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Filing made under Rule 497(e)
File Nos. 2-90519 and 811-4007
Statement of
Additional Information
September 11, 2000
CITIFUNDS(SM) SMALL CAP VALUE PORTFOLIO
CITIFUNDS(SM) GROWTH & INCOME PORTFOLIO
(Members of the CitiFunds(SM) Family of Funds)
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 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 Asset Allocation Portfolios is Elizabethan Square,
George Town, Grand Cayman, British West Indies. Large Cap Value Portfolio and
Small Cap Value Portfolio are referred to as the "Portfolios." Asset
Allocation Portfolios are referred to as the "Portfolio Trust."
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
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1. The Trust ............................................................ 2
2. Investment Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 3
4. Investment Restrictions .............................................. 23
5. Performance Information and Advertising .............................. 24
6. Determination of Net Asset Value; Valuation of Securities ............ 27
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs ................................................. 28
8. Management ........................................................... 35
9. Portfolio Transactions ............................................... 42
10. Description of Shares, Voting Rights and Liabilities ................. 43
11. Tax Matters .......................................................... 44
12. Financial Statements ................................................. 46
This Statement of Additional Information sets forth information which may be
of interest to investors but which is not necessarily included in the Funds'
separate Prospectuses, dated March 1, 2000 as supplemented from time to time, 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.
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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 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. References in this Statement
of Additional Information to the "Prospectus" of a Fund are to the applicable
Fund's Prospectus, dated March 1, 2000.
Each Fund is a diversified fund. Each Fund is permitted to seek its
investment objective by investing all or a portion of its assets in one or
more investment companies to the extent not prohibited by the Investment
Company Act of 1940, as amended (the "1940 Act"), the rules and regulations
thereunder, and exemptive orders granted under such Act. Currently, each of
the Growth & Income Fund and the Small Cap Value Fund invests its assets in
Large Cap Value Portfolio and Small Cap Value Portfolio, respectively. 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.
Small Cap Value Portfolio has the same investment objective and policies as
Small Cap Value Fund. 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 Trust, except as
otherwise noted.
Citibank, N.A. ("Citibank" or the "Manager") is the Manager of each Fund
and each Portfolio. Citibank manages the investments of the Portfolios from
day to day in accordance with each Portfolio's investment objective and
policies. The selection of investments for the Portfolios and the way they are
managed depend on the conditions and trends in the economy and the financial
marketplaces. Citibank has delegated the daily management of the Large Cap
Value Portfolio to SSB Citi Fund Management LLC (formerly, SSBC Fund
Management Inc.), an affiliate of Citibank and an indirect wholly-owned
subsidiary of Citigroup Inc. Citibank has delegated the daily management of
those assets of the Small Cap Value Portfolio which are not managed by
Citibank to Franklin Advisory Services LLC, a wholly owned subsidiary of
Franklin Resources, Inc, a publicly owned holding company whose shares are
listed on the New York Stock Exchange. Each of SSB Citi Fund Management LLC
and Franklin Advisory Services LLC is referred to herein as a "Subadviser."
The Boards of Trustees of the Trust and the Portfolio Trust 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 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. 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 all of the investments and utilize all
of the investment techniques described below and in the Fund's Prospectus. 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
Managers' 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
portfolio managers believe that there may be a decline in the prices of the
securities covered by the index. The Fund will realize a gain if the put
option appreciates in excess of the premium paid for the option. If the option
does not increase in value, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs.
A Fund may purchase call options on securities 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 portfolio managers
desire that a Fund engage in such a transaction.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether a Fund
realizes a gain or loss from purchasing or writing options on an index depends
upon movements in the level of prices in the market generally or, in the case
of certain 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 portfolio managers' ability to
predict correctly movements in the direction of the market generally or of a
particular industry. This ability contemplates different skills and techniques
from those used in predicting changes in the price of individual securities.
When a Fund purchases or writes securities index options as a hedging
technique, the Fund's success will depend upon the extent to which price
movements in the portion of a securities portfolio being hedged correlate with
price movements of the securities index selected.
A Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause
losses, which, in the case of call options written, are potentially unlimited.
The Funds may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call
option writer, for example, is obligated to deliver the underlying stock to
the clearing organization if the option is exercised, and the clearing
organization is then obligated to pay the writer the exercise price of the
option. If a Fund were to purchase a dealer option, however, it would rely on
the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the
Fund, the Fund would lose the premium it paid for the option and the expected
benefit of the transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, a Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when a Fund writes a dealer option, it generally
will be able to close out the option prior to the expiration only by entering
into a closing purchase transaction with the dealer to which the Fund
originally sold the option. Although the Funds will seek to enter into dealer
options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Funds, there can be no
assurance that a Fund will be able to liquidate a dealer option at a favorable
price at any time prior to expiration. The inability to enter into a closing
transaction may result in material losses to a Fund. Until a Fund, as an OTC
call option writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used to cover the
written option until the option expires or is exercised. This requirement may
impair a Fund's ability to sell portfolio securities or, with respect to
currency options, currencies at a time when such sale might be advantageous.
