Rule 497(E)-File Nos. 33-6540 and 811-5033
Statement of
Additional Information
LANDMARK U.S. GOVERNMENT INCOME FUND April 3, 1995
LANDMARK INTERMEDIATE INCOME FUND AS AMENDED JANUARY 2, 1996
(Members of the LandmarkSM Family of Funds) CLASS A AND B SHARES
Each of Landmark U.S. Government Income Fund (the "Government Income Fund")
and Landmark Intermediate Income Fund (the "Intermediate Income Fund", and
together with the Government Income Fund, the "Funds") is a series of Landmark
Fixed Income Funds (the "Trust"). The address and telephone number of the Trust
are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679. The Trust
invests all of the investable assets of the Government Income Fund in the
Government Income Portfolio (the "Portfolio"), which is a separate series of The
Premium Portfolios (the "Portfolio Trust"). The address of the Portfolio Trust
is Elizabethan Square, George Town, Grand Cayman, British West Indies.
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
The Funds 2
Investment Objectives, Policies and Restrictions 3
Performance Information 21
Determination of Net Asset Value; 23
Valuation of Securities;
Additional Purchase and Redemption Information
Management 25
Portfolio Transactions 36
Description of Shares, Voting Rights and Liabilities 38
Certain Additional Tax Matters 40
Independent Accountants and Financial Statements 42
Appendix A 43
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the Funds'
Prospectus, dated April 3, 1995, by which shares of the Funds are offered. This
Statement of Additional Information should be read in conjunction with the
Prospectus, a copy of which may be obtained by an investor without charge by
contacting the Funds' Distributor (see inside back cover for address and phone
number).
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 FUNDS
Landmark Fixed Income Funds (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 June 23, 1986. The Trust was known as "Landmark
U.S. Government Income Fund" until its name was changed effective June 11, 1992.
This Statement of Additional Information describes Landmark U.S. Government
Income Fund and Landmark Intermediate Income Fund, each of which is a separate
series of the Trust. References in this Statement of Additional Information to
the "Prospectus" are to the Prospectus, dated April 3, 1995, of the Trust by
which shares of the Funds are offered.
The Trust seeks the investment objectives of the Government Income Fund by
investing all of its investable assets in Government Income Portfolio (the
"Portfolio"). The Portfolio is a series of The Premium Portfolios (the
"Portfolio Trust") and is an open-end, diversified management investment
company. The Portfolio has the same investment objectives and policies as the
Government Income Fund. Because the Government Income Fund invests through the
Portfolio, all references in this Statement of Additional Information to the
Government Income Fund include the Portfolio, except as otherwise noted. In
addition, references to the Trust, insofar as they relate to the Government
Income Fund, also include the Portfolio Trust, except as otherwise noted.
Citibank, N.A. ("Citibank" or the "Adviser") is investment adviser to the
Intermediate Income Fund and the Portfolio. The Adviser manages the investments
of the Intermediate Income Fund and the Portfolio from day to day in accordance
with such Fund's and the Portfolio's investment objectives and policies. The
selection of investments for the Intermediate Income Fund and the Portfolio and
the way they are managed depend on the conditions and trends in the economy and
the financial marketplaces.
The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the
"Administrator"), the administrator of each Fund, and Signature Financial Group
(Cayman) Ltd. ("SFG"), either directly or through a wholly-owned subsidiary, the
administrator of the Portfolio (the "Portfolio Administrator"), supervise the
overall administration of each Fund and the Portfolio, respectively. The Boards
of Trustees of the Trust and the Portfolio Trust provide broad supervision over
the affairs of the Funds and the Portfolio, respectively. Shares of the Funds
are continuously sold by LFBDS, the Funds' distributor (the "Distributor"), only
to investors who are customers of a financial institution, such as a federal or
state-chartered bank, trust company, savings and loan association or savings
bank, or a securities broker, that has entered into a shareholder servicing
agreement with the Trusts (collectively, "Shareholder Servicing Agents"). Shares
of each Fund are sold at net asset value, plus, in the case of Class A Shares, a
sales charge that may be reduced on purchases involving substantial amounts and
that may be eliminated in certain circumstances. LFBDS receives a distribution
fee from each Fund pursuant to a Distribution Plan adopted with respect to each
class of shares of the Funds in accordance with Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act"). LFBDS also receives a service
fee from the assets of each Fund represented by Class B shares pursuant to the
Distribution Plan adopted with respect to the Class B shares of the Funds.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objectives of LANDMARK U.S. GOVERNMENT INCOME FUND are to
generate current income and preserve the value of its shareholders' investment.
The investment objectives of LANDMARK INTERMEDIATE INCOME FUND are to
generate a high level of current income and preserve the value of its
shareholders' investment.
The investment objective of each Fund may be changed without approval by
the Fund's shareholders, but shareholders will be given written notice at least
30 days before any change is implemented. Of course, there can be no assurance
that either Fund will achieve its investment objectives.
INVESTMENT POLICIES
The Prospectus contains a discussion of the various types of securities in
which each Fund and the Portfolio may invest and the risks involved in such
investments. The following supplements the information contained in the
Prospectus concerning the investment objectives, policies and techniques of each
Fund.
The Trust may withdraw the investment of Government Income Fund from the
Portfolio at any time, if the Board of Trustees of the Trust determines that it
is in the best interests of the Government Income Fund to do so. Upon any such
withdrawal, the Government Income Fund's assets would continue to be invested in
accordance with the investment policies described herein with respect to that
Fund. The policies described below are not fundamental and may be changed
without shareholder approval.
U.S. GOVERNMENT SECURITIES
Each of the Funds may invest in debt obligations that are backed, as to the
timely payment of interest and principal, by the full faith and credit of the
U.S. Government. The Government Income Fund invests only in debt obligations
that are backed, as to the timely payment of interest and principal, by the full
faith and credit of the U.S. Government.
The debt obligations in which assets of the Funds are invested include (1)
U.S. Treasury obligations, which differ only in their interest rates, maturities
and times of issuance: U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds
(generally maturities of greater than 10 years); and (2) obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities. The
Government Income Fund may only invest in obligations issued or guaranteed by
U.S. Government agencies if such obligations are backed, as to the timely
payment of interest and principal, by the full faith and credit of the U.S.
Government, e.g., direct pass-through certificates of the Government National
Mortgage Association.
When and if available, U.S. Government obligations may be purchased at a
discount from face value. However, it is not intended that such securities will
be held to maturity for the purpose of achieving potential capital gains, unless
current yields on these securities remain attractive.
Although U.S. Government obligations which are purchased for the Funds may
be backed, as to the timely payment of interest and principal, by the full faith
and credit of the U.S. Government, shares of the Funds are neither insured nor
guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed-upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed-upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security, usually
U.S. Government or government agency issues. Under the 1940 Act, repurchase
agreements may be considered to be loans by the buyer. A Fund's risk is limited
to the ability of the seller to pay the agreed-upon amount on the delivery date.
If the seller defaults, the underlying security constitutes collateral for the
seller's obligation to pay although that 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 the Funds
are fully collateralized, with such collateral being marked to market daily.
FUTURES CONTRACTS
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an index
of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases or
sells a futures contracts. 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.
A Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity or
duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities. For
example, if interest rates were expected to increase, the 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.
Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction 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 the use of futures for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position (e.g., if a Fund sells
a futures contract to protect against losses in the debt securities held by the
Fund), at the same time the futures contracts limit 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 securities which the Fund
would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures
contracts was originally entered into. While a Fund will establish a futures
position only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular futures
contract at any specific time. In that event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the futures contract or to meet ongoing variation
margin requirements. The inability to close out futures positions also could
have an adverse impact on the ability effectively to use futures transactions
for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a futures contract during a
single trading day and prohibit trading beyond such limits once they have been
reached. The trading of futures contracts also is subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Investments in futures contracts also entail the risk that if the Adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance may be poorer than if any such contract had not
been entered into. For example, if a Fund hedged against the possibility of an
increase in interest rates which would adversely affect the price of the Fund's
bonds and interest rates decrease instead, part or all of the benefit of the
increased value of the Fund's bonds which were hedged will be lost because the
Fund will have offsetting losses in its futures positions. Similarly, if a Fund
purchases futures contracts expecting a decrease in interest rates and interest
rates instead increased, the Fund will have losses in its futures positions
which will increase the amount of the losses on the securities in its portfolio
which will also decline in value because of the increase in interest rates. In
addition, in such situations, if the Fund has insufficient cash, the Fund may
have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Adviser
does not believe that these trading and position limits would have an adverse
impact on a Fund's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions) if,
immediately thereafter, the sum of the amount of initial margin required to
establish the Fund's non-hedging futures positions would exceed 5% of the Fund's
net assets.
Each Fund will comply with this CFTC requirement, and each such Fund
currently intends to adhere to the additional policies described below. First,
an amount of cash or cash equivalents will be maintained by each Fund in a
segregated account with the Fund's custodian so that the amount so segregated,
plus the initial margin held on deposit, will be approximately equal to the
amount necessary to satisfy the Fund's obligations under the futures contract.
The second is that a Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by a
Fund not generally exceed 50% of the market value of the Fund's total assets
other than its futures contracts. For purposes of this third policy, "market
value" of a futures contract is deemed to be the amount obtained by multiplying
the number of units covered by the futures contract times the per unit price of
the securities covered by that contract.
