<PAGE>
497(c) File Nos. 33-6540 and 811-5033
Prospectus March 2, 1998
CitiFunds(SM) Intermediate Income Portfolio
This Prospectus describes CitiFunds(SM) Intermediate Income Portfolio, a
diversified mutual fund in the CitiFunds Family of Funds. Citibank, N.A. is
the investment manager.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated the date of this Prospectus (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 Fund may be made, by
contacting the investor's Service Agent or by calling 1-800-625-4554. The
Statement of Additional Information and other related materials are available
on the SEC's Internet web site (http://www.sec.gov).
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REMEMBER THAT SHARES OF THE FUND:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
CITIBANK OR ANY OF ITS AFFILIATES;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
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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>
TABLE OF CONTENTS
Prospectus Summary 3
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Expense Summary 5
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Condensed Financial Information 6
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Investment Information 7
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Risk Considerations 9
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Valuation of Shares 11
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Purchases 11
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Exchanges 12
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Redemptions 12
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Dividends and Distributions 13
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Management 13
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Tax Matters 16
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Performance Information 16
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General Information 17
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Appendix -- Permitted Investments and Investment Practices 19
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<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFunds(SM) Intermediate Income
Portfolio.
INVESTMENT OBJECTIVES AND POLICIES: The Fund's investment objectives are 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 MANAGER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the
"Manager"), a wholly-owned subsidiary of Citicorp, is the investment manager.
Citibank and its affiliates manage more than $88 billion in assets worldwide.
CFBDS, Inc. ("CFBDS" or the "Distributor") is the distributor of shares of the
Fund. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the
Fund through a Service Agent on any day the New York Stock Exchange is open
for trading. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares are subject to a fee of up to
0.25% per annum of the Fund's average daily net assets for distribution, sales
and marketing and shareholder services. See "Purchases" and "Management --
Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of the CitiSelect(R) Portfolios
and certain other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid monthly. Net capital
gains, if any, are distributed annually. See "Dividends and Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares at net asset value. See "Dividends and
Distributions."
WHO SHOULD INVEST: 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 the Fund will achieve its
investment objectives, and the 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 Fund should be aware that prices of fixed income securities
also fluctuate based on changes in the actual and perceived creditworthiness
of issuers. 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
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 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, differing regulations to
which non-U.S. issuers are subject and different characteristics of non-U.S.
economies and markets. The Fund's 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. The Fund may invest in securities of issuers in developing countries,
and all of these risks are increased for investments in issuers in developing
countries.
Certain investment practices, such as repurchase agreements, forward delivery
contracts and loans of securities, also may entail special risks. Investors
should read "Risk Considerations" and the Appendix for more information.
<PAGE>
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and annual
operating expenses for shares of the Fund. For more information on costs and
expenses, see "Management" -- page 13 and "General Information -- Expenses" --
page 18.*
CITIFUNDS
INTERMEDIATE
INCOME
PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (after fee waivers) (1)(3) 0.20%
12b-1 Fees (including service fees) (2) 0.25%
Other Expenses (after fee waivers) (3) 0.45%
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Total Fund Operating Expenses (after fee waivers) (3) 0.90%
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* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. The table shows the fees paid to various service
providers after giving effect to expected voluntary partial fee waivers.
There can be no assurance that the fee waivers reflected in the table
will continue at these levels. The information in the table and in the
example below is based on the Fund's expenses for the fiscal year ended
December 31, 1997, as revised to reflect current fees.
(1) A combined fee for investment advisory and administrative services.
(2) 12b-1 distribution fees are asset-based sales charges. Long-term
shareholders in the 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.
(3) Absent fee waivers and reimbursements, management fees, other expenses
and total fund operating expenses would be 0.70%, 0.47% and 1.42%,
respectively, as revised to reflect the Fund's current fees and expense
structure.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period indicated below:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
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<S> <C> <C> <C> <C>
CITIFUNDS INTERMEDIATE INCOME PORTFOLIO $9 $29 $50 $111
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</TABLE>
The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers. If the fee waivers and reimbursements were not made,
the amounts in the example would be $14, $45, $78 and $170. 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 the Fund's future performance.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table provides condensed financial information about the Fund
for the periods indicated. The information below should be read in conjunction
with the financial statements appearing in the Fund's Annual Report to
Shareholders, which are incorporated by reference in the Statement of
Additional Information. The financial statements and notes, as well as the
table below, have been audited by Deloitte & Touche LLP, independent certified
public accountants. The report of Deloitte & Touche LLP is included in the
Fund's Annual Report. Copies of the Annual Report may be obtained without
charge from an investor's Service Agent or by calling 1-800-625-4554.
<TABLE>
CITIFUNDS INTERMEDIATE INCOME PORTFOLIO -- FINANCIAL HIGHLIGHTS
<CAPTION>
FOR THE PERIOD
JUNE 25, 1993
(COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS) TO
1997 1996 1995 1994 DECEMBER 31, 1993
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<S> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $ 9.48 $ 9.77 $ 8.91 $ 9.88 $10.00
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Income from Operations:
Net investment income 0.575 0.54 0.57 0.521 0.261
Net realized and
unrealized gain (loss)
on investments 0.239 (0.29) 0.86 (0.959) 0.037
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Total from operations 0.814 0.25 1.43 (0.438) 0.298
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Less Distributions From:
Net investment income (0.574) (0.54) (0.57) (0.516) (0.261)
In excess of net
investment income -- -- -- -- (0.006)
Net realized gain on
investments -- -- -- (0.016) (0.151)
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Total from dividends
and distributions (0.574) (0.54) (0.57) (0.532) (0.418)
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Net Asset Value, end
of period $ 9.72 $ 9.48 $ 9.77 $ 8.91 $ 9.88
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000's omitted) $36,702 $43,919 $49,618 $47,582 $61,183
Ratio of expenses to
average net assets 0.92% 0.90% 0.90% 0.90% 0.90%*
Ratio of expenses to
average net assets
after fees paid
indirectly(A) 0.90% 0.90% 0.90% 0.90% 0.90%
Ratio of net
investment income to
average net assets 5.92% 5.72% 5.97% 5.52% 4.95%*
Portfolio turnover 146% 495% 396% 291% 103%
Total return 8.87% 2.73% 16.45% (4.48)% 2.99%+
Note: If certain agents of the Fund had not voluntarily agreed to waive a portion of their fees for the periods indicated and
expenses were not reduced for fees paid indirectly for the years ended after December 31, 1994, the net investment income per share
and the ratios would have been as follows:
Net investment income
per share $ 0.522 $ 0.50 $ 0.52 $ 0.475 $0.236
RATIOS:
Expenses to average
net assets 1.47% 1.39% 1.42% 1.39% 1.38%*
Net investment income
to average net assets 5.37% 5.23% 5.45% 5.03% 4.47%*
*Annualized. +Not annualized.