In the event of insolvency of the other party, the Fund may be unable to
liquidate a dealer option.
The Growth & Income 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 portfolio managers anticipate that interest rates are about
to rise, depressing future prices of bonds, the Funds 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 foreign 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
portfolio managers' investment judgment about the general direction of
interest rates, equity markets, or other economic factors is incorrect, the
Fund's overall performance may be poorer than if any such contract had not
been entered into. For example, if 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 portfolio managers believe that the
underlying futures contract will rise. If prices do rise, the Fund could
exercise the option and acquire the underlying futures contract at the strike
price or the Fund could offset the long call position with a sale and realize
a profit. Or, a Fund can sell a call option if the portfolio managers believe
that futures prices will decline. If prices decline, the call will likely not
be exercised and the Fund would profit. However, if the underlying futures
contract should rise, the buyer of the option would likely exercise the call
against the Fund and acquire the underlying futures position at the strike
price; the Fund's loss in this case could be unlimited.
The Funds' use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be
out of proportion to the amount invested in the instrument -- a relatively
small investment may lead to much greater losses.
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
(frequently overnight and usually not more than seven days) 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 by the Fund. In the event
of the bankruptcy of the other party to a reverse repurchase agreement, a Fund
could experience delays in recovering the securities sold. To the extent that,
in the meantime, the value of the securities sold has increased, the Fund
could experience a loss.
SECURITIES OF NON-U.S. ISSUERS
The Growth & Income Fund may invest in securities of non-U.S. issuers.
Investing in securities issued by foreign governments or 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 the 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 the Fund's assets may be released
prior to receipt of payments, may expose the Fund to increased risk in the
event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, 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 Growth & Income Fund may invest in securities of non-U.S. issuers that
impose restrictions on transfer within the U.S. or to U.S. persons. Although
securities subject to such transfer restrictions may be marketable abroad,
they may be less liquid than securities of non-U.S. issuers of the same class
that are not subject to such restrictions.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased to the extent that the 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 the 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.
EURO CONVERSION
The Growth & Income Fund may invest in securities of issuers in European
countries. Certain European countries have joined the European Economic and
Monetary Union (EMU). Each EMU participant's currency began a conversion into a
single European currency, called the euro, on January 1, 1999, to be completed
by July 1, 2002. The consequences of the euro conversion for foreign exchange
rates, interest rates and the value of European securities held by the Fund are
presently unclear. European financial markets, and therefore, the Fund, could be
adversely affected if the euro conversion does not continue as planned or if a
participating country chooses to withdraw from the EMU. The Fund could also be
adversely affected if the computing, accounting and trading systems used by its
service providers are not capable of processing transactions related to the
euro. These issues may negatively affect the operations of the companies in
which the Fund invests as well.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Growth & Income Fund may buy and sell securities denominated
in currencies other than the U.S. dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. dollar, the Fund may 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 Fund 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 Fund may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
currency exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a currency at one rate, while offering a lesser rate of exchange should
the 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. The 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.
When the 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 portfolio managers believe that the currency of a particular
country may suffer a substantial decline against the U.S. dollar, the Fund may
enter into a forward contract to sell the non-U.S. currency, for a fixed
amount of U.S. dollars. If the Fund owns securities in that currency, the
portfolio managers 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, the 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 the 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 the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the non-U.S. currency. Should forward prices decline during the period
between the date the Fund enters into a forward contract for the sale of the
non-U.S. currency and the date it enters into an offsetting contract for the
purchase of such currency, the Fund will realize a gain to the extent the
selling price of the currency exceeds the purchase price of the currency.
Should forward prices increase, the Fund will suffer a loss to the extent that
the purchase price of the currency exceeds the selling price of the currency.
Where the 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 the Fund's securities at the expiration of
a forward contract. Accordingly, it may be necessary for the 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 the 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, the 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, the 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.
The Growth & Income Fund has established procedures consistent with
policies of the SEC concerning forward contracts. Those policies currently
require that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment or
that the Fund otherwise covers its position in accordance with applicable
regulations and policies.
The Fund may purchase put options on a currency in an attempt to protect
against currency rate fluctuations or to seek to enhance gains. When the 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.
The 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 Fund may write options on currencies for hedging purposes or otherwise
in an attempt to achieve their investment objectives. For example, where the
Fund anticipates a decline in the value of the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund 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. The 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, the 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, the 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. The 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 the 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 the 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 Fund 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 Fund 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
Fund.
