As filed with the Securities and Exchange Commission on November 7, 1997
File Nos. 2-90519
811-4007
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE
AMENDMENT NO. 21*
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 22
LANDMARK FUNDS II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
6 ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 6 ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP
150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on January 7, 1998,
pursuant to paragraph (a) of Rule 485.
Asset Allocation Portfolios, on behalf of Small Cap Value Portfolio, and
The Premium Portfolios, on behalf of Growth & Income Portfolio, have also
executed this Amendment.
- -------------------------------------------------------------------------------
* This filing relates only to shares of CitiFunds Small Cap Value Portfolio and
CitiFunds Growth & Income Portfolio.
<PAGE>
LANDMARK FUNDS II
(CITIFUNDS SMALL CAP VALUE PORTFOLIO)
(CITIFUNDS GROWTH & INCOME PORTFOLIO)
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. N-1A ITEM LOCATION
PROSPECTUS
PART A
<S> <C> <C>
Item 1. Cover Page.......................................... Cover Page
Item 2. Synopsis............................................ Expense Summary
Item 3. Condensed Financial Information..................... Not Applicable
Item 4. General Description of Registrant................... Investment Information; General
Information; Appendix
Item 5. Management of the Fund.............................. Management; Expenses
Item 5A. Management's Discussion of Fund Performance......... Not Applicable
Item 6. Capital Stock and Other Securities.................. General Information; Voting and
Other Rights; Purchases; Exchanges;
Redemptions; Dividends and
Distributions; Tax Matters
Item 7. Purchase of Securities Being Offered................ Purchases; Exchanges; Redemptions
Item 8. Redemption or Repurchase............................ Purchases; Exchanges; Redemptions
Item 9. Pending Legal Proceedings........................... Not Applicable
STATEMENT OF
ADDITIONAL
PART B INFORMATION
Item 10. Cover Page.......................................... Cover Page
Item 11. Table of Contents................................... Cover Page
Item 12. General Information and History..................... The Trust
Item 13. Investment Objectives and Policies.................. Investment Objective and Policies;
Description of Permitted Investments
and Investment Practices; Investment
Restrictions
Item 14. Management of the Fund.............................. Management
Item 15. Control Persons and Principal Holders of Securities Management
Item 16. Investment Advisory and Other Services.............. Management
Item 17. Brokerage Allocation and Other Practices............ Portfolio Transactions
Item 18. Capital Stock and Other Securities.................. Description of Shares, Voting Rights
and Liabilities
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered....................................... Description of Shares, Voting Rights
and Liabilities; Determination of Net
Asset Value; Valuation of Securities;
Additional Redemption Information
Item 20. Tax Status.......................................... Certain Additional Tax Matters
Item 21. Underwriters........................................ Management
Item 22. Calculation of Performance Data..................... Performance Information
Item 23. Financial Statements................................ Financial Statements
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<PAGE>
PART C Information required to be included in Part C is set
forth under the appropriate Item, so numbered, in Part
C to this Registration Statement.
<PAGE>
PROSPECTUS
_______________________________________________________________________________
______________ __, 199__
CITIFUNDS SMALL CAP VALUE PORTFOLIO
(A Member of the CitiFundsSM Family of Funds)
This Prospectus describes CitiFunds Small Cap Value Portfolio, a mutual
fund in the CitiFunds Family of Funds. Citibank, N.A. is the investment
manager.
_______________________________________________________________________________
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN P
ORTFOLIOS OF SECURITIES, THE FUND MAY SEEK ITS INVESTMENT OBJECTIVE BY INVESTING
IN ONE OR MORE OTHER INVESTMENT COMPANIES. SEE "SPECIAL INFORMATION CONCERNING
INVESTMENT STRUCTURE" ON PAGE __.
_______________________________________________________________________________
REMEMBER THAT SHARES OF THE FUND:
- ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, CITIBANK OR ANY OF ITS AFFILIATES
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED
_______________________________________________________________________________
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated __________ ___, 199__ (and incorporated by reference in this
Prospectus) has been filed with the Securities and Exchange Commission. Copies
of the Statement of Additional Information may be obtained without charge, and
further inquiries about the Fund may be made, by calling 1-800-625-4554.
<PAGE>
_______________________________________________________________________________
TABLE OF CONTENTS
Prospectus Summary...................................
Expense Summary......................................
Investment Information...............................
Risk Considerations..................................
Valuation of Shares..................................
Purchases............................................
Exchanges............................................
Redemptions..........................................
Dividends and Distributions..........................
Management...........................................
Tax Matters..........................................
Performance Information..............................
General Information..................................
Appendix _
Permitted Investments and Investment Practices.......
_______________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
PROSPECTUS SUMMARY
_______________________________________________________________________________
See the body of the Prospectus for more information on the topics discussed
in this summary.
THE FUND: This Prospectus describes CitiFunds Small Cap Value Portfolio (the
"Fund"). Because the Fund currently invests through Small Cap Value Portfolio
(the "Portfolio"), all references in this Prospectus to the Fund include the
Portfolio, except as otherwise noted.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's investment objective is long-term
capital growth. Dividend income, if any, is incidental to this investment
objective. The Fund invests primarily (i.e., at least 65% of its total assets
under normal circumstances) in equity securities of U.S. issuers that have
small market capitalizations and are deemed to be undervalued.
INVESTMENT MANAGER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the
"Manager") a wholly-owned subsidiary of Citicorp, is the investment manager.
Citibank and its affiliates manage more than $88 billion in assets worldwide.
Citibank has delegated the daily management of the Portfolio to Franklin
Advisory Services, Inc. (the "Subadviser"). The Landmark Funds Broker-Dealer
Services, Inc. ("LFBDS" or the "Distributor") is the distributor of shares of
the Fund. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the Fund
through a Service Agent on any day the New York Stock Exchange is open for
trading. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares of the Fund are subject to a
fee of up to 0.25% per annum of the Fund's average daily net assets for
distribution, sales and marketing and shareholder services. See "Purchases" and
"Management - Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of the CitiSelect Portfolios
and other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid semiannually. Net capital
gains, if any, are distributed annually. See "Dividends and Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares at net asset value. See "Dividends and
Distributions."
WHO SHOULD INVEST: The Fund is designed for investors seeking long-term capital
growth who are willing to commit a portion of their assets to investments in
small capitalization U.S. issuers and who do not require current income from
their investment.
RISK FACTORS: There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. Equity securities
fluctuate in value based on many factors, including actual and anticipated
earnings, changes in management, political and economic developments and the
potential for takeovers and acquisitions. The value of debt securities
generally fluctuates based on changes in the actual and perceived
credit-worthiness of issuers. Also, the value of debt securities generally goes
down when interest rates go up, and vice versa. As a result, shares may be
worth more or less at redemption than at the time of purchase.
Shareholders should be aware that the securities of companies with small
market capitalizations and the securities of certain growth companies may have
more risks than the securities of other companies. Small cap companies and
<PAGE>
certain growth companies may be more susceptible to market downturns or
setbacks because they may have limited product lines, markets, distribution
channels, and financial and management resources. Further, there is often less
publicly available information about small cap companies and many growth
companies than about more established companies. As a result of these and other
factors, the prices of securities issued by small cap companies and some growth
companies may be volatile. Shares of the Fund, therefore, may be subject to
greater fluctuation in value than shares of an equity fund investing primarily
in securities of larger, more established companies.
Certain investment practices also may entail special risks. See "Risk
Considerations" and the Appendix for more information.
EXPENSE SUMMARY
_______________________________________________________________________________
The following table summarizes estimated shareholder transaction and
annual operating expenses for the Fund.* For more information on costs and
expenses, see "Management" on page __ and "General Information - Expenses" on
page __.
CitiFunds
Small Cap
Value Portfolio (1)
SHAREHOLDER TRANSACTION EXPENSES............... None
ANNUAL FUND OPERATING EXPENSES, AFTER FEE
WAIVERS AND REIMBURSEMENTS
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees................................ 1.00%
12b-1 Fees (including service fees) (3) 0.25%
fees)(3).......................................
Other Expenses(2).............................. 0.25%
Total Fund Operating Expenses(2)............... 1.50%
* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder will bear, either directly or
indirectly. The table shows the fees paid to various service providers
after giving effect to expected voluntary partial fee waivers. There can
be no assurance that the fee waivers and reimbursements reflected in the
table will continue at their these levels.
(1) Because the Fund is newly organized, all amounts in the table and the
example are estimated for the current fiscal year.
(2) Absent fee waivers and reimbursements, Other Expenses and Total Fund
Operating Expenses would be 1.11% and 2.36%, respectively.
(3) Includes fees for distribution and shareholder servicing. Long-term
shareholders in the Fund could pay more in sales charges than the economic
equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
<PAGE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and redemption at the end of each period indicated
below:
One Year Three Years
CitiFunds Small Cap
Value Portfolio (1) $15 $47
The Example assumes that all dividends are reinvested. Without waivers and
reimbursements, the amounts in the Example would be $24 and $74, respectively.
The assumption of a 5% annual return is required by the Securities and Exchange
Commission for all mutual funds, and is not a prediction of the Fund's future
performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
INVESTMENT INFORMATION
_______________________________________________________________________________
INVESTMENT OBJECTIVE: The investment objective of the Fund is long-term capital
growth. Dividend income, if any, is incidental to this investment objective.
The investment objective of the Fund may be changed by its Trustees
without approval by the Fund's shareholders, but shareholders will be given
written notice at least 30 days before any change is implemented. Of course,
there can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES: The Fund invests primarily (i.e., at least 65% of its total
assets under normal circumstances) in equity securities of U.S. issuers that
have small market capitalizations and are deemed to be undervalued. Equity
securities include common stocks, securities convertible into common stocks,
preferred stocks and warrants for the purchase of stock.
Small cap issuers are those with market capitalizations below the top
1,000 stocks that comprise the large and mid-range capitalization sector of the
equity market. These stocks are comparable to, but not limited to, the stocks
comprising the Russell 2000 Index, an index of small capitalization stocks.
Small cap companies are generally represented in new or rapidly changing
industries. They may offer more profit opportunity in growing industries and
during certain economic conditions than do large and medium sized companies.
However, small cap companies also involve special risks. Often, liquidity and
overall business stability of a small cap company may be less than that
associated with larger capitalized companies. Small cap stocks frequently
involve smaller, rapidly growing companies with high growth rates, negligible
dividend yields and extremely high levels of volatility.
An issuer may be undervalued relative to the stock market in general,
relative to the underlying value of its assets or relative to what a
sophisticated private investor would pay for the entire company. A variety of
factors are analyzed in order to determine that an issuer is undervalued. These
factors include low price to earnings ratio relative to the market, industry
group or earnings growth; low price relative to book value or cash flow;
valuable franchises, patents, trademarks, trade names, distribution channels or
market share for particular products or services, tax loss carryforwards, or
other intangibles that may not be reflected in stock prices; ownership of
understated or underutilized tangible assets such as land, timber or minerals;
underutilized cash or investment assets; and unusually high current income.
These criteria and others, alone and in combination, may identify companies
that are attractive to financial or strategic acquirers (i.e., takeover
candidates). Issuers selected may include companies in cyclical businesses,
turnarounds and companies emerging from bankruptcy. Investment decisions may
also be influenced by a company's and its insiders' stock buy-backs.
<PAGE>
CERTAIN ADDITIONAL INVESTMENT POLICIES:
FUTURES. The Fund may purchase stock index futures in order to protect
against declines in the value of portfolio securities or increases in the cost
of securities or other assets to be acquired and, subject to applicable law, to
enhance potential gain. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a security at a
specified future time and price, or for making payment of a cash settlement
based on changes in the value of a security, an index of securities or other
assets. In many cases, the futures contracts that may be purchased by the Fund
are standardized contracts traded on commodities exchanges or boards of trade.
See the Appendix for more information.
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, the Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Fund's
permitted investments and investment practices, see the Appendix - Permitted
Investments and Investment Practices on page __. The Fund will not necessarily
invest or engage in each of the investments and investment practices described
in the Appendix but reserves the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains
a list of specific investment restrictions which govern the investment policies
of the Fund, including a limitation that the Fund may borrow money from banks
in an amount not to exceed 1/3 of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Except as otherwise
indicated, the Fund's investment objective and policies may be changed without
shareholder approval. If a percentage or rating restriction (other than a
restriction as to borrowing) is adhered to at the time an investment is made, a
later change in percentage or rating resulting from changes in the Fund's
securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of the Fund will be sold whenever it is
appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. The
turnover rate for the Fund is not expected to exceed 100% for the fiscal year
ending October 31, 1998. The amount of brokerage commissions and realization of
taxable capital gains will tend to increase as the level of portfolio activity
increases.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or
dealers for securities transactions for the Fund and the placing of such
orders, brokers or dealers may be selected who also provide brokerage and
research services to the Fund or the other accounts over which Citibank, the
Subadviser or their affiliates exercise investment discretion. The Fund is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for the Fund which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Fund 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.
<PAGE>
Risk Considerations
_______________________________________________________________________________
The risks of investing in the Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. The Fund's net asset value will fluctuate
based on changes in the values of the underlying portfolio securities. This
means that an investor's interest may be worth more or less at redemption than
at the time of purchase. Equity securities fluctuate in response to general
market and economic conditions and other factors, including actual and
anticipated earnings, changes in management, political developments and the
potential for takeovers and acquisitions. During periods of rising interest
rates the value of debt securities generally declines, and during periods of
falling rates the value of these securities generally increases. Changes by
recognized rating agencies in the rating of any debt security, and actual or
perceived changes in an issuer's ability to make principal or interest
payments, also affect the value of these investments.
SMALLER COMPANIES. Shareholders should be aware that the securities of
companies with small market capitalizations and the securities of certain
growth companies may have more risks than the securities of other companies.
Small cap companies and certain growth companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources.
Further, there is often less publicly available information about small cap
companies and many growth companies than about more established companies. As a
result of these and other factors, the prices of securities issued by small cap
companies and some growth companies may be volatile.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Rating Services ("S&P") and equivalent securities may have
speculative characteristics. Adverse economic or changing circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade obligations.
INVESTMENT PRACTICES. Certain of the investment practices employed for the
Fund may entail additional risks that are described in the Appendix. See the
Appendix - Permitted Investments and Investment Practices on page __.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE. The Fund does not
invest directly in securities. Instead, the Fund is permitted to invest all or
a portion of its assets in one or more investment companies to the extent not
prohibited by the Investment Company Act of 1940, the rules and regulations
thereunder, and exemptive orders granted under such Act. Currently, the Fund
invests all of its investable assets in the Portfolio, which is a mutual fund
having the same investment objective and policies as the Fund. The Portfolio,
in turn, buys, holds and sells securities in accordance with this objective and
these policies. Of course, there can be no assurance that the Fund or the
Portfolio will achieve its objective. The Trustees of the Fund believe that the
aggregate per share expenses of the Fund and the Portfolio will be less than or
approximately equal to the expenses that the Fund would incur if the assets of
the Fund were invested directly in the types of securities held by the
Portfolio. The Fund may withdraw its investment in the Portfolio at any time,
and will do so if the Trustees believe it to be in the best interest of the
Fund's shareholders. If the Fund were to withdraw its investment in the
Portfolio, the Fund could either invest directly in securities in accordance
with the investment policies described above or invest in another mutual fund
or pooled investment vehicle having the same investment objective and policies.
