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Rule 497(e) File Nos. 2-90519 and 811-4007
Supplement dated August 1, 1999
to
Prospectus dated March 1, 1999
As Supplemented May 17, 1999
for
CitiFunds(SM) Growth & Income Portfolio
CitiFunds(SM) Growth & Income Portfolio now invests in securities through
Large Cap Value Portfolio, a mutual fund having the same investment goals as the
Fund. The Fund's expense ratio is not changing.
Citibank, N.A. is the investment manager of Large Cap Value Portfolio, and
SSBC Fund Management, Inc. (SSBC), an affiliate of Citibank and an indirect
wholly-owned subsidiary of Citigroup Inc., is the sub-adviser. SSBC's address is
388 Greenwich Street, New York, New York 10013. In managing the Portfolio, SSBC
uses a value-oriented approach similar to Citibank's value style described in
the Prospectus. The success of the Fund's investment strategy depends largely on
SSBC's skill in identifying securities of companies that are in fact
undervalued, but have good longer term business prospects.
SSBC's management fees are deducted from the investment management fee
payable to Citibank. For the fiscal year ended October 31, 1998, Citibank
received a total of 0.62% of the Fund's average daily net assets, after waivers.
Frances A. Root is the portfolio manager of Large Cap Value Portfolio. Ms.
Root is a Managing Director and a Senior Equity Portfolio Manager of SSBC. She
joined Smith Barney Capital Management in 1992 as a Vice President and Equity
Portfolio Manager and in 1998 became a Managing Director of SSBC and a Senior
Equity Portfolio Manager. Formerly, she was with Shearson Lehman Advisors as a
Vice President and Portfolio Manager for seven years and prior to that, with
E.F. Hutton & Company, Inc.
<PAGE>
Rule 497(e) File Nos. 2-90519 and 811-4007
Statement of
Additional Information
March 1, 1999
As supplemented
August 1, 1999
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 ............................................... 41
10. Description of Shares, Voting Rights and Liabilities ................. 42
11. Tax Matters .......................................................... 44
12. Certain Bank Regulatory Matters ...................................... 46
13. 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, 1999, as supplemented May 17,
1999 and August 1, 1999, 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, 1999, as supplemented May 17, 1999 and August 1, 1999.
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
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 SSBC Fund Management,
Inc. 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 Funds 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 shares
of each Fund for the periods indicated, assuming that dividends and capital
gains distributions, if any, were reinvested. All outstanding shares were
designated Class A shares on January 4, 1999. The return information relates to
periods prior to January 4, 1999, when there were no sales charges on the
purchase or sale of the Funds' shares. The Class A performance for past periods
has therefore been adjusted to reflect the maximum sales charge currently in
effect. The Class B shares are newly offered and have no investment history.
Performance results include any applicable fee waivers or expense subsidies in
place during the time period, which may cause the results to be more favorable
than they would otherwise have been.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
--------- -----------------
LARGE CAP GROWTH FUND
- ---------------------
<S> <C> <C>
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
- --------------------
March 2, 1998 (Commencement of Operations) to October 31, 1998 ......................... (12.51)%** $ 874.95
- ----------
**Not Annualized.
</TABLE>
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, 1998 of Class A shares
from the Fund aggregating less than $25,000 subject to the schedule of sales
charges set forth below.
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP SMALL CAP GROWTH &
GROWTH GROWTH VALUE INCOME
FUND FUND FUND FUND
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net Asset Value per share ................................................ $21.47 $16.96 $7.16 $9.19
Per Share Sales Charge - 5.00% of public offering price (5.26% of net
asset value per share) ................................................. $ 1.13 0.89 0.38 0.48
Per Share Offering Price to the Public ................................... $22.60 17.85 7.54 9.67
</TABLE>
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.
<TABLE>
<CAPTION>
BROKER/DEALER
SALES CHARGE SALES CHARGE COMMISSION
AMOUNT OF AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT OFFERING PRICE
- --------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $25,000 ................................ 5.00% 5.26% 4.50%
$25,000 to less than $50,000 ..................... 4.00% 4.17% 3.60%
$50,000 to less than $100,000 .................... 3.50% 3.63% 3.15%
$100,000 to less than $250,000 ................... 3.00% 3.09% 2.70%
$250,000 to less than $500,000 ................... 2.00% 2.04% 1.80%
$500,000 or more ................................. none* none* up to 1.00%
- ----------
*A contingent deferred sales charge may apply in certain instances. See "Sales Charge Waivers--Class A" below.