(A) The expense ratios for the year ended December 31, 1995 and the periods thereafter have been adjusted to reflect a change
in reporting requirements. The new reporting guidelines require the Fund to increase its expense ratio by the effect of any
expense offset arrangments with its service providers. The expense ratios for each of the periods ended before December 31, 1995
have not been adjusted to reflect this change.
</TABLE>
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES: The investment objectives of the Fund are to generate a
high level of current income and preserve the value of its shareholders'
investment.
The investment objectives of the Fund may be changed by its Trustees 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 the Fund will achieve its investment objectives.
INVESTMENT POLICIES: The 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 Manager
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 the Appendix to the Statement of
Additional Information for a description of these ratings.
The Fund may invest up to 20% of its assets in non-U.S. securities, including
securities of issuers in developing countries. 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. The 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 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. The 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
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. When interest
rates go up, mortgage-backed securities experience lower rates of prepayment.
This has the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease more
than prices of other debt obligations when interest rates go up.
The 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 Manager 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.
Determinations of average maturity of asset-backed securities take into
account expectations of prepayments, which may change in different interest
rate environments. The Fund will not consider it a violation of policy if its
average maturity deviates from its normal range as a result of actual or
expected changes in prepayments.
Zero-Coupon Obligations. The 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 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, the 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 Fund's
permitted investments and investment practices, see the Appendix -- Permitted
Investments and Investment Practices on page 19. The Fund will not necessarily
invest or engage in each of the investments and investment practices in the
Appendix but reserves 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 Fund, including a limitation that the Fund may borrow money from banks
in an amount not to exceed 1/3 of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Except as otherwise
indicated, the Fund's 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 the
Fund's securities will not be a violation of policy.
Portfolio Turnover. Securities of the Fund will be sold whenever the Manager
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 Fund's annual portfolio turnover rate appears in the
Financial Highlights for the Fund. See "Condensed Financial Information." 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 the 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 the 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. The 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 Fund should be aware that prices of fixed income
securities fluctuate based on changes in the actual and perceived
creditworthiness of issuers. 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 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. Investments in non-U.S. securities involve risks relating
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and non-
U.S. issuers and markets are subject. 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 Fund.
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 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 Fund may
be higher than those of investment companies investing exclusively in U.S.
securities.
The Fund may invest in securities of issuers in developing countries, and all
of these risks are increased for investments in issuers in developing
countries.
Investment Practices. Certain of the investment practices employed for the
Fund may entail certain risks. These risks are in addition to risks described
above and are described in the Appendix. See the Appendix -- Permitted
Investments and Investment Practices on page 19.
VALUATION OF SHARES
Net asset value per share of the 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
(normally 4:00 p.m. Eastern time) by adding the market value of all securities
and other assets of the Fund, then subtracting the Fund's liabilities, and
then dividing the result by the number of the Fund's outstanding shares. The
net asset value per share is effective for orders received and accepted by the
Transfer Agent 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 of the Fund's investments, trading may
take place in securities held by the Fund on days which are not Business Days
and on which it will not be possible to purchase or redeem shares of the Fund.
PURCHASES
Shares of the Fund are offered continuously and may be purchased on any
Business Day at the public offering price. The public offering price is the
net asset value next determined after an order is transmitted to and accepted
by the Transfer Agent. The Fund and the Transfer Agent reserve the right to
reject any purchase order and to suspend the offering of Fund shares for a
period of time.
Shares may be purchased through certain financial institutions (which may
include banks), securities dealers and other industry professionals (called
Service Agents) that have entered into service agreements with the
Distributor. Service Agents may receive certain fees from the Distributor and/
or the Fund. See "Management -- Distribution Arrangements." Investors should
contact their Service Agents for information on purchases. Each Service 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 Service Agent.
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
From time to time the Distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Fund. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
EXCHANGES
Shares may be exchanged for shares of the CitiSelect Portfolios and certain
other CitiFunds, or may be acquired through an exchange of shares of those
funds.
Shareholders must place exchange orders through the Transfer Agent or, if they
are customers of a Service Agent, through their Service Agent, 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 and accepted by the Transfer Agent. See "Valuation of
Shares." Shares of the Fund may be exchanged only after payment in federal
funds for the shares has been received by the Transfer Agent.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission rules, and is available only in those jurisdictions where such
exchanges legally may be made. See the Statement of Additional Information for
further details. 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 the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the Fund on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. Shareholders should
consult their Service Agents for details. A redemption is treated as a sale of
the shares redeemed and could result in 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 the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. 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 the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent.
During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone exchange or redemption. In such an event, another method of
instruction, such as a written request sent via an overnight delivery service,
should be considered. The Fund, the Transfer Agent and each Service Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for his or her
name, address, telephone number, Social Security number, and account number.
If these or other reasonable procedures are not followed, the Fund, the
Transfer Agent or the Service Agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholder will bear all risk of loss relating to a redemption or exchange by
telephone.
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, the
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
Redemption Information" in the Statement of Additional Information regarding
the Fund's right to pay the redemption price in kind with securities (instead
of cash).
Questions about redemption requirements should be referred to the Transfer
Agent or, for customers of a Service Agent, their Service 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 the Fund's net income from dividends and interest, if
any, is paid to its shareholders of record as a dividend on a monthly basis on
or around the last day of each month.
The 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. The
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.
A shareholder may elect to receive dividends and capital gains distributions
in either cash or additional shares of the Fund issued at net asset value.
MANAGEMENT
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
CitiFunds Fixed Income Trust. A majority of the Trustees are not affiliated
with Citibank. More information on the Trustees and officers of the Fund
appears under "Management" in the Statement of Additional Information.
INVESTMENT MANAGER: 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 $88 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank also serves as investment
adviser to other registered investment companies. Citibank's address is 153
East 53rd Street, New York, New York 10043.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Fund pursuant to a Management Agreement with the Fund.
Citibank also provides certain administrative services to the Fund. These
administrative services include providing general office facilities and
supervising the overall administration of the Fund. Pursuant to a sub-
administrative services agreement with Citibank, the Distributor performs such
sub-administrative duties for the Fund as from time to time are agreed upon by
Citibank and the Distributor. The Distributor's compensation as sub-
administrator is paid by Citibank.
Mark Lindbloom, a Vice President of Citibank, has served as manager of the
Fund since June 1993, and has been a portfolio manager for fixed income
securities since joining Citibank in 1986. Mr. Lindbloom has more than 12
years of investment management experience. Prior to joining Citibank, 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 the Fund's performance is included in the Fund's
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
Management Fees. For its services under the Management Agreement, Citibank
receives fees, which are accrued daily and paid monthly, of 0.70% of the
Fund's average daily net assets on an annualized basis for the Fund's then-
current fiscal year. Citibank may voluntarily agree to waive a portion of its
management fees.
For the fiscal year ended December 31, 1997, the investment advisory fee paid
to Citibank under a prior investment advisory agreement, after waivers, was
0.14% of the Fund's average daily net assets for that fiscal year.