If the Fund were to withdraw, the Fund could receive securities from the
Portfolio instead of cash, causing the Fund to incur brokerage, tax and other
charges or leaving it with securities which may or may not be readily
marketable or widely diversified.
<PAGE>
The Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but the
Portfolio will notify the Fund (which in turn will notify its shareholders) and
its other investors at least 30 days before implementing any change in its
investment objective. A change in investment objective, policies or
restrictions may cause the Fund to withdraw its investment in the Portfolio.
Certain investment restrictions of the Portfolio cannot be changed without
approval by the investors in the Portfolio. These policies are described in the
Statement of Additional Information. When the Fund is asked to vote on certain
matters concerning the Portfolio, the Fund will hold a shareholder meeting and
vote in accordance with shareholder instructions. Of course, the Fund could be
outvoted, or otherwise adversely affected, by other investors in the Portfolio.
The Portfolio may sell interests to investors in addition to the Fund.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Fund. Therefore, the investment
return for all investors in funds investing in the Portfolio may not be the
same. These differences in returns are also present in other mutual fund
structures.
Information about other holders of interests in the Portfolio is available
from the Fund's distributor, LFBDS, at (617) 423-1679.
VALUATION OF SHARES
_______________________________________________________________________________
Net asset value per share of the Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange (normally
4:00 p.m. Eastern time) by adding the market value of all securities and other
assets of the Fund (including the Fund's interest in the Portfolio), then
subtracting the liabilities charged to the Fund, and then dividing the result
by the number of outstanding shares of the Fund. The net asset value per share
is effective for orders received and accepted by the Transfer Agent prior to
its calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value.
PURCHASES
_______________________________________________________________________________
Shares of the Fund are offered continuously and may be purchased on any
Business Day without a sales load at the shares' net asset value next
determined after an order is transmitted to and accepted by the Transfer Agent.
The Fund and the Transfer Agent reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
While there is no sales load imposed on shares of the Fund, the
Distributor receives fees from the Fund pursuant to a Service Plan. See
"Management - Distribution Arrangements."
Shares may be purchased through certain financial institutions (which may
include banks), securities dealers and other industry professionals (called
Service Agents) that have entered into service agreements with the Distributor.
Service Agents may receive certain fees from the Distributor and/or the Fund.
See "Management - Distribution Arrangements." Customers should contact their
Service Agents for information on purchases. Each Service Agent may establish
its own terms, conditions and charges with respect to services it offers to its
customers. Charges for these services may include fixed annual fees and account
<PAGE>
maintenance fees. The effect of any such fees will be to reduce the net return
on the investment of customers of that Service Agent. Each Service Agent has
agreed to transmit to its customers who are shareholders of the Fund
appropriate written disclosure of any fees that it may charge them directly.
Each Service Agent is responsible for transmitting promptly orders of its
customers.
From time to time LFBDS may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Fund. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
EXCHANGES
_______________________________________________________________________________
Shares may be exchanged for shares of the CitiSelect Portfolios and other
CitiFunds, or may be acquired through an exchange of shares of those funds.
Shareholders may place exchange orders through the Transfer Agent or, if
they are customers of a Service Agent, through their Service Agent, and may do
so by telephone if their account applications so permit. For more information
on telephone transactions see "Redemptions." All exchanges will be effected
based on the relative net asset values per share next determined after the
exchange order is received by the Transfer Agent. See "Valuation of Shares."
Shares of the Fund may be exchanged only after payment in federal funds for the
shares has been made.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission ("SEC") rules, and is available only in those jurisdictions where
such exchanges legally may be made. See the Statement of Additional Information
for further details. An exchange is treated as a sale of the shares exchanged
and could result in taxable gain or loss to the shareholder making the
exchange.
REDEMPTIONS
_______________________________________________________________________________
Fund shares may be redeemed at their net asset value next determined after
a redemption request in proper form is received by the Transfer Agent. The
Transfer Agent is responsible for the prompt transmission of redemption orders
to the Fund on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. Shareholders should
consult their Service Agents for details. A redemption is treated as a sale of
the shares redeemed and could result in taxable gain or loss to the shareholder
making the redemption.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written
instructions in proper form (as determined by the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. Shareholders are responsible
for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by
telephone, if their account applications so permit, by calling the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent. During
periods of drastic economic or market changes or severe weather or other
emergencies, shareholders may experience difficulties implementing a telephone
exchange or redemption. In such an event, another method of instruction, such
<PAGE>
as a written request sent via an overnight delivery service, should be
considered. The Fund, the Transfer Agent and each Service Agent will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for the
shareholder's name, address, telephone number, Social Security or taxpayer
identification number, and account number. If these or other reasonable
procedures are not followed, the Fund, the Transfer Agent or the Service Agent
may be liable for any losses to a shareholder due to unauthorized or fraudulent
instructions. Otherwise, the shareholder will bear all risk of loss relating to
a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds
normally on the next Business Day, but in any event within seven days. If a
shareholder requests redemption of shares which were purchased recently, the
Fund may delay payment until it is assured that good payment has been received.
In the case of purchases by check, this can take up to ten days. See
"Determination of Net Asset Value" in the Statement of Additional Information
regarding the Fund's right to pay the redemption price in kind with securities
(instead of cash).
Questions about redemption requirements should be referred to the Transfer
Agent or, for customers of a Service Agent, their Service Agent. The right of
any shareholder to receive payment with respect to any redemption may be
suspended or the payment of the redemption price postponed during any period in
which the New York Stock Exchange is closed (other than weekends or holidays)
or trading on the Exchange is restricted or if an emergency exists.
DIVIDENDS AND DISTRIBUTIONS
_______________________________________________________________________________
Substantially all of the Fund's net income from dividends and interest, if
any, is paid to its shareholders of record as a dividend semiannually.
The Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually. The Fund may
also make additional distributions to its shareholders to the extent necessary
to avoid the application of the 4% non-deductible excise tax on certain
undistributed income and net capital gains of mutual funds.
A shareholder may elect to receive dividends and capital gains
distributions in either cash or additional shares of the Fund issued at net
asset value.
MANAGEMENT
_______________________________________________________________________________
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
CitiFunds Trust II. The Portfolio is supervised by the Board of Trustees of
Asset Allocation Portfolios. In each case, a majority of the Trustees are not
affiliated with Citibank. In addition, a majority of the disinterested Trustees
of the Fund are different from a majority of the disinterested Trustees of the
Portfolio. More information on the Trustees and officers of the Fund and
Portfolio appears under "Management" in the Statement of Additional
Information.
INVESTMENT MANAGER: Citibank offers a wide range of banking and investment
services to customers across the United States and throughout the world, and
has been managing money since 1822. Its portfolio managers are responsible for
investing in money market, equity and fixed income securities. Citibank and its
affiliates manage more than $88 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank also serves as investment adviser
<PAGE>
to other registered investment companies. Citibank's address is 153 East 53rd
Street, New York, New York 10043.
Subject to policies set by the Trustees, Citibank is responsible for
overall management of the Fund's business affairs, and has a Management
Agreement with the Fund. Citibank also provides certain administrative services
to the Fund. These administrative serves include providing general office
facilities and supervising the overall administration of the Fund. Pursuant to
a sub-administrative services agreement, the Distributor performs such
sub-administrative duties for the Fund as from time to time are agreed upon by
Citibank and the Distributor. The Distributor's compensation as
sub-administrator is paid by Citibank.
Citibank has also entered into a Management Agreement with respect to the
Portfolio. Pursuant to this Agreement, Citibank is responsible for managing
that portion of the Portfolio's assets allocated to cash and invested in U.S.
dollar-denominated high quality and short-term money market instruments. The
Portfolio may make such investments during periods of unusual economic or
market conditions or for temporary defensive purposes or liquidity.
Citibank has delegated the daily management of the Portfolio's assets not
managed by Citibank to Franklin Advisory Services, Inc., One Parker Plaza, 16th
Floor, Fort Lee, New Jersey 07024. Franklin Advisory Services, a wholly-owned
subsidiary of Franklin Resources, Inc., is a registered investment adviser.
William J. Lippman, President and Director of Franklin Advisory Services, has
been responsible for the daily management of U.S. small capitalization value
securities since the Fund's inception. Mr. Lippman holds a master of business
administration degree from New York University and a bachelor of business
administration degree from City College of New York. Mr. Lippman also serves as
Senior Vice President of Franklin Resources, Inc. and Franklin Management, Inc.
He has been in the securities industry for over 30 years and with the Franklin
Templeton Group since 1988.
MANAGEMENT FEES. For its services under the Management Agreements with respect
to the Fund and the Portfolio, Citibank receives fees, which are computed daily
and paid monthly, at annual rates equal to 0.25% of the Fund's average net
assets, and 0.75% of the Portfolio's average net assets less the aggregate
amount (if any) payable by Asset Allocation Portfolios pursuant to the
Submanagement Agreement with the Subadviser. These combined management fees are
higher than the management fees paid by most mutual funds. Citibank may
voluntarily agree to waive a portion of its management fees.
The Portfolio pays the Subadviser the following fees, which are accrued
daily and payable monthly and are at the annual rates equal to the percentages
specified below of the aggregate assets of the Portfolio allocated to the
Subadviser:
0.55% on first $250 million
0.50% on remaining assets
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Citibank has informed
the Fund that, in making its investment decisions, it does not obtain or use
material inside information in the possession of any division or department of
Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Fund. Citibank believes that its services
under the Management Agreements and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there
is no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law and
banks and financial institutions may be required to register as dealers
<PAGE>
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the investment manager or a
Service Agent the Fund would seek alternative means for obtaining these
services. The Fund does not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian of the
Fund's assets. Securities may be held by a sub-custodian bank approved by the
Trustees. State Street also provides fund accounting services and calculates
the daily net asset value for the Fund. The principal business address of State
Street is 225 Franklin Street, Boston, MA 02110.
DISTRIBUTION ARRANGEMENTS: LFBDS, 6 St. James Avenue, Boston, MA 02116
(telephone: (617) 423-1679) is the Distributor of the Fund's shares. Under a
Service Plan which has been adopted in accordance with Rule 12b-1 under the
1940 Act, the Fund may pay monthly fees at an annual rate not to exceed 0.25%
of the average daily net assets of the Fund. These fees may be used to make
payments to the Distributor for distribution services, to make payments to
Service Agents and others as compensation for the sale of shares of the Fund,
and to make payments for advertising, marketing or other promotional activity,
and payments for preparation, printing and distribution of prospectuses,
statements of additional information and reports for recipients other than
regulators and existing shareholders. The Fund also may make payments to the
Distributor, Service Agents and others for providing personal service or the
maintenance of shareholder accounts.
The Fund and the Distributor provide to the Trustees quarterly a written
report of amounts expended pursuant to the Service Plan and the purposes for
which the expenditures were made.
During the period they are in effect, the Service Plan and Distribution
Agreement obligate the Fund to pay fees to the Distributor, Service Agents and
others as compensation for their services, not as reimbursement for specific
expenses incurred. Thus, even if their expenses exceed the fees provided for
under the Service Plan, the Fund will not be obligated to pay more than those
fees and, if their expenses are less than the fees paid to them, they will
realize a profit. The Fund will pay the fees to the Distributor, Service Agents
and others until the Service Plan or Distribution Agreement is terminated or
not renewed. In that event, the Distributor's or Service Agent's expenses in
excess of fees received or accrued through the termination date will be the
Distributor's or Service Agent's sole responsibility and not obligations of the
Fund.
TAX MATTERS
_______________________________________________________________________________
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
The Fund intends to meet requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes. The Fund may pay withholding or other taxes
to foreign governments during the year, however, and these taxes will reduce
the Fund's dividends.
Fund dividends and capital gains distributions are subject to federal
income tax and may also be subject to state and local taxes. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Generally, distributions from
the Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of distributions from net investment income may be
eligible for the dividends-received deduction available to corporations.
<PAGE>
Distributions of long-term net capital gains will be taxed as such regardless
of how long the shares of the Fund have been held. It is uncertain at this time
whether all or any part of such long-term capital gains will be eligible to be
taxed at a maximum rate below 28%.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
Early each year, the Fund will notify its shareholders of the amount and
tax status of distributions paid to shareholders for the preceding year.
Investors should consult their own tax advisers regarding the status of their
accounts under state and local laws.
PERFORMANCE INFORMATION
_______________________________________________________________________________
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of yield, effective yield or total rate of
return. All performance information is historical and is not intended to
indicate future performance. Yields and total rates of return fluctuate in
response to market conditions and other factors, and the value of the Fund's
shares when redeemed may be more or less than their original cost.
The Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period, reflects any change in net asset
value per share and is compounded to include the value of any shares purchased
with any dividends or capital gains declared during such period. Period total
rates of return may be "annualized." An "annualized" total rate of return
assumes that the period total rate of return is generated over a one-year
period.
Total returns calculated for the Fund for any period which includes a
period prior to the commencement of operations of the Fund will reflect the
historical performance of the Portfolio. Total returns calculated for the Fund
for any period which includes a period prior to the commencement of operations
of the Portfolio will reflect a composite of the asset-weighted performance
histories of accounts representing the small capitalization value asset class
of four predecessor funds that contributed the securities and other assets in
those accounts to the Portfolio on October 31, 1997, the date of commencement
of operations of the Portfolio.
The subadviser for the accounts representing the small capitalization
value asset class of the predecessor funds is the Subadviser to the Portfolio.
The Subadviser managed those accounts following substantially the same
investment policies, guidelines and processes which are used by the Subadviser
with respect to the Portfolio.
As of October 31, 1997, the average annual total returns for the Fund,
including the asset-weighted composite of the performance histories of the
accounts representing the small capitalization value asset class of the
Portfolio's predecessor funds as noted above, were as follows:
For The For The Period Since
Year Inception
Ended Through
10/31/97 10/31/97
----- -----
<PAGE>
The Fund may provide annualized "yield" and "effective yield" quotations.
The "yield" of the Fund refers to the income generated by an investment in the
Fund over a 30-day or one month period (which period is stated in any such
advertisement or communication). This income is then annualized; that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of the
maximum offering price on the last day of that period. The "effective yield" is
calculated similarly, but when annualized the income earned by the investment
during that 30-day or one month period is assumed to be reinvested. The
effective yield is slightly higher than the yield because of the compounding
effect of this assumed reinvestment. The Fund may also provide yield and
effective yield quotations for longer periods.
