<PAGE>
Rule 497(e) File Nos. 2-90518 and 811-4006
Statement of
Additional Information
September 5, 2000
CITI(SM) NASDAQ-100 INDEX FUND
CITI(SM) SMALL CAP INDEX FUND
CITI(SM) U.S. 1000 INDEX FUND
CITI(SM) GLOBAL TITANS INDEX FUND
CITI(SM) FINANCIAL SERVICES INDEX FUND
CITI(SM) HEALTH SCIENCES INDEX FUND
CITI(SM) TECHNOLOGY INDEX FUND
CITI(SM) U.S. BOND INDEX FUND
CitiFunds Trust 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 two classes
of shares of Citi Nasdaq-100 Index Fund, Citi Small Cap Index Fund, Citi U.S.
1000 Index Fund, Citi Global Titans Index Fund, Citi Financial Services Index
Fund, Citi Health Sciences Index Fund, Citi Technology Index Fund, and Citi
U.S. Bond Index Fund (collectively, the "Funds"), to which this Statement of
Additional Information relates. The address and telephone number of the Trust
are 388 Greenwich Street, New York, New York 10013, (800) 451-2010.
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INVESTMENT PRODUCTS:
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
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TABLE OF CONTENTS PAGE
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1. The Trust ........................................................... 2
2. Investment Objectives and Policies .................................. 2
3. Description of Permitted Investments and Investment Practices ....... 3
4. Investment Restrictions ............................................. 27
5. Performance Information and Advertising ............................. 28
6. Determination of Net Asset Value; Valuation of Securities ........... 30
7. Additional Information on the Purchase and Sale of Fund Shares ...... 30
8. Management .......................................................... 33
9. Portfolio Transactions .............................................. 39
10. Description of Shares, Voting Rights and Liabilities ................ 40
11. Tax Matters ......................................................... 41
12. Financial Statements ................................................ 42
13. Other Information ................................................... 42
This Statement of Additional Information sets forth information which may be
of interest to investors but which is not necessarily included in the
Prospectus dated September 5, 2000, by which Citi Index Shares of the Funds
are offered, or the Prospectus dated April 28, 2000 as supplemented September
11, 2000 by which the Smith Barney Index Shares of the Funds are offered. This
Statement of Additional Information should be read in conjunction with the
applicable Prospectus. Please call 1-800-995-0134 toll free to obtain a
Prospectus for the Citi Index Shares. A Cititrade customer may obtain copies
of the Citi Index Shares' Prospectus without charge on the Cititrade website
at www.mycititrade.com or by calling 1-888-663-CITI[2484]. Please call
1-800-451-2020 toll free to obtain a Prospectus for the Smith Barney Index
Shares.
THIS STATE OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
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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 eight funds offered by the Trust - Citi Nasdaq-100
Index Fund, Citi Small Cap Index Fund, Citi U.S. 1000 Index Fund, Citi Global
Titans Index Fund, Citi Financial Services Index Fund, Citi Health Sciences
Index Fund, Citi Technology Index Fund, and Citi U.S. Bond Index Fund,
(collectively, the "Funds"). Each Fund is "non-diversified," which means it
may invest a larger percentage of its assets in one issuer than a diversified
fund.
Each Fund offers two classes of shares, referred to as "Citi Index Shares"
and "Smith Barney Index Shares" as follows: Citi Nasdaq-100 Index Fund - Citi
Nasdaq-100 Index Shares and Smith Barney Nasdaq-100 Index Shares; Citi Small
Cap Index Fund - Citi Small Cap Index Shares and Smith Barney Small Cap Index
Shares; Citi U.S. 1000 Index Fund - Citi U.S. 1000 Index Shares and Smith
Barney U.S. 1000 Index Shares; Citi Global Titans Index Fund - Citi Global
Titans Index Shares and Smith Barney Global Titans Index Shares; Citi
Financial Services Index Fund - Citi Financial Services Index Shares and Smith
Barney Financial Services Index Shares; Citi Health Sciences Index Fund - Citi
Health Sciences Index Shares and Smith Barney Health Sciences Index Shares;
Citi Technology Index Fund - Citi Technology Index Shares and Smith Barney
Technology Index Shares; and Citi U.S. Bond Index Fund - Citi U.S. Bond Index
Shares and Smith Barney U.S. Bond Index Shares.
SSB Citi Fund Management LLC ("SSB Citi" or the "Manager") supervises the
overall management of the Funds and also provides certain administrative
services to each of the Funds. The selection of investments for the Funds and
the way they are managed depend upon the Indexes which they track and the
conditions and trends in the economy and the financial marketplaces.
SSB Citi has delegated the daily management of the Funds to State Street
Bank and Trust Company ("State Street"), which will act as subadviser through
its State Street Global Advisors division.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by Salomon
Smith Barney, Inc., the Funds' distributor ("Salomon Smith Barney" or the
"Distributor").
At the date of this Statement of Additional Information, the Funds, like
most mutual funds, invest directly in securities. In the future, however, one
or more of the Funds may convert to a master/feeder investment structure. In
the master/feeder investment structure, a Fund, instead of investing directly
in securities, would invest in a mutual fund with the same investment goals
and policies as the Fund's. The underlying mutual fund, referred to as a
portfolio, would buy, hold and sell securities in accordance with these
policies. Of course, there could be no assurance that a Fund or its portfolio
would achieve their goals.
If a Fund invests using the master/feeder structure, all references in
this Statement of Additional Information to a Fund include that Fund's
underlying portfolio unless the context otherwise requires.
<PAGE>
2. INVESTMENT OBJECTIVES AND POLICIES
The investment objective (or goal) of each Fund is as follows*:
CITI NASDAQ-100 INDEX FUND - The Fund's goal is to provide investment
results that, before fees and expenses, correspond to the performance of
the Nasdaq-100 Index(R).
CITI SMALL CAP INDEX FUND - The Fund's goal is to provide investment
results that, before fees and expenses, correspond to the performance of
the Russell 2000(R) Index.
CITI U.S. 1000 INDEX FUND - The Fund's goal is to provide investment
results that, before fees and expenses, correspond to the performance of
the Russell 1000(R) Index.
CITI GLOBAL TITANS INDEX FUND - The Fund's goal is to provide
investment results that, before fees and expenses, correspond to the
performance of the Dow Jones Global Titans Index(SM).
CITI FINANCIAL SERVICES INDEX FUND - The Fund's goal is to provide
investment results that, before fees and expenses, correspond to the
performance of the Goldman Sachs Sector Index - Financials (GSSI
Financials Index).
CITI HEALTH SCIENCES INDEX FUND - The Fund's goal is to provide
investment results that, before fees and expenses, correspond to the
performance of the Goldman Sachs Sector Index - Healthcare (GSSI
Healthcare Index).
CITI TECHNOLOGY INDEX FUND - The Fund's goal is to provide investment
results that, before fees and expenses, correspond to the performance of
the Goldman Sachs Technology (GSTI(TM) Composite) Index.
CITI U.S. BOND INDEX FUND - The Fund's goal is to provide investment
results that, before fees and expenses, correspond to the performance of
the Lehman Brothers Aggregate Bond Index(TM).
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*The Funds are not sponsored, endorsed, sold or promoted by the sponsors of
their corresponding Indexes and the sponsors of the Indexes are not in any
way affiliated with the Funds. The sponsors of the Indexes make no
representation or warranty, implied or express, to purchasers of any of the
Funds or to any member of the public regarding the advisability of investing
in the Funds or the ability of the Indexes to track general stock or bond
market performance. The sponsors of the Indexes do not guarantee the accuracy
and/or the completeness of any Index or any data included therein.
The Funds have licensed for use the following trademarks and service
marks: Russell 1000(R) and Russell 2000(R) are trademarks/service marks of
Frank Russell Company and Russell(TM) is a trademark of the Frank Russell
Company; MSCI, Morgan Stanley Capital International, EAFE and MSCI(R) EAFE
Free Index are service marks of MSCI; Dow Jones and Dow Jones Global Titans
Index(SM) are service marks of Dow Jones & Company, Inc.; The Nasdaq-100(R),
Nasdaq-100 Index(R), and Nasdaq(R) are trade or service marks of The Nasdaq
Stock Market, Inc.; "GSTI", "GSTI Composite Index", "Goldman Sachs Technology
Index", "GSSI" and "Goldman Sachs Sector Indices" are trademarks of Goldman,
Sachs & Co.
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.
Each Fund invests primarily in securities of companies and other issuers
that make up its corresponding Index or uses derivatives or other investment
techniques to match, as closely as possible, the performance of its Index.
Each Fund may also use various investment techniques, such those described in
the Prospectuses and described under "Description of Permitted Investments and
Investment Practices," below.
The Prospectuses 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 Prospectuses concerning
the investment policies and techniques of each Fund.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The Funds may, but need not, invest in all of the investments and utilize
all of the investment techniques described below and in the Prospectuses. The
selection of investments and the utilization of investment techniques depend
on, among other things, the Indexes the Funds track, conditions and trends in
the economy and financial markets and investments being available on terms
that, in the portfolio managers' opinion, make economic sense.
ALL FUNDS
BANK OBLIGATIONS
Each of the Funds may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. Certificates of
deposit ("CDs") are negotiable certificates evidencing the obligation of a bank
to repay funds deposited with it for a specified period of time. Time deposits
("TDs") are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. TDs that may be held by a
Fund will not benefit from insurance from the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the FDIC. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the FDIC.