Banking Relationships. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, 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 Fund 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 Fund. Citibank believes that its services
under the Management Agreement and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there
is no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or a Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for
the Fund. Securities may be held by a sub-custodian bank approved by the
Trustees. State Street also provides fund accounting services and calculates
the daily net asset value for the Fund. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: CFBDS, 6 St. James Avenue, Boston, Massachusetts
02116 (telephone (617) 423-1679), is the distributor of the Fund's shares.
Under a Service Plan which has been adopted in accordance with Rule 12b-1
under the 1940 Act, the Fund may pay monthly fees at an annual rate not to
exceed 0.25% of the average daily net assets of the Fund. These fees may be
used to make payments to the Distributor for distribution services and to
Service Agents and others as compensation for the sale of shares of the Fund
for advertising, marketing or other promotional activity, and for preparation,
printing and distribution of prospectuses, statements of additional
information and reports for recipients other than regulators and existing
shareholders. The Fund also may make payments to the Distributor, Service
Agents and others for providing personal service or the maintenance of
shareholder accounts. In those states where CFBDS is not a registered broker-
dealer, shares of the Fund are sold through Signature Broker-Dealer Services,
Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The Fund and the Distributor provide to the Trustees quarterly a written
report of amounts expended pursuant to the Service Plan and the purposes for
which the expenditures were made.
During the period they are in effect, the Service Plan and related
Distribution Agreement obligate the Fund to pay fees to the Distributor,
Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if these entities'
expenses exceed the fees provided for under the Service Plan, the Fund will
not be obligated to pay more than those fees and, if their expenses are less
than the fees paid to them, they will realize a profit. The Fund will pay the
fees to the Distributor, Service Agents and others until the Service Plan or
Distribution Agreement is terminated or not renewed. In that event, the
Distributor's or Service Agent's expenses in excess of fees received or
accrued through the termination date will be the Distributor's or Service
Agent's sole responsibility and not obligations of the Fund.
TAX MATTERS
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
The 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. The Fund may pay withholding or other
taxes to foreign governments during the year, however, and these taxes will
reduce the Fund's dividends.
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
the Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of 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 the Fund have been held. Such capital gains may be
taxable to shareholders that are individuals, estates, or trusts at maximum
rates of 20%, 25%, or 28% depending upon the source of the gains.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the 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.
Early each year, the 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 the Fund's shares when redeemed
may be more or less than their original cost.
The Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period, reflects any change in net asset
value per share and is compounded to include the value of any shares purchased
with any dividends or capital gains declared during such period. Period total
rates of return may be "annualized." An "annualized" total rate of return
assumes that the period total rate of return is generated over a one-year
period.
The Fund may provide annualized "yield" and "effective yield" quotations. The
"yield" of the Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period (which period is stated in any such
advertisement or communication). This income is then annualized; that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of
the 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.
Of course, any fees charged by a shareholder's Service 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 Fund.
GENERAL INFORMATION
ORGANIZATION: The Fund is a series of CitiFunds Fixed Income Trust, a
Massachusetts business trust that was organized on June 23, 1986. The Trust is
also an open-end management investment company registered under the 1940 Act.
Prior to March 2, 1998, the Fund was called Landmark Intermediate Income Fund
and CitiFunds Fixed Income Trust was called Landmark Fixed Income Funds.
The 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 Fund is permitted to invest all or a portion of its assets in one or more
investment companies.
INVESTMENT STRUCTURE: The Fund currently invests directly in securities.
However, in the future, the Fund may invest in securities indirectly through
one or more investment companies, to the extent permitted by applicable law.
Shareholder approval is not needed to change the Fund's investment structure.
VOTING AND OTHER RIGHTS: CitiFunds Fixed Income 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 the Fund gives the shareholder one
vote in Trustee elections and other matters submitted to shareholders for
vote. All shares of each series of CitiFunds Fixed Income Trust have equal
voting rights except that, in matters affecting only a particular series or
class, only shares of that particular series or class are entitled to vote.
At any meeting of shareholders of the Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with the instructions it
receives for all other shares of which that Service Agent is the holder of
record.
As a Massachusetts business trust, CitiFunds Fixed Income Trust is not
required to hold annual shareholder meetings. Shareholder approval will
usually be sought only for changes in the Fund'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 the Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation of the Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in the 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 Service Agents and tax and retirement advisers.
EXPENSES: In addition to amounts payable under its Management Agreement and
Service Plan, the Fund is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Distributor, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
For the fiscal year ended December 31, 1997, the total expenses for the Fund
were 0.92% of the average daily net assets for that fiscal year.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
COUNSEL AND INDEPENDENT AUDITORS: Bingham Dana LLP, 150 Federal Street,
Boston, MA 02110, is counsel for the Fund. Deloitte & Touche LLP, 125 Summer
Street, Boston, MA 02110, are the independent auditors for the Fund.
- --------------------------------------------------------------------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Fund, including information related to (i)
investment policies and restrictions, (ii) the Trustees, officers and
investment manager, (iii) securities transactions, (iv) the Fund's shares,
including rights and liabilities of shareholders, (v) the method used to
calculate performance information and (vi) 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 Fund or its distributor. This Prospectus
does not constitute an offering by the Fund or its distributor in any
jurisdiction in which such offering may not lawfully be made.
APPENDIX
PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
Repurchase Agreements. The Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. 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. The 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 the 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, the 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 the 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 reverse repurchase agreement, the Fund could
experience delays in recovering either the securities or cash. To the extent
that, in the meantime, the value of the securities loaned or sold has
increased or the value of the securities purchased has decreased, the Fund
could experience a loss.
Rule 144A Securities. The Fund may purchase restricted securities that are not
registered for sale to the general public. If the Manager determines that
there is a dealer or institutional market in the securities, 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.
Private Placements and Illiquid Investments. The 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 the Fund to sell them promptly at an acceptable price.
"When-Issued" Securities. In order to ensure the availability of suitable
securities, the 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 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. The Fund may use financial
futures in order to protect itself from fluctuations in interest rates
(sometimes called "hedging") without actually buying or selling debt
securities, or to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain. 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, or for making payment of a cash settlement
based on changes in the value of a security or an index of securities. Because
the value of a futures contract changes based on the price of the underlying
security, futures contracts are commonly referred to as "derivatives." Futures
contracts are a generally accepted part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors. The
futures contracts that may be purchased by the Fund are standardized contracts
traded on commodities exchanges or boards of trade.
When the Fund purchases or sells a futures contract, it is required to make an
initial margin deposit. Although the amount may vary, initial margin can be as
low as 1% or less of the face amount of the contract. Additional margin may be
required as the contract fluctuates in value. Since the amount of margin is
relatively small compared to the value of the securities covered by a futures
contract, the potential for gain or loss on a futures contract is much greater
than the amount of the Fund's initial margin deposit. The Fund does not
currently intend to enter into a futures contract if, as a result, the initial
margin deposits on all of the Fund's futures contracts would exceed
approximately 5% of the Fund's net assets. Also, the Fund intends to limit its
futures contracts so that the value of the securities covered by its futures
contracts would not generally exceed 50% of its total assets other than its
futures contracts and to segregate sufficient assets to meet its obligations
under outstanding futures contracts.
