<PAGE>
As filed with the Securities and Exchange Commission on December 29, 1999
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. 30
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 31
CITIFUNDS TRUST II*
(Exact Name of Registrant as Specified in Charter)
21 Milk Street, 5th Floor, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 617-423-1679
Philip W. Coolidge, 21 Milk Street, 5th Floor, Boston, Massachusetts 02109
(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 the 60th day after the
date of the filing hereof, pursuant to paragraph (a)(1) of Rule 485.
Asset Allocation Portfolios, on behalf of Large Cap Value Portfolio, has also
executed this registration statement.
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*This filing relates solely to shares of the Trust's series designated CitiFunds
Growth & Income Portfolio.
<PAGE>
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PROSPECTUS
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MARCH 1, 2000
CitiFunds(SM)
Growth & Income
Portfolio
CITIBANK, N.A., INVESTMENT MANAGER
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
FUND AT A GLANCE ....................................................... 3
YOUR CITIFUNDS ACCOUNT ................................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 18
HOW THE PRICE OF YOUR SHARES IS CALCULATED 19
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
DIVIDENDS ........................................................... 23
TAX MATTERS ......................................................... 24
MANAGEMENT OF THE FUND ................................................. 26
MANAGERS ............................................................ 26
MANAGEMENT FEES ..................................................... 27
MORE ABOUT THE FUND .................................................... 28
PRINCIPAL INVESTMENT STRATEGIES ..................................... 28
RISKS ............................................................... 34
FINANCIAL HIGHLIGHTS ................................................... A-1
APPENDIX ............................................................... B-1
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FUND AT A GLANCE
----------------
Fund at a Glance
This summary briefly describes CitiFunds Growth & Income
Portfolio and the principal risks of investing in it. For more
information, see MORE ABOUT THE FUND on page 28.
CitiFunds Growth &
Income Portfolio
FUND GOAL
The Fund's goal is to provide long-term capital growth and
current income. Of course, there is no assurance that the Fund
will achieve its goal.
MAIN INVESTMENT STRATEGIES
CitiFunds Growth & Income Portfolio invests primarily in
common stocks that the Fund's Managers believe have potential
for capital growth or current income, or both. In selecting
securities, the Managers emphasize securities of established,
large cap U.S. issuers, meaning those with market
capitalizations within the top 1,000 stocks of the U.S. equity
market. In addition, the Fund may, but is not required to,
purchase bonds, notes, mortgage-backed and asset-backed
securities (including collateralized mortgage obligations or
CMOs), U.S. government securities, preferred stock and
convertible securities (both debt securities and preferred
stocks), and may invest a portion of its assets in cash or
money market instruments.
The Fund intends to invest primarily in securities of U.S.
issuers, but the Fund may invest up to 25% of its total assets
in foreign equity and debt securities, including securities of
issuers in developing countries.
The Managers use a value oriented approach in managing the
Fund. This means that they look for securities that they
believe are currently undervalued, or priced below their true
worth, but whose issuers have good longer term business
prospects. At the same time, they look for the catalysts or
factors that may soon cause the market value of these
securities to rise.
If the Fund purchases debt securities, it may purchase both
investment grade or lower quality debt securities, or "junk
bonds". Investment grade debt securities are those rated Baa
by Moody's, BBB by Standard & Poor's, or which the Managers
believe to be of comparable quality. Junk bonds generally have
a higher incidence of default than higher quality securities.
The Fund may, but is not required to, use derivatives in order
to protect (or "hedge") against changes in interest rates or
the prices of securities held or to be bought. The Fund may
also use derivatives for non-hedging purposes, to enhance
potential gains or generate income. In addition, the Fund may
use derivatives to manage the maturity or duration of fixed
income securities. These derivatives include futures, options
and forward foreign currency exchange contracts. The Fund's
ability to use derivatives successfully depends on a number of
factors, including derivatives being available at prices that
are not too costly, tax considerations, and the Managers
accurately predicting movements in stock prices, interest
rates and currency exchange rates.
Please note that the Fund invests in securities through an
underlying mutual fund.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in
this Fund. The principal risks of investing in the Fund are
described below. See page 34 for more information about risks.
o MARKET RISK. This is the risk that the prices of securities will
rise or fall due to changing economic, political or market
conditions, or due to a company's individual situation. The value
of the Fund's shares will change daily as the value of its
underlying securities change. This means that your shares of the
Fund may be worth more or less when you sell them than when you
bought them.
o EQUITY SECURITIES. Equity securities are subject to market risk
that historically has resulted in greater price volatility than
exhibited by fixed income securities.
o VALUE INVESTING. The success of the Fund's investment strategy
depends largely on the skill of the Managers in identifying
securities of companies that are in fact undervalued, but have good
longer term business prospects. A security may not achieve its
expected value because the circumstances causing it to be
underpriced worsen (causing the security's price to decline
further) or do not change or because the portfolio managers are
incorrect in their determinations. In addition, the Fund may
underperform certain other stock funds (those emphasizing growth
stocks, for example) during periods when value stocks are out of
favor.
o FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments
abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are
subject. These risks may include expropriation of assets,
confiscatory taxation, withholding taxes on dividends and interest
paid on Fund investments, fluctuations in currency exchange rates,
currency exchange controls and other limitations on the use or
transfer of assets by the Fund or issuers of securities, and
political or social instability. There may be rapid changes in the
value of foreign currencies or securities, causing the Fund's share
price to be volatile. Also, in certain circumstances, the Fund
could realize reduced or no value in U.S. dollars from its
investments in foreign securities, causing the Fund's share price
to go down.
The Fund may invest in issuers located in emerging, or developing,
markets. All of the risks of investing in foreign securities are
heightened by investing in these markets.
o INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise. Longer
term obligations are usually more sensitive to interest rate
changes. If the Fund holds debt securities, a change in interest
rates could cause the Fund's share price to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Fund, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a
security and leading to greater volatility in the price of the
security and in shares of the Fund. The prices of lower rated
securities, especially junk bonds, often are more volatile than
those of higher rated securities.
o PREPAYMENT RISK. The issuers of debt securities held by the Fund
may be able to prepay principal due on the securities, particularly
during periods of declining interest rates. The Fund may not be
able to reinvest that principal at attractive rates, reducing
income to the Fund, and the Fund may lose any premium paid. On the
other hand, rising interest rates may cause prepayments to occur at
slower than expected rates. This effectively lengthens the
maturities of the affected securities, making them more sensitive
to interest rate changes and the Fund's share price more volatile.
Mortgage-backed securities, including CMOs, are particularly
susceptible to prepayment risk and their prices may be very
volatile.
o SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible
securities, which are debt securities or preferred stock that may
be converted into common stock, are subject to the market risk of
stocks, and, like other debt securities, are also subject to
interest rate risk and the credit risk of their issuers.
o DERIVATIVES. The Fund's use of derivatives (such as futures
contracts, options and forward foreign currency exchange
contracts), particularly when used for non-hedging purposes, may be
risky. This practice could result in losses that are not offset by
gains on other portfolio assets. Losses would cause the Fund's
share price to go down. The Fund's ability to use derivatives
successfully depends on a number of factors, including the ability
of the Managers to accurately predict movements in stock prices,
interest rates and currency exchange rates. If these predictions
are wrong, the Fund could suffer greater losses than if the Fund
had not used derivatives.
Please remember that an investment in the Fund is not a
deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency.
<PAGE>
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a value-oriented
stock fund is not a complete investment program.
You should consider investing in CitiFunds Growth & Income
Portfolio if:
o You're seeking growth of principal as well as some income from
dividends on a quarterly basis.
o Your investment horizon is longer term -- typically at least five
years.
Don't invest in the Fund if:
o You are not prepared to accept fluctuations in dividends or daily
share price and possible losses.
o You are looking for the more significant amounts of current income
that may be available from a fixed income fund.
o Your investment horizon is shorter term -- usually less than five
years.
<PAGE>
Fund Performance
The following bar chart and table can help you evaluate the
risks and performance of the Fund.
o The bar chart shows the Fund's total return for the calendar year
indicated. The chart and related information do not take into
account any sales charges that you may be required to pay. Any
sales charges will reduce your return.
o The table compares the Fund's average annual returns for the
periods indicated to those of a broad measure of market
performance. Please remember that unlike the Fund, the market index
does not include the costs of buying and selling securities and
other Fund expenses or sales charges.
o The Fund offers two classes of shares, Class A and Class B. The
chart shows the performance of the Class A shares, and the table
shows the performance of the Class A and Class B shares. All
existing Fund shares were designated Class A shares on January 4,
1999. Prior to that date, there were no sales charges on the
purchase or sale of Fund shares. The returns for Class A shares in
the table, but not the bar chart, have been adjusted to reflect the
maximum front-end sales charge currently applicable to the Class A
shares. The returns for Class B shares in the table reflect the
contingent deferred sales charge applicable to Class B shares. You
should note that Class B performance is lower than that shown in
the chart for Class A shares, because of higher expenses for Class
B shares.
When you consider this information, please remember that the
Fund's past performance is not necessarily an indication of
how it will perform in the future. For current yield
information, please call 800-625-4554 toll free, or contact
your account representative.
The Fund's performance reflects certain fee waivers or
reimbursements. If these are reduced or terminated, the Fund's
performance may go down.
CITIFUNDS GROWTH & INCOME PORTFOLIO
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ANNUAL TOTAL RETURN -- CLASS A
(WITHOUT SALES CHARGE)
1999
As of _______________, the Class A shares had a year-to-date return of ___%.
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FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
................................................................................
Quarter Ending
................................................................................
Highest % , 1999
................................................................................
Lowest % , 1999
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
................................................................................
Life of
Fund Since
1 Year March 2, 1998
................................................................................
Class A % %
................................................................................
Class B % N/A
................................................................................
Standard & Poor's Barra Value Index % *
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*Information regarding performance for this period is not available.
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
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SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
................................................................................
SHARE CLASS (Class descriptions begin on page 13) CLASS A CLASS B
................................................................................
Maximum Sales Charge (Load) Imposed on Purchases 5.00% None
................................................................................
Maximum Deferred Sales Charge (Load) None(1) 5.00%(2)
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ANNUAL FUND OPERATING EXPENSES(3)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
................................................................................
Management Fees 0.80% 0.80%
................................................................................
Distribution (12b-1) Fees 0.25% 1.00%
................................................................................
Other Expenses (administrative, shareholder servicing
and other expenses) % %
................................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES* % %
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* Because some of the Fund's expenses were waived or reimbursed, actual total
operating expenses for the prior fiscal year were: % %
These fee waivers and reimbursements may be reduced or terminated
at any time.
(1) Except for investment of $500,000 or more.
(2) Class B shares have a contingent deferred sales charge (CDSC) which is
deducted from your sale proceeds if you sell your Class B shares within
five years of your original purchase of the shares. In the first year
after purchase, the CDSC is 5.00% of the price at which you purchased
your shares, or the price at which you sold your shares, whichever is
less, declining to 1.00% in the fifth year after purchase.
(3) The Fund invests in an underlying mutual fund, Large Cap Value
Portfolio. This table reflects the expenses of the Fund and Large Cap
Value Portfolio.
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<PAGE>
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual
funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods (for
Class B shares, two numbers are given, one showing your expenses if
you sold (redeemed) all your shares at the end of each time period
and one if you held onto your shares; the example also shows the
effects of the conversion of Class B shares to Class A shares after
8 years);
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and
is not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table without waivers
remain the same.
Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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CITIFUNDS GROWTH & INCOME PORTFOLIO
................................................................................
1 Year 3 Years 5 Years 10 Years
................................................................................
Class A $ $ $ $
................................................................................
Class B
................................................................................
Assuming redemption at end of
period $ $ $ $
................................................................................
Assuming no redemption $ $ $ $
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<PAGE>
----------------------
Your CitiFunds Account
----------------------
Your CitiFunds Account
CHOOSING A SHARE CLASS
The Fund offers two share classes, Class A and Class B. Each
class has its own sales charge and expense structure. Please
read the information below carefully to help you decide which
share class is best for you.
CLASS A AT A GLANCE
o Front-end load -- there is an initial sales charge of 5.00% or less
o Lower sales charge rates for larger investments
o Annual distribution/service fee of up to 0.25%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE
o No initial sales charge
o The deferred sales charge declines from 5% to 1% over five years,
and is eliminated if you hold your shares for six years or more
o Annual distribution/service fee of up to 1.00%
o Automatic conversion to Class A shares after 8 years
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WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/
SERVICE FEES that are paid under a
12B-1 PLAN. These are fees, also called 12B-1 FEES, that are
deducted from Fund assets and are used to compensate those
financial professionals who sell fund shares and provide
ongoing services to shareholders and to pay other marketing
and advertising expenses. Because you pay these fees during
the whole period that you own the shares, over time you may
pay more than if you had paid other types of sales charges.
For this reason, you should consider the effects of 12b-1 fees
as well as sales loads when choosing a share class.
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<PAGE>
SALES CHARGES -- CLASS A SHARES
o Class A shares are sold at net asset value plus a front- end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The chart below shows
the rate of sales charge that you pay, depending on the amount that
you purchase.
o The chart below also shows the amount of broker/dealer compensation
that is paid out of the sales charge. This compensation includes
commissions and other fees that financial professionals who sell
shares of the Fund receive. The distributor keeps up to
approximately 10% of the sales charge imposed on Class A shares.
Financial professionals that sell Class A shares will also receive
the service fee payable on Class A shares at an annual rate equal
to 0.25% of the average daily net assets represented by the Class A
shares sold by them.
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BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING PRICE
................................................................................
Less than $25,000 5.00% 5.26% 4.50%
................................................................................
$25,000 to less than $50,000 4.00% 4.17% 3.60%
................................................................................
$50,000 to less than $100,000 3.50% 3.63% 3.15%
................................................................................
$100,000 to less than $250,000 3.00% 3.09% 2.70%
................................................................................
$250,000 to less than $500,000 2.00% 2.04% 1.80%
................................................................................
$500,000 or more none* none* up to 1.00%
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* A contingent deferred sales charge may apply in certain instances. See
page 15.
o After the initial sales charge is deducted from your investment,
the balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain
circumstances, as described in "Sales Charge Waivers or Reductions"
below. If you qualify to purchase Class A shares without a sales
load, you should purchase Class A shares rather than Class B shares
because Class A shares pay lower fees.
o If you invest at least $500,000 in the Fund, you do not pay any
initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) of 1% of the purchase price, or the
sale price, whichever is less, if you sell within the first year.
Under certain circumstances, waivers may apply. Other policies
regarding the application of the CDSC are the same as for Class B
shares. Please read the discussion below on Class B shares for more
information.
PLEASE NOTE: If you owned Fund shares prior to January 4,
1999, you may exchange those shares into Class A shares of
other CitiFunds and other mutual funds managed by Citibank
without paying any sales charge, subject to verification.
Shares subject to the waiver include shares purchased prior to
January 4, 1999, and any shares that represent capital
appreciation or the reinvestment of dividends or capital gains
distributions on those shares.
SALES CHARGES -- CLASS B SHARES
o Class B shares are sold without a front-end, or initial, sales
charge, but you are charged a contingent deferred sales charge
(CDSC) when you sell shares within five years of purchase. The rate
of CDSC goes down the longer you hold your shares. The table below
shows the rates that you pay, as a percentage of your original
purchase price (or the sale price, whichever is less), depending
upon when you sell your shares.
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SALE DURING CDSC ON SHARES BEING SOLD
................................................................................
1st year since purchase 5.00%
................................................................................
2nd year since purchase 4.00%
................................................................................
3rd year since purchase 3.00%
................................................................................
4th year since purchase 2.00%
................................................................................
5th year since purchase 1.00%
................................................................................
6th year (or later) since purchase None
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o Financial professionals selling Class B shares receive a commission
of 4.50% of the purchase price of the Class B shares that they
sell, except for sales exempt from the CDSC. Financial
professionals also receive a service fee at an annual rate equal to
0.25% of the average daily net assets represented by the Class B
shares that they have sold.
o When you sell your shares, the CDSC will be based on either your
original purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of
dividends and capital gain distributions or on shares representing
capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Fund will
always use the Class B shares with the lowest CDSC to fill your
sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares
for Class B shares of certain CitiFunds -- any payment will be
deferred until your Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from
another fund managed or advised by Citibank, the date of your
initial investment will be used as the basis of the CDSC
calculations. If the rate of CDSC on the shares exchanged was
higher than the rate of CDSC on your Fund shares, you will be
charged the higher rate when you sell your Fund shares.
The Fund's distributor may make payments for distribution and/
or shareholder servicing activities out of its past profits
and other available sources. The distributor may also make
payments for marketing, promotional or related expenses to
dealers. The amount of these payments is determined by the
distributor and may vary. Citibank may make similar payments
under similar arrangements.
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you
qualify for certain waivers or elect to participate in certain
programs. These include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers, including
certain tax-exempt organizations, certain employee benefit plans,
certain entities or persons with a qualifying affiliation or
relationship with Citibank, and, under certain circumstances,
investors using the proceeds of a redemption from another mutual
fund for their purchase of Class A shares. Further information
about eligible purchasers may be found in the Appendix to this
prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other
retirement accounts.
o Redemptions made under the Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or
reduction and how the programs work by requesting a copy of
the Fund's Statement of Additional Information, or by
consulting with your account representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares
approximately eight years after purchase. If you acquired your
shares through an exchange, the date of your initial
investment will be used to determine your conversion date. You
will receive the same dollar amount of Class A shares as the
Class B shares converted. The price of Class A shares may be
higher than Class B shares at the time of conversion, because
of the lower expenses of Class A shares. Therefore, you may
receive fewer Class A shares than the number of Class B shares
converted.
HOW TO BUY SHARES
Shares of CitiFunds Growth & Income Portfolio are offered
continuously and purchases may be made Monday through Friday,
except on certain holidays. Shares may be purchased from the
Fund's distributor or a broker-dealer or financial institution
(called a Service Agent) that has entered into a service
agreement with the distributor concerning the Fund. Please
specify whether you are purchasing Class A or Class B shares.
If you fail to specify, Class A shares will be purchased for
your account. The Fund and the distributor have the right to
reject any purchase order or cease offering Fund shares at any
time.
Shares are purchased at net asset value (NAV) the next time it
is calculated after your order is received and accepted by the
Fund's transfer agent. NAV is the value of a single share of
the Fund. If you are purchasing Class A shares, the applicable
sales charge will be added to the cost of your shares.
Your Service Agent will not transmit your purchase order for
Fund shares until it receives the purchase price in federal or
other immediately available funds. If you pay by check, the
Service Agent transmits the order when the check clears,
usually within two business days.
If you hold your shares through a Service Agent, your Service
Agent will establish and maintain your account and be the
shareholder of record. If you wish to transfer your account,
you may only transfer it to another financial institution that
acts as a Service Agent, or you may set up an account directly
with the Fund's transfer agent.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
The Fund calculates its NAV every day the New York Stock
Exchange is open for trading. This calculation is made at the
close of regular trading on the New York Stock Exchange,
normally 4:00 p.m. Eastern time. NAV is calculated separately
for each class of shares. NAV may be higher for Class A shares
because Class A shares bear lower expenses. On days when the
financial markets in which the Fund invests close early, NAV
may be calculated as of the earlier close of those markets.
The Fund's securities are valued primarily on the basis of
market quotations. When market quotations are not readily
available, the Fund may price securities at fair value. Fair
value is determined in accordance with procedures approved by
the Fund's Board of Trustees. When the Fund uses the fair
value pricing method, a security may be priced higher or lower
than if the Fund had used a market quotation to price the same
security. For foreign securities the values are translated
from the local currency into U.S. dollars using current
exchange rates. If trading in the currency is restricted, the
Fund uses a rate believed to reflect the currency's fair value
in U.S. dollars. Trading may take place in foreign securities
held by the Fund on days when the Fund is not open for
business. As a result, the Fund's NAV may change on days on
which it is not possible to purchase or sell shares of the
Fund.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The
price will be the NAV the next time it is calculated after
your redemption request in proper form has been received by
the Fund's transfer agent. If your shares are subject to a
CDSC, the applicable charge will be deducted from your sale
proceeds.
You may make redemption requests in writing through the Fund's
transfer agent or, if you are a customer of a Service Agent,
through your Service Agent. If your account application
permits, you may also make redemption requests by calling the
Fund's transfer agent or, if you are a customer of a Service
Agent, your Service Agent. Each Service Agent is responsible
for promptly submitting redemption requests to the Fund's
transfer agent. You are responsible for making sure your
redemption request is in proper form.
The Fund has a Systematic Withdrawal Plan which allows you to
automatically withdraw a specific dollar amount from your
account on a regular basis. You must have at least $10,000 in
your account to participate in this program. Under the Plan,
if your shares are subject to a CDSC, you may only withdraw up
to 10% of the value of your account in any year, but you will
not be subject to a CDSC on the shares withdrawn under the
Plan. For more information, please contact your Service Agent.
If you own both Class A and Class B shares, and want to sell
shares, you should specify which class of shares you wish to
sell. If you fail to specify, Class A shares will be redeemed
first.
When you sell your Class B shares, they will be redeemed so as
to minimize your CDSC. Shares on which the CDSC is not
payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds
normally on the business day after you sell your shares but in
any event within seven days. Your redemption proceeds may be
delayed for up to ten days if your purchase was made by check.
Your redemption proceeds may also be delayed, or your right to
receive redemption proceeds suspended, if the New York Stock
Exchange is closed (other than on weekends or holidays) or
trading is restricted, or if an emergency exists. The Fund has
the right to pay your redemption proceeds by giving you
securities instead of cash. In that case, you may incur costs
(such as brokerage commissions) converting the securities into
cash. You should be aware that you may have to pay taxes on
your redemption proceeds.
Your account balance may be subject to a $500 minimum. If so,
the Fund reserves the right to close your account. You will
have 60 days' notice to make an additional investment. If you
do not increase your balance, the Fund may close your account
and send the proceeds to you. Your shares will be sold at NAV
(normally $1.00 per share) on the day your account was closed.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Fund
permits you to repurchase Class A shares in the Fund, up to
the dollar amount of the shares redeemed, without paying any
sales charges. To take advantage of this reinstatement
privilege, you must notify the Fund in writing at the time you
wish to repurchase the shares.
EXCHANGES
You may exchange Fund shares for shares of the same class of
certain other CitiFunds. You may also be able to exchange your
Class A shares for shares of certain CitiFunds that offer only
a single class of shares, unless your Class A shares are
subject to a CDSC. You may not exchange Class B shares for
shares of CitiFunds that offer only a single class of shares.
You may also acquire Fund shares through an exchange from
another fund managed by Citibank.
You may place exchange orders through the transfer agent or,
if you are a customer of a Service Agent, through your Service
Agent. You may place exchange orders by telephone if your
account application permits. The transfer agent or your
Service Agent can provide you with more information, including
a prospectus for any fund that may be acquired through an
exchange.