Of course, any fees charged by a shareholder's Service Agent will reduce
that shareholder's net return on investment. See the Statement of Additional
Information for more information concerning the calculation of yield and total
rate of return quotations for the Fund.
GENERAL INFORMATION
_______________________________________________________________________________
ORGANIZATION: The Fund is a diversified series of CitiFunds Trust II.
CitiFunds Trust II is a Massachusetts business trust organized on April 13,
1984; it also is an open-end management investment company registered under the
1940 Act. Prior to January 2, 1998 CitiFunds Trust II was known as "Landmark
Funds II." CitiFunds Trust II currently has four active series.
The Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must invest at least 75% of its assets in cash and cash items, U.S.
Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
mutual fund and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Fund is permitted to invest all or a portion of its assets in one or
more investment companies. The Fund currently invests in the Portfolio. The
Portfolio is a series of Asset Allocation Portfolios, a New York trust.
VOTING AND OTHER RIGHTS: CitiFunds Trust II may issue an unlimited number of
shares, may create new series of shares and may divide shares in each series
into classes. Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each series of CitiFunds Trust II have equal voting rights except that, in
matters affecting only a particular series, only shares of that particular
series are entitled to vote.
At any meeting of shareholders of the Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with instructions it receives
for all other shares of which that Service Agent is the holder of record.
As a Massachusetts business trust, CitiFunds Trust II is not required to
hold annual shareholder meetings. Shareholder approval will usually be sought
only for changes in the Fund's or Portfolio's fundamental investment
restrictions and for the election of Trustees under certain circumstances.
Trustees may be removed by shareholders under certain circumstances. Each share
of the Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation of the Fund.
<PAGE>
CERTIFICATES: The Fund's Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in the Fund
under one of several tax-sheltered plans. Such plans include IRAs, Keogh or
Corporate Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts,
and certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and tax and retirement advisers.
EXPENSES: In addition to amounts payable under its Management Agreement and
Service Plan, the Fund is responsible for its own expenses, including among
other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Fund's Distributor,
government fees, taxes, accounting and legal fees, expenses of communicating
with shareholders, interest expense, and insurance premiums.
COUNSEL AND INDEPENDENT AUDITOR: Bingham Dana LLP, Boston, MA, is counsel for
the Fund.
Price Waterhouse LLP, 160 Federal Street, Boston, MA 02110, serves as
independent auditor for the Fund.
_______________________________________________________________________________
The Statement of Additional Information dated the date hereof contains
more detailed information about the Fund, including information related to (i)
investment policies and restrictions, (ii) the Trustees, officers and
investment manager, (iii) securities transactions, (iv) the Fund's shares,
including rights and liabilities of shareholders, (v) the method used to
calculate performance information and (vi) the determination of net asset
value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or its distributor. This Prospectus does not constitute an offering by the Fund
or its distributor in any jurisdiction in which such offering may not lawfully
be made.
APPENDIX
_______________________________________________________________________________
PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. Repurchase agreements are
transactions in which an institution sells the Fund a security at one price,
subject to the Fund's obligation to resell and the selling institution's
obligation to repurchase that security at a higher price normally within a
seven day period. There may be delays and risks of loss if the seller is unable
to meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. The 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 the Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
<PAGE>
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, the Fund may lend its
portfolio securities to broker-dealers and other institutional borrowers. Such
loans must be callable at any time and continuously secured by collateral (cash
or U.S. Government securities) in an amount not less than the market value,
determined daily, of the securities loaned. It is intended that the value of
securities loaned by the Fund would not exceed 30% of the Fund's net assets.
In the event of the bankruptcy of the other party to a securities loan or
a repurchase agreement, the Fund could experience delays in recovering either
the securities lent or cash. To the extent that, in the meantime, the value of
the securities lent have increased or the value of the securities purchased
have decreased, the Fund could experience a loss.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
RULE 144A SECURITIES. The Fund may purchase restricted securities that are not
registered for sale to the general public. If it is determined that there is a
dealer or institutional market in the securities, the securities will not be
treated as illiquid for purposes of the Fund's investment limitations. The
Trustees will review these determinations. These securities are known as "Rule
144A securities," because they are traded under SEC Rule 144A among qualified
institutional buyers. Institutional trading in Rule 144A securities is
relatively new, and the liquidity of these investments could be impaired if
trading in Rule 144A securities does not develop or if qualified institutional
buyers become, for a time, uninterested in purchasing Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 15% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
<PAGE>
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, the Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
COMMERCIAL PAPER. The Fund may invest in commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and regulatory
limitations, assets of the Fund may be invested in shares of other investment
companies.
SECURITIES RATED BAA OR BBB. The Fund may purchase securities rated Baa by
Moody's or BBB by S&P and securities of comparable quality, which may have poor
protection of payment of principal and interest. These securities are often
considered to be speculative and involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. The market prices of these securities may fluctuate
more than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
FUTURES. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are commonly referred
to as "derivatives." Futures contracts are a generally accepted part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. When the Fund purchases or sells a futures contract,
it is required to make an initial margin deposit. Although the amount may vary,
initial margin can be as low as 1% or less of the face amount of the contract.
Additional margin may be required as the contract fluctuates in value. Since
the amount of margin is relatively small compared to the value of the
securities covered by a futures contract, the potential for gain or loss on
a futures contract is much greater than the amount of the Fund's initial margin
deposit. The Fund does not currently intend to enter into a futures contract
if, as a result, the initial margin deposits on all of the Fund's futures
contracts would exceed approximately 5% of the Fund's net assets. Also, the
Fund intends to limit its futures contracts so that the value of the securities
covered by its futures contracts would not generally exceed 50% of the Fund's
other assets and to segregate sufficient assets to meet its obligations under
outstanding futures contracts.
The ability of the Fund to utilize stock index futures contracts
successfully will depend on the Fund's ability to predict stock price movements,
which cannot be assured. In addition to general risks associated with any
investment, the use of futures contracts entails the risk that, to the extent
the Fund's view as to stock price movements is incorrect, the use of futures
contracts, even for hedging purposes, could result in losses greater than if
they had not been used. This could happen, for example, if there is a poor
correlation between price movements of futures contracts and price movements in
the Fund's related portfolio position. Also, the futures markets may not be
liquid in all circumstances. As a result, in certain markets, the Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. When futures contracts are used for hedging, even if they
are successful in minimizing the risk of loss due to a decline in the value of
the hedged position, at the same time they limit any potential gain which might
result from an increase in value of such position. As noted, the Fund may also
enter into transactions in futures contracts for other than hedging purposes
(subject to applicable law), including speculative transactions, which involve
greater risk. In particular, in entering into such transactions, the Fund may
experience losses which are not offset by gains on other portfolio positions,
thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, which could increase
the risks incurred by the Fund in entering into such transactions.
<PAGE>
The use of futures contracts potentially exposes the Fund to the effects
of "leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases the Fund's
potential for both gain and loss. As noted above, the Fund intends to adhere to
certain policies relating to the use of futures contracts, which should have
the effect of limiting the amount of leverage by the Fund.
Options. The Fund may write (sell) covered call and put options and
purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or
to protect the values of its portfolio. In particular, where the Fund writes an
option which expires unexercised or is closed out by the Fund at a profit, it
will retain the premium paid for the option which will increase its gross
income and will offset in part the reduced value of the portfolio security
underlying the option, or the increased cost of portfolio securities to be
acquired. If the price of the underlying security moves adversely to the Fund's
position, the option may be exercised and the Fund will be required to purchase
or sell the underlying security at a disadvantageous price, which may only be
partially offset by the amount of the premium.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
The Fund may purchase and write options to buy or sell options on stock
index futures contracts. Such investment strategies will be used for hedging
and non-hedging purposes, subject to applicable law. Put and call options on
futures contracts may be traded by the Fund in order to protect against
declines in values of portfolio securities or against increases in the cost of
securities to be acquired. Purchase of options on futures contracts may present
less risk in hedging the investment portfolio of the Fund than the purchase or
sale of the underlying futures contracts since the potential loss is limited to
the amount of the premium plus related transaction costs. The writing of such
options, however, does not present less risk than the trading of futures
contracts and will constitute only a partial hedge, up to the amount of the
premium received. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction.
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC and in the over-the-counter market. Futures contracts and options on
futures contracts may be entered into on U.S. exchanges regulated by the
Commodity Futures Trading Commission.
Transactions in options, futures contracts and options on futures
contracts entered into for non-hedging purposes involve greater risk and could
result in losses which are not offset by gains on other portfolio assets. For
example, the Fund may sell futures contracts on an index of securities in order
to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transactions will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
CITIFUNDS GROWTH & INCOME PORTFOLIO
CITIFUNDS SMALL CAP VALUE PORTFOLIO __________ __, 199__
(Members of the CitiFundsSM Family of Funds)
CitiFunds Growth & Income Portfolio and CitiFunds Small Cap Value
Portfolio (the "Funds") are series of CitiFunds Trust II (the "Trust"). The
Trust is an investment company which was organized as a business trust under
the laws of the Commonwealth of Massachusetts on April 13, 1984. Prior to
January 2, 1998, the Trust was known as "Landmark Funds II." The address and
telephone number of the Trust are 6 St. James Avenue, Boston, Massachusetts
02116, (617) 423-1679. Each Fund is permitted to invest all or a portion of its
assets in one or more other investment companies. Currently, CitiFunds Growth &
Income Portfolio invests its assets in Growth & Income Portfolio, a series of
The Premium Portfolios, and CitiFunds Small Cap Value Portfolio invests its
assets in Small Cap Value Portfolio, a series of Asset Allocation Portfolios.
The address of each of The Premium Portfolios and Asset Allocation Portfolios
(the "Portfolio Trusts") is Elizabethan Square, George Town, Grand Cayman,
British West Indies.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
----------------- ----
The Trust..................................
Investment Objective and Policies..........
Description of Permitted Investments and
Investment Practices.......................
Investment Restrictions....................
Performance Information....................
Determination of Net Asset Value; Valuation
of Securities; Additional Redemption
Information................................
Management.................................
Portfolio Transactions.....................
Description of Shares, Voting Rights and
Liabilities................................
Certain Additional Tax Matters.............
Financial Statements.......................
Appendix I - Securities Ratings............
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in each
Fund's Prospectus, dated __________ ___, 199__. This Statement of Additional
Information should be read in conjunction with the Prospectus of each Fund, a
copy of which may be obtained by an investor without charge by calling
1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Trust II (the "Trust") is an investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on April 13,
1984. This Statement of Additional Information describes shares of CitiFunds
Growth & Income Portfolio (the "Growth & Income Fund") and CitiFunds Small Cap
Value Portfolio (the "Small Cap Value Fund" and together with the Growth &
Income Fund, the "Funds"), which are two of four active series of the Trust.
References in this Statement of Additional Information to the "Prospectus" of a
Fund are to the Prospectus, dated __________ ___, 199__, of such Fund.
Each Fund is permitted to seek its investment objective by investing all
or a portion of its assets in one or more investment companies to the extent
not prohibited by the Investment Company Act of 1940, the rules and regulations
thereunder, and exemptive orders granted under such Act. Currently, each of the
Growth & Income Fund and the Small Cap Value Fund invests its assets in Growth
& Income Portfolio and Small Cap Value Portfolio (the "Portfolios"),
respectively. The Growth & Income Portfolio and the Small Cap Value Portfolio
are series of The Premium Portfolios and Asset Allocation Portfolios (the
"Portfolio Trusts"), respectively and are open-end, diversified management
investment companies. Each Portfolio has the same investment objective and
policies as the Fund that invests in it. Because each Fund invests through its
corresponding Portfolio, all references in this Statement of Additional
Information to a Fund include such Fund's corresponding Portfolio, except as
otherwise noted. In addition, references to the Trust include the Portfolio
Trusts, except as otherwise noted.
Citibank, N.A. ("Citibank" or the "Manager") is the investment adviser and
also provides certain administrative services to the Trust and the Portfolio
Trusts. Citibank manages the investments of the Portfolios from day to day in
accordance with each Portfolio's investment objective and policies. The
selection of investments for the Portfolios, and the way they are managed,
depend on the conditions and trends in the economy and the financial
marketplaces. Citibank has delegated the daily management of the Small Cap
Value Portfolio's assets not managed by Citibank to Franklin Advisory Services,
Inc. (the "Subadviser"), a wholly owned subsidiary of Franklin Resources, Inc.,
a publicly owned holding company whose shares are listed on the New York Stock
Exchange.
The Boards of Trustees of the Trust and the Portfolio Trusts provide broad
supervision over the affairs of the Funds and the Portfolios, respectively.
Shares of the Funds are continuously sold by The Landmark Funds Broker-Dealer
Services, Inc., the Funds' distributor ("LFBDS" or the "Distributor"). Shares
of the Funds are sold at net asset value. LFBDS may receive distribution fees
from the Funds pursuant to a Service Plan adopted in accordance with Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the CITIFUNDS GROWTH & INCOME PORTFOLIO is
long-term capital growth and current income. The Growth & Income Fund invests
primarily in common stocks that offer potential for capital growth, current
income, or both.
The investment objective of the CITIFUNDS SMALL CAP VALUE PORTFOLIO is
long-term capital growth. Dividend income, if any, is incidental to this
investment objective. The Small Cap Value Fund invests primarily (i.e., at
least 65% of its total assets under normal circumstances) in equity securities
of U.S. issuers that have small market capitalizations and are deemed to be
undervalued.
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.
<PAGE>
Each Fund's Prospectus contains a discussion of the various types of
securities in which that Fund may invest and the risks involved in such
investments. The following supplements the information contained in each
Prospectus concerning the investment objective, policies and techniques of each
Fund.
The Trust may withdraw the investment of any Fund from its corresponding
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the Fund to do so. Upon any such withdrawal, the
Fund's assets would continue to be invested in accordance with the investment
policies described herein with respect to the Fund. The policies described
above and those described below are not fundamental and may be changed without
shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
OPTIONS
Each Fund may write covered call and put options and purchase call and put
options on securities. Call and put options written by a Fund may be covered in
the manner set forth below.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
a Fund is "covered" if the Fund maintains cash, short term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund
in cash, short-term money market instruments or high quality debt securities in
a segregated account with its custodian. Put and call options written by a Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
A Fund may purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, a 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.
A Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
A Fund may write (sell) covered call and put options and purchase call and
put options on stock indices. In contrast to an option on a security, an option
<PAGE>
on a stock index provides the holder with the right, but not the obligation, to
make or receive a cash settlement upon exercise of the option, rather than the
right to purchase or sell a security. The amount of this settlement is equal to
(i) the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
A Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Manager or the Subadviser, are expected to
be similar to those of the underlying index, or by having an absolute and
immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities in
its portfolio. Where a Fund covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. A Fund may also cover call options on stock indices by holding a call on
the same index and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, short-term money
market instruments or high quality debt securities in a segregated account with
its custodian. A Fund may cover put options on stock indices by maintaining
cash, short-term money market instruments or high quality debt securities with
a value equal to the exercise price in a segregated account with its custodian,
or by holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written or where the exercise price of the
put held is less than the exercise price of the put written if the difference
is maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. Put and
call options on stock indices may also be covered in such other manner as may
be in accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, a Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the Fund's stock investments. By writing a put option, a Fund assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by a Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
A Fund may also purchase put options on stock indices to hedge the Fund's
investments against a decline in value. By purchasing a put option on a stock
index, a Fund will seek to offset a decline in the value of securities it owns
through appreciation of the put option. If the value of the Fund's investments
does not decline as anticipated, or if the value of the option does not
increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely
depend on the accuracy of the correlation between the changes in value of the
index and the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options
for this purpose, a Fund will also bear the risk of losing all or a portion of
the premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
<PAGE>
The Growth & Income Fund may purchase and write options on foreign
currencies in a manner similar to that in which futures contracts on foreign
currencies, or forward contracts, will be utilized.
FUTURES CONTRACTS
Each of the Funds may enter into stock index futures contracts. The Growth
& Income Fund may also enter into interest rate futures contracts and foreign
currency futures contracts. Such investment strategies will be used for hedging
purposes and for nonhedging purposes, subject to applicable law.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases
or sells a futures contract. At the same time such a purchase or sale is made,
a 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 a 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.
The Growth & Income Fund may purchase or sell futures contracts to attempt
to protect the Fund from fluctuations in interest rates, or to manage the
effective maturity or duration of the Fund's investment portfolio in an effort
to reduce potential losses or enhance potential gain, without actually buying
or selling debt securities. For example, if interest rates were expected to
increase, the Growth & Income Fund might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as if the
Fund sold bonds that it owned, or as if the Fund sold longer-term bonds and
purchased shorter-term bonds. If interest rates did increase, the value of the
Fund's debt securities would decline, but the value of the futures contracts
would increase, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. Similar results could be accomplished by
selling bonds, or by selling bonds with longer maturities and investing in
bonds with shorter maturities. However, by using futures contracts, the Growth
& Income Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, the Growth
& Income Fund might enter into futures contracts for the purchase of debt
securities. Such a purchase would be intended to have much the same effect as
if the Fund purchased bonds, or as if the Fund sold shorter-term bonds and
purchased longer-term bonds. If interest rates did decline, the value of the
futures contracts would increase.
Each of the Funds may enter into stock index futures contracts to gain
stock market exposure while holding cash available for investments and
redemptions.
<PAGE>
The Growth & Income Fund may purchase and sell foreign currency futures
contracts to attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if the
value of such securities in the currencies in which they are denominated
remains constant. The Growth & Income Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Growth & Income 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 Growth & Income Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses on its
futures position which could reduce or eliminate the benefits of the reduced
cost of portfolio securities to be acquired.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if a Fund
sells a futures contract to protect against losses in the debt securities held
by the Fund), at the same time the futures contract limits any potential gain
which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a Fund's
investments through transactions in futures contracts depends on the degree to
which movements in the value of the debt securities underlying such contracts
correlate with movements in the value of the Fund's securities. If the security
underlying a futures contract is different than the security being hedged, they
may not move to the same extent or in the same direction. In that event, a
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, a Fund's overall return could be less
than if the hedging transactions had not been undertaken. Similarly, even where
a Fund enters into futures transactions other than for hedging purposes, the
effectiveness of its strategy may be affected by lack of correlation between
changes in the value of the futures contracts and changes in value of the
securities which the Fund would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, there is the potential that the liquidity of
the futures market may be lacking. Prior to expiration, a futures contract may
be terminated only by entering into a closing purchase or sale transaction,
which requires a secondary market on the contract market on which the futures
contract was originally entered into. While a Fund will establish a futures
position only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular futures
contract at any specific time. In that event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the futures contract or to meet ongoing
variation margin requirements. The inability to close out futures positions
also could have an adverse impact on the ability effectively to use futures
transactions for hedging or other purposes.
<PAGE>
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract during
a single trading day and prohibit trading beyond such limits once they have
been reached. The trading of futures contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or the Subadviser's investment judgment about the general direction
of interest rates or stock prices is incorrect, a Fund's overall performance
may be poorer than if any such contract had not been entered into. For example,
if the Growth & Income Fund hedged against the possibility of an increase in
interest rates which would adversely affect the price of the Fund's bonds and
interest rates decrease instead, part or all of the benefit of the increased
value of the Fund's bonds which were hedged will be lost because the Fund will
have offsetting losses in its futures positions. Similarly, if the Growth &
Income Fund purchases futures contracts expecting a decrease in interest rates
and interest rates instead increased, the Fund will have losses in its futures
positions which will increase the amount of the losses on the securities in its
portfolio which will also decline in value because of the increase in interest
rates. In addition, in such situations, if the Growth & Income Fund has
insufficient cash, the Fund may have to sell bonds from its investments to meet
daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Manager
does not believe that these trading and position limits would have an adverse
impact on a Fund's hedging strategies.
CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit a Fund from purchasing or
selling futures contracts (other than for bona fide hedging transactions) if,
immediately thereafter, the sum of the amount of initial margin required to
establish the Fund's non-hedging futures positions would exceed 5% of the
Fund's net assets.
Each Fund will comply with this CFTC requirement, and each Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by each Fund in a segregated
account with the Fund's custodian so that the amount so segregated, plus the
initial margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract. The
second is that each Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by
each Fund not exceed approximately 50% of the market value of the Fund's total
assets other than its futures contracts. For purposes of this third policy,
"market value" of a futures contract is deemed to be the amount obtained by
multiplying the number of units covered by the futures contract times the per
unit price of the securities covered by that contract.
The use of futures contracts may increase the amount of taxable income of
a Fund and may affect the amount, timing and character of a Fund's income for
tax purposes, as more fully discussed herein in the section entitled "Certain
Additional Tax Matters."
OPTIONS ON FUTURES CONTRACTS
A Fund may purchase and write options to buy or sell futures contracts in
which the Fund may invest. Such investment strategies will be used for hedging
purposes and for non-hedging purposes, subject to applicable law.
<PAGE>
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.
A Fund may cover the writing of call options on futures contracts (a)
through purchases of the underlying futures contract, (b) through ownership of
the instrument, or instruments included in the index underlying the futures
contract, or (c) through the holding of a call on the same futures contract and
in the same principal amount as the call written where the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. A Fund may cover the writing of put options on
futures contracts (a) through sales of the underlying futures contract, (b)
through segregation of cash, short-term money market instruments or high
quality debt securities in an amount equal to the value of the security or
index underlying the futures contract, (c) through the holding of a put on the
same futures contract and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. Put and call options on
futures contracts may also be covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Upon the exercise of a call option on a
futures contract written by a Fund, the Fund will be required to sell the
underlying futures contract which, if the Fund has covered its obligation
through the purchase of such contract, will serve to liquidate its futures
position. Similarly, where a put option on a futures contract written by a Fund
is exercised, the Fund will be required to purchase the underlying futures
contract which, if the Fund has covered its obligation through the sale of such
contract, will close out its futures position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities deliverable on exercise of the
futures contract. A Fund will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may
have occurred in the Fund's security holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If
a Fund writes an option on a futures contract and that option is exercised, the
Fund may incur a loss, which loss will be reduced by the amount of the option
premium received, less related transaction costs. A Fund's ability to hedge
effectively through transactions in options on futures contracts depends on,
among other factors, the degree of correlation between changes in the value of
securities held by the Fund and changes in the value of its futures positions.
This correlation cannot be expected to be exact, and a 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
<PAGE>
be possible for a Fund to incur a loss on both the hedging instrument and the
futures contract being hedged.
A Fund may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, 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.
SECURITIES OF NON-U.S. ISSUERS
The Growth & Income Fund may invest in securities of non-U.S. issuers.
Investing in securities of foreign issuers may involve significant risks not
present in domestic investments. For example, the value of such securities
fluctuates based on the relative strength of the U.S. dollar. In addition,
there is generally less publicly available information about foreign issuers,
particularly those not subject to the disclosure and reporting requirements of
the U.S. securities laws. Non-U.S. issuers are generally not bound by uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to domestic issuers. Investments in securities of non-U.S. issuers
also involve the risk of possible adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation, limitation on the
removal of funds or other assets of the Growth & Income Fund, political or
financial instability or diplomatic and other developments which would affect
such investments. Further, economies of other countries or areas of the world
may differ favorably or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. stock markets, while growing in
volume and sophistication, are generally not as developed as those in the U.S.,
and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. security trading practices, including those
involving securities settlement where the Growth & Income Fund's assets may be
released prior to receipt of payments, may expose the Fund to increased risk in
the event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, foreign brokerage commissions are generally higher than commissions
on securities traded in the U.S. and may be non-negotiable. In general, there
is less overall governmental supervision and regulation of non-U.S. securities
exchanges, brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of
such investments may be substantially less than their net asset value and that
there would be duplication of investment management and other fees and
expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Growth & Income Fund to make non-U.S. investments. These securities are not
usually denominated in the same currency as the securities into which they may
be converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement. ADRs, EDRs and GDRs are subject to many of the same risks
that apply to other investments in non-U.S. securities.
The Growth & Income Fund may invest in securities of non-U.S. issuers that
impose restrictions on transfer within the U.S. or to U.S. persons. Although
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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.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased to the extent that the Growth
& Income Fund invests in issuers located in less developed and developing
nations, whose securities markets are sometimes referred to as "emerging
securities markets." Investments in securities located in such countries are
speculative and subject to certain special risks. Political and economic
structures in many of these countries may be in their infancy and developing
rapidly, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of these
countries have in the past failed to recognize private property rights and have
at times nationalized and expropriated the assets of private companies.
In addition, unanticipated political or social developments may affect the
value of Growth & Income Fund's investments in these countries and the
availability to the Fund of additional investments in these countries. The
small size, limited trading volume and relative inexperience of the securities
markets in these countries may make the Growth & Income Fund's investment in
such countries illiquid and more volatile than investments in more developed
countries, and the Fund may be required to establish special custodial or other
arrangements before making investments in these countries. There may be little
financial or accounting information available with respect to issuers located
on these countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Growth & Income Fund may buy and sell securities denominated
in currencies other than the U.S. dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. dollar, the Fund may enter into
foreign currency exchange transactions to convert U.S. currency to foreign
currency and foreign currency to U.S. currency, as well as convert foreign
currency to other foreign currencies. The Growth & Income Fund either enters
into these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or uses forward contracts
to purchase or sell foreign currencies. The Growth & Income Fund may also enter
into foreign currency hedging transactions in an attempt to protect the value
of the assets of the Fund as measured in U.S. dollars from unfavorable changes
in currency exchange rates and control regulations. (Although the Growth &
Income Fund's assets are valued daily in terms of U.S. dollars, the Trust does
not intend to convert the Fund's holdings of other currencies into U.S. dollars
on a daily basis.)
The Growth & Income Fund may convert currency on a spot basis from time to
time, and investors should be aware of the costs of currency conversion.
Although currency exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a currency at one rate, while offering a lesser rate of exchange should
the Growth & Income Fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When the Growth & Income Fund enters into a contract for the purchase or
sale of a security denominated in a non-U.S. currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into a forward contract
for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
non-U.S. currency involved in the underlying security transaction, the Fund
will be able to protect against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the non-U.S. currency
<PAGE>
during the period between the date the security is purchased or sold and the
date on which payment is made or received.
When the Manager believes that the currency of a particular country may
suffer a substantial decline against the U.S. dollar, the Growth & Income Fund
may enter into a forward contract to sell, for a fixed amount of U.S. dollars,
the amount of non-U.S. currency approximating the value of some or all of the
Fund's securities denominated in such non-U.S. currency. The precise matching
of the forward contract amounts and the value of the securities involved is not
generally possible since the future value of such securities in non-U.S.
currencies changes as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of a short-term hedging strategy is highly
uncertain. The Growth & Income Fund does not enter into such forward contracts
or maintain a net exposure to such contracts where the consummation of the
contracts obligates the Fund to deliver an amount of non-U.S. currency in
excess of the value of the Fund's securities or other assets denominated in
that currency. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated in the investment decisions made with
regard to overall diversification strategies. However, the Fund believes that
it is important to have the flexibility to enter into such forward contracts
when it determines that its best interests will be served.
The Growth & Income Fund generally would not enter into a forward contract
with a term greater than one year. At the maturity of a forward contract, the
Fund will either sell the security and make delivery of the non-U.S. currency,
or retain the security and terminate its contractual obligation to deliver the
non-U.S. currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the non-U.S. currency. If the Growth & Income Fund retains the security and
engages in an offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in forward contract
prices. If the Growth & Income Fund engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the non-U.S.
currency. Should forward prices decline during the period between the date the
Fund enters into a forward contract for the sale of the non-U.S. currency and
the date it enters into an offsetting contract for the purchase of such
currency, the Fund will realize a gain to the extent the selling price of the
currency exceeds the purchase price of the currency. Should forward prices
increase, the Growth & Income Fund will suffer a loss to the extent that the
purchase price of the currency exceeds the selling price of the currency.
It is impossible to forecast with precision the market value of Fund
securities at the expiration of the contract. Accordingly, it may be necessary
for the Growth & Income 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 Growth & Income Fund may also purchase put options on a non-U.S.
currency in order to protect against currency rate fluctuations. If the Fund
purchases a put option on a non-U.S. currency and the value of the U.S.
currency declines, the Fund will have the right to sell the non-U.S. currency
for a fixed amount in U.S. dollars and will thereby offset, in whole or in
part, the adverse effect on the Fund which otherwise would have resulted.
Conversely, where a rise in the U.S. dollar value of another currency is
projected, and where the Growth & Income Fund anticipates investing in
securities traded in such currency, the Fund may purchase call options on the
non-U.S. currency.