The ability of a Fund to engage in futures transactions may be limited by
the current federal income tax requirement that less than 30% of a Fund's gross
income be derived from the sale or other disposition of stock or securities held
for less than three months. In addition, the use of futures contracts may
increase the amount of taxable income of a Fund and may affect the amount,
timing and character of a Fund's income for tax purposes, as more fully
discussed herein in the section entitled "Certain Additional Tax Matters".
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Fund would take delivery of such securities. When a Fund commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, it sets
up procedures consistent with Securities and Exchange Commission ("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, the Fund will always have cash, cash equivalents
or high quality debt securities sufficient to cover any commitments or to limit
any potential risk. However, even though the Funds do not intend to make such
purchases for speculative purposes and intend to adhere to the provisions of SEC
policies, purchases of securities on such bases may involve more risk than other
types of purchases. For example, a Fund may have to sell assets which have been
set aside in order to meet redemptions. Also, if the Adviser determines it is
advisable as a matter of investment strategy to sell the "when-issued" or
"forward delivery" securities, a Fund would be required to meet its obligations
from the then available cash flow or the sale of securities, or, although it
would not normally expect to do so, from the sale of the "when-issued" or
"forward delivery" securities themselves (which may have a value greater or less
than the Fund's payment obligation).
SECURITIES OF NON-U.S. ISSUERS
The Intermediate Income Fund may invest in securities of non-U.S. issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in U.S.
investments. For example, the value of such securities fluctuates based on the
relative strength of the U.S. dollar. In addition, there is generally less
publicly available information about non-U.S. issuers, particularly those not
subject to the disclosure and reporting requirements of the U.S. securities
laws. Non-U.S. issuers are generally not bound by uniform accounting, auditing
and financial reporting requirements comparable to those applicable to U.S.
issuers. Investments in securities of non-U.S. issuers also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of a Fund, political or financial instability or diplomatic and
other developments which would affect such investments. Further, economies of
other countries or areas of the world may differ favorably or unfavorably from
the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. securities markets, while growing in
volume and sophistication, are generally not as developed as those in the U.S.,
and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. security trading practices, including those
involving securities settlement where a 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.
It is the Trust's policy to invest not more than 5% of the Intermediate
Income Fund's assets in closed-end investment companies which primarily hold
foreign securities. 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. The Trust may invest a portion of the Intermediate Income
Fund's assets in foreign securities that impose restrictions on transfer within
the United States or to United States persons. Although securities subject to
such transfer restrictions may be marketable abroad, they may be less liquid
than foreign securities of the same class that are not subject to such
restrictions.
The Trust's policy is not to invest more than 50% of the Intermediate
Income Fund's assets in the securities of foreign issuers. It is the intention
of the Trust to limit the Intermediate Income Fund's investments in non-U.S.
obligations to securities rated A or better and unrated securities which, in the
opinion of the Adviser, are of comparable quality to such rated securities.
The Intermediate Income Fund may invest in securities of non-U.S. issuers
that impose restrictions on transfer within the United States or to United
States 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.
CURRENCY EXCHANGE TRANSACTIONS
Because the Intermediate Income Fund may buy and sell securities
denominated in currencies other than the U.S. dollar, and receive interest and
sale proceeds in currencies other than the U.S. dollar, that Fund may enter into
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. The Intermediate Income 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 Intermediate Income Fund may also enter into currency
hedging transactions in an attempt to protect the value of its assets as
measured in U.S. dollars from unfavorable changes in currency exchange rates and
control regulations. (Although the Intermediate Income Fund's assets are valued
daily in terms of U.S. dollars, the Trust does not intend to convert the Fund's
holdings of non-U.S. currencies into U.S. dollars on a daily basis.) It is not
intended that the Intermediate Income Fund speculate in currency exchange rates
or forward contracts.
The Intermediate Income Fund may convert currency on a spot basis from time
to time, and investors should be aware of the costs of currency conversion.
Although currency exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a currency at one rate, while offering a lesser rate of exchange should
the Intermediate Income Fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When the Intermediate Income Fund enters into a contract for the purchase
or sale of a security denominated in a non-U.S. currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into a forward contract
for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
non-U.S. currency involved in the underlying security transaction, the
Intermediate Income Fund will be able to protect against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the non-U.S. currency during the period between the date the security is
purchased or sold and the date on which payment is made or received.
When the Adviser believes that the currency of a particular country may
suffer a substantial decline against the U.S. dollar, the Intermediate Income
Fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of non-U.S. currency approximating the value of some or all
of its respective securities denominated in such non-U.S. currency. The precise
matching of the forward contract amounts and the value of the securities
involved is not generally possible since the future value of such securities in
non-U.S. currencies changes as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of a short-term hedging strategy is highly
uncertain. The Intermediate Income Fund does not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts obligates the Fund to deliver an amount of non-U.S. currency in
excess of the value of the Fund's securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated in the investment decisions made with regard to
overall diversification strategies. However, the Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Intermediate Income Fund will be
served.
The Intermediate Income Fund generally would not enter into a forward
contract with a term greater than one year. At the maturity of a forward
contract, the Intermediate Income Fund will either sell the security and make
delivery of the non-U.S. currency, or retain the security and terminate its
contractual obligation to deliver the non-U.S. currency by purchasing an
"offsetting" contract with the same currency trader obligating it to purchase,
on the same maturity date, the same amount of the non-U.S. currency. If the Fund
retains the security and engages in an offsetting transaction, the Fund will
incur a gain or a loss (as described below) to the extent that there has been
movement in forward contract prices. If the 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.
It is impossible to forecast with precision the market value of the
Intermediate Income Fund's securities at the expiration of a forward contract.
Accordingly, it may be necessary for the Intermediate Income Fund to purchase
additional non-U.S. currency on the spot market if the market value of the
security is less than the amount of non-U.S. currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of such
currency. Conversely, it may be necessary to sell on the spot market some of the
non-U.S. currency received upon the sale of the security if its market value
exceeds the amount of such currency the Fund is obligated to deliver.
The Intermediate Income Fund may also purchase put options on a non-U.S.
currency in order to protect against currency rate fluctuations. If the Fund
purchases a put option on a non-U.S. currency and the value of the U.S. currency
declines, the Fund will have the right to sell the non-U.S. currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the adverse
effect on the Fund which otherwise would have resulted. Conversely, where a rise
in the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency.
The purchase of such options could offset, at least partially, the effects
of adverse movements in exchange rates. However, the benefit to the Intermediate
Income Fund from purchases of non-U.S. 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
Intermediate Income Fund could sustain losses on transactions in non-U.S.
currency options which would require it to forgo a portion or all of the
benefits of advantageous changes in such rates.
The Intermediate Income Fund may write options on non-U.S. currencies for
hedging purposes or otherwise to achieve its investment objectives. For example,
where the Intermediate Income Fund anticipates a decline in the value of the
U.S. dollar value of a non-U.S. security due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of the security held by the Fund
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a non-U.S. 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 Intermediate Income Fund could write a put
option on the relevant currency which, if rates move in the manner projected,
will expire unexercised and allow the Fund to hedge such increased cost up to
the amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the 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 Intermediate Income 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.
Put and call options on non-U.S. currencies written by the Intermediate
Income Fund will be covered by segregation of cash, short-term money market
instruments or high quality debt securities in an account with the custodian in
an amount sufficient to discharge the Fund's obligations with respect to the
option, by acquisition of the non-U.S. currency or of a right to acquire such
currency (in the case of a call option) or the acquisition of a right to dispose
of the currency (in the case of a put option), or in such other manner as may be
in accordance with the requirements of any exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations.
The Intermediate Income Fund's dealings in non-U.S. currency contracts are
limited to the transactions described above. As stated above, the Government
Income Fund will not deal in such contracts. Of course, the Intermediate Income
Fund is not required to enter into such transactions and does not do so unless
deemed appropriate by the Adviser. It should also be realized that these methods
of protecting the value of the Intermediate Income Fund's securities against a
decline in the value of a currency do not eliminate fluctuations in the
underlying prices of the securities. Additionally, although such contracts tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, they also tend to limit any potential gain which might result should
the value of such currency increase.
The Intermediate Income Fund has established procedures consistent with
policies of the SEC concerning forward contracts. Since those policies currently
recommend 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, the
Intermediate Income Fund is expected always to have cash, cash equivalents or
high quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk.
SHORT SALES "AGAINST THE BOX"
In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. Each of the Funds, in
accordance with applicable investment restrictions, may engage in short sales
only if at the time of the short sale it owns or has the right to obtain, at no
additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short sale, the collateral for the short position
is maintained for the Fund by the custodian or qualified sub-custodian. While
the short sale is open, an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities are maintained in a segregated account for the Fund. These
securities constitute the Fund's long position.
The Funds do not engage in short sales against the box for investment
purposes. A Fund may, however, make a short sale against the box as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when the Fund wants to sell the security at
an attractive current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes or for purposes of satisfying certain tests
applicable to regulated investment companies under the Internal Revenue Code. In
such case, any future losses in the Fund's long position should be reduced by a
gain in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced depends upon the amount of the security sold short relative
to the amount the Fund owns. There are certain additional transaction costs
associated with short sales against the box, but the Funds endeavor to offset
these costs with the income from the investment of the cash proceeds of short
sales.