The exchange will be based on the relative NAVs of both funds
when they are next determined after your order is accepted by
the Fund's transfer agent, subject to any applicable sales
charge. You cannot exchange shares until the Fund has received
payment in federal funds for your shares.
When you exchange your Class A shares, you will generally be
required to pay the difference, if any, between the sales
charge payable on the shares to be acquired in the exchange
and the sales charge paid in connection with your original
purchase of Class A shares. However, if your Fund shares were
purchased prior to January 4, 1999, you will not have to pay a
sales charge when you exchange those shares for Class A
shares, subject to confirmation through a check of appropriate
records and documentation.
When you exchange your Class B shares, you will not pay any
initial sales charge, and no CDSC is imposed when your Class B
shares are exchanged for Class B shares of certain other
CitiFunds that are made available by your Service Agent.
However, you may be required to pay a CDSC when you sell those
shares. The length of time that you owned Fund shares will be
included in the holding period of your new Class B shares.
The exchange privilege may be changed or terminated at any
time. You should be aware that you may have to pay taxes on
your exchange.
DIVIDENDS
CitiFunds Growth & Income Portfolio pays substantially all of
its net income, if any, from dividends and interest to its
shareholders of record as a dividend at least quarterly during
the months of March, June, September and December.
The Fund's net realized short-term and long-term capital
gains, if any, will be distributed to Fund shareholders at
least annually, in December. The Fund may also make additional
distributions to shareholders to the extent necessary to avoid
the application of the 4% non-deductible excise tax on certain
undistributed income and net capital gains of mutual funds.
Unless you choose to receive your dividends in cash, you will
receive them as full and fractional additional Fund shares.
TAX MATTERS
This discussion of taxes is for general information only. You
should consult your own tax adviser about your particular
situation, and the status of your account under state and
local laws.
TAXABILITY OF DISTRIBUTIONS. You will normally have to pay
federal income taxes on the distributions you receive from the
Fund, whether you take the distributions in cash or reinvest
them in additional shares. Distributions designated by the
Fund as capital gain dividends are taxable as long-term
capital gains. Other distributions are generally taxable as
ordinary income. Some distributions paid in January may be
taxable to you as if they had been paid the previous December.
Each year the Fund will mail you a report of your
distributions for the prior year and how they are treated for
federal tax purposes.
Fund distributions will reduce the Fund's net asset value per
share. As a result, if you buy shares just before the Fund
makes a distribution, you may pay the full price for the
shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
BACKUP WITHHOLDING. The account application asks each new
investor to certify that the investor's Social Security or
taxpayer identification number is correct and that the
shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. The Fund may be required
to withhold (and pay over to the IRS for your credit) 31% of
certain distributions and proceeds it pays you if you fail to
provide this information or otherwise violate IRS regulations.
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of
the U.S., the Fund will withhold U.S. federal income tax
payments at the rate of 30% (or any lower applicable treaty
rate) on taxable dividends and other payments subject to
withholding taxes. Fund distributions received by non-U.S.
persons also may be subject to tax under the laws of their own
jurisdictions.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange
shares, it is considered a taxable event for you. Depending on
the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or a loss on the transaction.
You are responsible for any tax liabilities generated by your
transactions.
<PAGE>
----------------------
MANAGEMENT OF THE FUND
----------------------
Management of the Fund
MANAGERS
CitiFunds Growth & Income Portfolio draws on the strength and
experience of Citibank. Citibank is the investment manager of
the Fund. Subject to policies set by the Fund's Trustees,
Citibank makes investment decisions. Citibank has been
managing money since 1822. With its affiliates, it currently
manages more than $351 billion in assets worldwide.
Citibank, with its headquarters at 153 East 53rd Street, New
York, New York, is a wholly-owned subsidiary of Citicorp,
which is, in turn, a wholly-owned subsidiary of Citigroup Inc.
"CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates may have banking and investment
banking relationships with the issuers of securities that are
held in the Fund. However, in making investment decisions for
the Fund, Citibank does not obtain or use material inside
information acquired by any division, department or affiliate
of Citibank in the course of those relationships. Citibank and
its affiliates may have loans outstanding that are repaid with
proceeds of securities purchased by the Fund.
Citibank has delegated the daily management of the Fund to a
subadviser, SSB Citi Fund Management LLC (formerly, SSBC Fund
Management, Inc.) (SSB Citi). SSB Citi is an affiliate of
Citibank and an indirect wholly-owned subsidiary of Citigroup
Inc. SSB Citi's address is 388 Greenwich Street, New York, New
York 10013. Both Citibank and SSB Citi are referred to as the
Fund's Managers.
Frances A. Root has been the portfolio manager of the Fund
since May 17, 1999. Ms. Root is a Managing Director and a
Senior Equity Portfolio Manager of SSB Citi. She joined Smith
Barney Capital Management in 1992 as a Vice President and
Equity Portfolio Manager and in 1998 became a Managing
Director of SSB Citi and a Senior Equity Portfolio Manager.
Formerly, she was with Shearson Lehman Advisors as a Vice
President and Portfolio Manager for seven years and prior to
that, with E.F. Hutton & Company, Inc.
Citibank is responsible for recommending the hiring,
termination or replacement of any subadviser and for
supervising and monitoring the performance of any subadviser.
MANAGEMENT FEES
For the fiscal year ended October 31, 1999, Citibank and the
subadviser received a total of % of the Fund's average
daily net assets, after waivers.
<PAGE>
-------------------
MORE ABOUT THE FUND
-------------------
More About the Fund
The Fund's goal, principal investments and risks are
summarized in FUND AT A GLANCE on page 3. More information on
investments, investment strategies and risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
CitiFunds Growth & Income Portfolio's principal investment
strategies are the strategies that, in the opinion of the
Managers, are most likely to achieve the Fund's investment
goal. Of course, there can be no assurance that the Fund will
achieve its goal. Please note that the Fund may also use
strategies and invest in securities that are not described
below but that are described in the Statement of Additional
Information. The Fund may not use all of the strategies and
techniques or invest in all of the types of securities
described in this Prospectus or in the Statement of Additional
Information. The Fund's goal and strategies may be changed
without shareholder approval.
- --------------------------------------------------------------------------------
WHAT ARE EQUITY SECURITIES?
EQUITY SECURITIES generally represent an ownership interest
(or a right to acquire an ownership interest) in an issuer,
and include COMMON STOCKS, SECURITIES CONVERTIBLE INTO COMMON
STOCKS, PREFERRED STOCKS, WARRANTS for the purchase of stock
and DEPOSITARY RECEIPTS (receipts which represent the right to
receive the securities of foreign issuers deposited in a U.S.
bank or a local branch of a foreign bank). While equity
securities historically have been more volatile than fixed
income securities, they historically have produced higher
levels of total return.
- --------------------------------------------------------------------------------
The Fund invests primarily in common stocks. Although not
required to, the Fund may also purchase debt securities as
described below. The Fund invests primarily in equity and debt
securities of established, large cap issuers. Large cap
issuers are those with market capitalizations within the top
1,000 stocks of the equity market.
The Fund invests primarily in securities with a record of
earnings and dividend payments but may, from time to time,
invest in securities that pay no dividends or interest.
- --------------------------------------------------------------------------------
WHAT ARE DEBT SECURITIES?
These securities generally represent a debt obligation of an
issuer, and include BONDS, SHORT-TERM OBLIGATIONS and
MORTGAGE-BACKED and ASSET-BACKED SECURITIES (including
collateralized mortgage obligations or CMOs), U.S. government
securities, preferred stock, and convertible securities (both
debt securities and preferred stocks). Debt securities, in
general, offer a fixed stream of cash flow. Most bond
investments focus on generating income. The potential for
capital appreciation is a secondary objective.
- --------------------------------------------------------------------------------
The Fund may invest in investment grade debt securities (those
rated Baa by Moody's, BBB by Standard & Poor's or which the
Managers believe to be of comparable quality), but may also
invest in debt securities rated below Baa by Moody's or below
BBB by Standard & Poor's and equivalent debt securities.
Securities rated below Baa or BBB are commonly known as "junk
bonds." These securities may offer higher income than more
highly rated debt securities, but they have special risks. See
"Risks" below.
- --------------------------------------------------------------------------------
WHAT ARE MORTGAGE-BACKED SECURITIES?
Home mortgage loans are typically grouped together into
"pools" by banks and other lending institutions, and interests
in these pools are then sold to investors, allowing the bank
or other lending institution to have more money available to
loan to home buyers. When homeowners make interest and
principal payments, these payments are passed on to the
investors in the pool. Mortgage-backed securities generally
are backed or collateralized by a pool of mortgages. Certain
types of mortgage-backed securities are called collateralized
mortgage obligations, or CMOs.
- --------------------------------------------------------------------------------
The Fund may invest in mortgage-backed securities that are
issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies, such as GNMA.
These securities may or may not be backed by the full faith
and credit of the U.S. government. 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
the security is not insured and may be volatile. The Fund also
may invest in asset-backed securities and in mortgage-backed
securities that are not backed by the U.S. government. These
securities are backed by pools of assets such as automobile
loans, credit card receivables or mortgage loans. It may be
difficult to enforce rights against the assets backing these
securities.
The Fund may enter into "dollar rolls," where the Fund sells
mortgage-backed securities and simultaneously agrees to
repurchase similar securities in the future at a lower price.
The Fund's dollar rolls are "covered," meaning that the Fund
establishes a segregated account with liquid securities equal
in value to the securities it will repurchase.
The Fund may invest in zero coupon obligations, such as zero
coupon bonds issued by companies and securities representing
future principal and interest installments on debt obligations
of the U.S. and foreign governments. Zero coupon obligations
pay no current interest. The Fund may also invest in payment-
in-kind obligations which are similar to zero coupon
securities because the issuer has the option to make payments
in additional debt obligations rather than cash.
The Fund may invest up to 25% of its assets in foreign equity
and debt securities. Foreign securities may be issued by
issuers in developing countries.
The portfolio managers use a value-oriented approach in
managing the Fund. This means that they look for securities
that they believe are currently undervalued, or priced below
their true worth, but whose issuers have good longer term
prospects. The portfolio managers look for securities that
they believe are underpriced according to certain financial
measurements of their intrinsic worth or business prospects
(such as the company's cash flow, earnings prospects, growth
rate and/or dividend paying ability). The portfolio managers
believe that securities of companies which are temporarily
underpriced due to earnings declines, cyclical business
downturns or other adverse factors may provide a higher total
return over time than securities of companies whose positive
attributes are more accurately reflected in the security's
current price.
The Fund may hold cash pending investment, and may invest in
money market instruments, repurchase agreements and reverse
repurchase agreements for cash management purposes.
DERIVATIVES. The Fund may, but is not required to, use
derivatives in order to protect (or "hedge") against declines
in the value of securities held by the Fund or increases in
cost of securities to be purchased in the future, or to hedge
against changes in interest rates. The Fund may also use
derivatives for non-hedging purposes, to generate income or
enhance potential gains. In addition, the Fund may use
derivatives to manage the effective maturity or duration of
fixed income securities. These derivatives include financial
futures, stock index futures, foreign currency futures,
forwards and exchange contracts, options on securities and
foreign currencies, and options on interest rate and stock
index futures. In some cases, the derivatives purchased by the
Fund are standardized contracts traded on commodities
exchanges or boards of trade. This means that the exchange or
board of trade guaranties counterparty performance. In some
cases, the derivatives may be illiquid, and the Fund may bear
more counterparty risk. Derivatives may not be available on
terms that make economic sense (they may be too costly). The
Fund's ability to use derivatives may also be limited by tax
considerations.
DEFENSIVE STRATEGIES. The Fund may, from time to time, take
temporary defensive positions that are inconsistent with the
Fund's principal investment strategies in attempting to
respond to adverse market, political or other conditions. When
doing so, the Fund may invest without limit in high quality
money market and other short-term instruments, and may not be
pursuing its investment goal.
INVESTMENT STRUCTURE. The Fund does not invest directly in
securities but instead invests through an underlying mutual
fund, Large Cap Value Portfolio, having the same investment
goals and similar strategies as the Fund. Large Cap Value
Portfolio buys, holds and sells securities in accordance with
these goals and strategies. The Fund may stop investing in an
underlying mutual fund at any time, and will do so if the
Fund's Trustees believe that to be in the best interests of
the Fund's shareholders. The Fund could then invest in one or
more mutual funds or pooled investment vehicles or invest
directly in securities. Prior to August 1, 1999, the Fund
invested in Growth & Income Portfolio.
MANAGEMENT STYLE. Managers of mutual funds use different
styles when selecting securities to purchase. The portfolio
managers generally use a "bottom-up" approach when selecting
securities to purchase or sell for the Fund. This means that
they look primarily at individual companies against the
context of broader market forces. The portfolio managers use
this same approach when deciding which securities to sell.
Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better
opportunities exist or that the security no longer fits within
the managers' overall strategies for achieving the Fund's
goals. For more information about the portfolio managers, see
"Managers" on page 26.
The Fund is actively managed. Although the portfolio managers
attempt to minimize portfolio turnover, from time to time the
Fund's annual portfolio turnover rate may exceed 100%. The
sale of securities may produce capital gains, which, when
distributed, are taxable to investors. Active trading may also
increase the amount of commissions or mark-ups the Fund pays
to brokers or dealers when it buys and sells securities. The
"Financial Highlights" section of this prospectus shows the
Fund's historical portfolio turnover rate.
The Managers may use brokers or dealers for Fund transactions
who also provide brokerage and research services to the Fund
or other accounts over which the Managers or their affiliates
exercise investment discretion. The Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a
broker or dealer who provides these brokerage and research
services a commission for executing a portfolio transaction
which is higher than the commission another broker or dealer
would have charged. However, the Fund will "pay up" only if
the Managers determine in good faith that the higher
commission is reasonable in relation to the brokerage and
research services provided, viewed in terms of either the
particular transaction or all of the accounts over which the
Managers exercise investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing,
you should consider the risks you will assume. Certain of
these risks are described below. More information about risks
appears in the Fund's Statement of Additional Information.
Remember that you may receive little or no return on your
investment in the Fund. You may lose money if you invest in
this Fund.
Please remember that an investment in the Fund is not a
deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK. This is the risk that the prices of securities
will rise or fall due to changing economic, political or
market conditions, or due to a company's individual situation.
The value of the Fund's shares will change daily as the value
of its underlying securities change. This means that your
shares of the Fund may be worth more or less when you sell
them than when you bought them.
EQUITY SECURITIES. Equity securities are subject to market
risk that historically has resulted in greater price
volatility than exhibited by fixed income securities.
VALUE INVESTING. The success of the Fund's investment strategy
depends largely on the portfolio managers' skill in
identifying securities of companies that are in fact
undervalued, but have good longer term business prospects. A
security may not achieve its expected value because the
circumstances causing it to be underpriced worsen (causing the
security's price to decline further) or do not change or
because the portfolio managers are incorrect in their
determinations. In addition, the Fund may underperform certain
other stock funds (those emphasizing growth stocks, for
example) during periods when value stocks are out of favor.
FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o These risks may include expropriation of assets, confiscatory
taxation, withholding taxes on dividends and interest paid on fund
investments, currency exchange controls and other limitations on
the use or transfer of Fund assets and political or social
instability.
o Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S.
markets. Rapid increases in money supply may result in speculative
investing, contributing to volatility. Also, equity securities may
trade at price-earnings multiples that are higher than those of
comparable U.S. companies, and that may not be sustainable. As a
result, there may be rapid changes in the value of foreign
securities.
o Foreign markets may offer less protection to investors. Enforcing
legal rights may be difficult, costly and slow. There may be
special problems enforcing claims against foreign governments.
o Since foreign securities often trade in currencies other than the
U.S. dollar, changes in currency exchange rates will affect the
Fund's net asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities. An
increase in the U.S. dollar relative to these other currencies will
adversely affect the value of the Fund. In addition, some foreign
currency values may be volatile and there is the possibility of
governmental controls on currency exchanges or governmental
intervention in currency markets. Controls or intervention could
limit or prevent the Fund from realizing value in U.S. dollars from
its investment in foreign securities. The Fund may also be
adversely affected by the introduction of the Euro.
o The Fund may invest in issuers located in emerging, or developing,
markets.
o Emerging or developing countries are generally defined as
countries in the initial stages of their industrialization
cycles with low per capita income.
o All of the risks of investing in foreign securities are
heightened by investing in developing countries.
o The markets of developing countries have been more volatile than
the markets of developed countries with more mature economies.
INTEREST RATE RISK. In general, the prices of debt securities
rise when interest rates fall, and fall when interest rates
rise. Longer term obligations are usually more sensitive to
interest rate changes. If the Fund holds debt securities, a
change in interest rates could cause the Fund's share price to
go down.
CREDIT RISK. The Fund may invest in debt securities of any
grade, including junk bonds. It is possible that some issuers
will not make payments on debt securities held by the Fund,
causing a loss. Or, an issuer may suffer adverse changes in
its financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the
security and in shares of the Fund. The lower quality debt
securities, especially the junk bonds, in which the Fund may
invest are more susceptible to these problems than higher
quality obligations.
Junk bonds are considered to be speculative investments and
involve greater risks than higher quality securities. A higher
percentage of issuers of junk bonds may default on payments of
principal and interest than the issuers of higher quality
bonds. The value of junk bonds will usually fall substantially
if the issuer defaults or goes bankrupt. Even anticipation of
defaults by certain issuers, or the perception of economic or
financial weakness, may cause the market for junk bonds to
fall. The price of a junk bond may therefore fluctuate
drastically due to bad news about the issuer or the economy in
general. Lower quality debt securities, especially junk bonds,
may be less liquid and may be more difficult for the Fund to
value and sell. The Fund may incur additional expenses if an
issuer defaults and the Fund tries to recover some of its
losses in a bankruptcy or other similar proceeding.
PREPAYMENT RISK. The issuers of debt securities that may be
held by the Fund may be able to prepay principal due on the
securities, particularly during periods of declining interest
rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund, and the Fund
may lose any premium paid. On the other hand, rising interest
rates may cause prepayments to occur at slower than expected
rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest
rate changes and the Fund's share price more volatile.
Mortgage-backed securities, including CMOs, are particularly
susceptible to prepayment risk and their prices may be very
volatile.
ZERO COUPON AND PAYMENT-IN-KIND OBLIGATIONS. Zero coupon
obligations pay no current interest. Although payment-in-kind
obligations may pay interest in cash, they are similar to zero
coupon obligations because the issuer has the option to make
interest payments in additional debt obligations rather than
cash. As a result, the prices of zero coupon and payment-in-
kind obligations tend to be more volatile than those of
securities that offer regular payments of interest. This makes
the Fund's share price more volatile. In order to pay cash
distributions representing income on zero coupon and payment-
in-kind obligations, the Fund may have to sell other
securities on unfavorable terms. These sales may generate
taxable gains for Fund investors.
SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible
securities, which are debt securities or preferred stock that
may be converted into common stock, are subject to the market
risk of stocks, and, like other debt securities, are also
subject to interest rate risk and the credit risk of their
issuers. Call provisions may allow the issuer to repay the
debt before it matures.
DERIVATIVES. The Fund's use of derivatives (such as futures
contracts, options and forward foreign currency exchange
contracts), particularly when used for non-hedging purposes,
may be risky. This practice could result in losses that are
not offset by gains on other portfolio assets. Losses would
cause the Fund's share price to go down. There is also the
risk that the counterparty may fail to honor its contract
terms. This risk becomes more acute when the Fund invests in
derivatives that are not traded on commodities exchanges or
boards of trade. The Fund's ability to use derivatives depends
on the ability of the Managers to accurately predict movements
in stock prices, interest rates and currency exchange rates.
If the Managers' predictions are wrong, the Fund could suffer
greater losses than if the Fund had not used derivatives.
YEAR 2000. The Fund could be adversely affected if the
computer systems used by the Fund or its service providers
have not been programmed to process information accurately on
or after January 1, 2000. The Fund, and its service providers,
have made efforts to resolve any potential Year 2000 problems.
While it is likely these efforts will be successful, the
failure to implement any necessary modifications could have an
adverse impact on the Fund. The Fund also could be adversely
affected if the issuers of securities held by the Fund or the
markets on which those securities are traded do not solve
their Year 2000 problems, or if it costs them large amounts of
money to do so.
<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
performance for the fiscal periods indicated. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information has been audited by PricewaterhouseCoopers LLP whose report, along
with the Fund's financial statements, is included in the Annual Report which
is incorporated by reference into the Statement of Additional Information and
which is available upon request.
CITIFUNDS GROWTH & INCOME PORTFOLIO
Class A
- ------------------------------------------------------------------------------
March 2, 1998
(Commencement of
Year Ended Operations) to
October 31, 1999 October 31, 1998
..............................................................................
Net Asset Value, beginning of period
..............................................................................
Income From Operations
Net investment income
Net realized and unrealized loss on
investments
..............................................................................
Total from operations
..............................................................................
Less Distributions From:
Net investment income
..............................................................................
Total distributions
..............................................................................
Net Asset Value, end of period
..............................................................................
Total return **
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in
thousands) *
Ratio of expenses to average net
assets (A) *
Ratio of net investment income to
average net assets *
Portfolio turnover rate (B)
Note: If agents of the Fund for the period indicated had not voluntarily
waived a portion of their fees, the net investment income per share and the
ratios would have been as follows:
Net investment income per share
RATIOS:
Expenses to average net assets *
Net investment income to average
net assets *
* Annualized.
** Not annualized.
(A) Includes the Fund's share of Growth & Income Portfolio allocated expenses
for the period indicated.
(B) Portfolio turnover represents the rate of portfolio activity of Growth &
Income Portfolio, the underlying portfolio through which the Fund invests.
<PAGE>
CITIFUNDS GROWTH & INCOME PORTFOLIO
Class B
- -------------------------------------------------------------------------------
For the period
January 4, 1999
(Commencement of Operations)
to October 31, 1999
...............................................................................
Net Asset Value, beginning of period
...............................................................................
Income from Operations:
Net investment income
Net realized and unrealized gain (loss)
...............................................................................
Total from operations
...............................................................................
Less Distributions From:
Net investment income
Net realized gain
...............................................................................
Total distributions
...............................................................................
Net Asset Value, end of period
...............................................................................