The purchase of such options could offset, at least partially, the effects
of the adverse movements in exchange rates. However, the benefit to the Growth
& Income Fund from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Growth & Income Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
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The Growth & Income Fund may write options on non-U.S. currencies for
hedging purposes or otherwise to achieve its investment objective. For example,
where the Fund anticipates a decline in the value of the U.S. dollar value of a
foreign security due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of the security held by the Fund will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because
of an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, the Growth & Income 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 Growth & Income Fund would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
Put and call options on non-U.S. currencies written by the Growth & Income
Fund will be covered by segregation of cash, short-term money market
instruments or high quality debt securities in an account with the custodian in
an amount sufficient to discharge the Fund's obligations with respect to the
option, by acquisition of the non-U.S. currency or of a right to acquire such
currency (in the case of a call option) or the acquisition of a right to
dispose of the currency (in the case of a put option), or in such other manner
as may be in accordance with the requirements of any exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
denominated in currencies other than the U.S. dollar. Because the securities
underlying these receipts are traded primarily in non-U.S. currencies, changes
in currency exchange rates will affect the value of these receipts. For
example, decline in the U.S. dollar value of another currency in which
securities are primarily traded will reduce the U.S. dollar value of such
securities, even if their value in the other non-U.S. currency remains
constant, and thus will reduce the value of the receipts covering such
securities. The Growth & Income Fund may employ any of the above described
foreign currency hedging techniques to protect the value of its assets invested
in depositary receipts.
Of course, the Growth & Income Fund is not required to enter into the
transactions described above and does not do so unless deemed appropriate by
the Manager. It should also be realized that these methods of protecting the
value of the Growth & Income Fund's securities against a decline in the value
of a currency do not eliminate fluctuations in the underlying prices of the
securities. Additionally, although such contracts tend to minimize the risk of
loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result should the value of such currency
increase.
The Growth & Income Fund has established procedures consistent with
policies of the Securities and Exchange Commission ("SEC") concerning forward
contracts. Since those policies currently recommend that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated
to be used to pay for the commitment, the Fund expects to always have cash,
cash equivalents or high quality debt securities available sufficient to cover
any commitments under these contracts or to limit any potential risk.
REPURCHASE AGREEMENTS
A Fund may invest in repurchase agreements collateralized by securities in
which the Fund may otherwise invest. Repurchase agreements are agreements by
<PAGE>
which a Fund purchases a security and simultaneously commits to resell that
security to the seller (which is usually a member bank of the U.S. Federal
Reserve System or a member firm of the New York Stock Exchange (or a subsidiary
thereof)) at an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security, usually U.S. Government
or Government agency issues. Under the 1940 Act repurchase agreements may be
considered to be loans by the buyer. A Fund's risk is limited to the ability of
the seller to pay the agreed-upon amount on the delivery date. If the seller
defaults, the underlying security constitutes collateral for the seller's
obligation to pay although a Fund may incur certain costs in liquidating this
collateral and in certain cases may not be permitted to liquidate this
collateral. All repurchase agreements entered into by a Fund are fully
collateralized, with such collateral being marked to market daily.
CONVERTIBLE SECURITIES
The Funds 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.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, a Fund may purchase
securities that are not registered ("restricted securities") under the
Securities Act of 1933 (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act.
However, no Fund will invest more than 15% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and restricted
securities, unless the Board of Trustees of the Trust determine, based on the
trading markets for the specific restricted security, that it is liquid. The
Trustees may adopt guidelines and delegate to the Manager or to the Subadviser
the daily function of determining and monitoring liquidity of restricted
securities. The Trustees, however, retain sufficient oversight and are
ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Trust's Trustees will carefully monitor each Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information.
<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, a Fund may lend its securities to broker-dealers and other
institutional borrowers. Such loans will usually be made only to member banks
of the U.S. Federal Reserve System and to member firms of the New York Stock
Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. Either party has the right to terminate a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and with respect to cash collateral would
also receive compensation based on investment of cash collateral (subject to a
rebate payable to the borrower) or a fee from the borrower in the event the
collateral consists of securities. Where the borrower provides a Fund with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Fund a fee for use of the borrowed securities. A Fund,
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of its consent on a material matter affecting the investment. As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail financially. However,
the loans would be made only to entities deemed by the Manager or the
Subadviser to be of good standing, and when, in the judgment of the Manager or
the Subadviser, the consideration which can be earned currently from loans of
this type justifies the attendant risk. In addition, a Fund could suffer loss
if the borrower terminates the loan and the Fund is forced to liquidate
investments in order to return the cash collateral to the buyer. If the Manager
or the Subadviser determines to make loans, it is not intended that the value
of the securities loaned would exceed 30% of the value of a Fund's total
assets.
WHEN-ISSUED SECURITIES
A Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, a Fund would
take delivery of such securities. When a Fund commits to purchase a security on
a "when-issued" or on a "forward delivery" basis, it sets up procedures
consistent with SEC policies. Since those policies currently require that an
amount of the Fund's assets equal to the amount of the purchase be held aside
or segregated to be used to pay for the commitment, each Fund expects always to
have cash, cash equivalents, or high quality debt securities sufficient to
cover any commitments or to limit any potential risk. However, even though no
Fund intends to make such purchases for speculative purposes and intends to
adhere to the provisions of SEC policies, purchases of securities on such bases
may involve more risk than other types of purchases. For example, a Fund may
have to sell assets which have been set aside in order to meet redemptions.
Also, if the Manager or the Subadviser determines it is advisable as a matter
of investment strategy to sell the "when-issued" or "forward delivery"
securities, a Fund would be required to meet its obligations from the then
available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the "when-issued" or "forward
delivery" securities themselves (which may have a value greater or less than
the Fund's payment obligation).
BANK OBLIGATIONS
A Fund may invest in bank obligations, i.e., certificates of deposit, time
deposits (including, with respect to the Growth & Income Fund, Eurodollar time
deposits) and bankers' acceptances and other short-term debt obligations issued
by domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. A bankers' acceptance is a bill of
exchange or time draft drawn on and accepted by a commercial bank. It is used
by corporations to finance the shipment and storage of goods and to furnish
dollar exchange. Maturities are generally six months or less. A certificate of
deposit is a negotiable interest-bearing instrument with a specific maturity.
Certificates of deposit are issued by banks and savings and loan institutions
in exchange for the deposit of funds and normally can be traded in the
secondary market prior to maturity. A time deposit is a non-negotiable receipt
issued by a bank in exchange for the deposit of funds. Like a certificate of
<PAGE>
deposit, it earns a specified rate of interest over a definite period of time;
however, it cannot be traded in the secondary market. Time deposits with a
withdrawal penalty are considered to be illiquid securities.
MORTGAGE-BACKED SECURITIES
The Growth & Income Fund may invest in mortgage-backed securities, which
are securities representing interests in pools of mortgage loans. Interests in
pools of mortgage-related securities differ from other forms of debt securities
which normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the U.S. 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.
The Growth & Income Fund may also invest a portion of its assets in
collateralized mortgage obligations or "CMOs," a type of mortgage-backed
security. CMOs are securities collateralized by mortgages, mortgage
pass-through certificates, mortgage pay-through bonds (bonds representing an
interest in a pool of mortgages where the cash flow generated from the mortgage
collateral pool is dedicated to bond repayment), and mortgage-backed bonds
(general obligations of the issuers payable out of the issuers' general funds
and additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior
to their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed
by U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The price 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.
<PAGE>
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Growth & Income Fund may enter into mortgage "dollar roll"
transactions pursuant to which it sells mortgage-backed securities for delivery
in the future and simultaneously contracts to repurchase substantially similar
securities on a specified future date. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The
Growth & Income 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 Growth & Income Fund may also be
compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES
The Growth & Income 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
Growth & Income Fund will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
LOWER RATED DEBT SECURITIES
The Growth & Income Fund may invest in lower rated fixed income securities
(commonly known as "junk bonds"), to the extent described in its Prospectus.
The lower ratings of certain securities held by the Fund reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of such
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
<PAGE>
such securities. In the absence of a liquid trading market for securities held
by it, the Fund at times may be unable to establish the fair value of such
securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate. In addition, the rating assigned to a
security by Moody's Investors Service, Inc. or Standard & Poor's Rating
Services (or by any other nationally recognized securities rating organization)
does not reflect an assessment of the volatility of the security's market value
or the liquidity of an investment in the security. See Appendix I to this SAI
for a description of security ratings.
Like those of other fixed-income securities, the values of lower rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of fixed
income securities. Conversely, during periods of rising interest rates, the
value of the Fund's fixed-income securities will generally decline. The values
of lower rated securities may often be affected to a greater extent by changes
in general economic conditions and business conditions affecting the issuers of
such securities and their industries. Negative publicity or investor
perceptions may also adversely affect the values of lower rated securities.
Changes by recognized rating services in their ratings of any fixed-income
security and changes in the ability of an issuer to make payments of interest
and principal may also affect the value of these investments. Changes in the
value of portfolio securities generally will not affect income derived from
these securities, but will affect the Fund's net asset value. The Fund will not
necessarily dispose of a security when its rating is reduced below its rating
at the time of purchase. However, the Manager will monitor the investment to
determine whether its retention will assist in meeting the Fund's investment
objective.
Issuers of lower rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such issuers
may not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Growth & Income Fund's assets may
be invested in securities as to which the Fund, by itself or together with
other funds and accounts managed by Citibank and its affiliates, holds all or a
major portion. Although Citibank generally considers such securities to be
liquid because of the availability of an institutional market for such
securities, it is possible that, under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the issuer, the
Fund could find it more difficult to sell these securities when Citibank
believes it advisable to do so or may be able to sell the securities only at
prices lower than if they were more widely held. Under these circumstances, it
may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value. In order to enforce its
rights in the event of a default under such securities, the Fund may be
required to participate in various legal proceedings or take possession of and
manage assets securing the issuer's obligations on such securities. This could
increase the Fund's operating expenses and adversely affect the Fund's net
asset value. In addition, the 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.
Certain securities held by the Growth & Income Fund may permit the issuer
at its option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Fund during a time of declining interest rates, the Fund
may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed.
The Growth & Income Fund may invest without limit in "zero-coupon" bonds
and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant
<PAGE>
discount from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Because
zero-coupon and payment-in kind bonds do not pay current interest in cash,
their value is subject to greater fluctuation in response to changes in market
interest rates than bonds that pay interest currently. Both zero-coupon and
payment-in-kind bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently in cash. The Fund is required
to accrue interest income on such investments and to distribute such amounts at
least annually to shareholders even though such bonds do not pay current
interest in cash. Thus, it may be necessary at times for the Fund to liquidate
investments in order to satisfy its dividend requirements.
To the extent the Growth & Income Fund invests in securities in the lower
rating categories, the achievement of the Fund's objective is more dependent on
the Manager's investment analysis than would be the case if the Fund were
investing in securities in the higher rating categories. This may be
particularly true with respect to tax-exempt securities, as the amount of
information about the financial condition of an issuer of tax-exempt securities
may not be as extensive as that which is made available by corporations whose
securities are publicly traded.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trusts, on behalf of
the Portfolios, have each adopted the following policies which may not be
changed with respect to any Fund or any Portfolio without approval by holders
of a majority of the outstanding voting securities of that Fund or Portfolio,
which as used in this Statement of Additional Information means the vote of the
lesser of (i) 67% or more of the outstanding voting securities of the Fund or
Portfolio present at a meeting at which the holders of more than 50% of the
outstanding voting securities of the Fund or Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Fund or Portfolio. The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.
None of the Funds or the Portfolios may:
(1) Borrow money, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed 1/3 of the current
value of its net assets, including the amount borrowed, or purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Fund or Portfolio, taken at market value. It is intended that a Fund or
Portfolio would borrow money only from banks and only to accommodate requests
for the repurchase of shares of the Fund or beneficial interests in the
Portfolio while effecting an orderly liquidation of portfolio securities.
(2) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of the
Fund's or Portfolio's total assets, (b) through the use of repurchase
agreements or fixed time deposits or the purchase of short-term obligations or
(c) by purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions. The purchase of
short-term commercial paper or a portion of an issue of debt securities which
is part of an issue to the public shall not be considered the making of a loan.
(3) Purchase securities of any issuer if such purchase at the time thereof
would cause with respect to 75% of the total assets of the Fund or Portfolio
more than 10% of the voting securities of such issuer to be held by the Fund or
Portfolio; provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the security
or securities underlying such contract; and provided further that each Fund and
Portfolio may invest all or any portion of its assets in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act.
<PAGE>
(4) Purchase securities of any issuer if such purchase at the time thereof
would cause as to 75% of the Fund's or Portfolio's total assets more than 5% of
the Fund's or Portfolio's assets (taken at market value) to be invested in the
securities of such issuer (other than securities or obligations issued or
guaranteed by the United States, any state or political subdivision thereof, or
any political subdivision of any such state, or any agency or instrumentality
of the United States or of any state or of any political subdivision of any
state); provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the security
or securities underlying such contract; and provided further that each Fund and
Portfolio may invest all or any portion of its assets in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act.
(5) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Fund's or Portfolio's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions in
futures contracts shall not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that all or any
portion of the assets of the Fund or Portfolio may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the rules
and regulations thereunder, and exemptive orders granted under such Act, and
except insofar as the Fund or Portfolio may technically be deemed an
underwriter under the Securities Act in selling a security.
(7) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts in
the ordinary course of business (the foregoing shall not be deemed to preclude
the Fund or Portfolio from purchasing or selling futures contracts or options
thereon, and each Fund and Portfolio reserves the freedom of action to hold and
to sell real estate acquired as a result of the ownership of securities by the
Fund or Portfolio).
(8) Issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities or a
later change in the rating of the securities held for the Fund or Portfolio is
not considered a violation of policy.
5. PERFORMANCE INFORMATION
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 on the first day of such
period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting
1 from the result. Total rates of return also may be calculated on investments
at net asset value.
Total returns calculated for the Small Cap Value Fund for any period which
includes a period prior to the commencement of operations of the Fund will
reflect the historical performance of the Small Cap Value Portfolio. Total
<PAGE>
returns calculated for the Small Cap Value Fund for any period which includes a
period prior to the commencement of operations of the Small Cap Value Portfolio
will reflect a composite of the asset-weighted performance histories of
accounts representing the small capitalization value asset class of four
predecessor funds that contributed the securities and other assets in those
accounts to the Small Cap Value Portfolio on October 31, 1997, the date of
commencement of operations of the Small Cap Value Portfolio.
The subadviser for the accounts representing the small capitalization
value asset class of the predecessor funds is the Subadviser to the Small Cap
Value Portfolio. The Subadviser managed those accounts following substantially
the same investment policies, guidelines and processes which are used by the
Subadviser with respect to the Small Cap Value Portfolio.
The predecessor funds were registered under the 1940 Act and were subject
to substantially similar investment restrictions imposed on the Small Cap Value
Portfolio by that Act and by the Internal Revenue Code of 1986, as amended.
As of October 31, 1997, the average annual total returns for the Small Cap
Value Fund, including the asset-weighted composite of the performance histories
of the accounts representing the small capitalization value asset class of the
Small Cap Value Portfolio's predecessor funds as noted above, were as follows:
FOR THE FOR THE PERIOD SINCE
YEAR INCEPTION
ENDED THROUGH
10/31/97 10/31/97
SMALL CAP VALUE FUND ----- -----
A 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 maximum 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.