The ability of the Fund to utilize futures contracts successfully will depend
on the Manager's ability to predict interest rate movements, which cannot be
assured. In addition to general risks associated with any investment, the use
of futures contracts entails the risk that, to the extent the Manager's view
as to interest rate movements is incorrect, the use of futures contracts, even
for hedging purposes, could result in losses greater than if they had not been
used. This could happen, for example, if there is a poor correlation between
price movements of futures contracts and price movements in the Fund's related
portfolio position. Also, although the Fund will purchase only standardized
futures traded on regulated exchanges, the futures markets may not be liquid
in all circumstances. As a result, in certain markets, the Fund might not be
able to close out a transaction without incurring substantial losses, if at
all. When futures contracts are used for hedging, even if they are successful
in minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result
from an increase in value of such position.
The use of futures contracts potentially exposes the Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases the Fund's
potential for both gain and loss. As noted above, the Fund intends to adhere
to certain policies relating to the use of futures contracts, which should
have the effect of limiting the amount of leverage by the Fund. The use of
futures contracts may increase the amount of taxable income of the Fund and
may affect in other ways the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed in the section entitled "Certain
Additional Tax Matters" in the Statement of Additional Information.
The use of futures by the Fund and some of their risks are described more
fully in the Statement of Additional Information.
Short Sales "Against the Box." In a short sale, the Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The 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. Not more
than 40% of the Fund's total assets would be involved in short sales "against
the box."
<PAGE>
CFP/IIP 398 [recycle logo] Printed on recycled paper
<PAGE>
497(c) File Nos. 33-6540 and 811-5033
Prospectus March 2, 1998
CitiFunds(SM) Short-Term U.S. Government
Income Portfolio
This Prospectus describes CitiFunds SM Short-Term U.S. Government Income
Portfolio, a diversified mutual fund in the CitiFunds Family of Funds.
Citibank, N.A. is the investment adviser.
Unlike other mutual funds which directly acquire and manage their own
portfolios of securities, the Fund seeks its investment objectives by
investing all of its investable assets in a portfolio with the same investment
objectives and policies. See "Special Information Concerning Investment
Structure" on page 10.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated the date of this Prospectus (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 Fund may be made, by
contacting the investor's Shareholder Servicing Agent or by calling
1-800-625-4554. The Statement of Additional Information and other related
materials are available on the SEC's Internet web site (http://www.sec.gov).
- ------------------------------------------------------------------------------
REMEMBER THAT SHARES OF THE FUNDS:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
CITIBANK OR ANY OF ITS AFFILIATES;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
- --------------------------------------------------------------------------------
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>
TABLE OF CONTENTS
Prospectus Summary 3
..............................................................................
Expense Summary 5
..............................................................................
Condensed Financial Information 6
..............................................................................
Investment Information 8
..............................................................................
Risk Considerations 10
..............................................................................
Valuation of Shares 11
..............................................................................
Purchases 11
..............................................................................
Exchanges 12
..............................................................................
Redemptions 12
..............................................................................
Dividends and Distributions 13
..............................................................................
Management 14
..............................................................................
Tax Matters 17
..............................................................................
Performance Information 18
..............................................................................
General Information 19
..............................................................................
Appendix -- Permitted Investments and Investment Practices 21
..............................................................................
<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFunds Short-Term U.S. Government
Income Portfolio. The Fund is a diversified mutual fund.
INVESTMENT OBJECTIVES AND POLICIES: The Fund's investment objectives are 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 the Portfolio, all references in this
Prospectus to the Fund include the Portfolio, except as otherwise noted.
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 $88 billion in assets worldwide.
CFBDS, Inc. ("CFBDS" or the "Distributor") is the distributor of shares of the
Fund. See "Management."
PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may
purchase and redeem shares of the Fund on any day the New York Stock Exchange
is open for trading. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares are subject to a distribution
fee at the annual rate of 0.20% of the average daily net assets of the Fund.
See "Purchases" and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of the CitiSelect(R) Portfolios
and certain other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid monthly. Net capital
gains, if any, are distributed at least annually. See "Dividends and
Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares at net asset value, subject to the policies
of a shareholder's Shareholder Servicing Agent. See "Dividends and
Distributions."
WHO SHOULD INVEST: 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.
RISK FACTORS: There can be no assurance that the Fund will achieve its
investment objectives, and the 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 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. Securities that are backed by
the full faith and credit of the U.S. Government are generally thought to have
minimal credit risk.
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
The following table summarizes estimated shareholder transaction and annual
operating expenses for shares of the Fund and for the Portfolio. For more
information on costs and expenses, see "Management" -- page 14 and "General
Information -- Expenses" -- page 20.*
CITIFUNDS
SHORT-TERM
U.S. GOVERNMENT
INCOME PORTFOLIO
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee waivers)(1) 0.12%
12b-1 Fees (after fee waivers)(1)(2) 0.05%
Other Expenses
Administrative Services Fees (after fee waivers)(1) 0.05%
Shareholder Servicing Agent Fees 0.25%
Other Operating Expenses 0.33%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses (after fee waivers and
reimbursements)(1) 0.80%
- -------------------------------------------------------------------------------
* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. The table shows the fees paid to various service
providers after giving effect to expected voluntary partial fee waivers
and reimbursements. There can be no assurance that the fee waivers and
reimbursements reflected in the table will continue at these levels.
(1) Absent fee waivers and reimbursements, management fees, 12b-1 fees,
administrative services fees and total fund operating expenses would be
0.35%, 0.20%, 0.30% and 1.43% respectively.
(2) 12b-1 distribution fees are asset-based sales charges. Long-term
shareholders in the 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.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period indicated below:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------
CITIFUNDS SHORT-TERM U.S. GOVERNMENT
INCOME PORTFOLIO $8 $26 $44 $99
- ------------------------------------------------------------------------------
The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers. Expenses are based on the fiscal year ended December
31, 1997. If fee waivers were not made, the amounts in the example would be
$15, $45, $78 and $171. 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 the Fund's future performance. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table provides condensed financial information about CitiFunds
Short-Term U.S. Government Income Portfolio (formerly Landmark U.S. Government
Income Fund) for the periods indicated. The information below should be read
in conjunction with the financial statements appearing in the Fund's Annual
Report to Shareholders, which are incorporated by reference in the Statement
of Additional Information. The financial statements and notes for the year
ended December 31, 1997, as well as the table below, have been audited by
Price Waterhouse LLP, independent accountants. The report of Price Waterhouse
LLP is included in the Fund's Annual Report. Copies of the Annual Report may
be obtained without charge from an investor's Shareholder Servicing Agent or
by calling 1-800-625-4554.
CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO -- FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning
of period $ 9.55 $ 9.78 $ 9.28 $ 9.91
- -------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.504 0.516 0.543 0.466
Net realized and
unrealized gain (loss)
on investments 0.064 (0.232) 0.500 (0.635)
- -------------------------------------------------------------------------------
Total from operations 0.568 0.284 1.043 (0.169)
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.508) (0.514) (0.543) (0.461)
In excess of net
investment income -- -- -- --
- -------------------------------------------------------------------------------
Total from dividends (0.508) (0.514) (0.543) (0.461)
- -------------------------------------------------------------------------------
Net Asset Value, end of
period $ 9.61 $ 9.55 $ 9.78 $ 9.28
- -------------------------------------------------------------------------------
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31, YEAR ENDED AUGUST 31,
1993(A) 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period $10.01 $ 9.85 $ 9.42 $ 8.93 $ 9.08 $ 9.03 $ 9.16
- --------------------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.183 0.448 0.591 0.710 0.653 0.770 0.763
Net realized and
unrealized gain (loss)
on investments (0.138) 0.183 0.413 0.499 (0.148) 0.052 (0.114)
- --------------------------------------------------------------------------------------------------------------
Total from operations 0.045 0.631 1.004 1.209 0.505 0.822 0.649
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.145) (0.464) (0.574) (0.719) (0.655) (0.772) (0.779)
In excess of net
investment income -- (0.007) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total from dividends (0.145) (0.471) (0.574) (0.719) (0.655) (0.772) (0.779)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, end of
period $ 9.91 $10.01 $ 9.85 $ 9.42 $ 8.93 $ 9.08 $ 9.03
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $20,237 $26,744 $35,325 $52,933
Ratio of expenses to
average net assets 0.80%(B) 0.80%(B) 0.80%(B) 0.80%(B)
Ratio of net investment
income to average net
assets 5.20% 5.31% 5.38% 4.72%
Portfolio turnover (C) -- -- -- 22%
Total return 6.11% 3.02% 11.48% (1.72)%
Note: If certain agents of the Fund for the periods indicated and certain agents
of Government Income Portfolio for periods after May 1, 1994 had not waived a
portion of their fees and assumed Fund expenses, the net investment income per
share and the ratios would have been as follows:
Net investment income per
share $0.442 $0.460 $0.499 $0.421
RATIOS:
Expenses to average net
assets 1.43%(B) 1.38%(B) 1.23%(B) 1.26%(B)
Net investment income to
average net assets 4.57% 4.73% 4.95% 4.26%
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31, YEAR ENDED AUGUST 31,
1993(A) 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $79,306 $82,114 $56,159 $25,556 $21,521 $24,834 $31,733
Ratio of expenses to
average net assets 0.80%+ 0.80% 0.51% 0.97% 1.88% 1.73% 1.29%
Ratio of net investment
income to average net
assets 4.34%+ 4.46% 6.03% 7.71% 7.19% 8.55% 8.31%
Portfolio turnover (C) 26% 111% 161% 42% 14% 151% 283%
Total return 0.45%** 6.59% 10.94% 14.04% 5.73% 9.66% 7.18%
Note: If certain agents of the Fund for the periods indicated and certain agents
of Government Income Portfolio for periods after May 1, 1994 had not waived a
portion of their fees and assumed Fund expenses, the net investment income per
share and the ratios would have been as follows:
Net investment income per
share $ 0.164 $ 0.400 $ 0.503 $ 0.659 $ 0.648 * $ 0.762
RATIOS:
Expenses to average net
assets 1.27%+ 1.27% 1.41% 1.52% 1.94% * 1.30%
Net investment income to
average net assets 3.88%+ 3.98% 5.13% 7.16% 7.13% * 8.30%
* No waivers or assumption of expenses during the period.
** Not annualized.
+ Annualized.
(A) Effective September 1, 1993, the Fund changed its fiscal year end from August 31 to December 31.
(B) Includes the Fund's share of Government Income Portfolio's allocated expenses for periods subsequent to May 1, 1994.
(C) Represents the rate of portfolio activity for the period while the Fund was making investments directly in
securities. The portfolio turnover rates for the fiscal years on or after December 31, 1995 are included
under "Investment Information -- Certain Additional Investment Policies."
</TABLE>
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES: The investment objectives of the Fund are to generate
current income and preserve the value of its shareholders' investment.
The investment objectives of the Fund may be changed by its Trustees 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 the Fund will achieve its investment objectives.
INVESTMENT POLICIES: The 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.
U.S. GOVERNMENT SECURITIES: The Fund invests 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.
ASSET-BACKED SECURITIES: The 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.
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. When interest
rates go up, mortgage-backed securities experience lower rates of prepayment.
This has the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease more
than prices of other debt obligations when interest rates go up.
Determinations of average maturity of asset-backed securities take into
account expectations of prepayments, which may change in different interest
rate environments. The Fund will not consider it a violation of policy if its
average maturity deviates from its normal range as a result of actual or
expected changes in prepayments.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
Temporary Investments. During periods of unusual economic or market conditions
or for temporary defensive purposes or liquidity, the 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 Fund's
permitted investments and investment practices, see the Appendix -- Permitted
Investments and Investment Practices on page 21. The Fund will not necessarily
invest or engage in each of the investments and investment practices in the
Appendix but reserves 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 Fund, including a limitation that the Fund may borrow money from banks
in an amount not to exceed 1/3 of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Except as otherwise
indicated, the Fund's 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 the
Fund's securities will not be a violation of policy.
Portfolio Turnover. Securities of the 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. For the fiscal years ended December 31, 1995, 1996 and 1997,
the turnover rates for the Fund were 284%, 100% and 126%, respectively. 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 the 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 the 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. The 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 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.
Investment Practices. Certain of the investment practices employed for the
Fund may entail certain risks. These risks are in addition to risks described
above and are described in the Appendix. See the Appendix -- Permitted
Investments and Investment Practices on page 21.
Special Information Concerning Investment Structure. The Fund does not invest
directly in securities. Instead, the Fund invests all of its investable
assets in the Portfolio, which is a mutual fund having the same investment
objectives and policies as the Fund. The Portfolio, in turn, buys, holds and
sells securities in accordance with these objectives and policies. Of course,
there can be no assurance that the Fund or the Portfolio will achieve its
objectives. The Trustees of the Fund believe that the aggregate per share
expenses of the Fund and the Portfolio will be less than or approximately
equal to the expenses that the Fund would incur if the assets of the Fund were
invested directly in the types of securities held by the Portfolio. The Fund
may withdraw its investment in the Portfolio at any time, and will do so if
the Fund's Trustees believe it to be in the best interest of the Fund's
shareholders. If the Fund were to withdraw its investment in the Portfolio,
the Fund could either invest directly in securities in accordance with the
investment policies described above or invest in another mutual fund or pooled
investment vehicle having the same investment objectives and policies. If the
Fund were to withdraw, the Fund could receive securities from the Portfolio
instead of cash, causing the Fund to incur brokerage, tax and other charges or
leaving it with securities which may or may not be readily marketable or
widely diversified.
The Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but
the Portfolio will notify the Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause the Fund to withdraw its investment in the
Portfolio.