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose CDs may be purchased by a Fund are
insured by the FDIC (although such insurance may not be of material benefit to
the Fund, depending on the principal amount of the CDs of each bank held by the
Fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of Federal or state laws and
regulations, domestic branches of domestic banks whose CDs may be purchased by
the Funds generally are required, among other things, to maintain specified
levels of reserves, are limited in the amounts that they can loan to a single
borrower and are subject to other regulation designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and TDs, may be general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific obligation and
governmental regulation as well as governmental action in the country in which a
foreign bank has its head office. Such obligations are subject to different
risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. These
foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. A domestic branch of a foreign bank with assets in excess
of $1 billion may be subject to reserve requirements imposed by the Federal
Reserve System or by the state in which the branch is located if the branch is
licensed in that state.
In addition, Federal branches licensed by the Comptroller of the Currency
and branches licensed by certain states ("State Branches") may be required to:
(1) pledge to the regulator by depositing assets with a designated bank within
the state, a certain percentage of their assets as fixed from time to time by
the appropriate regulatory authority; and (2) maintain assets within the state
in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches
generally must be insured by the FDIC if such branches take deposits of less
than $100,000.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches
of foreign banks, the portfolio managers carefully evaluate such investments
on a case-by-case basis.
Each Fund may purchase CDs issued by banks, savings and loan associations
and similar thrift institutions with less than $1 billion in assets, which are
members of the FDIC, provided such Fund purchases any such CD in a principal
amount of not more than $100,000, which amount would be fully insured by the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the FDIC. Interest payments on such a CD are not insured by the FDIC. No Fund
will own more than one such CD per such issuer.
COMMERCIAL PAPER AND SHORT-TERM CORPORATE DEBT INSTRUMENTS
Each Fund may invest in commercial paper (including variable amount master
demand notes), which consists of short-term, unsecured promissory notes issued
by corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes. The
portfolio managers monitor on an ongoing basis the ability of an issuer of a
demand instrument to pay principal and interest on demand.
Each Fund, other than the U.S. Bond Index Fund, also may invest in
non-convertible corporate debt securities (e.g., bonds and debentures) with not
more than one year remaining to maturity at the date of settlement. The U.S.
Bond Index Fund invests in additional debt securities (See "Additional
Information Regarding the U.S. Bond Index Fund" below). A Fund, other than the
U.S. Bond Index Fund, will invest only in such corporate bonds and debentures
that are rated at the time of purchase at least "Aa" by Moody's or "AA" by S&P.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The portfolio managers will consider such an event in
determining whether the Fund should continue to hold the obligation. To the
extent the Fund continues to hold such obligations, it may be subject to
additional risk of default.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities issued by other open-end, management
investment companies to the extent permitted under the Investment Company Act of
1940, as amended (the "1940 Act"). As a general matter, under the 1940 Act
investment in such securities is limited to: (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Fund's net assets with respect to any
one investment company and (iii) 10% of the Fund's net assets with respect to
all such companies in the aggregate. Investments in the securities of other
investment companies generally will involve duplication of advisory fees and
certain other expenses. Each Fund may also purchase interests of exchange-listed
closed-end funds to the extent permitted under the 1940 Act.
RULE 144A SECURITIES
Each Fund may invest in privately issued securities, including those which
may be resold only in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted securities that
are not publicly traded. Accordingly, the liquidity of the market for specific
Rule 144A Securities may vary. Delay or difficulty in selling such securities
may result in a loss to the Fund. Privately issued or Rule 144A securities that
are determined by the portfolio managers to be "illiquid" are subject to the
Fund's policy of not investing more than 15% of its net assets in illiquid
securities. The portfolio managers, under guidelines approved by the board of
trustees, will evaluate the liquidity characteristics of each Rule 144A Security
proposed for purchase by the Fund on a case-by-case basis and will consider the
following factors, among others, in their evaluation: (1) the frequency of
trades and quotes for the Rule 144A Security; (2) the number of dealers willing
to purchase or sell the Rule 144A Security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the Rule 144A Security;
and (4) the nature of the Rule 144A Security and the nature of the marketplace
trades (e.g., the time needed to dispose of the Rule 144A Security, the method
of soliciting offers and the mechanics of transfer).
FLOATING AND VARIABLE-RATE OBLIGATIONS
Each Fund may purchase floating- and variable-rate obligations. A Fund may
purchase floating- and variable-rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of thirteen months,
but which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding thirteen months. Variable rate demand notes
include master demand notes that are obligations that permit the Fund to invest
fluctuating amounts, which may change daily without penalty, pursuant to direct
arrangements between the Fund, as lender, and the borrower. The interest rates
on these notes fluctuate from time to time. The issuer of such obligations
ordinarily has a corresponding right after a given period, to prepay in its
discretion the outstanding principal amount of the obligations plus accrued
interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating-rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted automatically
each time such rate is adjusted. The interest rate on a variable-rate demand
obligation is adjusted automatically at specified intervals. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Accordingly, where these obligations are not secured by letters of credit
or other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and the Fund may
invest in obligations, which are not so rated only if the portfolio managers
determine that at the time of investment the obligations are of comparable
quality to the other obligations in which each Fund may invest. The portfolio
managers, on behalf of the Fund, consider on an ongoing basis the
creditworthiness of the issuers of the floating- and variable-rate demand
obligations in the Fund's portfolio. Each Fund will not invest more than 10% of
the value of its total net assets in floating- or variable-rate demand
obligations whose demand feature is not exercisable within seven days. Such
obligations may be treated as liquid, provided an active secondary market
exists.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of the value of its net assets in securities
as to which a liquid trading market does not exist, provided such investments
are consistent with its investment objective. Such securities may include
securities that are not readily marketable, such as privately issued securities
and other securities that are subject to legal or contractual restrictions on
resale, floating- and variable-rate demand obligations as to which the Fund
cannot exercise a demand feature on not more than seven days' notice and as to
which there is no secondary market and repurchase agreements providing for
settlement more than seven days after notice.
FOREIGN SECURITIES
To the extent included in the Fund's Index, a Fund may invest in foreign
securities, including common stocks, preferred stocks, warrants, convertible
securities and other securities of issuers organized under the laws of countries
other than the United States. Such securities also include equity interests in
foreign investment funds or trusts, real estate investment trust securities and
any other equity or equity-related investment whether denominated in foreign
currencies or U.S. dollars.
To the extent included in the Fund's Index, each Fund may invest in foreign
securities through American Depository Receipts ("ADRs"), Canadian Depository
Receipts ("CDRs"), European Depository Receipts ("EDRs"), International
Depository Receipts ("IDRs") and Global Depository Receipts ("GDRs") or other
similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company and traded on a U.S.
stock exchange, and CDRs are receipts typically issued by a Canadian bank or
trust company that evidence ownership of underlying foreign securities. Issuers
of unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, such information may not correlate to
the market value of the unsponsored ADR. EDRs and IDRs are receipts typically
issued by European banks and trust companies, and GDRs are receipts issued by
either a U.S. or non-U.S. banking institution, that evidence ownership of the
underlying foreign securities. Generally, ADRs in registered form are designed
for use in US. securities markets and EDRs and IDRs in bearer form are designed
primarily for use in Europe.
For temporary defensive purposes, each Fund may invest in fixed income
securities of non-U.S. governmental and private issuers. Such investments may
include bonds, notes, debentures and other similar debt securities, including
convertible securities.
Investments in foreign obligations involve certain considerations that are
not typically associated with investing in domestic securities. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same accounting
auditing and financial reporting standards or governmental supervision as
domestic issuers. In addition, with respect to certain foreign countries, taxes
may be withheld at the source under foreign tax laws, and there is a possibility
of expropriation or confiscatory taxation, political, social and monetary
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries.
From time to time, investments in other investment companies may be the most
effective available means by which a Fund may invest in securities of issuers in
certain countries. Investment in such investment companies may involve the
payment of management expenses and, in connection with some purchases, sales
loads, and payment of substantial premiums above the value of such companies'
portfolio securities. At the same time, the Fund would continue to pay its own
management fees and other expenses.
Investment income on certain foreign securities in which the Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which a Fund would be subject.
To the extent included in the Fund's Index, a Fund may invest in securities
of non-U.S. issuers that impose restrictions on transfer within the United
States or to United States persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than securities
of non-U.S. issuers of the same class that are not subject to such restrictions.
REPURCHASE AGREEMENTS
Each Fund may engage in a repurchase agreement with respect to any security
in which it is authorized to invest, although the underlying security may mature
in more than thirteen months. A Fund may enter into repurchase agreements
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually agreed-upon time and price that involves the
acquisition by the Fund of an underlying debt instrument, subject to the
seller's obligation to repurchase, and the Fund's obligation to resell, the
instrument at a fixed price usually not more than one week after its purchase.
The Fund's custodian has custody of, and holds in a segregated account,
securities acquired as collateral by the Fund under a repurchase agreement.
Repurchase agreements are considered by the staff of the Securities and Exchange
Commission (the "SEC") to be loans by the Funds. The Funds may enter into
repurchase agreements only with respect to securities of the type in which they
may invest, including government securities and mortgage-related securities,
regardless of their remaining maturities, and require that additional securities
be deposited with the custodian if the value of the securities purchased should
decrease below resale price. The portfolio managers monitor on an ongoing basis
the value of the collateral to assure that it always equals or exceeds the
repurchase price. Certain costs may be incurred by a Fund in connection with the
sale of the underlying securities if the seller does not repurchase them in
accordance with the repurchase agreement. In addition, if bankruptcy proceedings
are commenced with respect to the seller of the securities, disposition of the
securities by a Fund may be delayed or limited. While it does not presently
appear possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delay and costs to the Funds in connection with insolvency proceedings),
it is the policy of the each Fund to limit repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. Each Fund considers on an ongoing basis the creditworthiness of
the institutions with which it enters into repurchase agreements.