The Adviser does not expect that more than 40% of each Fund's total assets
would be involved in short sales against the box. The Adviser does not currently
intend to engage in such sales.
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, certain of the Intermediate Income Fund's
assets may be invested in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, including but not limited to 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 assets 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. No
additional or separate fees will be paid for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security. It is intended that no more than 5% of the Intermediate Income Fund's
total assets would be invested in corporate asset-backed securities.
COLLATERALIZED MORTGAGE OBLIGATIONS
As described in the Prospectus, a portion of each Fund's assets may be
invested in collateralized mortgage obligations ("CMOs"), which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities; provided, however, that, in the case of the Government Income Fund,
the CMOs are backed as to the timely payment of interest and principal by the
full faith and credit of the U.S. Government. Typically, CMOs are collateralized
by certificates issued by the Government National Mortgage Association, the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Each of the Funds may also invest a portion of the their
assets in multi-class pass-through securities which are interests in a trust
composed of Mortgage Assets; provided, however, that, in the case of the
Government Income Fund, the Mortgage Assets are backed as to the timely payment
of interest and principal by the full faith and credit of the U.S. Government.
CMOs (which include multi-class pass-through securities) may be issued by
agencies, authorities or instrumentalities of the U.S. Government or by private
originators of or investors in mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. In a CMO, a series of bonds or certificates is usually
issued in multiple classes with different maturities. Each class of a CMO, often
referred to as a "tranche", is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in various ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
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. A Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will not usually exceed five 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 would also receive
compensation based on investment of the collateral. 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 Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which can be earned currently
from loans of this type justifies the attendant risk. If the Adviser determines
to make loans, it is not intended that the value of the securities loaned by a
Fund would exceed 30% of the value of its total assets.
RULE 144A SECURITIES
Each of the Funds may purchase securities that are not registered ("Rule
144A securities") under the Securities Act of 1933 (the "Securities Act"), but
can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act. However, the Intermediate Income Fund will not invest
more than 15% of its net assets in illiquid investments, and the Government
Income Fund will not invest more than 10% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and Rule 144A
securities, unless the Trustees of the Trust determine, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Trustees may
adopt guidelines and delegate to the Adviser the daily function of determining
and monitoring liquidity of Rule 144A securities. The Trustees, however, retain
oversight and are ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for Rule 144A securities will develop, the Trustees will carefully monitor each
Fund's investments in Rule 144A securities, focusing on such factors, among
others, as valuation, liquidity and availability of information. The liquidity
of investments in Rule 144A securities could be impaired if trading in Rule 144A
securities does not develop or if qualified institutional buyers become for a
time uninterested in purchasing Rule 144A securities.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trust, on behalf of
the Portfolio, have each adopted the following policies which may not be changed
with respect to either Fund or the 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 respective 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 respective Fund or Portfolio. The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.
Neither of the Funds nor the Portfolio may:
(1) Borrow money or pledge, mortgage or hypothecate assets of the Fund or
Portfolio, 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
the Fund's or the Portfolio's net assets, including the amount borrowed, and may
pledge, mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed for the Fund or
Portfolio 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), provided that collateral
arrangements with respect to futures contracts, including deposits of initial
and variation margin, are not considered a pledge of assets for purposes of this
restriction; for additional related restrictions, see clause (i) under the
caption "State and Federal Restrictions" hereafter.
(2) Purchase any security or evidence of interest therein on margin, except
that such short-term credit may be obtained for the Fund or Portfolio as may be
necessary for the clearance of purchases and sales of securities and except that
deposits of initial and variation margin may be made for the Fund or Portfolio
in connection with the purchase, ownership, holding or sale of futures
contracts.
(3) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent (i) the writing, purchasing or
selling of puts, calls or combinations thereof with respect to U.S. Government
securities or with respect to futures contracts, or (ii) the writing, purchase,
ownership, holding or sale of futures contracts.
(4) Underwrite securities issued by other persons except insofar as either
the Trust or the Portfolio Trust may technically be deemed an underwriter under
the Securities Act of 1933 in selling a portfolio security (provided, however,
that the Fund may invest all of its assets in an open-end management investment
company with the same investment objective and policies and substantially the
same investment restrictions as the Fund (a "Qualifying Portfolio")).
(5) Make loans to other persons except (a) through the lending of the
Fund's or Portfolio's securities and provided that any such loans not exceed 30%
of a Fund's or Portfolio's total assets, as the case may be (taken at market
value), (b) through the use of repurchase agreements or the purchase of
short-term obligations (and, in the case of the Intermediate Income Fund,
provided that not more than 15% of the total assets of the Fund, as the case may
be, will be invested in repurchase agreements maturing in more than seven days),
or (c) by purchasing a portion of an issue of debt securities of types commonly
distributed privately to financial institutions, for which purposes the purchase
of short-term commercial paper or a portion of an issue of debt securities which
are part of an issue to the public shall not be considered the making of a loan.
(6) 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 (except
futures contracts) in the ordinary course of business (the Trust and Portfolio
Trust reserve 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).
(7) With respect to the Government Income Fund or the Portfolio, purchase
securities of any issuer if such purchase at the time thereof would cause more
than 10% of the voting securities of such issuer to be held for the Fund or
Portfolio, except that all of the assets of the Government Income Fund may be
invested in a Qualifying Portfolio.
(8) With respect to 75% of the assets of the Intermediate Income Fund,
purchase securities of any issuer if such purchase at the time thereof would
cause more than 10% of the voting securities of such issuer to be held for the
Fund, except that all of the assets of the Fund may be invested in a Qualifying
Portfolio.
(9) With respect to the Government Income Fund or the Portfolio, purchase
securities of any issuer if such purchase at the time thereof would cause more
than 5% of the assets of the Fund or Portfolio (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 or the United States); provided that for purposes of
this restriction the issuer of a futures contract shall not be deemed to be the
issuer of the security or securities underlying such contract; and further
provided that all of the assets of the Government Income Fund may be invested in
a Qualifying Portfolio.
(10) With respect to 75% of the assets of the Intermediate Income Fund,
purchase securities of any issuer if such purchase at the time thereof would
cause more than 5% of the assets of the Fund (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 or the United States); provided that for purposes of
this restriction the issuer of a futures contract shall not be deemed to be the
issuer of the security or securities underlying such contract; and further
provided that all of the assets of the Fund may be invested in a Qualifying
Portfolio.
(11) Make short sales of securities or maintain a short position, unless at
all times when a short position is open the Fund or Portfolio owns an equal
amount of such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not more than
10% of the net assets of the Fund or Portfolio (taken at market value), is held
as collateral for such sales at any one time.
(12) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the investment objective of the Fund
or Portfolio 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 and except that all
of the assets of the Fund may be invested in a Qualifying Portfolio.
(13) 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, provided that collateral arrangements with
respect to futures contracts, including deposits of initial and variation
margin, are not considered to be the issuance of a senior security for purposes
of this restriction.
The Trust, with respect to the Government Income Fund, and the Portfolio
Trust, with respect to the Portfolio, have each also adopted a policy which is
fundamental and which provides that all of the assets of the Government Income
Fund or Portfolio will be invested in obligations that are backed by the full
faith and credit of the U.S. Government except that all of the assets of the
Government Income Fund may be invested in a Qualifying Portfolio all of whose
assets will be invested in obligations that are backed by the full faith and
credit of the U.S. Government. This policy is not intended to prohibit the use
of futures contracts on fixed income securities by the Government Income Fund.
Investment Restriction (11) above applies only to short sales of or short
positions in securities, and does not prevent the writing, purchase, ownership,
holding or sale of futures contracts.
NON-FUNDAMENTAL RESTRICTIONS
As a non-fundamental policy, the Trust, on behalf of either Fund, and the
Portfolio Trust on behalf of the Portfolio, will not knowingly invest in
securities which are subject to legal or contractual restrictions on resale
(other than repurchase agreements maturing in not more than seven days) if, as a
result thereof, more than 15% of the Fund's or Portfolio's net assets (taken at
market value) would be so invested (including repurchase agreements maturing in
more than seven days).