Certain investment restrictions of the Portfolio cannot be changed without
approval by the investors in the Portfolio. These policies are described in
the Statement of Additional Information. When the Fund is asked to vote on
matters concerning the Portfolio (other than a vote to continue the Portfolio
following the withdrawal of an investor), the Fund will hold a shareholder
meeting and vote in accordance with shareholder instructions. Of course, the
Fund could be outvoted, or otherwise adversely affected, by other investors in
the Portfolio.
The Portfolio may sell interests to investors in addition to the Fund. These
investors may be mutual funds which offer shares to their shareholders with
different costs and expenses than the Fund. Therefore, the investment returns
for all investors in funds investing in the Portfolio may not be the same. The
differences in returns are also present in other mutual fund structures.
Information about other holders of interests in the Portfolio is available
from the Fund's distributor, CFBDS (6 St. James Avenue, Boston, MA 02116,
(617) 423-1679).
VALUATION OF SHARES
Net asset value per share of the 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
(normally 4:00 p.m. Eastern time) by adding the market value of all securities
and other assets of the Fund (including its interest in the Portfolio), then
subtracting the Fund's liabilities, and then dividing the result by the number
of the Fund's outstanding shares. The net asset value per share 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.
PURCHASES
Shares of the Fund are offered continuously and may be purchased on any
Business Day at the public offering price. The public offering price is the
net asset value next determined after an order is transmitted to and accepted
by the Distributor. The 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.
Shares may be purchased 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 Fund 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 the Fund). A
securities broker may receive both commissions and shareholder servicing fees.
Each Shareholder Servicing Agent is required to promptly forward orders for
Fund shares to the Distributor.
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 unless they are in proper form.
EXCHANGES
Shares may be exchanged for shares of the CitiSelect Portfolios and certain
other CitiFunds that are made available by a shareholder's Shareholder
Servicing Agent, or may be acquired through an exchange of shares of those
funds.
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 and accepted by the
Distributor. See "Valuation of Shares."
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission 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 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. Shareholders may redeem shares of the Fund only by
authorizing their Shareholder Servicing Agents to redeem such shares on their
behalf through the Distributor.
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 Fund 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, the
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
Redemption Information" in the Statement of Additional Information regarding
the Fund's right to pay the redemption price in kind with securities (instead
of cash).
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 the 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.
The Fund's net realized short-term and long-term capital gains, if any, will
be distributed to the Fund's shareholders at least annually. The 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 issued at net asset value.
MANAGEMENT
TRUSTEES AND OFFICERS: The 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 Fund are different from a majority of the
disinterested Trustees of the Portfolio. More information on the Trustees and
officers of the Fund and the Portfolio appears under "Management" in the
Statement of Additional Information.
INVESTMENT ADVISER: CITIBANK. The 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 $88 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank's address is 153 East 53rd
Street, New York, New York 10043.
Citibank manages the Fund's assets pursuant to an Investment Advisory
Agreement. Subject to policies set by the Trustees, Citibank makes investment
decisions for the Fund.
Denise Guetta, a Vice President of Citibank, has served as manager of the Fund
since April 1997. Ms. Guetta is a Senior Portfolio Manager responsible for
managing institutional liquidity and short-duration portfolios. Ms. Guetta has
over ten years investment experience. Prior to joining Citibank in 1996, she
was a portfolio manager at Fischer Francis Trees and Watts, Inc. managing
leveraged risk positions in the U.S. Treasury and Canadian markets. She began
her career as an account executive at Drexel Burnham Lambert, Inc. managing
fixed income and equity portfolios.
Management's discussion of performance of the Fund is included in the Fund's
Annual Report to Shareholders, which investors may obtain without charge by
contacting their Shareholder Servicing Agents.
Advisory Fees. For its services under the Investment Advisory Agreement, the
Adviser receives an investment advisory fee, which is accrued daily and paid
monthly, of 0.35% of the Fund's average daily net assets on an annualized
basis for the Fund's then-current fiscal year. The Adviser has voluntarily
agreed to waive a portion of its investment advisory fee from the Fund.
For the fiscal year ended December 31, 1997, the investment advisory fee paid
to Citibank for the Fund, after waivers, was 0.12% of the Fund's average daily
net assets for that fiscal year.
Banking Relationships. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, 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 Fund 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 Fund. Citibank believes that its services
under the Investment Advisory Agreement 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 Fund would seek alternative means for obtaining these services. The
Fund does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
ADMINISTRATIVE SERVICES PLANS: The Fund and the Portfolio have Administrative
Services Plans which provide that the Fund and the Portfolio may obtain the
services of an administrator, a transfer agent, a custodian, and, in the case
of the Fund, one or more Shareholder Servicing Agents, and may enter into
agreements providing for the payment of fees for such services. Under the
Fund's Administrative Services Plan, the total of the fees paid to the Fund'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
shares are included in this expense limitation. 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: CFBDS and Signature Financial Group (Cayman) Ltd. ("SFG")
provide certain administrative services to the Fund and the Portfolio under
administrative services agreements. These administrative services include
providing general office facilities, supervising the overall administration of
the Fund and the Portfolio, and providing persons satisfactory to the Boards
of Trustees to serve as Trustees and officers of the Fund and Portfolio. These
Trustees and officers may be directors, officers or employees of CFBDS, SFG or
their affiliates.
For these services, the Administrators receive fees accrued daily and paid
monthly of 0.25% of the average daily net assets of the 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. See "General Information -- Expenses."
CFBDS and SFG are wholly-owned subsidiaries of Signature Financial Group, Inc.
SUB-ADMINISTRATOR: Pursuant to sub-administrative services agreements,
Citibank performs such sub-administrative duties for the Fund and Portfolio as
from time to time are agreed upon by Citibank and CFBDS or SFG. Citibank's
compensation as sub-administrator is paid by CFBDS or SFG.
SHAREHOLDER SERVICING AGENTS: The Fund has 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 the
Fund at an annual rate of 0.25% 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.
Some Shareholder Servicing Agents may impose certain conditions on their
customers in addition to or different from those imposed by the Fund, 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 the 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, dividend disbursing agent and custodian for
the Fund. Securities may be held by a sub-custodian bank approved by the
Trustees. State Street also provides fund accounting services and calculates
the daily net asset value for the Fund. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: CFBDS, 6 St. James Avenue, Boston, Massachusetts
02116 (telephone (617) 423-1679), is the Distributor of the Fund's shares and
also serves as a Shareholder Servicing Agent for certain investors. CFBDS
receives distribution fees from the Fund pursuant to a Distribution Plan
adopted in accordance with Rule 12b-1 under the Investment Company Act of
1940. In those states where CFBDS is not a registered broker-dealer, shares of
the Fund are sold through Signature Broker-Dealer Services, Inc., as dealer.
The Fund's Distribution Plan provides that the Fund may pay the Distributor a
monthly distribution fee at an annual rate not to exceed 0.15% of the average
daily net assets of the Fund. The Plan also permits the Fund to pay the
Distributor an additional fee not to exceed 0.05% of the average daily net
assets of the Fund in anticipation of or as reimbursement for print or
electronic media advertising expenses incurred in connection with the sale of
shares. The Fund did not pay anything under this provision during 1997 and
does not anticipate doing so during the current fiscal year.