Total return
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in thousands)
Ratio of expenses to average net assets
Ratio of net investment income to average net assets
Portfolio turnover rate
Note: If agents of the Fund for the period indicated had not voluntarily waived
a portion of their fees, the net investment income per share and the ratios
would have been as follows:
Net investment income per share
RATIOS:
Expenses to average net assets
Net investment income to average net assets
<PAGE>
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<PAGE>
Appendix
CLASS A SHARES -- ELIGIBLE PURCHASERS
Class A shares may be purchased without a sales charge by the
following eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises discretionary
investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees
for acting as custodian
[] directors or trustees (and their immediate families), and retired
directors or trustees (and their immediate families), of any
investment company for which Citibank or any subsidiary or
affiliate of Citibank serves as the investment adviser or as a
service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired
employees of Citibank and its affiliates or CFBDS and its
affiliates (including immediate families of any of the foregoing)
[] investors participating in a fee-based or promotional arrangement
sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances in
selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan offered
to Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by the Fund's Board
of Trustees or by the Board of Trustees of any other CitiFund or
mutual fund managed or advised by Citibank (all of such funds
being referred to herein as CitiFunds) the terms of which entitle
those shareholders to purchase shares of the Fund or any other
CitiFund at net asset value without a sales charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4,
1999
[] employee benefit plans qualified under Section 401 of the
Internal Revenue Code, including salary reduction plans qualified
under Section 401(k) of the Code, subject to minimum requirements
as may be established by CFBDS with respect to the amount of
purchase; currently, the amount invested by the qualified plan in
the Fund or in any combination of CitiFunds must total a minimum
of $1 million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares; however,
a contingent deferred sales charge will be imposed on the
investments in the event of certain share redemptions within 12
months following the share purchase, at the rate of 1% of the
lesser of the value of the shares redeemed (not including
reinvested dividends and capital gains distributions) or the
total cost of the shares; the contingent deferred sales charge on
Class A shares will be waived under the same circumstances as the
contingent deferred sales charge on Class B shares will be
waived; in determining whether a contingent deferred sales charge
on Class A shares is payable, and if so, the amount of the
charge:
o it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
o all investments made during a calendar month will age one
month on the last day of the month and each subsequent month
o any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the redemption
proceeds when the exchanged shares are subsequently redeemed
(assuming the contingent deferred sales charge is then
payable)
o the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which the
original Class A shares were held
[] subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund (other
than a CitiFund), if:
o the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed),
and
o the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from another
investment firm within six months prior to the date of purchase
by the investor, if:
o the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative, and
either paid an initial sales charge or was at some time
subject to, but did not actually pay, a deferred sales charge
or redemption fee with respect to the redemption proceeds
o the redemption is made within 60 days prior to the investment
in the Fund, and
o the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds
of the redemption.
<PAGE>
The Statement of Additional Information (SAI) provides more
details about the Fund and its policies. The SAI is
incorporated by reference into this prospectus and is legally
part of it.
Additional information about the Fund's investments is
available in the Fund's Annual and Semi-Annual Reports to
Shareholders. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Fund's performance.
The Annual and Semi-Annual Reports for the Fund also list its
portfolio holdings and describe its performance.
To obtain free copies of the SAI and the Annual and Semi-
Annual Reports or to make other inquiries, please call toll-
free 1-800-625-4554.
The SAI is also available from the Securities and Exchange
Commission. You can find it on the SEC Internet site at http:/
/www.sec.gov. Information about the Fund (including the SAI)
can also be reviewed and copied at the SEC's Public Reference
Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Copies may also be obtained upon payment of a
duplicating fee by electronic request to [email protected],
or by writing to the SEC's Public Reference Section,
Washington, DC 20549-6009.
SEC File Number: 811-4007 CFP/GI399
<PAGE>
Statement of
Additional Information
March 1, 2000
CITIFUNDS(SM) LARGE CAP GROWTH PORTFOLIO
CITIFUNDS(SM) SMALL CAP GROWTH PORTFOLIO
CITIFUNDS(SM) SMALL CAP VALUE PORTFOLIO
CITIFUNDS(SM) GROWTH & INCOME PORTFOLIO
(Members of the CitiFunds(SM) Family of Funds)
CitiFunds Large Cap Growth Portfolio, CitiFunds Small Cap Growth
Portfolio, CitiFunds Small Cap Value Portfolio and CitiFunds Growth & Income
Portfolio (the "Funds") are series of CitiFunds Trust II (the "Trust"). The
Trust is an open-end management investment company which was organized as a
business trust under the laws of the Commonwealth of Massachusetts on April
13, 1984. The address and telephone number of the Trust are 21 Milk Street,
Boston, Massachusetts 02109 (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 Large Cap Growth Portfolio invests all of its investable
assets in Large Cap Growth Portfolio, and CitiFunds Small Cap Growth Portfolio
invests all of its investable assets in Small Cap Growth Portfolio. Large Cap
Growth Portfolio and Small Cap Growth Portfolio are series of The Premium
Portfolios. CitiFunds Growth & Income Portfolio invests all of its investable
assets in Large Cap Value Portfolio, and CitiFunds Small Cap Value Portfolio
invests all of its investable assets in Small Cap Value Portfolio. Large Cap
Value Portfolio and Small Cap Value Portfolio are series of Asset Allocation
Portfolios. The address of each of The Premium Portfolios and Asset Allocation
Portfolios is Elizabethan Square, George Town, Grand Cayman, British West
Indies. Large Cap Growth Portfolio, Small Cap Growth Portfolio, Small Cap
Value Portfolio and Growth & Income Portfolio are referred to as the
"Portfolios." The Premium Portfolios and Asset Allocation Portfolios are
referred to as the "Portfolio Trusts."
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
1. The Trust ............................................................ 2
2. Investment Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 3
4. Investment Restrictions .............................................. 23
5. Performance Information and Advertising .............................. 24
6. Determination of Net Asset Value; Valuation of Securities ............ 26
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs ............................................... 27
8. Management ........................................................... 34
9. Portfolio Transactions ............................................... 42
10. Description of Shares, Voting Rights and Liabilities ................. 43
11. Tax Matters .......................................................... 44
12. Financial Statements ................................................. 46
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Funds' separate Prospectuses, dated March 1, 2000, by which shares of the
Funds are offered. This Statement of Additional Information should be read in
conjunction with the applicable Prospectus. This Statement of Additional
Information incorporates by reference the financial statements described on
page 46 hereof. These financial statements can be found in each Fund's Annual
Report to Shareholders. An investor may obtain copies of each Fund's
Prospectus and Annual Report 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 is an open-end management investment company organized
as a business trust under the laws of the Commonwealth of Massachusetts on
April 13, 1984. The Trust was called Landmark Funds II until its name was
changed effective January 7, 1998. This Statement of Additional Information
describes shares of CitiFunds Large Cap Growth Portfolio (the "Large Cap
Growth Fund"), CitiFunds Small Cap Growth Portfolio (the "Small Cap Growth
Fund"), CitiFunds Small Cap Value Portfolio (the "Small Cap Value Fund") and
CitiFunds Growth & Income Portfolio (the "Growth & Income Fund"), each of
which is a separate series of the Trust. Prior to March 2, 1998, the Large Cap
Growth Fund was called Landmark Equity Fund, and the Small Cap Growth Fund was
called Landmark Small Cap Equity Fund. References in this Statement of
Additional Information to the "Prospectus" of a Fund are to the applicable
Fund's Prospectus, dated March 1, 2000.
Each Fund is a diversified 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, as amended (the "1940 Act"), the rules and regulations
thereunder, and exemptive orders granted under such Act. Currently, each of
the Large Cap Growth Fund and the Small Cap Growth Fund invests its assets in
Large Cap Growth Portfolio and Small Cap Growth Portfolio, respectively. Each
of the Growth & Income Fund and the Small Cap Value Fund invests its assets in
Large Cap Value Portfolio and Small Cap Value Portfolio, respectively. Prior
to November 1, 1997, Large Cap Growth Portfolio was called Equity Portfolio
and Small Cap Growth Portfolio was called Small Cap Equity Portfolio. Large
Cap Growth Portfolio and Small Cap Growth Portfolio are series of The Premium
Portfolios, and Large Cap Value Portfolio and Small Cap Value Portfolio are
series of Asset Allocation Portfolios. The Portfolios are open-end,
diversified management investment companies organized as New York trusts.
Under the 1940 Act, a diversified management investment company must invest at
least 75% of its assets in cash and cash items, U.S. Government securities,
investment company securities and other securities limited as to any one
issuer to not more than 5% of the total assets of the investment company and
not more than 10% of the voting securities of the issuer.
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 Manager of each Fund
and each Portfolio. 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 Large Cap
Value Portfolio to SSB Citi Fund Management LLC (formerly, SSBC Fund
Management, Inc.), an affiliate of Citibank and an indirect wholly-owned
subsidiary of Citigroup Inc. Citibank has delegated the daily management of
those assets of the Small Cap Value Portfolio which are not managed by
Citibank to Franklin Advisory Services, Inc., a wholly owned subsidiary of
Franklin Resources, Inc, a publicly owned holding company whose shares are
listed on the New York Stock Exchange. Each of SSB Citi Fund Management LLC
and Franklin Advisory Services, Inc. is referred to herein as a "Subadviser."
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 CFBDS, Inc., the Funds'
distributor ("CFBDS" or the "Distributor").
2. INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each of the Large Cap Growth Fund, the Small
Cap Growth Fund and the Small Cap Value Fund is long-term capital growth.
Dividend income, if any, is incidental to each of these investment objectives.
The investment objective of the Growth & Income Fund is long-term capital
growth and current income.
Each Fund's Prospectus contains a discussion of the principal investment
strategies of the Fund and the principal risks of investing in the Fund. The
following supplements the information contained in each Fund's Prospectus
concerning the investment policies and techniques of each Fund.
The policies described herein and those described below under "Description
of Permitted Investments and Investment Practices" are not fundamental and may
be changed without shareholder approval.
As noted above, a Fund does not invest directly in securities, but instead
invests all of its investable assets in a corresponding Portfolio, which has
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 a Fund or a
Portfolio will achieve its objective. The Trustees of the Trust believe that
the aggregate per share expenses of each Fund and the corresponding 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 Trust may withdraw the investment of a Fund from the 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
objective and policies described herein, either directly in securities or 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.
A 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 corresponding 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 Portfolios described below under
"Investment Restrictions" are fundamental and cannot be changed with respect
to a Portfolio without approval by the investors in the Portfolio. When a Fund
is asked to vote on certain matters concerning a Portfolio, the Fund will
either hold a shareholder meeting and vote in accordance with shareholder
instructions or otherwise vote in accordance with applicable rules and
regulations. Of course, the Fund could be outvoted, or otherwise adversely
affected by other investors in the Portfolio.
A Portfolio may sell interests to investors in addition to the
corresponding 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 a 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
Portfolios is available from the Funds' distributor, CFBDS.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
A Fund may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described in the Fund's
Prospectus and herein. The selection of investments and the utilization of
investment techniques depend on, among other things, the Manager's and, as
applicable, a Subadviser's investment strategies for the Funds, conditions and
trends in the economy and financial markets and investments being available on
terms that, in the Manager's or a Subadviser's opinion, make economic sense.
OPTIONS
The Funds may write covered call and put options and purchase call and put
options on securities for hedging and non-hedging purposes. Call and put
options written by a Fund may be covered in the manner set forth below, or a
Fund will segregate cash or liquid securities equal to the value of the
securities underlying the option.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of
other securities held in its portfolio. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash or liquid securities in a segregated account. A put option written by
a Fund is "covered" if the Fund maintains cash or liquid securities with a
value equal to the exercise price in a segregated account, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the difference is maintained by
the Fund in cash or liquid securities in a segregated account. Put and call
options written by a Fund may also be covered in such other manner as may be
in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded, and applicable laws and
regulations. Even if the Fund's obligation is covered, it is subject to the
risk of the full change in value of the underlying security from the time the
option is written until exercise. Covering an option does not protect the Fund
from risk of loss.
When a Fund writes a call option, the Fund, in return for a fee, or
"premium", agrees to sell a security at the exercise price, if the holder
exercises the right to purchase prior to the expiration date of the call
option. If the Fund holds the security in question, the Fund gives up some or
all of the opportunity to profit from the increase in the market price of the
security during the life of the option. The Fund retains the risk of loss
should the price of the security decline. If the option expires unexercised,
the Fund realizes a gain equal to the premium, which may be offset by a
decline in price of the underlying security. If the option is exercised, the
Fund realizes a gain or loss equal to the difference between the fund's cost
for the underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Fund may terminate a call option it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security
or to write another call on the security, realize a profit on a previously
written call option, or protect a security from being called in an unexpected
market rise. Any profits from closing a purchase transaction may be offset by
a decline in the value of the underlying security. Conversely, because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, if the Fund holds
the underlying security any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by unrealized appreciation of the
underlying security. If the Fund does not hold the underlying security, the
Fund's loss could be unlimited.
A Fund may write put options in an attempt to enhance its current return.
Such option transactions may also be used as a limited form of hedging against
an increase in the price of securities that a Fund plans to purchase. A put
option written by the Fund gives the holder the right to sell, and, in return
for a premium, obligates the Fund to buy, a security at the exercise price at
any time before the expiration date.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Fund may also
receive a return on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a loss
to the Fund, unless the security later appreciates in value. A Fund may
terminate a put option it has written before it expires by a closing purchase
transaction. Any loss from this transaction may be partially or entirely
offset by the premium received on the terminated option.
Each of the Funds may purchase options for hedging purposes or to increase
the Fund's return. When put options are purchased as a hedge against a decline
in the value of portfolio securities, the put options may be purchased at or
about the same time that the Fund purchases the underlying security or at a
later time. If such decline occurs, the put options will permit a Fund to sell
the securities at the exercise price, or to close out the options at a profit.
By using put options in this way, the Fund will reduce any profit it might
otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs. Similarly, when put
options are used for non-hedging purposes, the Fund may make a profit when the
price of the underlying security or instrument falls below the strike price.
If the price of the underlying security or instrument does not fall
sufficiently, the options may expire unexercised and the Fund would lose the
premiums it paid for the option. If the price of the underlying security or
instrument falls sufficiently and the option is exercised, the amount of any
resulting profit will be offset by the amount of premium paid.
Each of the Funds may purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund and the premium would be lost.
Call options may also be purchased in order to increase a Fund's return at
a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a call
option may be sold by a Fund in closing sale transactions, which are sales by
the Fund, prior to the exercise of options that it has purchased, of options
of the same series. Profit or loss from the sale will depend upon whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs. The purchase of call options on securities that a
Fund owns, when a Fund is substantially fully invested, is a form of leverage,
up to the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility.
Each of the Funds may write (sell) call and put options and purchase call
and put options on securities indices. The delivery requirements of options on
securities indices differ from options on securities. Unlike a securities
option, which contemplates the right to take or make delivery of securities at
a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (1) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (2) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in securities index options prior to expiration by entering into a closing
transaction on an exchange or it may allow the option to expire unexercised.
Each of the Funds may cover call options on securities indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities in
its portfolio. Where a Fund covers a call option on a securities index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. A Fund may also cover call options on securities indices by holding a
call on the same index and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or
liquid securities in a segregated account. A Fund may cover put options on
securities indices by maintaining cash or liquid securities with a value equal
to the exercise price in a segregated account or by holding a put on the same
securities index and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written or where the exercise price of the put held is less than
the exercise price of the put written if the difference is maintained by the
Fund in cash or liquid securities in a segregated account. Put and call
options on securities indices may also be covered in such other manner as may
be in accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded, and applicable laws and regulations.
Investors should be aware that although a Fund will only write call or put
options on securities indices that are covered, covering an option does not
protect the Fund from risk of loss.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Fund has
written a call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, a Fund
assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by a Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset
in part by the premium received for writing the option.
Each of the Funds may purchase put options on securities indices when the
Manager or a Subadviser believes that there may be a decline in the prices of
the securities covered by the index. The Fund will realize a gain if the put
option appreciates in excess of the premium paid for the option. If the option
does not increase in value, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs.
A Fund may purchase call options on securities indices to take advantage
of an anticipated broad market advance, or an advance in an industry or market
segment. A Fund will bear the risk of losing all or a portion of the premium
paid if the value of the index does not rise. The purchase of call options on
securities indices when a Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. The
ability of a Fund to engage in closing purchase transactions with respect to
securities index options depends on the existence of a liquid secondary
market. However, no such secondary market may exist, or the market may cease
to exist at some future date, for some options. No assurance can be given that
a closing purchase transaction can be effected when the Manager or a
Subadviser desires that a Fund engage in such a transaction.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether a Fund
realizes a gain or loss from purchasing or writing of options on an index
depends upon movements in the level of prices in the market generally or, in
the case of certain indices, in an industry or market segment, rather than
movements in the price of a particular security. As a result, successful use
by a Fund of options on securities indices is subject to the Manager's or a
Subadviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual securities. When a Fund purchases or writes securities
index options as a hedging technique, the Fund's success will depend upon the
extent to which price movements in the portion of a securities portfolio being
hedged correlate with price movements of the securities index selected.
A Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause
losses, which, in the case of call options written, are potentially unlimited.
The Funds may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call
option writer, for example, is obligated to deliver the underlying stock to
the clearing organization if the option is exercised, and the clearing
organization is then obligated to pay the writer the exercise price of the
option. If a Fund were to purchase a dealer option, however, it would rely on
the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the
Fund, the Fund would lose the premium it paid for the option and the expected
benefit of the transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, a Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when a Fund writes a dealer option, it generally
will be able to close out the option prior to the expiration only by entering
into a closing purchase transaction with the dealer to which the Fund
originally sold the option. Although the Funds will seek to enter into dealer
options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Funds, there can be no
assurance that a Fund will be able to liquidate a dealer option at a favorable
price at any time prior to expiration. The inability to enter into a closing
transaction may result in material losses to a Fund. Until a Fund, as an OTC
call option writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used to cover the
written option until the option expires or is exercised. This requirement may
impair a Fund's ability to sell portfolio securities or, with respect to
currency options, currencies at a time when such sale might be advantageous.
In the event of insolvency of the other party, the Fund may be unable to
liquidate a dealer option.
Each of the Funds (other than Small Cap Value Fund) may purchase and write
options on foreign currencies as more fully described in "Foreign Currency
Exchange Transactions" below. Each of the Funds may also purchase or write
call options on futures contracts as more fully described in "Options on
Futures Contracts" below.
The use of options by the Funds may involve leveraging. Leveraging adds
increased risks to a Fund, because the Fund's losses may be out of proportion
to the amount invested in the instrument--a relatively small investment may
lead to much greater losses.
FUTURES CONTRACTS
Each of the Funds may enter into stock index futures contracts. The Growth
& Income Fund may also enter into interest rate futures contracts and foreign
currency futures contracts. These investment strategies may be used for
hedging purposes and for nonhedging purposes.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the
United States have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. Futures contracts may also be traded on markets outside the
U.S.
Futures contracts based on debt securities provide for the delivery and
acceptance of securities, although such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when the Fund
purchases or sells a futures contract. At the same time such a purchase or
sale is made, the Fund must provide cash or securities as a deposit ("initial
deposit") known as "margin." The initial deposit required will vary, but may
be as low as 1% or less of a contract's face value. Daily thereafter, the
futures contract is valued through a process known as "marking to market," and
the Fund may receive or be required to pay additional "variation margin" as
the futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into. Interest
rate futures, which are typically based on shorter-term interest rates, such
as overnight to six-month time periods, settle in cash only rather than by
delivery of the underlying instrument.
The Growth & Income Fund may purchase or sell interest rate futures
contracts or bond futures contracts to attempt to protect the Fund from
fluctuations in interest rates, to manage the effective maturity or duration
of the Fund's investment portfolio in an effort to reduce potential losses, or
in an effort to enhance potential gain, without actually buying or selling
debt securities. For example, if the Fund owned long-term bonds and interest
rates were expected to increase, the Fund might enter into futures contracts
for the sale of debt securities. Such a sale would have much the same effect
as if the Fund sold bonds that it owned, or as if the Fund sold longer-term
bonds and purchased shorter-term bonds. If interest rates did increase, the
value of the Fund's debt securities would decline, but the value of the
futures contracts would increase, thereby keeping the net asset value of the
Fund from declining as much as it otherwise would have. Similar results could
be accomplished by selling bonds, or by selling bonds with longer maturities
and investing in bonds with shorter maturities. However, by using futures
contracts, the Fund avoids having to sell its securities.
Bond futures may be used for non-hedging purposes. For example, even if the
Growth & Income Fund were not trying to protect the value of any bonds held by
it, if the Manager or Subadviser anticipates that interest rates are about to
rise, depressing future prices of bonds, the Manager or Subadviser may sell bond
futures short, closing out the position later at a lower price, if the future
prices had fallen, as expected. If the prices had not fallen, the Fund would
experience a loss and such loss may be unlimited.
Similarly, when it is expected that interest rates may decline, the 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.
Although futures on individual equity securities are not available in
United States markets, futures contracts on individual equity securities may
be available in foreign markets, and may be purchased or sold by the Funds.
Each of the Funds may buy and sell stock index futures contracts to
attempt to increase investment return, to gain stock market exposure while
holding cash available for investments and redemptions, or to protect against
a decline in the stock market.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at the price agreed upon when the
contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100
Index were $180, one contract would be worth $18,000 (100 units x $180). The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if a Fund enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date,
the Fund will gain $400 (100 units x gain of $4) reduced by transaction costs.
If the Fund enters into a futures contract to sell 100 units of the stock
index at a specified future date at a contract price of $180 and the S&P 100
Index is at $182 on that future date, the Fund will lose $200 (100 units x
loss of $2) increased by transaction costs.
Positions in index futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures.
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, or for non-hedging purposes in an
attempt to benefit from such fluctuations. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if
the value of such securities in the currencies in which they are denominated
remains constant. The Fund may sell futures contracts on a foreign currency,
for example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts. The Growth & Income Fund may also sell futures
contracts in a foreign currency even if it does not hold securities
denominated in such currency, if it anticipates a decline in the value of such
currency.
Conversely, the 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 Fund purchases futures
contracts under such circumstances, however, and the prices of securities to
be acquired instead decline, the Fund will sustain losses on its futures
position which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired. The Growth & Income Fund could also
purchase futures contracts on a currency if it expected the currency to rise
in value, even if the Fund did not anticipate purchasing securities
denominated in that currency.
Although the use of futures for hedging may minimize the risk of loss due
to a decline in the value of the hedged position (e.g., if a Fund sells a
futures contract to protect against losses in the debt securities held by the
Fund), 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, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by
gains on the Fund's other investments or, alternatively, the gains on the
hedging transaction might not be sufficient to offset losses on the Fund's
other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, even where a Fund enters into futures transactions
other than for hedging purposes, the effectiveness of its strategy may be
affected by lack of correlation between changes in the value of the futures
contracts and changes in value of the underlying securities, currencies or
indices.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures contract was originally entered into. There can be no assurance
that a liquid secondary market will exist for any particular futures contract
at any specific time. In that event, it may not be possible to close out a
position held by the Fund, which could require the Fund to purchase or sell
the instrument underlying the futures contract or to meet ongoing variation
margin requirements. The inability to close out futures positions also could
have an adverse impact on the ability effectively to use futures transactions
for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Each contract market on which futures contracts are traded
has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert
with others. The trading of futures contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or a Subadviser's investment judgment about the general direction of
interest rates, equity markets, or other economic factors is incorrect, the
Fund's overall performance may be poorer than if any such contract had not
been entered into. For example, if the Growth & Income Fund entered into a
futures contract in the belief that interest rates would increase, and
interest rates decreased instead, the Fund would have offsetting losses in its
futures positions. Similarly, if the Growth & Income Fund purchased futures
contracts expecting a decrease in interest rates and interest rates instead
increased, the Fund would have losses in its futures positions which would
increase the amount of the losses on the securities in its portfolio which
would also decline in value because of the increase in interest rates. In
addition, in such situations, if the Fund had insufficient cash, the Fund
might have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. 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 that Fund's non-hedging futures positions would exceed 5% of that
Fund's net assets. These limitations apply only to instruments regulated by
the CFTC, and may not apply to all of the Funds' transactions in futures
contracts.