STATE AND FEDERAL RESTRICTIONS
In order to comply with certain state and federal statutes and policies,
the Trust, on behalf of each Fund, and the Portfolio Trust, on behalf of the
Portfolio, will not, as a matter of operating policy:
(i) borrow money for any purpose in excess of 10% of the total assets of
the Fund or Portfolio (taken at cost) (moreover, the Trust or Portfolio Trust
will not purchase any securities for the Fund or Portfolio at any time at which
borrowings exceed 5% of the total assets of the Fund or Portfolio, as the case
may be (taken at market value)),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the net assets of the Fund or Portfolio (taken at market value), provided that
collateral arrangements with respect to futures contracts, including deposits of
initial and variation margin, are not considered a pledge of assets for purposes
of this restriction,
(iii) sell any security which the Fund or Portfolio does not own unless by
virtue of the ownership of other securities there is at the time of sale a right
to obtain securities, without payment of further consideration, equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions,
(iv) invest for the purpose of exercising control or management, except
that all of the assets of the Fund may be invested in a Qualifying Portfolio,
(v) purchase securities issued by any registered investment company, except
that all of the assets of the Fund may be invested in a Qualifying Portfolio and
except by purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market, is
part of a plan of merger or consolidation; provided, however, that the Trust, on
behalf of the Fund, and the Portfolio Trust, on behalf of the Portfolio, will
not purchase the securities of any registered investment company (other than a
Qualifying Portfolio in which all the assets of the Fund are invested) if such
purchase at the time thereof would cause more than 10% of the total assets of
the Fund or Portfolio (taken in each case at the greater of cost or market
value) to be invested in the securities of such issuers or would cause more than
3% of the outstanding voting securities of any such issuer to be held for the
Fund or Portfolio (the Portfolio Trust, on behalf of the Portfolio, shall not
purchase securities issued by any open-end investment company),
(vi) invest more than 10%, in the case of the Government Income Fund and
the Portfolio, or 15%, in the case of the Intermediate Income Fund, of the net
assets of the Fund (for the Government Income Fund or the Portfolio, taken at
the greater of cost or market value, and for the Intermediate Income Fund, taken
at market value) in securities that are not readily marketable,
(vii) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund or Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that all of the assets of the Fund may be invested
in a Qualifying Portfolio and except that Futures Contracts shall not be subject
to this restriction,
(viii) invest more than 5% of the assets of the Fund or Portfolio in
companies which, including predecessors, have a record of less than three years'
continuous operation, except that all of the assets of the Fund may be invested
in a Qualifying Portfolio, or
(ix) purchase or retain any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Trust or of the Portfolio Trust, or is an officer or director of the
Adviser, if after the purchase of the securities of such issuer one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.
These policies are not fundamental and may be changed by the Trust with
respect to a Fund or the Portfolio Trust with respect to the Portfolio without
approval of its shareholders (or holders of beneficial interests) in response to
changes in the various state and federal requirements.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction on investment or utilization of assets set
forth above or referred to in the Prospectus is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the securities held for a Fund is not
considered a violation of policy.
3. PERFORMANCE INFORMATION
A total rate of return quotation for a Fund is calculated for any period by
(a) dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of shares
purchasable with dividends and capital gains distributions declared during such
period with respect to a share held at the beginning of such period and with
respect to shares purchased with such dividends and capital gains distributions,
by (ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. Any annualized total rate of return quotation
is calculated by (x) adding 1 to the period total rate of return quotation
calculated above, (y) raising such sum to a power which is equal to 365 divided
by the number of days in such period, and (z) subtracting 1 from the result.
Total rates of return may also be calculated on investments at various sales
charge levels or at net asset value. Any performance data which is based on a
reduced sales charge or net asset value per share would be reduced if the
maximum sales charge were taken into account.
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 maximum public offering price per share on the last day of the
period, (b) subtracting 1 from the result, and (c) multiplying the result by 2.
Any tax equivalent yield quotation of a Fund is calculated as follows: If
the entire current yield quotation for such period is state tax-exempt, the tax
equivalent yield would be the current yield quotation divided by 1 minus a
stated income tax rate or rates. If a portion of the current yield quotation is
not state tax-exempt, the tax equivalent yield would be the sum of (a) that
portion of the yield which is state tax-exempt divided by 1 minus a stated
income tax rate or rates and (b) the portion of the yield which is not state
tax-exempt.
Set forth below is total rate of return information for the Class A shares
of the Government Income Fund and the Intermediate Income Fund for the periods
indicated, assuming that dividends and capital gains distributions, if any, were
reinvested, and that at the beginning of such periods the maximum sales charge
of 1.50% had been applicable to purchases of shares of the Government Income
Fund and that the maximum sales charge of 4.00% had been applicable to purchases
of shares of the Intermediate Income Fund.
Class A Shares
REDEEMABLE VALUE
OF A HYPOTHETICAL
$1,000 INVESTMENT
ANNUALIZED TOTAL AT THE END OF THE
PERIOD RATE OF RETURN PERIOD
GOVERNMENT INCOME FUND
September 8,1986 (commencement of 5.88% $1,608.24
operations)to December 31, 1994
Five years endedDecember 31, 1994 5.89% $1,331.05
One year ended December 31, 1994 (3.18)% $ 968.19
INTERMEDIATE INCOME FUND
June 25, 1993 (commencement of
operations) to December 31, 1994 (3.70)% $ 944.45
One year ended December 31, 1994 (8.30)% $ 917.04
The annualized yields of the Class A shares of the Government Income Fund
and the Intermediate Income Fund for the 30-day period ended December 31, 1994
were, respectively, 6.80% and 6.57%.
Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical Services,
Inc. and other industry sources and publications. From time to time a 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 the Funds 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 the Funds may refer to or discuss current or past economic or
financial conditions, developments and events. The Intermediate Income Fund's
advertising materials also may refer to the integration of the world's
securities markets, discuss the investment opportunities available worldwide and
mention the increasing importance of an investment strategy including non-U.S.
investments.
<PAGE>
4. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The net asset value of each share of each class of each Fund is determined
each day during which the New York Stock Exchange (the "Exchange") is open for
trading. 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, 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 (currently 4:00 p.m. Eastern time) by adding the
market value of all securities and other assets attributable to a class of
shares of a Fund (including in the case of Government Income Fund its interest
in the Portfolio), then subtracting the liabilities charged to the class, and
then dividing the result by the number of outstanding shares of the class. Per
share net asset value of each class of each Fund's shares can be expected to
differ because the Class B shares bear higher expenses than Class A shares. The
net asset value per share of each class of shares is effective for orders
received and accepted by the Distributor prior to its calculation.
The value of the 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 the Government Income Fund is determined. The net asset value of the
Government Income Fund's investment in the Portfolio is equal to the Fund's pro
rata share of the net assets of the Portfolio.
Bonds and other fixed income securities (other than short-term obligations)
held for each Fund are valued on the basis of valuations furnished by a pricing
service, use of which has been approved by the Board of Trustees of the Trust.
In making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations (maturing in 60 days or less) are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees of the
Trust. Futures Contracts are normally valued at the settlement price on the
exchange on which they are traded. Securities for which there are no such
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees of the Trust.
Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. 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
will be valued at fair value in accordance with procedures established by and
under the general supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premium.
Subject to compliance with applicable regulations, the Trust and the
Portfolio Trust have each reserved the right to pay the redemption or repurchase
price of shares of the Funds or of beneficial interests in the Portfolio, 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 or beneficial interests being sold. If a holder of shares or beneficial
interests received a distribution in kind, such holder could incur brokerage or
other charges in converting the securities to cash.
The Trust or the Portfolio Trust may suspend the right of redemption or
postpone the date of payment for shares of a Fund or beneficial interests in the
Portfolio more than seven days during any period when (a) trading in the markets
the Fund or the Portfolio normally utilizes is restricted, or an emergency, as
defined by the rules and regulations of the SEC exists making disposal of a
Fund's or Portfolio'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.
LETTER OF INTENT
If an investor anticipates purchasing at least the minimum amount of Class
A shares of any Fund required for a volume discount as described in the
Prospectus, either alone or in combination with Class B shares of the Fund or
any of the classes of other Landmark Funds within a 13-month period, the
investor may obtain such shares at the same reduced sales charge as though the
total quantity were invested in one lump sum by completing a Letter of Intent on
the terms described below. Subject to acceptance by the 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 his or her Shareholder Servicing Agent must
inform the Distributor 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 such purchase if the
Distributor is informed in writing of this intent within such 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 such Letter, but
the reduced sales charge applicable to the amount covered by such 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 Shareholder Servicing Agent stating
that the shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain 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 such
Letter of Intent.
If the investment specified in the Letter of Intent is not completed
(either prior to or by the end of the 13-month period), the Shareholder
Servicing 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 appoints the Shareholder Servicing
Agent his or her attorney to surrender for redemption any or all shares
purchased under the Letter of Intent with full power of substitution in the
premises.
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 Landmark Funds,
reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity discounts. For example, if a Government Income Fund
shareholder owns shares valued at $50,000 and purchases an additional $50,000 of
Class A shares of a Fund, the sales charge for the $50,000 purchase would be at
the rate of 1.00% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
5. MANAGEMENT
The Trustees and officers of the Trusts and the Portfolio Trust 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 6 St. James Avenue, Boston, Massachusetts. The
address of the Portfolio Trust is Elizabethan Square, George Town, Grand Cayman,
British West Indies.
TRUSTEES OF THE TRUST
H.B. ALVORD -- Treasurer-Tax Collector, County of Los Angeles (retired,
March, 1984); Chairman, certain registered investment companies in the 59 Wall
Street funds group. His address is P.O. Box 1812, Pebble Beach, California.
PHILIP W. COOLIDGE* -- President of the Trust and the Portfolio Trust;
Chief Executive Officer, Signature Financial Group, Inc. and The Landmark Funds
Broker-Dealer Services, Inc. (since December, 1988).
RILEY C. GILLEY -- Vice President and General Counsel, Corporate Property
Investors (November, 1988 to December, 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December, 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
DIANA R. HARRINGTON -- Professor, Babson College (since September, 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September, 1992 to September, 1993); Professor, Darden Graduate
School of Business, University of Virginia (September, 1978 to September, 1993);
Consultant to PanAgora Asset Management (since 1994). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY -- President, Global Research Associates, Inc. (Investment
Research) (since August, 1990); Manager, Rockefeller & Co. (March, 1988 to July,
1990); Trustee, Mainstay Institutional Funds (since December, 1990). Her address
is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR. -- Managing Director, Morong Capital Management (since
February, 1993); Senior Vice President and Investment Manager, CREF Investments,
Teachers Insurance & Annuity Association (retired January, 1993); Director,
Indonesia Fund; Director, MAS Funds. His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
DONALD B. OTIS -- Director of Investor Relations, International Business
Machines Corporation (retired February, 1982). His address is 6300 Midnight Pass
Road, Sarasota, Florida.
