to attempt to protect the Fund from fluctuations in interest
rates, to manage the effective maturity or duration of the Fund's portfolio in
an effort to reduce potential losses, or in an effort to enhance potential
gain, without actually buying or selling debt securities. For example, if the
Fund owned long-term bonds and interest rates were expected to increase, the
Fund might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as if the Fund sold
bonds that it owned, or as if the Fund sold longer-term bonds and purchased
shorter-term bonds. If interest rates did increase, the value of the Fund's
debt securities would decline, but the value of the futures contracts would
increase, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. Similar results could be accomplished by
selling bonds, or by selling bonds with longer maturities and investing in
bonds with shorter maturities. However, by using futures contracts, the Fund
avoids having to sell its securities.
Bond futures may be used for nonhedging purposes. For example, even if the
Fund were not trying to protect the value of any bonds held by it, if the
Manager or a Subadviser anticipates that interest rates are about to rise,
depressing future prices of bonds, the Manager or Subadviser may sell bond
futures short, closing out the position later at a lower price, if the future
prices fall, as expected. If the prices do not fall, the Fund would
experience a loss and such loss may be unlimited.
Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
purchase would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
Although futures on individual equity securities are not available in
United States markets, futures contracts on individual equity securities may
be available in foreign markets, and may be purchased or sold by the Funds.
Each of the Funds may buy and sell stock index futures contracts to
attempt to increase investment return, to gain stock market exposure while
holding cash available for investments and redemptions, or to protect against
a decline in the stock market.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at the price agreed upon when the
contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100
Index were $180, one contract would be worth $18,000 (100 units x $180). The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if a Fund enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date,
the Fund will gain $400 (100 units x gain of $4) reduced by transaction costs.
If the Fund enters into a futures contract to sell 100 units of the stock
index at a specified future date at a contract price of $180 and the S&P 100
Index is at $182 on that future date, the Fund will lose $200 (100 units x
loss of $2) increased by transaction costs.
Positions in index futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures.
Each of the Funds may purchase and sell foreign currency futures contracts
to attempt to protect its current or intended investments from fluctuations in
currency exchange rates or, for non-hedging purposes, in an attempt to benefit
from such fluctuations. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the cost
of foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant. A
Fund may sell futures contracts on a foreign currency, for example, where it
holds securities denominated in such currency and it anticipates a decline in
the value of such currency relative to the dollar. In the event such decline
occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. A Fund may also sell futures contracts in a foreign currency even
if it does not hold securities denominated in such currency, if it anticipates
a decline in the value of such currency.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where the Fund purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired
instead decline, the Fund will sustain losses on its futures position which
could reduce or eliminate the benefits of the reduced cost of portfolio
securities to be acquired. The Fund could also purchase futures contracts on a
currency if it expected the currency to rise in value, even if the Fund did
not anticipate purchasing securities denominated in that currency.
Although the use of futures for hedging, if correctly used, may minimize
the risk of loss due to a decline in the value of the hedged position (e.g.,
if a Fund sells a futures contract to protect against losses in the debt
securities held by the Fund), they do not eliminate the risk of loss and at
the same time the futures contract limits any potential gain which might
result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a Fund's
investments through transactions in futures contracts depends on the degree to
which movements in the value of the securities underlying such contracts
correlate with movements in the value of the Fund's securities. If the
security underlying a futures contract is different than the security being
hedged, they may not move to the same extent or in the same direction. In that
event, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by
gains on the Fund's other investments or, alternatively, the gains on the
hedging transaction might not be sufficient to offset losses on the Fund's
other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, even where a Fund enters into futures transactions
other than for hedging purposes, the effectiveness of its strategy may be
affected by lack of correlation between changes in the value of the futures
contracts and changes in value of the underlying securities, currencies or
indices.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures contract was originally entered into. There can be no assurance
that a liquid secondary market will exist for any particular futures contract
at any specific time. In that event, it may not be possible to close out a
position held by the Fund, which could require the Fund to purchase or sell
the instrument underlying the futures contract or to meet ongoing variation
margin requirements. The inability to close out futures positions also could
have an adverse impact on the ability effectively to use futures transactions
for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Each contract market on which futures contracts are traded
has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert
with others. The trading of futures contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or a Subadviser's investment judgment about the general direction of
interest rates, equity markets, or other economic factors is incorrect, the
Fund's overall performance may be poorer than if any such contract had not
been entered into. For example, if a Fund entered into a futures contract in
the belief that interest rates would increase, and interest rates decrease
instead, the Fund will have offsetting losses in its futures positions.
Similarly, if a Fund purchases futures contracts expecting a decrease in
interest rates and interest rates instead increased, the Fund will have losses
in its futures positions which will increase the amount of the losses on the
securities in its portfolio which will also decline in value because of the
increase in interest rates. In addition, in such situations, if the Fund has
insufficient cash, the Fund may have to sell bonds from its investments to
meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so.
CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. Generally speaking, CFTC regulations prohibit a Fund from
purchasing or selling futures contracts (other than for bona fide hedging
transactions) if, immediately thereafter, the sum of the amount of initial
margin required to establish that Fund's non-hedging futures positions and the
premiums required to establish positions in options on futures, would exceed
5% of that Fund's net assets. These limitations apply only to instruments
regulated by the CFTC, and may not apply to all of the Funds' transactions in
futures contracts.
Each Fund will comply with this CFTC requirement if applicable. In
addition, an amount of cash or liquid securities will be maintained by each
Fund in a segregated account so that the amount so segregated, plus the
applicable margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract, or a
Fund will otherwise "cover" its positions in accordance with applicable
policies and regulations.
The use of futures contracts may expose a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases a Fund's
potential for both gain and loss.
OPTIONS ON FUTURES CONTRACTS
Each of the Funds may purchase and write options to buy or sell futures
contracts in which the Fund may invest. Such investment strategies may be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract, in
the case of a put option, at a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. Upon exercise of the
option by the holder, the contract market clearinghouse establishes a
corresponding short position for the writer of the option, in the case of a
call option, or a corresponding long position in the case of a put option. In
the event that an option is exercised, the parties will be subject to all the
risks associated with the trading of futures contracts, such as payment of
initial and variation margin deposits. In addition, the writer of an option on
a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profits or loss on the transaction.
Options on futures contracts that are written or purchased by a Fund on
U.S. exchanges are traded on the same contract market as the underlying
futures contract, and, like futures contracts, are subject to regulation by
the CFTC and the performance guarantee of the exchange clearinghouse. In
addition, options on futures contracts may be traded on foreign exchanges.
Each of the Funds may cover the writing of call options on futures
contracts (a) through purchases of the underlying futures contract, (b)
through ownership of the instrument, or instruments included in the index
underlying the futures contract, or (c) through the holding of a call on the
same futures contract and in the same principal amount as the call written
where the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or
securities in a segregated account. A Fund may cover the writing of put
options on futures contracts (a) through sales of the underlying futures
contract, (b) through segregation of cash or liquid securities in an amount
equal to the value of the security or index underlying the futures contract,
(c) through the holding of a put on the same futures contract and in the same
principal amount as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or where the
exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by a Fund in cash or liquid securities
in a segregated account. Put and call options on futures contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
Upon the exercise of a call option on a futures contract written by a Fund,
the Fund will be required to sell the underlying futures contract which, if
the Fund has covered its obligation through the purchase of such contract,
will serve to liquidate its futures position. Similarly, where a put option on
a futures contract written by a Fund is exercised, the Fund will be required
to purchase the underlying futures contract which, if the Fund has covered its
obligation through the sale of such contract, will close out its futures
position.