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 by the Fund. 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.
SECURITIES LOANS
Each Fund may lend securities from its portfolio to brokers, dealers and
financial institutions (but not individuals) if cash, U.S. Government securities
or other high quality debt obligations equal to at least 100% of the current
market value of the securities loaned (including accrued interest thereon) plus
the interest payable to the Fund with respect to the loan is maintained with the
Fund. In determining whether or not to lend a security to a particular broker,
dealer or financial institution, the portfolio managers consider all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. No
Fund will enter into any portfolio security lending arrangements having a
duration longer than one year. Any securities that a Fund receives as collateral
do not become part of its portfolio at the time of the loan and, in the event of
a default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the Fund any accrued income on those securities, and the Fund may invest the
cash collateral and earn income or receive an agreed-upon fee from a borrower
that has delivered cash-equivalent collateral. No Fund will lend securities
having a value that exceeds one-third of the current value of its total assets.
Loans of securities by a Fund are subject to termination at the Fund's or the
borrower's option. Each Fund may pay reasonable administrative and custodial
fees in connection with a securities loan and may pay a negotiated portion of
the interest or fee earned with respect to the collateral to the borrower or the
placing broker. Borrowers and placing brokers are not permitted to be
affiliated, directly or indirectly, with the Fund, the Manager, or the
Subadviser.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS
Each Fund may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward-commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Funds will generally purchase securities with the intention of
acquiring them, a Fund may dispose of securities purchased on a when-issued,
delayed-delivery or a forward-commitment basis before settlement when deemed
appropriate by the Manager or the subadviser. Securities purchased on a
when-issued or forward-commitment basis may expose the Fund to risk because they
may experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued or forward-commitment basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Each Fund will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
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 as described under "Foreign Currency Exchange Transactions" below.
EURO CONVERSION
The Funds 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 its
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.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
To the extent included in a Fund's Index, a Fund may invest in foreign
securities which involve currency risks. The U.S. dollar value of a foreign
security tends to decrease when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated, and tends to increase
when the value of the U.S. dollar falls against such currency. To attempt to
minimize risks to a Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies, the Fund may engage in foreign currency
transactions on a spot (i.e., cash) basis and may purchase or sell forward
foreign currency exchange contracts ("forward contracts"). A forward contract is
an obligation to purchase or sell a specific currency for an agreed price at a
future date that is individually negotiated and privately traded by currency
traders and their customers. A Fund may also purchase and sell foreign currency
futures contracts (see "Futures Contracts" below).
Forward contracts establish an exchange rate at a future date. These
contracts are transferable 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 is traded at a net price
without commission. Neither spot transactions nor forward contracts eliminate
fluctuations in the prices of a Fund's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.
Each Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the portfolio managers believe that a
foreign currency may suffer a substantial decline against the U.S. dollar, a
Fund may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency, or when the portfolio managers believe
that the U.S. dollar may suffer a substantial decline against the foreign
currency, the Fund may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount (a "position hedge").
Each Fund may, in the alternative, enter into a forward contract to sell a
different foreign currency for a fixed U.S. dollar amount where the portfolio
managers believe that the U.S. dollar value of the currency to be sold pursuant
to the forward contract will fall whenever there is a decline in the U.S. dollar
value of the currency in which the portfolio securities are denominated (a
"cross-hedge").
Foreign currency hedging transactions are an attempt to protect the Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The cost to a Fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange usually
are conducted on a principal basis, no fees or commissions are involved.
Currency exchange dealers may, however, realize a profit on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. The portfolio managers consider on an ongoing basis the
creditworthiness of the institutions with which a Fund enters into foreign
currency transactions. The use of forward currency exchange contracts does not
eliminate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. If a
devaluation generally is anticipated, a Fund may not be able to contract to sell
the currency at a price above the devaluation level it anticipates.
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.
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.
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. 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 SEC
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.
The Funds may purchase put options on a currency in an attempt to protect
against currency-rate fluctuations. 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.
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 Manager's or 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 portfolio
managers 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. For
example, the Fund would sell the currency expected to decrease and purchase a
currency which is expected to increase against the currency sold in an attempt
to protect against declines in value of the Fund's holdings denominated in the
currency sold.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in currency
exchange rates will affect the value of these receipts. For example, a decline
in the U.S. dollar value of another currency in which securities are primarily
traded will reduce the U.S. dollar value of such securities, even if their value
in the other non-U.S. currency remains constant, and thus will reduce the value
of the receipts covering such securities. 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 portfolio managers. 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 portfolio
managers deem 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.
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 indexes. The delivery requirements of options on
securities indexes 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 indexes by owning
securities whose price changes, in the opinion of the portfolio managers, 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 indexes 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 indexes 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 indexes 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 indexes 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 indexes 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 indexes when the
portfolio managers believe 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 indexes 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 indexes 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 portfolio managers desire 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 options on an index depends
upon movements in the level of prices in the market generally or, in the case of
certain indexes, 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 indexes is subject to the portfolio managers' 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 interest rate
futures contracts, stock index futures contracts, in the case of a Fund that
tracks an index including foreign securities, foreign currency futures contracts
and, in the case of the U.S. Bond Index Fund, bond 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 that 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
portfolio managers anticipate that interest rates are about to rise, depressing
future prices of bonds, the portfolio managers 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.
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.
A Fund may purchase and sell foreign currency futures contracts to attempt
to protect its current or intended foreign investments from fluctuations in
currency exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant. A
Fund may sell futures contracts on a foreign currency, for example, where it
holds securities denominated in such currency and it anticipates a decline in
the value of such currency relative to the dollar. In the event such decline
occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. 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.
A currency futures contract sale creates an obligation by the Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction.
In connection with transactions in foreign currency futures, a Fund will be
required to deposit as "initial margin" an amount of cash or short-term
government securities equal to from 5% to 8% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the value of the futures contract.
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. Futures markets can be highly volatile
and transactions of this type carry a high risk of loss. Moreover, a relatively
small adverse market movement with respect to these transactions may result not
only in loss of the original investment but also in unquantifiable further loss
exceeding any margin deposited.
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 values of
the securities being hedged do not move in the same direction as the underlying
securities, 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 indexes.
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. This could require a Fund to post additional cash
or cash equivalents as the value of the position fluctuates. Further, rather
than meeting additional variation margin requirements, investors may close out
futures contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, there is the
potential that the liquidity of the futures market may be lacking. Prior to
expiration, a futures contract may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the contract
market on which the futures contract was originally entered into. While a Fund
will establish a futures position only if there appears to be a liquid secondary
market therefor, there can be no assurance that 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 effective use of futures strategies depends on, among other things, the
Fund's ability to terminate futures positions at times when the portfolio
managers deem it desirable to do so. Although no Fund will enter into a futures
position unless the portfolio managers believe that a liquid secondary market
exists for such futures contract, there is no assurance that the Fund will be
able to effect closing transactions at any particular time or at an acceptable
price. Each Fund generally expects that its futures transactions will be
conducted on recognized U.S. and foreign securities and commodity exchanges.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a futures contract during a
single trading day and prohibit trading beyond such limits once they have been
reached. The trading of futures contracts also is subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments. 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 portfolio managers do not believe that these trading and position limits
will have an adverse impact on the hedging strategies regarding the Funds'
investments.
Investments in futures contracts also entail the risk that if the portfolio
managers' 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 that
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.
Regulations of the CFTC require that each Fund enter into transactions in
futures contracts for hedging purposes only, in order to assure that it is not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by a Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, no Fund may
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets. The Funds' ability to engage in the hedging transactions
described herein may be limited by the additional policies and concerns of
various Federal and state regulatory agencies.
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 portfolio managers use a variety of internal risk management procedures
to ensure that derivatives use is consistent with the each Fund's investment
objective, does not expose the Fund to undue risk and is closely monitored.
These procedures include providing periodic reports to the board of trustees
concerning the use of derivatives.
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 portfolio managers believe
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 portfolio managers
believe 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.
INDEXED SECURITIES
Indexed securities include commercial paper, certificates of deposit, and
other fixed-income securities whose values at maturity or coupon interest rates
are determined by reference to the returns of a specified index. Indexed
securities can be affected by stock and bond prices as well as changes in
interest rates and the creditworthiness of their issuers and may not track their
corresponding index as accurately as direct investments in that index.
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.
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.
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 their dividend
requirements.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in various types of U.S. Government obligations. U.S.
Government obligations include securities issued or guaranteed as to principal
and interest by the U.S. Government its agencies or instrumentalities. Payment
of principal and interest on U.S. Government obligations (i) may be backed by
the full faith and credit of the United States (as with U.S. Treasury
obligations and Government National Mortgage Association ("GNMA") certificates)
or (ii) may be backed solely by the issuing or guaranteeing agency or
instrumentality itself (as with Federal National Mortgage Association ("FNMA")
notes). In the latter case, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
which agency or instrumentality may be privately owned. There can be no
assurance that the U.S. Government would provide financial support to its
agencies or instrumentalities where it is not obligated to do so. As a general
matter, the value of debt instruments, including U.S. Government obligations,
declines when market interest rates increase and rises when market interest
rates decrease. Certain types of U.S. Government obligations are subject to
fluctuations in yield or value due to their structure or contract terms.
