<PAGE>
497(e) File Nos. 2-90519 and 811-4007
Prospectus March 2, 1998
As Supplemented August 24, 1998
CitiFunds(SM) Small Cap Growth Portfolio
This Prospectus describes CitiFunds(SM) Small Cap Growth 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
portfolios of securities, the Fund may seek its investment objective by
investing all of its investable assets in one or more investment companies.
See "Special Information Concerning Investment Structure" on page 10.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated March 2, 1998 (and incorporated by reference in this
Prospectus) has been filed with the Securities and Exchange Commission
("SEC"). 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. The Statement of Additional Information and other related
materials are available on the SEC's Internet Web site (http://www.sec.gov).
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REMEMBER THAT SHARES OF THE FUND:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary 3
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Expense Summary 5
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Condensed Financial Information 6
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Investment Information 7
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Risk Considerations 8
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Valuation of Shares 11
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Purchases 11
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Exchanges 12
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Redemptions 12
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Dividends and Distributions 13
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Management 14
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Tax Matters 16
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Performance Information 17
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General Information 18
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Appendix -- Permitted Investments and Investment Practices 19
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<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 Growth Portfolio (the
"Fund"). The Fund is a diversified mutual fund.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's objective is long-term capital
growth. Dividend income, if any, is incidental to this investment objective.
Through Small Cap Growth Portfolio (the "Portfolio"), the Fund invests
primarily in stocks of U.S. issuers that have small market capitalizations
(i.e., those issuers with market capitalizations below the top 1,000 stocks of
the equity market). In addition, the Fund may invest in companies that are
believed to be emerging companies relative to their potential markets. In
selecting equity securities, the Manager emphasizes securities of small cap
companies with strong management teams. Because the Fund invests through the
Portfolio, all references in this Prospectus to the Fund include the
Portfolio, except as otherwise noted.
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.
CFBDS, Inc. ("CFBDS" 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 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(R) Portfolios
and other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid semi-annually. 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: Investing primarily in common stock of U.S. issuers, the
Fund is designed for investors seeking long-term capital growth and for whom
current income is not a primary consideration. The Fund is designed for long-
term investors who are willing to accept the risks of potential loss
associated with opportunities for above-average growth, who can tolerate
substantial changes in the value of their investment 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 creditworthiness of issuers. Also, the value of debt securities
generally goes down when interest rates go up, and vice versa. As a result, an
investor's shares may be worth more or less at redemption than at the time of
purchase.
Investors in the Fund should be aware that the securities of companies with
small market capitalizations may have more risks than the securities of other
companies. Small cap companies may be more susceptible to market downturns or
setbacks because they may have limited product lines, markets, distribution
channels, and financial and management resources. Further, there is often less
publicly available information about small cap companies than about more
established companies. As a result of these and other factors, the prices of
securities issued by small cap companies may be volatile. Shares of the 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.
The Fund may invest a portion of its assets in non-U.S. securities. The
special risks of investing in non-U.S. securities include possible adverse
political, social and economic developments abroad, differing regulations to
which non-U.S. issuers are subject and different characteristics of non-U.S.
economies and markets. The Fund's non-U.S. securities often will trade in non-
U.S. currencies, which can be volatile and may be subject to governmental
controls or intervention. In addition, securities of non-U.S. issuers may be
less liquid and their prices more volatile than those of comparable U.S.
issuers. The Fund may invest in securities of issuers in developing countries,
and all of these risks are increased for investments in issuers in developing
countries.
Certain investment practices, such as the use of forward non-U.S. currency
exchange contracts, also may entail special risks. See "Risk Considerations"
and the Appendix for more information.
<PAGE>
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and annual
operating expenses for shares of the Fund. For more information on costs and
expenses, see "Management" -- page 14 and "General Information -- Expenses" --
page 19.*
CITIFUNDS
SMALL CAP
GROWTH PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee waivers)(1)(3) 0.85%
12b-1 Fees (including service fees)(2) 0.25%
Other Expenses (after fee waivers and reimbursements)(3) 0.25%
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Total Fund Operating Expenses(3) 1.35%
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* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of the Fund 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
and reimbursements. There can be no assurance that the fee waivers and
reimbursements reflected in the table will continue at these levels. The
information in the table and in the example below is based on the Fund's
expenses for the fiscal year ended October 31, 1997, as revised to
reflect current fees.
(1) A combined fee for investment advisory and administrative services.
(2) 12b-1 distribution fees are asset-based sales charges. 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.
(3) After voluntary fee waivers and reimbursements. Absent fee waivers and
reimbursements "Management Fees", "Other Expenses" and "Total Fund
Operating Expenses" would be 1.10%, 0.38%, and 1.73%, respectively,
revised to reflect the Fund's current fees and expense structure.