The writing of a call option on a futures contract may be used as a
partial hedge against declining prices of the securities deliverable on
exercise of the futures contract. A Fund will receive an option premium when
it writes the call, and, if the price of the futures contract at expiration of
the option is below the option exercise price, the Fund will retain the full
amount of this option premium, which provides a partial hedge against any
decline that may have occurred in the Fund's security holdings. Similarly, the
writing of a put option on a futures contract may be used as a partial hedge
against increasing prices of the securities deliverable upon exercise of the
futures contract. If a Fund writes an option on a futures contract and that
option is exercised, the Fund may incur a loss, which loss will be reduced by
the amount of the option premium received, less related transaction costs. A
Fund's ability to hedge effectively through transactions in options on futures
contracts depends on, among other factors, the degree of correlation between
changes in the value of securities held by the Fund and changes in the value
of its futures positions. This correlation cannot be expected to be exact, and
the Fund bears a risk that the value of the futures contract being hedged will
not move in the same amount, or even in the same direction, as the hedging
instrument. Thus it may be possible for a Fund to incur a loss on both the
hedging instrument and the futures contract being hedged.
Each of the Funds may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts.
For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, a Fund could, in lieu of selling futures
contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the option.
Conversely, where it is projected that the value of securities to be acquired
by a Fund will increase prior to acquisition, due to a market advance or
changes in interest or exchange rates, the Fund could purchase call options on
futures contracts, rather than purchasing the underlying futures contracts.
Each of the Funds may also purchase options on futures contracts for non-
hedging purposes, in order to take advantage of projected market advances or
declines or changes in interest rates or exchange rates. For example, a Fund
can buy a call option on a bond futures contract when the Manager or
Subadviser believes that the underlying futures contract will rise. If prices
do rise, the Fund could exercise the option and acquire the underlying futures
contract at the strike price or the Fund could offset the long call position
with a sale and realize a profit. Or, a Fund can sell a call option if the
Manager or Subadviser believes that futures prices will decline. If prices
decline, the call will likely not be exercised and the Fund would profit.
However, if the underlying futures contract should rise, the buyer of the
option would likely exercise the call against the Fund and acquire the
underlying futures position at the strike price; the Fund's loss in this case
could be unlimited.
The Funds' use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is
a fixed-income security (a bond or preferred stock) which may be converted at
a stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities purchased are not
subject to the ratings requirements applicable to the Funds' purchase of fixed
income investments.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase
in market value when interest rates decline and tends to decrease in value
when interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
SWAPS AND RELATED TRANSACTIONS
Each Fund may enter into interest rate swaps, currency swaps, equity swaps
and other types of available swap agreements, such as caps, collars and
floors, for the purpose of attempting to obtain a particular desired return at
a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest. An equity swap is an agreement to exchange cash flows on
a principal amount based on changes in the values of the reference index. A
currency swap is an agreement to exchange cash flows on a principal amount
based on changes in the values of the currency exchange rates. In a typical
cap or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
A Fund will maintain liquid assets with its custodian or otherwise cover
its current obligations under swap transactions in accordance with current
regulations and policies applicable to the Fund.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the
arrangement. If the Manager or a Subadviser is incorrect in its forecasts of
such factors, the investment performance of the Fund would be less than what
it would have been if these investment techniques had not been used. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. No Fund will enter into any swap unless the Manager or
Subadviser deems the counterparty to be creditworthy. If the counterparty's
creditworthiness declined, the value of the swap agreement would be likely to
decline, potentially resulting in losses. If the counterparty defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. Each Fund anticipates that it will be able
to eliminate or reduce its exposure under these arrangements by assignment or
other disposition or by entering into an offsetting agreement with the same or
another counterparty.
Swap agreements are subject to each Fund's overall limit that not more
than 15% of its net assets may be invested in illiquid securities.
Engaging in swap and related transactions may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while
forward contracts may be entered into only in the over-
the-counter market. Futures contracts and options on futures contracts may be
entered into on U.S. exchanges regulated by the CFTC and on foreign exchanges.
The securities underlying options and futures contracts traded by a Fund may
include domestic as well as foreign securities. Investors should recognize
that transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S. markets.
Transactions in options, futures contracts, options on futures contracts
and forward contracts entered into for non-hedging purposes involve greater
risk and could result in losses which are not offset by gains on other
portfolio assets. For example, a Fund may sell futures contracts on an index
of securities in order to profit from any anticipated decline in the value of
the securities comprising the underlying index. In such instances, any losses
on the futures transactions will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction.
The use of certain derivatives, such as futures, forward contracts, and
written options may involve leverage for the Funds because they create an
obligation, or indebtedness, to someone other than the Funds' shareholders and
enable a Fund to participate in gains and losses on an amount that exceeds its
initial investment. If a Fund writes a stock put option, for example, it makes
no initial investment, but instead receives a premium in an amount equal to a
fraction of the price of the underlying stock. In return, the Fund is
obligated to purchase the underlying stock at a fixed price, thereby being
subject to losses on the full stock price.
Likewise, if a Fund purchases a futures contract, it makes an initial
margin payment that is typically a small percentage of the contract's price.
However, because of the purchase, the Fund will participate in gains or losses
on the full contract price.
Other types of derivatives provide the economic equivalent of leverage
because they display heightened price sensitivity to market fluctuations, such
as changes in stock prices or interest rates. These derivatives magnify a
Fund's gain or loss from an investment in much the same way that incurring
indebtedness does. For example, if a Fund purchases a stock call option, the
Fund pays a premium in an amount equal to a fraction of the stock price, and
in return, the Fund participates in gains on the full stock price. If there
were no gains, the Fund generally would lose the entire initial premium.
Options, futures contracts, options on futures contracts, forward
contracts and swaps may be used alone or in combinations in order to create
synthetic exposure to securities in which a Fund otherwise invests, such as
non-U.S. government securities.
The use of derivatives may increase the amount of taxable income of a Fund
and may affect the amount, timing and character of a Fund's income for tax
purposes, as more fully discussed herein in the section entitled "Tax
Matters."
ADDITIONAL INFORMATION
At times, a substantial portion of a Fund's assets may be invested in
securities as to which a Fund, by itself or together with other funds and
accounts managed by Citibank and its affiliates, holds all or a major portion.
Although Citibank generally considers such securities to be liquid because of
the availability of an institutional market for such securities, it is
possible that, under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, a Fund could find it
more difficult to sell these securities when Citibank believes it advisable to
do so or may be able to sell the securities only at prices lower than if they
were more widely held. Under these circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, a Fund may be required to
participate in various legal proceedings or take possession of and manage
assets securing the issuer's obligations on such securities. This could
increase the Fund's operating expenses and adversely affect a Fund's net asset
value. In addition, a Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code may limit the extent to which the
Fund may exercise its rights by taking possession of such assets.