</TABLE>
CLASS B SHARES
Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a "contingent deferred sales charge" (CDSC) when you sell shares
within five years of purchase. The rate of CDSC goes down the longer you hold
your shares. The 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 are outstanding on January 4, 1999
will be able to exchange those Class A shares, and any shares acquired through
capital appreciation and the reinvestment of dividends and capital gains
distributions on those shares, into Class A shares of the other funds without
paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged for
Class B shares of certain other CitiFunds that are made available by your
Service Agent. However, you may be required to pay a CDSC when you sell those
shares. When determining the amount of the CDSC, each Fund will use the CDSC
schedule of any fund from which you have exchanged shares that would result in
you paying the highest CDSC.
You must notify your Service Agent at the time of exchange if you believe
that you qualify for share prices which do not include the sales charge or which
reflect a reduced sales charge, because the Fund shares you are exchanging were:
(a) purchased with a sales charge, (b) acquired through a previous exchange from
shares purchased with a sales charge, (c) outstanding as of January 4, 1999, or
(d) acquired through capital appreciation or the reinvestment of dividends and
capital gains distributions on those shares. Any such qualification may be
subject to confirmation, through a check of appropriate records and
documentation, of your existing share balances and any sales charges paid on
prior share purchases.
This exchange privilege may be modified or terminated at any time, and is
available only in those jurisdictions where such exchanges legally may be made.
Before making any exchange, shareholders should contact their Service Agents to
obtain more information and prospectuses of the funds to be acquired through the
exchange. An exchange is treated as a sale of the shares exchanged and could
result in taxable gain or loss to the shareholder making the exchange.
ADDITIONAL PURCHASE AND SALE INFORMATION
Each Service Agent has agreed to transmit to its customers who are
shareholders of a Fund appropriate prior written disclosure of any fees that it
may charge them directly. Each Service Agent is responsible for transmitting
promptly orders of its customers. Your Service Agent is the shareholder of
record for the shares of a Fund 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*; 47 -- 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 September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate School
of Business, University of Virginia (September 1978 to September 1993); Trustee,
The Highland Family of Funds (March 1997 to March 1998). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 47 -- President, Global Research Associates, Inc. (Investment
Research) (since August 1990); Manager, Rockefeller & Co. (March 1988 to July
1990); Trustee, Mainstay Institutional Funds (since December 1990). Her
address is P.O. Box 9572, New Haven, Connecticut.
HEATH B. MCLENDON*; 65 -- Chairman, President, and Chief Executive Officer of
SSBC Fund Management, Inc. (formerly known as Mutual Management Corp.) (since
March 1996); Managing Director of Salomon Smith Barney (since August 1993); and
Chairman, President and Chief Executive Officer of fifty-eight investment
companies sponsored by Salomon Smith Barney. His address is 388 Greenwich
Street, New York, New York.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Senior Vice President and Investment Manager, CREF Investments,
Teachers Insurance & Annuity Association (retired, January 1993); Director,
Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385 Outlook
Drive West, Mountainside, New Jersey.
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 79 -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV; 56 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE*; 47 -- 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 Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Director, Vantage Consulting Group, Inc.
(since October 1988). His address is 3500 Pacific Avenue, P.O. Box 539,
Virginia Beach, Virginia.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trusts; Managing Director, Morong Capital Management (since
February 1993); Senior Vice President and Investment Manager, CREF Investments,
Teachers Insurance & Annuity Association (retired, January 1993); Director,
Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385 Outlook
Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUSTS
PHILIP W. COOLIDGE*; 47 -- President of the Trust and the Portfolio Trusts;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
CHRISTINE A. DRAPEAU*; 28 -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc. (since January 1996); Paralegal and Compliance Officer, various financial
companies (July 1992 to January 1996).
TAMIE EBANKS-CUNNINGHAM*; 26 -- Assistant Secretary of the Trust and the
Portfolio Trusts; Office Manager, Signature Financial Group (Cayman) Ltd. (since
April 1995); Administrator, Cayman Islands Primary School (prior to April 1995).
Her address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman,
Cayman Islands, B.W.I.
JOHN R. ELDER*; 50 -- Treasurer of the Trust and the Portfolio Trusts; Vice
President, Signature Financial Group, Inc. (since April 1995); Assistant
Treasurer, CFBDS (since April 1995); Treasurer, the Phoenix Family of Mutual
Funds (Phoenix Home Life Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON*; 34 -- Secretary of the Trust and the Portfolio Trusts;
Senior Vice President, Signature Financial Group, Inc.; Secretary, CFBDS.