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.
Each Fund may also enter into index swaps in pursuit of its investment
objective. Index swaps involve the exchange by a Fund with another party of cash
flows based upon the performance of an index of securities or a portion of an
index of securities that usually include dividends or income. In each case, the
exchange commitments can involve payments to be made in the same currency or in
different currencies. The Funds will usually enter into swaps on a net basis. In
so doing, the two payment streams are netted out, with the Funds receiving or
paying, as the case may be, only the net amount of the two payments. If a Fund
enters into a swap, it will maintain a segregated account on a gross basis,
unless the contract provides for a segregated account on a net basis. If there
is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The use of index swaps is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. There is no limit, except as provided below, on
the amount of swap transactions that may be entered into by the Fund. These
transactions generally do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps generally is limited to the net amount of payments that the Fund is
contractually obligated to make.
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 portfolio managers are incorrect in their 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 portfolio managers deem 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.
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.
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.
INDEX-RELATED SECURITIES
Each Fund may invest in certain types of derivative securities that enable
investors to purchase or sell shares in a portfolio of securities that seeks to
track the performance of an underlying index or a portion of an Index. Such
index-related securities include among others DIAMONDS (interests in a portfolio
of securities that seeks to track the performance of the Dow Jones Industrial
Average), SPDRs or Standard & Poor's Depositary Receipts (interests in a
portfolio of securities that seeks to track the performance of the S&P 500
Index), WEBS or World Equity Benchmark Shares (interests in a portfolio of
securities that seeks to track the performance of a benchmark index of a
particular foreign country's stocks), and the Nasdaq-100 Trust (interests in a
portfolio of securities of the largest and most actively traded non-financial
companies listed on the Nasdaq Stock Market). Such securities are similar to
index mutual funds, but they are traded on various stock exchanges or secondary
markets. The value of these securities is dependent upon the performance of the
underlying index on which they are based. Thus, these securities are subject to
the same risks as their underlying indexes as well as the securities that make
up those indexes. For example, if the securities comprising an index that an
index-related security seeks to track perform poorly, the index-related security
will lose value.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
In some cases, the derivatives purchased by the Funds are standardized
contracts traded on commodities exchanges or boards of trade in the U.S. or in
foreign countries. This means that the exchange or board of trade guarantees
counterparty performance. Over-the-counter derivatives, which may be traded in
the U.S. and in foreign countries, are not guaranteed. 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.
The Funds may take advantage of opportunities in the area of options and
futures contracts and options on futures contracts and any other derivative
investments which are not presently contemplated for use by the Funds or which
are not currently available but which may be developed, to the extent such
opportunities are both consistent with a Fund's investment objective and legally
permissible for the Fund.
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 SSB Citi and its affiliates, holds all or a major portion.
Although SSB Citi 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 SSB Citi 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.
ADDITIONAL INFORMATION REGARDING THE U.S. BOND INDEX FUND MORTGAGE-BACKED
SECURITIES
U.S. Bond Index Fund may invest in mortgage-backed securities. Some
mortgage-backed securities represent 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 GNMA, 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.
Mortgage-backed securities may also be issued by private issuers such as
commercial banks, savings and loans, mortgage bankers and private mortgage
insurance companies. These obligations are not backed by any governmental
authority or agency.
The 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 the Fund's fixed income securities, but would also
increase the inherent volatility of the Fund by effectively converting
short-term debt instruments into long-term debt instruments. As a result, prices
of mortgage-backed securities may decrease more than prices of other debt
obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
U.S. Bond Index Fund may enter into mortgage "dollar roll" transactions
pursuant to which it sells mortgage-backed securities for delivery in the future
and simultaneously contracts to repurchase substantially similar securities on a
specified future date. During the roll period, the Fund 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, the Fund
takes the risk that the market price of the mortgage-backed security will drop
below the future purchase price. When the Fund uses a mortgage dollar roll, it
is also subject to the risk that the other party to the agreement will not be
able to perform. A "covered roll" is a specific type of dollar roll for which
the Fund establishes a segregated account with liquid securities equal in value
to the securities subject to repurchase by the Fund. The Fund invests only in
covered rolls.
CORPORATE ASSET-BACKED SECURITIES
U.S. Bond Index Fund may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. 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.
ADDITIONAL INFORMATION REGARDING THE FINANCIAL SERVICES INDEX FUND
Financial Services Index Fund seeks to achieve its investment objective by
investing substantially all of its assets in the stocks that comprise the GSSI
Financials Index and in derivatives based on the performance of the Index or the
market sector represented by the Index. Normally, the Fund invests at least 80%
of its assets in securities of companies included in the Index and in
derivatives based on the performance of the Index or the market sector
represented by the Index.
The GSSI Financials Index includes stocks in the following types of
companies:
o Banking services - regional trust, money center, commercial and consumer
finance services including credit cards, savings and loans, and mortgage
finance
o Brokerage firms and asset managers
o Insurance companies including brokers, life insurance, property and
casualty, disability and reinsurance
o Real estate companies including developers, investors, operating companies
and real estate investment trusts
This sector generally is subject to extensive governmental regulation,
which may change frequently. In addition, the profitability of businesses in
financial services depends heavily upon the availability and cost of money,
and may fluctuate significantly in response to changes in interest rates, as
well as changes in general economic conditions. From time to time, severe
competition may also affect the profitability of financial services companies.
Most financial services companies are subject to extensive governmental
regulation, which limits their activities and may (as with insurance rate
regulation) affect the ability to earn a profit from a given line of business.
Certain financial services businesses are subject to intense competitive
pressures, including market share and price competition. The removal of
regulatory barriers to participation in certain segments of the financial
services sector may also increase competitive pressures on different types of
firms. The availability and cost of funds to financial services firms is crucial
to their profitability. Consequently, volatile interest rates and general
economic conditions can adversely affect their financial performance.
Financial services companies in foreign countries are subject to similar
regulatory and interest rate concerns. In particular, government regulation in
certain foreign countries may include controls on interest rates, credit
availability, prices and currency movements. In some cases, foreign governments
have taken steps to nationalize the operations of banks and other financial
services companies.
The deregulation of many segments of the financial services sector may
provide new opportunities for issuers in this sector. As new segments of the
financial services sector are opened to certain larger financial services firms
formerly prohibited from doing business in these segments (such as national and
money center banks); certain established companies in these market segments
(such as regional banks or securities firms) may become attractive acquisition
candidates for the larger firm seeking entrance into the segment. Typically,
acquisitions accelerate the capital appreciation of the shares of the company to
be acquired.
ADDITIONAL INFORMATION REGARDING THE HEALTH SCIENCES INDEX FUND AND THE
TECHNOLOGY INDEX FUND
HEALTH SCIENCES INDEX FUND
The Health Sciences Index Fund seeks to achieve its investment objective by
investing substantially all of its assets in the stocks that comprise the GSSI
Healthcare Index and in derivatives based on the performance of the Index or the
market sector represented by the Index. Normally, the Fund invests at least 80%
of its assets in securities of companies included in the Index and in
derivatives based on the performance of the Index or the market sector
represented by the Index.
The GSSI Healthcare Index includes stocks of the following types of
companies:
o Providers of healthcare related services including long-term care and
hospital facilities, healthcare management organizations and continuing
care services
o Researchers, manufacturers, and distributors of pharmaceuticals, drugs and
related sciences, and medical supplies, instruments and products
Many faster-growing healthcare companies have limited operating histories
and their potential profitability may be dependent on regulatory approval of
their products, which increases the volatility of these companies' security
prices. Many of these activities are funded or subsidized by governments;
withdrawal or curtailment of this support could lower the profitability and
market prices of such companies. Changes in government regulation could also
have an adverse impact. Continuing technological advances may mean rapid
obsolescence of products and services.
TECHNOLOGY INDEX FUND
The Fund seeks to achieve its investment objective by investing
substantially all of its assets in the stocks that comprise the GSTI Composite
Index and in derivatives based on the performance of the Index or the market
sector represented by the Index. Normally, the Fund invests at least 80% of its
assets in securities of companies included in the Index and in derivatives based
on the performance of the Index or the market sector represented by the Index.
The GSTI Composite Index includes stocks of companies in the following
segments of the U.S. technology marketplace:
o Producers of sophisticated devices related to the fields of computers,
electronics, networking and Internet services
o Producers of computer and Internet software
o Consultants for information technology
o Providers of computer services
Many technological products and services are subject to rapid obsolescence,
which may lower the market value of the securities of the companies in this
sector. Also, the portfolio may consist of securities of faster-growing, more
volatile technology companies. The market prices of these companies tend to rise
and fall more rapidly than those of larger, more established companies.
TECHNOLOGY AND HEALTH SCIENCE AREAS
Because of rapid advances in technology and health science, an investment in
companies with business operations in these areas may potentially offer
opportunities for long-term capital appreciation. Of course, prices of common
stocks of even the best managed, most profitable corporations are subject to
market risk, which means their stock prices can decline. In addition, swings in
investor psychology or significant trading by large institutional investors can
result in price fluctuations.
