Rule 497(c)
File Nos. 33-6540 and 811-5033
PROSPECTUS
APRIL 3, 1995
LANDMARK U.S. GOVERNMENT INCOME FUND
LANDMARK INTERMEDIATE INCOME FUND
(Members of the LandmarkSM Family of Funds)
Class A and B Shares
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This Prospectus describes two mutual funds in the Landmark Family of Funds:
Landmark U.S. Government Income Fund and Landmark Intermediate Income Fund. Each
Fund has its own investment objectives and policies. Citibank, N.A. is the
investment adviser.
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UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, LANDMARK U.S. GOVERNMENT INCOME FUND SEEKS ITS
INVESTMENT OBJECTIVES BY INVESTING ALL OF ITS INVESTABLE ASSETS IN GOVERNMENT
INCOME PORTFOLIO, A SERIES (CALLED THE "PORTFOLIO") OF THE PREMIUM PORTFOLIOS.
THE PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVES AND POLICIES AS THE U.S.
GOVERNMENT INCOME FUND. SEE "SPECIAL INFORMATION CONCERNING INVESTMENT
STRUCTURE" ON PAGE 10.
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REMEMBER THAT SHARES OF THE FUNDS:
* ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY
* ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES
* ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated April 3, 1995 (and incorporated by reference in this
Prospectus) has been filed with the Securities and Exchange Commission. Copies
of the Statement of Additional Information may be obtained without charge, and
further inquiries about the Funds may be made, by contacting the investor's
shareholder servicing agent (see inside back cover for address and phone
number).
TABLE OF CONTENTS
Prospectus Summary
2
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Expense Summary
4
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Condensed Financial Information
6
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Investment Information
8
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Risk Considerations
10
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Valuation of Shares
Classes of Shares
12
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Purchases
14
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Exchanges
Redemptions
18
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Dividends and Distributions
Management
19
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Tax Matters
22
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Performance Information
General Information
23
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Appendix -- Permitted Investments and
Investment Practices
25
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed
in this summary.
THE FUNDS: This Prospectus describes two mutual funds: Landmark U.S. Government
Income Fund and Landmark Intermediate Income Fund. Each Fund has its own
investment objectives and policies. There can be no assurance that either Fund
will achieve its objectives.
INVESTMENT OBJECTIVES AND POLICIES:
LANDMARK U.S. GOVERNMENT INCOME FUND. To generate current income and preserve
the value of its shareholders' investment. Through Government Income Portfolio,
the Fund invests in debt securities backed by the full faith and credit of the
U.S. Government with a dollar weighted average maturity that is generally three
years or less. Because the Fund invests through Government Income Portfolio, all
references in this Prospectus to the Fund include the Government Income
Portfolio, except as otherwise noted.
LANDMARK INTERMEDIATE INCOME FUND. To generate a high level of current income
and preserve the value of its shareholders' investment. The Fund invests in a
broad range of fixed income securities, including preferred stock and debt
securities issued by U.S. and non-U.S. companies and debt securities of the U.S.
Government and governments of other countries, including developing countries.
Under normal market conditions, the Fund's dollar weighted average portfolio
maturity will be from three to ten years.
INVESTMENT ADVISER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the
"Adviser"), a wholly-owned subsidiary of Citicorp, is the investment adviser.
Citibank and its affiliates manage more than $73 billion in assets worldwide.
The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Distributor")
is the distributor of shares of each Fund. See "Management."
PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may
purchase and redeem shares of the Funds on any Business Day. See "Purchases" and
"Redemptions."
PRICING: Investors may select Class A or Class B shares, with different expense
levels and sales charges (if available through the investors' Shareholder
Servicing Agents). See "Classes of Shares," "Purchases" and "Management --
Distribution Arrangements."
CLASS A SHARES. Offered at net asset value plus any applicable initial sales
charge (maximum of 1.50% of the public offering price for the U.S. Government
Income Fund and 4.00% of the public offering price for the Intermediate Income
Fund) and subject to a distribution fee at the annual rate of 0.05% of the
average daily net assets represented by the Class A shares. Purchases of $1
million or more are not subject to an initial sales charge, but are subject to a
1.00% contingent deferred sales charge in the event of certain redemptions
within 12 months following purchase.
The sales charge on Class A shares may be reduced or eliminated through the
following programs:
Letter of Intent
Right of Accumulation
Reinstatement Privilege
See "Purchases" and "Redemptions."
CLASS B SHARES. Offered at net asset value. A maximum contingent deferred sales
charge of 2.00% for the U.S. Government Income Fund, and 5.00% for the
Intermediate Income Fund, of the lesser of the shares' net asset value at
redemption or their original purchase price is imposed on certain redemptions
made within four years of the date of purchase for the U.S. Government Income
Fund and six years of the date of purchase for the Intermediate Income Fund.
Class B shares are subject to a distribution fee at the annual rate of 0.45% for
the U.S. Government Income Fund, and 0.75% for the Intermediate Income Fund, of
the average daily net assets represented by the Class B shares. Class B shares
are also subject to a service fee at the annual rate of 0.05% of the average
daily net assets represented by the Class B shares. Class B shares automatically
convert into Class A shares (which have a lower distribution fee) approximately
eight years after purchase.
EXCHANGES: Shares may be exchanged for shares of the corresponding class of most
other Landmark Funds. See "Exchanges."
DIVIDENDS: Dividends are declared and paid monthly for each Fund. Net capital
gains are distributed annually. See "Dividends and Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares of the same class at net asset value, subject
to the policies of a shareholder's Shareholder Servicing Agent. See "Dividends
and Distributions."
WHO SHOULD INVEST: Each Fund has its own suitability considerations and risk
factors, as summarized below and described in more detail in "Investment
Information" and "Risk Considerations." No single Fund is intended to provide a
complete investment program.
U.S. GOVERNMENT INCOME FUND. The Fund is designed for investors seeking a higher
level of current income than is generally available from money market funds, but
who do not want the price fluctuations that are inherent in longer-term
securities. Investors should still be willing to accept fluctuation in the price
of shares of the Fund.
INTERMEDIATE INCOME FUND. The Fund is designed for investors seeking a higher
level of current income than is generally available from shorter-term
securities, and who are willing to accept the greater price fluctuations
associated with higher levels of income.
RISK FACTORS: There can be no assurance that any Fund will achieve its
investment objectives, and each Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. As a result, an
investor's shares may be worth more or less at redemption than at the time of
purchase.
The value of fixed income securities, including those backed by the U.S.
Government, generally goes down when interest rates go up, and vice versa.
Changes in interest rates will generally cause bigger changes in the prices of
longer-term securities than in the prices of shorter-term securities.
Investors in the Intermediate Income Fund should be aware that prices of fixed
income securities also fluctuate based on changes in the actual and perceived
creditworthiness of issuers. Bond ratings take into account the likelihood that
each issuer will be able to make its required payments, and the prices of lower
rated securities often fluctuate more than those of higher rated securities.
Also, it is possible that some issuers will be unable to make required payments
on fixed income securities held by the Intermediate Income Fund. Securities that
are backed by the full faith and credit of the U.S. Government are generally
thought to have minimal credit risk.
The Intermediate Income Fund may invest a portion of its assets in non-U.S.
securities. The special risks of investing in non-U.S. securities, include
possible adverse political, social and economic developments abroad, the
difficulties of enforcing legal rights under some non-U.S. legal systems and
against some non-U.S. governments and different characteristics of non-U.S.
economies and markets. Non-U.S. securities often will trade in non-U.S.
currencies, which can be volatile and may be subject to governmental controls or
intervention. In addition, securities of non-U.S. issuers may be less liquid and
their prices more volatile than those of comparable U.S. issuers.
Certain investment techniques, such as repurchase agreements, forward delivery
contracts and loans of securities, also may entail special risks. Investors
should read "Risk Considerations" for more information about risk factors.
<PAGE>
EXPENSE SUMMARY
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The following table summarizes estimated shareholder transaction and annual
operating expenses for Class A and B shares of each Fund. The U.S. Government
Income Fund invests all of its investable assets in Government Income Portfolio.
The Trustees of the U.S. Government Income Fund believe that the aggregate per
share expenses of that Fund and the Portfolio will be less than or approximately
equal to the expenses that the Fund would incur if its assets were invested
directly in the types of securities held by the Portfolio. For more information
on costs and expenses, see "Management" -- page 19 and "General Information-
Expenses" -- page 24.*
U.S. GOVERNMENT INTERMEDIATE
INCOME FUND INCOME FUND
CLASS A CLASS B CLASS A CLASS B
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) .................. 1.50% None 4.00% None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds, whichever is See See
less) ............................ Below(1) 2.00% Below(1) 5.00%
ANNUAL FUND OPERATING EXPENSES,
AFTER FEE WAIVERS (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Management Fee(2) ....... 0.25% 0.25% 0.12% 0.12%
12b-1 Fees (including service fees
for Class B shares)(2)(3) ........ 0.05% 0.50% 0.05% 0.80%
Other Expenses
Administrative Services Fees(2) .. 0.09% 0.09% 0.14% 0.14%
Shareholder Servicing Agent Fees
(2) ............................. 0.25% 0.25% 0.25% 0.25%
Other Operating Expenses(2) ...... 0.16% 0.16% 0.34% 0.34%
Total Fund Operating Expenses(4) ... 0.80% 1.25% 0.90% 1.65%
(1) Purchases of $1 million or more are not subject to an intial sales charge;
however, a contingent deferred sales charge of 1.00% will be imposed in the
event of certain redemptions within 12 months following purchase. See
"Classes of Shares" and "Purchases."
(2) After fee waivers.
(3) 12b-1 distribution fees are asset-based sales charges. Long-term
shareholders in a Fund could pay more in sales charges than the economic
equivalent of the maximum front-end sales charges permitted by the National
Association of Securities Dealers, Inc. The figures for Class B shares
include service fees, which are payable at the annual rate of 0.05% of the
average daily net assets represented by Class B shares.