DEFENSIVE STRATEGIES
The Funds may, from time to time, take temporary defensive positions that
are inconsistent with the Funds' principal investment strategies in attempting
to respond to adverse market, political or other conditions. When doing so,
the Funds may invest without limit in high quality money market and other
short-term instruments, and may not be pursuing their investment goals.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trusts, on behalf of
the Portfolios, have each adopted the following policies which may not be
changed with respect to any of the foregoing Funds or Portfolios without
approval by holders of a majority of the outstanding voting securities of that
Fund or Portfolio, which as used in this Statement of Additional Information
means the vote of the lesser of (i) 67% or more of the outstanding voting
securities of the Fund or Portfolio present at a meeting at which the holders
of more than 50% of the outstanding voting securities of the Fund or Portfolio
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities of the Fund or Portfolio. The term "voting securities" as
used in this paragraph has the same meaning as in the 1940 Act.
None of the Funds or Portfolios may:
(1) Borrow money, except that as a temporary measure for extraordinary
or emergency purposes it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed, or
purchase any securities at any time at which borrowings exceed 5% of the
total assets of the Fund or Portfolio, taken at market value. It is
intended that the Fund or Portfolio would borrow money only from banks and
only to accommodate requests for the repurchase of shares of the Fund or
beneficial interests in the Portfolio while effecting an orderly
liquidation of portfolio securities.
(2) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of
the Fund's or Portfolio's total assets (taken at market value), (b)
through the use of repurchase agreements, fixed time deposits or the
purchase of short-term obligations or (c) by purchasing all or a portion
of an issue of debt securities of types commonly distributed privately to
financial institutions. The purchase of short-term commercial paper or a
portion of an issue of debt securities which is part of an issue to the
public shall not be considered the making of a loan.
(3) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Fund or
Portfolio more than 10% of the voting securities of such issuer to be held
by the Fund or Portfolio; 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 or Portfolio 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 or Portfolio's total assets
more than 5% of the Fund's or Portfolio's assets (taken at market value)
to be invested in the securities of such issuer (other than securities or
obligations issued or guaranteed by the United States, any state or
political subdivision thereof, or any political subdivision of any such
state, or any agency or instrumentality of the United States or of any
state or of any political subdivision of any state); 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 or Portfolio
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 or Portfolio'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 or Portfolio 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 or Portfolio may
technically be deemed an underwriter under the Securities Act in selling a
security.
(7) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the foregoing
shall not be deemed to preclude the Fund or Portfolio from purchasing or
selling futures contracts or options thereon, and each of the Fund and the
Portfolio reserves the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities by the Fund or the
Portfolio).
(8) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder.
For purposes of restriction (1) above, covered mortgage dollar rolls and
arrangements with respect to securities lending are not treated as borrowing.
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in this Registration Statement is
adhered to at the time an investment is made or assets are so utilized, a
later change in percentage resulting from changes in the value of the
securities or a later change in the rating of the securities held for the Fund
will not be considered a violation of policy.
5. PERFORMANCE INFORMATION AND ADVERTISING
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of total rate of return. All performance
information is historical and is not intended to indicate future performance.
Total rates of return fluctuate in response to market conditions and other
factors, and the value of a Fund's shares when redeemed may be worth more or
less than their original cost.
Each Fund may provide its period, annualized, cumulative and average
annual "total rates of return". The "total rate of return" refers to the
change in the value of an investment in the Fund over a stated period,
reflects any change in net asset value per share and is compounded to include
the value of any shares purchased with any dividends or capital gains declared
during such period. Period total rates of return may be "annualized". An
"annualized" total rate of return assumes that the period rate of return is
generated over a one-year period. Average annual total return figures
represent the average annual percentage change over the specified period.
Cumulative total return figures are not annualized and represent the aggregate
percentage or dollar value changes over a stated period of time.
A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day
of the period and the net asset value per share on the last day of the period
of shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such
period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
Average annual total return is a measure of a Fund's performance over
time. It is determined by taking a Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of the investment at the end of the period.
The redeemable value is then divided by the initial investment, and its
quotient is taken to the Nth root (N representing the number of years in the
period) and 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 date during the period.
Each Fund may provide annualized "yield" quotations. the "yield" of a Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one year period and is shown as a percentage of the maximum
public offering price on the last day of that period. A "yield" quotation,
unlike a total rate of return quotation, does not reflect changes in net asset
value.
Any current yield quotation for a Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of
the average daily number of shares outstanding during the period that were
entitled to receive dividends and the public offering price per share on the
last day of the period, (b) subtracting 1 from the result, and (c) multiplying
the result by 2.
Set forth below is average annual total rate of return information for the
Class A shares of each 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 Funds' 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 are newly offered and have no investment
history. 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. CitiSelect Folio 100 Income
is newly organized and had no operations at October 31, 1998.
<TABLE>
CITISELECT FOLIO 200 CONSERVATIVE
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
PERIOD OF RETURN THE PERIOD
------ --------- -----------------
<S> <C> <C>
June 17, 1996
(commencement of operations) to October 31, 1998 ............................... 5.31%* $1,130.72
One year ended October 31, 1998 .................................................. (1.79)% $ 981.74
</TABLE>
<TABLE>
CITISELECT FOLIO 300 BALANCED
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
PERIOD OF RETURN THE PERIOD
------ --------- -----------------
<S> <C> <C>
June 17, 1996
(commencement of operations) to October 31, 1998 ............................... 5.95%* $1,146.96
One year ended October 31, 1998 .................................................. (3.18)% $ 963.11
</TABLE>
<TABLE>
CITISELECT FOLIO 400 GROWTH
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
PERIOD OF RETURN THE PERIOD
------ --------- -----------------
<S> <C> <C>
June 17, 1996
(commencement of operations) to October 31, 1998 ............................... 4.86%* $1,119.10
One year ended October 31, 1998 .................................................. (7.59)% $ 924.35
</TABLE>
<TABLE>
CITISELECT FOLIO 500 GROWTH PLUS
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
PERIOD OF RETURN THE PERIOD
------ --------- -----------------
<S> <C> <C>
September 3, 1996
(commencement of operations) to October 31, 1998 ............................... 3.64%* $1,080.15
One year ended October 31, 1998 .................................................. (10.83)% $ 892.05
- ----------
*Not Annualized.
</TABLE>
From time to time, advertising and marketing material of any of the Funds
may include charts showing the historical performance of hypothetical
portfolios comprised of classes of assets similar to those in which the Funds
invest. The classes of assets will be represented by the historical
performance of specific unmanaged indices. The information contained in such
charts should not be viewed as a projection of results of any of the Funds or
as the historical performance of any of the Funds. In addition, the past
performance illustrated by such charts should not be viewed as a guarantee of
future results.