JAMES E. HOOLAHAN*; 52 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Senior Vice President,
Signature Financial Group, Inc.
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 August 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994).
MOLLY S. MUGLER*; 47 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
CLAIR TOMALIN*; 30 -- Assistant Secretary of the Trust and the Portfolio Trusts;
Office Manager, Signature Financial Group (Europe) Limited. Her address is 117
Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON*; 50 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Assistant Vice President, Signature Financial
Group, Inc.
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, 1998:
<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 ...................... $4,293 None None $41,500
Diana R. Harrington .................. $5,538 None None $59,000
Susan B. Kerley ...................... $5,299 None None $55,000
Heath B. McLendon (2) ................ $ 0 None None $ 0
C. Oscar Morong, Jr. ................. $6,392 None None $71,000
E. Kirby Warren ...................... $5,090 None None $49,000
William S. Woods, Jr. ................ $5,389 None None $54,000
- ------------
(1) Messrs. Coolidge, Gilley, McLendon, Morong, Warren and Woods, and Mses. Harrington and Kerley are Trustees
of 50, 34, 22, 41, 41, 27, 29 and 29 funds 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.
</TABLE>
As of February 22, 1999, 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, the fees paid to Citibank under its Management Agreement with respect
to Growth & Income Fund was $48,279. For the period from March 2, 1998
(commencement of operations) to October 31, 1998, the fees paid to Citibank
under a prior management agreement with Growth & Income Portfolio, the Portfolio
in which the Growth & Income Fund previously invested, was $246,222.
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
SSBC Fund Management, Inc. (SSBC), an affiliate of Citibank and an indirect
wholly-owned subsidiary of Citigroup Inc. SSBC's compensation is payable by
Large Cap Value Portfolio from the assets of the Portfolio. Large Cap Value
Portfolio pays SSBC 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 SSBC:
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.
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, the fees payable to CFBDS under the current Distribution
Agreement with respect to Class A shares of Growth & Income Fund were $120,697.
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, the Growth & Income
Portfolio, the Portfolio in which the Growth & Income Fund previously invested,
paid brokerage commissions in the amount of $187,468.
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. CERTAIN BANK REGULATORY MATTERS
The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies, such as
the Funds. Citibank believes that its services under the Management Agreements
and the activities performed by it or its affiliates as Service Agents are not
underwriting and are consistent with the Glass-Steagall Act and other relevant
federal and state laws. However, there is no controlling precedent regarding the
performance of the combination of investment advisory, shareholder servicing and
administrative activities by banks. State laws on this issue may differ from
applicable federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws. Changes in either federal
or state statutes or regulations, or in their interpretations, could prevent
Citibank or its affiliates from continuing to perform these services. If
Citibank or its affiliates were to be prevented from acting as the Manager or a
Service Agent, the Funds would seek alternative means for obtaining these
services. The Funds do not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
13. FINANCIAL STATEMENTS
The audited financial statements of the Large Cap Growth Fund (Statement of
Assets and Liabilities at October 31, 1998, Statement of Operations for the year
ended October 31, 1998, Statement of Changes in Net Assets for the year ended
December 31, 1996, for the ten months ended October 31, 1997 and for the year
ended October 31, 1998, Financial Highlights for each of the years in the
five-year period ended December 31, 1996, for the ten months ended October 31,
1997 and for the year ended October 31, 1998, Notes to Financial Statements and
Independent Auditors' Report), each of which is included in the Annual Report to
Shareholders of the Large Cap Growth Fund, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance upon the reports of PricewaterhouseCoopers LLP, independent
accountants, on behalf of the Fund.
The audited financial statements of the Large Cap Growth Portfolio
(Portfolio of Investments at October 31, 1998, Statement of Assets and
Liabilities at October 31, 1998, Statement of Operations for the year ended
October 31, 1998, Statement of Changes in Net Assets for the year ended December
31, 1996, for the ten months ended October 31, 1997 and for the year ended
October 31, 1998, Financial Highlights for the period May 1, 1994 (commencement
of operations) to December 31, 1994, the fiscal years ended December 31, 1995
and 1996, for the ten months ended October 31, 1997 and for the year ended
October 31, 1998, Notes to Financial Statements and Independent Auditors'
Report), each of which is included in the Annual Report to Shareholders of the
Large Cap Growth Fund, are incorporated by reference into this Statement of
Additional Information and have been so incorporated in reliance upon the
reports of PricewaterhouseCoopers LLP, chartered accountants, on behalf of the
Portfolio.