(4) Absent fee waivers "Total Fund Operating Expenses" would have been 1.31% for
Class A shares and 1.91% for Class B shares of the U.S. Government Income
Fund and 1.44% for Class A shares and 2.34% for Class B shares of the
Intermediate Income Fund:
*This table is intended to assist investors in understanding the various costs
and expenses that a shareholder of a Fund will bear, either directly or
indirectly. Because Class B shares were not offered during the most recent
fiscal year of the Funds, Other Operating Expenses in the table with respect to
Class B shares of the Funds are based on estimated amounts for the current
fiscal year. There can be no assurance that the fee waivers reflected in the
table will continue at their present levels. For more information on costs and
expenses, see "Management" and "General Information-Expenses."
More complete descriptions of the following expenses of the Funds and the
Portfolio are set forth on the following pages: (i) investment management fees
- -- page 20, (ii) distribution and service fees -- page 22, (iii) administrative
services fees -- page 21, and (iv) shareholder servicing agent fees -- page 21.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming, except as otherwise noted, redemption at the end of each
period indicated below:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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U.S. GOVERNMENT INCOME FUND
Class A shares(1) .................. $23 $40 $ 59 $112
Class B shares:
Assuming complete redemption at end
of period(2)(3) .................. $33 $50 $ 69 $133
Assuming no redemption(3) ........ $13 $40 $ 69 $133
INTERMEDIATE INCOME FUND
Class A shares(1) .................. $49 $68 $ 88 $146
Class B shares:
Assuming complete redemption at end
of period(2)(3) .................. $67 $82 $110 $166
Assuming no redemption(3) ........ $17 $52 $ 90 $166
(1) Assumes deduction at the time of purchase of the maximum sales load, which
is 1.50% for U.S. Government Income Fund and 4.00% for Intermediate Income
Fund.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares
approximately eight years after purchase.
The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers. If waivers were not in place, the amounts in the example
would be $28, $56, $86 and $171 for U.S. Government Income Fund -- Class A; $39,
$70, $103 and $207 for U.S. Government Income Fund -- Class B (assuming complete
redemption at the end of each period); $54, $84, $116 and $206 for Intermediate
Income Fund -- Class A; and $74, $103, $145 and $234 for Intermediate Income
Fund -- Class B (assuming complete redemption at the end of each period).
Expenses for Class A shares are based on the fiscal year ended December 31,
1994. Expenses for Class B shares are estimated, because Class B shares were not
offered during the fiscal year ended December 31, 1994. The assumption of a 5%
annual return is required by the Securities and Exchange Commission for all
mutual funds, and is not a prediction of any Fund's future performance. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF
ANY FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
CONDENSED FINANCIAL INFORMATION
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The following tables provide condensed financial information about the U.S.
Government Income Fund and the Intermediate Income Fund for the periods
indicated. The information below should be read in conjunction with the
financial statements appearing in the Annual Reports to Shareholders of the U.S.
Government Income Fund and the Intermediate Income Fund, which are incorporated
by reference in the Statement of Additional Information. The financial
statements and notes, as well as the tables below of U.S. Government Income Fund
have been audited by 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. The report of
Price Waterhouse LLP is included in the Fund's Annual Report. The financial
statements and notes, as well as the tables below, of Intermediate Income Fund
have been audited by Deloitte & Touche LLP, independent certified public
accountants, whose report is included in the Fund's Annual Report. Copies of the
Annual Reports may be obtained without charge from an investor's Shareholder
Servicing Agent (see inside of back cover for address and phone number).
<TABLE>
<CAPTION>
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U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
CLASS A SHARES
(No Class B shares were outstanding during these periods.)
FOUR
YEAR MONTHS
ENDED ENDED
DEC. 31, DEC. 31, YEAR ENDED AUGUST 31,
1994 1993<F5> 1993 1992 1991 1990 1989 1988 1987<F4>
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period ....... $ 9.91 $10.01 $ 9.85 $ 9.42 $ 8.93 $ 9.08 $ 9.03 $ 9.16 $10.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from Operations:
Net investment income .... 0.466 0.183 0.448 0.591 0.710 0.653 0.770 0.763 0.739
Net realized and unrealized gain (loss)
on investments............................. (0.635) (0.138) 0.183 0.413 0.499 (0.148) 0.052 (0.114) (0.871)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from operations .................. (0.169) 0.045 0.631 1.004 1.209 0.505 0.822 0.649 (0.132)
------- ------- ------- ------- ------- ------- ------- ------- -------
Less Dividends and Distributions From:
Net investment income .................... (0.461) (0.145) (0.464) (0.574) (0.719) (0.655) (0.772) (0.779) (0.708)
In excess of net investment income ......... -- -- (0.007) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from dividends ................... (0.461) (0.145) (0.471) (0.574) (0.719) (0.655) (0.772) (0.779) (0.708)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, end of period .............$ 9.28 $ 9.91 $10.01 $ 9.85 $ 9.42 $ 8.93 $ 9.08 $ 9.03 $ 9.16
======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $52,933 $79,306 $82,114 $56,159 $25,556 $21,521 $24,834 $31,733 $46,447
Ratio of expenses to average net assets ... 0.80%<F6> 0.80%<F3> 0.80% 0.51% 0.97% 1.88% 1.73% 1.29% 0.62%<F3>
Ratio of net investment income to average
net assets 4.72% 4.34% 4.46% 6.03% 7.71% 7.19% 8.55% 8.31% 8.45%<F3>
Portfolio turnover ........................ 22%<F7> 26% 111% 161% 42% 14% 151% 283% 411%
Total return .............................. (1.72%) 0.45%<F2> 6.59% 10.94% 14.04% 5.73% 9.66% 7.18% (1.37%)<F3>
Note: If certain agents of the U.S. Government Income Fund for the periods
indicated and certain agents of the Portfolio for the period May 1, 1994 to
December 31, 1994 had not waived a portion of their fees, the net investment
income per share and the ratios would have been as follows:
Net investment income per share ........... $0.421 $0.164 $0.400 $0.503 $0.659 $0.648 <F1> $0.762 $0.686
RATIOS:
Expenses to average net assets ............ 1.26%(B) 1.27%<F3> 1.27% 1.41% 1.52% 1.94% <F1> 1.30% 1.23%<F3>
Net investment income to average net assets 4.26% 3.88%<F3> 3.98% 5.13% 7.16% 7.13% <F1> 8.30% 7.84%<F3>
<FN>
<F1> No waivers or assumption of expenses during the period.
<F2> Not annualized.
<F3> Annualized.
<F4> For the period from the start of business, September 8, 1986 to August 31, 1987.
<F5> Effective September 1, 1993, the U.S. Government Income Fund changed its fiscal year end from August 31 to December 31.
<F6> Includes U.S. Government Income Fund's share of Portfolio allocated expenses for the period May 1, 1994 to December 31, 1994.
<F7> Portfolio turnover represents the rate of portfolio activity for the period while the U.S. Government Income Fund was making
investments directly in securities. The portfolio turnover rate for the period since the U.S. Government Income Fund
transferred all of its investable assets to the Portfolio, was 40%.
</TABLE>
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS
CLASS A SHARES
(No Class B shares were outstanding
during these periods.)
FOR THE PERIOD
JUNE 25, 1993
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS) TO
1994 DECEMBER 31, 1993
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Net Asset Value, beginning of period ... $ 9.88 $10.00
------ ------
Income from Operations:
Net investment income .................. 0.521 0.261
Net realized and unrealized gain (loss)
on investments ...................... (0.959) 0.037
------ ------
Total from operations .............. (0.438) 0.298
------ ------
Less Dividends and Distributions From:
Net investment income ................ (0.516) (0.261)
In excess of net investment income ... -- (0.006)
Net realized gain (loss) on
investments ........................ (0.016) (0.151)
------ ------
Total from dividends and distributions (0.532) (0.418)
------ ------
Net Asset Value, end of period ......... $ 8.91 $ 9.88
====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $47,582 $61,183
Ratio of expenses to average net assets 0.90% 0.90%*
Ratio of net investment income to average
net assets .......................... 5.52% 4.95%*
Portfolio turnover ..................... 291% 103%
Total return ........................... (4.48%) 2.99%+
Note: If certain agents of the Intermediate Income Fund had not voluntarily
agreed to waive a portion of their fees for the periods indicated, the net
investment income per share and the ratios would have been as follows:
Net investment income per share ........ $ 0.475 $0.236
RATIOS:
Expenses to average net assets ......... 1.39% 1.38%*
Net investment income to average net assets 5.03% 4.47%*
*Annualized.
+Not annualized.
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES: The investment objectives of the U.S. GOVERNMENT INCOME
FUND are to generate current income and preserve the value of its shareholders'
investment.
The investment objectives of the INTERMEDIATE INCOME FUND are to generate a
high level of current income and preserve the value of its shareholders'
investment.
The investment objectives of each Fund may be changed by its Trustees
without approval by that 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 U.S. GOVERNMENT INCOME FUND seeks its objectives by
investing in debt securities that are backed, as to timely repayment of
principal and interest, by the full faith and credit of the U.S. Government. The
dollar weighted average maturity of securities held by the Fund is generally
three years or less.
The Fund invests in both direct obligations of the U.S. Treasury and
obligations issued or guaranteed by U.S. Government agencies, including
mortgage-backed securities, that are backed by the full faith and credit of the
U.S. Government as to the timely payment of principal and interest. Up to 80% of
the Fund's assets may be invested in direct pass-through certificates guaranteed
by the Government National Mortgage Association ("GNMA"). See "U.S. Government
Securities" and "Asset-Backed Securities."
The Fund is designed to provide a higher level of current income than is
generally available from money market funds. The Fund invests in securities with
prices that tend to vary more than the prices of money market instruments but
less than the prices of intermediate and long-term bonds.
The INTERMEDIATE INCOME FUND seeks its objectives by investing in a broad
range of fixed income securities, including preferred stock and debt issued by
U.S. and non-U.S. companies and debt of the U.S. Government and governments of
other countries. As a non-fundamental policy, under normal circumstances, at
least 65% of the Fund's total assets are invested in fixed income securities,
but the Fund expects that substantially all of its assets generally will be
invested in fixed income securities.