For advertising and sales purposes, the Funds 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 4.50% (5.00% for CitiSelect
Folio 400 Growth and CitiSelect Folio 500 Growth Plus). 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 each Fund is determined for each class on
each day during which the New York Stock Exchange is open for trading
("Business Day"). As of the date of this Statement of Additional Information,
the Exchange is open for trading every weekday except for the following
holidays (or the days on which they are observed): New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. This determination of net
asset value is made once each day as of the close of regular trading on the
Exchange by adding the market value of all securities and other assets
attributable to the class (including its interest in its underlying
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
Transfer Agent prior to its calculation.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates or if there are no market rates,
at fair value, at the time of valuation. Equity securities are valued at the
last sale price on the exchange on which they are primarily traded or on the
NASDAQ system for unlisted national market issues, or at the last quoted bid
price for securities in which there were no sales during the day or for
unlisted securities not reported on the NASDAQ system. Securities listed on a
foreign exchange are valued at the last quoted sale price available before the
time when net assets are valued. Bonds and other fixed income securities
(other than short-term obligations) are valued on the basis of valuations
furnished by a pricing service, use of which has been approved by the Board of
Trustees of the Trust. In making such valuations, the pricing service utilizes
both dealer-supplied valuations and electronic data processing techniques
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. In certain instances, securities are valued on the basis of
valuations received from a single dealer, which is usually an established
market maker in the security. In these instances, additional dealer valuations
are obtained monthly. Short-term obligations (maturing in 60 days or less) are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees of the Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Securities for
which there are no such valuations are valued at fair value as determined in
good faith by or at the direction of the Board of Trustees of the Trust.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the
Exchange. Trading may also take place on days on which the Exchange is closed
and on which it is not possible to purchase or redeem shares of the Funds. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when a
Fund's net asset value is calculated, such securities may be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued plus amortization of premiums.
7. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE
OF FUND SHARES AND SHAREHOLDER PROGRAMS
As described in the Prospectus, the Funds provide you with alternative
ways of purchasing shares based upon your individual investment needs.
Each class of shares of a 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)
Securities and Exchange Commission ("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 .50%. See "Distributor." Set forth below is an
example of the method of computing the offering price of the Class A shares of
the Funds, except CitiSelect Folio 100 Income which is newly offered. The
example assumes a purchase on October 31, 1998 of Class A shares from a Fund
aggregating less than $25,000 subject to the schedule of sales charges set forth
below.
<TABLE>
<CAPTION>
CITISELECT FOLIO 200 CITISELECT FOLIO 300
-------------------- --------------------
<S> <C> <C>
Net Asset Value per share ............................................. $11.28 $11.48
Per Share Sales Charge -- 4.50% of public offering price (4.71% of net
asset value per share) .............................................. $ 0.53 $ 0.54
Per Share Offering Price to the Public ................................ $11.81 $12.02
</TABLE>
<TABLE>
<CAPTION>
CITISELECT FOLIO 400 CITISELECT FOLIO 500
-------------------- --------------------
<S> <C> <C>
Net Asset Value per share ............................................. $11.36 $11.11
Per Share Sales Charge -- 5.00% of public offering price (5.26% of net
asset value per share) .............................................. $ 0.60 $ 0.58
Per Share Offering Price to the Public ................................ $11.96 $11.69
</TABLE>
A 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 tables below. The Funds
have 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>
CITISELECT FOLIO 100, CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
BROKER/DEALER
SALES CHARGE SALES CHARGE COMMISSION
AMOUNT OF AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT OFFERING PRICE
- --------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $25,000 ................................ 4.50% 4.71% 4.05%
$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 ................... 2.50% 2.56% 2.25%
$250,000 to less than $500,000 ................... 1.50% 1.52% 1.35%
$500,000 or more ................................. none* none* up to 1.00%
</TABLE>
<TABLE>
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
<CAPTION>
BROKER/DEALER
SALES CHARGE SALES CHARGE COMMISSION
AMOUNT OF AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR 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".
</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 tables below show 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.
<TABLE>
CITISELECT FOLIO 100, CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
-------------------------------------------------------------------
<CAPTION>
SALE DURING CDSC ON SHARES BEING SOLD
- ----------- -------------------------
<S> <C>
1st year since purchase 4.50%
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
</TABLE>
<TABLE>
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
---------------------------------------------
<CAPTION>
SALE DURING CDSC ON SHARES BEING SOLD
- ----------- -------------------------
<S> <C>
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
</TABLE>
Class B shares pay distribution/service fees of up to 0.75% (up to 1.00% for
CitiSelect Folio 400 Growth and CitiSelect Folio 500 Growth Plus) of the average
daily net assets represented by the Class B shares. Financial professionals
selling Class B shares receive a commission based upon the purchase price of the
Class B shares that they sell, except sales exempt from the CDSC. The commission
is 4.00% of the purchase price of Folio 100, Folio 200 and Folio 300 Class B
shares, and 4.50% of the purchase price of Folio 400 and Folio 500 Class B
shares. Financial professionals also receive a service fee at an annual rate
equal to 0.25% of the average daily net assets represented by the Class B shares
that they have sold.
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 and capital gain distributions and
shares representing capital appreciation. Each 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 a 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, each 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 and 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 a 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 a 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 a Fund or
in any combination of CitiFunds must total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] 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 a 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 a 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 same 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 Funds' 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 Funds make 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 Funds and the members
[] agree to include sales and other materials related to the Funds 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 Funds
LETTER OF INTENT
If an investor anticipates purchasing $25,000 or more of Class A shares of
a 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 Funds' 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 a 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 additional $50,000 purchase would be at the rate of
2.50% for CitiSelect Folio 100 Income, CitiSelect Folio 200 Conservative and
CitiSelect Folio 300 Balanced and 3.00% for CitiSelect Folio 400 Growth and
CitiSelect Folio 500 Growth Plus (in each case, the rate applicable to single
transactions from $100,000 to less than $250,000). A shareholder must provide
the Transfer Agent with information to verify that the quantity sales charge
discount is applicable at the time the investment is made.
SYSTEMATIC WITHDRAWAL PLAN
Each 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 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 same 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 each Fund may be exchanged for shares of the same class of
certain other CitiFunds that are made available by 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, each 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 a Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers. Your Service Agent is the
shareholder of record for the shares of a Fund that you own.
Investors may be able to establish new accounts in the Funds 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
Funds, the transfer agent and each Service Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures may include recording of the telephone instructions and
verification of a caller's identity by asking for his or her name, address,
telephone, Social Security number, and account number. If these or other
reasonable procedures are not followed, the Funds, 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 has reserved
the right to pay the redemption or repurchase price of shares of the Funds,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a holder of shares received a distribution in
kind, such holder could incur brokerage or other charges in converting the
securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the Securities and
Exchange Commission (the "SEC"), exists making disposal of a Fund's
investments or determination of its net asset value not reasonably
practicable; (b) the New York Stock Exchange is closed (other than customary
weekend and holiday closings); or (c) the SEC has by order permitted such
suspension.
8. MANAGEMENT
Each Fund is supervised by the Board of Trustees of the Trust. Each
Portfolio is supervised by the Board of Trustees of Asset Allocation
Portfolios or The Premium Portfolios, as the case may be. In each case, a
majority of the Trustees are not affiliated with Citibank.
The Trustees and officers of the Trust and the Portfolio Trusts 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* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
RILEY C. GILLEY (aged 72) -- Vice President and General Counsel, Corporate
Property Investors (November 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 59) -- Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, the Highland Family of Funds (March 1997 to March 1998). Her address
is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 47) -- President, Global Research Associates, Inc.