Comparative performance information may be used from time to time in
advertising shares of each Fund, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
each 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 each 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 each Fund may refer to or discuss current or past
economic or financial conditions, developments and events.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL REDEMPTION INFORMATION
The net asset value per share of each Fund is determined each day which
the New York Stock Exchange is open for trading ("Business Day"). As of the
date of this Statement of Additional Information, such Exchange is open for
trading every weekday except for the following holidays (or the days on which
they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of net asset value of shares of each Fund is made once each day
as of the close of regular trading on such Exchange by adding the market value
of all securities and other assets of the Fund (including the Fund's interest
in its corresponding Portfolio), then subtracting the liabilities of the Fund,
and then dividing the result by the number of outstanding shares of the Fund.
<PAGE>
The net asset value per share is effective for orders received and accepted by
the Transfer Agent prior to its calculation.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates at the time of valuation. Equity
securities are valued at the last sale price on the exchange on which they are
primarily traded or on the NASDAQ system for unlisted national market issues,
or at the last quoted bid price for securities in which there where no sales
during the day or for unlisted securities not reported on the NASDAQ system.
Securities listed on a foreign exchange are valued at the last quoted sale
price available before the time when net assets are valued. Bonds and other
fixed income securities (other than short-term obligations) are valued on the
basis of valuations furnished by a pricing service, use of which has been
approved by the Board of Trustees of the Trust. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations (maturing
in 60 days or less) are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees of the Trust. Futures contracts are
normally valued at the settlement price on the exchange on which they are
traded. Securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees of the Trust.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the
Exchange and may also take place on days on which the Exchange is closed. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when a
Fund's net asset value is calculated, such securities will be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued plus amortization of premiums.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption price of shares of a Fund, either totally or
partially, by a distribution in kind of readily marketable securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the net asset value for the shares being
sold. If a holder of shares received a distribution in kind, such holder could
incur brokerage or other charges in converting the securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets 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 Exchange is closed (other than customary
weekend and holiday closings); or (c) the SEC has by order permitted such
suspension.
7. MANAGEMENT
The Trustees and officers of the Trust and the Portfolio Trusts, their
ages and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate that
those Trustees and officers are "interested persons" (as defined in the 1940
Act) of
<PAGE>
the Trust or the Portfolio Trusts. Unless otherwise indicated below, the
address of each Trustee and officer is 6 St. James Avenue, Boston,
Massachusetts. The address of each Portfolio Trust is Elizabethan Square,
George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (aged 46) - President of the Trust and the Portfolio
Trusts; Chief Executive Officer, Signature Financial Group, Inc. and LFBDS
(since December 1988).
RILEY C. GILLEY (aged 71) - Vice President and General Counsel, Corporate
Property Investors (November 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 57) - Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, the Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 46) - President, Global Research Associates, Inc.
(Investment Research) (since August 1990); Manager, Rockefeller & Co. (March
1988 to July 1990); Trustee, Mainstay Institutional Funds (since December
1990). Her address is P.O. Box 9572 New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 63) - Managing Director, Morong Capital
Management (since February 1993); Senior Vice President and Investment Manager,
CREF Investments, Teachers Insurance & Annuity Association (retired, January
1993); Director, Indonesia Fund; Director, MAS Funds. His address is 1385
Outlook Drive, West, Mountainside, New Jersey.
E. KIRBY WARREN (aged 63) - Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 77) - Vice President-Investments, Sun Company,
Inc. (retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV (aged 54) - Chairman and Director, Catalyst, Inc.
(Management Consultants) (since June 1992); President, Chief Operating Officer
and Director, Deven International, Inc. (International Consultants) (June 1991
to June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 15 Stowaway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* (aged 46) - President of the Trust and the Portfolio
Trusts; Chief Executive Officer, Signature Financial Group, Inc. and LFBDS
(since December 1988).
MARK T. FINN (aged 54) - President and Director, Delta Financial, Inc.
(since June 1983); Chairman of the Board and Chief Executive Officer, FX 500
Ltd. (Commodity Trading Advisory Firm) (since April 1990); Director, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
C. OSCAR MORONG, JR. (aged 63) - Managing Director, Morong Capital
Management (since February 1993); Senior Vice President and Investment Manager,
CREF Investments, Teachers Insurance & Annuity Association (retired, January
1993); Director, Indonesia Fund; Director, MAS Funds. His address is 1385
Outlook Drive, West, Mountainside, New Jersey.
<PAGE>
WALTER E. ROBB, III (aged 71) - President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (corporate financial advisers) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUSTS
PHILIP W. COOLIDGE* (aged 46) - President of the Trust and the Portfolio
Trusts; Chairman, Chief Executive Officer and President, Signature Financial
Group, Inc. and LFBDS (since December 1988).
CHRISTINE A. DRAPEAU* (aged 27) - Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Assistant Vice President, Signature
Financial Group, Inc. (since January 1996); Paralegal and Compliance Officer,
various financial companies (July 1992 to January 1996); Graduate Student,
Bentley College (prior to December 1994).
JOHN R. ELDER* (aged 49) - Treasurer of the Trust and the Portfolio
Trusts; Vice President, Signature Financial Group, Inc. (since April 1995);
Treasurer of the Phoenix Family of Mutual Funds, Phoenix Home Life Mutual
Insurance Company (1983 to March 1995).
LINDA T. GIBSON* (aged 32) - Secretary of the Trust and the Portfolio
Trusts; Vice President, Signature Financial Group, Inc. (since May 1992);
Assistant Secretary, LFBDS (since October 1992); Law Student, Boston University
School of Law (September 1989 to May 1992).
JOAN R. GULINELLO* (aged 42) - Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Vice President, Signature Financial
Group, Inc. (since October 1993); Secretary, LFBDS (since October 1995); Vice
President and Assistant General Counsel, Massachusetts Financial Services
Company (prior to October 1993).
JAMES E. HOOLAHAN* (aged 50) - Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 33) - Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Vice President, Signature Financial
Group (Cayman), Ltd. (since August 1994); Senior Fund Administrator, Signature
Financial Group, Inc. (since August 1994); Assistant Treasurer, Signature
Broker-Dealer Services, Inc. (since September 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994). Her
address is Elizabethan Square, George Town, Grand Cayman, British West Indies.
MOLLY S. MUGLER* (aged 46) - Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Vice President, Signature Financial
Group, Inc.; Assistant Secretary, LFBDS (since December 1988).
KARYN A. NOKE* (aged 27) - Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Vice President,
Signature Financial Group (Cayman), Ltd. (since September 1996); Assistant Vice
President, Signature Financial Group, Inc. (May 1993 to August 1996); Student,
University of Massachusetts (prior to May 1993).
SHARON M. WHITSON* (aged 49) - Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Assistant Vice President, Signature
Financial Group, Inc. (since November 1992); Associate Trader, Massachusetts
Financial Services Company (prior to November 1992).
JULIE J. WYETZNER* (aged 38) - Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Vice President,
Signature Financial Group, Inc.
<PAGE>
The Trustees and officers of the Trust and the Portfolio Trusts also hold
comparable positions with certain other funds for which LFBDS, Signature
Financial Group, Inc., or their affiliates serve as the distributor or
administrator.
The following table shows estimated Trustee compensation for the period
indicated.
TRUSTEES COMPENSATION TABLE
TOTAL
PENSION OR COMPENSATION
AGGREGATE AGGREGATE RETIREMENT ESTIMATED FROM THE
COMPENSATION COMPENSATION BENEFITS ANNUAL REGISTRANT AND
FROM SMALL FROM GROWTH ACCRUED AS BENEFITS FUND COMPLEX
CAP VALUE & INCOME PART OF FUND UPON PAID TO
TRUSTEE FUND(1) FUND(1) EXPENSES RETIREMENT TRUSTEES(1)(2)
Philip W.
Coolidge $0 $0 None None $0
Riley C.
Gilley $1,355 $1,355 None None $46,000
Diana R.
Harrington $1,435 $1,435 None None $47,250
Susan B.
Kerley $1,429 $1,429 None None $45,250
C. Oscar
Morong, Jr. $1,439 $1,439 None None $58,875
E. Kirby
Warren $1,410 $1,410 None None $47,375
William S. $1,442 $1,442 None None $47,000
Woods, Jr.
(1) Information is estimated for the fiscal year ending October 31, 1998.
(2) Messrs. Coolidge, Gilley, Morong, Warren and Woods and Mses.
Harrington and Kerley are trustees of 48, 31, 28, 28, 30, 29 and 29 funds,
respectively, of the fund family.
As of the date of this Statement of Additional Information, all of the
outstanding shares of each Fund are owned by LFBDS.
The Declaration of Trust of each of the Trust and the Portfolio Trusts
provides that the Trust or the Portfolio Trust, as the case may be, will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust or a Portfolio Trust, as the case may be, unless, as to
liability to the Trust or such Portfolio Trust or their respective investors,
it is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless with respect to any other matter it is finally adjudicated that they
did not act in good faith in the reasonable belief that their actions were in
the best interests of the Trust or such Portfolio Trust, as the case may be. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees of the Trust
or such Portfolio Trust or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
<PAGE>
MANAGER
Citibank serves as the manager of each Portfolio and provides certain
administrative services to the Trust and the Portfolio Trusts pursuant to
separate management agreements (the "Management Agreements"). Subject to
policies as the Board of Trustees of the Portfolio Trusts may determine,
Citibank manages the securities of each Portfolio and makes investment
decisions for each Portfolio. The Management Agreements with the Portfolio
Trusts provide that Citibank may delegate the daily management of the
securities of the Portfolios to one or more subadvisers. Citibank furnishes at
its own expense all services, facilities and personnel necessary in connection
with managing each Portfolio's investments and effecting securities
transactions for each Portfolio. The Management Agreement with respect to Small
Cap Value Portfolio will continue in effect until August 8, 1999 and the
Management Agreement with respect to Growth & Income Portfolio will continue in
effect until November 14, 1999, and thereafter as long as such continuance is
specifically approved at least annually by the Board of Trustees of the
applicable Portfolio Trust or by a vote of a majority of the outstanding voting
securities of the applicable Portfolio, and, in either case, by a majority of
the Trustees of the applicable Portfolio Trust who are not parties to the
Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement. The Management
Agreements with the Trust with respect to each of the Funds will continue in
effect until November 14, 1999 and thereafter as long as such continuance is
specifically approved at least annually by the Board of Trustees of the Trust
or by a vote of a majority of the outstanding voting securities of the
applicable Fund, and, in either case, by a majority of the Trustees of the
Trust who are not parties to the Management Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Management
Agreement.
Citibank provides the Trust and each of the Portfolio Trusts with general
office facilities and supervises the overall administration of the Trust and
each of the Portfolio Trusts, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the Trust's or a Portfolio Trust's independent contractors and
agents; the preparation and filing of all documents required for compliance by
the Trust or a Portfolio Trust with applicable laws and regulations; and
arranging for the maintenance of books and records of the Trust or a Portfolio
Trust. Trustees, officers, and investors in the Trust or a Portfolio Trust are
or may be or may become interested in Citibank, as directors, officers,
employees, or otherwise and directors, officers and employees of Citibank are
or may become similarly interested in the Trust or a Portfolio Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by a Portfolio Trust or the
Trust, as the case may be, when authorized either by a vote of a majority of
the outstanding voting securities of the applicable Portfolio or Fund or by a
vote of a majority of the Board of Trustees of a Portfolio Trust or the Trust,
or by Citibank on not more than 60 days' nor less than 30 days' written notice,
and will automatically terminate in the event of its assignment. The Management
Agreement with each Portfolio Trust provides that neither Citibank nor its
personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of security transactions for the applicable Portfolio, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Management Agreement with such
Portfolio Trust. The Management Agreement with the Trust provides that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any omission in the administration or management of the Trust or
the performance of its duties under the Management Agreement, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank for
services under each of the Management Agreements. Citibank may reimburse any
Fund or Portfolio or waive all or a portion of its management fees.
<PAGE>
Pursuant to separate sub-administrative services agreements with Citibank,
LFBDS and Signature Financial Group (Cayman) Ltd. ("SFG") perform such
sub-administrative duties for the Trust and the Portfolio Trusts, respectively,
as from time to time are agreed upon by Citibank, LFBDS and SFG, as
appropriate. For performing such sub-administrative services, LFBDS and SFG
receive compensation as from time to time is agreed upon by Citibank, not in
excess of the amount paid to Citibank for its services under the Management
Agreements with the Trust and the Portfolio Trusts, respectively. All such
compensation is paid by Citibank.
Pursuant to its Management Agreement with Asset Allocation Portfolios
("AAP"), Citibank is responsible for managing that portion of the Small Cap
Value Portfolio's assets allocated to cash and invested in U.S.
dollar-denominated high quality and short-term money market instruments. The
Portfolio may make such investments during periods of unusual economic or
market conditions or for temporary defensive purposes or liquidity. Pursuant to
a Submanagement Agreement with AAP, the Subadviser manages those assets of the
Small Cap Value Portfolio not managed by Citibank. The Subadviser's
compensation is described in the Prospectus for the Small Cap Value Fund and is
payable by AAP from the assets of the Small Cap Value Portfolio.
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for its allocated assets of the Small Cap Value Fund, and
to place the purchase and sales orders for securities transactions concerning
those assets, subject in all cases to the general supervision of Citibank. The
Subadviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the assets of the Small Cap Value Fund
allocated to it and effecting securities transactions concerning those assets.
The Submanagement Agreement will continue in effect until May 9, 1999, and
thereafter as long as such continuance is specifically approved at least
annually by the Board of Trustees of AAP or by a vote of a majority of the
outstanding voting securities of the Small Cap Value Portfolio, and, in either
case, by a majority of the Trustees of AAP who are not parties to the
Submanagement Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Submanagement Agreement.
The Submanagement Agreement provides that the Subadviser may render
services to others. The Submanagement Agreement is terminable without penalty
on not more than 60 days' nor less than 30 days' written notice by AAP, when
authorized either by a vote of a majority of the outstanding voting securities
of the Small Cap Value Portfolio or by a vote of a majority of the Board of
Trustees of AAP, or by Citibank on not more than 60 days' nor less than 30
days' written notice, and will automatically terminate in the event of its
assignment. The Submanagement Agreement may be terminated by the Subadviser on
not less than 90 days' written notice. Upon termination of the Submanagement
Agreement, Citibank will maintain responsibility for managing those assets
formerly managed by the Subadviser. The 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 the Small Cap
Value Portfolio, except for willful misfeasance, bad faith or gross negligence
or reckless disregard of its or their obligations and duties under the
Submanagement Agreement.