Put and call options on non-U.S. currencies written by the 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 Fund may engage in proxy hedges and cross hedges. For example, in a
proxy hedge, the 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. The 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. The Fund may employ
any of the above described foreign currency hedging techniques to protect the
value of its assets invested in depositary receipts.
Of course, the Fund is not required to enter into the transactions
described above and does not do so unless deemed appropriate by the portfolio
managers. It should be realized that under certain circumstances, the Funds
may not be able to hedge against a decline in the value of a currency, even if
the portfolio managers deem it appropriate to try to do so, because doing so
would be too costly. Transactions entered into to protect the value of the
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 the 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 the Fund's other assets. Although the 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 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.
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). 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 portfolio managers to be of good standing, and when, in the
judgment of the portfolio managers, 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 portfolio managers will make loans only when, in the judgment of
the portfolio managers, the consideration which can be earned currently from
loans of this type justifies the attendant risk. If the portfolio managers
determine 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, neither 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 Growth & Income Fund, Eurodollar
time deposits) and bankers' acceptances and other short-term debt obligations
issued by domestic banks, foreign subsidiaries or foreign branches of domestic
banks, domestic and foreign branches of foreign banks, domestic savings and
loan associations and other banking institutions. A bankers' acceptance is a
bill of exchange or time draft drawn on and accepted by a commercial bank. It
is used by corporations to finance the shipment and storage of goods and to
furnish dollar exchange. Maturities are generally six months or less. A
certificate of deposit is a negotiable interest-bearing instrument with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. A time deposit is a non-
negotiable receipt issued by a bank in exchange for the deposit of funds. Like
a certificate of 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. The Growth &
Income 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. Some
mortgage-backed securities represent interests in pools of mortgage loans.
Interests in pools of mortgage-related securities differ from other forms of
debt securities which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. The market value and
interest yield of these instruments can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities 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.
Mortgage-backed securities may also be issued by private issuers such as
commercial banks, savings and loans, mortgage bankers and private mortgage
insurance companies. These obligations are not backed by any governmental
authority or agency.
The 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. If the issuer defaults on its obligation, the value of the
security would fall and the Fund's income would also decline.
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 portfolio managers 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 portfolio managers' 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 portfolio managers are incorrect in their 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 portfolio managers deem the counterparty to be
creditworthy. If the counterparty's creditworthiness declined, the value of
the swap agreement would be likely to decline, potentially resulting in
losses. If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to receive. 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 it 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 Trust, 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, annualized, cumulative and average
annual "total rates of return". The "total rate of return" refers to the
change in the value of an investment in the Fund over a stated period,
reflects any change in net asset value per share and is compounded to include
the value of any shares purchased with any dividends or capital gains declared
during such period. Period total rates of return may be "annualized". An
"annualized" total rate of return assumes that the period rate of return is
generated over a one-year period. Average annual total return figures
represent the average annual percentage change over the specified period.
Cumulative total return figures are not annualized and represent the aggregate
percentage or dollar-value changes over a stated period of time.
A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day
of the period and the net asset value per share on the last day of the period
of shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such
period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
Average annual total return is a measure of a Fund's performance over
time. It is determined by taking a Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of the investment at the end of the period.
The redeemable value is then divided by the initial investment, and its
quotient is taken to the Nth root (N representing the number of years in the
period) and is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
distributions have been reinvested in Fund shares at net asset value on the
reinvestment dates during the period.
Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of a
period, deducting (as applicable) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by each Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Average annual and cumulative total returns may also be presented in
advertising and sales literature without the inclusion of sales charges. Total
return calculations that do not include the effect of the sales charge would
be reduced if such charge were included.
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.
In computing total rates of return and yield quotations, all Fund expenses
are included. However, fees that may be charged directly to a shareholder by
that shareholder's broker dealer, Service Agent or other financial
intermediaries are not included. Of course, any such fees will reduce the
shareholder's net return on investment.
Set forth below is the average annual total rate of return information for
the shares of each Fund for the periods indicated, assuming that dividends and
capital gains distributions, if any, were reinvested. All outstanding shares
were designated Class A shares on January 4, 1999. Prior to January 4, 1999
there were no sales charges on the purchase or sale of the Funds' shares. The
Class A performance for past periods has therefore been adjusted to reflect
the maximum sales charge currently in effect. The Fund offered Class B shares
beginning January 4, 1999. For periods prior to that date, Class B share
performance includes the performance of the Fund's Class A shares, adjusted to
take into account the deduction of the Class B contingent deferred sales
charge, which declines over six years from 5% to 0%, rather than the initial
sales charge applicable to Class A shares. This blended performance has been
adjusted to take into account differences in class specific operating
expenses.