Each Fund will comply with this CFTC requirement, if applicable. In
addition, an amount of cash or liquid securities will be maintained by the
Fund in a segregated account so that the amount so segregated, plus the
applicable margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract, or the
Fund will otherwise "cover" its positions in accordance with applicable
policies and regulations.
The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases a Fund's
potential for both gain and loss.
OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and write options to buy or sell futures contracts
in which the Funds may invest. These investment strategies may be used for
hedging purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract, in
the case of a put option, at a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. Upon exercise of the
option by the holder, the contract market clearinghouse establishes a
corresponding short position for the writer of the option, in the case of a
call option, or a corresponding long position in the case of a put option. In
the event that an option is exercised, the parties will be subject to all the
risks associated with the trading of futures contracts, such as payment of
initial and variation margin deposits. In addition, the writer of an option on
a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profits or loss on the transaction.
Options on futures contracts that are written or purchased by a Fund on
U.S. exchanges are traded on the same contract market as the underlying
futures contract, and, like futures contracts, are subject to regulation by
the CFTC and the performance guarantee of the exchange clearinghouse. In
addition, options on futures contracts may be traded on foreign exchanges.
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 Funds in cash or securities in a segregated
account. A Fund may cover the writing of put options on futures contracts (a)
through sales of the underlying futures contract, (b) through segregation of
cash or liquid securities in an amount equal to the value of the security or
index underlying the futures contract, (c) through the holding of a put on the
same futures contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by the Funds in cash or liquid securities in a segregated account.
Put and call options on futures contracts may also be covered in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Upon the exercise of a
call option on a futures contract written by a Fund, the Fund will be required
to sell the underlying futures contract which, if the Fund has covered its
obligation through the purchase of such contract, will serve to liquidate its
futures position. Similarly, where a put option on a futures contract written
by a Fund is exercised, the Fund will be required to purchase the underlying
futures contract which, if the Fund has covered its obligation through the
sale of such contract, will close out its futures position.
The writing of a call option on a futures contract 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 be possible for a Fund to incur a loss on both the hedging instrument and
the futures contract being hedged.
The Funds may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling futures contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by 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.
The Funds may also purchase options on futures contracts for non-hedging
purposes, in order to take advantage of projected market advances or declines
or changes in interest rates or exchange rates. For example, a Fund can buy a
call option on a futures contract when the Manager or a Subadviser believes
that the underlying futures contract will rise. If prices do rise, the Fund
could exercise the option and acquire the underlying futures contract at the
strike price or the Fund could offset the long call position with a sale and
realize a profit. Or, a Fund can sell a call option if the Manager or a
Subadviser believes that futures prices will decline. If prices decline, the
call will likely not be exercised and the Fund would profit. However, if the
underlying futures contract should rise, the buyer of the option would likely
exercise the call against the Fund and acquire the underlying futures position
at the strike price; the Fund's loss in this case could be unlimited.
The Funds' use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument -- a relatively
small investment may lead to much greater losses.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed-upon date within a number of days (usually
not more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed-upon market rate of interest which is unrelated
to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or Government agency issues. Under the 1940 Act,
repurchase agreements may be considered to be loans by the buyer. A Fund's
risk is limited to the ability of the seller to pay the agreed-upon amount on
the delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although 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. In the event of the bankruptcy of the other party to a
repurchase agreement, a Fund could experience delays in recovering the resale
price. To the extent that, in the meantime, the value of the securities
purchased has decreased, the Fund could experience a loss.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by the Fund and the agreement
by the Fund to repurchase the securities at an agreed-upon price, date and
interest payment. When a Fund enters into reverse repurchase transactions,
securities of a dollar amount equal in value to the securities subject to the
agreement will be segregated. The segregation of assets could impair the
Fund's ability to meet its current obligations or impede investment management
if a large portion of the Fund's assets are involved. Reverse repurchase
agreements are considered to be a form of borrowing. In the event of the
bankruptcy of the other party to a reverse repurchase agreement, a Fund could
experience delays in recovering the securities sold. To the extent that, in
the meantime, the value of the securities sold has increased, the Fund could
experience a loss.
SECURITIES OF NON-U.S. ISSUERS
Each of the Funds (other than the Small Cap Value Fund) may invest in
securities of non-U.S. issuers. Investing in securities issued by companies
whose principal business activities are outside the United States may involve
significant risks not present in U.S. investments. For example, the value of
such securities fluctuates based on the relative strength of the U.S. dollar.
In addition, there is generally less publicly available information about non-
U.S. issuers, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Non-U.S. issuers are generally not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers. Investments in securities of
non-U.S. issuers also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitation on the removal of funds or other assets of a Fund,
political or financial instability or diplomatic and other developments which
would affect such investments. Further, economies of other countries or areas
of the world may differ favorably or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. securities markets, while growing in
volume and sophistication, are generally not as developed as those in the
U.S., and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. securities trading practices, including
those involving securities settlement where a Fund's assets may be released
prior to receipt of payments, may expose the Funds to increased risk in the
event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, non-U.S. brokerage commissions are generally higher than commissions
on securities traded in the U.S. and may be non-negotiable. In general, there
is less overall governmental supervision and regulation of non-U.S. securities
exchanges, brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of
such investments may be substantially less than their net asset value and that
there would be duplication of investment management and other fees and
expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of non-U.S. issuers provide an alternative method for
the Funds to make non-U.S. investments. These securities are not usually
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by
a U.S. bank or trust company evidencing ownership of the underlying
securities. EDRs and GDRs are European and global receipts, respectively,
evidencing a similar arrangement.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of
a sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
depositary receipts.
The Funds may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the U.S. or to U.S. persons. Although
securities subject to such transfer restrictions may be marketable abroad,
they may be less liquid than securities of non-U.S. issuers of the same class
that are not subject to such restrictions.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased to the extent that a 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 a 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 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 in 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 each of the Funds (other than the Small Cap Value 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 Funds (other than the Small Cap Value Fund) may engage in
foreign currency exchange transactions as an attempt to protect against
uncertainty in the level of future foreign currency exchange rates or as an
attempt to enhance performance.
The Funds may enter into foreign currency exchange transactions to convert
U.S. currency to non-U.S. currency and non-U.S. currency to U.S. currency, as
well as convert one non-U.S. currency to another non-U.S. currency. A Fund
either enters into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the currency exchange markets, or uses forward contracts to
purchase or sell non-U.S. currencies.
The Funds may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
currency exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a currency at one rate, while offering a lesser rate of exchange should a
Fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
fees or commissions are charged at any stage for trades. A Fund may enter into
forward contracts for hedging and non-hedging purposes, including transactions
entered into for the purposes of profiting from anticipated changes in foreign
currency exchange rates.
Forward contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the futures and
options contracts described herein. A forward contract entered into by a Fund
may involve the purchase or sale, for a fixed amount of U.S. currency, of
another currency. Each of the Funds (other than Small Cap Value Fund) may also
enter into forward contracts for the purchase or sale, for a fixed amount of a
non-U.S. currency, of another non-U.S. currency.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency
involved in the underlying security transaction, the Fund may be able to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on
which payment is made or received.
When the Manager or a Subadviser believes that the currency of a
particular country may suffer a substantial decline against the U.S. dollar, a
Fund may enter into a forward contract to sell the non-U.S. currency, for a
fixed amount of U.S. dollars. If a Fund owns securities in that currency, the
Manager or a Subadviser may enter into a contract to sell the non-U.S.
currency in an amount approximating the value of some or all of the Fund's
securities denominated in such non-U.S. currency. The precise matching of the
forward contract amounts and the value of the securities involved is not
generally possible since the future value of such securities in non-U.S.
currencies changes as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures.
At the maturity of a forward contract, a Fund will either deliver the non-
U.S. currency, or terminate its contractual obligation to deliver the non-U.S.
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
non-U.S. currency. If a Fund engages in an offsetting transaction, the Fund
will incur a gain or a loss (as described below) to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
non-U.S. currency. Should forward prices decline during the period between the
date a Fund enters into a forward contract for the sale of the non-U.S.
currency and the date it enters into an offsetting contract for the purchase
of such currency, the Fund will realize a gain to the extent the selling price
of the currency exceeds the purchase price of the currency. Should forward
prices increase, the Fund will suffer a loss to the extent that the purchase
price of the currency exceeds the selling price of the currency.
Where a Fund enters into a forward contract with respect to securities it
holds denominated in the non-U.S. currency, it is impossible to forecast with
precision the market value of a Fund's securities at the expiration of a
forward contract. Accordingly, it may be necessary for a Fund to purchase
additional non-U.S. currency on the spot market if the market value of the
security is less than the amount of non-U.S. currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of
such currency. Conversely, it may be necessary to sell on the spot market some
of the non-U.S. currency received upon the sale of the security if its market
value exceeds the amount of such currency the Fund is obligated to deliver.
When a Fund enters into a forward contract for non-hedging purposes, there
is a greater potential for profit but also a greater potential for loss. For
example, a Fund may purchase a given foreign currency through a forward
contract if the value of such currency is expected to rise relative to the
U.S. dollar or another foreign currency. Conversely, a Fund may sell the
currency through a forward contract if the value of the currency is expected
to decline against the dollar or another foreign currency. The Fund will
profit if the anticipated movements in foreign currency exchange rates occur,
which will increase gross income. Where exchange rates do not move in the
direction or the extent anticipated, however, the Fund may sustain losses
which will reduce its gross income. Such transactions should be considered
speculative and could involve significant risk of loss.
Each Fund (other than the Small Cap Value Fund) has established procedures
consistent with policies of the SEC concerning forward contracts. Those
policies currently require that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment or that the Fund otherwise covers its position in accordance with
applicable regulations and policies.
Each of the Funds (other than Small Cap Value Fund) may purchase put
options on a currency in an attempt to protect against currency rate
fluctuations or to seek to enhance gains. When a Fund purchases a put option
on a currency, the Fund will have the right to sell the currency for a fixed
amount in U.S. dollars, or other currency. Conversely, where a rise in the
value of one currency is projected against another, the Fund may purchase call
options on the currency, giving it the right to purchase the currency for a
fixed amount of U.S. dollars or another currency. Each Fund (other than Small
Cap Value Fund) may purchase put or call options on currencies, even if the
Fund does not currently hold or intend to purchase securities denominated in
such currencies.
The benefit to the Fund from purchases of currency options will be reduced
by the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options.
The Funds may write options on currencies for hedging purposes or
otherwise in an attempt to achieve their investment objectives. For example,
where a Fund anticipates a decline in the value of the U.S. dollar value of a
foreign security due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of the security held by the Fund may be
offset by the amount of the premium received. If the expected decline does not
occur, the Fund may be required to sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. A Fund could also write call options
on a currency, even if it does not own any securities denominated in that
currency, in an attempt to enhance gains. In that case, if the expected
decline does not occur, the Fund would be required to purchase the currency
and sell it at a loss, which may not be offset by the premium received. The
losses in this case could be unlimited.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because
of an increase in the U.S. dollar value of the currency in which the
underlying security is primarily traded, a Fund could write a put option on
the relevant currency which, if rates move in the manner projected, will
expire unexercised and allow the Fund to hedge such increased cost up to the
amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may
be exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on currencies, a Fund also may be required to
forgo all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates. A Fund could also write
put options on a currency, even if it does not own, or intend to purchase, any
securities denominated in that currency. In that case, if the expected
increase does not occur, the Fund would be required to purchase the currency
at a price that is greater than the current exchange rate for the currency,
and the losses in this case could exceed the amount of premium received for
writing the options, and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or
in the over-the-counter market. Each of the Funds (other than Small Cap Value
Fund) may enter into transactions in options on foreign currencies that are
traded in the over-the-counter market. These transactions are not afforded the
protections provided to traders on organized exchanges or those regulated by
the CFTC. In particular, over-the-counter options are not cleared and
guaranteed by a clearing corporation, thereby increasing the risk of
counterparty default. In addition, there may not be a liquid market on these
options, which may prevent a Fund from liquidating open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market conditions.
The purchase and sale of foreign currency options are subject to the risks
of the availability of a liquid secondary market and counterparty risk, as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible interventions by governmental authorities and the effects of other
political and economic events. In addition, the value of a Fund's positions in
foreign currency options could be adversely affected by (1) other complex
foreign political and economic factors, (2) lesser availability of data on
which to make trading decisions than in the United States, (3) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, and (4) imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States.
In addition, because foreign currency transactions occurring in the
interbank market generally involve substantially larger amounts than those
that may be involved in the use of foreign currency options, the Funds may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets, or other markets used by
the Manager or a Subadviser are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that may not be reflected in the U.S. or other markets
used by the Funds.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash and liquid securities in an amount sufficient
to discharge the Fund's obligations with respect to the option, by acquisition
of the non-U.S. currency or of a right to acquire such currency (in the case
of a call option) or the acquisition of a right to dispose of the currency (in
the case of a put option), or in such other manner as may be in accordance
with the requirements of any exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
The Funds (other than Small Cap Value Fund) may engage in proxy hedges and
cross hedges. For example, in a proxy hedge, a Fund, having purchased a
security, would sell a currency whose value is believed to be closely linked
to the currency in which the security is denominated. Interest rates
prevailing in the country whose currency was sold might be expected to be
closer to those in the U.S. and lower than those of securities denominated in
the currency of the original holding. This type of hedging entails greater
risk than a direct hedge because it is dependent on a stable relationship
between the two currencies paired as proxies and the relationships can be very
unstable at times. A Fund may enter into a cross hedge if a particular
currency is expected to decrease against another currency. For example, the
Fund would sell the currency expected to decrease and purchase a currency
which is expected to increase against the currency sold in an attempt to
protect against declines in value of the Fund's holdings denominated in the
currency sold.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in
currency exchange rates will affect the value of these receipts. For example,
a decline in the U.S. dollar value of another currency in which securities are
primarily traded will reduce the U.S. dollar value of such securities, even if
their value in the other non-U.S. currency remains constant, and thus will
reduce the value of the receipts covering such securities. A Fund may employ
any of the above described foreign currency hedging techniques to protect the
value of its assets invested in depositary receipts.
Of course, a Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Manager or a
Subadviser. It should be realized that under certain circumstances, the Funds
may not be able to hedge against a decline in the value of a currency, even if
the Manager or a Subadviser deems it appropriate to try to do so, because
doing so would be too costly. Transactions entered into to protect the value
of a Fund's securities against a decline in the value of a currency (even when
successful) do not eliminate fluctuations in the underlying prices of the
securities. Additionally, although hedging transactions may tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they
also tend to limit any potential gain which might result should the value of
such currency increase.
Investors should also be aware of the increased risk to a Fund and its
investors when it enters into foreign currency exchange transactions for non-
hedging purposes. Non-hedging transactions in such instruments involve greater
risks and may result in losses which are not offset by increases in the value
of a Fund's other assets. Although a Fund is required to segregate assets or
otherwise cover certain types of transactions, this does not protect the Fund
against risk of loss. Furthermore, the Funds' use of foreign currency exchange
transactions may involve leveraging. Leveraging adds increased risks to a
Fund, because the Fund's losses may be out of proportion to the amount
invested in the instrument--a relatively small investment may lead to much
greater losses.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers
and other institutional borrowers. 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 the
collateral (subject to a rebate payable to the borrower) or a fee from the
borrower in the event the collateral consists of securities. Where the
borrower provides a Fund with collateral consisting of U.S. Treasury
obligations, the borrower is also obligated to pay the Fund a fee for use of
the borrowed securities. The Fund would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to entities deemed by the Manager or a Subadviser to be of good
standing, and when, in the judgment of the Manager or a 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. The Manager or a Subadviser will
make loans only when, in the judgment of the Manager or a Subadviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. If the Manager or a Subadviser determines to make loans,
it is not intended that the value of the securities loaned by a Fund would
exceed 30% of the market value of its total assets.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis, meaning that delivery of the securities will occur
beyond customary settlement time. It is expected that, under normal
circumstances, the applicable Fund would take delivery of such securities, but
the Fund may sell them before the settlement date. In general, the Fund does
not pay for the securities until received and does not start earning interest
until the contractual settlement date. When a Fund commits to purchase a
security on a "when-issued" or on a "forward delivery" basis, it sets up
procedures consistent with SEC policies. Since those policies currently
require that an amount of a Fund's assets equal to the amount of the purchase
be held aside or segregated to be used to pay for the commitment, each Fund
expects always to have cash or liquid securities sufficient to cover any
commitments or to limit any potential risk. However, even though the Funds
intend to adhere to the provisions of SEC policies, purchases of securities on
such bases may involve more risk than other types of purchases. The when-
issued securities are subject to market fluctuation, and no interest accrues
on the security to the purchaser during this period. The payment obligation
and the interest rate that will be received on the securities are each fixed
at the time the purchaser enters into the commitment. Purchasing obligations
on a when-issued basis is a form of leveraging and can involve a risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself. In that case, there
could be an unrealized loss at the time of delivery. An increase in the
percentage of a Fund's assets committed to the purchase of securities on a
"when-issued" basis may increase the volatility of its net asset value.
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, each of the Funds may
purchase securities that are not registered under the Securities Act of 1933,
as amended (the "Securities Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act ("Rule 144A
securities"). However, no Fund will invest more than 15% of its net assets
(taken at market value) in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale and Rule 144A securities, unless, in the case of Rule
144A securities, the Board of Trustees of the Trust determines, based on the
trading markets for the specific Rule 144A security, that it is liquid. The
Trustees have adopted guidelines and, subject to oversight by the Trustees,
have delegated to the Manager or to a Subadviser the daily function of
determining and monitoring liquidity of Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in securities for which
there is no readily available market. These illiquid securities may include
privately placed restricted securities for which no institutional market
exists. The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for a Fund to sell them promptly at an acceptable price.
BANK OBLIGATIONS
The Funds may invest in bank obligations, i.e., certificates of deposit,
time deposits (including, with respect to the Funds other than the Small Cap
Value 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 deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
COMMERCIAL PAPER
Each Fund may invest in commercial paper, which is unsecured debt of
corporations usually maturing in 270 days or less from its date of issuance.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of each
Fund may be invested in shares of other investment companies. Each Fund (other
than the Small Cap Value Fund) may invest up to 5% of its assets in closed-end
investment companies as permitted by applicable law.
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. This particular risk, referred to as "maturity extension risk," may
effectively convert a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities. Thus, rising interest rates would not
only likely decrease the value of a Fund's fixed income securities, but would
also increase the inherent volatility of the Fund by effectively converting
short-term debt instruments into long-term debt instruments. As a result,
prices of mortgage-backed securities may decrease more than prices of other
debt obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The 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. However, the Growth & Income Fund takes the risk that the market
price of the mortgage- backed security will drop below the future purchase
price. When the Growth & Income Fund uses a mortgage dollar roll, it is also
subject to the risk that the other party to the agreement will not be able to
perform. A "covered roll" is a specific type of dollar roll for which a Fund
establishes a segregated account with liquid high grade debt securities equal in
value to the securities subject to repurchase by the Fund. The Growth & Income
Fund will invest only in covered rolls.
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 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.
SECURITIES RATED BAA OR BBB
Each 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. The market prices of these
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty which may follow
periods of rising interest rates.
LOWER RATED DEBT SECURITIES
The 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 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
Ratings Group (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 or Subadviser 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.
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 or Subadviser'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.
CALL FEATURES
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.
ZERO-COUPON BONDS AND PAYMENT-IN-KIND BONDS
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
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.
SWAPS AND RELATED TRANSACTIONS
The Growth & Income Fund may enter into interest rate swaps, currency
swaps, equity swaps and other types of available swap agreements, such as
caps, collars and floors, for the purpose of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest. An equity swap is an agreement to
exchange cash flows on a principal amount based on changes in the values of
the reference index. A currency swap is an agreement to exchange cash flows on
a principal amount based on changes in the values of the currency exchange
rates. In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the counterparty. For example, the purchase of an interest rate cap entitles
the buyer, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the counterparty selling such interest rate cap. The
sale of an interest rate floor obligates the seller to make payments to the
extent that a specified interest rate falls below an agreed-upon level. A
collar arrangement combines elements of buying a cap and selling a floor.
The Growth & Income Fund will maintain liquid assets with its custodian or
otherwise cover its current obligations under swap transactions in accordance
with current regulations and policies applicable to the Fund.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the
arrangement. If the Manager or Subadviser is incorrect in its forecasts of
such factors, the investment performance of the Growth & Income Fund would be
less than what it would have been if these investment techniques had not been
used. If a swap agreement calls for payments by the Fund, the Fund must be
prepared to make such payments when due. The Growth & Income Fund will not
enter into any swap unless the Manager or Subadviser deems the counterparty to
be creditworthy. If the counterparty's creditworthiness declined, the value of
the swap agreement would be likely to decline, potentially resulting in
losses. If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to receive. The
Growth & Income Fund anticipates that it will be able to eliminate or reduce
its exposure under these arrangements by assignment or other disposition or by
entering into an offsetting agreement with the same or another counterparty.
Swap agreements are subject to the Fund's overall limit that not more than
15% of its net assets may be invested in illiquid securities.
Engaging in swap and related transactions may involve leveraging.
Leveraging adds increased risks to the Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument -- a relatively
small investment may lead to much greater losses.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while
forward contracts may be entered into only in the over-the-counter market.
Futures contracts and options on futures contracts may be entered into on U.S.
exchanges regulated by the CFTC and on foreign exchanges. The securities
underlying options and futures contracts traded by a Fund may include domestic
as well as foreign securities (except in the case of the Small Cap Value Fund,
which does not invest in non-U.S. securities). Investors should recognize that
transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S. markets.
Transactions in options, futures contracts, options on futures contracts
and forward contracts entered into for non-hedging purposes involve greater
risk and could result in losses which are not offset by gains on other
portfolio assets. For example, a Fund may sell futures contracts on an index
of securities in order to profit from any anticipated decline in the value of
the securities comprising the underlying index. In such instances, any losses
on the futures transactions will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction.
The use of certain derivatives, such as futures, forward contracts, and
written options may involve leverage for the Funds because they create an
obligation, or indebtedness, to someone other than the Funds' investors and
enable a Fund to participate in gains and losses on an amount that exceeds its
initial investment. If a Fund writes a stock put option, for example, it makes
no initial investment, but instead receives a premium in an amount equal to a
fraction of the price of the underlying stock. In return, the Fund is
obligated to purchase the underlying stock at a fixed price, thereby being
subject to losses on the full stock price.