The Fund will invest in debt obligations of U.S. companies only if they
carry at least a Baa rating from Moody's Investors Service, Inc. ("Moody's") or
a BBB rating from Standard & Poor's Ratings Group ("S&P"), or if the Adviser
determines that they are of comparable quality. Securities rated Baa or BBB have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on bonds rated Baa or BBB than is the case for higher
grade securities. Investors should review Appendix A to the Statement of
Additional Information for a description of these ratings.
The Fund may invest up to 50% of its assets in non-U.S. securities. See
"Risk Considerations -- Non-U.S. Securities."
The Fund is designed to provide a higher level of current income than is
generally available from shorter-term securities, but investors should be
willing to accept the greater price fluctuations associated with higher levels
of income. Under normal market conditions, the Fund's dollar weighted average
portfolio maturity will be from three to ten years.
U.S. GOVERNMENT SECURITIES: Each Fund may invest in U.S. Government securities,
including (1) U.S. Treasury obligations, such as Treasury bills, notes and
bonds, which are backed by the full faith and credit of the United States; and
(2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities that are backed by the full faith and credit of the U.S.
Government. The Intermediate Income Fund may also invest in other obligations
issued by agencies or instrumentalities of the U.S. Government, some of which
are supported by the right of the issuer to borrow from the U.S. Treasury and
some of which are backed only by the credit of the issuer itself.
ASSET-BACKED SECURITIES: Each Fund may purchase mortgage-backed securities
issued or guaranteed as to payment of principal and interest by the U.S.
Government or one of its agencies and backed by the full faith and credit of the
U.S. Government, including direct pass-through certificates of GNMA. The
Intermediate Income Fund may also invest in mortgage-backed securities for which
principal and interest payments are backed by the credit of particular agencies
of the U.S. Government. Mortgage-backed securities are generally backed or
collateralized by a pool of mortgages. These securities are sometimes called
collateralized mortgage obligations or CMOs.
Even if the U.S. Government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment, because the underlying mortgages are refinanced to take advantage
of the lower rates. Thus the prices of mortgage-backed securities may not
increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of locking
in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid.
The Intermediate Income Fund may also invest in corporate asset-backed
securities and collateralized mortgage obligations that are rated no lower than
Baa by Moody's or BBB by S&P, or are judged by the Adviser to be of comparable
quality. These securities are backed by pools of assets, including, among other
things, mortgage loans, automobile loans or credit card receivables. These
securities are not backed by the U.S. Government and have special risks,
including inherent difficulties in enforcing rights against the underlying
assets.
ZERO-COUPON OBLIGATIONS: The Intermediate Income Fund may invest up to 15% of
its assets in zero-coupon obligations, such as zero-coupon bonds issued by
companies and securities representing future principal and interest installments
on debt obligations of the U.S. Government and governments of other countries.
Zero-coupon obligations pay no current interest, and as a result their prices
tend to be more volatile than those of securities that offer regular payments of
interest. In order to pay cash distributions representing income on zero-coupon
obligations, the Intermediate Income Fund may have to sell other securities on
unfavorable terms, and these sales may generate taxable gain for investors.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, each Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower yield
than would be available from investments with a lower quality or longer term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Funds'
permitted investments and investment practices, see the Appendix -- Permitted
Investments and Investment Practices on p. 25. The Funds will not necessarily
invest or engage in each of the investments and investment practices in the
Appendix but reserve the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a
list of specific investment restrictions which govern the investment policies of
the Funds, including a limitation that each Fund may borrow money from banks in
an amount not to exceed 33 1/3% of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Certain of these
specific restrictions may not be changed without shareholder approval. Except as
otherwise indicated, the Funds' investment objectives and policies may be
changed without shareholder approval. If a percentage or rating restriction
(other than a restriction as to borrowing) is adhered to at the time an
investment is made, a later change in percentage or rating resulting from
changes in a Fund's securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of each Fund will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objectives, without regard to the length of time a particular security may have
been held. The turnover rate for the U.S. Government Income Fund is expected to
be approximately 125% annually; for the fiscal year ended August 31, 1993, for
the four month period ended December 31, 1993, for the period from January 1,
1994 to April 30, 1994 and for the period from May 1, 1994 to December 31, 1994,
the turnover rate for the U.S. Government Income Fund was 111%, 26%, 22% and
40%, respectively. The turnover rate for the Intermediate Income Fund is
expected to be between 100% and 250% annually; for the period June 25, 1993
(commencement of operations) to December 31, 1993 the Intermediate Income Fund's
turnover rate was 103% and for the fiscal year ended December 31, 1994 the
turnover rate was 291%. The amount of transaction costs and realization of
taxable capital gains will tend to increase as the level of portfolio activity
increases.
BROKERAGE TRANSACTIONS. The primary consideration in placing each Fund's
security transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible.
RISK CONSIDERATIONS
The risks of investing in each Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. Each Fund's net asset value will fluctuate based
on changes in the values of the underlying portfolio securities. This means that
an investor's shares may be worth more or less at redemption than at the time of
purchase.
INTEREST RATE RISK. The value of fixed income securities, including those
backed by the U.S. Government, generally goes down when interest rates go up,
and vice versa. Furthermore, the value of fixed income securities may vary based
on anticipated or potential changes in interest rates. Changes in interest rates
will generally cause bigger changes in the prices of longer-term securities than
in the prices of shorter-term securities.
CREDIT RISK. Investors in the Intermediate Income Fund should be aware that
prices of fixed income securities fluctuate based on changes in the actual and
perceived creditworthiness of issuers. Bond ratings take into account the
likelihood that each issuer will be able to make its required payments, and the
prices of lower rated securities often fluctuate more than those of higher rated
securities. It is possible that some issuers will be unable to make required
payments on fixed income securities held by the Intermediate Income Fund.
Securities that are backed by the full faith and credit of the U.S. Government
are generally thought to have minimal credit risk.
NON-U.S. SECURITIES. Investors in the Intermediate Income Fund also should
be aware that investments in non-U.S. securities involve risks relating to
political, social and economic developments abroad. These risks may include
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets and political
or social instability. Enforcing legal rights may be difficult, costly and slow
in non-U.S. countries, and there may be special problems enforcing claims
against non-U.S. governments. In addition, non-U.S. companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies, and there may be less public information about their operations.
Non-U.S. markets may be less liquid and more volatile than U.S. markets, and may
offer less protection to investors such as the Funds. These risks are increased
for investments in issuers in developing countries.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect the investment
performance of the Intermediate Income Fund. In addition, some non-U.S. currency
values may be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those of U.S. investing. As a result, the operating expense ratios of the
Intermediate Income Fund may be higher than those of investment companies
investing exclusively in U.S. securities.
INVESTMENT PRACTICES. Certain of the investment practices employed for the
Funds may entail certain risks. See the Appendix -- Permitted Investments and
Investment Practices on p. 25.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE: Unlike other mutual funds
which directly acquire and manage their own portfolio securities, the U.S.
Government Income Fund seeks its investment objective by investing all of its
investable assets in the Government Income Portfolio, a registered investment
company. The Portfolio has the same investment objective and policies as the
U.S. Government Income Fund. In addition to selling a beneficial interest to the
U.S. Government Income Fund, the Portfolio may sell beneficial interests to
other mutual funds, collective investment vehicles, or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the U.S. Government Income Fund due to
variations in sales commissions and other operating expenses. Therefore,
investors in the U.S. Government Income Fund should be aware that these
differences may result in differences in returns experienced by investors in the
different funds that invest in the Portfolio. Such differences in returns are
also present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from the Funds' distributor,
LFBDS at the address and telephone number indicated on the back cover of this
Prospectus.
The investment objective of each Fund may be changed by its Trustees without
the approval of the Fund's shareholders, but shareholders will be given written
notice at least 30 days before any change is implemented. If there is a change
in the U.S. Government Income Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial positions and needs. The investment objective of the
Portfolio may also be changed without the approval of the investors in the
Portfolio, but not without written notice thereof to the investors in the
Portfolio (and, if the U.S. Government Income Fund is then invested in the
Portfolio, notice to Fund shareholders) at least 30 days prior to implementing
the change. There can, of course, be no assurance that the investment objective
of either the U.S. Government Income Fund or the Portfolio will be achieved. See
"Investment Objective, Policies and Restrictions -- Investment Restrictions" in
the Statement of Additional Information for a description of the fundamental
policies of the U.S. Government Income Fund and the Portfolio that cannot be
changed without approval by the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Fund or Portfolio. Except as
stated otherwise, all investment guidelines, policies and restrictions described
herein and in the Statement of Additional Information are non-fundamental.
Certain changes in the Portfolio's investment objective, policies or
restrictions or a failure by the U.S. Government Income Fund's shareholders to
approve a change in the Portfolio's investment objective or restrictions, may
preclude the Fund from investing its investable assets in the Portfolio or
require the Fund to withdraw its interest in the Portfolio. Any such withdrawal
could result in an "in kind" distribution of securities (as opposed to a cash
distribution) from the Portfolio which may or may not be readily marketable. If
securities are distributed, the Fund could incur brokerage, tax or other charges
in converting the securities to cash. The in kind distribution may result in the
Fund having a less diversified portfolio of investments or adversely affect the
liquidity of the Fund. Notwithstanding the above, there are other means for
meeting shareholder redemption requests, such as borrowing. The absence of
substantial experience with this investment structure could have an adverse
effect on an investment in the U.S. Government Income Fund.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may subsequently experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, because the Portfolio would become smaller, it may become less
diversified, resulting in increased portfolio risk; however, these possibilities
exist for traditionally structured funds which have large or institutional
investors who may withdraw from a fund. Also, funds with a greater pro rata
ownership in the Portfolio could have effective voting control of the operations
of the Portfolio. If the U.S. Government Income Fund is requested to vote on
matters pertaining to the Portfolio (other than a vote by the Fund to continue
the operation of the Portfolio upon the withdrawal of another investor in the
Portfolio), the Fund will hold a meeting of its shareholders and will cast all
of its votes proportionately as instructed by its shareholders who vote at the
meeting. Shareholders of the Fund who do not vote will have no effect on the
outcome of such matters.