Companies in the rapidly changing fields of technology and health science
face special risks. For example, their products or services may not prove
commercially successful or may become obsolete quickly. The value of a Fund's
shares may be susceptible to factors affecting the technology and health science
areas and to greater risk and market fluctuation than an investment in a fund
that invests in a broader range of portfolio securities not concentrated in any
particular industry. As such, the Health Sciences Index Fund and the Technology
Index Fund are not appropriate investments for individuals who are not long-term
investors and who, as their primary objective, require safety of principal or
stable income from their investments. The technology and health science areas
may be subject to greater governmental regulation than many other areas and
changes in governmental policies and the need for regulatory approvals may have
a material adverse effect on these areas. Additionally, companies in these areas
may be subject to risks of developing technologies, competitive pressures and
other factors and are dependent upon consumer and business acceptance as new
technologies evolve.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following policies which
may not be changed with respect to any Fund without approval by holders of a
majority of the outstanding voting securities of that Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding voting securities of the Fund present at a meeting at
which the holders of more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund. The term "voting securities" as used
in this paragraph has the same meaning as in the 1940 Act.
None of the Funds may:
(1) Borrow money, if such borrowing is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder.
(2) Make loans to other persons if such loans are specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
(3) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar as the Fund may technically be deemed an underwriter
under the Securities Act in selling a security.
(4) 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 any Fund from purchasing or selling futures contracts or
options thereon, and each Fund reserves the freedom of action to hold and to
sell real estate acquired as a result of the ownership of securities by the
Fund).
(5) 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.
In addition, none of the U.S. 1000 Index Fund, the Small Cap Index Fund, the
Global Titans Index Fund, the Nasdaq-100 Index Fund, or the U.S. Bond Index
Fund, may:
Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Fund's investment objectives,
up to 25% of its assets, at market value at the time of each investment, may
be invested in any one industry, except that positions in futures contracts
shall not be subject to this restriction.
None of the Financial Services Index Fund, the Health Sciences Index Fund,
or the Technology Index Fund, may:
Purchase or sell the securities of any issuer, if, as a result of such
purchase or sale, less than 25% of the total assets of the Fund would be
invested in the securities of issuers principally engaged in the business
activities having the specific characteristics denoted by the Fund's name,
provided that the Fund may invest without limit in short-term corporate and
government bonds and notes and money market instruments for temporary
defensive purposes.
The Financial Services Index Fund, the Health Sciences Index Fund and the
Technology Index Fund reserve the right to change their names from time to time.
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 dates during
the period.
Cumulative total return for a specific period is calculated by first taking
a hypothetical initial investment in Fund shares on the first day of a period,
deducting (as applicable) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial investment
from the redeemable value and dividing the remainder by the initial investment
and expressing the result as a percentage. The calculation assumes that all
income and capital gains distributions by each Fund have been reinvested at net
asset value on the reinvestment dates during the period. Cumulative total return
may also be shown as the increased dollar value of the hypothetical investment
over 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.
In computing total rates of return and yield quotations, all Fund expenses
are included. However, fees that may be charged directly to a shareholder by
other financial intermediaries are not included. Of course, any such fees will
reduce the shareholder's net return on investment.
Historical data on the Indexes may be used to promote the applicable Fund.
The historical Index data presented from time to time is not intended to suggest
that an investor would have achieved comparable results by investing in any one
equity security or in managed portfolios of equity securities, such as the
Funds, during the periods shown.
Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical Services,
Inc., Morningstar, Inc. and other industry sources and publications. From time
to time a Fund may compare its performance against inflation with the
performance of other instruments against inflation, such as FDIC-insured bank
money market accounts. In addition, advertising for a Fund may indicate that
investors should consider diversifying their investment portfolios in order to
seek protection of the value of their assets against inflation. From time to
time, advertising materials for a Fund may refer to or discuss current or past
economic or financial conditions, developments and events. A Fund's advertising
materials also may refer to the integration of the world's securities markets,
discuss the investment opportunities available worldwide and mention the
increasing importance of an investment strategy including non-U.S. investments.
The Funds are newly-offered and do not have performance information as of
the date of this Statement of Additional Information.
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 (the "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 a class, 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
The Funds offer two classes of shares, Citi Index Shares and Smith Barney
Index Shares. Both Citi Index Shares and Smith Barney Index Shares of the Funds
are sold at net asset value without an initial sales charge. There are no
deferred sales charges when you sell your shares. However, as indicated in the
Funds' Prospectuses, each Fund, other than the U.S. Bond Index Fund, charges a
redemption fee, payable to the Fund, on the sale or exchange of any shares that
have been held for less than 180 days.
Citi Index Shares may be purchased from the Distributor or a broker-dealer
financial intermediary, financial institution, or the Distributor's financial
consultants (each called a "Service Agent") that has entered into a sales or
service agreement with the Distributor concerning the Funds. Shares may be
purchased through the Cititrade Program by customers that have established a
Cititrade Account. For more detailed information on how to open a Cititrade
Account, please visit the Cititrade website at www.mycititrade.com or call a
Cititrade account representative at 1-888-663-CITI [2484].
Smith Barney Index Shares may be purchased from a Service Agent or from a
Fund, but only if the investor is investing through certain qualified plans or
certain dealer representatives. Service Agents may charge their customers an
annual account maintenance fee in connection with a brokerage account through
which an investor purchases or holds Smith Barney Index Shares. Smith Barney
Index Shares held directly at the sub-transfer agent are not subject to a
maintenance fee.
The Funds do not, but your Service Agent may, impose a minimum initial or
subsequent investment requirement with respect to Citi Index Shares. Investors
may open a Smith Barney Index Shares account in a Fund by making an initial
investment of at least $1,000 for each account, or $250 for an IRA or a
Self-Employed Retirement Plan, in Smith Barney Index Shares of a Fund.
Subsequent investments of at least $50 may be made for Smith Barney Index
Shares. For shareholders purchasing Smith Barney Index Shares of the Fund
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement and subsequent investment requirement for Smith Barney
Index Shares is $25. For shareholders purchasing Smith Barney Index Shares of a
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment required and the subsequent investment requirement is $50.
There are no minimum investment requirements for Smith Barney Index Shares for
employees of Citigroup, Inc. and its subsidiaries, including Salomon Smith
Barney, unitholders who invest distributions from a Unit Investment Trust
sponsored by Salomon Smith Barney, and Directors/Trustees of any of the Smith
Barney mutual funds, and their spouses and children. A Fund reserves the right
to waive or change minimums.
Citi Index Shares are not subject to a distribution and service fee. Smith
Barney Index Shares of the Funds may pay a distribution and service fee of up to
0.20% of the average daily net assets represented by these shares.
During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone or Internet exchange or redemption. In such an event, another method
of instruction, if available, should be considered. The Funds 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 shareholder's identity by asking for the shareholder's
name, address, telephone number, Social Security number, account number, or
password identification number. If these or other reasonable procedures are not
followed, the Funds or their transfer agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholders will bear all risk of loss relating to a redemption or exchange by
telephone.
Systematic Withdrawal Plan. The Citi Index Shares' Systematic Withdrawal
Plan permits you to have a specified dollar amount (minimum of $100 per
withdrawal) automatically withdrawn from your account without a redemption fee
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. You
may receive your withdrawals by check, or have the monies transferred directly
into your bank account. Or you may direct that payments be made directly to a
third party. To participate in the Plan, you must complete the appropriate forms
provided by the sub-transfer agent or, if you hold your shares through a Service
Agent, by your Service Agent. Cititrade customers should contact a Cititrade
account representative at 1-888-663-CITI [2484] for more information.
The Smith Barney Index Shares' Withdrawal Plan is available to shareholders
of a Fund who own Smith Barney Index Shares of the Fund with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly or quarterly.
Withdrawals of at least $50 may be made without a redemption fee under the
Withdrawal Plan by redeeming as many Smith Barney Index Shares of the Fund as
may be necessary to cover the stipulated withdrawal payment. As it generally
would not be advantageous to a shareholder to make additional investments in
Smith Barney Index Shares at the same time he or she is participating in the
Withdrawal Plan, purchases by such shareholders in amounts of less than $5,000
ordinarily will not be permitted.
Smith Barney Index shareholders who wish to participate in the Withdrawal
Plan and who hold their shares in certificate form must deposit their share
certificates with the sub-transfer agent as agent for Withdrawal Plan members.
All dividends and distributions on shares in the Withdrawal Plan are reinvested
automatically at net asset value in additional Smith Barney Index Shares of the
Fund involved. A shareholder who purchases shares directly through the
sub-transfer agent may continue to do so and applications for participation in
the Withdrawal Plan must be received by the sub-transfer agent no later than the
eighth day of the month to be eligible for participation beginning with that
month's withdrawal. For additional information, shareholders should contact
their Service Agent.
To the extent withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in a Fund, continued withdrawal payments will
reduce the shareholder's investment, and may ultimately exhaust it. Withdrawal
payments should not be considered as income from investment in a Fund.
Systematic Investment Plan. Citi Index and Smith Barney Index Shareholders
may make additions to their accounts at any time by purchasing shares through a
service known as the Systematic Investment Plan. Under the Systematic Investment
Plan, your Service Agent or the sub-transfer agent is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the shareholder's account held with a bank or other
financial institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the shareholder's Fund
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by your Service Agent or the sub-transfer agent.
The Systematic Investment Plan also authorizes the Funds to apply cash held in a
Smith Barney Index shareholder's brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account. For
Cititrade customers, the Systematic Investment Plan authorizes the Funds to
apply cash held in a Citi Index shareholder's Cititrade Account to make
additions to the account. For additional information, please contact the Funds'
sub-transfer agent, or if you hold your shares through a Service Agent, your
Service Agent.