Likewise, if a Fund purchases a futures contract, it makes an initial
margin payment that is typically a small percentage of the contract's price.
However, because of the purchase, the Fund will participate in gains or losses
on the full contract price.
Other types of derivatives provide the economic equivalent of leverage
because they display heightened price sensitivity to market fluctuations, such
as changes in stock prices or interest rates. These derivatives magnify a
Fund's gain or loss from an investment in much the same way that incurring
indebtedness does. For example, if a Fund purchases a stock call option, the
Fund pays a premium in an amount equal to a fraction of the stock price, and
in return, the Fund participates in gains on the full stock price. If there
were no gains, the Fund generally would lose the entire initial premium.
Options, futures contracts, options on futures contracts, forward
contracts and swaps may be used alone or in combinations in order to create
synthetic exposure to securities in which a Fund otherwise invests.
The use of derivatives may increase the amount of taxable income of a Fund
and may affect the amount, timing and character of a Fund's income for tax
purposes, as more fully discussed herein in the section entitled "Tax
Matters."
ADDITIONAL INFORMATION
At times, a substantial portion of a Fund's assets may be invested in
securities as to which 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.
DEFENSIVE STRATEGIES
Each Fund may, from time to time, take temporary defensive positions that
are inconsistent with the Fund's principal investment strategies in attempting
to respond to adverse market, political or other conditions. When doing so,
the Funds may invest without limit in high quality money market and other
short-term instruments, and may not be pursuing their investment goals.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trusts, on behalf of
the Portfolios, have each adopted the following policies which may not be
changed with respect to any Fund or 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 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 (taken at market value), (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.
(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.
For purposes of restriction (1) above, covered mortgage dollar rolls and
arrangements with respect to securities lending are not treated as borrowing.
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in the applicable 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 a Fund or Portfolio will not
be considered a violation of policy.
5. PERFORMANCE INFORMATION AND ADVERTISING
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of 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 a Fund's
shares when redeemed may be worth more or less than their original cost.
Each 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 rate of return is generated over a one-year period.
A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day
of the period and the net asset value per share on the last day of the period
of shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such
period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
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, as
adjusted for Fund expenses.
Each 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. Each Fund may also provide yield and
effective yield quotations for longer periods.
Any current yield quotation for a Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of
the average daily number of shares outstanding during the period that were
entitled to receive dividends and the public offering price per share on the
last day of the period, (b) subtracting 1 from the result, and (c) multiplying
the result by 2.
Of course, any fees charged by a shareholder's Service Agent will reduce
the shareholder's net return on investment.
Set forth below is total rate of return information for the Class A and
Class B shares of each Fund for the periods indicated, assuming that dividends
and capital gains distributions, if any, were reinvested. All outstanding
shares were designated Class A shares on January 4, 1999. Prior to January 4,
1999 there were no sales charges on the purchase or sale of the Funds' shares.
The Class A performance for past periods has therefore been adjusted to
reflect the maximum sales charge currently in effect. The Fund offered Class B
shares beginning January 4, 1999. For periods prior to that date, Class B
share performance includes the performance of the Fund's Class A shares,
adjusted to take into account the deduction of the Class B contingent deferred
sales charge, which declines over six years from 5% to 0%, rather than the
initial sales charge applicable to Class A shares. This blended performance
has not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of Class B shares are higher
than those of Class A shares, this blended Class B share performance is higher
than the performance of Class B shares would have been had Class B shares been
offered for the entire period.
Performance results include any applicable fee waivers or expense
subsidies in place during the time period, which may cause the results to be
more favorable than they would otherwise have been.
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
--------- ----------
LARGE CAP GROWTH FUND
October 19, 1990 (Commencement of
Operations) to October 31, 1998 ....... 17.05% $3,546.01
Five Years Ended October 31, 1998 ....... 16.77% $2,170.85
One Year Ended October 31, 1998 ......... 20.56% $1,205.51
SMALL CAP GROWTH FUND
June 21, 1995 (Commencement of
Operations) to October 31, 1998 ....... 20.08% $1,851.12
One Year Ended October 31, 1998 ......... (20.73)% $ 792.75
SMALL CAP VALUE FUND
March 2, 1998 (Commencement of
Operations) to October 31, 1998 ....... (31.98)%** $ 680.20
GROWTH & INCOME FUND
CLASS A
March 2, 1998 (Commencement of
Operations) to October 31, 1999 ....... % $
One Year Ended October 31, 1999 ......... % $
CLASS B
March 2, 1998 (Commencement of
Operations) to October 31, 1999 ....... % $
One Year Ended October 31, 1999 ......... % $
- ----------
**Not Annualized.
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.
For advertising and sales purposes, the Funds will generally use the
performance of Class A shares. All outstanding Fund shares were designated
Class A shares on January 4, 1999. Performance prior to that date will be
adjusted to include the sales charges currently in effect. Class A shares are
sold at net asset value plus a current maximum sales charge of 5.00%.
Performance will typically include this maximum sales charge for the purposes
of calculating performance figures. If the performance of Class B shares is
used for advertising and sales purposes, performance after class inception on
January 4, 1999 will be actual performance, while performance prior to that
date will be Class A performance, adjusted to reflect the differences in sales
charges (but not the differences in fees and expenses) between the classes.
For these purposes, it will be assumed that the maximum contingent deferred
sales charge applicable to the Class B shares is deducted at the times, in the
amount, and under the terms stated in the Prospectus. Class B share
performance generally would have been lower than Class A performance, had the
Class B shares been offered for the entire period, because the expenses
attributable to Class B shares are higher than the expenses attributable to
the Class A shares. Fund performance may also be presented in advertising and
sales literature without the inclusion of sales charges.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The net asset value per share of each Fund is determined for each class on
each day during which the New York Stock Exchange is open for trading
("Business Day"). As of the date of this Statement of Additional Information,
the Exchange is open for trading every weekday except for the following
holidays (or the days on which they are observed): New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. This determination is made
once each day as of the close of regular trading on the Exchange (normally
4:00 p.m. Eastern time) by adding the market value of all securities and other
assets attributable to the class (including its interest in its corresponding
Portfolio), then subtracting the liabilities attributable to the class, and
then dividing the result by the number of outstanding shares of the class. The
net asset value per share is effective for orders received and accepted by the
Transfer Agent prior to its calculation.
The value of each Portfolio's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses payable
or accrued) is determined at the same time and on the same days as the net
asset value per share of its corresponding Fund is determined. The net asset
value of each Fund's investment in the Portfolio in which it invests is equal
to the Fund's pro rata share of the net assets of the Portfolio.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates or if there are no market rates,
at fair value, at the time of valuation. Equity securities are valued at the
last sale price on the exchange on which they are primarily traded or on the
NASDAQ system for unlisted national market issues, or at the last quoted bid
price for securities in which there were no sales during the day or for
unlisted securities not reported on the NASDAQ system. Securities listed on a
non-U.S. exchange are valued at the last quoted sale price available before
the time when net assets are valued. Bonds and other fixed income securities
(other than short-term obligations) are valued on the basis of valuations
furnished by a pricing service, use of which has been approved by the Board of
Trustees of the Trust. In making such valuations, the pricing service utilizes
both dealer-supplied valuations and electronic data processing techniques that
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the- counter prices, since
such valuations are believed to reflect more accurately the fair value of such
securities. Short-term obligations (maturing in 60 days or less) are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Trust. Futures contracts are normally valued at the settlement
price on the exchange on which they are traded. Securities for which there are
no such valuations are valued at fair value as determined in good faith by or
at the direction of the Board of Trustees of the Trust.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange. Trading may also take place on days on which the Exchange
is closed and on which it is not possible to purchase or redeem shares of the
Funds. If events materially affecting the value of non-U.S. securities occur
between the time when the exchange on which they are traded closes and the
time when a Fund's net asset value is calculated, such securities may be
valued at fair value in accordance with procedures established by and under
the general supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premiums.
7. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE OF FUND SHARES AND
SHAREHOLDER PROGRAMS
As described in the Prospectus, the Funds provide you with alternative
ways of purchasing shares based upon your individual investment needs.
Each class of shares of a Fund represents an interest in the same
portfolio of investments. Each class is identical in all respects except that
each class bears its own class expenses, including distribution and service
fees, and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per
share, dividends per share and net asset value per share will vary for each
class of shares. There are no conversion, preemptive or other subscription
rights, except that Class B shares automatically convert to Class A shares in
eight years as more fully described below.
Shareholders of each class will share expenses proportionately for
services that are received equally by all shareholders. A particular class of
shares will bear only those expenses that are directly attributable to that
class, where the type or amount of services received by a class varies from
one class to another. The expenses that may be borne by specific classes of
shares may include (i) transfer agency fees attributable to a specific class
of shares, (ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxy
statements to current shareholders of a specific class of shares, (iii)
Securities and Exchange Commission ("SEC") and state securities registration
fees incurred by a specific class, (iv) the expense of administrative
personnel and services required to support the shareholders of a specific
class of shares, (v) litigation or other legal expenses relating to a specific
class of shares, (vi) accounting expenses relating to a specific class of
shares and (vii) any additional incremental expenses subsequently identified
and determined to be properly allocated to one or more classes of shares.
CLASS A SHARES
You may purchase Class A shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the applicable Prospectus. You may
qualify for a reduced sales charge depending upon the amount of your purchase,
or the sales charge may be waived in its entirety, as described below under
"Sales Charge Waivers." If you qualify to purchase Class A shares without a
sales load, you should purchase Class A shares rather than Class B shares
because Class A shares pay lower fees. Class A shares are also subject to an
annual distribution/service fee of up to .25%. See "Distributor." Set forth
below is an example of the method of computing the offering price of the Class
A shares of the Fund. The example assumes a purchase on October 31, 1999 of
Class A shares from the Fund aggregating less than $25,000 subject to the
schedule of sales charges set forth below.
LARGE CAP SMALL CAP SMALL CAP GROWTH &
GROWTH GROWTH VALUE INCOME
FUND FUND FUND FUND
---- ---- ---- ----
Net Asset Value per share ............ $21.47 $16.96 $7.16 $
Per Share Sales Charge - 5.00% of
public offering price (5.26% of net
asset value per share) ............. $ 1.13 0.89 0.38
Per Share Offering Price to the
Public ............................. $22.60 17.85 7.54
The Fund receives the entire net asset value of all Class A shares that
are sold. The Distributor retains the full applicable sales charge from which
it pays the uniform reallowances shown in the table below.
The front-end sales charge for Class A shares expressed as a percentage of
offering price and net asset value, and the dealer reallowance expressed as a
percentage of the offering price is set forth in the table below. The Funds
have established certain shareholder programs that may permit you to take
advantage of the lower rates available for larger purchases, as described
under "Shareholder Programs" below.
BROKER/DEALER
SALES CHARGE SALES CHARGE COMMISSION
AMOUNT OF AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT OFFERING PRICE
- --------------- -------------- --------------- --------------
Less than $25,000 ............ 5.00% 5.26% 4.50%
$25,000 to less than $50,000 . 4.00% 4.17% 3.60%
$50,000 to less than $100,000 3.50% 3.63% 3.15%
$100,000 to less than $250,000 3.00% 3.09% 2.70%
$250,000 to less than $500,000 2.00% 2.04% 1.80%
$500,000 or more ............. none* none* up to 1.00%
- ----------
*A contingent deferred sales charge may apply in certain instances. See "Sales
Charge Waivers--Class A" below.
CLASS B SHARES
Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a "contingent deferred sales charge" (CDSC) when you sell
shares within five years of purchase. The rate of CDSC goes down the longer
you hold your shares. The table below shows the rates that you pay, as a
percentage of the purchase price (or the sale price, whichever is less),
depending upon when you sell your shares.
SALE DURING CDSC ON SHARES BEING SOLD
- ----------- -------------------------
1st year since purchase 5%
2nd year since purchase 4%
3rd year since purchase 3%
4th year since purchase 2%
5th year since purchase 1%
6th year (or later) since purchase None
Class B shares pay distribution/service fees of up to 1.00% of the average
daily net assets of a Fund represented by the Class B shares. Commissions will
be paid to brokers, dealers and other institutions that sell Class B shares in
the amount of 4.50% of the purchase price of Class B shares sold by these
entities. These commissions are not paid on exchanges from other CitiFunds or
on sales of Class B shares to investors exempt from the CDSC. Entities that
sell Class B shares will also receive a portion of the service fee payable
under the Class B Service Plan at an annual rate equal to 0.25% of the average
daily net assets represented by the Class B shares sold by them.
When you sell your shares, the CDSC will be based on either your purchase
price, or the sale price, whichever is less. You do not pay a CDSC on shares
acquired through reinvestment of dividends and capital gain distributions and
shares representing capital appreciation. Each Fund will assume that a
redemption of Class B shares is made:
[] first, of Class B shares representing capital appreciation
[] next, of shares representing the reinvestment of dividends and capital
gains distributions
[] finally, of other shares held by the investor for the longest period of
time.
Under certain circumstances, as set forth below in "Sales Charge Waivers," the
CDSC will be waived.
The holding period of Class B shares of a Fund acquired through an
exchange with another CitiFund will be calculated from the date that the Class
B shares were initially acquired in the other CitiFund, and Class B shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gains distribution reinvestments in the
other fund. When determining the amount of the CDSC, each Fund will use the
CDSC schedule of any fund from which you have exchanged shares that would
result in you paying the highest CDSC.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares, and the CDSC imposed upon sales of Class A or Class B shares,
are waived. Waivers are generally instituted in order to promote good will
with persons or entities with which Citibank or the Distributor or their
affiliates have business relationships, or because the sales effort, if any,
involved in making such sales is negligible, or, in the case of certain CDSC
waivers, because the circumstances surrounding the sale of Fund shares were
not foreseeable or voluntary. These sales charge waivers may be modified or
discontinued at any time.
CLASS A -- FRONT-END SALES CHARGE
o Reinvestment. The sales charge does not apply to Class A shares acquired
through the reinvestment of dividends and capital gains distributions.
o Eligible Purchasers. Class A shares may be purchased without a sales
charge by:
[] tax exempt organizations under Section 501(c)(3-13) of the Internal
Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises discretionary
investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees for
acting as custodian
[] directors or trustees (and their immediate families), and retired
directors and trustees (and their immediate families), of any
investment company for which Citibank or any subsidiary or
affiliate of Citibank serves as the investment adviser or as a
service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired employees
of Citibank and its affiliates or CFBDS, Inc. and its affiliates
(including immediate families of any of the foregoing)
[] investors participating in a fee- based or promotional arrangement
sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances in
selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the assurance
of the purchaser that the purchase is made for investment purposes
and that the securities will not be resold except through
redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan offered to
Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by a Fund's Board of
Trustees or by the Board of Trustees of any other CitiFund or
mutual fund managed or advised by Citibank (all of such funds being
referred to herein as CitiFunds) the terms of which entitle those
shareholders to purchase shares of a Fund or any other CitiFund at
net asset value without a sales charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4, 1999.
[] employee benefit plans qualified under Section 401 of the Internal
Revenue Code, including salary reduction plans qualified under
Section 401(k) of the Code, subject to minimum requirements as may
be established by CFBDS with respect to the amount of purchase;
currently, the amount invested by the qualified plan in a Fund or
in any combination of CitiFunds must total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares; however, a
contingent deferred sales charge will be imposed on the investments
in the event of certain share redemptions within 12 months
following the share purchase, at the rate of 1% of the lesser of
the value of the shares redeemed (not including reinvested
dividends and capital gains distributions) or the total cost of the
shares; the contingent deferred sales charge on Class A shares will
be waived under the same circumstances as the contingent deferred
sales charge on Class B shares will be waived; in determining
whether a contingent deferred sales charge on Class A shares is
payable, and if so, the amount of the charge:
+ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by other
shares held for the longest period of time
+ all investments made during a calendar month will age one month
on the last day of the month and each subsequent month
+ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A shares
of another CitiFund and deducted from the redemption proceeds
when the exchanged shares are subsequently redeemed (assuming
the contingent deferred sales charge is then payable)
+ the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which the
original Class A shares were held
[] subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund (other
than a CitiFund), if:
+ the redeemed shares were subject to an initial sales charge or
a deferred sales charge (whether or not actually imposed), and
+ the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a broker-
dealer which has a sales agreement with CFBDS from another
investment firm within six months prior to the date of purchase by
the investor, if:
+ the investor redeems shares of another mutual fund sold through
the investment firm that previously employed that investment
consultant or other registered representative, and either paid
an initial sales charge or was at some time subject to, but did
not actually pay, a deferred sales charge or redemption fee
with respect to the redemption proceeds,
+ the redemption is made within 60 days prior to the investment
in a Fund, and
+ the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds of
the redemption
CONTINGENT DEFERRED SALES CHARGE:
o Reinvestment. There is no CDSC on shares representing capital
appreciation or on shares acquired through reinvestment of dividends or
capital gains distributions.
o Waivers. The CDSC will be waived in connection with:
[] a total or partial redemption made within one year of the death of
the shareholder; this waiver is available where the deceased
shareholder is either the sole shareholder or owns the shares with
his or her spouse as a joint tenant with right of survivorship, and
applies only to redemption of shares held at the time of death
[] a lump sum or other distribution in the case of an Individual
Retirement Account (IRA), a self-employed individual retirement
plan (Keogh Plan) or a custodian account under Section 403(b) of
the Internal Revenue Code, in each case following attainment of age
59 1/2
[] a total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement plan
[] a redemption resulting from a tax- free return of an excess
contribution to an IRA
[] redemptions under a Fund's Systematic Withdrawal Plan
AUTOMATIC CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A
shares in the same Fund approximately eight years after the date of issuance.
At the same time, a portion of all Class B shares representing dividends and
other distributions paid in additional Class B shares will be converted in
accordance with procedures from time to time approved by the Funds' Trustees.
The conversion will be effected at the relative net asset values per share of
the two classes on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs. If a shareholder
effects one or more exchanges among Class B shares of the CitiFunds during the
eight-year period, the holding periods for the shares so exchanged will be
counted toward the eight-year period. Because the per share net asset value of
the Class A shares may be higher than that of the Class B shares at the time
of conversion, a shareholder may receive fewer Class A shares than the number
of Class B shares converted, although the dollar value will be the same.
SHAREHOLDER PROGRAMS
The Funds make the following programs available to shareholders to enable
them to reduce or eliminate the front-end sales charges on Class A shares or
exchange Fund shares for shares of other CitiFunds without, in many cases, the
payment of a sales charge. These programs may be changed or discontinued at
any time. For more information, please contact your Service Agent.
REDUCED SALES CHARGE PLAN
A qualified group may purchase shares as a single purchaser under the
reduced sales charge plan. The purchases by the group are lumped together
and the sales charge is based on the lump sum. A qualified group must:
[] have been in existence for more than six months
[] have a purpose other than acquiring Fund shares at a discount
[] satisfy uniform criteria that enable CFBDS to realize economies of
scale in its costs of distributing shares
[] have more than ten members
[] be available to arrange for group meetings between representatives
of the Funds and the members
[] agree to include sales and other materials related to the Funds in
its publications and mailings to members at reduced or no cost to
the distributor
[] seek to arrange for payroll deduction or other bulk transmission of
investments to the Funds
LETTER OF INTENT
If an investor anticipates purchasing $25,000 or more of Class A shares of
a Fund alone or in combination with Class B shares of the Fund or any of the
classes of other CitiFunds or of any other mutual fund managed or advised by
Citibank (all of such funds being referred to herein as CitiFunds) within a
13-month period, the investor may obtain the shares at the same reduced sales
charge as though the total quantity were invested in one lump sum by
completing a letter of intent on the terms described below. Subject to
acceptance by CFBDS, Inc., the Funds' distributor, and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the
letter of intent.
[] The shareholder or, if the shareholder is a customer of a Service
Agent, his or her Service Agent must inform CFBDS that the letter
of intent is in effect each time shares are purchased.
[] The shareholder makes no commitment to purchase additional shares,
but if his or her purchases within 13 months plus the value of
shares credited toward completion of the letter of intent do not
total the sum specified, an increased sales charge will apply as
described below.
[] A purchase not originally made pursuant to a letter of intent may
be included under a subsequent letter of intent executed within 90
days of the purchase if CFBDS is informed in writing of this intent
within the 90-day period.
[] The value of shares of a Fund presently held, at cost or maximum
offering price (whichever is higher), on the date of the first
purchase under the letter of intent, may be included as a credit
toward the completion of the letter, but the reduced sales charge
applicable to the amount covered by the letter is applied only to
new purchases.
[] Instructions for issuance of shares in the name of a person other
than the person signing the letter of intent must be accompanied by
a written statement from the Transfer Agent or a Service Agent
stating that the shares were paid for by the person signing the
letter.
[] Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of
intent.
[] The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the letter of
intent are deducted from the total purchases made under the letter
of intent.
If the investment specified in the letter of intent is not completed
(either prior to or by the end of the 13-month period), the Transfer Agent
will redeem, within 20 days of the expiration of the letter of intent, an
appropriate number of the shares in order to realize the difference between
the reduced sales charge that would apply if the investment under the letter
of intent had been completed and the sales charge that would normally apply to
the number of shares actually purchased. By completing and signing the letter
of intent, the shareholder irrevocably grants a power of attorney to the
Transfer Agent to redeem any or all shares purchased under the letter of
intent, with full power of substitution.
RIGHT OF ACCUMULATION
A shareholder qualifies for cumulative quantity discounts on the purchase
of Class A shares when his or her new investment, together with the current
offering price value of all holdings of that shareholder in the CitiFunds,
reaches a discount level. For example, if a Fund shareholder owns shares
valued at $50,000 and purchases an additional $50,000 of Class A shares of the
Fund, the sales charge for the additional $50,000 purchase would be at the
rate of 3.00% (the rate applicable to single transactions from $100,000 to
less than $250,000). A shareholder must provide the Transfer Agent with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
SYSTEMATIC WITHDRAWAL PLAN
Each Fund's Systematic Withdrawal Plan permits you to have a specified
dollar amount (minimum of $100 per withdrawal) automatically withdrawn from
your account on a regular basis if you have at least $10,000 in your Fund
account at the time of enrollment. You are limited to one withdrawal per month
under the Plan.
If you redeem Class A or Class B shares under the Plan that are subject to
a CDSC, you are not subject to any CDSC applicable to the shares redeemed, but
the maximum amount that you can redeem under the Plan in any year is limited
to 10% of the average daily balance in your account.
You may receive your withdrawals by check, or have the monies transferred
directly into your bank account. Or you may direct that payments be made
directly to a third party.
To participate in the Plan, you must complete the appropriate forms
provided by your Service Agent.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed (with a credit
for any contingent deferred sales charge paid) by purchasing Class A shares of
the same Fund within 90 days after the redemption. To take advantage of this
reinstatement privilege, shareholders must notify their Service Agents in
writing at the time the privilege is exercised.
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged for shares of the same class of
certain other CitiFunds that are made available by your Service Agent, or may
be acquired through an exchange of shares of the same class of those funds.