E. KIRBY WARREN -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978-1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. -- Vice President-Investments, Sun Company, Inc.
(retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
TRUSTEES OF THE PORTFOLIO TRUST
ELLIOTT J. BERV -- Chairman and Director, Catalyst, Inc. (Management
Consultants)(since June, 1992); President, Chief Operating Officer and Director,
Deven International, Inc. (International Consultants)(June, 1991 to June 1992);
President and Director, Elliott J. Berv & Associates (Management
Consultants)(since May, 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* -- President of the Trust and the Portfolio Trust;
Chief Executive Officer, Signature Financial Group, Inc. and The Landmark Funds
Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN -- President and Director, Delta Financial, Inc. (since June,
1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd. (Commodity
Trading Advisory Firm)(since April, 1990); Director, Vantage Consulting Group,
Inc. (since October, 1988). His address is 3500 Pacific Avenue, P.O. Box 539,
Virginia Beach, Virginia.
WALTER E. ROBB, III -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (corporate financial advisers) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors)(since 1989);
Trustee of certain registered investment companies in the MFS Family of Funds.
His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUSTS AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE* -- President of the Trust and the Portfolio Trust;
Chief Executive Officer, Signature Financial Group, Inc. and The Landmark Funds
Broker-Dealer Services, Inc. (since December, 1988).
DAVID G. DANIELSON* -- Assistant Treasurer of the Trust and the Portfolio
Trust; Assistant Manager, Signature Financial Group, Inc. (since May, 1991);
Graduate Student, Northeastern University (April, 1990 to March, 1991).
JOHN R. ELDER* -- Treasurer of the Trust and the Portfolio Trust; Vice
President, Signature Financial Group, Inc. (since April, 1995); Treasurer of the
Phoenix Family of Mutual Funds, Phoenix Home Life Mutual Insurance Company (1983
to March, 1995).
LINDA T. GIBSON* -- Assistant Secretary of the Trust and the Portfolio
Trust; Legal Counsel, Signature Financial Group, Inc. (since June, 1991); Law
Student, Boston University School of Law (September, 1989 to May, 1992); Product
Manager, Signature Financial Group, Inc. (January, 1989 to September, 1989).
SUSAN JAKUBOSKI* -- Vice President, Assistant Treasurer and Assistant
Secretary of the Portfolio Trust (since August, 1994); Manager, Signature
Financial Group (Cayman) Ltd. (since August, 1994); Senior Fund Administrator,
Signature Financial Group, Inc. (since August, 1994); Assistant Treasurer,
Signature Broker-Dealer Services, Inc. (since September, 1994); Fund Compliance
Administrator, Concord Financial Group (November, 1990 to August, 1994); Senior
Fund Accountant, Neuberger & Berman Management, Inc. (from February, 1988 to
November, 1990); Customer Service Representative, I.B.J. Schroder (prior to
1988). Her address is Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, BWI.
JAMES S. LELKO, JR.* -- Assistant Treasurer of the Trust and the Portfolio
Trust; Assistant Manager, Signature Financial Group, Inc. (since January, 1993);
Senior Tax Compliance Accountant, the Putnam Companies (September, 1988 to
December, 1992).
THOMAS M. LENZ* -- Secretary of the Trust and the Portfolio Trust; Vice
President and Associate General Counsel, Signature Financial Group, Inc. (since
November, 1989); Assistant Secretary, Signature Broker-Dealer Services, Inc.
(since February, 1991); Attorney, Ropes & Gray (September, 1984 to November,
1989).
MOLLY S. MUGLER* -- Assistant Secretary of the Trust and the Portfolio
Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc.
(since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer
Services, Inc. (since December, 1988).
BARBARA M. O'DETTE* -- Assistant Treasurer of the Trust and the Portfolio
Trust; Assistant Treasurer, Signature Financial Group, Inc. and The Landmark
Funds Broker-Dealer Services, Inc. (since December, 1988).
ANDRES E. SALDANA* -- Assistant Secretary of the Trust and the Portfolio Trust;
Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. (since
November, 1992); Attorney, Ropes & Gray (September, 1990 to November, 1992).
DANIEL E. SHEA* -- Assistant Treasurer of the Trust and the Portfolio
Trust; Assistant Manager of Fund Administration, Signature Financial Group, Inc.
(since November, 1993); Supervisor and Senior Technical Advisor, Putnam
Investments (prior to 1990).
The Trustees and officers of the Trust and the Portfolio Trust also hold
comparable positions with certain other funds for which LFBDS, SFG or their
affiliates serve as the distributor or administrator.
As of February 28, 1995, all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Funds. 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 Shareholder Servicing Agents of the Funds for the accounts
of their respective clients.
The Declaration of Trust of each of the Trust and the Portfolio Trust
provides that each of the Trust and the Portfolio Trust, respectively, 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 the Portfolio Trust, as the case may be, unless, as to
liability to the Trust, the 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 the 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
the 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.
ADVISER
Citibank manages the assets of the Intermediate Income Fund and the
Portfolio pursuant to separate investment advisory agreements (the "Advisory
Agreements"). Subject to such policies as the Board of Trustees of the Trust or
the Portfolio Trust, as the case may be, may determine, the Adviser manages the
securities of the Intermediate Income Fund and the Portfolio and makes
investment decisions for the Intermediate Income Fund and the Portfolio. The
Adviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Intermediate Income Fund's and the
Portfolio's investments and effecting securities transactions for the
Intermediate Income Fund and the Portfolio. The Portfolio's Advisory Agreement
will continue in effect until September 15, 1995 and thereafter as long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Portfolio Trust or by a vote of a majority of the outstanding voting
securities of the Portfolio, and, in either case, by a majority of the Trustees
of the Portfolio Trust who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement. The Advisory Agreement of the Intermediate
Income Fund will continue in effect 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 Intermediate Income Fund,
and, in either case, by a majority of the Trustees of the Trust who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Advisory Agreement.
Each of the Advisory Agreements provides that the Adviser may render
services to others. Each Advisory Agreement is terminable without penalty on not
more than 60 days' nor less than 30 days' written notice by the Trust or the
Portfolio Trust, as the case may be, when authorized either by a vote of a
majority of the outstanding voting securities of the Intermediate Income Fund or
Portfolio or by a vote of a majority of the Board of Trustees of the Trust or
Portfolio Trust, as appropriate, or by the Adviser on not more than 60 days' nor
less than 30 days' written notice, and will automatically terminate in the event
of its assignment. Each Advisory Agreement provides that neither the Adviser 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 and management of the Intermediate Income Fund or Portfolio, as the
case may be, except for willful misfeasance, bad faith or gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
The Prospectus contains a description of the fees payable to the Adviser
for services under the Advisory Agreements. For the fiscal year ended August 31,
1992, the fee payable to the Adviser from the Government Income Fund under a
prior investment advisory agreement between the Government Income Fund and the
Adviser was $135,486 (of which $127,843 was voluntarily waived). For the fiscal
year ended August 31, 1993, the fee payable to the Adviser from the Government
Income Fund under such prior investment advisory agreement was $213,869 (of
which $134,725 was voluntarily waived). For the four-month period ended December
31, 1993, the fee payable to the Adviser from the Government Income Fund under
the prior advisory agreement was $96,878 (of which $61,193 was voluntarily
waived). For the four month period ended April 30, 1994, the fee payable from
the Government Income Fund to the Adviser under a prior advisory agreement was
$93,572 (of which $67,712 was voluntarily waived). For the period from May 1,
1994 to December 31, 1994, the fee payable to the Adviser under the Portfolio's
Advisory Agreement was $148,797. For the period June 25, 1993 (commencement of
operations) to December 31, 1993 and for the fiscal year ended December 31,
1994, the fees payable from the Intermediate Income Fund to the Adviser under
its Advisory Agreement were $115,175 (of which $53,119 was waived) and $186,301
(of which $120,645 was voluntarily waived), respectively.
ADMINISTRATOR
Pursuant to administrative services agreements (the "Administrative
Services Agreements"), LFBDS and SFG provide the Trust and the Portfolio Trust,
respectively, with general office facilities and LFBDS and SFG supervise the
overall administration of the Trust or the Portfolio Trust, including, among
other responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's or the Portfolio Trust's
independent contractors and agents; the preparation and filing of all documents
required for compliance by the Trust or the Portfolio Trust with applicable laws
and regulations; and arranging for the maintenance of books and records of the
Trust or the Portfolio Trust. The Administrator and the Portfolio Administrator
provide persons satisfactory to the Board of Trustees of the Trust or the
Portfolio Trust to serve as Trustees and officers of the Trust and the Portfolio
Trust, respectively. Such Trustees and officers, as well as certain other
employees and Trustees of the Trust and the Portfolio Trust, may be directors,
officers or employees of LFBDS, SFG or their affiliates.