The U.S. Government Income Fund may withdraw its investment from the
portfolio at any time, if the Fund's Board of Trustees determines that it is in
the best interest of the Fund to do so. Upon any such withdrawal, the Board of
Trustees would consider what action might be taken, including the investment of
all of the investable assets of the Fund in another pooled investment entity
having the same investment objective as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies described above. In the event the Fund's Trustees were unable to find a
substitute investment company in which to invest the Fund's assets or were
unable to secure directly the services of an investment adviser, the Trustees
would determine the best course of action.
For a description of the management of the Portfolio, see "Management" --
page 19. For descriptions of the expenses of the Portfolio, see "Management" and
"General Information -- Expenses" -- page 24. For a description of the
investment objective, policies and restrictions of the Portfolio, see
"Investment Information" -- page 8.
The Intermediate Income Fund may at some time invest all or substantially
all of its investable assets in another mutual fund that has the same investment
objectives and policies as that Fund. In that case, some or all of the
considerations described above might also would apply.
VALUATION OF SHARES
Net asset value per share of each class of shares of each Fund is determined
each day the New York Stock Exchange is open for trading (a "Business Day").
This determination is made once each day as of the close of regular trading on
the Exchange (currently 4:00 p.m. Eastern time) by adding the market value of
all securities and other assets attributable to a class of a Fund (including, in
the case of the U.S. 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 may differ because 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.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In light
of the non-U.S. nature of some investments of the Intermediate Income Fund,
trading may take place in securities held by that Fund on days which are not
Business Days and on which it will not be possible to purchase or redeem shares
of that Fund.
CLASSES OF SHARES
DIFFERENCES AMONG THE CLASSES: Class A and B shares of a Fund represent
interests in the same mutual fund. The primary distinctions between the classes
of each Fund's shares are their initial and contingent deferred sales charge
structures and their ongoing expenses, including service fees and asset-based
sales charges in the form of distribution fees. These differences are summarized
in the following table. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class that best suits their
circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A PERCENTAGE OF
SALES CHARGE AVERAGE DAILY NET ASSETS) OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 1.50% of Distribution fee of 0.05% Initial sales charge waived or reduced
the public offering price for U.S. for certain purchases; a contingent
Government Income Fund and 4.00% of the deferred sales charge may apply in
public offering price for Intermediate certain instances where the initial sales
Income Fund charge is waived
CLASS B Maximum contingent deferred sales charge Distribution fee of 0.45% Shares convert to Class A shares
of 2.00% for U.S. Government Income Fund for U.S. Government Income approximately eight years after issuance
and 5.00% for Intermediate Income Fund, Fund and 0.75% for
of the lesser of redemption proceeds or Intermediate Income Fund.
original purchase price; declines to Service fee of 0.05%
zero after for years for U.S. Government
Income Fund and six years for Intermediate
Income Fund
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES: In deciding which class of
shares to purchase, investors should consider the cost of sales charges together
with the cost of the ongoing annual expenses described below, as well as any
other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial
sales charge of up to 1.50% of the public offering price for the U.S. Government
Income Fund and up to 4.00% of the public offering price for the Intermediate
Income Fund (except that for purchases of $1 million or more, no initial sales
charge is imposed and a contingent deferred sales charge may be imposed
instead). Because of this initial sales charge, not all of a Class A
shareholder's purchase price is invested in a Fund. Class B shares are sold with
no initial sales charge, but a contingent deferred sales charge (up to 2.00% for
the U.S. Government Income Fund and up to 5.00% for the Intermediate Income Fund
of the lesser of the shares' net asset value at redemption or their original
purchase price) applies to redemptions made within four years of purchase for
the U.S. Government Income Fund and six years of purchase for the Intermediate
Income Fund. Thus, the entire amount of a Class B shareholder's purchase price
is immediately invested in a Fund.
WAIVERS AND REDUCTIONS OF SALES CHARGES. Class A share purchases totalling
at least $50,000 for the U.S. Government Income Fund and at least $100,000 for
the Intermediate Income Fund and Class A share purchases made under a Fund's
reduced sales charge plan may be made at a reduced sales charge. In considering
the combined cost of sales charges and ongoing annual expenses, investors should
take into account any reduced sales charges on Class A shares for which they may
be eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. However, a 1.00% contingent deferred sales charge is
imposed on certain redemptions of Class A shares on which no initial sales
charge was assessed. Because Class A shares bear lower ongoing annual expenses
than Class B shares, in most cases investors eligible for reduced initial sales
charges should purchase Class A shares.
The contingent deferred sales charge may be waived upon redemption of
certain Class B shares. See "Purchases."
ONGOING ANNUAL EXPENSES. Class A shares pay an annual 12b-1 distribution fee
of 0.05% of average daily net assets. Class B shares pay an annual 12b-1
distribution fee of 0.45% of average daily net assets for the U.S. Government
Income Fund and 0.75% of average daily net assets for the Intermediate Income
Fund. In addition, Class B shares are subject to a service fee at the annual
rate of 0.05% of the average daily net assets represented by Class B shares.
Annual 12b-1 distribution fees are a form of asset-based sales charge. An
investor should consider both ongoing annual expenses and initial or contingent
deferred sales charges in estimating the costs of investing in the different
classes of Fund shares over various time periods.
CONVERSION OF CLASS B SHARES: A shareholder's Class B shares will automatically
convert to Class A shares in the same Fund approximately eight years after the
date of issuance, together with a pro rata portion of all Class B shares
representing dividends and other distributions paid in additional Class B
shares. The conversion will be effected at the relative net asset values per
share of the two classes on the first Business Day of the month in which the
eighth anniversary of the issuance of the Class B shares occurs. If a
shareholder effects one or more exchanges among Class B shares of the Landmark
Funds during the eight-year period, the holding periods for the shares so
exchanged will be counted toward the eight-year period. Because the per share
net asset value of the Class A shares may be higher than that of the Class B
shares at the time of conversion, a shareholder may receive fewer Class A shares
than the number of Class B shares converted, although the dollar value will be
the same. See "Valuation of Shares." The conversion of Class B shares to Class A
shares is subject to the continuing availability of a ruling from the Internal
Revenue Service or an opinion of counsel that the conversion will not constitute
a taxable event for federal tax purposes. There can be no assurance that such a
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
that event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
OTHER INFORMATION: See "Purchases," "Redemptions" and "Management --
Distribution Arrangements" for a more complete description of the initial and
contingent deferred sales charges and distribution fees for each class of shares
of each Fund. By purchasing shares an investor agrees to the imposition of
initial and deferred sales charges as described in this Prospectus.
PURCHASES
Each Fund offers two classes of shares, Class A and B shares, with different
expense levels and sales charges. See "Classes of Shares" for more information.
WHEN PLACING PURCHASE ORDERS, INVESTORS SHOULD SPECIFY WHETHER THE ORDER IS FOR
CLASS A OR CLASS B SHARES. ALL SHARE PURCHASE ORDERS THAT FAIL TO SPECIFY A
CLASS AUTOMATICALLY WILL BE INVESTED IN CLASS A SHARES.
Shares of the Funds are offered continuously and may be purchased on any
Business Day at the public offering price either through a securities broker
which has a sales agreement with the Distributor or through a bank or other
financial institution which has an agency agreement with the Distributor. Such a
bank or financial institution will receive transaction fees that are equal to
the commissions paid to securities brokers. Shares of the Funds are being
offered exclusively to customers of a Shareholder Servicing Agent (i.e., 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 concerning a Fund). An investor's
Shareholder Servicing Agent may not make available both classes of shares. The
public offering price is the net asset value next determined after an order is
transmitted to and accepted by the Distributor, plus any applicable sales charge
for Class A shares. Each Shareholder Servicing Agent is required to promptly
forward orders for Fund shares to the Distributor. Each Fund and the Distributor
reserve the right to reject any purchase order and to suspend the offering of
Fund shares for a period of time.
Each shareholder's account is established and maintained by his or her
Shareholder Servicing Agent, which will be the shareholder of record of the
Fund. Each Shareholder Servicing Agent may establish its own terms, conditions
and charges with respect to services it offers to its customers. Charges for
these services may include fixed annual fees and account maintenance fees. The
effect of any such fees will be to reduce the net return on the investment of
customers of that Shareholder Servicing Agent.
Shareholder Servicing Agents will not transmit purchase orders to the
Distributor until they have received the purchase price in federal or other
immediately available funds. If Fund shares are purchased by check, there will
be a delay (usually not longer than two business days) in transmitting the
purchase order until the check is converted into federal funds.
PURCHASING CLASS A SHARES: INITIAL SALES CHARGE -- CLASS A SHARES. Each Fund's
public offering price of Class A shares is the next determined net asset value,
plus any applicable sales charge, which will vary with the size of the purchase
as shown in the following table:
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
SALES CHARGE AS
PERCENTAGE OF THE
---------------------
PUBLIC NET BROKER COMMISSION AS
AMOUNT OF PURCHASE AT THE OFFERING AMOUNT PERCENTAGE OF THE
PUBLIC OFFERING PRICE PRICE INVESTED PUBLIC OFFERING PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 .............................. 1.50% 1.52% 1.34%
$50,000 to less than $100,000 ................. 1.25% 1.27% 1.11%
$100,000 to less than $250,000 ................. 1.00% 1.01% 0.89%
$250,000 to less than $1,000,000 ............... 0.50% 0.50% 0.45%
$1,000,000 or more ............................. none<F1> none<F1> none
------------
<FN>
<F1>A contingent deferred sales charge may apply in certain instances.