The Distributor uses the distribution fees under the Plan to offset the Fund's
marketing costs, 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 Fund and the Distributor
provide to the Trustees quarterly a written report of amounts expended
pursuant to the Plan and the purposes for which the expenditures were made.
During the period they are in effect, the Plan and related Distribution
Agreement obligate the Fund to pay distribution fees to CFBDS as compensation
for its distribution activities, not as reimbursement for specific expenses
incurred. Thus, even if CFBDS's expenses exceed its distribution fees for the
Fund, the Fund will not be obligated to pay more than those fees and, if
CFBDS's expenses are less than such fees, it will retain its full fees and
realize a profit. The Fund will pay the distribution fees to CFBDS until
either the Plan or Distribution Agreement is terminated or not renewed. In
that event, CFBDS's expenses in excess of distribution fees received or
accrued through the termination date will be CFBDS's sole responsibility and
not obligations of the Fund.
TAX MATTERS
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
The 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 and state income or federal 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
the Fund's net investment income and short-term capital gains will be taxed as
ordinary income. Distributions of long-term net capital gains will be taxed as
such regardless of how long the shares of the Fund have been held. Such
capital gains may be taxable to shareholders that are individuals, estates, or
trusts at maximum rates of 20%, 25% or 28%, depending upon the source of the
gains.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the 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.
Early each year, the 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 the Fund's shares when redeemed
may be more or less than their original cost.
The Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period, reflects any change in net asset
value per share and is compounded to include the value of any shares purchased
with any dividends or capital gains declared during such period. Period total
rates of return may be "annualized." An "annualized" total rate of return
assumes that the period total rate of return is generated over a one-year
period.
The Fund may provide annualized "yield" and "effective yield" quotations. The
"yield" of the Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period (which period is stated in any such
advertisement or communication). This income is then annualized; that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of
the 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.
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 Fund.
GENERAL INFORMATION
ORGANIZATION: The Fund is a series of CitiFunds Fixed Income Trust, a
Massachusetts business trust that was organized on June 23, 1986. The Trust is
also an open-end management investment company registered under the 1940 Act.
Prior to March 2, 1998, the Fund was called Landmark U.S. Government Income
Fund and CitiFunds Fixed Income Trust was called Landmark Fixed Income Funds.
The 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 Fund and the 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: CitiFunds Fixed Income 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 the Fund gives the shareholder one
vote in Trustee elections and other matters submitted to shareholders for
vote. All shares of each series of CitiFunds Fixed Income Trust have equal
voting rights except that, in matters affecting only a particular series or
class, only shares of that particular series or class are entitled to vote.
At any meeting of shareholders of the 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.
As a Massachusetts business trust, CitiFunds Fixed Income Trust is not
required to hold annual shareholder meetings. Shareholder approval will
usually be sought only for changes in the Fund's or the 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 the Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation of the
Fund.
CERTIFICATES: The Fund's 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 the 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
Agreement, the Administrative Services Plans and the Distribution Plan, the
Fund and the Portfolio are responsible for their 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.
For the fiscal year ended December 31, 1997, the total expenses for the Fund
were 0.80% of the average daily net assets.
COUNSEL AND INDEPENDENT AUDITORS: Bingham Dana LLP, 150 Federal Street,
Boston, MA 02110, is counsel for the Fund. Price Waterhouse LLP, located at
160 Federal Street, Boston, MA 02110, serves as independent accoun-
tant for the Fund.
- --------------------------------------------------------------------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Fund and the Portfolio, including information
related to (i) investment policies and restrictions, (ii) the Trustees,
officers, Adviser and Administrators, (iii) securities transactions, (iv) the
Fund's shares, including rights and liabilities of shareholders, (v) the
method used to calculate performance information, and (vi) 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 Fund or its distributor. This Prospectus
does not constitute an offering by the Fund or its distributor in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>
APPENDIX
PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
Repurchase Agreements. The Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. The 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. The 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 the 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, the 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 the 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 reverse repurchase agreement, the Fund could
experience delays in recovering either the securities or cash. To the extent
that, in the meantime, the value of the securities loaned or sold has
increased or the value of the securities purchased has decreased, the Fund
could experience a loss.
Rule 144A Securities. The 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, 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.
Private Placements and Illiquid Investments. The 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 the Fund to sell them promptly at an acceptable price.
"When-Issued" Securities. In order to ensure the availability of suitable
securities, the 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.
Futures Contracts and Options on Futures Contracts. The Fund may use financial
futures in order to protect the Fund from fluctuations in interest rates
(sometimes called "hedging") without actually buying or selling debt
securities, or to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain. 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, or for making payment of a cash settlement
based on changes in the value of a security or an index of securities. Because
the value of a futures contract changes based on the price of the underlying
security, futures contracts are considered to be "derivatives." Futures
contracts are a generally accepted part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors. The
futures contracts that may be purchased by the Fund are standardized contracts
traded on commodities exchanges or boards of trade.
When the Fund purchases or sells a futures contract, it is required to make an
initial margin deposit. Although the amount may vary, initial margin can be as
low as 1% or less of the face amount of the contract. Additional margin may be
required as the contract fluctuates in value. Since the amount of margin is
relatively small compared to the value of the securities covered by a futures
contract, the potential for gain or loss on a futures contract is much greater
than the amount of the Fund's initial margin deposit. The Fund currently does
not intend to enter into a futures contract if, as a result, the initial
margin deposits on all of the Fund's futures contracts would exceed
approximately 5% of the Fund's net assets. Also, the Fund intends to limit its
futures contracts so that the value of the securities covered by its futures
contracts would not generally exceed 50% of the Fund's total assets other than
its futures contracts and to segregate sufficient assets to meet its
obligations under outstanding futures contracts.
The ability of the Fund to utilize futures contracts successfully will depend
on the Adviser's ability to predict interest rate movements, which cannot be
assured. In addition to general risks associated with any investment, the use
of futures contracts entails the risk that, to the extent the Adviser's view
as to interest rate movements is incorrect, the use of futures contracts, even
for hedging purposes, could result in losses greater than if they had not been
used. This could happen, for example, if there is a poor correlation between
price movements of futures contracts and price movements in the Fund's related
portfolio position. Also, although the Fund will purchase only standardized
futures traded on regulated exchanges, the futures markets may not be liquid
in all circumstances. As a result, in certain markets, the Fund might not be
able to close out a transaction without incurring substantial losses, if at
all. When futures contracts are used for hedging, even if they are successful
in minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result
from an increase in value of such position.
The use of futures contracts potentially exposes the Fund to the effects of
"leveraging", which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases the Fund's
potential for both gain and loss. As noted above, the Fund intends to adhere
to certain policies relating to the use of futures contracts, which should
have the effect of limiting the amount of leverage by the Fund. The use of
futures contracts may increase the amount of taxable income of the Fund and
may affect in other ways the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed in the section entitled "Certain
Additional Tax Matters" in the Statement of Additional Information.