(Investment Research) (since August 1990); 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* (aged 65) - Chairman, President, and Chief Executive
Officer of SSBC Fund Management, Inc. (formerly known as Mutual Management
Corp.) (since March 1996); Managing Director of Salomon Smith Barney (since
August 1993); and Chairman, President and Chief Executive Officer of fifty-
eight investment companies sponsored by Salomon Smith Barney. His address is
388 Greenwich Street, New York, New York.
C. OSCAR MORONG, JR. (aged 64) - Chairman of the Board of the Trust 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; Director, MAS Funds. His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
E. KIRBY WARREN (aged 64) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 78) -- Vice President-Investments, Sun Company,
Inc. (retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV (aged 56) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
MARK T. FINN (aged 55) -- President and Director, Delta Financial, Inc. (since
June 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Director, Vantage Consulting Group, Inc.
(since October 1988). His address is 3500 Pacific Avenue, P.O. Box 539,
Virginia Beach, Virginia.
C. OSCAR MORONG, JR. (aged 64) - Chairman of the Board 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; Director, MAS Funds. His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
WALTER E. ROBB, III (aged 72) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN (aged 64) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
CHRISTINE A. DRAPEAU* (aged 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* (aged 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* (aged 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, the Phoenix Family of Mutual
Funds (Phoenix Home Life Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON* (aged 33) -- Secretary of the Trust and the Portfolio Trusts;
Senior Vice President, Signature Financial Group, Inc.; Secretary, CFBDS.
JAMES E. HOOLAHAN* (aged 52) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 35) -- Vice President, Assistant Secretary and
Assistant Treasurer 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* (aged 47) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
CLAIR TOMALIN* (aged 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* (aged 50) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Assistant Vice President, Signature
Financial Group, Inc.
JULIE J. WYETZNER* (aged 39) -- 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 Trustees of the Trust received the following remuneration from the
Trust during its fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM TRUST AND
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FUND COMPLEX
TRUSTEE FROM REGISTRANT(1) OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
------- ------------------ ---------------- --------------- -------------------
<S> <C> <C>
Philip W. Coolidge .............. $ 0 None None $ 0
Riley C. Gilley ................. $ 5,206 None None $41,500
Diana R. Harrington ............. $ 8,196 None None $59,000
Susan B. Kerley ................. $ 8,096 None None $55,000
Heath B. McLendon(2) ............ $ 0 None None $ 0
C. Oscar Morong, Jr. ............ $11,640 None None $71,000
E. Kirby Warren ................. $ 7,404 None None $49,000
William S. Woods, Jr. ........... $ 7,434 None None $54,000
(1) Information relates to the fiscal year ended October 31, 1998. 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, respectively, of
the family of open-end registered investment companies advised or managed by Citibank.
(2) Mr. McLendon was appointed as Trustee in February, 1999.
</TABLE>
As of April 9, 1999 all Trustees and officers as a group owned less than
1% of each Fund's outstanding shares. As of the same date, more than 95% of
the outstanding shares of each Fund were held of record by Citibank, N.A. or
its affiliates as Service Agents of the Fund for the accounts of their
respective clients.
The Declaration of Trust of each of the Trust and the Portfolio Trusts
provides that the Trust or the Portfolio Trust, 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 Trust, as the case may be, unless, as
to liability to the Trust, the Portfolio Trust or their respective investors,
it is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their
offices, or unless with respect to any other matter it is finally adjudicated
that they did not act in good faith in the reasonable belief that their
actions were in the best interests of the Trust or the Portfolio Trust, as the
case may be. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon
a review of readily available facts, by vote of a majority of disinterested
Trustees of the Trust or the Portfolio Trust, or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
MANAGER
Citibank manages the assets of each Portfolio and provides certain
administrative services to the Funds and the Portfolios pursuant to separate
management agreements (the "Management Agreements"). Subject to such policies
as the Board of Trustees of the Portfolio Trusts 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. Each
Management Agreement with the Portfolio Trusts provides that Citibank may
delegate the daily management of the securities of each Portfolio to one or
more Subadvisers. Each Management Agreement with the Portfolio Trusts will
continue in effect indefinitely as long as such continuance is specifically
approved at least annually by the Board of Trustees of the applicable
Portfolio Trust or by a vote of a majority of the outstanding voting
securities of the applicable Portfolio, and, in either case, by a majority of
the Trustees of the applicable Portfolio Trust who are not parties to the
Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement. Unless otherwise
terminated, each Management Agreement with the Trust 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 applicable Fund, and, in either case,
by a majority of the Trustees of the Trust who are not parties to the
Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement.
Citibank provides the Funds and the Portfolios with general office
facilities and supervises the overall administration of the Funds and the
Portfolios, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of,
the Funds' or the Portfolios' independent contractors and agents; the
preparation and filing of all documents required for compliance by the Funds
or the Portfolios with applicable laws and regulations; and arranging for the
maintenance of books and records of the Funds 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 the applicable
Portfolio Trust or the Trust, as the case may be, when authorized either by a
vote of a majority of the outstanding voting securities of the applicable
Portfolio or Fund or by a vote of a majority of the Board of Trustees of the
applicable 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. Each Management Agreement with the Portfolio
Trusts provides that neither Citibank nor its personnel shall be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of security
transactions for the applicable Portfolio, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations
and duties under the Management Agreement with the Portfolio Trust. Each
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.
CitiSelect Folio 100 pays an aggregate management fee, which is accrued
daily and paid monthly, of 0.50% of the Fund's average daily net assets on an
annualized basis for the Fund's then-current fiscal year. Each of CitiSelect
Folio 200, CitiSelect Folio 300, CitiSelect Folio 400, and CitiSelect Folio
500 pays an aggregate management fee, which is accrued daily and paid monthly,
of 0.75% of such Fund's average daily net assets on an annualized basis for
the Fund's then-current fiscal year. This fee is higher than the management
fee paid by most mutual funds. Citibank may reimburse any Fund or Portfolio or
waive all or a portion of its management fees.
For the period from June 17, 1996 (September 3, 1996 for CitiSelect Folio
500), commencement of operations, to December 31, 1996, all fees payable to
Citibank under prior management agreements with the Trust with respect to
CitiSelect Folio 200, CitiSelect Folio 300 and CitiSelect Folio 500 were
voluntarily waived. For the period from June 17, 1996, commencement of
operations, to December 31, 1996, the fees paid to Citibank, after waivers and
reimbursements, under a prior management agreement with the Trust with respect
to CitiSelect Folio 400 were $78,821. For the period from January 1, 1997 to
October 31, 1997, the fees paid to Citibank, after waivers and reimbursements,
under prior management agreements with the Trust were as follows: CitiSelect
Folio 200 $35,899, CitiSelect Folio 300 $170,079, CitiSelect Folio 400
$299,950 and CitiSelect Folio 500 $120,606. For the period from November 1,
1997 to October 31, 1998, the fees paid to Citibank, after waivers and
reimbursements, under the Management Agreements with the Trust were as
follows: CitiSelect Folio 200 $440,035, CitiSelect Folio 300 $579,750,
CitiSelect Folio 400 $439,941 and CitiSelect Folio 500 $140,476.