You may be able to invest 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. You should consult with the Transfer Agent and
your tax and retirement advisers. If you own your shares through a 401(k) plan
or an IRA account, you will not be charged the otherwise applicable redemption
fee when you redeem Citi Index Shares or Smith Barney Index Shares, unless
otherwise provided by the terms of your plan or account. In addition, no
redemption fee will be charged on the redemption or exchange of Smith Barney
Index Shares through accounts reflected on the records of the transfer agent as
omnibus accounts approved by Salomon Smith Barney.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption price of shares of the Funds either totally or
partially, by a distribution in kind of 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 the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of the 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.
There are no conversion, preemptive or other subscription rights.
ADDITIONAL DEALER CONCESSIONS
From time to time, the Funds' Distributor or SSB Citi, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers that sell or arrange for the sale of shares of the
Funds. Such concessions provided by the Funds' Distributor or SSB Citi may
include financial assistance to dealers in connection with pre-approved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding the Funds, and/or other dealer-sponsored events. From time
to time, the Funds' Distributor or SSB Citi may make expense reimbursements for
special training of a dealer's registered representatives and other employees in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
8. MANAGEMENT
Each Fund is supervised by the Board of Trustees of the Trust. In each case,
a majority of the Trustees are not affiliated with SSB Citi.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate that those Trustees and officers are
"interested persons" (as defined in the 1940 Act) of the Funds. Unless otherwise
indicated below, the address of each Trustee and officer of the Trust is 388
Greenwich Street, New York, New York 10013.
TRUSTEES OF THE TRUST
ELLIOTT J. BERV (age 57) -- President and Chief Executive Officer, Catalyst,
Inc. (Management Consultants) (since June 1992); President and Director, Elliott
J. Berv & Associates (Management Consultants) (since May 1984).
DONALD M. CARLTON (age 62) -- President and Chief Executive of Radian
International L.L.C. (chemical engineering). Director of National Instruments
Corp. and Central and Southwest Corporation. Formerly Director of The Hartford
Steam Boiler Inspection and Insurance Company (insurance/engineering services).
His address is c/o Radian International L.L.C., 8501 Mopac Blvd., Building No.
6, Austin, Texas 78759.
A. BENTON COCANOUGHER (age 61) -- Dean of College of Business Administration and
Graduate School of Business of Texas A & M University; Director of Randall's
Food Markets, Inc.; Director of First American Bank; and Director of First
American Savings Bank. His address is c/o Texas A & M University, 601 Blocker
Bldg., College Station, Texas 77843-4113.
MARK T. FINN (age 57) -- President and Director, Delta Financial, Inc. (since
June, 1983); Chairman of the Board and part Owner, FX 500 Ltd. (Commodity
Trading Advisory Firm) (April, 1990 to February, 1996); General Partner and
shareholder, Greenwich Ventures LLC (Investment Partnership) (since January,
1996); President, Secretary and Owner, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March, 1997); Director, Chairman and Owner, Vantage
Consulting Group, Inc. (since October, 1988).
RILEY C. GILLEY (age 74) -- Vice President and General Counsel, Corporate
Property Investors (November 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987).
STEPHEN RANDOLPH GROSS (age 52) -- Managing Partner of Gross, Collins & Cress,
P.C. (accounting firm); Director of Charter Bank & Trust. His address is 2625
Cumberland Parkway, Suite 400, Atlanta, Georgia 30339.
DIANA R. HARRINGTON (age 60) -- Professor, Babson College (since September
1993); Trustee, the Highland Family of Funds (March 1997 to March 1998).
SUSAN B. KERLEY (age 49) -- President, Global Research Associates, Inc.
(Investment Research) (since September 1990); Trustee, Mainstay Institutional
Funds (since December 1990).
HEATH B. MCLENDON* (age 66) -- Chairman, President, and Chief Executive Officer
of SSB Citi (since March 1996); Managing Director of Salomon Smith Barney (since
August 1993); President of Travelers Investment Adviser, Inc. ("TIA"); Chairman
or Co-Chairman of the Board of seventy-one investment companies associated with
Salomon Smith Barney. His address is 7 World Trade Center, New York, New York
10048.
ALAN G. MERTEN (age 58) -- President of George Mason University. Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York: formerly The Anne and Elmer Lindseth Dean of Johnson Graduate
School of Management of Cornell University. His address is c/o George Mason
University, 4400 University Drive, Fairfax, Virginia 22030-4444.
C. OSCAR MORONG, JR. (age 65) -- Chairman of the Board of the Trust; Managing
Director, Morong Capital Management (since February 1993); Director, Indonesia
Fund (1990 to 1999); Director, MAS Funds (since 1993).
R. RICHARDSON PETTIT (age 57) -- Duncan Professor of Finance of the University
of Houston; formerly Hanson Distinguished Professor of Business of the
University of Washington. His address is c/o Department of Finance, College of
Business, University of Houston, 4800 Calhoun, Houston, Texas 77204-6283.
WALTER E. ROBB, III (age 74) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors) (since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985).
E. KIRBY WARREN (age 66) -- Professor of Management, Graduate School of
Business, Columbia University (1987 to December 1999).
OFFICERS OF THE TRUST
HEATH B. McLENDON* (age 66) -- President of the Trust; Chairman, President, and
Chief Executive Officer of SSB Citi (since March 1996); Managing Director of
Salomon Smith Barney (since August 1993); President of Travelers Investment
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the Board of seventy-one
investment companies associated with Salomon Smith Barney. His address is 7
World Trade Center, New York, New York 10048.
LEWIS E. DAIDONE* (age 42) -- Senior Vice President and Treasurer of the Trust;
Managing Director of Salomon Smith Barney; Chief Financial Officer of the Smith
Barney mutual funds; Treasurer and Senior Vice President or Executive Vice
President of sixty-one investment companies associated with Citigroup; Director
and Senior Vice President of SSB Citi and TIA. His address is 125 Broad Street,
New York, New York 10004.
IRVING DAVID* (age 39) -- Controller of the Trust; Director of Salomon Smith
Barney; formerly Assistant Treasurer of First Investment Management Company.
Controller or Assistant Treasurer of fifty-three investment companies associated
with Citigroup. His address is 125 Broad Street, New York, New York 10004.
FRANCES GUGGINO* (age 42) -- Assistant Controller of the Trust; Vice President
of Citibank, N.A. since February, 1991.
PAUL BROOK* (age 46) -- Assistant Controller of the Trust; Director of Salomon
Smith Barney; Controller or Assistant Treasurer of forty-three investment
companies associated with Citigroup; from 1997-1998 Managing Director of AMT
Capital Services Inc.; prior to 1997 Partner with Ernst & Young LLP. His address
is 125 Broad Street, New York, New York 10004.
ANTHONY PACE* (age 35) -- Assistant Treasurer of the Trust. Mr. Pace is Vice
President - Mutual Fund Administration for Salomon Smith Barney Inc. Since 1986,
when he joined the company as a Fund Accountant, Mr. Pace has been responsible
for accounts payable, financial reporting and performance of mutual funds and
other investment products.
MARIANNE MOTLEY* (age 41) -- Assistant Treasurer of the Trust. Ms. Motley is
Director - Mutual Fund Administration for Salomon Smith Barney Inc. Since 1994,
when she joined the company as a Vice President, Ms. Motley has been responsible
for accounts payable, financial reporting and performance of mutual funds and
other investment products.
ROBERT I. FRENKEL, ESQ.* (age 45) -- Secretary of the Trust Mr. Frenkel is a
Managing Director and General Counsel - Global Mutual Funds for SSB Citi Asset
Management Group. Since 1994, when he joined Citibank as a Vice President and
Division Counsel, he has been responsible for legal affairs relating to mutual
funds and other investment products.
THOMAS C. MANDIA, ESQ.* (age 38) -- Assistant Secretary of the Trust. Mr. Mandia
is a Vice President and Associate General Counsel for SSB Citi Asset Management
Group. Since 1992, he has been responsible for legal affairs relating to mutual
funds and other investment products.
ROSEMARY D. EMMENS, ESQ.* (age 30) -- Assistant Secretary of the Trust. Ms.
Emmens has been a Vice President and Associate General Counsel of SSB Citi Asset
Management Group since 1998, where she has been responsible for legal affairs
relating to mutual funds and other investment products. Before joining Citibank,
Ms. Emmens was Counsel at The Dreyfus Corporation since 1995.
HARRIS GOLDBLAT, ESQ.* (age 30) -- Assistant Secretary of the Trust. Associate
General Counsel at SSB Citi Asset Management Group since April 2000. From June
1997 to March 2000, he was an associate at the law firm of Stroock & Stroock &
Lavan LLP, New York City, and from September 1996 to May 1997, he was an
associate at the law firm of Sills Cummis Radin Tischman Epstein & Gross,
Newark, NJ. From August 1995 to September 1996, Mr. Goldblat served as a law
clerk to the Honorable James M. Havey, P.J.A.D., in New Jersey.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which Salomon Smith Barney or its affiliates serve as
the distributor or administrator.