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE INCOME FUND
SALES CHARGE AS
PERCENTAGE OF THE
---------------------
PUBLIC NET BROKER COMMISSION AS
AMOUNT OF PURCHASE AT THE OFFERING AMOUNT PERCENTAGE OF THE
PUBLIC OFFERING PRICE PRICE INVESTED PUBLIC OFFERING PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ............................. 4.00% 4.17% 3.56%
$100,000 to less than $250,000 ................. 3.25% 3.36% 2.89%
$250,000 to less than $500,000 ................. 2.50% 2.56% 2.23%
$500,000 to less than $1,000,000 ............... 2.00% 2.04% 1.78%
$1,000,000 or more ............................. none<F1> none<F1> none
------------
<FN>
<F1>A contingent deferred sales charge may apply in certain instances.
- -----------------------------------------------------------------------------------------------------
</TABLE>
SALES CHARGE ELIMINATION -- CLASS A SHARES. Class A shares of the Funds are
available without a sales charge through exchanges for Class A shares of most
other Landmark Funds. See "Exchanges." Also, the sales charge does not apply to
Class A shares acquired through the reinvestment of dividends and capital gains
distributions. Class A shares may be purchased without a sales charge by:
(i) tax exempt organizations under Section 501(c)(3-13) of the Internal
Revenue Code (the "Code"),
(ii) trust accounts for which Citibank or any subsidiary or affiliate of
Citibank (a "Citibank Affiliate") acts as trustee and exercises
discretionary investment management authority,
(iii) accounts purchasing shares through the Private Client Division of
Citicorp Investment Services, or through other programs accessed through
the Private Client Division of Citicorp Investment Services, or the
private banking division of either Citibank, N.A., Citibank FSB or
Citicorp Trust, N.A.,
(iv) accounts for which Citibank or any Citibank Affiliate performs investment
advisory services,
(v) accounts for which Citibank or any Citibank Affiliate charges fees for
acting as custodian,
(vi) trustees of any investment company for which Citibank or any Citibank
Affiliate serves as the investment adviser or as a shareholder servicing
agent,
(vii) any affiliated person of a Fund, the Adviser, the Distributor, the
Administrator or any Shareholder Servicing Agent,
(viii) shareholder accounts established through a reorganization or similar form
of business combination approved by a Fund's Board of Trustees or by the
Board of Trustees of any other Landmark Fund the terms of which entitle
those shareholders to purchase shares of a Fund or any other Landmark
Fund at net asset value without a sales charge,
(ix) employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code,
subject to such minimum requirements as may be established by the
Distributor with respect to the number of employees or amount of
purchase; currently, these criteria require that (a) the employer
establishing the qualified plan have at least 50 eligible employees or
(b) the amount invested by such qualified plan in a Fund or in any
combination of Landmark Funds totals a minimum of $500,000,
(x) investors purchasing $1 million or more of Class A shares. However, a
contingent deferred sales charge will be imposed on such investments in
the event of certain share redemptions within 12 months following the
share purchase, at the rate of 1.00% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gains
distributions) or the total cost of such shares. In determining whether a
contingent deferred sales charge on Class A shares is payable, and if so,
the amount of the charge, it is assumed that shares not subject to the
contingent deferred sales charge are the first redeemed followed by other
shares held for the longest period of time. All investments made during a
calendar month will age one month on the last day of the month and each
subsequent month. Any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A shares of another
Landmark Fund and deducted from the redemption proceeds when such
exchanged shares are subsequently redeemed (assuming the contingent
deferred sales charge is then payable). The holding period of Class A
shares so acquired through an exchange will be aggregated with the period
during which the original Class A shares were held. The contingent
deferred sales charge on Class A shares will be waived under the same
circumstances as the contingent deferred sales charge on Class B shares
will be waived. See "Sales Charge Waivers -- Class B Shares." Any
applicable contingent deferred sales charges will be paid to the
Distributor,
(xi) subject to appropriate documentation, investors where the amount invested
represents redemption proceeds from a mutual fund (other than a Landmark
Fund) if: (i) the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed); and (ii)
such redemption has occurred no more than 90 days prior to the purchase
of Class A shares of the Fund, or
(xii) an investor who has a business relationship with an investment consultant
or other registered representative who joined a broker-dealer which has a
sales agreement with the Distributor from another investment firm within
six months prior to the date of purchase by such investor, if (a) the
investor redeems shares of another mutual fund sold through the
investment firm that previously employed that investment consultant or
other registered representative, and either paid an initial sales charge
or was at some time subject to, but did not actually pay, a deferred
sales charge or redemption fee with respect to the redemption proceeds,
(b) the redemption is made within 60 days prior to the investment in a
Fund, and (c) the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds of such
redemption.
REDUCED SALES CHARGE PLANS -- CLASS A SHARES. An individual who is a member
of a qualified group may purchase Class A shares of a Fund at the reduced sales
charge applicable to the group as a whole. The sales charge is based upon the
aggregate dollar value of Class A shares previously purchased and still owned by
the group, plus the amount of the purchase. A "qualified group" is one which (i)
has been in existence for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount, and (iii) satisfies uniform criteria which
enable the Distributor to realize economies of scale in its costs of
distributing shares. A qualified group must have more than ten members, must be
available to arrange for group meetings between representatives of the Fund and
the members, must agree to include sales and other materials related to the Fund
in its publications and mailings to members at reduced or no cost to the
Distributor, and must seek to arrange for payroll deduction or other bulk
transmission of investments to the Fund.
Reduced initial sales charges on Class A shares also may be achieved through
a RIGHT OF ACCUMULATION or a LETTER OF INTENT. Under a RIGHT OF ACCUMULATION,
eligible investors are permitted to purchase Class A shares of a Fund at the
public offering price applicable to the total of (a) the dollar amount then
being purchased, plus (b) an amount equal to the then-current net asset value or
cost (whichever is higher) of the purchaser's combined holdings in the Landmark
Funds. The Right of Accumulation may be amended or terminated at any time.
If an investor anticipates purchasing at least the minimum amount of Class A
shares of a Fund required for a volume discount as described above, 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, subject to the appointment of an attorney for redemptions of shares if
the intended purchases are not completed, by completing a LETTER OF INTENT.
Investors should consult "Determination of Net Asset Value; Valuation of
Securities; Additional Purchase and Redemption Information" in the Statement of
Additional Information and their Shareholder Servicing Agents for more
information about Rights of Accumulation and Letters of Intent.
PURCHASING CLASS B SHARES: CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES.
Each Fund's public offering price of Class B shares is the next determined net
asset value, and no initial sales charge is imposed. A contingent deferred sales
charge, however, is imposed upon certain redemptions of Class B shares.
Class B shares of a Fund that are redeemed will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (i) capital appreciation of Fund assets, (ii) reinvestment of
dividends or capital gains distributions or (iii) shares redeemed more than four
years after their purchase for the U.S. Government Income Fund or more than six
years after their purchase for the Intermediate Income Fund. Otherwise,
redemptions of Class B shares will be subject to a contingent deferred sales
charge. The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the lesser of net asset value of such shares at the
time of redemption or their original purchase price by the applicable percentage
shown in the following table.
<PAGE>
U.S. GOVERNMENT INCOME FUND
CONTINGENT
DEFERRED
REDEMPTION DURING SALES CHARGE
- -----------------------------------------------------------------
lst Year Since Purchase .......................... 2.00%
2nd Year Since Purchase .......................... 2.00%
3rd Year Since Purchase .......................... 1.00%
4th Year Since Purchase .......................... 1.00%
5th Year (or Later) Since Purchase ............... None
- -----------------------------------------------------------------
INTERMEDIATE INCOME FUND
CONTINGENT
DEFERRED
REDEMPTION DURING SALES CHARGE
- -----------------------------------------------------------------
lst Year Since Purchase .......................... 5.00%
2nd Year Since Purchase .......................... 4.00%
3rd Year Since Purchase .......................... 3.00%
4th Year Since Purchase .......................... 3.00%
5th Year Since Purchase .......................... 2.00%
6th Year Since Purchase .......................... 1.00%
7th Year (or Later) Since Purchase ............... None
- -----------------------------------------------------------------
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing capital appreciation, next of shares representing the reinvestment
of dividends and capital gains distributions and finally of other shares held by
the shareholder for the longest period of time. The holding period of Class B
shares of a Fund acquired through an exchange with another Landmark Fund will be
calculated from the date that the Class B shares were initially acquired in one
of the other Landmark Funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other funds. This will result
in any contingent deferred sales charge being imposed at the lowest possible
rate. For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. Any contingent deferred sales charges will be
paid to the Distributor.
SALES CHARGE WAIVERS -- CLASS B SHARES. The contingent deferred sales charge
will be waived for exchanges. In addition, the contingent deferred sales charge
will be waived for a total or partial redemption made within one year of the
death of the shareholder. This waiver is available where the deceased
shareholder is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship, and applies only to
redemption of shares held at the time of death. The contingent deferred sales
charge also will be waived in connection with:
(i) a lump sum or other distribution in the case of an Individual Retirement
Account ("IRA"), a self-employed individual retirement plan (so-called
"Keogh Plan") or a custodian account under Section 403(b) of the Code, in
each case following attainment of age 59 1/2,
(ii) a total or partial redemption resulting from any distribution following
retirement in the case of a tax-qualified retirement plan, and
(iii) a redemption resulting from a tax-free return of an excess contribution
to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation by a shareholder's Shareholder Servicing Agent of the shareholder's
status or holdings, as the case may be.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A and Class B shares. The
Distributor, at its expense, may from time to time provide additional
promotional incentives to brokers who sell shares of a Fund. In some instances,
these incentives may be offered to certain brokers who have sold or may sell
significant numbers of shares of a Fund.
EXCHANGES
Shares of each Fund may be exchanged for shares of the same class of other
Landmark Funds that are made available by a shareholder's Shareholder Servicing
Agent, or may be acquired through an exchange of shares of the same class of
those funds. No initial sales charge is imposed on shares being acquired through
an exchange unless Class A shares are being acquired and the sales charge of the
fund being exchanged into is greater than the current sales charge of the Fund
(in which case an initial sales charge will be imposed at a rate equal to the
difference). No contingent deferred sales charge is imposed on shares being
disposed of through an exchange; however, contingent deferred sales charges may
apply to redemptions of Class B shares acquired through an exchange.