Class A shares also may be exchanged for shares of certain CitiFunds that
offer only a single class of shares, unless the Class A shares are subject to
a contingent deferred sales charge. Class B shares may not be exchanged for
shares of CitiFunds that offer only a single class of shares.
No initial sales charge is imposed on shares being acquired through an
exchange unless Class A shares are being acquired and the sales charge for
Class A of the fund being exchanged into is greater than the current sales
charge of the Fund (in which case an initial sales charge will be imposed at a
rate equal to the difference). Investors whose shares were outstanding on
January 4, 1999 are able to exchange those Class A shares, and any shares
acquired through capital appreciation and the reinvestment of dividends and
capital gains distributions on those shares, into Class A shares of the other
funds without paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged for
Class B shares of certain other CitiFunds that are made available by your
Service Agent. However, you may be required to pay a CDSC when you sell those
shares. When determining the amount of the CDSC, each Fund will use the CDSC
schedule of any fund from which you have exchanged shares that would result in
you paying the highest CDSC.
You must notify your Service Agent at the time of exchange if you believe
that you qualify for share prices which do not include the sales charge or
which reflect a reduced sales charge, because the Fund shares you are
exchanging were: (a) purchased with a sales charge, (b) acquired through a
previous exchange from shares purchased with a sales charge, (c) outstanding
as of January 4, 1999, or (d) acquired through capital appreciation or the
reinvestment of dividends and capital gains distributions on those shares. Any
such qualification may be subject to confirmation, through a check of
appropriate records and documentation, of your existing share balances and any
sales charges paid on prior share purchases.
This exchange privilege may be modified or terminated at any time, and is
available only in those jurisdictions where such exchanges legally may be
made. Before making any exchange, shareholders should contact their Service
Agents to obtain more information and prospectuses of the funds to be acquired
through the exchange. An exchange is treated as a sale of the shares exchanged
and could result in taxable gain or loss to the shareholder making the
exchange.
ADDITIONAL PURCHASE AND SALE INFORMATION
Each Service Agent has agreed to transmit to its customers who are
shareholders of a Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers. Your Service Agent is the
shareholder of record for the shares of a Fund you own.
Investors may be able to establish new accounts in the Funds under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and
certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
Shareholders may redeem or exchange Fund shares by telephone, if their
account applications so permit, by calling the transfer agent or, if they are
customers of a Service Agent, their Service Agent. During periods of drastic
economic or market changes or severe weather or other emergencies,
shareholders may experience difficulties implementing a telephone exchange or
redemption. In such an event, another method of instruction, such as a written
request sent via an overnight delivery service, should be considered. The
Funds, the transfer agent and each Service Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures may include recording of the telephone instructions and
verification of a caller's identity by asking for his or her name, address,
telephone, Social Security number, and account number. If these or other
reasonable procedures are not followed, the Funds, the transfer agent or the
Service Agent may be liable for any losses to a shareholder due to
unauthorized or fraudulent instructions. Otherwise, the shareholder will bear
all risk of loss relating to a redemption or exchange by telephone.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption or repurchase price of shares of the Funds,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a holder of shares received a distribution in
kind, such holder could incur brokerage or other charges in converting the
securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of a Fund's investments or determination of its net asset value not
reasonably practicable; (b) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); or (c) the SEC has by order permitted
such suspension.
8. MANAGEMENT
Each Fund is supervised by the Board of Trustees of the Trust. Each
Portfolio is supervised by the Board of Trustees of Asset Allocation
Portfolios or The Premium Portfolios, as the case may be. In each case, a
majority of the Trustees are not affiliated with Citibank.
The Trustees and officers of the Trust and the Portfolio Trusts, their
ages and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
that those Trustees and officers are "interested persons" (as defined in the
1940 Act) of the Trust or the Portfolio Trusts. Unless otherwise indicated
below, the address of each Trustee and officer is 21 Milk Street, Boston,
Massachusetts. The address of each Portfolio Trust is Elizabethan Square,
George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE*; 48 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
RILEY C. GILLEY; 73 -- Vice President and General Counsel, Corporate Property
Investors (November 1988 to December 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
DIANA R. HARRINGTON; 58 -- Professor, Babson College (since 1994); Trustee,
The Highland Family of Funds (March 1997 to March 1998). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 48 -- President, Global Research Associates, Inc. (Investment
Research) (since September 1990); Trustee, Mainstay Institutional Funds (since
December 1990). Her address is P.O. Box 9572, New Haven, Connecticut.
HEATH B. MCLENDON*; 66 -- Chairman, President, and Chief Executive Officer of
SSB Citi Fund Management LLC (formerly known as SSBC Fund Management Inc.)
(since March 1996); Managing Director of Salomon Smith Barney (since August
1993); and Chairman, President and Chief Executive Officer of fifty-eight
investment companies sponsored by Salomon Smith Barney. His address is 388
Greenwich Street, New York, New York.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Director, Indonesia Fund (since 1990); Trustee, MAS Funds
(since 1993). His address is 1385 Outlook Drive West, Mountainside, New
Jersey.
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV; 56 -- President and Chief Executive Officer, Catalyst, Inc.
(Management Consultants) (since June 1992); President and Director, Elliott J.
Berv & Associates (Management Consultants) (since May 1984). His address is 24
Atlantic Drive, Scarborough, Maine.
PHILIP W. COOLIDGE*; 48 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
MARK T. FINN; 56 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and part Owner, FX 500 Ltd. (Commodity Trading
Advisory Firm) (April 1990 to February 1996); General Partner and Shareholder,
Greenwich Ventures LLC (Investment Partnership) (since January 1996);
President, Secretary and Owner, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Chairman and Owner, Vantage Consulting
Group, Inc. (since October 1988). His address is 3500 Pacific Avenue, P.O. Box
539, Virginia Beach, Virginia.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Director, Indonesia Fund (since 1990); Trustee, MAS Funds
(since 1993). His address is 1385 Outlook Drive West, Mountainside, New
Jersey.
WALTER E. ROBB, III; 73 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors) (since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985). His address is 35 Farm Road, Sherborn,
Massachusetts.
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUSTS
PHILIP W. COOLIDGE*; 48 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
CHRISTINE D. DORSEY*; 29 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc. (since January 1996); Paralegal and Compliance Officer, various financial
companies (July 1992 to January 1996).
LINWOOD C. DOWNS; 38* -- Assistant Treasurer of the Trust and the Portfolio
Trusts; Chief Financial Officer and Senior Vice President, Signature Financial
Group, Inc.; Treasurer, CFBDS.
TAMIE EBANKS-CUNNINGHAM*; 27 -- Assistant Secretary of the Trust and the
Portfolio Trusts; Office Manager, Signature Financial Group (Cayman) Ltd.
(since April 1995); Administrator, Cayman Islands Primary School (prior to
April 1995). Her address is P.O. Box 2494, Elizabethan Square, George Town,
Grand Cayman, Cayman Islands, B.W.I.
LINDA T. GIBSON*; 34 -- Secretary of the Trust and the Portfolio Trusts;
Senior Vice President, Signature Financial Group, Inc.; Secretary, CFBDS.
SUSAN JAKUBOSKI*; 35 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group (Cayman) Ltd. (since July 1994).
MOLLY S. MUGLER*; 48 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
JULIE J. WYETZNER*; 40 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group, Inc.
The trustees and officers of the Trust and the Portfolio Trusts also hold
comparable positions with certain other funds for which CFBDS, Signature
Financial Group, Inc., or their affiliates serve as distributor or
administrator.
The following table shows Trustee compensation for the fiscal year ended
October 31, 1999:
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM TRUST AND
AGGREGATE BENEFITS BENEFITS FUND COMPLEX
COMPENSATION ACCRUED AS PART UPON PAID TO
TRUSTEE FROM REGISTRANT OF FUND EXPENSES RETIREMENT TRUSTEES(1)
------- --------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Philip W. Coolidge ................... $ 0 None None $ 0
Riley C. Gilley ...................... $ None None $
Diana R. Harrington .................. $ None None $
Susan B. Kerley ...................... $ None None $
Heath B. McLendon (2) ................ $ 0 None None $ 0
C. Oscar Morong, Jr. ................. $ None None $
E. Kirby Warren ...................... $ None None $
William S. Woods, Jr. (3) ............ $ None None $
- ------------
(1) Messrs. Coolidge, Gilley, McLendon, Morong and Warren, and Mses. Harrington and Kerley are Trustees of
49, 34, 22, 40, 40, 29 and 29 funds and portfolios, respectively, in the family of open-end registered
investment companies advised or managed by Citibank.
(2) Mr. McLendon was appointed as Trustee in February, 1999.
(3) Effective December 31, 1999, Mr. Woods became a Trustee Emeritus of the Trust. Per the terms of the
Trust's Trustee Emeritus Plan, Mr. Woods serves the Board of Trustees in an advisory capacity. As a
Trustee Emeritus, Mr. Woods is paid 50% of the annual retainer fee and meeting fees otherwise applicable
to Trustees, together with reasonable out-of-pocket expenses for each meeting attended.
</TABLE>
As of , 2000, all Trustees and officers as a group
owned less than 1% of the outstanding shares of each Fund. As of the same
date, more than 95% of the outstanding shares of each Fund were held of record
by Citibank, N.A. or its affiliates as Service Agents of the Fund for the
accounts of their respective clients.
The Declaration of 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, 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.
MANAGER
Citibank manages the assets of each Fund and each Portfolio and provides
certain administrative services to the Funds and the Portfolios pursuant to
separate management agreements (the "Management Agreements"). Subject to such
policies as the Board of Trustees of the applicable Portfolio Trust may
determine, Citibank manages the securities of each Portfolio and makes
investment decisions for each Portfolio. Citibank furnishes at its own expense
all services, facilities and personnel necessary in connection with managing
each Portfolio's investments and effecting securities transactions for each
Portfolio. The Management Agreements with the Portfolio Trusts provide that
Citibank may delegate the daily management of the securities of each Portfolio
to one or more subadvisers.
Unless otherwise terminated, the Management Agreements with the Trust
relating to the Large Cap Growth Fund, the Small Cap Growth Fund, the Small
Cap Value Fund and the Growth & Income Fund will each continue in effect
indefinitely as long as such continuance is specifically approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of
the outstanding voting securities of the applicable Fund, and, in either case,
by a majority of the Trustees of the Trust who are not parties to the
Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement.
Unless otherwise terminated, the Management Agreements with The Premium
Portfolios relating to the Large Cap Growth Portfolio and the Small Cap Growth
Portfolio will each continue in effect indefinitely as long as such
continuance is specifically approved at least annually by the Board of
Trustees of The Premium Portfolios or by a vote of a majority of the
outstanding voting securities of the applicable Portfolio, and, in either
case, by a majority of the Trustees of The Premium Portfolios who are not
parties to the Management Agreement or interested persons of any such party,
at a meeting called for the purpose of voting on the Management Agreement.
Unless otherwise terminated, the Management Agreements with Asset Allocation
Portfolios relating to the Large Cap Value Portfolio and the Small Cap Value
Portfolio will continue in effect indefinitely as long as such continuance is
specifically approved at least annually by the Board of Trustees of Asset
Allocation Portfolios or by a vote of a majority of the outstanding voting
securities of the applicable Portfolio, and, in either case, by a majority of
the Trustees of the Asset Allocation Portfolios who are not parties to the
Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement.
Citibank provides the Funds and the Portfolios with general office
facilities and supervises the overall administration of the Funds and the
Portfolios, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of,
the Funds' or the Portfolios' independent contractors and agents; the
preparation and filing of all documents required for compliance by the Funds
and the Portfolios with applicable laws and regulations; and arranging for the
maintenance of books and records of the Funds or the Portfolios. Trustees,
officers, and investors in the Trust and the Portfolio Trusts are or may be or
may become interested in Citibank, as directors, officers, employees, or
otherwise and directors, officers and employees of Citibank are or may become
similarly interested in the Trust and the Portfolio Trusts.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by 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 for each Fund contains a description of the fees payable to
Citibank for services under each of the Management Agreements. These fees are
higher than the management fees paid by most mutual funds. Citibank may
reimburse any Fund or Portfolio or waive all or a portion of its management
fees.
For the fiscal years ended December 31, 1995 and 1996, the fees paid to
Citibank under a prior investment advisory agreement with respect to Large Cap
Growth Portfolio were $1,049,008 and $1,387,227, respectively. For the period
from January 1, 1997 to October 31, 1997, the fees paid to Citibank under its
investment advisory agreement with respect to Large Cap Growth Fund and Large
Cap Growth Portfolio were $1,312,700. For the fiscal year ended October 31,
1998, the fees paid to Citibank under its Management Agreements with respect
to Large Cap Growth Fund and Large Cap Growth Portfolio were $84,677 and
$3,167,841, respectively.
For the period from June 21, 1995 (commencement of operations) to December
31, 1995 and for the fiscal year ended December 31, 1996 the fees payable to
Citibank under a prior investment advisory agreement with respect to Small Cap
Growth Portfolio were $10,222 (all of which was voluntarily waived) and
$147,259 (of which $100,088 was voluntarily waived). For the period from
January 1, 1997 to October 31, 1997, the fees paid to Citibank under its
investment advisory agreements with respect to Small Cap Growth Fund and Small
Cap Growth Portfolio were $284,285 (of which $57,125 was voluntarily waived).
For the fiscal year ended October 31, 1998, the fees paid to Citibank under
its Management Agreements with respect to Small Cap Growth Fund and Small Cap
Growth Portfolio were $0 and $1,673,322, respectively.
For the period from March 2, 1998 (commencement of operations) to October
31, 1998, the fee paid to Citibank under its Management Agreement with respect
to Small Cap Value Fund was $4,129. For the period from November 1, 1997 to
October 31, 1998, the fee paid to Citibank under its Management Agreement with
respect to Small Cap Value Portfolio was $396,874.
For the period from March 2, 1998 (commencement of operations) to October
31, 1998, and for the fiscal year ended October 31, 1999, the fees paid to
Citibank under its Management Agreement with respect to Growth & Income Fund
were $48,279 and $ , respectively. For the period from March 2,
1998 (commencement of operations) to October 31, 1998, and for the period from
November 1, 1998 to July 31, 1999, the fees paid to Citibank under a prior
management agreement with Growth & Income Portfolio, the Portfolio in which the
Growth & Income Fund previously invested, were $246,222 and $ ,
respectively. For the period from August 1, 1999 to October 31, 1999, the fees
paid to Citibank under the Management Agreement with respect to Large Cap Value
Portfolio, the Portfolio in which the Growth & Income Fund currently invests,
were $ .
For the fiscal years ended December 31, 1995 and 1996 and for the period
from January 1, 1997 to October 31, 1997, the fees payable by the Large Cap
Growth Fund to CFBDS under a prior administrative services agreement with
respect to the Large Cap Growth Fund were $294,337 (of which $196,224 was
voluntarily waived), $561,584 (of which $449,267 was voluntarily waived) and
$508,746 (of which $406,939 was voluntarily waived). For the period from June
21, 1995 (commencement of operations) to December 31, 1995, for the fiscal
year ended December 31, 1996 and for the period from January 1, 1997 to
October 31, 1997, the fees payable by the Small Cap Growth Fund to CFBDS under
a prior administrative services agreement were $2,063 (all of which was
voluntarily waived), $39,957 (all of which was voluntarily waived) and $52,561
(all of which was voluntarily waived). For the fiscal years ended December 31,
1995 and 1996 and the period from January 1, 1997 to October 31, 1997, The
Premium Portfolios paid Signature Financial Group (Cayman) Ltd. ("SFG") under
a prior administrative services agreement $104,901, $138,723 and $131,270,
respectively, with respect to the Large Cap Growth Portfolio. For the period
June 21, 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 Premium Portfolios was obligated to pay SFG under a prior
administrative services agreement $682 (all of which was voluntarily waived),
$9,817 (all of which was voluntarily waived) and $18,952 (of which $13,008 was
voluntarily waived), respectively, with respect to the Small Cap Growth
Portfolio.
Pursuant to separate sub-administrative services agreements with Citibank,
CFBDS and SFG perform such sub-administrative duties for the Trust and the
Portfolio Trusts, respectively, as from time to time are agreed upon by
Citibank, CFBDS and SFG, as appropriate. For performing such sub-
administrative services, CFBDS and SFG receive compensation as from time to
time is agreed upon by Citibank, not in excess of the amount paid to Citibank
for its services under the Management Agreements with the Trust and the
Portfolio Trusts, respectively. All such compensation is paid by Citibank.
Pursuant to its Management Agreement with Asset Allocation Portfolios with
respect to the Small Cap Value Portfolio, 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 Asset Allocation
Portfolios, the Subadviser manages those assets of the Small Cap Value
Portfolio not managed by Citibank. Small Cap Value 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 Small Cap Value Portfolio allocated to the Subadviser:
0.55% on first $250 million
0.50% on remaining assets
For the period from November 1, 1997 (commencement of operations of the
Portfolio) to October 31, 1998, the fees paid to the Subadviser with respect
to the Small Cap Value Portfolio were $1,091,403.
Large Cap Value Portfolio has entered into a Submanagement Agreement with
SSB Citi Fund Management LLC ("SSB Citi"), an affiliate of Citibank and an
indirect wholly-owned subsidiary of Citigroup Inc. SSB Citi's compensation is
payable by Large Cap Value Portfolio from the assets of the Portfolio. Large
Cap Value Portfolio pays SSB Citi 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 SSB
Citi:
0.65% on the first $10 million;
0.50% on the next $10 million;
0.40% on the next $10 million; and
0.30% on remaining assets.
For the period from August 1, 1999 to October 31, 1999, the fees paid to
SSB Citi with respect to the Large Cap Value Portfolio were $ .
It is the responsibility of a Subadviser to make the day-to-day investment
decisions for the applicable Portfolio and to place the purchase and sales
orders for securities transactions concerning the applicable Portfolio,
subject in all cases to the general supervision of Citibank. Each Subadviser
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the assets of the Portfolio allocated to it and
effecting securities transactions concerning those assets.
Each Submanagement Agreement will continue in effect indefinitely as long
as such continuance is specifically approved at least annually by the Board of
Trustees of the applicable Portfolio Trust or by a vote of a majority of the
outstanding voting securities of the applicable Portfolio, and, in either
case, by a majority of the Trustees of the Portfolio Trust who are not parties
to the Submanagement Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Submanagement Agreement.
Notwithstanding the foregoing, the Submanagement Agreement with Large Cap
Value Portfolio will automatically terminate 120 days after its date if at
such time it has not been approved by "vote of a majority of the outstanding
voting securities" of the Portfolio.
Each Submanagement Agreement provides that the Subadviser may render
services to others. Each Submanagement Agreement is terminable without penalty
on not more than 60 days' nor less than 30 days' written notice by the
applicable Portfolio Trust, when authorized either by a vote of a majority of
the outstanding voting securities of the applicable Portfolio or by a vote of
a majority of the Board of Trustees of the applicable Portfolio Trust or by
Citibank on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. Each
Submanagement Agreement may be terminated by the Subadviser on not less than
90 days' written notice. Upon termination of a Submanagement Agreement,
Citibank will maintain responsibility for managing those assets formerly
managed by the Subadviser. Each Submanagement Agreement provides that neither
the Subadviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution of security transactions for the applicable
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
CFBDS, 21 Milk Street, Boston, MA 02109, serves as the Distributor of each
Fund's shares pursuant to Distribution Agreements with the Trust with respect
to each class of shares of the Funds (each, a "Distribution Agreement"). In
those states where CFBDS is not a registered broker-dealer, shares of the
Funds are sold through Signature Broker-Dealer Services, Inc., as dealer.
Under the Distribution Agreements, CFBDS is obligated to use its best efforts
to sell shares of each class of the Funds.
Either party may terminate a Distribution Agreement on not less than
thirty days' nor more than sixty days' written notice to the other party.
Unless otherwise terminated each Distribution Agreement will continue from
year to year upon annual approval by the Trust's Board of Trustees and by the
vote of a majority of the outstanding voting securities of the particular Fund
and by the vote of a majority of the Board of Trustees of the Trust who are
not parties to the Distribution Agreement or interested persons of any party
to the Distribution Agreement, cast in person at a meeting called for the
purpose of voting on such approval. Each Distribution Agreement will terminate
in the event of its assignment, as defined in the 1940 Act.
Each class of each Fund has a Service Plan (each, a "Service Plan")
adopted in accordance with Rule 12b-1 under the 1940 Act. Under the Plans, a
Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average
daily net assets of the Fund attributable to that class in the case of the
Plans relating to Class A shares, and not to exceed 1.00% of the average daily
net assets of the Fund attributable to that class in the case of the Plans
relating to Class B shares. Such fees may be used to make payments to the
Distributor for distribution services, to securities dealers and other
industry professionals (called Service Agents) that have entered into service
agreements with the Distributor and others in respect of the sale of shares of
the Funds, and to other parties in respect of the sale of shares of the Funds,
and to make payments for advertising, marketing or other promotional activity,
and payments for preparation, printing, and distribution of prospectuses,
statements of additional information and reports for recipients other than
regulators and existing shareholders. The Funds also may make payments to the
Distributor, Service Agents and others for providing personal service or the
maintenance of shareholder accounts. The amounts paid by the Distributor to
each recipient may vary based upon certain factors, including, among other
things, the levels of sales of Fund shares and/or shareholder services
provided. Recipients may receive different compensation for sales for Class A
and Class B shares.
The Service Plan with respect to Class A shares also provides that the
Distributor, broker-dealers, banks and other financial intermediaries may
receive the sales charge paid by Class A investors as partial compensation for
their services in connection with the sale of shares. The Service Plan with
respect to Class B shares provides that the Distributor, dealers, and others
may receive all or a portion of the deferred sales charges paid by Class B
investors.
The Service Plans permit the Funds to pay fees to the Distributor, Service
Agents and others as compensation for their services, not as reimbursement for
specific expenses incurred. Thus, even if their expenses exceed the fees
provided for by the applicable Plan, the Fund will not be obligated to pay
more than those fees and, if their expenses are less than the fees paid to
them, they will realize a profit. Each Fund will pay the fees to the
Distributor and others until the applicable Plan or Distribution Agreement is
terminated or not renewed. In that event, the Distributor's or other
recipient's expenses in excess of fees received or accrued through the
termination date will be the Distributor's or other recipient's sole
responsibility and not obligations of the Fund. In their annual consideration
of the continuation of the Service Plans for each Fund, the Trustees will
review the Service Plans and the expenses for each Fund separately.
Each Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's
Trustees and a majority of the 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 the Plan (for
purposes of this paragraph "Qualified Trustees"). Each Service Plan requires
that the Trust and the Distributor provide to the Board of Trustees, and the
Board of Trustees review, at least quarterly, a written report of the amounts
expended (and the purposes therefor) under the Service Plan. Each Service Plan
further provides that the selection and nomination of the Qualified Trustees
is committed to the discretion of such Qualified Trustees then in office. A
Service Plan may be terminated with respect to any class of a Fund at any time
by a vote of a majority of the Trust's Qualified Trustees or by a vote of a
majority of the outstanding voting securities of that class. A Service Plan
may not be amended to increase materially the amount of a class's permitted
expenses thereunder without the approval of a majority of the outstanding
securities of that class and may not be materially amended in any case without
a vote of a majority of both the Trustees and Qualified Trustees. The
Distributor will preserve copies of any plan, agreement or report made
pursuant to the Service Plans for a period of not less than six years, and for
the first two years the Distributor will preserve such copies in an easily
accessible place.