The Prospectus contains a description of the fees payable to the
Administrator and the Portfolio Administrator under the Administrative Services
Agreements. For the fiscal year ended August 31, 1992, the fee payable to LFBDS
from the Government Income Fund under a prior administrative services agreement
was $38,710 (of which $32,313 was voluntarily waived). For the fiscal year ended
August 31, 1993, the fee payable to LFBDS from the Government Income Fund under
the Administrative Services Agreement and a prior administrative services
agreement with the Trust was $122,210 (of which $33,344 was voluntarily waived).
For the four-month period ended December 31, 1993, the fee payable to LFBDS from
the Government Income Fund under the Administrative Services Agreement was
$55,359 (of which $12,386 was voluntarily waived). For the four month period
ended April 30, 1994 and for the period from May 1, 1994 to December 31, 1994,
the fees payable to LFBDS from the Government Income Fund under the
Administrative Services Agreement were $53,470 (of which $15,652 was voluntarily
waived) and $62,191 (of which $60,059 was voluntarily waived), respectively. For
the period from May 1, 1994 to December 31, 1994 the fee payable to SFG from the
Portfolio under the Administrative Services Agreement with the Portfolio Trust
was $21,257 (of which $1,583 was voluntarily waived). For the period from June
25, 1993 (commencement of operations) to December 31, 1993 and for the fiscal
year ended December 31, 1994, the fees payable to LFBDS from the Intermediate
Income Fund were $65,815 (of which $35,202 was voluntarily waived) and $106,458
(of which $37,176 was voluntarily waived), respectively.
The Administrative Services Agreement with the Trust acknowledges that the
names "Landmark" and "Landmark Funds" are the property of the Administrator and
provides that if LFBDS ceases to serve as the Administrator of the Trust, the
Trust would change its name and the name of the Funds so as to delete the word
"Landmark" or the words "Landmark Funds". The Administrative Services Agreement
with the Trust also provides that LFBDS may render administrative services to
others and may permit other investment companies to use the word "Landmark" or
the words "Landmark Funds" in their names.
The Administrative Services Agreement with the Trust continues in effect
with respect to each Fund if 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 Trust and, in either case, by a majority of
the Trustees who are not parties to the Administrative Services Agreement or
interested persons of any such party. The Administrative Services Agreement with
the Trust terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the outstanding voting securities of
the Trust or by either party on not more than 60 days' nor less than 30 days'
written notice. The Administrative Services Agreement with the Trust also
provides that neither LFBDS, as the Administrator, nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust, except for willful misfeasance,
bad faith or gross negligence in the performance of its or their duties or by
reason of reckless disregard of its or their obligations and duties under the
Administrative Services Agreement.
The Administrative Services Agreement with the Portfolio Trust provides
that SFG may render administrative services to others. The Administrative
Services Agreement with the Portfolio Trust terminates automatically if it is
assigned and may be terminated without penalty by a vote of a majority of the
outstanding voting securities of the Portfolio Trust or by either party on not
more than 60 days' nor less than 30 days' written notice. The Administrative
Services Agreement with the Portfolio Trust also provides that neither SFG, as
the Portfolio Administrator, nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration or
management of the Portfolio Trust, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Portfolio
Trust's Administrative Services Agreement.
LFBDS and SFG are wholly-owned subsidiaries of Signature Financial Group,
Inc. SFG is a company organized under the laws of the Cayman Islands. Its
principal place of business is in George Town, Grand Cayman, British West
Indies.
Pursuant to sub-administrative services agreements, Citibank performs such
sub-administrative duties for the Trust and the Portfolio Trust as from time to
time are agreed upon by Citibank and, respectively, LFBDS or SFG. Citibank's
sub-administrative duties may include providing equipment and clerical personnel
necessary for maintaining the Trust's or the Portfolio Trust's organization,
participation in the preparation of documents required for compliance by the
Trust or the Portfolio Trust with applicable laws and regulations, the
preparation of certain documents in connection with meetings of Trustees and
shareholders, and other functions which would otherwise be performed by the
Administrator. For performing such sub-administrative services, Citibank
receives compensation as from time to time is agreed upon by Citibank and,
respectively, LFBDS or SFG, not in excess of the amount paid to LFBDS or SFG for
its respective services under the Administrative Services Agreements with the
Trust and the Portfolio Trust. All such compensation is paid by LFBDS or SFG.
DISTRIBUTOR
LFBDS serves as the Distributor of each Fund's shares pursuant to
Distribution Agreements with the Trust with respect to each class of shares of
each Fund. Unless otherwise terminated, the Distribution Agreement remains in
effect from year to year upon annual approval by the Trust's Board of Trustees,
or by the vote of a majority of the outstanding voting securities of the Trust
and by the vote of a majority of the Board of Trustees of the Trust who are not
parties to the Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Agreement
will terminate in the event of its assignment, as defined in the 1940 Act.
The Trust has adopted a Distribution Plan (each a "Distribution Plan") in
accordance with Rule 12b-1 under the 1940 Act with respect to each class of
shares of the Funds after concluding that there is a reasonable likelihood that
the Distribution Plans will benefit each Fund and its shareholders. The
Distribution Plan with respect to Class A shares provides that each Fund shall
pay a distribution fee to the Distributor at an annual rate not to exceed 0.15%
of each Fund's average daily net assets represented by the Class A shares. The
Distribution Plan with respect to Class B shares provides that each Fund will
pay the Distributor a distribution fee at annual rate not to exceed 0.75% (0.45%
in the case of the Government Income Fund) of the average daily net assets
represented by the Class B shares. The Distributor receives the distribution
fees for its services under the Distribution Agreements in connection with the
distribution of each Fund's shares of each class (exclusive of any advertising
expenses incurred by the Distributor in connection with the sale of Class A
shares of each Fund). The Distributor may use all or any portion of such
distribution fee to pay for expenses of printing prospectuses and reports used
for sales purposes, expenses of the preparation and printing of sales
literature, commissions to dealers who sell shares of the applicable class of
the Fund and other distribution-related expenses.
Each of the Funds is permitted to pay a service fee with respect to the
Class B shares at an annual rate not to exceed 0.25% of each Fund's average
daily net assets represented by the Class B shares.
Each Distribution Plan with respect to the Class A Shares also permits the
Funds to pay the Distributor an additional fee (not to exceed 0.05% of the
average daily net assets of the Class A shares) in anticipation of or as
reimbursement for print or electronic media advertising expenses incurred in
connection with the sale of Class A shares.
The Distribution Plans continue 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 Trustees who are not "interested persons"
of the Trust and who have no direct or indirect financial interest in the
operation of the Distribution Plans or in any agreement related to the Plans
(for purposes of this paragraph "Qualified Trustees"). Each Distribution 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 Distribution Plan. Each
Distribution Plan further provides that the selection and nomination of the
Qualified Trustees is committed to the discretion of the disinterested Trustees
(as defined in the 1940 Act) then in office. The Distribution Plans may be
terminated with respect to any class of shares of any Fund at any time by a vote
of a majority of the Trust's Qualified Trustees or by a vote of a majority of
the outstanding voting securities of that class of shares of the Fund. The
Distribution Plan applicable to a class of shares of any Fund may not be amended
to increase materially the amount of a Fund's permitted expenses thereunder
without the approval of a majority of the outstanding securities of that class
of shares of that Fund 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 each
Distribution Plan for a period of not less than six years from the date of the
Plan, and for the first two years the Distributor will preserve such copies in
an easily accessible place.
As contemplated by the Distribution Plans, LFBDS acts as the agent of the
Trust in connection with the offering of shares of the Funds pursuant to the
Distribution Agreements. After the prospectuses and periodic reports of the
Funds have been prepared, set in type and mailed to existing shareholders, the
Distributor pays for the printing and distribution of copies thereof which are
used in connection with the offering of shares of the Funds to prospective
investors. The Prospectus contains a description of fees payable to the
Distributor under the Distribution Agreements. For the fiscal years ended August
31, 1992 and August 31, 1993, for the four-month period ended December 31, 1993
and for the fiscal year ended December 31, 1994, the fees payable to the
Distributor by the Government Income Fund under the Distribution Agreement were
$58,066 (of which $52,025 was voluntarily waived), $30,553 (of which $28,974 was
voluntarily waived), $13,840 (all of which was voluntarily waived) and $34,098
(all of which was voluntarily waived), no portion of which was applicable to
reimbursement for expenses incurred in connection with print or electronic media
advertising. For the period June 25, 1993 (commencement of operations) to
December 31, 1993 and for the fiscal year ended December 31, 1994, the fees
payable to the Distributor from the Intermediate Income Fund under the
Distribution Plan were $16,454 (all of which was voluntarily waived) and $26,617
(all of which was voluntarily waived), respectively.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has adopted an administrative services plan (the "Administrative
Services Plan") after having concluded that there is a reasonable likelihood
that the Administrative Services Plan will benefit the Funds and their
shareholders. The Administrative Services Plan provides that the Trust may
obtain the services of an administrator, a transfer agent, a custodian and one
or more Shareholder Servicing Agents, and may enter into agreements providing
for the payment of fees for such services. Under the Trust's Administrative
Services Plan, the total of the fees paid from a Fund to the Trust's
Administrator and Shareholder Servicing Agents may not exceed 0.65% of the
Fund's average daily net assets on an annualized basis for the Fund's
then-current fiscal year. Any distribution fees (other than any fee concerning
electronic or other media advertising) payable under the Distribution Plan for
Class A shares are included in this expense limitation. This limitation with
respect to the Class B shares of each Fund, does not include any amounts payable
under the Distribution Plans for such shares. The Administrative Services Plan
continues in effect if such continuance is specifically approved at least
annually by a vote of both a majority of the Trustees and a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Administrative Services Plan
or in any agreement related to such Plan (for purposes of this paragraph
"Qualified Trustees"). The Administrative Services Plan requires that the Trust
provide to its 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 Administrative Services Plan. The Administrative Services Plan may be
terminated at any time by a vote of a majority of the Qualified Trustees of the
Trust or as to each Fund by a vote of a majority of the outstanding voting
securities of the Fund. The Administrative Services Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of a majority of the outstanding voting securities of the Funds. The
Administrative Services Plan with respect to each Fund may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent and a Transfer Agency and
Service Agreement with State Street Bank and Trust Company ("State Street")
pursuant to which State Street acts as transfer agent for each Fund. The Trust
has entered into a Custodian Agreement with Investors Bank & Trust Company
("IBT") and a Fund Accounting Agreement with Signature Financial Services, Inc.