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:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
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<S> <C> <C> <C> <C>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO $14 $43 $74 $162
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</TABLE>
The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers and reimbursements. If fee waivers and reimbursements
were not made, the amounts in the example would be $18, $54, $94 and $204. 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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table provides condensed financial information about the Fund
for the periods indicated. The information below should be read in conjunction
with the financial statements appearing in the Fund's Annual Report to
Shareholders, which are incorporated by reference in the Statement of
Additional Information. The financial statements and notes, as well as the
table below, have been audited by Price Waterhouse LLP, independent
accountants on behalf of CitiFunds Small Cap Growth Portfolio (formerly
Landmark Small Cap Equity Fund). The report of Price Waterhouse LLP is
included in the Fund's Annual Report. Copies of the Annual Report may be
obtained without charge from an investor's Service Agent or by calling
1-800-625-4554.
<TABLE>
CITIFUNDS SMALL CAP GROWTH PORTFOLIO -- FINANCIAL HIGHLIGHTS
<CAPTION>
JUNE 21, 1995
TEN MONTHS ENDED YEAR ENDED (COMMENCEMENT OF
OCTOBER 31, DECEMBER 31, OPERATIONS) TO
1997(A) 1996 DECEMBER 31, 1995
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<S> <C> <C> <C>
Net Asset Value, beginning of period $18.21 $14.32 $10.00
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Income from Operations:
Net investment income (loss) (0.138)(+) (0.016) 0.05
Net realized and unrealized gain 3.236(+) 5.407 4.42
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Total from operations 3.098 5.391 4.47
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Less Distributions From:
Net investment income -- -- (0.05)
Net realized gain (0.068) (1.501) (0.10)
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Total from distributions (0.068) (1.501) (0.15)
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Net Asset Value, end of period $21.24 $18.21 $14.32
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted) $25,799 $24,311 $5,148
Ratio of expenses to average net assets(B) 1.35%* 0.88% 0%
Ratio of net investment income (loss)
to average net assets (0.87)%* (0.13)% 1.21%*
Total return 17.05%** 37.80% 44.78%**
Note: If agents of the Fund and of the Portfolio had not voluntarily waived a portion of their fees or assumed
Fund expenses and had expenses been limited to that required by certain state securities laws for the period
ended December 31, 1995, the net investment income (loss) per share and the ratios would have been as follows:
Net investment loss per share $(0.252)(+) $(0.133) $(0.288)
RATIOS:
Expenses to average net assets (B) 2.06%* 1.83% 2.50%*
Net investment income (loss) to average
net assets (1.58)%* (1.08)% (1.29)%*
* Annualized. **Not annualized.
(+) The per share amounts were computed using a monthly average number of shares outstanding during the period.
(A) The Fund changed its fiscal year end from December 31 to October 31.
(B) Includes the Fund's share of the Portfolio's allocated expenses.
</TABLE>
<PAGE>
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 seeks its objective by investing in a
diversified portfolio consisting primarily of equity securities of U.S.
companies that have small market capitalizations. Under normal circumstances,
at least 65% of the Fund's total assets is invested in equity securities of
these companies. Small market capitalization companies are those with market
capitalizations below the top 1,000 stocks of the equity market. In addition,
the Fund may invest in companies that are believed to be emerging companies
relative to their potential markets. In selecting equity securities to invest
in, the Manager emphasizes securities of small cap companies with strong
management teams.
The Manager may also select other securities for the Fund that it believes
provide an opportunity for appreciation, such as fixed income securities and
convertible and non-convertible bonds. Most of the Fund's long-term non-
convertible debt investments are investment grade securities, and less than 5%
of the Fund's investments consist of securities rated Baa by Moody's Investors
Service, Inc. or BBB by Standard & Poor's Ratings Group.
The Fund will not sell the equity securities of an issuer solely due to the
fact that the issuer's market capitalization has grown above the small cap
level. Rather, the Fund will evaluate the continued appropriateness of such
securities within its investment criteria.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
Non-U.S. Securities. While the Fund emphasizes U.S. securities, the Fund may
invest a portion of its assets in non-U.S. equity and debt securities,
including depository receipts. The Fund does not intend to invest more than
25% of its assets in non-U.S. securities, including sponsored American
Depositary Receipts, which represent the right to receive securities of non-
U.S. issuers deposited in a U.S. or correspondent bank. The Fund may invest up
to 5% of its assets in closed-end investment companies which primarily hold
non-U.S. securities.
Futures. The Fund may purchase or sell 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 or sold by
the Fund are standardized contracts traded on commodities exchanges or boards
of trade.