The audited financial statements of the Small Cap Growth Fund (Statement of
Assets and Liabilities at October 31, 1998, Statement of Operations for the year
ended October 31, 1998, Statement of Changes in Net Assets for the year ended
December 31, 1996, for the ten months ended October 31, 1997 and for the year
ended October 31, 1998, Financial Highlights for the period June 21, 1995
(commencement of operations) to December 31, 1995, the year ended December 31,
1996, for the ten months ended October 31, 1997 and for the year ended October
31, 1998, Notes to Financial Statements and Independent Auditors' Report), each
of which is included in the Annual Report to Shareholders of the Small Cap
Growth Fund, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, independent accountants, on behalf of the Fund.
The audited financial statements of the Small Cap Growth Portfolio
(Portfolio of Investments at October 31, 1998, Statement of Assets and
Liabilities at October 31, 1998, Statement of Operations for the year ended
October 31, 1998, Statement of Changes in Net Assets for the year ended December
31, 1996, for the ten months ended October 31, 1997 and for the year ended
October 31, 1998, Financial Highlights for the period June 21, 1995
(commencement of operations) to December 31, 1995, the fiscal year ended
December 31, 1996, for the ten months ended October 31, 1997 and for the year
ended October 31, 1998, Notes to Financial Statements and Independent Auditors'
Report), each of which is included in the Annual Report to Shareholders of the
Small Cap Growth Fund, are incorporated by reference into this Statement of
Additional Information and have been so incorporated in reliance upon the
reports of PricewaterhouseCoopers LLP, chartered accountants, on behalf of the
Portfolio.
The audited financial statements of the Small Cap Value Fund (Statement of
Assets and Liabilities at October 31, 1998, Statement of Operations for the
period March 2, 1998 (commencement of operations) to October 31, 1998, Statement
of Changes in Net Assets for the period March 2, 1998 (commencement of
operations) to October 31, 1998, Financial Highlights for the period March 2,
1998 (commencement of operations) to October 31, 1998, Notes to Financial
Statements and Independent Auditors' Report), each of which is included in the
Annual Report to Shareholders of the Small Cap Value Fund, are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the reports of PricewaterhouseCoopers LLP,
independent accountants, on behalf of the Fund.
The audited financial statements of the Small Cap Value Portfolio (Portfolio
of Investments at October 31, 1998, Statement of Assets and Liabilities at
October 31, 1998, Statement of Operations for the period November 1, 1997
(commencement of operations) to October 31, 1998, Statement of Changes in Net
Assets for the period November 1, 1997 (commencement of operations) to October
31, 1998, Financial Highlights for the period November 1, 1997 (commencement of
operations) to October 31, 1998, Notes to Financial Statements and Independent
Auditors' Report), each of which is included in the Annual Report to
Shareholders of the Small Cap Value Fund, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance upon the reports of PricewaterhouseCoopers LLP, chartered accountants,
on behalf of the Portfolio.
The audited financial statements of the Growth & Income Fund (Statement of
Assets and Liabilities at October 31, 1998, Statement of Operations for the
period March 2, 1998 (commencement of operations) to October 31, 1998, Statement
of Changes in Net Assets for the period March 2, 1998 (commencement of
operations) to October 31, 1998, Financial Highlights for the period March 2,
1998 (commencement of operations) to October 31, 1998, Notes to Financial
Statements and Independent Auditors' Report), each of which is included in the
Annual Report to Shareholders of the Growth & Income Fund, are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the reports of PricewaterhouseCoopers LLP,
independent accountants, on behalf of the Fund.
The audited financial statements of the Growth & Income Portfolio, the
Portfolio in which the Growth & Income Fund previously invested (Portfolio of
Investments at October 31, 1998, Statement of Assets and Liabilities at October
31, 1998, Statement of Operations for the period March 2, 1998 (commencement of
operations) to October 31, 1998, Statement of Changes in Net Assets for the
period March 2, 1998 (commencement of operations) to October 31, 1998, Financial
Highlights for the period March 2, 1998 (commencement of operations) to October
31, 1998, Notes to Financial Statements and Independent Auditors' Report), each
of which is included in the Annual Report to Shareholders of the Growth & Income
Fund, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, chartered accountants, on behalf of the Portfolio.
Copies of the Annual Report for each Fund accompany this Statement of
Additional Information.
<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