Shareholders must place exchange orders through their Shareholder Servicing
Agents, and may do so by telephone if their account applications so permit. For
more information on telephone transactions see "Redemptions." All exchanges will
be effected based on the relative net asset values per share next determined
after the exchange order is received by the Distributor. See "Valuation of
Shares." Shares of the Funds may be exchanged only after payment in federal
funds for the shares has been made.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by SEC rules, and is
available only in those jurisdictions where such exchanges legally may be made.
See the Statement of Additional Information for further details. Before making
any exchange, shareholders should contact their Shareholder Servicing Agents to
obtain more information and prospectuses of the Landmark Funds to be acquired
through the exchange.
An exchange is treated as a sale of the shares exchanged and could result in
taxable gain or loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by a shareholder's Shareholder
Servicing Agent (subject to any applicable contingent deferred sales charge).
Shareholders may redeem shares of a Fund only by authorizing their Shareholder
Servicing Agents to redeem such shares on their behalf through the Distributor.
If a redeeming shareholder owns shares of more than one class, Class A shares
will be redeemed first unless the shareholder specifically requests otherwise.
A redemption is treated as a sale of the shares redeemed and could result in
a taxable gain or loss to the shareholder making the redemption.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written
instructions in proper form (as determined by a shareholder's Shareholder
Servicing Agent) to their Shareholder Servicing Agents. Shareholders are
responsible for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by
telephone, if their account applications so permit, by calling their Shareholder
Servicing Agents. During periods of drastic economic or market changes or severe
weather or other emergencies, shareholders may experience difficulties
implementing a telephone exchange or redemption. In such an event, another
method of instruction, such as a written request sent via an overnight delivery
service, should be considered. The Funds and each Shareholder Servicing Agent
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for his or her
name, address, telephone number, Social Security number, and account number. If
these or other reasonable procedures are not followed, the Fund or the
Shareholder Servicing Agent may be liable for any losses to a shareholder due to
unauthorized or fraudulent instructions. Otherwise, the shareholder will bear
all risk of loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal
funds normally on the next Business Day, but in any event within seven days. If
a shareholder requests redemption of shares which were purchased recently, a
Fund may delay payment until it is assured that good payment has been received.
In the case of purchases by check, this can take up to ten days. See
"Determination of Net Asset Value; Valuation of Securities; Additional Purchase
and Redemption Information" in the Statement of Additional Information regarding
the Funds' right to pay the redemption price in kind with securities (instead of
cash).
REINSTATEMENT PRIVILEGE. Shareholders who have redeemed Class A shares may
reinstate their Fund account without a sales charge up to the dollar amount
redeemed (with a credit for any contingent deferred sales charge paid) by
purchasing Class A shares of the same Fund within 30 days after the redemption.
To take advantage of this reinstatement privilege, shareholders must notify
their Shareholder Servicing Agents in writing at the time the privilege is
exercised.
Questions about redemption requirements should be referred to the
shareholder's Shareholder Servicing Agent. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption price postponed during any period in which the New York Stock
Exchange is closed (other than weekends or holidays) or trading on the Exchange
is restricted or if an emergency exists.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of each Fund's net income from dividends and interest is
paid to its shareholders of record as a dividend on a monthly basis on or around
the last day of each month.
Each Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually, in December.
Each Fund may also make additional distributions to its shareholders to the
extent necessary to avoid the application of the 4% non-deductible excise tax on
certain undistributed income and net capital gains of mutual funds.
Subject to the policies of the shareholder's Shareholder Servicing Agent, a
shareholder may elect to receive dividends and capital gains distributions in
either cash or additional shares of the same class issued at net asset value
without a sales charge. Distributions paid by each Fund with respect to Class A
shares generally will be higher than those paid with respect to Class B shares
because expenses attributable to Class B shares generally will be higher.
MANAGEMENT
TRUSTEES AND OFFICERS: Each Fund is supervised by a Board of Trustees. The
Portfolio is also supervised by a Board of Trustees. In each case, a majority of
the Trustees are not affiliated with the Adviser. In addition, a majority of the
disinterested Trustees of the U.S. Government Income Fund are different from a
majority of the disinterested Trustees of the Portfolio. More information on the
Trustees and officers of the Funds and the Portfolio appears under "Management"
in the Statement of Additional Information.
INVESTMENT ADVISER: CITIBANK. Each Fund draws on the strength and experience of
Citibank. Citibank offers a wide range of banking and investment services to
customers across the United States and throughout the world, and has been
managing money since 1822. Its portfolio managers are responsible for investing
in money market, equity and fixed income securities. Citibank and its affiliates
manage more than $73 billion in assets worldwide. Citibank is a wholly-owned
subsidiary of Citicorp. Citibank also serves as investment adviser to 12 other
Landmark Funds or portfolios.
Citibank manages the Funds' assets pursuant to separate investment advisory
agreements ("Advisory Agreements"). Subject to policies set by the Trustees,
Citibank makes investment decisions. Citibank's address is 153 East 53rd Street,
New York, New York 10043.
U.S. GOVERNMENT INCOME FUND. Thomas M. Halley, a Vice President of Citibank,
has served as manager of the U.S. Government Income Fund since December 1988. He
also manages other commingled investment funds at Citibank as well as
institutional insurance portfolios. Mr. Halley authors the commentary on
economic trends for Citibank Global Asset Management publications. Prior to
joining Citibank in 1988, Mr. Halley was a Senior Fixed Income Portfolio Manager
with Brown Brothers Harriman & Company. He has more than 20 years of experience
in the management of taxable fixed income investments.
INTERMEDIATE INCOME FUND. Mark Lindbloom, a Vice President of Citibank, has
served as manager of the Intermediate Income Fund since June 1993. Mr. Lindbloom
has more than 12 years of investment management experience. Prior to joining the
Adviser in 1986, Mr. Lindbloom was a Fixed Income Portfolio Manager with Brown
Brothers Harriman & Co. where he managed fixed income assets for discretionary
institutional portfolios.
Management's discussion of performance of the Funds is included in the
Funds' Annual Reports to Shareholders, which investors may obtain without charge
by contacting their Shareholder Servicing Agents.
ADVISORY FEES. For its services under the Advisory Agreements, the Adviser
receives the following investment advisory fees, which are accrued daily and
paid monthly, expressed as a percentage of the applicable Fund's average daily
net assets on an annualized basis for that Fund's then-current fiscal year:
U.S. Government Income Fund 0.35%
Intermediate Income Fund 0.35%
The Adviser has voluntarily agreed to waive a portion of its investment advisory
fee from each Fund on a month-to-month basis.
For the fiscal year ended December 31, 1994, the investment advisory fee
payable to Citibank for the U.S. Government Income Fund was $242,369, of which
$67,712 was voluntarily waived (after the waiver, 0.10% of the Fund's average
daily net assets for that fiscal year).
For the fiscal year ended December 31, 1994, the investment advisory fee
payable to Citibank for the Intermediate Income Fund was $186,301, of which
$120,645 was voluntarily waived (after the waiver, 0.12% of the Fund's average
daily net assets on an annualized basis).
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan
and other relationships with the issuers of securities purchased on behalf of
the Funds, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Citibank has
informed the Funds that, in making its investment decisions, it does not obtain
or use material inside information in the possession of any division or
department of Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Funds. Citibank believes that its services
under the Advisory Agreements and the activities performed by it or its
affiliates as Shareholder Servicing Agents and sub-administrator are not
underwriting and are consistent with the Glass-Steagall Act and other relevant
federal and state laws. However, there is no controlling precedent regarding the
performance of the combination of investment advisory, shareholder servicing and
sub-administrative activities by banks. State laws on this issue may differ from
applicable federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws. Changes in either federal
or state statutes or regulations, or in their interpretations, could prevent
Citibank or its affiliates from continuing to perform these services. If
Citibank or its affiliates were to be prevented from acting as the Adviser,
sub-administrator or a Shareholder Servicing Agent, the Funds would seek
alternative means for obtaining these services. The Funds do not expect that
shareholders would suffer any adverse financial consequences as a result of any
such occurrence.
ADMINISTRATIVE SERVICES PLANS: The Funds and the Portfolio have administrative
services plans (the "Administrative Services Plans") which provide that the
Funds and the Portfolio may obtain the services of an administrator, a transfer
agent, a custodian, and, in the case of the Funds, one or more Shareholder
Servicing Agents, and may enter into agreements providing for the payment of
fees for such services. Under the Administrative Services Plan, the total of the
fees paid to the Funds' Administrator and Shareholder Servicing Agents may not
exceed 0.65% of each applicable 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.
For Class B shares this limitation does not include any amounts payable under
the Distribution Plans for those shares. Within this overall limitation,
individual fees may vary. Under the Portfolio's Administrative Services Plan,
fees paid to the Portfolio's Administrator may not exceed 0.05% of the
Portfolio's average daily net assets on an annualized basis for the Portfolio's
then-current fiscal year. See "Administrators," "Shareholder Servicing Agents"
and "Transfer Agent, Custodian and Fund Accountant."
ADMINISTRATORS: LFBDS and Signature Financial Group (Cayman), Ltd., either
directly or through a wholly-owned subsidiary ("SFG"), provide certain
administrative services to the Funds and the Portfolio under administrative
services agreements. These administrative services include providing general
office facilities, supervising the overall administration of the Funds and the
Portfolio, and providing persons satisfactory to the Boards of Trustees to serve
as Trustees and officers of the Funds and Portfolio. These Trustees and officers
may be directors, officers or employees of LFBDS, SFG or their affiliates.
For these services, the Administrators receive fees accrued daily and paid
monthly of 0.20% of the average daily net assets of each Fund and 0.05% of the
average daily net assets of the Portfolio, in each case on an annualized basis
for the Fund's or the Portfolio's then-current fiscal year. However, each of the
Administrators has voluntarily agreed to waive a portion of the fees payable to
it on a month-to-month basis. See "General Information -- Expenses."