Prior to November 1, 1997, CitiSelect Folio 200, CitiSelect Folio 300,
CitiSelect Folio 400 and CitiSelect Folio 500 invested their assets in,
respectively, Asset Allocation Portfolio 200, Asset Allocation Portfolio 300,
Asset Allocation Portfolio 400, and Asset Allocation Portfolio 500. For the
period from June 17, 1996 (September 3, 1996 for Asset Allocation Portfolio
500), commencement of operations, to December 31, 1996, all fees payable to
Citibank under prior management agreements with Asset Allocation Portfolios
with respect to Asset Allocation Portfolio 200, Asset Allocation Portfolio 300
and Asset Allocation Portfolio 500 were voluntarily waived. For the period
from June 17, 1996, commencement of operations, to December 31, 1996, the fees
paid to Citibank, after waivers and reimbursements, under a prior management
agreement with Asset Allocation Portfolios with respect to Asset Allocation
Portfolio 400 were $133,692. For the period from January 1, 1997 to October
31, 1997, the fees paid to Citibank, after waivers and reimbursements, under
prior management agreements with Asset Allocation Portfolios were as follows:
Asset Allocation Portfolio 200 $528,753, Asset Allocation Portfolio 300
$1,478,303, Asset Allocation Portfolio 400 $1,993,100 and Asset Allocation
Portfolio 500 $698,291.
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust and the Portfolio Trusts
as from time to time are agreed upon by Citibank and CFBDS. For performing
such sub-administrative services, CFBDS receives compensation as from time to
time is agreed upon by Citibank, not in excess of the amount paid to Citibank
for its services under the Management Agreements with the Trust and the
Portfolio Trusts. All such compensation is paid by Citibank.
The Subadvisers listed below provide advisory services for the kinds of
assets of each Fund noted opposite the Subadvisers' names.
Small cap value securities -- Franklin Advisory Services
Large cap value securities -- SSBC Fund Management, Inc. (formerly known
as Mutual Management Corp.)
International equity securities -- Hotchkis and Wiley
Foreign fixed income securities -- Salomon Brothers Asset Management
Limited
High yield debt securities -- Salomon Brothers Asset Management Inc
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for their allocated assets of the Funds, and to place the
purchase and sales orders for securities transactions concerning those assets,
subject in all cases to the general supervision of Citibank. Each Subadviser
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the assets of the Funds allocated to it and
effecting securities transactions concerning those assets.
The Submanagement Agreements with Franklin Advisory Services and
Hotchkis and Wiley will continue in effect as to each applicable Portfolio
indefinitely as long as such continuance is specifically approved at least
annually by the Board of Trustees of the applicable Portfolio Trust as to that
Portfolio or by a vote of a majority of the outstanding voting securities of
that Portfolio, and, in either case, by a majority of the Trustees of the
Portfolio Trust who are not parties to the Submanagement Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Submanagement Agreement.
The Submanagement Agreement with SSBC Fund Management, Inc. will continue in
effect indefinitely as long as after the first two years such continuance is
specifically approved at least annually by the Board of Trustees of the
Portfolio Trust as to Large Cap Value Portfolio or by a vote of a majority of
the outstanding voting securities of that Portfolio, and, in either case, by a
majority of the Trustees of the Portfolio Trust who are not parties to the
Submanagement Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Submanagement Agreement.
The Submanagement Agreement with Salomon Brothers Asset Management Limited
will continue in effect indefinitely as long as after the first two years such
continuance is specifically approved at least annually by the Board of Trustees
of the Portfolio Trust as to Foreign Bond Portfolio or by a vote of a majority
of the outstanding voting securities of that Portfolio, and, in either case, by
a majority of the Trustees of the Portfolio Trust who are not parties to the
Submanagement Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Submanagement Agreement.
The Submanagement Agreement with Salomon Brothers Asset Management Inc will
continue in effect indefinitely as long as after the first two years such
continuance is specifically approved at least annually by the Board of Trustees
of the Portfolio Trust as to High Yield Portfolio or by a vote of a majority of
the outstanding voting securities of that Portfolio, and, in either case, by a
majority of the Trustees of the Portfolio Trust who are not parties to the
Submanagement Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Submanagement Agreement.
Each Submanagement Agreement provides that the applicable Subadviser may
render services to others. Each Submanagement Agreement is terminable as to
any Portfolio without penalty on not more than 60 days' nor less than 30 days'
written notice by the applicable Portfolio Trust, when authorized either by a
vote of a majority of the outstanding voting securities of the applicable
Portfolio or by a vote of a majority of the Board of Trustees of the
applicable Portfolio Trust, or by Citibank on not more than 60 days' nor less
than 30 days' written notice, and will automatically terminate in the event of
its assignment. Each Submanagement Agreement may be terminated by the
applicable Subadviser on not less than 90 days' written notice. Each
Submanagement Agreement provides that neither the Subadviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
security transactions for any Portfolio, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations
and duties under the Submanagement Agreement.
The management fee is allocated among the Subadvisers at the annual rates
equal to the percentages specified below of the aggregate assets managed by
the particular Subadviser. Citibank retains any management fee in excess of
amounts payable to the Subadvisers. Citibank pays the Subadvisers' fees to the
extent they exceed the aggregate fee of 0.50% of CitiSelect Folio 100's
average daily net assets or 0.75% of each other Fund's average daily net
assets.
Franklin Advisory Services
0.55% on first $250 million
0.50% on remaining assets
SSBC Fund Management, Inc. (formerly known as Mutual Management Corp.)
0.65% on the first $10 million
0.50% on the next $10 million
0.40% on the next $10 million
0.30% on assets in excess of $30 million
Hotchkis and Wiley
0.60% on first $10 million
0.55% on next $40 million
0.45% on next $100 million
0.35% on next $150 million
0.30% on remaining assets
Salomon Brothers Asset Management Limited
0.30% on the first $200 million
0.25% on assets in excess of $200 million
Salomon Brothers Asset Management Inc
0.45% on the first $100 million
0.40% on assets in excess of $100 million
The aggregate fees paid to each of the Subadvisers under prior submanagement
agreements were as follows:
<TABLE>
<CAPTION>
JUNE 17, 1996 (SEPTEMBER 3, 1996
FOR ASSET ALLOCATION
PORTFOLIO 500)
(COMMENCEMENT OF OPERATIONS)
TO JANUARY 1, 1997 TO
SUBADVISER: DECEMBER 31, 1996: OCTOBER 31, 1997:
- ----------- --------------------------------- ------------------
<S> <C> <C>
Franklin Advisory Services $123,189 $716,245
Hotchkis and Wiley $160,913 $290,312
Pacific Investment Management Company(1) $123,950 $474,072
Miller Anderson & Sherrerd, LLP(2) $ 90,990 $580,234
</TABLE>
The aggregate fees paid to each of the Subadvisers under the Submanagement
Agreements during the period from November 1, 1997 to October 31, 1998 were as
follows:
SUBADVISER:
- -----------
Franklin Advisory Services $1,091,403
Hotchkis and Wiley $1,082,007
Pacific Investment Management Company(1) $ 900,099
Miller Anderson & Sherrerd, LLP(2) $ 511,730
(1) Pacific Investment Management Company served as Subadviser to Foreign
Bond Portfolio prior to March 1, 1999. Since March 1, 1999, Salomon Brothers
Asset Management Limited, an affiliate of Citibank, has managed the Foreign
Bond Portfolio.