DISTRIBUTOR
LFBDS, 6 St. James Avenue, Boston, MA 02116, serves as the Distributor of
each Fund's shares pursuant to a Distribution Agreement with the Trust for
shares of each Fund (the "Distribution Agreement"). Unless otherwise terminated
the Distribution Agreement will continue from year to year upon annual approval
by the Trust's Board of Trustees and by vote of a majority of the Board of
Trustees of the Trust who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act.
Under a Service Plan for shares of the Funds (the "Service Plan") which
has been adopted in accordance with Rule 12b-1 under the 1940 Act, each Fund
<PAGE>
may pay monthly fees at an annual rate not to exceed 0.25% of the average daily
net assets of the Fund. Such fees may be used to make payments to the
Distributor for distribution services, to securities dealers and other industry
professionals (called "Service Agents") that have entered into service
agreements with the Distributor and others in respect of the sale of shares of
the Fund, and to other parties in respect of the sale of shares of the Fund,
and to make payments for advertising, marketing or other promotional activity,
and payments for preparation, printing, and distribution of prospectuses,
statements of additional information and reports for recipients other than
regulators and existing shareholders. Each Fund also may make payments to the
Distributor, Service Agents and others for providing personal service or the
maintenance of shareholder accounts. Each Fund and the Distributor provide to
the Trustees quarterly a written report of amounts expended pursuant to the
Service Plan and the purposes for which the expenditures were made.
The Service Plan obligates each Fund to pay fees to the Distributor,
Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if their expenses
exceed the fees provided for by the Service Plan for the Funds, each Fund will
not be obligated to pay more than those fees and, if their expenses are less
than the fees paid to them, they will realize a profit. Each Fund will pay the
fees to the Distributor, Service Agents and others until the Service Plan or
Distribution Agreement is terminated or not renewed. In that event, the
Distributor's or Service Agent's expenses in excess of fees received or accrued
through the termination date will be the Distributor's or Service Agent's sole
responsibility and not obligations of the Fund.
From time to time the Distributor may make payments for distribution out
of its past profits or any other sources available to it.
The Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's Trustees
and a majority of the Trust's 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 such Plan (for purposes of this
paragraph "Qualified Trustees"). The Service Plan requires that the Trust and
the Distributor provide to the Board of Trustees and the Board of Trustees
review, at least quarterly, a written report of the amounts expended (and the
purposes therefor) under the Service Plan. The Service Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of the disinterested Trustees (as defined in the 1940 Act) then in
office. The Service Plan may be terminated with respect to any Fund at any time
by a vote of a majority of the Trust's Qualified Trustees or by a vote of a
majority of the outstanding voting securities of that Fund. The Service Plan
may not be amended to increase materially the amount of any Fund's permitted
expenses thereunder without the approval of a majority of the outstanding
voting securities of that Fund and may not be materially amended in any case
without a vote of the 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.
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents out of the
distribution fees received by the Distributor and out of the Distributor's past
profits or any other source available to it.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street"), pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
each Fund. See "Transfer Agent, Custodian and Fund Accountant" in each
Prospectus for additional information.
<PAGE>
Each Portfolio Trust, on behalf of the applicable Portfolio, has entered
into a Custodian Agreement with State Street pursuant to which State Street
acts as custodian for the Portfolio. Each Portfolio Trust, on behalf of the
applicable Portfolio, also has entered into a Fund Accounting Agreement with
State Street Cayman Trust Company, Ltd. ("State Street Cayman") pursuant to
which State Street Cayman provides fund accounting services for the Portfolio.
State Street Cayman also provides transfer agency services to the Portfolio.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
AUDITORS
Price Waterhouse LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Price Waterhouse LLP is 160
Federal Street, Boston, Massachusetts 02110. Price Waterhouse are the chartered
accountants for each Portfolio Trust. The address of Price Waterhouse is Suite
3000, Box 82, Royal Trust Towers, Toronto Dominion Center, Toronto, Ontario,
Canada M5K 1G8.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in a 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 a Fund are made by a portfolio manager who is an
employee of Citibank and who is appointed and supervised by its senior officers
or in the case of the Small Cap Value Fund, by the Subadviser. The portfolio
manager or Subadviser may serve other clients of Citibank in a similar
capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which the Manager, the Subadviser or their affiliates exercise
investment discretion. The Manager and Subadviser are authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for a Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if the Manager 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 the Manager, the Subadviser and their
affiliates have with respect to accounts over which they exercise investment
discretion. The Trustees of the Trust periodically review the commissions paid
by a Fund to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits to a Fund.
The investment advisory fees that a Fund pays to Citibank will not be
reduced as a consequence of Citibank's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of
Citibank, Citibank would, through the use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or the
Subadviser's other clients. Investment decisions for a Fund and for Citibank's
and the Subadviser's other clients are made with a view to achieving their
<PAGE>
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 or the size of the position obtainable
in a security for a Fund. When purchases or sales of the same security for a
Fund and for other portfolios managed by Citibank or 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.
9. 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 and to divide or combine the shares of any series into a greater
or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such shares
into classes. In addition to the Funds, there are currently two other active
series of the Trust: CitiFunds Large Cap Growth Portfolio and CitiFunds Small
Cap Growth Portfolio. Each share of a Fund represents an equal proportionate
interest in the Fund with each other share. Shares of each series of the Trust
participate equally in the earnings, dividends and distribution of net assets
of the particular series upon liquidation or dissolution. Shares of each series
are entitled to vote separately to approve management agreements or changes in
investment policy, but shares of all series may vote together in the election
or selection of Trustees and accountants for the Trust. In matters affecting
only a particular series or class, only shares of that series or class are
entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required and has no
present intention of holding annual meetings of shareholders but the Trust will
hold special meetings of a Fund's shareholders when in the judgment of the
Trust's Trustees it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have under certain circumstances (e.g., upon
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 the 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.
Share certificates will not be issued.
<PAGE>
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 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 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 protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
The Growth & Income Portfolio is a series of The Premium Portfolios and
the Small Cap Value Portfolio is a series of Asset Allocation Portfolios. Each
of the Portfolio Trusts is organized as a trust under the laws of the state of
New York. Each investor in a Portfolio, including the applicable Fund, may add
to or withdraw from its investment in the Portfolio on each Business Day. As of
the close of regular trading on each Business Day, the value of each investor's
beneficial interest in a Portfolio is determined by multiplying the net asset
value of the Portfolio by the percentage, effective for that day, that
represents that investor's share of the aggregate beneficial interest in the
Portfolio. Any additions or withdrawals that are to be effected on that day are
then effected. The investor's percentage of the aggregate beneficial interests
in the Portfolio is then re-computed as the percentage equal to the fraction
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of the close of regular trading on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of the close of
regular trading on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of the close of regular trading on the next following Business Day.
10. CERTAIN ADDITIONAL TAX MATTERS
Each Fund has elected to be treated, and intends to qualify each year, as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by meeting all applicable requirements
of Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition of the Fund's
portfolio assets. Provided all such requirements are met, no U.S. federal
income or excise taxes generally will be required to be paid by a Fund,
although non-U.S. source income earned by a Fund may be subject to non-U.S.
withholding or other taxes. If any 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. Each Portfolio Trust
believes its Portfolio also will not be required to pay any U.S. federal income
or excise taxes on its income.
The portion of each Fund's ordinary income dividends attributable to
dividends received in respect to 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
<PAGE>
alternative minimum tax and result in certain basis adjustments. Any Fund
dividend that is declared in October, November or December of any calendar
year, that is payable to shareholders of record in such a month, and that is
paid the following January will be treated as if received by the shareholders
on December 31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares
of a Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual shareholder will be eligible
for reduced tax rates if the shares were held for more than eighteen months.
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.
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, a Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold
potentially resulting in additional taxable gain or loss to the Fund.
Each Fund's transactions in options, futures and forward contracts will be
subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain
positions held by a Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. Each Fund intends to limit its activities in options, futures and
forward contracts to the extent necessary to meet the requirements of
Subchapter M of the Code.
An investment by a Fund in residual interests of a CMO that has elected to
be treated as a real estate mortgage investment conduit, or "REMIC," can create
complex tax problems, especially if the Fund has state or local governments or
other tax-exempt organizations as shareholders.
The Growth & Income Fund 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 may 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. Investment by a Fund in certain "passive foreign investment
companies" may also be limited in order to avoid a tax on the Fund. Investment
income received by a Fund from non-U.S. securities may be subject to non-U.S.
taxes. The 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 available.
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.
<PAGE>
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If a Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by the Fund and thus includable in their gross income for federal income
tax purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction for such amounts will be permitted to
individuals in computing their alternative minimum tax liability. If a Fund
does not qualify or elect to "pass through" to its shareholders foreign income
taxes paid by it, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.
Each Fund 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 U.S. Distributions received from a Fund by non-U.S. persons also may be
subject to tax under the laws of their own jurisdiction.
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. Each Fund may be required to withhold (and pay over
to the IRS for the shareholder's credit) tax at the rate of 31% on certain
distributions and redemption proceeds paid to shareholders who fail to provide
this information or who otherwise violate IRS regulations.
11. FINANCIAL STATEMENTS
Each Fund is newly-organized and has not yet issued financial statements.
<PAGE>
APPENDIX I
SECURITIES RATINGS
THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS FOLLOWS:
MOODY'S INVESTORS SERVICE, INC.
BONDS
Aaa -- Bonds which are rated Aaa rate judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
<PAGE>
STANDARD & POOR'S RATING SERVICES BONDS
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only to a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. An obligation rated BBB exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
pay interest and repay principal on obligations in this category than in higher
rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair the capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC ratings category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- Debt rated CC is currently highly vulnerable to nonpayment. The rating CC
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating.
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but debt service payments are continued.
D -- Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
debt service payments are jeopardized.
DUFF & PHELPS CORPORATION
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
<PAGE>
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
very strong, although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB -- Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margins
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
<PAGE>
CCC -- Bonds have certain characteristics which, with passing of time, could
lead to default on either principal or interest payments. The ability to meet
obligations requires an advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default and in arrears in interest and/or
principal payments. Such bonds are extremely speculative and should be valued
only on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery on these bonds, and D represents the lowest potential for recovery.
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
CITIFUNDS SMALL CAP VALUE PORTFOLIO
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
The Landmark Funds Broker-Dealer Services, Inc.
6 St. James Avenue, Boston, MA 02116
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
Price Waterhouse LLP
160 Federal Street, Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Not applicable.
FINANCIAL STATEMENTS INCLUDED IN PART B:
Not applicable.
<TABLE>
<CAPTION>
(b) Exhibits.
<S> <C> <C>
*** 1(a) Amended and Restated Declaration of Trust of the Registrant
**** 1(b) Forms of Amendments to Amended and Restated Declaration of Trust
of the Registrant
* 2(a) Amended and Restated By-Laws of the Registrant
** and **** 2(b) Amendments to Amended and Restated By-Laws of the Registrant
**** 5(a) Form of Management Agreement between the Registrant, with respect
to CitiFunds Small Cap Value Portfolio, and Citibank, N.A.
("Citibank"), as investment manager and administrator
**** 5(b) Form of Management Agreement between the Registrant, with respect
to CitiFunds Growth & Income Portfolio, and Citibank, as investment
manager and administrator
**** 6 Form of Distribution Agreement between the Registrant, with respect
to CitiFunds Small Cap Value Portfolio and CitiFunds Growth &
Income Portfolio, and The Landmark Funds Broker-Dealer Services,
Inc. ("LFBDS"), as distributor
**** 8 Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street"), as custodian
**** 9(a) Form of Sub-Administrative Services Agreement between Citibank
and LFBDS
* and **** 9(b) Transfer Agency and Service Agreement between the Registrant and
State Street, as transfer agent
**** 9(c) Accounting Services Agreement between the Registrant and State
Street, as fund accounting agent
**** 10 Opinion and Consent of Counsel
**** 15 Form of Service Plan of the Registrant with respect to the CitiFunds
Small Cap Value Portfolio and CitiFunds Growth & Income Portfolio
** 16 Performance Calculations
**** 25(a) Powers of Attorney for the Registrant
**** 25(b) Powers of Attorney for Asset Allocation Portfolios
**** 25(c) Powers of Attorney for The Premium Portfolios
</TABLE>
- ---------------------
* Incorporated herein by reference to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File No. 2-90519) as
filed with the Securities and Exchange Commission on March 2, 1992.
<PAGE>
** Incorporated herein by reference to Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-1A (File No. 2-90519) as
filed with the Securities and Exchange Commission on October 14, 1994.
*** Incorporated herein by reference to Post-Effective Amendment No. 17 to the
Registrant's Registration Statement on Form N-1A (File No. 2-90519) as
filed with the Securities and Exchange Commission on February 28, 1997.
**** Incorporated herein by reference to Post-Effective Amendment No. 19 to the
Registrant's Registration Statement on Form N-1A (File No. 2-90519) as
filed with the Securities and Exchange Commission on October 24, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
Shares of Beneficial Interest As of November 5, 1997
(without par value)
Landmark Small Cap Equity Fund 7
Landmark Equity Fund 7
CitiFunds Small Cap Value Portfolio 0
CitiFunds Growth & Income Portfolio 0
Item 27. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Amended and
Restated Declaration of Trust, filed as an Exhibit to Amendment No. 17 to the
Registrant's Registration Statement on Form N-1A; (b) Section 6 of the
Distribution Agreement between the Registrant and The Landmark Funds
Broker-Dealer Services, Inc., filed as an Exhibit hereto; and (c) the
undertaking of the Registrant regarding indemnification set forth in its
Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, a
registered bank holding company. Citibank also serves as investment adviser to
the following registered investment companies (or series thereof): The Premium
Portfolios (Balanced Portfolio, Equity Portfolio, Government Income Portfolio,
International Equity Portfolio, Emerging Asian Markets Equity Portfolio and
Small Cap Equity Portfolio), Tax Free Reserves Portfolio, U.S. Treasury
Reserves Portfolio, Cash Reserves Portfolio, Asset Allocation Portfolios (Asset
Allocation Portfolio 200, Asset Allocation Portfolio 300, Asset Allocation
Portfolio 400 and Asset Allocation Portfolio 500), Landmark Multi-State Tax
Free Funds (Landmark New York Tax Free Reserves, Landmark Connecticut Tax Free
Reserves and Landmark California Tax Free Reserves), Landmark Fixed Income
Funds (Landmark Intermediate Income Fund), Landmark Tax Free Income Funds
(Landmark National Tax Free Income Fund and Landmark New York Tax Free Income
Fund), CitiFunds Institutional Trust (CitiFunds Institutional Cash Reserves)
and Variable Annuity Portfolios (CitiSelectR VIP Folio 200, CitiSelectR VIP
Folio 300, CitiSelectR VIP Folio 400, CitiSelectR VIP Folio 500 and Landmark
Small Cap Equity VIP Fund). Citibank and its affiliates manage assets in excess
of $88 billion worldwide. The principal place of business of Citibank is
located at 399 Park Avenue, New York, New York 10043.