("SFSI") pursuant to which custodial and fund accounting services, respectively,
are provided for the Government Income Fund. The Trust has entered into a
Custodian Agreement with State Street Bank and Trust Company pursuant to which
custodial and fund accounting services are provided for the Intermediate Income
Fund. See "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund
Accountant" in the Prospectus for additional information, including a
description of fees paid to the Shareholder Servicing Agents under the Servicing
Agreements. For the fiscal year ended August 31, 1993, aggregate fees payable to
Shareholder Servicing Agents by the Government Income Fund under the
Administrative Services Plan were $244,421 (of which $91,658 was voluntarily
waived). For the four-month period ended December 31, 1993, aggregate fees
payable to Shareholder Servicing Agents by the Government Income Fund under the
Administrative Services Plan were $110,717 (of which $41,519 was voluntarily
waived). For the fiscal year ended December 31, 1994, aggregate fees payable to
Shareholder Servicing Agents by the Government Income Fund under the
Administrative Services Plan were $272,783 (of which $102,294 was voluntarily
waived). For the period from June 25, 1993 (commencement of operations) to
December 31, 1993 and for the fiscal year ended December 31, 1994, aggregate
fees payable to Shareholder Servicing Agents by the Intermediate Income Fund
under the Administrative Services Plan were $131,629 (of which $51,581 was
voluntarily waived) and $212,916 (of which $79,843 was voluntarily
waived),respectively.
The Portfolio Trust has also adopted an administrative services plan (the
"Portfolio Administrative Plan"), which provides that the Portfolio Trust may
obtain the services of an administrator, a transfer agent and a custodian and
may enter into agreements providing for the payment of fees for such services.
Under the Portfolio Administrative Plan, the administrative services fee payable
to the Portfolio Administrator from the Portfolio may not exceed 0.05% of the
Portfolio's average daily net assets on an annualized basis for its then-current
fiscal year.
The Portfolio Administrative Plan continues in effect if such continuance
is specifically approved at least annually by a vote of both a majority of the
Portfolio Trust's Trustees and a majority of the Portfolio Trust's Trustees who
are not "interested persons" of the Portfolio and who have no direct or indirect
financial interest in the operation of the Portfolio Administrative Plan or in
any agreement related to such Plan (for purposes of this paragraph "Qualified
Trustees"). The Portfolio Administrative Plan requires that the Portfolio Trust
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 Portfolio Administrative Plan. The Portfolio Administrative Plan may
not be amended to increase materially the amount of permitted expenses
thereunder without the approval of a majority of the outstanding voting
securities of the Portfolio Trust and may not be materially amended in any case
without a vote of the majority of both the Portfolio Trust's Trustees and the
Portfolio Trust's Qualified Trustees.
State Street acts as transfer agent and dividend disbursing agent for each
Fund and as the custodian of Intermediate Income Fund's assets. The Portfolio
Trust, on behalf of the Portfolio has entered into a Custodian Agreement with
IBT pursuant to which IBT acts as custodian for the Portfolio. The Portfolio
Trust, on behalf of the Portfolio has entered into a Fund Accounting Agreement
with SFSI pursuant to which SFSI provides fund accounting services for the
Portfolio. Pursuant to a separate Transfer Agency and Service Agreement with the
Portfolio Trust, SFSI provides transfer agency services to the Portfolio. See
"Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund
Accountant" in the Prospectus for additional information.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of IBT is One
Lincoln Plaza, Boston, Massachusetts 02111. The principal business address of
SFSI is 6 St. James Avenue, Boston, Massachusetts 02116.
AUDITORS
Price Waterhouse LLP are the independent certified public accountants for
the Government Income Fund, providing audit services and assistance and
consultation with respect to the preparation of filings with the SEC. The
address of Price Waterhouse LLP is 160 Federal Street, Boston, Massachusetts
02110. Price Waterhouse are the chartered accountants for the Portfolio Trust.
The address of Price Waterhouse is Suite 3000, 1 First Canadian Place, Toronto,
Ontario M5X 1H7, Canada.
Deloitte & Touche LLP are the independent certified public accountants for
the Intermediate Income Fund, providing audit services and assistance and
consultation with respect to the preparation of filings with the SEC. The
address of Deloitte & Touche LLP is 125 Summer Street, Boston, Massachusetts
02110.
6. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objectives. Changes in each 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. The turnover rate for the
Government Income Fund is expected to be approximately 125% annually. The
turnover rate for the Intermediate Income Fund is expected to be between 100%
and 250% annually. Specific decisions to purchase or sell securities for each
Fund are made by a portfolio manager who is an employee of the Adviser and who
is appointed and supervised by its senior officers. The portfolio manager may
serve other clients of the Adviser in a similar capacity.
The primary consideration in placing portfolio securities transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of each Fund and other clients
of the Adviser on the basis of their professional capability, the value and
quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Adviser normally seeks to deal directly with the primary
market makers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Adviser on the tender of a
Fund's securities in so-called tender or exchange offers. Such soliciting dealer
fees are in effect recaptured for the Fund by the Adviser. At present no other
recapture arrangements are in effect.
Under the Advisory Agreements, in connection with the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed to
seek for each Fund in its best judgment, prompt execution in an effective manner
at the most favorable price. Subject to this requirement of seeking the most
favorable price, securities may be bought from or sold to broker-dealers who
have furnished statistical, research and other information or services to the
Adviser or the Funds, subject to any applicable laws, rules and regulations.
The investment advisory fee that each Fund pays to the Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through the use of the services, avoid the
additional expenses which would be incurred if it should attempt to develop
comparable information through its own staff.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of the Adviser's other clients.
Investment decisions for each Fund and for the Adviser's 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 the Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large volume purchases or sales.
For the fiscal years ended August 31, 1992 and August 31, 1993, for the
four month period ended December 31, 1993 and for the four month period ended
April 30, 1994, the Government Income Fund paid no brokerage commissions. For
the period from May 1, 1994 to December 31, 1994, the Portfolio paid no
brokerage commissions. For the period from June 25, 1993 (commencement of
operation) to December 31, 1993 and for the fiscal year ended December 31, 1994,
the Intermediate Income Fund paid no brokerage commissions.
7. 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. Currently, the Trust has four
series of shares, each divided into two classes. The Trust has reserved the
right to create and issue additional series and classes of shares. Each share of
each class of each Fund represents an equal proportionate interest in the Fund
with each other share of that class. Shares of each series participate equally
in the earnings, dividends and distribution of net assets of the particular
series upon liquidation or dissolution (except for any differences among classes
of shares in a series). Shares of each series are entitled to vote separately to
approve advisory agreements or changes in investment policy, but shares of all
series may vote together in the election or selection of Trustees and
accountants for the Trust. In matters affecting only a particular Fund or class,
only shares of that particular Fund 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 to hold, and has no
present intention of holding, annual meetings of shareholders but the Trust will
hold special meetings of shareholders when in the judgment of the 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 Objectives, Policies and Restrictions--Investment
Restrictions".) At any meeting of shareholders of any Fund, a Shareholder
Servicing 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 Shareholder
Servicing Agent is the holder of record. Shares have no preference, pre-emptive,
conversion or similar rights. Shares, when issued, are fully paid and
non-assessable, except as set forth below.
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 outstanding
shares would be sufficient. The Trust or any series of the Trust, as the case
may be, may be terminated (i) by a vote of a majority of the outstanding voting
securities of the Trust or the affected series or (ii) by the Trustees by
written notice to the shareholders of the Trust or the affected series. If not
so terminated, the Trust will continue indefinitely.
Share certificates will not be issued.
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 of the 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 of each Trust protects a Trustee
against any liability to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Portfolio is a series of the Portfolio Trust, organized as a trust
under the laws of the State of New York. The Portfolio Trust's Declaration of
Trust provides that investors in the Portfolio (e.g., other investment companies
(including the Government Income Fund), insurance company separate accounts and
common and commingled trust funds) are each liable for all obligations of the
Portfolio. However, the risk of the Government Income Fund incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations. It is not expected that the liabilities of the Portfolio would ever
exceed its assets.