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
---------- -----------------
SMALL CAP VALUE FUND
--------------------
CLASS A
<S> <C> <C>
March 2, 1998 (Commencement of Operations) to October 31, 1999 ......................... (22.73)% $ 650.75
One Year Ended October 31, 1999 ........................................................ (9.11)% $ 908.87
CLASS B
January 4, 1999 (Commencement of Operations) to October 31, 1999 ....................... (13.51)% $ 864.91
One Year Ended October 31, 1999 ........................................................ (10.84)% $ 891.59
GROWTH & INCOME FUND
--------------------
CLASS A
March 2, 1998 (Commencement of Operations) to October 31, 1999 ......................... 0.18% $1,002.95
One Year Ended October 31, 1999 ........................................................ 8.90% $1,089.02
CLASS B
January 4, 1999 (Commencement of Operations) to October 31, 1999 ....................... 0.75% $1,007.49
One Year Ended October 31, 1999 ........................................................ 7.78% $1,077.88
</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 may not reflect 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 each Fund. The example assumes a purchase on October 31, 1999 of
Class A shares from a Fund aggregating less than $25,000 subject to the
schedule of sales charges set forth below.
<TABLE>
<CAPTION>
SMALL CAP GROWTH &
VALUE INCOME
FUND FUND
--------- ---------
<S> <C> <C>
Net Asset Value per share .............................................................. $6.85 $10.44
Per Share Sales Charge - 5.00% of public offering price (5.26% of net asset value per
share) ............................................................................... 0.36 0.55
Per Share Offering Price to the Public ................................................. 7.21 10.99
</TABLE>
A 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 applicable CDSC.
ADDITIONAL DEALER CONCESSIONS
From time to time, the Funds' Distributor or Citibank, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers that sell or arrange for the sale of shares of the
Funds. Such concessions provided by the Funds' Distributor or Citibank may
include financial assistance to dealers in connection with pre-approved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding the Funds, and/or other dealer-sponsored events. From time
to time, the Funds' Distributor or Citibank may make expense reimbursements
for special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
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 or retired 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)
[] 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
(qualified plans investing through certain programs sponsored by
Citibank or its affiliates are not subject to this minimum).
[] 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 the Transfer Agent or, if you
hold your shares through a Service Agent, 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 front-end
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 holds Fund shares through 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.
[] Class B shares included in the shares covered by the Letter of Intent
will continue to be subject to the applicable CDSC.
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 the Transfer Agent or, if you hold your shares through a Service
Agent, 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, you must notify the Transfer Agent, or, if you hold
your shares through a Service Agent, your Service Agent 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, or may be acquired through an exchange of shares of
the same class of those funds. Class A shares also may be exchanged for shares
of certain CitiFunds that offer only a single class of shares, unless the
Class A shares are subject to a contingent deferred sales charge. Class B
shares may not be exchanged for shares of CitiFunds that offer only a single
class of shares.
No initial sales charge is imposed on shares being acquired through an
exchange unless Class A shares are being acquired and the sales charge for
Class A of the fund being exchanged into is greater than the current sales
charge of the Fund (in which case an initial sales charge will be imposed at a
rate equal to the difference). Investors whose shares were outstanding on
January 4, 1999 are able to exchange those Class A shares, and any shares
acquired through capital appreciation and the reinvestment of dividends and
capital gains distributions on those shares, into Class A shares of the other
funds without paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged for
Class B shares of certain other CitiFunds. 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 the Transfer Agent or, if you hold your shares through a
Service Agent, 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 the Transfer
Agent or, if they hold their shares through Service Agents, 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. If you hold your shares through
a Service Agent, your Service Agent is the shareholder of record for the
shares of a Fund you own.
Investors may be able to invest in the Funds under one of several tax-
sheltered plans. Such plans include IRAs, Keogh or Corporate Profit-Sharing
and Money-Purchase Plans, 403(b) Custodian Accounts, and certain other
qualified pension and profit-sharing plans. 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 hold
shares through 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. In each case, a majority of the Trustees are not affiliated with
Citibank.
The Trustees and officers of the Trust and the Portfolio Trust, 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 Trust. Unless otherwise indicated
below, the address of each Trustee and officer is 21 Milk Street, Boston,
Massachusetts. The address of the Portfolio Trust is Elizabethan Square,
George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE*; 48 -- President of the Trust and the Portfolio Trust;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS, Inc.
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).
DIANA R. HARRINGTON; 58 -- Professor, Babson College (since 1994); Trustee,
The Highland Family of Funds (March 1997 to March 1998).
SUSAN B. KERLEY; 48 -- President, Global Research Associates, Inc. (Investment
Research) (since September 1990); Trustee, Mainstay Institutional Funds (since
December 1990).