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 19. The Fund will not necessarily
invest or engage in each of the investments and investment practices 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 Portfolio will be sold whenever the
Manager believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the period from June 2, 1995 (commencement of operations) to
December 31, 1995, the fiscal year ended December 31, 1996, and the period
from January 1, 1997 to October 31, 1997, the turnover rates for the Portfolio
were 41%, 89% and 108%, respectively. The amount of brokerage commissions and
realization of taxable capital gains will tend to increase as the level of
portfolio activity increases.
Brokerage Transactions. The primary consideration in placing the Fund's
security transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible.
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 shares may be worth more or less at redemption than at the time
of purchase. Equity securities fluctuate in response to general market and
economic conditions and other factors, including actual and anticipated
earnings, changes in management, political developments and the potential for
takeovers and acquisitions. During periods of rising interest rates the value
of debt securities generally declines, and during periods of falling rates the
value of these securities generally increases. Changes by recognized rating
agencies in the rating of any debt security, and actual or perceived changes
in an issuer's ability to make principal or interest payments, also affect the
value of these investments.
Credit Risk of Debt Securities. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's or BBB by S&P and equivalent securities may
have speculative characteristics. Adverse economic or changing circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade obligations.
Small Cap Companies. Investors in the Fund should be aware that the securities
of companies with small market capitalizations may have more risks than the
securities of other companies. Small cap companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources.
Further, there is often less publicly available information about small cap
companies than about more established companies. As a result of these and
other factors, the prices of securities issued by small cap companies may be
volatile.
Non-U.S. Securities. Investments in non-U.S. securities involve risks relating
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and non-
U.S. issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets and political or social
instability. Enforcing legal rights may be difficult, costly and slow in non-
U.S. countries, and there may be special problems enforcing claims against
non-U.S. governments. In addition, non-U.S. companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Non-U.S.
markets may be less liquid and more volatile than U.S. markets, and may offer
less protection to investors such as the Fund. Prices at which the Fund may
acquire securities may be affected by trading by persons with material non-
public information and by securities transactions by brokers in anticipation
of transactions by the Fund.
Because non-U.S. securities often are denominated in currencies other than the
U.S. dollar, changes in currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. In addition, some non-U.S. currency values
may be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
Equity securities traded in certain foreign countries may trade at price-
earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of maintaining
custody of securities in non-U.S. countries, frequently are higher than those
attributable to U.S. investing. As a result, the operating expense ratio of
the Fund may be higher than those of investment companies investing
exclusively in U.S. securities.
The Fund may invest in securities of issuers in developing countries, and all
of these risks are increased for investments in issuers in developing
countries.
Investment Practices. Certain of the investment practices employed for the
Fund may entail certain risks. These risks are in addition to risks described
above and are described in the Appendix. See the Appendix -- Permitted
Investments and Investment Practices on page 20.
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 Fund's 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 one or more mutual funds or pooled investment vehicles 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.
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 returns
for all investors in funds investing in the Portfolio may not be the same. The
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, CFBDS, 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 Fund's liabilities, and then dividing the result by the
number of the Fund's outstanding shares. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In
light of the non-U.S. nature of some of the Fund's investments, trading may
take place in securities held by the Fund on days which are not Business Days
and on which it will not be possible to purchase or redeem shares of the
Fund.
PURCHASES
Shares of the Fund are offered continuously and may be purchased on any
Business Day at the public offering price. The public offering price is the
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.
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." Investors should
contact their Service Agents for information on purchases. Each Service Agent
may establish its own terms, conditions and charges with respect to services
it offers to its customers. Charges for these services may include fixed
annual fees and account maintenance fees. The effect of any such fees will be
to reduce the net return on the investment of customers of that Service Agent.
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
From time to time the Distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the 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 must place exchange orders through the Transfer Agent or, if they
are customers of a Service Agent, though 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 and accepted 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 received by the Transfer Agent.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission rules, and is available only in those jurisdictions where such
exchanges legally may be made. See the Statement of Additional Information for
further details. An exchange is treated as a sale of the shares exchanged and
could result in taxable gain or loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the 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 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 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; Valuation of Securities; Additional
Redemption Information" 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
The Premium 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 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 pursuant to a Management Agreement with the Fund.
Citibank also provides certain administrative services to the Fund. These
administrative services include providing general office facilities and
supervising the overall administration of the Fund. Pursuant to a sub-
administrative services agreement with Citibank, 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.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank since 1995,
has been the portfolio manager of the Fund since August 1998. Prior to joining
Citibank in 1995, Mr. Keblusek, who has 25 years experience in the investment
management industry, was Senior Vice President and Director of Portfolio
Management for The Northern Trust Company with responsibility for investment
performance in the organization's High Net Worth, Corporate and Institutional
and Mutual Fund Group. Earlier in his career, Mr. Keblusek held senior
investment positions with Maryland National Bank and the National Bank of
Washington.