(2) Miller Anderson & Sherrerd, LLP, served as Subadviser to Large Cap
Value Portfolio prior to January 22, 1999. Since January 22, 1999, SSBC Fund
Management, Inc. (formerly known as Mutual Management Corp.), an affiliate of
Citibank, has managed the Large Cap Value Portfolio.
Salomon Brothers Asset Management Inc has served as the Subadviser for the
High Yield Portfolio since May 1, 1999.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, MA 02109, serves as the Distributor of each
Fund's shares pursuant to Distribution Agreements with the Trust with respect
to each class of shares of the Funds (each, a "Distribution Agreement"). In
those states where CFBDS is not a registered broker-dealer, shares of the
Funds 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 Funds.
Either party may terminate a Distribution Agreement on not less than
thirty days' nor more than sixty days' 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 Distribution 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 each Fund has a Service Plan (each, a "Service Plan") adopted
in accordance with Rule 12b-1 under the 1940 Act. Under the Plan related to
Class A shares, a Fund may pay monthly fees at an annual rate not to exceed
0.50% of the average daily net assets of the Fund attributable to that class.
Under the Plan related to Class B shares, CitiSelect Folio 100 Income,
CitiSelect Folio 200 Conservative, and CitiSelect Folio 300 Balanced may pay
monthly fees at an annual rate not to exceed 0.75% of the average daily net
assets of the Fund attributable to that class, and CitiSelect Folio 400 Growth
and CitiSelect Folio 500 Growth Plus may pay monthly fees at an annual rate not
to exceed 1.00% of the average daily net assets of the Fund attributable to that
class. Such fees may be used to make payments to the Distributor for
distribution services, to securities dealers and other industry professionals
(called Service Agents) that have entered into service agreements with the
Distributor and others in respect of the sale of shares of the Funds, and to
other parties in respect of the sale of shares of the Funds, and to make
payments for advertising, marketing or other promotional activity, and payments
for preparation, printing, and distribution of prospectuses, statements of
additional information and reports for recipients other than regulators and
existing shareholders. The Funds also may make payments to the Distributor,
Service Agents and others for providing personal service or the maintenance of
shareholder accounts. The 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 Service 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 Service 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 Service Plans permit the Funds to pay fees to the Distributor, Service
Agents and others as compensation for their services, not as reimbursement for
specific expenses incurred. Thus, even if their expenses exceed the fees
provided for by the 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. Each 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. In their annual consideration
of the continuation of the Service Plans for each Fund, the Trustees will
review the Service Plans and the expenses for each Fund separately.
Each Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's
Trustees and a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Service Plan or in any agreement related to the Plan (for
purposes of this paragraph "Qualified Trustees"). Each Service Plan requires
that the Trust and the Distributor provide to the Board of Trustees, and the
Board of Trustees review, at least quarterly, a written report of the amounts
expended (and the purposes therefor) under the Service Plan. Each Service 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
Service Plan may be terminated with respect to any class of a 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 Service Plan
may not be amended to increase materially the amount of a class's permitted
expenses 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 Service 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 Service Plans, CFBDS acts as the agent of the Trust
in connection with the offering of shares of the Funds pursuant to the
Distribution Agreements. For the periods from June 17, 1996 (September 3, 1996
for CitiSelect Folio 500), commencement of operations of the Funds, to
December 31, 1996, January 1, 1997 to October 31, 1997, and November 1, 1997
to October 31, 1998, the fees paid to CFBDS, after waivers, under the
Distribution Agreement for Class A shares were as follows: CitiSelect Folio
200, $158,021, $548,279 and $1,026,202, respectively; CitiSelect Folio 300,
$307,039, $1,102,327 and $1,796,242, respectively; CitiSelect Folio 400,
$394,103, $1,499,752 and $2,318,563, respectively; and CitiSelect Folio 500,
$83,802, $603,033 and $1,003,503, 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.
EXPENSES
In addition to amounts payable under the Management Agreements and the
Service Plans, each Fund is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Fund's distributor,
government fees, taxes, accounting and legal fees, expenses of communication
with shareholders, interest expense, and insurance premiums. The Prospectus
for each Fund contains more information about the expenses of each Fund.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street,
pursuant to which custodial and fund accounting services, respectively, are
provided for each Fund. Among other things, State Street calculates the daily
net asset value for the Funds. 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, 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.
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 Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, is
counsel for each Fund.
9. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in the Fund's investments are made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of turnover
is not a limiting factor when changes are appropriate. Specific decisions to
purchase or sell securities for each Fund are made by a portfolio manager who
is an employee of Citibank or a Subadviser and who is appointed and supervised
by senior officers of Citibank or by a Subadviser. The portfolio manager may
serve other clients in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which the Manager, the Subadvisers or their affiliates exercise
investment discretion. The Manager and the Subadvisers are authorized to pay a
broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund which is in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction if the Manager or the applicable Subadviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities which the Manager, the
Subadvisers and their affiliates have with respect to accounts over which they
exercise investment discretion.
The management fee that each Fund pays to Citibank or a Subadviser will
not be reduced as a consequence of Citibank's or the Subadviser's receipt of
brokerage and research services. While such services are not expected to
reduce the expenses of Citibank or the Subadviser, Citibank would, through the
use of the services, avoid the additional expenses which would be incurred if
it should attempt to develop comparable information through its own staff or
obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or a
Subadviser's other clients. Investment decisions for each Fund and for
Citibank's and the Subadvisers' other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than one client. When two or more clients are simultaneously engaged
in the purchase or sale of the same security, the securities are allocated
among clients in a manner believed to be equitable to each. It is recognized
that in some cases this system could adversely affect the price of or the size
of the position obtainable in a security for a Fund. When purchases or sales
of the same security for a Fund and for other portfolios managed by Citibank
or a Subadviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large volume
purchases or sales.
For the period from November 1, 1997 to October 31, 1998, Large Cap Value
Portfolio paid brokerage commissions of $259,902.64; Small Cap Value Portfolio
paid brokerage commission of $464,356.80; International Portfolio paid
brokerage commissions of $575,319.99; Large Cap Growth Portfolio paid
brokerage commissions of $855,647.86; and Small Cap Growth Portfolio paid
brokerage commissions of $214,400.62. For the period from November 1, 1997 to
October 31, 1998, Intermediate Income Portfolio, Short-Term Portfolio and
Foreign Bond Portfolio paid no brokerage commissions. Prior to November 1,
1997, CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400 and
CitiSelect Folio 500 invested their assets in, respectively, Asset Allocation
Portfolio 200, Asset Allocation Portfolio 300, Asset Allocation Portfolio 400,
and Asset Allocation Portfolio 500. For the periods from June 17, 1996
(September 3, 1996 for Asset Allocation Portfolio 500), commencement of
operations, to December 31, 1996 and January 1, 1997 to October 31, 1997,
Asset Allocation Portfolios paid brokerage commissions in the following
amounts: Asset Allocation Portfolio 200, $89,479 and $111,725, respectively;
Asset Allocation Portfolio 300, $241,111 and $301,201, respectively; Asset
Allocation Portfolio 400, $453,048 and $561,555, respectively; and Asset
Allocation Portfolio 500, $185,397 and $308,557, respectively.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value) of each series, to divide or combine the shares of any series into a
greater or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such shares
into classes. The Trust has reserved the right to create and issue additional
series and classes of shares. Each share of each class represents an equal
proportionate interest in that Fund 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 between classes of shares of a
series). Shares of each series are entitled to vote separately to approve
management 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 Fund or class, only shares of
that particular Fund or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required to hold, and
has no present intention of holding, annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances (e.g., upon the
application and submission of certain specified documents to the Trustees by a
specified number of shareholders), the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees. Shareholders also have under certain
circumstances the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of shareholders. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of
each series affected by the amendment. (See "Investment Restrictions.")