HEATH B. MCLENDON*; 66 -- Chairman, President, and Chief Executive Officer of
SSB Citi Fund Management LLC (formerly known as SSBC Fund Management Inc.)
(since March 1996); Managing Director of Salomon Smith Barney (since August
1993); and Chairman, President and Chief Executive Officer of fifty-eight
investment companies sponsored by Salomon Smith Barney. His address is 388
Greenwich Street, New York, New York.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trust; Managing Director, Morong Capital Management (since
February 1993); Director, Indonesia Fund (since 1990); Trustee, MAS Funds
(since 1993).
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987).
TRUSTEES OF THE PORTFOLIO TRUST
ELLIOTT J. BERV; 56 -- President and Chief Executive Officer, Catalyst, Inc.
(Management Consultants) (since June 1992); President and Director, Elliott J.
Berv & Associates (Management Consultants) (since May 1984).
PHILIP W. COOLIDGE*; 48 -- President of the Trust and the Portfolio Trust;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS, Inc.
MARK T. FINN; 56 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and part Owner, FX 500 Ltd. (Commodity Trading
Advisory Firm) (April 1990 to February 1996); General Partner and Shareholder,
Greenwich Ventures LLC (Investment Partnership) (since January 1996);
President, Secretary and Owner, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Chairman and Owner, Vantage Consulting
Group, Inc. (since October 1988).
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust and
the Portfolio Trust; Managing Director, Morong Capital Management (since
February 1993); Director, Indonesia Fund (since 1990); Trustee, MAS Funds
(since 1993).
WALTER E. ROBB, III; 73 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors) (since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985).
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987).
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
HEATH B. McLENDON*; 66 -- President of the Trust; Chairman, President, and Chief
Executive Officer of SSB Citi (since March 1996); Managing Director of Salomon
Smith Barney (since August 1993); President of Travelers Investment Adviser,
Inc. ("TIA"); Chairman or Co-Chairman of the Board of seventy-one investment
companies associated with Salomon Smith Barney. His address is 7 World Trade
Center, New York, New York 10048.
LEWIS E. DAIDONE*; 42 -- Senior Vice President and Treasurer of the Trust;
Managing Director of Salomon Smith Barney; Chief Financial Officer of the Smith
Barney mutual funds; Treasurer and Senior Vice President or Executive Vice
President of sixty-one investment companies associated with Citigroup; Director
and Senior Vice President of SSB Citi and TIA. His address is 125 Broad Street,
New York, New York 10004.
IRVING DAVID*; 39 -- Controller of the Trust; Director of Salomon Smith Barney;
formerly Assistant Treasurer of First Investment Management Company. Controller
or Assistant Treasurer of fifty-three investment companies associated with
Citigroup. His address is 125 Broad Street, New York, New York 10004.
FRANCES GUGGINO*; 42 - Assistant Controller of the Trust; Vice President of
Citibank, N.A. since February, 1991.
PAUL BROOK*; 46 - Assistant Controller of the Trust; Director of Salomon Smith
Barney; Controller or Assistant Treasurer of forty-three investment companies
associated with Citigroup; from 1997-1998 Managing Director of AMT Capital
Services Inc.; prior to 1997 Partner with Ernst & Young LLP. His address is 125
Broad Street, New York, New York 10004.
ANTHONY PACE*; 35 -- Assistant Treasurer of the Trust. Mr. Pace is Vice
President - Mutual Fund Administration for Salomon Smith Barney Inc. Since 1986,
when he joined the company as a Fund Accountant, Mr. Pace has been responsible
for accounts payable, financial reporting and performance of mutual funds and
other investment products.
MARIANNE MOTLEY*; 41 -- Assistant Treasurer of the Trust. Ms. Motley is Director
- Mutual Fund Administration for Salomon Smith Barney Inc. Since 1994, when she
joined the company as a Vice President, Ms. Motley has been responsible for
accounts payable, financial reporting and performance of mutual funds and other
investment products.
ROBERT I. FRENKEL, ESQ.*;e 45 -- Secretary of the Trust Mr. Frenkel is a
Managing Director and General Counsel - Global Mutual Funds for SSB Citi Asset
Management Group. Since 1994, when he joined Citibank as a Vice President and
Division Counsel, he has been responsible for legal affairs relating to mutual
funds and other investment products.
THOMAS C. MANDIA, ESQ.*; 38 -- Assistant Secretary of the Trust. Mr. Mandia
is a Vice President and Associate General Counsel for SSB Citi Asset
Management Group. Since 1992, he has been responsible for legal affairs
relating to mutual funds and other investment products.