The Trustees of the Trust received the following remuneration from the
sources indicated for the periods set forth below:
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM TRUST
AGGREGATE ACCRUED AS ANNUAL AND FUND
COMPENSATION PART OF BENEFITS COMPLEX
FROM FUND UPON PAID TO
TRUSTEE(1) TRUST(2) EXPENSES(2) RETIREMENT(2) TRUSTEES
---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Elliott J. Berv N/A N/A None $69,500(3)
Donald M. Carlton N/A N/A N/A $56,000(3)
A. Benton Cocanougher N/A N/A N/A $57,000(3)
Mark T. Finn N/A N/A None $63,250(3)
Riley C. Gilley $2,007 None None $65,250(2)
Stephen Randolph Gross N/A N/A N/A $59,000(3)
Diana R. Harrington $2,600 None None $71,250(2)
Susan B. Kerley $2,562 None None $69,750(2)
Alan G. Merten N/A N/A N/A $56,000(3)
Heath B. McLendon None None None None(2)
C. Oscar Morong, Jr. $3,053 None None $92,000(2)
R. Richardson Pettit N/A N/A N/A $59,000(3)
E. Kirby Warren $2,293 None None $62,750(2)
(1) Messrs. Berv, Carlton, Cocanougher, Finn, Gilley, Gross, Merten, McLendon, Morong, Pettit and Warren and Mses. Harrington
and Kerley are trustees of 33, 14, 14, 32, 43, 14, 14, 31, 47, 14, 47, 38 and 38 funds, respectively, of the family of open-end
registered investment companies advised or managed by SSB Citi, Citibank, N.A, or their affiliates.
(2) For the fiscal year ended October 31, 1999.
(3) For the calendar year ended December 31, 1999. Messrs. Berv, Carlton, Cocanougher, Finn, Gross, Merten, and Pettit became
Trustees of the Trust effective September 1, 2000, and therefore did not receive compensation from the Trust for the fiscal year
ended October 31, 1999.
</TABLE>
As of the date of this Statement of Additional Information, there are no
shareholders of the Funds.
The Declaration of Trust of the Trust provides that the Trust 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 unless, as to liability to the Trust or its shareholders,
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. 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 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.
MANAGERS
SSB Citi provides certain administrative services to the Funds pursuant to
separate management agreements (the "Management Agreements"). SSB Citi is a
wholly owned subsidiary of Salomon Smith Barney Holdings Inc., which in turn, is
a wholly-owned subsidiary of Citigroup Inc. Unless otherwise terminated, each
Management Agreement with the Trust 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 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.
SSB Citi provides the Funds with general office facilities and supervises
the overall administration of the Funds, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the Funds' independent contractors and agents;
the preparation and filing of all documents required for compliance by the Funds
with applicable laws and regulations; and arranging for the maintenance of books
and records of the Funds. Trustees, officers, and investors in the Trust are or
may be or may become interested in SSB Citi, as directors, officers, employees,
or otherwise and directors, officers and employees of SSB Citi are or may become
similarly interested in the Trust.
Each Management Agreement provides that SSB Citi 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 Trust, when authorized
either by a vote of a majority of the outstanding voting securities of the
applicable Fund or by a vote of a majority of the Board of Trustees of the
Trust, or by SSB Citi 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 Trust provides that neither SSB Citi nor its
personnel shall be liable for any error of judgment or mistake of law or for any
omission in the administration or management of the Trust or the performance of
its duties under the Management Agreement, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations and
duties under the Management Agreement with the Trust.
The Funds pay the following aggregate management fees, which are accrued
daily and paid monthly and are based on each Fund's average daily net assets on
an annualized basis for the Fund's then-current fiscal year:
Citi Nasdaq-100 Index Fund 0.30%
Citi Small Cap Index Fund 0.30%
Citi U.S. 1000 Index Fund 0.25%
Citi Global Titans Index Fund 0.35%
Citi Financial Services Index Fund 0.50%
Citi Health Sciences Index Fund 0.50%
Citi Technology Index Fund 0.50%
Citi U.S. Bond Index Fund 0.15%
State Street, through its State Street Global Advisors division, serves as
the Subadviser to each Fund. State Street is a wholly owned subsidiary of State
Street Corporation, a publicly held bank holding company. As of December 31,
1999, State Street managed approximately $672 billion in assets. State Street's
principal address is Two International Place, Boston, Massachusetts 02110.
It is the responsibility of the Subadviser to make the day-to-day investment
decisions for 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 SSB Citi. The Subadviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
assets of the Funds and effecting securities transactions concerning those
assets.
Each of the Submanagement Agreements 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 Trust as to that Fund or by a
vote of a majority of the outstanding voting securities of that Fund, and, in
either case, by a majority of the Trustees of the 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 Subadviser may render
services to others. Each Submanagement Agreement is terminable as to any Fund
without penalty on not more than 60 days' nor less than 30 days' written notice
by the applicable Fund, when authorized either by a vote of a majority of the
outstanding voting securities of the applicable Fund or by a vote of a majority
of the Board of Trustees of the Trust, or by SSB Citi 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
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 Fund, except for willful misfeasance, bad faith or gross negligence or
reckless disregard of its or their obligations and duties under the
Submanagement Agreement.
The Funds pay a management fee to the Subadviser at the annual rates equal
to the percentages specified below of the aggregate assets of each Fund. SSB
Citi retains the aggregate management fee specified above in excess of amounts
payable to the Subadviser. SSB Citi pays the Subadviser's fee with respect to a
Fund to the extent it exceeds the aggregate management fee specified above.
Citi Nasdaq-100 Index Fund 0.04%
Citi Small Cap Index Fund 0.05%
Citi U.S.1000 Index Fund 0.05%
Citi Global Titans Index Fund 0.04%
Citi Financial Services Index Fund 0.05%
Citi Health Sciences Index Fund 0.05%
Citi Technology Index Fund 0.05%
Citi U.S. Bond Index Fund 0.05%
After the first year, the Funds pay a minimum annual management fee to the
Subadviser in the amount of $25,000, payable only to the extent greater than the
amount calculated pursuant to the percentages above.
DISTRIBUTOR
Salomon Smith Barney, 388 Greenwich Street, New York, New York 10013, 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 (the
"Distribution Agreements"). Under the Distribution Agreements, Salomon Smith
Barney is obligated to use its best efforts to sell shares of the Funds.
The Distribution Agreements are terminable with or without cause, without
penalty, on 60 days' notice by the Board of Trustees of the Trust or by vote of
holders of a majority of the relevant Fund's outstanding voting securities, or
on 90 days' notice by Salomon Smith Barney. Unless otherwise terminated, each
Distribution Agreement shall continue for successive annual periods so long as
such continuance is specifically approved at least annually by (a) the Trust's
Board of Trustees, or (b) by a vote of a majority (as defined in the 1940 Act)
of the relevant Fund's outstanding voting securities, provided that in either
event the continuance is also approved by a majority of the Board members of the
Trust who are not interested persons (as defined in the 1940 Act) of any party
to the Distribution Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreements will
terminate automatically in the event of their assignment, as defined in the 1940
Act and the rules and regulations thereunder.
The Smith Barney Index Shares of the Funds have adopted a Service Plan (the
"Service Plan") in accordance with Rule 12b-1 under the 1940 Act. Under the
Plan, the Smith Barney Index Shares of a Fund may pay the Distributor, a
broker-dealer or financial institution that has entered into a service agreement
with the Distributor concerning the Smith Barney Index Shares of the Funds or
others a monthly distribution and service fee at an annual rate not to exceed
0.20% of the average daily net assets represented by the Smith Barney Index
Shares of a Fund.
The Service Plan permits 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 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. Smith Barney Index Shares of each Fund will pay the fees to
the Distributor, and others until the Service 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 Plan for the Smith Barney Index Shares of each Fund, the Trustees
will review the Service Plan and the expenses for each Fund separately.
The Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's Trustees
and a majority of the Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the operation of the
Service Plan or in any agreement related to the Plan (for purposes of this
paragraph "Qualified Trustees"). The Service Plan requires that the Trust and
the Distributor provide to the Board of Trustees, and the Board of Trustees
review, at least quarterly, a written report of the amounts expended (and the
purposes therefor) under the Service Plan. The Service Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of such Qualified Trustees then in office. The Service Plan may be
terminated with respect to the Smith Barney Index Shares of any Fund at any time
by a vote of a majority of the Trust's Qualified Trustees or by a vote of a
majority of the outstanding voting securities representing the Smith Barney
Index Shares of that Fund. The Service Plan may not be amended to increase
materially the amount of a Fund's permitted expenses thereunder without the
approval of a majority of the outstanding securities representing the Smith
Barney Index Shares of that Fund and may not be materially amended in any case
without a vote of a majority of both the Trustees and Qualified Trustees. The
Distributor will preserve copies of any plan, agreement or report made pursuant
to the Service Plan for a period of not less than six years, and for the first
two years the Distributor will preserve such copies in an easily accessible
place.
CODE OF ETHICS
The Trust, the Manager, the Subadviser and the Distributor each have adopted
a code of ethics pursuant to Rule 17j-1 under the 1940 Act. Each code of ethics
permits personnel subject to such code to invest in securities, including
securities that may be purchased or held by a Fund. However, the codes of ethics
contain provisions and requirements designed to identify and address certain
conflicts of interest between personal investment activities and the interests
of the Funds. Of course, there can be no assurance that the codes of ethics will
be effective in identifying and addressing all conflicts of interest relating to
personal securities transactions.
EXPENSES
In addition to amounts payable under the Management Agreements,
Submanagement Agreements and the Service Plan, each Fund is responsible for its
own expenses, including, among other things, the costs of securities
transactions, the compensation of Trustees that are not affiliated with SSB Citi
or the Distributor, government fees, taxes, accounting and legal fees, expenses
of communication with shareholders, interest expense, and insurance premiums.