At any meeting of shareholders of any Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with the instructions it
receives for all other shares of which that Service Agent is the holder of
record.
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 Funds' 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.
Each Fund invests in multiple Portfolios. Each Portfolio is a series of
one of the Portfolio Trusts, which are organized as New York trusts.
Each investor in a Portfolio, including the corresponding Fund, may add to
or withdraw from its investment in the applicable Portfolio on each Business
Day. As of the close of regular trading on each Business Day, the value of
each investor's beneficial interest in each Portfolio is determined by
multiplying the net asset value of the Portfolio by the percentage, effective
for that day, that represents that investor's share of the aggregate
beneficial interests in the Portfolio. Any additions or withdrawals that are
to be effected on that day are then effected. The investor's percentage of the
aggregate beneficial interests in the Portfolio is then re-computed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of regular trading
on such day plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in the Portfolio effected on
such day, and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined is then applied to determine the value of the
investor's interest in the Portfolio as of the close of regular trading on the
next following Business Day.
11. TAX MATTERS
TAXATION OF THE FUNDS AND THE PORTFOLIO TRUSTS
FEDERAL TAXES. Each Fund is treated as a separate entity for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund has elected to be treated, and intends to qualify each
year, as a "regulated investment company" under Subchapter M of the Code by
meeting all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of Fund distributions,
and the composition of the Fund's portfolio assets. Provided all such
requirements are met, no U.S. federal income or excise taxes generally will be
required to be paid by the Funds. If a Fund should fail to qualify as a
"regulated investment company" for any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary income to shareholders. 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 a Fund from non-
U.S. securities may be subject to non-U.S. taxes. The U.S. has entered into
tax treaties with many other countries that may entitle a Fund to a reduced
rate of tax or an exemption from tax on such income. Each Fund intends to
qualify for treaty reduced rates where applicable. It is not possible,
however, to determine a Fund's effective rate of non-U.S. tax in advance since
the amount of the Fund's assets to be invested within various countries is not
known.
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If the Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by the Fund and thus includable in their gross income for federal income
tax purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction for such amounts will be permitted to
individuals in computing their alternative minimum tax liability. If a Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of a Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the
length of time the shareholders have held their shares. Any Fund dividend that
is declared in October, November, or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January, will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION. The portion of each Fund's ordinary income
dividends attributable to dividends received in respect of equity securities
of U.S. issuers is normally eligible for the dividends received deduction for
corporations subject to U.S. federal income taxes. Availability of the
deduction for particular shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax and result in
certain basis adjustments.
TAX TREATMENT FOR NON-U.S. PERSONS. The Funds will withhold tax payments
at a rate of 30% (or any lower applicable tax treaty rate) on taxable
dividends and other payments subject to withholding taxes that are made to
persons who are not citizens or residents of the United States. Distributions
received from the Funds by non-U.S. persons also may be subject to tax under
the laws of their own jurisdiction.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification
number is correct and that the shareholder is not subject to 31% backup
withholding for failing to report income to the IRS. The Funds may be required
to withhold (and pay over to the IRS for the shareholder's credit) 31% of
certain distributions and redemption proceeds paid to shareholders who fail to
provide this information or who otherwise violate IRS regulations.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such
shares as a capital asset will be treated as a long-term capital gain or loss
if the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a disposition
of shares in a Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a disposition of shares may
also be disallowed under rules relating to wash sales. 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 a 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
CERTAIN DEBT INVESTMENTS. Any investment by a Fund in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped securities,
and certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund. An investment by a Fund in residual interests of a
CMO that has elected to be treated as a real estate mortgage investment
conduit, or "REMIC," can create complex tax problems, especially if the Fund
has state or local governments or other tax-exempt organizations as
shareholders.
OPTIONS, ETC. Each Fund's transactions in options, futures and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. For
example, certain positions held by each Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by a
Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of Fund securities, and conversion of short-term into long-
term capital losses. Certain tax elections exist for straddles that may alter
the effects of these rules. Each Fund intends to limit its activities in
options, futures and forward contracts to the extent necessary to meet the
requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS. The Funds may make non-U.S. investments. Special tax
considerations apply with respect to such investments. Foreign exchange gains
and losses realized by a Fund will generally be treated as ordinary income and
loss. Use of non-U.S. currencies for non-hedging purposes and investment by a
Fund in certain "passive foreign investment companies" may have to be limited
in order to avoid a tax on a Fund. A Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of each
taxable year. This election may cause the Fund to recognize ordinary income
prior to the receipt of cash payments with respect to those investments; in
order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold potentially resulting in additional taxable gain or loss to
the Fund.
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 Funds. Citibank believes that its services under the Management
Agreements and the activities performed by it or its affiliates as Service
Agents are not underwriting and are consistent with the Glass-Steagall Act and
other relevant federal and state laws. However, there is no controlling
precedent regarding the performance of the combination of investment advisory,
shareholder servicing and administrative activities by banks. State laws on
this issue may differ from applicable federal law, and banks and financial
institutions may be required to register as dealers pursuant to state
securities laws. Changes in either federal or state statutes or regulations,
or in their interpretations, could prevent Citibank or its affiliates from
continuing to perform these services. If Citibank or its affiliates were to be
prevented from acting as the Manager or a Service Agent, the Funds would seek
alternative means for obtaining these services. The Funds do not expect that
shareholders would suffer any adverse financial consequences as a result of
any such occurrence.
13. FINANCIAL STATEMENTS
The audited financial statements of CitiSelect Folio 200, CitiSelect Folio
300, CitiSelect Folio 400, and CitiSelect Folio 500 (Statement of Assets and
Liabilities at October 31, 1998, Statement of Operations for the year ended
October 31, 1998, Statement of Changes in Net Assets for the year ended
October 31, 1998, the ten months ended October 31, 1997 and the period from
June 17, 1996 (commencement of operations, or as applicable, September 3,
1996, commencement of operations of CitiSelect Folio 500) to December 31,
1996, and Financial Highlights for the year ended October 31, 1998, the ten
months ended October 31, 1997 and the period from June 17, 1996 (commencement
of operations, or as applicable, September 3, 1996, commencement of operations
of CitiSelect Folio 500) to December 31, 1996, Notes to Financial Statements
and Independent Auditors' Report), which are included in the Annual Report to
Shareholders, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, independent accountants, on behalf of those Funds.
CitiSelect Folio 100 is newly offered and had no operations as at October 31,
1998.
A copy of the Annual Report for the Funds accompanies this Statement of
Additional Information.