LFBDS and SFG are wholly-owned subsidiaries of Signature Financial Group,
Inc. "Landmark" is a service mark of LFBDS.
SUB-ADMINISTRATOR: Pursuant to sub-administrative services agreements, Citibank
performs such sub-administrative duties for the Funds and Portfolio as from time
to time are agreed upon by Citibank and LFBDS or SFG. Citibank's compensation as
sub-administrator is paid by LFBDS or SFG.
SHAREHOLDER SERVICING AGENTS: The Funds have entered into separate shareholder
servicing agreements with each Shareholder Servicing Agent pursuant to which
that Shareholder Servicing Agent provides shareholder services, including
answering customer inquiries, assisting in processing purchase, exchange and
redemption transactions and furnishing Fund communications to shareholders. For
these services, each Shareholder Servicing Agent receives a fee from each Fund
at an annual rate of 0.40% of the average daily net assets of the Fund
represented by shares owned by investors for whom such Shareholder Servicing
Agent maintains a servicing relationship. However, each Shareholder Servicing
Agent has voluntarily agreed to waive a portion of its fee on a month-to-month
basis.
Some Shareholder Servicing Agents may impose certain conditions on their
customers in addition to or different from those imposed by the Funds, such as
requiring a minimum initial investment or charging their customers a direct fee
for their services. Each Shareholder Servicing Agent has agreed to transmit to
its customers who are shareholders of a Fund appropriate prior written
disclosure of any fees that it may charge them directly and to provide written
notice at least 30 days prior to imposition of any transaction fees.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent and dividend disbursing agent for each Fund and
as the custodian of the Intermediate Income Fund's assets. The principal
business address of State Street Bank and Trust Company is 225 Franklin Street,
Boston, Massachusetts 02110. Investors Bank & Trust Company acts as the
custodian of the U.S. Government Income Fund's bank approved by the Trustees.
Signature Financial Services, Inc. provides fund accounting services and
calculates the daily net asset value for the U.S. Government Income Fund and the
Portfolio.
DISTRIBUTION ARRANGEMENTS: LFBDS is the distributor of shares of each Fund and
also serves as distributor for each of the other Landmark Funds and as a
Shareholder Servicing Agent for certain investors. LFBDS receives distribution
fees from the Funds pursuant to Distribution Plans adopted in accordance with
Rule 12b-1 under the 1940 Act. LFBDS also collects the sales charges imposed on
purchases of Class A shares and collects any contingent deferred sales charges
imposed on redemptions of Class A and Class B shares. In those states where
LFBDS is not a registered broker-dealer, shares of the Funds are sold through
Signature Broker-Dealer Services, Inc., as dealer.
The Funds maintain separate plans of distribution pertaining to Class A
shares and Class B shares (collectively, "Plans"). The Class A Plan provides
that the Funds may pay the Distributor a monthly distribution fee at an annual
rate not to exceed 0.15% of the average daily net assets represented by Class A
shares. The Class A Plan 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
Funds did not pay anything under this provision during 1994 and do not
anticipate doing so during the current fiscal year.
The Class B Plan provides that the Funds may pay the Distributor a monthly
distribution fee and a monthly service fee at annual rates not to exceed,
respectively, 0.75% and 0.25% of the average daily net assets represented by
Class B shares. Currently the service fee for Class B shares is 0.05% per annum
of the average daily net assets represented by Class B shares.
The Distributor uses the distribution fees under the Plans to offset each
Fund's marketing costs attributable to the classes, such as preparation of sales
literature, advertising, and printing and distributing prospectuses and other
shareholder materials to prospective investors. In addition, the Distributor may
use the distribution fees to pay costs related to distribution activities,
including employee salaries, bonuses and other overhead expenses. The
Distributor also uses the distribution fees under the Class B Plan to offset the
commissions it pays to brokers and other institutions for selling the Funds'
Class B shares. The Funds and the Distributor provide to the Trustees quarterly
a written report of amounts expended pursuant to the Plans and the purposes for
which the expenditures were made.
During the period they are in effect, the Plans and related distribution
agreements pertaining to each class of shares ("Distribution Agreements")
obligate the Funds to pay distribution fees to LFBDS as compensation for its
distribution activities, not as reimbursement for specific expenses incurred.
Thus, even if LFBDS's expenses exceed its distribution fees for any Fund, the
Fund will not be obligated to pay more than those fees and, if LFBDS's expenses
are less than such fees, it will retain its full fees and realize a profit. Each
Fund will pay the distribution fees to LFBDS until either the applicable Plan or
Distribution Agreement is terminated or not renewed. In that event, LFBDS's
expenses in excess of distribution fees received or accrued through the
termination date will be LFBDS's sole responsibility and not obligations of the
Fund. In their annual consideration of the continuation of the Plans for each
Fund, the Trustees will review each Plan and LFBDS's expenses for each class
separately.
Each class of shares of each Fund has exclusive voting rights with respect
to the Plan for that class.
From time to time LFBDS may make payments for distribution and/or
shareholder servicing activities out of its past profits or any other sources
available to it.
TAX MATTERS
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
Each Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes.
Fund dividends and capital gains distributions are subject to federal income
tax and may also be subject to state and local taxes. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Generally, distributions from a
Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of the Intermediate Income Fund's distributions from
net investment income may be eligible for the dividends-received deduction
available to corporations. Distributions of long-term net capital gains will be
taxed as such regardless of how long the shares of a Fund have been held.
Fund distributions will reduce the distributing Fund's net asset value per
share. Shareholders who buy shares just before a Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Intermediate Income Fund may pay withholding or other taxes to foreign
governments during the year. These taxes will reduce that Fund's dividends.
Early each year, each Fund will notify its shareholders of the amount and
tax status of distributions paid to shareholders for the preceding year.
Investors should consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and other
communications in terms of yield, effective yield or total rate of return. All
performance information is historical and is not intended to indicate future
performance. Yields and total rates of return fluctuate in response to market
conditions and other factors, and the value of a Fund's shares when redeemed may
be more or less than their original cost.
Each Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period which was made at the maximum public
offering price and reflects any change in net asset value per share and is
compounded to include the value of any shares purchased with any dividends or
capital gains declared during such period. Period total rates of return may be
"annualized." An "annualized" total rate of return assumes that the period total
rate of return is generated over a one-year period. These total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the investment due to the initial or contingent deferred sales
charges, and which are thus higher.
Each Fund may provide annualized "yield" and "effective yield" quotations.
The "yield" of a Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period (which period is stated in any such
advertisement or communication). This income is then annualized; that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of the
maximum public offering price on the last day of that period. The "effective
yield" is calculated similarly, but when annualized the income earned by the
investment during that 30-day or one-month period is assumed to be reinvested.
The effective yield is slightly higher than the yield because of the compounding
effect of this assumed reinvestment. A "yield" quotation, unlike a total rate of
return quotation, does not reflect changes in net asset value.
Each Fund will include performance data for each class of Fund shares in any
advertisements, reports or communications including Fund performance data. Of
course, any fees charged by a shareholder's Shareholder Servicing Agent will
reduce that shareholder's net return on his or her investment. See the Statement
of Additional Information for more information concerning the calculation of
yield and total rate of return quotations for the Funds.
GENERAL INFORMATION
ORGANIZATION: Each Fund is a series of Landmark Fixed Income Funds (the
"Trust"), which is a Massachusetts business trust that was organized on June 23,
1986. The Trust was known as "Landmark U.S. Government Income Fund" until its
name was changed effective June 11, 1992. The Trust is an open-end management
investment company registered under the 1940 Act.
Each Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must invest at least 75% of its assets in cash and cash items, U.S.
Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
mutual fund and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Portfolio is a series of The Premium Portfolios, a trust organized under
the laws of the State of New York. The Declaration of Trust of The Premium
Portfolios provides that the U.S. Government Income Fund and other entities
investing in the Portfolio are each liable for all obligations of the Portfolio.
It is not expected that the liabilities of the Portfolio would ever exceed its
assets.
VOTING AND OTHER RIGHTS: The Trust may issue an unlimited number of shares, may
create new series of shares and may divide shares in each series into classes.
Each share of each Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each series of
the Trust have equal voting rights except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
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.
Each Fund's activities are supervised by its Board of Trustees. As a
Massachusetts business trust, the Funds are not required to hold annual
shareholder meetings. Shareholder approval will usually be sought only for
changes in a Fund's or Portfolio's fundamental investment restrictions and for
the election of Trustees under certain circumstances. Trustees may be removed by
shareholders under certain circumstances. Each share of each Fund is entitled to
participate equally in dividends and other distributions and the proceeds of any
liquidation of that Fund except that, due to the differing expenses borne by the
each class, dividends and proceeds generally will be lower for Class B shares
than for Class A shares.
CERTIFICATES: The Funds' Transfer Agent maintains a share register for
shareholders of record, i.e., Shareholder Servicing Agents. Share certificates
are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in a Fund
under one of several tax-sheltered plans. Such plans include IRAs, Keogh or
Corporate Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts,
and certain other qualified pension and profit-sharing plans. Investors should
consult with their Shareholder Servicing Agents and tax and retirement advisers.
EXPENSES: In addition to amounts payable as described above under the Advisory
Agreements, the Administrative Services Plans and the Distribution Plans, each
Fund and the Portfolio is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of Trustees
that are not affiliated with the Adviser, government fees, taxes, accounting and
legal fees, expenses of communicating with shareholders, interest expense, and
insurance premiums. All fee waivers are voluntary and may be reduced or
terminated at any time.
- ----------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Funds and the Portfolio, including information
related to (i) investment policies and restrictions, (ii) the Trustees,
officers, Adviser and Administrators, (iii) securities transactions, (iv) the
Funds' shares, including rights and liabilities of shareholders, (v) the method
used to calculate performance information, (vi) programs for the purchase of
shares, and (vii) the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or their distributor. This Prospectus does
not constitute an offering by the Funds or their distributor in any jurisdiction
in which such offering may not lawfully be made.