ROSEMARY D. EMMENS, ESQ.*; 30 -- Assistant Secretary of the Trust. Ms. Emmens
has been a Vice President and Associate General Counsel of SSB Citi Asset
Management Group since 1998, where she has been responsible for legal affairs
relating to mutual funds and other investment products. Before joining
Citibank, Ms. Emmens was Counsel at The Dreyfus Corporation since 1995.
HARRIS GOLDBLAT, ESQ.*; 30 -- Assistant Secretary of the Trust. Associate
General Counsel at SSB Citi Asset Management Group since April 2000. From June
1997 to March 2000, he was an associate at the law firm of Stroock & Stroock &
Lavan LLP, New York City, and from September 1996 to May 1997, he was an
associate at the law firm of Sills Cummis Radin Tischman Epstein & Gross,
Newark, NJ. From August 1995 to September 1996, Mr. Goldblat served as a law
clerk to the Honorable James M. Havey, P.J.A.D., in New Jersey.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which Salomon Smith Barney or its affiliates serve as
the distributor or administrator.
The following table shows Trustee compensation for the fiscal year ended
October 31, 1999:
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM TRUST AND
AGGREGATE BENEFITS BENEFITS FUND COMPLEX
COMPENSATION ACCRUED AS PART UPON PAID TO
TRUSTEE FROM REGISTRANT OF FUND EXPENSES RETIREMENT TRUSTEES(1)
------- --------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Philip W. Coolidge ................... $ 0 None None $ 0
Riley C. Gilley ...................... $5,485 None None $65,250
Diana R. Harrington .................. $7,013 None None $71,250
Susan B. Kerley ...................... $6,930 None None $69,750
Heath B. McLendon (2) ................ $ 0 None None $ 0
C. Oscar Morong, Jr. ................. $8,148 None None $92,000
E. Kirby Warren ...................... $6,226 None None $62,750
William S. Woods, Jr. (3) ............ $8,123 None None $66,000
------------
(1) Messrs. Coolidge, Gilley, McLendon, Morong and Warren, and Mses. Harrington and Kerley are Trustees of 48,
35, 23, 39, 39, 30 and 30 funds and portfolios, respectively, in the family of open-end registered
investment companies advised or managed by Citibank.
(2) Mr. McLendon was appointed as Trustee in February, 1999.
(3) Effective December 31, 1999, Mr. Woods became a Trustee Emeritus of the Trust. Per the terms of the Trust's
Trustee Emeritus Plan, Mr. Woods serves the Board of Trustees in an advisory capacity. As a Trustee
Emeritus, Mr. Woods is paid 50% of the annual retainer fee and meeting fees otherwise applicable to
Trustees, together with reasonable out-of-pocket expenses for each meeting attended.
</TABLE>
As of February 25, 2000, all Trustees and officers as a group owned less
than 1% of the outstanding shares of each Fund. As of the same date, more than
95% of the outstanding shares of each Fund were held of record by Citibank, N.A.
or its affiliates as Service Agents of the Fund for the accounts of their
respective clients.
The Declaration of each of the Trust and the Portfolio Trust 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.
CODE OF ETHICS
The Trust, the Portfolio Trust, the Adviser and the Distributor each have
adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act. Each code
of ethics permits personnel subject to such code to invest in securities,
including securities that may be purchased or held by the Fund. However, the
codes of ethics contain provisions and requirements designed to identify and
address certain conflicts of interest between personal investment activities and
the interests of the Fund. Of course, there can be no assurance that the codes
of ethics will be effective in identifying and addressing all conflicts of
interest relating to personal securities transactions.
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 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 Trust 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 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 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 Trust are or may be or
may become interested in Citibank, as directors, officers, employees, or
otherwise and directors, officers and employees of Citibank are or may become
similarly interested in the Trust and the Portfolio Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by a Portfolio Trust or
the Trust, as the case may be, when authorized either by a vote of a majority
of the outstanding voting securities of the applicable Portfolio or Fund or by
a vote of a majority of the Board of Trustees of a Portfolio Trust or the
Trust, or by Citibank on not more than 60 days' nor less than 30 days' written
notice, and will automatically terminate in the event of its assignment. The
Management Agreement with each Portfolio Trust provides that neither Citibank
nor its personnel shall be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in
the execution of security transactions for the applicable Portfolio, except
for willful misfeasance, bad faith or gross negligence or reckless disregard
of its or their obligations and duties under the Management Agreement with
such Portfolio Trust. The Management Agreement with the Trust provides that
neither Citibank nor its personnel shall be liable for any error of judgment
or mistake of law or for any omission in the administration or management of
the Trust or the performance of its duties under the Management Agreement,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Management
Agreement with the Trust.