As contemplated by the Service Plans, CFBDS acts as the agent of the Trust
in connection with the offering of shares of the Funds pursuant to the
Distribution Agreements. The Prospectus contains a description of fees payable
to the Distributor under the Distribution Agreements. For the fiscal years
ended December 31, 1995 and 1996, the fees payable to CFBDS under a prior
distribution agreement with respect to Large Cap Growth Fund were $98,112 and
$336,950 (of which $224,633 was voluntarily waived), respectively. For the
period from January 1, 1997 to October 31, 1997, the fees payable to CFBDS
under a prior distribution agreement with respect to Large Cap Growth Fund
were $101,807. For the fiscal year ended October 31, 1998, the fees payable to
CFBDS under the current Distribution Agreement with respect to Class A shares
of Large Cap Growth Fund were $763,085. For the period from June 21, 1995
(commencement of operations) to December 31, 1995 and for the fiscal year
ended December 31, 1996, the fees payable to CFBDS under a prior distribution
agreement with respect to Small Cap Growth Fund were $687 and $23,974 (all of
which was voluntarily waived), respectively. For the period from January 1,
1997 to October 31, 1997, the fees payable to CFBDS under a prior distribution
agreement with respect to Small Cap Growth Fund were $31,537 (all of which was
voluntarily waived). For the fiscal year ended October 31, 1998, the fees
payable to CFBDS under the current Distribution Agreement with respect to
Class A shares of Small Cap Growth Fund were $67,515. For the period from
March 2, 1998 (commencement of operations) to October 31, 1998, the fees
payable to CFBDS under the current Distribution Agreement with respect to
Class A shares of Small Cap Value Fund were $72,642. For the period from March
2, 1998 (commencement of operations) to October 31, 1998, and for the fiscal
year ended October 31, 1999, the fees payable to CFBDS under the current
Distribution Agreement with respect to Class A shares of Growth & Income Fund
were $120,697 and $ , respectively. For the period from January 4,
1999 to October 31, 1999, the fees payable to CFBDS under the current
Distribution Agreement with repsect to Class B shares of Growth & Income Fund
were $ .
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents or for other
distribution expenses out of the distribution fees received by the Distributor
and out of the Distributor's past profits or any other source available to it.
EXPENSES
In addition to amounts payable under the Management Agreements and the
Service Plans, each Fund is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Fund's distributor,
government fees, taxes, accounting and legal fees, expenses of communication
with shareholders, interest expense, and insurance premiums. The Prospectus
for each Fund contains more information about the expenses of each Fund.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street,
pursuant to which custodial and fund accounting services, respectively, are
provided for each Fund. Among other things, State Street calculates the daily
net asset value for the Funds. Securities may be held by a sub-custodian bank
approved by the Trustees.
Each Portfolio Trust, on behalf of the Portfolios, has entered into
Custodian Agreements with State Street pursuant to which State Street acts as
custodian for each Portfolio. Each Portfolio Trust, on behalf of the
Portfolios, also has entered into a Fund Accounting Agreement with State
Street Cayman Trust Company, Ltd. ("State Street Cayman") pursuant to which
State Street Cayman provides fund accounting services for each Portfolio.
State Street Cayman also provides transfer agency services to each Portfolio
Trust.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
AUDITORS
PricewaterhouseCoopers LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP
(Canada) are the chartered accountants for each Portfolio Trust. The address
of PricewaterhouseCoopers LLP (Canada) is Suite 3000, Box 82, Royal Trust
Towers, Toronto Dominion Center, Toronto, Ontario, Canada M5K 1G8.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel
for the Funds.
9. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in the Fund's investments are made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of turnover
is not a limiting factor when changes are appropriate. Specific decisions to
purchase or sell securities for each Fund are made by a portfolio manager who
is an employee of Citibank and who is appointed and supervised by its senior
officers or, if applicable, by a 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 Citibank, the Subadvisers or their affiliates exercise
investment discretion. Citibank and each 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 Citibank or the Subadviser determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which Citibank, the Subadvisers 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 management fees that a Fund pays to Citibank or a Subadviser will not
be reduced as a consequence of Citibank's or the Subadviser's receipt of
brokerage and research services. While such services are not expected to
reduce the expenses of Citibank or the Subadvisers, Citibank and the
Subadvisers would, through the use of the services, avoid the additional
expenses which would be incurred if they should attempt to develop comparable
information through their own staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or a
Subadviser's other clients. Investment decisions for a Fund and for Citibank's
and the Subadvisers' other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought
or sold for, other clients. Likewise, a particular security may be bought for
one or more clients when one or more clients are selling the same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some cases this
system could adversely affect the price of or the size of the position
obtainable in a security for a Fund. When purchases or sales of the same
security for a Fund and for other portfolios managed by Citibank or the
Subadvisers occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large volume
purchases or sales.
For the fiscal years ended December 31, 1995 and 1996, for the period from
January 1, 1997 to October 31, 1997 and for the fiscal year ended October 31,
1998, the Large Cap Growth Portfolio paid brokerage commissions of $418,145,
$586,248, $643,728 and $855,648, respectively. For the period from June 21,
1995 (commencement of operations) to December 31, 1995, for the fiscal year
ended December 31, 1996, for the period from January 1, 1997 to October 31,
1997 and for the fiscal year ended October 31, 1998, the Small Cap Growth
Portfolio paid brokerage commissions in the amount of $6,544, $84,320, $77,226
and $214,401, respectively. For the period from March 2, 1998 (commencement of
operations of the Small Cap Value Fund) to October 31, 1998, the Small Cap
Value Portfolio paid brokerage commissions in the amount of $183,702. For the
period from March 2, 1998 (commencement of operations) to October 31, 1998,
and the period from November 1, 1998 to July 31, 1999, Growth & Income
Portfolio, the Portfolio in which the Growth & Income Fund previously invested,
paid brokerage commissions in the amount of $187,468 and $ ,
respectively. For the period from August 1, 1999 to October 31, 1999, Large Cap
Value Portfolio, the Portfolio in which the Growth & Income Fund currently
invests, paid brokerage commissions of $ .
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value) of each series and to divide or combine the shares of any series
into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series and to divide
such series into classes. The Trust has reserved the right to create and issue
additional series and classes of shares. Each share of each class represents
an equal proportionate interest in the Fund with each other share of that
class. 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 (except for any differences between classes of
shares of a series). Shares of each series are entitled to vote separately to
approve advisory agreements or changes in investment policy, and shares of a
class are entitled to vote separately to approve any distribution or service
agreements relating to that class, but shares of all series may vote together
in the election or selection of Trustees and accountants for the Trust. In
matters affecting only a particular series or class, only shares of that
particular series or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required 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
the application and submission of certain specified documents to the Trustees
by a specified number of shareholders), the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees. Shareholders also have under certain
circumstances the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of shareholders. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of
each series affected by the amendment. (See "Investment Restrictions.")
At any meeting of shareholders of any Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with the instructions it
receives for all other shares of which that Service Agent is the holder of
record.
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares would be sufficient. The Trust or any
series of the Trust, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Trust or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, each Trust will continue
indefinitely.
The Fund's Transfer Agent maintains a share register for shareholders of
record. Share certificates are not issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as partners
for its obligations and liabilities. However, the Declaration of Trust of the
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Trust and provides for indemnification and reimbursement of
expenses out of Trust property for any shareholder held personally liable for
the obligations of the Trust. The Declaration of Trust 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.
Large Cap Growth Portfolio and Small Cap Growth Portfolio are series of
The Premium Portfolios. Large Cap Value Portfolio and Small Cap Value
Portfolio are 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 applicable Portfolio on each Business Day. As of
the close of regular trading on each Business Day, the value of each
investor's beneficial interest in each Portfolio is determined by multiplying
the net asset value of the Portfolio by the percentage, effective for that
day, that represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals that are to be
effected on that day are then effected. The investor's percentage of the
aggregate beneficial interests in the Portfolio is then re-computed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of regular trading
on such day plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in the Portfolio effected on
such day, and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined is then applied to determine the value of the
investor's interest in the Portfolio as of the close of regular trading on the
next following Business Day.
11. TAX MATTERS
TAXATION OF THE FUNDS AND THE PORTFOLIO TRUSTS
FEDERAL TAXES. Each Fund 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 or state income or federal excise taxes generally will be
required to be paid by a Fund. 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 Portfolios also will not be required to pay any U.S.
federal income or excise taxes on their income.
FOREIGN TAXES. Investment income and gains received by a Fund from non-
U.S. securities may be subject to non-U.S. taxes. The U.S. has entered into
tax treaties with many other countries that may entitle a Fund to a reduced
rate of tax or an exemption from tax on such income. Each Fund intends to
qualify for treaty reduced rates where applicable. It is not possible,
however, to determine a Fund's effective rate of non-U.S. tax in advance since
the amount of the Fund's assets to be invested within various countries is not
known.
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If 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.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of a Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the
length of time the shareholders have held their shares. Any Fund dividend that
is declared in October, November, or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January, will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION. The portion of each Fund's ordinary income
dividends attributable to dividends received in respect 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 alternative minimum tax and result in
certain basis adjustments.
SPECIAL CONSIDERATIONS FOR NON-U.S. PERSONS. 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.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification
number is correct and that the shareholder is not subject to 31% backup
withholding for failing to report income to the IRS. 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.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such
shares as a capital asset will be treated as a long-term capital gain or loss
if the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a disposition
of shares in a Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a disposition of shares may
also be disallowed under rules relating to wash sales. Gain may be increased
(or loss reduced) upon a redemption of Class A Fund shares held for 90 days or
less followed by any purchase of shares of a Fund or another of the CitiFunds,
including purchases by exchange or by reinvestment, without payment of a sales
charge which would otherwise apply because of any sales charge paid on the
original purchase of the Class A Fund shares.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
CERTAIN DEBT INVESTMENTS. Any investment by a Fund in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped securities,
and certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, 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. An investment by a Fund in residual interests of a CMO that
has elected to be treated as a real estate mortgage investment conduit, or
"REMIC," can create complex tax problems, especially if the Fund has state or
local governments or other tax-exempt organizations as shareholders.
OPTIONS, ETC. Each Fund's transactions in options, futures contracts and
forward contracts will be subject to special tax rules that may affect the
amount, timing and character of Fund income and distributions to shareholders.
For example, certain positions held by each Fund on the last business day of
each taxable year will be marked to market (i.e., treated as if closed out) on
that day, and any gain or loss associated with the positions will be treated
as 60% long-term and 40% short-term capital gain or loss. Certain positions
held by a Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles," and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. Each Fund will limit its
activities in options, futures contracts and forward contracts to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS. The Funds (other than the Small Cap Value 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 and investment by a Fund in certain "passive foreign
investment companies" may have to be limited in order to avoid a tax on a
Fund. A Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each taxable year. This election may
cause the Fund to recognize ordinary income prior to the receipt of cash
payments with respect to those investments; in order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold potentially
resulting in additional taxable gain or loss to the Fund.
12. FINANCIAL STATEMENTS
To be added by amendment.
<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.
STANDARD & POOR'S RATINGS GROUP
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 CREDIT RATING CO.
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
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 in periods of greater 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 IBCA, INC.
AAA -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A -- High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB -- Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
BB -- Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B -- Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained favorable business and economic environment.
CCC, CC and C -- High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent default.
DDD, DD, and D -- Default. Securities are not meeting current obligations and
are extremely speculative. "DDD" designates the highest potential for recovery
of amounts outstanding on any securities involved. For U.S. corporates, for
example, "DD" indicates expected recovery of 50% - 90% of such outstandings,
and "D" the lowest recovery potential, i.e., below 50%.
<PAGE>
CITIFUNDS LARGE CAP GROWTH PORTFOLIO
CITIFUNDS SMALL CAP GROWTH PORTFOLIO
CITIFUNDS SMALL CAP VALUE PORTFOLIO
CITIFUNDS GROWTH & INCOME PORTFOLIO
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, Boston, MA 02109 (617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street, Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
<PAGE>
PART C
Item 23. Exhibits.
* a(1) Amended and Restated Declaration of Trust of the
Registrant
****** a(2) Amendments to Amended and Restated Declaration of Trust
of the Registrant
**** b(1) Amended and Restated By-Laws of the Registrant
**** b(2) Amendments to Amended and Restated By-Laws of the
Registrant
*** d(1) Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Small Cap Growth
Portfolio
****** d(2) Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Small Cap Value
Portfolio
*** d(3) Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Large Cap Growth
Portfolio
****** d(4) Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Growth & Income
Portfolio
******* e(1) Amended and Restated Distribution Agreement between the
Registrant and CFBDS, Inc. ("CFBDS"), as distributor
with respect to Class A shares
******* e(2) Distribution Agreement between the Registrant and
CFBDS, as distributor with respect to Class B shares
** g(1) Custodian Contract between the Registrant and State
Street Bank and Trust Company ("State Street"), as
custodian
****** g(2) Letter Agreement adding CitiFunds Small Cap Value
Portfolio and CitiFunds Growth & Income Portfolio to the
Custodian Contract between the Registrant and State
Street
h(1) Services Agreement between Citibank, N.A. and CFBDS
**** h(2) Transfer Agency and Service Agreement between the
Registrant and State Street, as transfer agent
****** h(3) Letter Agreement adding CitiFunds Small Cap Value
Portfolio and CitiFunds Growth & Income Portfolio to the
Transfer Agency and Service Agreement between the
Registrant and State Street
** h(4) Accounting Services Agreement between the Registrant
and State Street, as fund accounting agent
***** h(5) Letter Agreement adding CitiFunds Small Cap Value
Portfolio and CitiFunds Growth & Income Portfolio to the
Accounting Services Agreement between the Registrant and
State Street
***** i Opinion and consent of counsel
******* m(1) Amended and Restated Service Plan of the Registrant
for Class A shares
******* m(2) Service Plan of the Registrant for Class B shares
******* o Multiple Class Plan of the Registrant
**** and filed p(1) Powers of Attorney for the Registrant
herewith
***** and filed p(2) Powers of Attorney for Asset Allocation Portfolios
herewith
- ---------------------
* 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.
*** Incorporated herein by reference to Post-Effective Amendment No. 20 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on November 3,
1997.
**** Incorporated herein by reference to Post-Effective Amendment No. 24 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on June 29, 1998.
***** Incorporated herein by reference to Post-Effective Amendment No. 27 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on December 16,
1998.
****** Incorporated herein by reference to Post-Effective Amendment No. 28 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on December 21,
1998.
******* Incorporated herein by reference to Post-Effective Amendment No. 29 to
the Registrant's Registration Statement on Form N-1A (File No. 2-90519)
as filed with the Securities and Exchange Commission on March 1, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's
Declaration of Trust, filed as an Exhibit to Post-Effective Amendment No. 17 to
its Registration Statement on Form N-1A; (b) Section 6 of the Distribution
Agreements between the Registrant and CFBDS, filed as Exhibits to Post-Effective
Amendment No. 29 to its Registration Statement on Form N-1A; 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.
Item 26. 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, which is,
in turn, a wholly owned subsidiary of Citigroup Inc. Citibank also serves as
investment adviser to the following registered investment companies (or series
thereof): Asset Allocation Portfolios (Large Cap Value Portfolio, Small Cap
Value Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate
Income Portfolio and Short-Term Portfolio), The Premium Portfolios (High Yield
Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth Portfolio,
International Equity Portfolio, Government Income Portfolio and Small Cap Growth
Portfolio), Tax Free Reserves Portfolio, U.S. Treasury Reserves Portfolio, Cash
Reserves Portfolio, CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM New York
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves and CitiFundsSM
California Tax Free Reserves), CitiFundsSM Tax Free Income Trust (CitiFundsSM
National Tax Free Income Portfolio, CitiFundsSM New York Tax Free Income
Portfolio and CitiFundsSM California Tax Free Income Portfolio), CitiFundsSM
Institutional Trust (CitiFundsSM Institutional Cash Reserves) and Variable
Annuity Portfolios (CitiSelect(R) VIP Folio 100 Income, CitiSelect(R) VIP Folio
200 Conservative, CitiSelect(R) VIP Folio 300 Balanced, CitiSelect(R) VIP Folio
400 Growth, CitiSelect(R) VIP Folio 500 Growth Plus and CitiFundsSM Small Cap
Growth VIP Portfolio). Citibank and its affiliates manage assets in excess of
$351 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.
Victor J. Menezes is the President and a Director of Citibank. William R. Rhodes
and H. Onno Ruding are Vice Chairmen and Directors of Citibank. The other
Directors of Citibank are Paul S. Collins, Vice Chairman of Citigroup, Inc. and
Robert I. Lipp, Chairman and Chief Executive Officer of Travelers Insurance
Group and of Travelers Property Casualty Corp.
Each of the individuals named above is also a Director of Citicorp. In
addition, the following persons have the affiliations indicated:
Paul J. Collins Director, Kimberly-Clark Corporation
Robert I. Lipp Chairman, Chief Executive Officer and President,
Travelers Property Casualty Corp.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
H. Onno Ruding Supervisory Director, Amsterdamsch
Trustees Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated
Item 27. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Growth Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves,
CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium Liquid Reserves,
CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM Institutional
Liquid Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM
Short-Term U.S. Government Income Portfolio, CitiFundsSM New York Tax Free
Income Portfolio, CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM
California Tax Free Income Portfolio, CitiFundsSM Small Cap Value Portfolio,
CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM Small Cap Growth Portfolio,
CitiFundsSM Balanced Portfolio, CitiSelect(R) Folio 100 Income, CitiSelect(R)
Folio 200 Conservative, CitiSelect(R) Folio 300 Balanced, CitiSelect(R) Folio
400 Growth, CitiSelect(R) Folio 500 Growth Plus, CitiSelect(R) VIP Folio 100
Income, CitiSelect(R) VIP Folio 200 Conservative, CitiSelect(R) VIP Folio 300
Balanced, CitiSelect(R) VIP Folio 400 Growth, CitiSelect(R) VIP Folio 500 Growth
Plus and CitiFundsSM Small Cap Growth VIP Portfolio. CFBDS is also the placement
agent for High Yield Portfolio, Government Income Portfolio, International
Equity Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, Large
Cap Value Portfolio, Small Cap Value Portfolio, International Portfolio, Foreign
Bond Portfolio, Intermediate Income Portfolio, Short-Term Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio. CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for Variable
Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD
II for Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Life Insurance, The Travelers Fund UL II for Life Insurance, The
Travelers Fund UL III for Life Insurance, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance Separate Account
Two, The Travelers Variable Life Insurance Separate Account Three, The Travelers
Variable Life Insurance Separate Account Four, The Travelers Separate Account
MGA, The Travelers Separate Account MGA II, The Travelers Growth and Income
Stock Account for Variable Annuities, The Travelers Quality Bond Account for
Variable Annuities, The Travelers Money Market Account for Variable Annuities,
The Travelers Timed Growth and Income Stock Account for Variable Annuities, The
Travelers Timed Short-Term Bond Account for Variable Annuities, The Travelers
Timed Aggressive Stock Account for Variable Annuities, The Travelers Timed Bond
Account for Variable Annuities, Small Cap Fund, Government Fund, Growth Fund,
Growth and Income Fund, International Equity Fund, Mid Cap Fund, Municipal Bond
Fund, Select Small Cap Portfolio, Select Government Portfolio, Select Growth
Portfolio, Select Growth and Income Portfolio, Select Mid Cap Portfolio,
Balanced Investments, Emerging Markets Equity Investments, Government Money
Investments, High Yield Investments, Intermediate Fixed Income Investments,
International Equity Investments, International Fixed Income Investments, Large
Capitalization Growth Investments, Large Capitalization Value Equity
Investments, Long- Term Bond Investments, Mortgage Backed Investments, Municipal
Bond Investments, S&P 500 Index Investments, Small Capitalization Growth
Investments, Small Capitalization Value Equity Investments, Multi-Sector Fixed
Income Investments, Multi-Strategy Market Neutral Investments, Appreciation
Portfolio, Diversified Strategic Income Portfolio, Emerging Growth Portfolio,
Equity Income Portfolio, Equity Index Portfolio, Growth & Income Portfolio,
Intermediate High Grade Portfolio, International Equity Portfolio, Money Market
Portfolio, Total Return Portfolio, Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation
Fund Inc., Smith Barney Arizona Municipals Fund Inc., Smith Barney California
Municipals Fund Inc., Balanced Portfolio, Conservative Portfolio, Growth
Portfolio, High Growth Portfolio, Income Portfolio, Global Portfolio, Select
Balanced Portfolio, Select Conservative Portfolio, Select Growth Portfolio,
Select High Growth Portfolio, Select Income Portfolio, Concert Social Awareness
Fund, Smith Barney Large Cap Blend Fund, Smith Barney Fundamental Value Fund
Inc., Large Cap Value Fund, Short-Term High Grade Bond Fund, U.S. Government
Securities Fund, Smith Barney Balanced Fund, Smith Barney Convertible Fund,
Smith Barney Diversified Strategic Income Fund, Smith Barney Exchange Reserve
Fund, Smith Barney High Income Fund, Smith Barney Municipal High Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney Total Return Bond Fund,
Cash Portfolio, Government Portfolio, Municipal Portfolio, Concert Peachtree
Growth Fund, Smith Barney Contrarian Fund, Smith Barney Government Securities
Fund, Smith Barney Hansberger Global Small Cap Value Fund, Smith Barney
Hansberger Global Value Fund, Smith Barney Investment Grade Bond Fund, Smith
Barney Premier Selections Fund, Smith Barney Small Cap Value Fund, Smith Barney
Small Cap Growth Fund, Smith Barney Intermediate Maturity California Municipals
Fund, Smith Barney Intermediate Maturity New York Municipals Fund, Smith Barney
Large Capitalization Growth Fund, Smith Barney S&P 500 Index Fund, Smith Barney
Mid Cap Blend Fund, Smith Barney EAFE Index Fund, Smith Barney US 5000 Index
Fund, Smith Barney Managed Governments Fund Inc., Smith Barney Managed
Municipals Fund Inc., Smith Barney Massachusetts Municipals Fund, Cash
Portfolio, Government Portfolio, Retirement Portfolio, California Money Market
Portfolio, Florida Portfolio, Georgia Portfolio, Limited Term Portfolio,
National Portfolio, Massachusetts Money Market Portfolio, New York Money Market
Portfolio, New York Portfolio, Pennsylvania Portfolio, Smith Barney Municipal
Money Market Fund, Inc., Smith Barney Natural Resources Fund, Smith Barney
Financial Services Fund, Smith Barney Health Sciences Fund, Smith Barney
Technology Fund, Smith Barney New Jersey Municipals Fund Inc., Smith Barney
Oregon Municipals Fund, Zeros Plus Emerging Growth Series 2000, Smith Barney
Security and Growth Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Income Fund, Income and Growth Portfolio, Reserve Account
Portfolio, U.S. Government/High Quality Securities Portfolio, Emerging Markets
Portfolio, European Portfolio, Global Government Bond Portfolio, International
Balanced Portfolio, International Equity Portfolio, Pacific Portfolio, AIM
Capital Appreciation Portfolio, Smith Aggressive Growth Portfolio, Smith Mid Cap
Portfolio, Alliance Growth Portfolio, INVESCO Global Strategic Income Portfolio,
MFS Total Return Portfolio, Putnam Diversified Income Portfolio, Smith Barney
High Income Portfolio, Smith Barney Large Cap Value Portfolio, Smith Barney
International Equity Portfolio, Smith Barney Large Capitalization Growth
Portfolio, Smith Barney Money Market Portfolio, Smith Barney Pacific Basin
Portfolio, Travelers Managed Income Portfolio, Van Kampen Enterprise Portfolio,
Centurion U.S. Equity Fund, Centurion International Equity Fund, Centurion U.S.