John S. Reed is the Chairman of the Board and a Director of Citibank. The
following are Vice Chairmen of the Board and Directors of Citibank: Paul J.
Collins and William R. Rhodes. Other Directors of Citibank are D. Wayne
Calloway, former Chairman and Chief Executive Officer, PepsiCo, Inc.; John M.
Deutch, Institute Professor, Massachusetts Institute of Technology; Reuben
Mark, Chairman and Chief Executive Officer, Colgate-Palmolive Company; Richard
D. Parsons, President, Time Warner, Inc.; Rozanne L. Ridgway, Former Assistant
Secretary of State for Europe and Canada; Robert B. Shapiro, Chairman,
President and Chief Executive Officer, Monsanto Company; Frank A. Shrontz,
Chairman Emeritus, The Boeing Company; and Franklin A. Thomas, former
President, The Ford Foundation.
Each of the individuals named above is also a Director of Citicorp. In
addition, the following persons have the affiliations indicated:
D. Wayne Calloway Director, Exxon Corporation
Director, General Electric Company
Retired Chairman and Chief Executive Officer and
Director, PepsiCo, Inc.
Paul J. Collins Director, Kimberly-Clark Corporation
John M. Deutch Director, Ariad Pharmaceuticals, Inc.
Director, CMS Energy
Director, Palomar Medical Technologies, Inc.
Director, Cummins Engine Company, Inc.
Director, Schlumberger, Ltd.
Reuben Mark Director, Chairman and Chief Executive Officer
Colgate-Palmolive Company
Director, New York Stock Exchange
Director, Time Warner, Inc.
Non-Executive Director, Pearson, PLC
<PAGE>
Richard D. Parsons Director, Federal National Mortgage Association
Director, Philip Morris Companies Incorporated
Member, Board of Representatives, Time Warner
Entertainment Company, L.P.
Director and President, Time Warner, Inc.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding Corporation
Rozanne L. Ridgway Director, 3M
Director, Bell Atlantic Corporation
Director, Boeing Company
Director, Emerson Electric Company
Member-International Advisory Board,
New Perspective Fund, Inc.
Director, RJR Nabisco, Inc.
Director, Sara Lee Corporation
Director, Union Carbide Corporation
Robert B. Shapiro Director, Chairman and Chief Executive Officer,
Monsanto Company
Director, Silicon Graphics
Frank A. Shrontz Director, 3M
Director, Baseball of Seattle, Inc.
Director and Chairman Emeritus, Boeing Company
Director, Boise Cascade Corp.
Director, Chevron Corporation
Franklin A. Thomas Director, Aluminum Company of America
Director, Cummins Engine Company, Inc.
Director, Lucent Technologies
Director, PepsiCo, Inc.
Franklin Advisory Services, Inc. ("Franklin"), a sub-adviser of CitiFunds
Small Cap Value Portfolio, maintains its principal office at One Parker Plaza,
16th Floor, Fort Lee, New Jersey 07024. Franklin, a Delaware corporation
incorporated in 1996, is a registered investment adviser under the Investment
Advisers Act of 1940 and is a wholly-owned subsidiary of Franklin Resources,
Inc., a publicly owned holding company. Franklin is an investment adviser to
various open-end and closed-end investment companies.
<PAGE>
William J. Lippman is the President and Director of Franklin Advisory
Services, Inc. Mr. Lippman holds a master of business administration degree
from New York University and a bachelor of business administration degree from
City College of New York. Mr. Lippman also serves as Senior Vice President of
Franklin Resources, Inc. and Franklin Management, Inc. and has been with the
Franklin Templeton Group since 1988. Prior to joining Franklin Advisers Inc.,
Mr. Lippman was president of L.F. Rothschild Fund Management, Inc. and has been
in the securities industry for over 30 years.
Each of the individuals named below is an officer and/or Director of
Franklin and has the affiliations indicated:
Name: Affiliations:
William J. Lippman Senior Vice President, Franklin Resources, Inc.
President and Director Senior Vice President, Franklin Advisers, Inc.
Senior Vice President, Franklin Templeton
Distributors, Inc.
Senior Vice President, Franklin Management, Inc.
Mr. Lippman also serves as officer and/or director
or trustee of eight of the investment companies in
the Franklin Group of Funds.
Charles B. Johnson President, Chief Executive Officer and Director,
Chairman of the Board Franklin Resources, Inc.
and Director Chairman of the Board and Director, Franklin
Advisers, Inc.
Chairman of the Board and Director, Franklin
Investment Advisory Services, Inc.
Chairman of the Board and Director, Franklin
Templeton Distributors, Inc.
Director, Franklin/Templeton Investor Services,
Inc.
Director, Franklin Templeton Services, Inc.
Director, General Host Corporation
Mr. Johnson also serves as officer and/or director
or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc.
and of 54 of the investment companies in the
Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. Executive Vice President and Director, Franklin
Senior Vice President Resources, Inc.
and Director Executive Vice President and Director, Franklin
Templeton Distributors, Inc.
President and Director, Franklin Advisers, Inc.
Senior Vice President and Director, Franklin
Investment Advisory Services, Inc.
Director, Franklin/Templeton Investor Services, Inc.
<PAGE>
Mr. Johnson also serves as officer and/or director,
trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin
Resources, Inc. and of 60 of the investment
companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek Senior Vice President and General
Vice President and Counsel, Franklin Resources, Inc.
Assistant Secretary Senior Vice President, Franklin Templeton
Distributors, Inc.
Vice President, Franklin Advisers, Inc.
Vice President, Franklin Investment
Advisory Services, Inc.
Ms. Gatzek also serves as officer of
60 of the investment companies in
the Franklin Templeton Group of Funds.
Martin L. Flanagan Senior Vice President, Chief Financial Officer and
Treasurer Financial Officer and Treasurer, Franklin
Resources, Inc.
Executive Vice President, Templeton Worldwide, Inc.
Senior Vice President and Treasurer, Franklin
Advisers, Inc.
Senior Vice President and Treasurer,
Franklin Templeton Distributors, Inc.
Senior Vice President, Franklin/Templeton
Investor Services, Inc.
Treasurer, Franklin Investment Advisory Services,
Inc.
Mr. Flanagan also serves as officer of most other
subsidiaries of Franklin Resources, Inc. and
officer, director and/or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
Leslie M. Kratter Vice President, Franklin Resources, Inc.
Secretary Vice President, Franklin Institutional Services
Corporation
President and Director,
Franklin/Templeton Travel, Inc.
Item 29. Principal Underwriters.
(a) The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS"), the
Registrant's Distributor, is also the distributor for Landmark International
Equity Fund, Landmark Emerging Asian Markets Equity Fund, Landmark U.S.
Treasury Reserves, Landmark Cash Reserves, Premium U.S. Treasury Reserves,
Premium Liquid Reserves, Landmark Institutional U.S. Treasury Reserves,
Landmark Institutional Liquid Reserves, Landmark Tax Free Reserves, Landmark
Institutional Tax Free Reserves, Landmark California Tax Free Reserves,
<PAGE>
Landmark Connecticut Tax Free Reserves, Landmark New York Tax Free Reserves,
Landmark U.S. Government Income Fund, Landmark Intermediate Income Fund,
Landmark Balanced Fund, Landmark Equity Fund, Landmark Small Cap Equity Fund,
Landmark National Tax Free Income Fund, Landmark New York Tax Free Income Fund,
CitiSelectR VIP Folio 200, CitiSelectR VIP Folio 300, CitiSelectR VIP Folio
400, CitiSelectR VIP Folio 500, Landmark Small Cap Equity VIP Fund, CitiSelectR
Folio 200, CitiSelectR Folio 300, CitiSelectR Folio 400 and CitiSelectR Folio
500. LFBDS is also the placement agent for International Equity Portfolio,
Balanced Portfolio, Equity Portfolio, Small Cap Equity Portfolio, Government
Income Portfolio, Emerging Asian Markets Equity Portfolio, Tax Free Reserves
Portfolio, Cash Reserves Portfolio, U.S. Treasury Reserves Portfolio, Asset
Allocation Portfolio 200, Asset Allocation Portfolio 300, Asset Allocation
Portfolio 400 and Asset Allocation Portfolio 500.
(b) The information required by this Item 29 with respect to each director
and officer of LFBDS is incorporated by reference to Schedule A of Form BD
filed by LFBDS pursuant to the Securities and Exchange Act of 1934 (File No.
8-32417).
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue
(distributor) Boston, MA 02116
State Street Bank and Trust Company 1776 Heritage Drive
(custodian and transfer agent) North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment manager and administrator) New York, NY 10043
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
<PAGE>
(a) The Registrant hereby undertakes to file a post-effective amendment to
this Registration Statement, containing reasonably current financial
statements that need not be certified, within four to six months
following the commencement of operations of CitiFunds Small Cap Value
Portfolio and CitiFunds Growth & Income Portfolio.
(b) The Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of one or more of
the Trust's Trustees when requested in writing to do so by the holders
of at least 10% of the Registrant's outstanding shares, and in
connection therewith to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940 relating to shareholder
communication.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus of CitiFunds Small Cap Value Portfolio and CitiFunds Growth
& Income Portfolio is delivered with a copy of the respective Fund's
latest Annual Report to Shareholders, upon request without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boston and
Commonwealth of Massachusetts on the 7th day of November, 1997.
LANDMARK FUNDS II
By: Philip W. Coolidge
------------------
Philip W. Coolidge, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated below on November 7, 1997.
Signature Title
Philip W. Coolidge President, Principal Executive Officer and
------------------------- Trustee
Philip W. Coolidge
John R. Elder Principal Accounting and Fiancial Officer
-------------------------
John R. Elder
Riley C. Gilley* Trustee
-------------------------
Riley C. Gilley
Diana R. Harrington* Trustee
-------------------------
Diana R. Harrington
Susan B. Kerley* Trustee
-------------------------
Susan B. Kerley
C. Oscar Morong, Jr.* Trustee
-------------------------
C. Oscar Morong, Jr.
E. Kirby Warren* Trustee
-------------------------
E. Kirby Warren
William S. Woods, Jr.* Trustee
-------------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
-------------------------
Philip W. Coolidge
Executed by Philip W.
Coolidge on behalf of
those indicated pursuant
to Powers of Attorney.
<PAGE>
SIGNATURES
The Premium Portfolios, on behalf of Growth & Income Portfolio, has duly
caused this Post-Effective Amendment to the Registration Statement on Form N-1A
of Landmark Funds II to be signed on its behalf by the undersigned, thereunto
duly authorized, in Hamilton, Bermuda, on the 7th day of November, 1997.
THE PREMIUM PORTFOLIOS
on behalf of Growth & Income Portfolio
By: Susan Jakuboski
Susan Jakuboski,
Assistant Treasurer of
The Premium Portfolios
This Post-Effective Amendment to the Registration Statement on Form N-1A
of Landmark Funds II has been signed by the following persons in the capacities
indicated on November 7, 1997.
Signature Title
Philip W. Coolidge* President, Principal Executive Officer and
Philip W. Coolidge Trustee
John R. Elder* Principal Financial Officer and Principal
John R. Elder Accounting Officer
Elliott J. Berv* Trustee
Elliott J. Berv
Mark T. Finn* Trustee
Mark T. Finn
Walter E. Robb, III* Trustee
Walter E. Robb, III
*By: Susan Jakuboski
Susan Jakuboski
Executed by Susan Jakuboski
on behalf of those indicated as
attorney in fact.
<PAGE>
SIGNATURES
Asset Allocation Portfolios, on behalf of Small Cap Value Portfolio, has
duly caused this Post-Effective Amendment to the Registration Statement on Form
N-1A of Landmark Funds II to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hamilton, Bermuda, on the 7th day of November,
1997.
ASSET ALLOCATION PORTFOLIOS
on behalf of Small Cap Value Portfolio
By: Susan Jakuboski
Susan Jakuboski
Assistant Treasurer
This Post-Effective Amendment to the Registration Statement on Form N-1A
of Landmark Funds II has been signed by the following persons in the capacities
indicated on November 7, 1997.
Signature Title
Philip W. Coolidge* President, Principal Executive Officer and
Philip W. Coolidge Trustee
John R. Elder* Principal Accounting and Financial Officer
John R. Elder
Elliott J. Berv* Trustee
Elliott J. Berv
Mark T. Finn* Trustee
Mark T. Finn
Walter E. Robb, III* Trustee
Walter E. Robb, III
*By: Susan Jakuboski
Susan Jakuboski
Executed by Susan Jakuboski on
behalf of those indicated
pursuant to Powers of Attorney.
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
*** 1(a) Amended and Restated Declaration of Trust of the Registrant
**** 1(b) Forms of Amendments to Amended and Restated Declaration of
Trust of the Registrant
* 2(a) Amended and Restated By-Laws of the Registrant
**and****2(b) Amendments to Amended and Restated By-Laws of the Registrant
**** 5(a) Form of Management Agreement between the Registrant, with
respect to CitiFunds Small Cap Value Portfolio, and Citibank,
N.A. ("Citibank"), as investment manager and administrator
**** 5(b) Form of Management Agreement between the Registrant, with
respect to CitiFunds Growth & Income Portfolio, and Citibank,
as investment manager and administrator
**** 6 Form of Distribution Agreement between the Registrant, with
respect to CitiFunds Small Cap Value Portfolio and CitiFunds
Growth & Income Portfolio, and The Landmark Funds Broker-Dealer
Services, Inc. ("LFBDS"), as distributor
**** 8 Custodian Contract between the Registrant and State Street
Bank and Trust Company ("State Street"), as custodian
**** 9(a) Form of Sub-Administrative Services Agreement between
Citibank and LFBDS
*and**** 9(b) Transfer Agency and Service Agreement between the Registrant
and State Street, as transfer agent
**** 9(c) Accounting Services Agreement between the Registrant and State
Street, as fund accounting agent
**** 10 Opinion and Consent of Counsel
**** 15 Form of Service Plan of the Registrant with respect to the
CitiFunds Small Cap Value Portfolio and CitiFunds Growth &
Income Portfolio
** 16 Performance Calculations
**** 25(a) Powers of Attorney for the Registrant
**** 25(b) Powers of Attorney for Asset Allocation Portfolios
**** 25(c) Powers of Attorney for The Premium Portfolios
- ---------------------
* Incorporated herein by reference to Post-Effective Amendment No. 8 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519) as
filed with the Securities and Exchange Commission on March 2, 1992.
** Incorporated herein by reference to Post-Effective Amendment No. 12 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on October 14, 1994.
<PAGE>
*** Incorporated herein by reference to Post-Effective Amendment No. 17 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on February 28, 1997.
**** Incorporated herein by reference to Post-Effective Amendment No. 19
to the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on October 24, 1997.