The Prospectus 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 period from March 2, 1998 (commencement of operations) to October
31, 1998 and for the fiscal year ended October 31, 1999, the fees paid to
Citibank under its Management Agreement with respect to Small Cap Value Fund
were $4,129 and $64,246, respectively. For the period from November 1, 1997 to
October 31, 1998 and for the fiscal year ended October 31, 1999, the fees paid
to Citibank under its Management Agreement with respect to Small Cap Value
Portfolio were $396,874 and $264,279, respectively.
For the period from March 2, 1998 (commencement of operations) to October
31, 1998, and for the fiscal year ended October 31, 1999, the fees paid to
Citibank under its Management Agreement with respect to Growth & Income Fund
were $48,279 and $60,395 (of which $22,833 was voluntarily waived),
respectively. For the period from March 2, 1998 (commencement of operations)
to October 31, 1998, and for the period from November 1, 1998 to July 31,
1999, the fees paid to Citibank under a prior management agreement with Growth
& Income Portfolio, the Portfolio in which the Growth & Income Fund previously
invested, were $246,222 and $268,817 (of which $49,884 was waived),
respectively. For the period from August 1, 1999 to October 31, 1999, the fees
paid to Citibank under the Management Agreement with respect to Large Cap
Value Portfolio, the Portfolio in which the Growth & Income Fund currently
invests, were $380,698.
Pursuant to separate sub-administrative services agreements with Citibank,
CFBDS and SFG perform such sub-administrative duties for the Trust and the
Portfolio Trust, 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 Trust, 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 and for the fiscal year ended October 31, 1999,
the fees paid to the Subadviser with respect to the Small Cap Value Portfolio
were $1,091,403 and $726,766, respectively.
Large Cap Value Portfolio has entered into a Submanagement Agreement with
SSB Citi Fund Management LLC ("SSB Citi"), an affiliate of Citibank and an
indirect wholly-owned subsidiary of Citigroup Inc. SSB Citi's compensation is
payable by Large Cap Value Portfolio from the assets of the Portfolio. Large
Cap Value Portfolio pays SSB Citi the following fees, which are accrued daily
and payable monthly and are at the annual rates equal to the percentages
specified below of the aggregate assets of the Portfolio allocated to SSB
Citi:
0.65% on the first $10 million;
0.50% on the next $10 million;
0.40% on the next $10 million; and
0.30% on remaining assets.
For the period from January 22, 1999 to October 31, 1999, the fees paid to
SSB Citi with respect to the Large Cap Value Portfolio were $420,678. For the
period from November 1, 1998 to January 21, 1999, the fees paid to Miller
Anderson & Sherrerd LLP with respect to Large Cap Value Portfolio were
$116,277.
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.
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 period from
March 2, 1998 (commencement of operations) to October 31, 1998 and for the
fiscal year ended October 31, 1999, the fees payable to CFBDS under the
current Distribution Agreement with respect to Class A shares of Small Cap
Value Fund were $72,642 and $64,060, respectively. For the period from January
4, 1999 to October 31, 1999, the fees payable to CFBDS under the current
Distribution Agreement with respect to Class B shares of Small Cap Value Fund
were $744. For the period from March 2, 1998 (commencement of operations) to
October 31, 1998, and for the fiscal year ended October 31, 1999, the fees
payable to CFBDS under the current Distribution Agreement with respect to
Class A shares of Growth & Income Fund were $120,697 and $149,839,
respectively. For the period from January 4, 1999 to October 31, 1999, the
fees payable to CFBDS under the current Distribution Agreement with repsect to
Class B shares of Growth & Income Fund were $4,595.
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. The Distributor may make payments for distribution and/
or shareholder servicing activities out of its past profits and other
available sources. The Distributor may also make payments for marketing,
promotional or related expenses to dealers. The amount of these payments are
determined by the Distributor and may vary. Citibank may make similar payments
under similar arrangements.
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
Citi Fiduciary Trust Company ("Citi Fiduciary") pursuant to which Citi Fiduciary
acts as transfer agent for each Fund.
Under the Transfer Agency and Service Agreement, Citi Fiduciary maintains
the shareholder account records for the funds, handles certain communications
between shareholders and the Funds and distributes dividends and distributions
payable by the funds. For these services, Citi Fiduciary receives a monthly fee
computed on the basis of the number of shareholder accounts it maintains for a
Fund during the month and is reimbursed for out-of-pocket expenses. The
principal business address of Citi Fiduciary is 388 Greenwich Street, New York,
New York 10013.
PFPC Global Fund Services ("PFPC") acts as sub-tranfer agent pursuant to an
Agreement with Citi Fiduciary. Under the sub-transfer agency agreement, the
sub-transfer agent maintains the shareholder account records for the Funds,
handles certain communications between shareholders and the Funds, and
distributes dividends and distributions payable by the Funds. For these
services, the sub-transfer agent receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for the Funds during the month,
and is reimbursed for out-of-pocket expenses. The principal business address of
PFPC is P.O. Box 9699, Providence, Rhode Island 02940-9699.