Contra Fund, Centurion International Contra Fund, Global High-Yield Bond Fund,
International Equity Fund, Emerging Opportunities Fund, Core Equity Fund,
Long-Term Bond Fund, Global Dimensions Fund L.P., Citicorp Private Equity L.P.,
AIM V.I. Capital Appreciation Fund, AIM V.I. Government Series Fund, AIM V.I.
Growth Fund, AIM V.I. International Equity Fund, AIM V.I. Value Fund, Fidelity
VIP Growth Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP Equity
Income Portfolio, Fidelity VIP Overseas Portfolio, Fidelity VIP II Contrafund
Portfolio, Fidelity VIP II Index 500 Portfolio, MFS World Government Series, MFS
Money Market Series, MFS Bond Series, MFS Total Return Series, MFS Research
Series, MFS Emerging Growth Series, Salomon Brothers Institutional Money Market
Fund, Salomon Brothers Cash Management Fund, Salomon Brothers New York Municipal
Money Market Fund, Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond
Fund, Salomon Brothers International Equity Fund, Salomon Brothers Strategic
Bond Fund, Salomon Brothers Large Cap Growth Fund, Salomon Brothers Balanced
Fund, Salomon Brothers Small Cap Growth Fund, Salomon Brothers Asia Growth Fund,
Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Value Fund Inc,
Salomon Brothers Opportunity Fund Inc, Salomon Brothers Institutional High Yield
Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund, Salomon
Brothers Variable Investors Fund, Salomon Brothers Variable Capital Fund,
Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable High
Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers
Variable U.S. Government Income Fund, Salomon Brothers Variable Asia Growth
Fund, and Salomon Brothers Variable Small Cap Growth Fund.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS is incorporated by reference to Schedule A of Form
BD filed by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No.
8-32417).
(c) Not applicable.
Item 28. 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
CFBDS, Inc. 21 Milk Street, 5th Floor
(subadministrator and distributor) Boston, MA 02109
State Street Bank and Trust Company 1776 Heritage Drive
(transfer agent, custodian and fund North Quincy, MA 02171
accounting agent)
Citibank, N.A. 153 East 53rd Street
(manager) New York, NY 10043
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<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 be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts on the 28th day of December, 1999.
CITIFUNDS TRUST 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 December 28, 1999.
Signature Title
--------- -----
Philip W. Coolidge President, Principal Executive
---------------------- Officer and Trustee
Philip W. Coolidge
Linwood C. Downs Principal Financial Officer and Principal
---------------------- Accounting Officer
Linwood C. Downs
Riley C. Gilley* Trustee
----------------------
Riley C. Gilley
Diana R. Harrington* Trustee
----------------------
Diana R. Harrington
Susan B. Kerley* Trustee
----------------------
Susan B. Kerley
Heath B. McLendon* Trustee
----------------------
Heath B. McLendon
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
Asset Allocation Portfolios has duly caused this Post-Effective
Amendment to the Registration Statement on Form N-1A of CitiFunds Trust II to be
signed on its behalf by the undersigned, thereunto duly authorized, in Grand
Cayman, Cayman Islands, on the 28th day of December, 1999.
ASSET ALLOCATION PORTFOLIOS
on behalf of Large Cap Value Portfolio
By: Tamie Ebanks-Cunningham
---------------------------
Tamie Ebanks-Cunningham,
Assistant Secretary of
Asset Allocation Portfolios
This Post-Effective Amendment to the Registration Statement on Form
N-1A of CitiFunds Trust II has been signed by the following persons in the
capacities indicated on December 28th, 1999.
Signature Title
--------- -----
Philip W. Coolidge* President, Principal Executive
---------------------- Officer and Trustee
Philip W. Coolidge
Linwood C. Downs* Principal Financial Officer and Principal
---------------------- Accounting Officer
Linwood C. Downs
Elliott J. Berv* Trustee
----------------------
Elliott J. Berv
Mark T. Finn* Trustee
----------------------
Mark T. Finn
C. Oscar Morong, Jr.* Trustee
----------------------
C. Oscar Morong, Jr.
Walter E. Robb, III* Trustee
----------------------
Walter E. Robb, III
E. Kirby Warren* Trustee
----------------------
E. Kirby Warren
*By: Tamie Ebanks-Cunningham
----------------------
Tamie Ebanks-Cunningham
Executed by Tamie Ebanks-Cunningham
on behalf of those indicated as
attorney in fact.
<PAGE>
EXHIBIT INDEX
h(1) Services Agreement between Citibank, N.A. and CFBDS
p(1) Powers of Attorney for the Registrant
p(2) Powers of Attorney for Asset Allocation Portfolios
<PAGE>
Exhibit h(1)
SERVICES AGREEMENT
SERVICES AGREEMENT, dated as of January 4, 1999, by and between CFBDS,
INC., a Massachusetts corporation ("CFBDS") and CITIBANK, N.A., a national
banking association ("Citibank").
W I T N E S S E T H :
WHEREAS, Citibank has been retained by certain registered open-end
management investment companies under the Investment Company Act of 1940, as
amended (the "1940 Act"), as listed on Schedule A hereto (each individually a
"Trust" and collectively the "Trusts"), to provide administrative services to
its investment portfolios, as listed on Schedule A hereto (each individually a
"Fund" and collectively the "Funds"), pursuant to separate Management Agreements
(each a "Management Agreement"), and
WHEREAS, as permitted by Section 1 of each Management Agreement,
Citibank desires to subcontract some or all of the performance of its
obligations thereunder to CFBDS, and CFBDS desires to accept such obligations;
and
WHEREAS, Citibank wishes to engage CFBDS to provide certain
administrative services on the terms and conditions hereinafter set forth, so
long as Citibank shall have found CFBDS to be qualified to perform the
obligations sought to be subcontracted; and
WHEREAS, CFBDS desires to retain Citibank to perform certain services
on the terms and conditions hereinafter set forth, and Citibank is willing to
render such services.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties as CFBDS. Subject to the supervision and direction of
Citibank, CFBDS will assist in supervising various aspects of each Trust's
administrative operations and undertakes to perform the following specific
services, from and after the effective date of this Agreement:
(a) To the extent requested by Citibank, furnish Trust secretarial
services;
(b) To the extent requested by Citibank, furnish Trust treasury
services, including the review of financial data, tax and
other regulatory filings and audit requests;
(c) To the extent requested by Citibank, provide the services of
certain persons who may be appointed as officers or Trustees
of the Trust by the Trust's Board;
(d) To the extent requested by Citibank, participate in the
preparation of documents required for compliance by the Trust
with applicable laws and regulations, including registration
statements, prospectuses, semi-annual and annual reports to
shareholders and proxy statements;
(e) To the extent requested by Citibank, prepare agendas and
supporting documents for and minutes of meetings of the
Trustees, Committees of Trustees and shareholders;
(f) Maintain books and records of the Trust;
(g) To the extent requested by Citibank, provide advice and
counsel to the Trust with respect to regulatory matters,
including monitoring regulatory and legislative developments
which may affect the Trust and assisting the Trust in routine
regulatory examinations or investigations of the Trust, and
working closely with outside counsel to the Trust in
connection with litigation in which the Trust is involved;
(h) To the extent requested by Citibank, generally assist in all
aspects of Trust's operations and provide general consulting
services on a day to day, as needed basis;
(i) In connection with the foregoing activities, maintain office
facilities (which may be in the offices of CFBDS or its
corporate affiliate); and
(j) In connection with the foregoing activities, furnishing
clerical services, and internal executive and administrative
services, stationery and office supplies.
Notwithstanding the foregoing, CFBDS under this Agreement shall not be
deemed to have assumed any duties with respect to, and shall not be responsible
for, the management of a Trust, or the distribution of beneficial interests in a
Trust, nor shall CFBDS be deemed to have assumed or have any responsibility with
respect to functions specifically assumed by any transfer agent or custodian of
a Trust.
In performing all services under this Agreement, CFBDS shall (a) act in
conformity with the Trust's charter documents and bylaws, the 1940 Act and other
applicable laws, as the same may be amended from time to time, (b) consult and
coordinate with legal counsel for the Trust, as necessary or appropriate, and
(c) advise and report to the Trust and its legal counsel, as necessary or
appropriate, with respect to any material compliance or other matters that come
to its attention.
In performing its services under this Agreement, CFBDS shall cooperate
and coordinate with Citibank as necessary and appropriate and shall provide such
information as is reasonably necessary or appropriate for Citibank to perform
its obligations to the Trust. CFBDS shall perform its obligations under this
Agreement in a conscientious and diligent manner consistent with prevailing
industry standards.
2. Compensation of CFBDS. For the services to be rendered and the
facilities to be provided by CFBDS hereunder, CFBDS shall be paid an
administrative fee as may from time to time be agreed to between Citibank and
CFBDS.
3. Duties of Citibank. CFBDS hereby retains Citibank to perform the
following services, and Citibank hereby agrees to render such services for the
compensation and on the terms herein provided, from and after the effective date
of this Agreement:
(a) From time to time, Citibank will prepare marketing materials
and advertising materials for the Funds, will review such
material for compliance with applicable legal standards,
submit such materials to CFBDS for final review (unless such
material is submitted to another NASD member for review),
assist CFBDS in connection with discussions with NASD
Regulation and others who review such materials submitted by
CFBDS, make responsive changes and obtain final approval for
use in a timely fashion, and arrange and pay for the
production and dissemination of such material. Citibank shall
coordinate its activities in this regard with brokers selling
shares of the Funds and may delegate its duties under this
provision to others as appropriate.
(b) Citibank will provide liaison between CFBDS and the Funds,
other brokers selling shares of the Funds, and other parties
related to the operations of the Funds, and Citibank shall
provide information and assistance in this regard, as
requested by CFBDS.
In performing its services under this Agreement, Citibank shall (a) act
in conformity with the Trust's charter documents, bylaws, prospectus, state of
additional information, the 1940 Act and other applicable laws, as the same may
be amended from time to time, and (b) cooperate and coordinate with CFBDS as
necessary and appropriate.
4. Compensation of Citibank. In consideration for the services to be
rendered by Citibank under this Agreement, CFBDS hereby assigns to Citibank for
the term of this Agreement all revenues payable to CFBDS pursuant to its
Distribution Agreements with the Trusts (as relate to the Funds) and/or any
related Distribution Plans or Service Plans of the Trusts (as relate to the
Funds) (the "Distribution Revenues"). Citibank will be solely responsible for
computing and collecting any and all Distribution Revenues to CFBDS and assigned
to Citibank hereby and it shall do so at its own expense. CFBDS shall have no
obligation to provide any accounting or other computation of the Distribution
Revenues to Citibank or to otherwise assist in the collection of the
Distribution Revenues, provided that CFBDS agrees to execute any instruments or
take any other actions reasonably necessary to effect or perfect the assignment
of the Distribution Revenues to Citibank, and the further assignment by
Citibank, at its discretion, of any part of the Distribution Revenues to any
other entity.
5. Limitation of Liability.
(a) CFBDS shall not be liable to Citibank for any error or
judgment or mistake of law or for any loss, liability,
expense, or damage (collectively a "Loss") suffered by
Citibank in connection with the performance of CFBDS'
obligations and duties under this Agreement, except a Loss
resulting from CFBDS' willful misfeasance, bad faith, or
negligence in the performance of such obligations and duties.
(b) Citibank will indemnify CFBDS, its affiliated companies and
its officers, employees, and agents, and hold each of them
harmless from any and all losses, claims, damages,
liabilities, or expenses (including reasonable counsel fees
and expenses) resulting from any claim, demand, action, or
suit relating to this Agreement, and not resulting from the
willful misfeasance, bad faith or negligence of CFBDS in the
performance of its obligations under such agreements, but only
to the extent such losses, claims, damages, liabilities, or
expenses are not covered by an applicable insurance policy
maintained by CFBDS and/or its affiliates (other than by
virtue of being part of a deductible under any such policy).
Citibank's indemnification obligations under this Section (b)
are expressly conditioned on satisfaction of all the following
requirements:
(i) CFBDS shall notify Citibank in writing of any claim,
demand, or other occurrence in respect of which CFBDS
may seek indemnification, promptly after CFBDS becomes
aware of it;
(ii) Subject to the terms of any applicable insurance
policies maintained by CFBDS and/or its affiliates,
Citibank shall have the right to assume sole control
of the defense of any resulting action or suit; and
(iii) CFBDS shall not confess any claim or settle or make
any compromise relating thereto, except with
Citibank's prior written consent.
(c) CFBDS will indemnify Citibank, its affiliated companies, and
their officers, employees, and agents, and hold each of them
harmless from any and all losses, claims, damages,
liabilities, or expenses (including reasonable counsel fees
and expenses) resulting from any claim, demand, action, or
suit relating to CFBDS' performance of its obligations under
this Agreement, not resulting from the willful misfeasance,
bad faith or negligence of Citibank or any of its affiliated
companies, but only to the extent such losses, claims,
damages, liabilities, or expenses are not covered by an
applicable insurance policy maintained by Citibank or any of
its affiliates (other than by virtue of being part of a
deductible under any such policy). CFBDS' indemnification
obligations under this Section 5(c) are expressly conditioned
on satisfaction of all the following requirements:
(i) Citibank shall notify CFBDS in writing of any claim,
demand, or other occurrence which relates to or in
respect of which Citibank or any of its affiliates may
seek indemnification, promptly after Citibank becomes
aware of it;
(ii) Subject to the terms of any applicable insurance
policies maintained by Citibank and/or its affiliates,
CFBDS shall have the right to assume sole control of
the defense of any resulting action or suit; and
(iii) Citibank and/or its affiliates shall not confess any
claim or settle or make any compromise relating
thereto, except with CFBDS' prior written consent.
6. Confidentiality.
(a) All books, records, information and data pertaining to the
business of Citibank, any of its affiliates, each Fund, each
Fund's prior, present, or potential shareholders, and the
customers of Citibank or any of its affiliates that are
exchanged or received by CFBDS pursuant to the performance of
CFBDS' duties under this Agreement shall remain confidential
and shall not be disclosed to any other person, except as
specifically authorized in writing by the applicable
affiliate, Citibank, or Fund or as may be required by law, and
shall not be used for any purposes other than the performance
of CFBDS' responsibilities and duties hereunder. The
provisions of this Section 6(a) shall survive this Agreement's
termination.
(b) All books, records, information and data that are the property
of CFBDS, which are not included in Section 6(a) above, and
which were received by Citibank or any of its affiliates
pursuant to CFBDS' performance of this Agreement, shall be
treated as confidential and shall not be disclosed to any
other person, except as specifically authorized in writing by
CFBDS, as may be required by law or as may be reasonably
necessary in connection with the conversion to a different
party upon termination of this Agreement. The provisions of
this Section 6(b) shall survive termination of this Agreement.
7. Service to Other Companies or Accounts: Limitation on Other
Activities. During the term of this Agreement, CFBDS shall not conduct any
business activities other than as contemplated by (i) this Agreement; (ii) any
Distribution Agreement between CFBDS and a Trust; (iii) any distribution
contract between CFBDS and any other investment company advised or administered
by a subsidiary of Citigroup Inc.; or (iv) any agreement between CFBDS and a
subsidiary of Citigroup Inc. Citibank acknowledges that the persons employed by
CFBDS to assist in the performance of CFBDS' duties under this Agreement may not
devote their full time to such service and nothing contained in this Agreement
shall be deemed to limit or restrict the right of any employee or affiliate of
CFBDS to engage in and devote time and attention to other business or to render
services of whatever kind or nature, provided such other activities do not
adversely affect CFBDS' performance hereunder, and that in conducting such
business or rending such services CFBDS' employees and affiliates would take
reasonable steps to assure that the other parties involved are put on notice as
to the legal entity with which they are dealing.
8. Books and Records; Audits; Reports. Citibank shall have the right at
any time to have representatives of its auditors and/or legal counsel, and/or
auditors and legal counsel of any of the Funds, and/or employees of any
affiliate to: (a) obtain full and complete access to any of CFBDS' books and
records relating to its services and duties required under this Agreement,
including, but not limited to, correspondence, contracts, agreements, bank
transaction documents and records of any type, receipts, ledgers, and any other
books of account ("Books and Records") and obtain a reasonable number of copies
of any such Books and Records; and (b) perform on-site audits at any of CFBDS'
system of internal controls with respect to its services and duties required
under this Agreement.
9. Change in Control. To the extent possible, CFBDS shall promptly
provide Citibank prior written notice of any change in "control" (as such term
is defined in the 1940 Act) of CFBDS.
10. Use of Name. Except as required by law, CFBDS shall not use the
name Citibank or Citicorp or Citigroup in any manner without Citibank's prior
written consent in any marketing or promotional materials for CFBDS. This
section 10 shall survive termination of this Agreement.
11. Insurance. CFBDS shall, during the term of this Agreement, maintain
directors/officers errors and omissions insurance coverage in the amount of $5
million.
12. Miscellaneous.
(a) Any notice or other written instrument authorized or required
by this Agreement to be given in writing to Citibank or CFBDS
shall be sufficiently given if addressed to the party and
received by it at its office set forth below or at such other
place as it may from time to time designate in writing.
To Citibank:
Citibank, N.A.
425 Park Avenue
22nd Floor
New York, NY 10022
Attn: Andrew Shoup
To CFBDS:
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Attn: Philip Coolidge
(b) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable
without the written consent of the other party.
(c) This Agreement shall be construed in accordance with the laws
of the State of New York, without giving effect to its
conflict of laws principles.
(d) This Agreement may be executed in counterparts, each of which
shall be an original and which collectively shall be deemed to
constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
(f) The parties hereto acknowledge that in performing its services
and duties under this Agreement, each of Citibank and CFBDS
shall do so in the capacity of an independent contractor.
13. Termination. This Agreement may be terminated by Citibank at any
time, in its entirety or as to one or more Funds, with or without cause. This
Agreement may be terminated by CFBDS, in its entirety or as to one or more
Funds, with or without cause, provided that CFBDS has notified Citibank of such
termination in writing at least 90 days prior to the effective date thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
CFBDS, INC. CITIBANK, N.A.
By: Philip Coolidge By: Andrew B. Shoup
--------------- ---------------
Title: C.E.O. Title: Vice President
--------------- ---------------
<PAGE>
SCHEDULE A
CitiFundsTrust I
CitiSelect(R) Folio 200
CitiSelect(R) Folio 300
CitiSelect(R) Folio 400
CitiSelect(R) Folio 500
CitiFunds Trust II
CitiFunds Large Cap Growth Portfolio
CitiFunds Small Cap Growth Portfolio
CitiFunds Small Cap Value Portfolio
CitiFunds Growth & Income Portfolio
CitiFunds Fixed Income Trust
CitiFunds Intermediate Income Portfolio
CitiFunds International Trust
CitiFunds International Growth & Income Portfolio
CitiFunds Tax Free Income Trust
CitiFunds New York Tax Free Income Portfolio
CitiFunds National Tax Free Income Portfolio
CitiFunds California Tax Free Income Portfolio
CitiFunds Institutional Trust
CitiFunds Institutional Cash Reserves
The Premium Portfolios
Large Cap Growth Portfolio
Small Cap Growth Portfolio
Growth & Income Portfolio
U.S. Fixed Income Portfolio
High Yield Portfolio
Asset Allocation Portfolios
International Portfolio
Large Cap Value Portfolio
Intermediate Income Portfolio
Foreign Bond Portfolio
Short-Term Portfolio
Small Cap Value Portfolio
Variable Annuity Portfolios
CitiSelect(R) VIP Folio 200
CitiSelect(R) VIP Folio 300
CitiSelect(R) VIP Folio 400
CitiSelect(R) VIP Folio 500
CitiFunds Small Cap Growth VIP Portfolio
<PAGE>
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
August 1, 1999
CFBDS, Inc.
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
Re: CitiFundsSM Balanced Portfolio - Services Agreement
Ladies and Gentlemen:
This letter serves as notice that CitiFunds Balanced Portfolio is
hereby added to the list of series of CitiFunds Trust I to which CFBDS, Inc.
("CFBDS") renders services as sub-administrator pursuant to the terms of the
Services Agreement dated as of January 4, 1999 (the "Agreement") between
Citibank, N.A. and CFBDS.
Please sign below to acknowledge your receipt of this notice adding
CitiFunds Balanced Portfolio as a beneficiary under the Agreement.
CITIBANK, N.A.
By: Camille B. Meade
----------------
Title: Vice President
----------------
Acknowledgment:
CFBDS, INC.
By: Philip Coolidge
---------------
Title: CEO
---------------
<PAGE>
Exhibit p(1)
CitiFunds Trust II
The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Trust II (on behalf of each of its series now or hereinafter created) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply with
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. Any one of such attorneys and agents shall
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 11th day
of February, 1999.
Heath B. McLendon
- ---------------------------
Heath B. McLendon
<PAGE>
Exhibit p(2)
ASSET ALLOCATION PORTFOLIOS
The undersigned hereby constitutes and appoints Philip W. Coolidge, Susan
Jakuboski, Tamie Ebanks-Cunningham, Molly S. Mugler and Linda T. Gibson, and
each of them, with full powers of substitution as his true and lawful attorneys
and agents to execute in his name and on his behalf in any and all capacities
the Registration Statements on Form N-1A, and any and all amendments thereto,
filed by Asset Allocation Portfolios (on behalf of each of its series now
existing or hereinafter created) (the "Registrant") with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended, the
Registration Statements on Form N-1A, and any and all amendments thereto, to be
executed by the Registrant and filed by another registrant with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended, or
under the Securities Act of 1933, as amended, and any and all other instruments
which such attorneys and agents, or any of them, deem necessary or advisable to
enable the Registrant to comply with the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. Any one of such attorneys and agents shall
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 28th day
of December, 1999.
Linwood C. Downs
- --------------------------------
Linwood C. Downs