The Prospectuses for the Funds contain more information about the expenses of
each Fund.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with Citi
Fiduciary Trust Company ("Citi Fiduciary") pursuant to which Citi Fiduciary acts
as transfer agent for each Fund. Under the Transfer Agency and Service
Agreement, Citi Fiduciary maintains the shareholder account records for the
Funds, handles certain communications between shareholders and the Funds and
distributes dividends and distributions payable by the Funds. For these
services, Citi Fiduciary receives a monthly fee computed on the basis of the
number of shareholder accounts it maintains for a Fund during the month and is
reimbursed for out-of-pocket expenses. The principal business address of Citi
Fiduciary is 388 Greenwich Street, New York, New York 10013.
Boston Financial Data Services ("BFDS" or "sub-transfer agent"), P.O. Box
9083, Boston, Massachusetts 02205-9083, serves as the Funds' sub-transfer agent.
Under the sub-transfer agency agreement, the sub-transfer agent maintains the
shareholder account records for the Funds, handles certain communications
between shareholders and the Funds, and distributes dividends and distributions
payable by the Funds. For these services, the sub-transfer agent receives a
monthly fee computed on the basis of the number of shareholder accounts it
maintains for the Funds during the month, and is reimbursed for out-of-pocket
expenses.
The Trust has entered into a Custodian Agreement and a Fund Accounting
Agreement with State Street Bank and Trust Company ("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. The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110.
AUDITORS
Deloitte & Touche LLP, independent auditors, 125 Summer Street, Boston,
Massachusetts, have been selected to serve as auditors of the Funds and to
render opinions on the Funds' financial statements.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, is
counsel for each Fund.
9. PORTFOLIO TRANSACTIONS
SSB Citi and/or the Subadviser trade securities for a Fund if they believe
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 one or more
portfolio managers who are employees of SSB Citi or the Subadviser and who are
appointed and supervised by senior officers of SSB Citi or by the Subadviser.
The portfolio managers 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 SSB Citi, the Subadviser or their affiliates exercise
investment discretion. SSB Citi and the Subadviser are authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if SSB Citi or the Subadviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which SSB Citi, the Subadviser and their affiliates
have with respect to accounts over which they exercise investment discretion.
The management fee that each Fund pays to SSB Citi or the Subadviser will
not be reduced as a consequence of SSB Citi's or the Subadviser's receipt of
brokerage and research services. While such services are not expected to reduce
the expenses of SSB Citi or the Subadviser, SSB Citi or the Subadviser would,
through the use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff or obtain such services independently.
It is possible that certain of the research services received primarily will
benefit one or more other accounts for which SSB Citi or the Subadviser
exercises investment discretion. Conversely, a Fund may be the primary
beneficiary of services received as a result of portfolio transactions effected
for other accounts.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of SSB Citi's or the
Subadviser's other clients. Investment decisions for each Fund and for SSB
Citi's or the Subadviser's 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 SSB Citi or the 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.
Because the Funds are newly-offered, they have not paid brokerage
commissions as of the date of this Statement of Additional Information.
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. 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, only shares of that particular Fund are
entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required to hold, and has no
present intention of holding, annual meetings of shareholders but the Trust will
hold special meetings of shareholders when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances (e.g., upon the application and submission of
certain specified documents to the Trustees by a specified number of
shareholders), the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's 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 and/or sub-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.
11. TAX MATTERS
TAXATION OF THE FUNDS
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.
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. It is not
expected that any Fund which incurs foreign income taxes will be able to pass
through to shareholders foreign tax credits with respect to such foreign taxes.
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.
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. FINANCIAL STATEMENTS
The Funds are newly-offered and have not issued financial statements as of
the date of this Statement of Additional Information.
13. OTHER INFORMATION
CITI NASDAQ-100 INDEX FUND
Citi Nasdaq-100 Index Fund is not sponsored, endorsed, sold or promoted by
The Nasdaq Stock Market, Inc. (including its affiliates) (Nasdaq, with its
affiliates, are referred to as the Corporations). The Corporations have not
passed on the legality or suitability of, or the accuracy or adequacy of
descriptions and disclosures relating to, the Fund. The Corporations make no
representation or warranty, express or implied to the owners of the Fund or any
member of the public regarding the advisability of investing in securities
generally or in the Fund particularly, or the ability of the Nasdaq-100 Index(R)
to track general stock market performance. The Corporations' only relationship
to SSB Citi is in the licensing of the Nasdaq-100(R), Nasdaq-100 Index(R), and
Nasdaq(R) trademarks or service marks, and certain trade names of the
Corporations and the use of the Nasdaq-100 Index(R) which is determined,
composed and calculated by Nasdaq without regard to SSB Citi or the Fund. Nasdaq
has no obligation to take the needs of SSB Citi or the owners of the Fund into
consideration in determining, composing or calculating the Nasdaq-100 Index(R).
The Corporations are not responsible for and have not participated in the
determination of the timing of, prices at, or quantities of the Fund to be
issued or in the determination or calculation of the equation by which the Fund
is to be converted into cash. The Corporations have no liability in connection
with the administration, marketing or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY SSB CITI, OWNERS OF CITI NASDAQ-100 INDEX FUND, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
CITI SMALL CAP INDEX FUND; CITI U.S. 1000 INDEX FUND
Neither Citi U.S. 1000 Index Fund nor Citi Small Cap Index Fund is promoted,
sponsored or endorsed by, nor in any way affiliated with Frank Russell Company.
Frank Russell Company is not responsible for and has reviewed neither such Fund
nor any associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change its indexes. Frank Russell Company
has no obligation to take the needs of any particular fund or its participants
or any other product or person into consideration in determining, composing or
calculating the indexes.
Frank Russell Company's publication of the indexes in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the indexes
are based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE
AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE INDEXES OR
ANY DATA INCLUDED IN THE INDEXES. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION
OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE INDEXES OR ANY DATA
INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF) COMPRISING THE
INDEXES. FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND
EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING, WITHOUT MEANS OF
LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
WITH RESPECT TO THE INDEXES OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF)
INCLUDED THEREIN.
CITI GLOBAL TITANS INDEX FUND
"Dow Jones" and "Dow Jones Global Titans Index(SM)" are service marks of Dow
Jones & Company, Inc. Dow Jones has no relationship to SSB Citi, other than the
licensing of the Dow Jones Global Titans Index and its service marks for use
with the Citi Global Titans Index Fund.
DOW JONES DOES NOT:
[X] Sponsor, endorse, sell or promote the Fund.
[X] Recommend that any person invest in the Fund or any other securities.
[X] Have any responsibility for or make any decisions about the timing, amount
or pricing of the Fund.
[X] Have any responsibility for the administration, management or marketing of
the Fund.
[X] Consider the needs of the Fund or the owners of the Fund in determining,
composing or calculating the Global Titans Index or have any obligation to
do so.
DOW JONES WILL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE FUND.
SPECIFICALLY,
o DOW JONES DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AND DOW JONES
DISCLAIMS ANY WARRANTY ABOUT:
o THE RESULTS TO BE OBTAINED BY THE FUND, THE OWNERS OF THE FUND OR ANY
OTHER PERSON IN CONNECTION WITH THE USE OF THE GLOBAL TITANS INDEX AND THE
DATA INCLUDED IN THE GLOBAL TITANS INDEX;
o THE ACCURACY OR COMPLETENESS OF THE GLOBAL TITANS INDEX AND ITS DATA;
o THE MERCHANTABILITY AND THE FITNESS FOR A PARTICULAR PURPOSE OR USE OF THE
GLOBAL TITANS INDEX AND ITS DATA;
o DOW JONES WILL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS IN
THE GLOBAL TITANS INDEX OR ITS DATA;
o UNDER NO CIRCUMSTANCES WILL DOW JONES BE LIABLE FOR ANY LOST PROFITS OR
INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF DOW
JONES KNOWS THAT THEY MIGHT OCCUR.
THE LICENSING AGREEMENT BETWEEN SSB CITI AND DOW JONES IS SOLELY FOR THEIR
BENEFIT AND NOT FOR THE BENEFIT OF THE OWNERS OF THE FUND OR ANY OTHER THIRD
PARTIES.
CITI FINANCIAL SERVICES INDEX FUND;
CITI HEALTH SCIENCES INDEX FUND;
CITI TECHNOLOGY INDEX FUND
The Funds are not sponsored, endorsed, sold or promoted by Goldman, Sachs &
Co. ("Goldman Sachs"). Goldman Sachs makes no representation or warranty,
express or implied, to the shareholders of the Funds or any member of the public
regarding the advisability of investing in securities generally or in the Funds
particularly or the ability of the GSTI Composite Index, the GSSI Healthcare
Index and GSSI Financials Index to track the appropriate sector stock market
performance. Goldman Sachs' only relationship to SSB Citi, the Subadviser or the
Funds is the licensing of certain trademarks and trade names of Goldman Sachs
and of the Indexes which are determined, composed and calculated by Goldman
Sachs without regard to SSB Citi, the Subadviser or the Funds. Goldman Sachs has
no obligation to take the needs of SSB Citi, the Subadviser, the Funds, or their
shareholders into consideration in determining, composing or calculating the
Indexes. Goldman Sachs is not responsible for and has not participated in the
determination of the prices and the amount of the Funds or the timing of the
issuance or sale of shares of the Funds or in the determination or calculation
of the redemption price per share. Goldman Sachs has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
GOLDMAN SACHS DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEXES OR ANY DATA INCLUDED THEREIN, AND GOLDMAN SACHS HEREBY EXPRESSLY
DISCLAIMS ANY AND ALL LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS
THEREIN. GOLDMAN SACHS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO
BE OBTAINED BY THE FUNDS, THEIR SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN. GOLDMAN SACHS MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
GOLDMAN SACHS HEREBY EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