APPENDIX
PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in
order to earn a return on temporarily available cash. The U.S. Government Income
Fund will only enter into repurchase agreements that cover securities that are
backed by the full faith and credit of the U.S. Government. Repurchase
agreements are transactions in which an institution sells the Fund a security at
one price, subject to the Fund's obligation to resell and the selling
institution's obligation to repurchase that security at a higher price normally
within a seven day period. There may be delays and risks of loss if the seller
is unable to meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, each Fund may lend its
portfolio securities to broker-dealers and other institutional borrowers. Such
loans must be callable at any time and continuously secured by collateral (cash
or U.S. Government securities) in an amount not less than the market value,
determined daily, of the securities loaned. It is intended that the value of
securities loaned by a Fund would not exceed 30% of the Fund's total assets.
In the event of the bankruptcy of the other party to a securities loan, a
repurchase agreement or a reverse repurchase agreement, the Fund could
experience delays in recovering either the securities lent or cash. To the
extent that, in the meantime, the value of the securities lent has increased or
the value of the securities purchased has decreased, the Fund could experience a
loss.
RULE 144A SECURITIES. Each Fund may purchase restricted securities that are
not registered for sale to the general public if the Adviser determines that
there is a dealer or institutional market in the securities. In that case, the
securities will not be treated as illiquid for purposes of the Fund's investment
limitations. The Trustees will review these determinations. These securities are
known as "Rule 144A securities," because they are traded under SEC Rule 144A
among qualified institutional buyers. Institutional trading in Rule 144A
securities is relatively new, and the liquidity of these investments could be
impaired if trading in Rule 144A securities does not develop or if qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities. The Funds will not knowingly invest more than 15% of their net
assets (taken at market value) in securities that are subject to legal or
contractual restrictions on resale (other than certain repurchase agreements).
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The U.S. Government Income Fund
may invest up to 10% of its net assets (taken at the greater of cost or market
value) and the Intermediate Income Fund may invest up to 15% of its net assets
(taken at market value) in securities for which there is no readily available
market. These illiquid securities may include privately placed restricted
securities for which no institutional market exists. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for a Fund
to sell them promptly at an acceptable price.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts may be
entered into for the Intermediate Income Fund for the purchase or sale of non-
U.S. currency for hedging purposes against adverse rate changes or otherwise to
achieve the Fund's investment objectives. A currency exchange contract allows a
definite price in dollars to be fixed for securities of non-U.S. issuers that
have been purchased or sold (but not settled) for the Fund. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To protect against the
effects of adverse changes in interest rates (sometimes known as "hedging"),
each Fund may enter into futures contracts on debt securities. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a security at a specified future time and price. Each Fund
may also purchase and write put and call options on such futures contracts. An
option on a futures contract gives the purchaser the right, in exchange for a
premium, to assume a position in a futures contract at a specified exercise
price during the term of the option. This type of option must be traded on a
national futures exchange.
Options and futures can be volatile investments, and involve certain risks.
If a Fund applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. A Fund
could also experience losses if the prices of its options and futures positions
were poorly correlated with its other investments or if it could not close out
its positions because of an illiquid secondary market.
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 Fund 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." A Fund may make a short sale as a
hedge, when it believes that the value of a security owned by the Fund (or a
security convertible or exchangeable for such security) may decline, or when the
Fund wants to sell the security at an attractive current price but wishes to
defer recognition of gain or loss for tax purposes. Not more than 40% of a
Fund's total assets would be involved in short sales "against the box."
<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 Glboal 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 10094
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
[Logo] LANDMARK
FUNDS
MONEY MARKET FUNDS:
Cash Reserves
Premium Liquid Reserves
Institutional Liquid Reserves
U.S. Treasury Reserves
Premium U.S. Treasury Reserves
Institutional U.S. Treasury Reserves
Tax Free Reserves
California Tax Free Reserves
Connecticut Tax Free Reserves
New York Tax Free Reserves
STOCKS & BOND FUNDS:
U.S. Government Income Fund
Intermediate Income Fund
National Tax Free Income Fund
New York Tax Free Income Fund
Balanced Fund
Equity Fund
International Equity Fund
Small Cap Equity Fund
<PAGE>
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
James B. Craver*
ASSISTANT TREASURER
Barbara M. O'Dette*
ASSISTANT SECRETARY
Molly S. Mugler*
*Affiliated Person of Administrator and Distributor
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 Frnklin 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
SHAREHOLDER SERVICING AGENTS
(See Inside of Cover)
FI/P.1/95 Printed on Recycled Paper
[Logo] LANDMARK(SM) FUNDS
Advised by Citibank, N.A.
LANDMARK
U.S. GOVERNMENT
INCOME FUND
LANDMARK
INTERMEDIATE
INCOME FUND
PROSPECTUS
April 3, 1995
<PAGE>
Rule 497(c)
Files nos. 33-6540 and 811-5033
Statement of
Additional Information
LANDMARK U.S. GOVERNMENT INCOME FUND April 3, 1995
LANDMARK INTERMEDIATE INCOME FUND
(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 26
Portfolio Transactions 36
Description of Shares, Voting Rights and Liabilities 38
Certain Additional Tax Matters 40
Independent Accountants and Financial Statements 42
Appendix A 44
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.
<PAGE>
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 an index of securities. A
"sale" of a Futures Contract means the acquisition of a contractual obligation
to deliver the securities or to make or accept the cash settlement called for by
the contract at a specified price on a specified date. A "purchase" of a Futures
Contract means the acquisition of a contractual obligation to acquire the
securities or to make or accept the cash settlement called for by the contract
at a specified price 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. Futures Contracts
will be entered into for the Government Income Fund only if such contracts are
based on U.S. Government securities, including any index of U.S. Government
securities if any such index is approved for trading. Futures Contracts for
non-U.S. currency which are purchased or sold to attempt to hedge against the
effect of exchange rate changes on the Intermediate Income Fund's current or
intended investments in non-U.S. securities may also be entered into for the
Intermediate Income Fund.
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 Contract. At the same time such a purchase or sale is made, a
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 2% or
less of a contract's face value. Daily thereafter, the Futures Contract is
valued through a process known as "marking to market", and a 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.
In the case of the Funds, which hold or will acquire debt securities,
the purpose of the acquisition or sale of a Futures Contract is to attempt to
protect the Funds from fluctuations in interest rates without actually buying or
selling debt securities. For example, if a Fund owns long-term bonds, and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the long-term bonds owned by the Fund.
If the interest rates did increase, the value of a Fund's debt securities would
decline, but the value of the Futures Contracts to the Fund would increase at
approximately the same rate, 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 with long maturities and investing in bonds with
short maturities when interest rates are expected to increase. However, the use
of Futures Contracts as an investment technique allows the Fund to maintain a
hedging position without having to sell its securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to those of long-term bonds, it may be possible to
protect a Fund, in whole or in part, against the increased cost of acquiring
bonds resulting from a decline in interest rates. At that time, the Futures
Contracts could be liquidated and the Fund could purchase long-term bonds on the
cash market. To the extent a Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or high quality debt securities in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts.
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, a
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 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.
A Fund would purchase or sell Futures Contracts only if, in the
judgment of the Adviser, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's securities for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
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 a 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 hedge the Fund's
securities.
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, a 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. 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. Such sale of bonds may be,
but will not necessarily be, at increased prices which reflect the rising
market.
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 hedging strategies.
CFTC regulations require that a Fund enter into transactions in Futures
Contracts for hedging purposes only, in order to assure that the Fund is not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into in order to
hedge the value of Fund securities, and that all long futures positions either
constitute bona fide hedge transactions, as defined in such regulations, or have
a total value not in excess of an amount determined by reference to certain cash
and securities positions maintained by the Fund, and accrued profits on such
positions. In addition, the Fund may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial deposits or margins on
the Fund's existing futures positions would exceed 5% of the market value of the
Fund's total assets.
When a Fund purchases a Futures Contract, an amount of cash or cash
equivalents will be deposited in a segregated account with the Fund's custodian,
Investors Bank & Trust Company (for the Government Income Fund) or State Street
Bank and Trust Company (for the Intermediate Income Fund)(the "Custodian"), so
that the amount so segregated, plus the initial and variation margin held in the
account of the Fund's broker, will at all times equal the value of the Futures
Contract, thereby ensuring that the use of such futures is unleveraged.
The ability to engage in the hedging transactions described herein 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.
The Trustees of the Trust have adopted the requirement that Futures
Contracts only be used for the Funds as a hedge and not for speculation. In
addition to this requirement, the Board of Trustees has also adopted two
percentage restrictions on the use of Futures Contracts. The first is that a
Fund will not enter into a Futures Contract if immediately thereafter the amount
of margin deposits on all the Futures Contracts held by the Fund would exceed 5%
of the market value of the total assets of the Fund. The second restriction is
that the aggregate market value of the Futures Contracts held by a Fund not
exceed 50% of the market value of the Fund's total assets. Neither of the
restrictions would be changed by the Board of Trustees as to a Fund without
considering the policies and concerns of the various federal and state
regulatory agencies.
The Trust has no current intentions of entering into any Futures
Contracts for either of the Funds in the foreseeable future.
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 to hedge the Fund's or
Portfolio's investments.
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.
<TABLE>
<CAPTION>
Class A Shares
REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE END OF
PERIOD RATE OF RETURN THE PERIOD
<S> <C> <C>
GOVERNMENT INCOME FUND
September 8, 1986 (commencement of
operations) to December 31, 1994 5.88% $1,608.24
Five years ended December 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
</TABLE>
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.
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).
JAMES B. CRAVER* -- Secretary and Treasurer of the Trust and the Portfolio
Trust; Senior Vice President and General Counsel, Signature Financial Group,
Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since January, 1991);
Partner, Baker & Hostetler (Attorneys) (prior to January, 1991).
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.
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).
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.
<PAGE>
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.
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
James B. Craver*
ASSISTANT TREASURER
Barbara M. O'Dette*
ASSISTANT SECRETARY
Molly S. Mugler*
*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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