CUSTODIAN
The Trust has entered into a Custodian Agreement and a Fund Accounting
Agreement with State Street Bank and Trust Company ("State Street"), pursuant to
which custodial and fund accounting services, respectively, are provided for
each Fund. Among other things, State Street calculates the daily net asset value
for the Funds. Securities may be held by a sub-custodian bank approved by the
Trustees.
The 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. The 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
Citibank or the applicable Subadviser trade securities for a Fund if they
believe that a transaction net of costs (including custodian charges) will
help achieve the Fund's investment objective. Changes in the Fund's
investments are made without regard to the length of time a security has been
held, or whether a sale would result in the recognition of a profit or loss.
Therefore, the rate of turnover is not a limiting factor when changes are
appropriate. Specific decisions to purchase or sell securities for each Fund
are made by 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 is 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 Citibank's or
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 period from March 2, 1998 (commencement of operations of the Small
Cap Value Fund) to October 31, 1998 and for the fiscal year ended October 31,
1999, the Small Cap Value Portfolio paid brokerage commissions in the amount
of $183,702 and $503,839 respectively. For the period from March 2, 1998
(commencement of operations) to October 31, 1998, and the period from November
1, 1998 to July 31, 1999, Growth & Income Portfolio, the Portfolio in which
the Growth & Income Fund previously invested, paid brokerage commissions in
the amount of $187,468 and $101,047, respectively. For the fiscal year ended
October 31, 1999, Large Cap Value Portfolio, the Portfolio in which the Growth
& Income Fund currently invests, paid brokerage commissions of $163,985.
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 Value Portfolio and Small Cap Value Portfolio are series of
Asset Allocation Portfolios, which Trust 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 TRUST
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 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. The 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 Growth & Income Fund may make non-U.S.
investments. Special tax considerations apply with respect to such
investments. Foreign exchange gains and losses realized by the Fund will
generally be treated as ordinary income and loss. Use of non-U.S. currencies
for non-hedging purposes and investment by the Fund in certain "passive
foreign investment companies" may have to be limited in order to avoid a tax
on the Fund. The Fund may elect to mark to market any investments in "passive
foreign investment companies" on the last day of each taxable year. This
election may cause the Fund to recognize ordinary income prior to the receipt
of cash payments with respect to those investments; in order to distribute
this income and avoid a tax on the Fund, the Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold
potentially resulting in additional taxable gain or loss to the Fund.
12. FINANCIAL STATEMENTS
The audited Statements of Assets and Liabilities as of October 31, 1999
for Small Cap Value Fund and Growth & Income Fund, and each of their
respective Statements of Operations for the year ended October 31, 1999, and
each of their respective Statements of Changes in Net Assets and Financial
Highlights for the periods presented in the 1999 Annual Reports to
Shareholders of the Funds, the Notes to Financial Statements of each of the
Funds and Independent Auditors' Reports for each of the Funds, each of which
is included in the Annual Report to Shareholders of the Funds, are
incorporated by reference into this Statement of Additional Information. These
financial statements and notes thereto have been so incorporated in reliance
upon the reports of PricewaterhouseCoopers LLP, independent accountants, on
behalf of each of the Funds.
The audited Statements of Assets and Liabilities, including its Portfolio
of Investments, as of October 31, 1999 for Small Cap Value Portfolio and Large
Cap Value Portfolio and each of their repsective Statements of Operations for
the year ended October 31, 1999, and each of their respective Statements of
Changes in Net Assets and Financial Highlights for the periods presented in
the 1999 Annual Reports to Shareholders of the Funds, the Notes to Financial
Statements of each of the Funds and Independent Auditors' Reports for each of
the Funds, are incorporated by reference into this Statement of Additional
Information. These financial statements have been so incorporated in reliance
upon the reports of PricewaterhouseCoopers LLP, on behalf of each of the
Portfolios.
Copies of the above referenced Annual Reports for the Funds and Portfolios
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 -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA -- An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- 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 meet its financial commitment
on the obligation.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued. C is also used for a preferred stock that is
in arrears (as well as for junior debt of issuers rated CCC- and CC).
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, upon the completion of a tender or
exchange offer whereby some or all of an issue is either repurchased for an
amount of cash or replaced with other securities having a total value that is
clearly less than par value, and, in the case of preferred stock of
deferrable-payment securities, upon nonpayment of the dividend or deferral of
the interest payment.
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 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
Citi Fiduciary Trust Company
388 Greenwich Street,
New York, NY 10013
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