Management's discussion of the Fund's performance is included in the Fund's
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
Management Fees. For its services under the Management Agreements with respect
to the Fund and the Portfolio, Citibank receives fees, which are computed
daily and paid monthly, at annual rates equal to 0.35% of the Fund's average
net assets, and 0.75% of the Portfolio's average net assets. These combined
management fees are higher than the management fees paid by most mutual funds.
For the fiscal year ended December 31, 1996, the investment advisory fees paid
to Citibank under a prior investment advisory agreement (after waivers) were
0.24% of the Fund's average daily net assets for that fiscal year. For the
period from January 1, 1997 to October 31, 1997, the management fees paid to
Citibank under its investment advisory agreement (after waivers) were 0.60% of
the Fund's average daily net assets for that period.
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
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or a Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for
the Fund. 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, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: CFBDS, 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 and to Service Agents
and others as compensation for the sale of shares of the Fund, for
advertising, marketing or other promotional activity, and 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. In those states where CFBDS is not a registered broker-
dealer, shares of the Fund are sold through Signature Broker-Dealer Services,
Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The 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 related
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 these entities'
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 the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal or state income or federal excise taxes. The Fund may pay
withholding or other taxes to foreign governments during the year, however,
and these taxes may 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.
Distributions of long-term net capital gains will be taxed as such regardless
of how long the shares of the Fund have been held. Such capital gains may be
taxable to shareholders that are individuals, estates, or trusts at maximum
rates of 20%, 25% or 28%, depending upon the source of the gains.
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.
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 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 his or her 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 series of CitiFunds Trust II, a Massachusetts
business trust which was organized on April 13, 1984. The Trust is also an
open-end management investment company registered under the 1940 Act. Prior to
March 2, 1998, the Fund was called Landmark Small Cap Equity Fund. Prior to
January 7, 1998, CitiFunds Trust II was called Landmark Funds II.
The Fund is a diversified mutual fund. Under the 1940 Act, a diversified
series or 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 The Premium Portfolios, a New York trust. Prior to
November 1, 1997, the Portfolio was called Small Cap Equity Portfolio.
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 or class, only shares of that
particular series or class 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 the 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.
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 Agents 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 Distributor, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
COUNSEL AND INDEPENDENT AUDITORS: Bingham Dana LLP, 150 Federal Street,
Boston, MA 02110 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 and the Portfolio, including information
relating 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 or the Statement of
Additional Information in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the 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 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
total assets.
In the event of the bankruptcy of the other party to a securities loan, a
repurchase agreement or a reverse repurchase agreement, the Fund could
experience delays in recovering either the securities or cash. To the extent
that, in the meantime, the value of the securities loaned or sold has
increased or the value of the securities purchased has decreased, the Fund
could experience a loss.
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 a Fund to sell them promptly at an
acceptable price.
"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.
Futures Contracts. 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.
Because the value of a futures contract changes based on the price of the
underlying security or other asset, futures contracts are considered to be
"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 total assets
other than its futures contracts and to segregate sufficient assets to meet its
obligations under outstanding futures contracts.
The ability of the Fund to utilize futures contracts successfully will depend
on the Manager'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 Manager's view
as to stock price movements is incorrect, the use of futures contracts 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.
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. The use of
futures contracts may increase the amount of taxable income of the Fund and
may affect in other ways the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed in the section entitled "Certain
Additional Tax Matters" in the Statement of Additional Information.
The use of futures by the Fund and some of their risks are described more
fully in the Statement of Additional Information.
Securities of Issuers in Developing Countries. Shareholders should be aware
that investing in the equity and fixed income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability,
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries with more mature economies; such markets often have
provided higher rates of return and greater risks. These heightened risks
include (i) greater risks of expropriation, confiscatory taxation and
nationalization, and less social, political and economic stability; (ii) the
small current size of markets for securities of issuers based in developing
countries and the currently low or non-existent volume of trading, resulting
in a lack of liquidity and in price volatility; (iii) certain national
policies which may restrict the Fund's investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to
relevant national interests; and (iv) the absence of developed legal
structures. Such characteristics can be expected to continue in the future.
Currency Exchange Contracts. Forward currency exchange contracts may be
entered into for the Fund for the purchase or sale of non-U.S. currency for
hedging purposes against adverse rate changes or otherwise to achieve the
Fund's investment objectives. A currency exchange contract allows a definite
price in dollars to be fixed for securities of non-U.S. issuers that have been
purchased or sold (but not settled) for the Fund. Entering into such exchange
contracts may result in the loss of all or a portion of the benefits which
otherwise could have been obtained from favorable movements in exchange rates.
In addition, entering into such contracts means incurring certain transaction
costs and bearing the risk of incurring losses if rates do not move in the
direction anticipated.
Lower-Rated Debt Securities. The Fund may purchase lower-rated securities
(those rated Baa or better by Moody's or BBB or better by S&P) 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.
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.
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