Each investor in the Portfolio, including the Government Income Fund, may
add to or withdraw from its investment in the Portfolio on each Business Day. As
of the close of regular trading on each Business Day, the value of each
investor's beneficial interest in the 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.
8. CERTAIN ADDITIONAL TAX MATTERS
Each Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Provided all such requirements are met and all
of a Fund's net investment income and realized capital gains are distributed to
shareholders in accordance with the timing requirements imposed by the Code no
federal income or excise taxes generally will be required to be paid by the
Fund, although foreign source income earned by the Fund may be subject to
non-U.S. withholding taxes and, as described in the Prospectus, the Fund may be
required to pay federal income taxes on certain distributions and realized
capital gains from securities in "passive foreign investment companies." 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 dividend
income to shareholders. The Portfolio Trust believes the Portfolio also will not
be required to pay any federal income or excise taxes.
Shareholders of a Fund will have to pay federal income taxes and any state
or local income taxes on the dividends and capital gains 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. Because each Fund expects to earn primarily interest income,
it is expected that no Fund dividends will qualify for the dividends received
deduction for corporations; however, a portion of the Intermediate Income Fund's
ordinary income dividends may be eligible for this deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its holding
of Fund shares. Availability of the deduction for particular shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax or result in certain basis adjustments. 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.
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 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 redemption 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 shares of a Fund within 90 days after their purchase followed by
any purchase (including purchases by exchanges or by reinvestment) of shares of
the Fund or another Landmark Fund without payment of an additional sales charge.
Any investments in zero coupon bonds and certain securities purchased at a
market discount will cause the applicable Fund or Portfolio 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, the Trust or Portfolio Trust may be
required to liquidate securities of a Fund or Portfolio that it might otherwise
have continued to hold. An investment in residual interests of a CMO that has
elected to be treated as a real estate mortgage investment conduit, or "REMIC",
may result in a federal tax to the extent a Fund has tax exempt entities as
shareholders. Each Fund's and the Portfolio'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 or Portfolio income and
distributions to holders of beneficial interests. For example, certain positions
held by a Fund or the Portfolio 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 or the
Portfolio 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 or Portfolio losses,
adjustments in the holding periods of securities held by the Fund or the
Portfolio and conversion of short-term into long-term capital losses. Certain
tax elections exist for straddles which may alter the effects of these rules.
Each of the Funds and the Portfolio will limit its investment activities in
options, Futures Contracts and forward contracts to the extent necessary to meet
the requirements of Subchapter M of the Code.
Any investment in certain securities purchased at a market discount will
cause the Portfolio 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 Government Income Fund, the Portfolio Trust may be required to
liquidate securities of the Portfolio that it might otherwise have continued to
hold and thereby potentially cause the corresponding Fund to realize additional
taxable gain or loss.
Special tax considerations apply with respect to non-U.S. investments of
the Funds. Use of non-U.S. currencies for non-hedging purposes may be limited in
order to avoid a tax on the corresponding Fund. Investment by a Fund in certain
"passive foreign investment companies" may also be limited in order to avoid a
tax on the Fund. Investment income received by a Fund from non-U.S. securities
may be subject to non-U.S. income taxes withheld at the source. The United
States 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. The
Funds intend to qualify for treaty reduced rates where available. It is not
possible, however, to determine the Funds' effective rate of non-U.S. tax in
advance since the amount of the Funds' respective assets to be invested within
various countries is not known.
The Funds generally do not expect to be able to pass through to
shareholders foreign tax credits with respect to any foreign taxes imposed on
non-U.S. investments.
9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Price Waterhouse LLP are the independent certified public accountants for
the Government Income Fund, providing audit services and assistance and
consultation with respect to the preparation of filings with the SEC. Price
Waterhouse are the chartered accountants for the Portfolio Trust. Deloitte &
Touche LLP were the independent certified public accountants for the Government
Income Fund through December 31, 1993 and are the independent certified public
accountants for the Intermediate Income Fund. The selection of Price Waterhouse
LLP for the Government Income Fund was based on management's decision with
respect to certain areas of expertise and service capabilities. There was no
disagreement between the Trust and Deloitte & Touche LLP with respect to the
accounting and audit services provided by such firm.
The audited financial statements of the Government Income Fund (Statement
of Assets and Liabilities at December 31, 1994, Statement of Operations for the
year ended December 31, 1994, Statement of Changes in Net Assets for the year
ended December 31, 1994, for the four-month period ended December 31, 1993 and
for the year ended August 31, 1993, Notes to Financial Statements and
Independent Auditors' Report), each of which is included in the Annual Report to
Shareholders of the Government Income Fund, are incorporated by reference into
this Statement of Additional Information and have been so incorporated in
reliance upon the reports of Price Waterhouse LLP (for the fiscal year ended
December 31, 1994) and Deloitte & Touche LLP (for periods prior to the fiscal
year ended December 31, 1994), independent certified public accountants, on
behalf of the Government Income Fund.
The audited financial statements of the Portfolio (Portfolio of Investments
at December 31, 1994, Statement of Assets and Liabilities at December 31, 1994,
Statement of Operations for the period May 1, 1994 (commencement of operations)
to December 31, 1994, Statement of Changes in Net Assets for the period May 1,
1994 (commencement of operations) to December 31, 1994, Financial Highlights for
the period May 1, 1994 (commencement of operations) to December 31, 1994, Notes
to Financial Statements and Independent Auditors' Report), each of which is
included in the Annual Report to Shareholders of the Government Income Fund, are
incorporated by reference into this Statement of Additional Information and have
been so incorporated in reliance upon the report of Price Waterhouse, chartered
accountants, on behalf of the Portfolio.
The audited financial statements of the Intermediate Income Fund (Portfolio
of Investments at December 31, 1994, Statement of Assets and Liabilities at
December 31, 1994, Statement of Operations for the year ended December 31, 1994,
Statement of Changes in Net Assets for the year ended December 31, 1994 and for
the period June 25, 1993 (commencement of operations) to December 31, 1993,
Notes to Financial Statements and Independent Auditors' Report), each of which
is included in the Annual Report to Shareholders of the Intermediate Income
Fund, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent certified public accountants, on behalf of
the Intermediate Income Fund.
Copies of the Annual Reports to Shareholders of each of the Funds accompany
this Statement of Additional Information.
APPENDIX A
DESCRIPTION OF BOND RATINGS*
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Ratings Group ("S&P") represent their opinions as to the quality of
various debt securities. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, debt securities with the same
maturity, coupon and rating may have different yields while debt securities of
the same maturity and coupon with different ratings may have the same yield.
Moody's Investors Service, Inc.
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as
"gilt edge". 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 risks appear
somewhat larger than in 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 sometime 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.
Note: Those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa 1, A 1 and Baa
1.
STANDARD & POOR'S RATINGS GROUP
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. AA Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree. A Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories. BBB Debt rated
BBB is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
* As described by the rating agencies. Ratings are generally given to securities
at the time of issuance. While the rating agencies may from time to time revise
such ratings, they undertake no obligation to do so.
<PAGE>
SHAREHOLDER SERVICING AGENTS
FOR CITIBANK NEW YORK RETAIL BANKING AND
BUSINESS AND PROFESSIONAL CUSTOMERS:
Citibank, N.A.
450 West 33rd Street, New York, NY 10001
(212) 564-3456 or (800) 846-5300
FOR CITIGOLD CUSTOMERS:
Citigold
666 Fifth Avenue, New York, NY 10150-5130
Call Your Account Officer or (212) 974-0900 or (800) 285-1701
FOR PRIVATE BANKING CLIENTS:
Citibank, N.A.
The Citibank Private Bank
153 East 53rd Street, New York, NY 10043
Call Your Citibank Private Banking Account Officer,
Investment Specialist or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS:
Citibank, N.A.
Citibank Global Asset Management
153 East 53rd Street, New York, NY 10043
(212) 559-7117
FOR NORTH AMERICAN INVESTOR SERVICES CLIENTS:
Citibank, N.A.
111 Wall Street, New York, NY 10043
Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS:
Citicorp Investment Services
One Court Square, Long Island City, NY 11120
Call Your Investment Consultant or (800) 846-5200,
(212) 736-8170 in New York City
<PAGE>
LANDMARK U.S. GOVERNMENT INCOME FUND
LANDMARK INTERMEDIATE INCOME FUND
TRUSTEES AND OFFICERS
Philip W. Coolidge
President*
H.B. Alvord
Riley C. Gilley
Diana R. Harrington
Susan B. Kerley
C. Oscar Morong, Jr.
Donald B. Otis
E. Kirby Warren
William S. Woods, Jr.
SECRETARY AND TREASURER
Thomas M. Lenz*
*Affiliated Person of Administrator and Distributor
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INVESTMENT ADVISER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
ADMINISTRATOR AND DISTRIBUTOR
The Landmark Funds Broker-Dealer Services, Inc.
6 St. James Avenue, Boston, MA 02116
(617) 423-1679
TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
CUSTODIAN
(For U.S. Government Income Fund)
Investors Bank & Trust Company
One Lincoln Plaza, Boston, MA 02111
(For Intermediate Income Fund)
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
(For U.S. Government Income Fund)
Price Waterhouse LLP
160 Federal Street, Boston, MA 02110
(For Intermediate Income Fund)
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
LEGAL COUNSEL
Bingham, Dana & Gould
150 Federal Street, Boston, MA 02110
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