The use of futures by the Fund and some of their risks are described more
fully in the Statement of Additional Information.
Short Sales "Against the Box." In a short sale, the Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The 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." The 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. Not more
than 40% of the Fund's total assets would be involved in short sales "against
the box."
<PAGE>
CFP/STGIP 398 [recycle logo] Printed on recycled paper
<PAGE>
497(c) File Nos. 33-6540 and 811-5033
Statement of
Additional Information
March 2, 1998
CITIFUNDS(SM) INTERMEDIATE INCOME PORTFOLIO
CitiFunds(SM) Intermediate Income Portfolio (the "Fund") is a series of
CitiFunds Fixed Income Trust (the "Trust"). The address and telephone number
of the Trust are 6 St. James Avenue, Boston, Massachusetts 02116, (617)
423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
1. The Trust ............................................................ 2
2. Investment Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 2
4. Investment Restrictions .............................................. 10
5. Performance Information .............................................. 12
6. Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information ................................. 12
7. Management ............................................................ 13
8. Portfolio Transactions ............................................... 17
9. Description of Shares, Voting Rights and Liabilities ................. 18
10. Certain Additional Tax Matters ....................................... 19
11. Independent Accountants and Financial Statements ..................... 21
Appendix ................................................................. 22
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Fund's Prospectus, dated March 2, 1998, by which shares of the Fund 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 calling
1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Fixed Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on June 23, 1986. The Trust was called
Landmark U.S. Government Income Fund until its name was changed to Landmark
Fixed Income Funds effective June 11, 1992. Effective March 2, 1998, the
Trust's name was changed to CitiFunds Fixed Income Trust. This Statement of
Additional Information describes CitiFunds Intermediate Income Portfolio (the
"Fund"), a series of the Trust. Prior to March 2, 1998, the Fund was called
Landmark Intermediate Income Fund. References in this Statement of Additional
Information to the "Prospectus" are to the Prospectus, dated March 2, 1998, of
the Fund.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser to the
Fund and also provides certain administrative services to the Trust. Citibank
manages the investments of the Fund from day to day in accordance with the
Fund's investment objectives and policies. The selection of investments for
the Fund and the way they are managed depend on the conditions and trends in
the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Fund. Shares of the Fund are continuously sold by CFBDS, Inc.
the Fund's distributor ("CFBDS" or the "Distributor"). Shares of the Fund are
sold at net asset value. CFBDS may receive distribution fees from the Fund
pursuant to a Service Plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to generate a high level of
current income and preserve the value of its shareholders' investment.
The investment objectives of the 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 the Fund will achieve its investment objectives.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The Prospectus contains a discussion of the various types of securities in
which the Fund 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 the Fund.
U.S. GOVERNMENT SECURITIES
The Fund 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 debt obligations in which assets of the Fund 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.
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 Fund 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 Fund are neither
insured nor guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements collateralized by securities
in which the Fund may otherwise invest. Repurchase agreements are agreements
by which the 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. The 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 the 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 Fund are fully collateralized, with such collateral being marked to
market daily.
FUTURES CONTRACTS
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are
very seldom made. Generally, a futures contract is terminated by entering into
an offsetting transaction. Brokerage fees will be incurred when the Fund
purchases or sells a futures contracts. At the same time such a purchase or
sale is made, the Fund must provide cash or securities as a deposit ("initial
deposit") known as "margin." The initial deposit required will vary, but may
be as low as 1% or less of a contract's face value. Daily thereafter, the
futures contract is valued through a process known as "marking to market," and
the Fund may receive or be required to pay additional "variation margin" as
the futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into.
The Fund may purchase or sell futures contracts to attempt to protect
itself from fluctuations in interest rates, or to manage the effective
maturity or duration of the Fund's portfolio in an effort to reduce potential
losses or enhance potential gain, without actually buying or selling debt
securities. For example, if interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a
sale would have much the same effect as if the Fund sold bonds that it owned,
or as if the Fund sold longer-term bonds and purchased shorter-term bonds. If
interest rates did increase, the value of the Fund's debt securities would
decline, but the value of the futures contracts would increase, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. Similar results could be accomplished by selling bonds, or by
selling bonds with longer maturities and investing in bonds with shorter
maturities. However, by using futures contracts, the Fund avoids having to
sell its securities.
Similarly, when it is expected that interest rates may decline, the Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if the
Fund sells a futures contract to protect against losses in the debt securities
held by the Fund), at the same time the futures contracts limit any potential
gain which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of the
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the debt securities underlying such
contracts correlate with movements in the value of the Fund's securities. If
the security underlying a futures contract is different than the security
being hedged, they may not move to the same extent or in the same direction.
In that event, the Fund's hedging strategy might not be successful and the
Fund could sustain losses on these hedging transactions which would not be
offset by gains on the Fund's other investments or, alternatively, the gains
on the hedging transaction might not be sufficient to offset losses on the
Fund's other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, even where the Fund enters into futures transactions
other than for hedging purposes, the effectiveness of its strategy may be
affected by lack of correlation between changes in the value of the futures
contracts and changes in value of the securities which the Fund would
otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures contracts was originally entered into. While the Fund will
establish a futures position only if there appears to be a liquid secondary
market therefor, there can be no assurance that such a market will exist for
any particular futures contract at any specific time. In that event, it may
not be possible to close out a position held by the Fund, which could require
the Fund to purchase or sell the instrument underlying the futures contract or
to meet ongoing variation margin requirements. The inability to close out
futures positions also could have an adverse impact on the ability effectively
to use futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. The trading of futures contracts also is subject to the
risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance may be poorer than if any such
contract had not been entered into. For example, if the Fund hedged against
the possibility of an increase in interest rates which would adversely affect
the price of the Fund's bonds and interest rates decrease instead, part or all
of the benefit of the increased value of the Fund's bonds which were hedged
will be lost because the Fund will have offsetting losses in its futures
positions. Similarly, if the Fund purchases futures contracts expecting a
decrease in interest rates and interest rates instead increased, the Fund will
have losses in its futures positions which will increase the amount of the
losses on the securities in its portfolio which will also decline in value
because of the increase in interest rates. In addition, in such situations, if
the Fund has insufficient cash, the Fund may have to sell bonds from its
investments to meet daily variation margin requirements, possibly at a time
when it may be disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Manager
does not believe that these trading and position limits would have an adverse
impact on the Fund's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions)
if, immediately thereafter, the sum of the amount of initial margin required
to establish the Fund's non-hedging futures positions would exceed 5% of the
Fund's net assets.
The Fund will comply with this CFTC requirement, and the Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by the Fund in a segregated
account with the Fund's custodian so that the amount so segregated, plus the
initial margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract. The
second is that the Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by
the Fund not generally exceed 50% of the market value of the Fund's total
assets other than its futures contracts. For purposes of this third policy,
"market value" of a futures contract is deemed to be the amount obtained by
multiplying the number of units covered by the futures contract times the per
unit price of the securities covered by that contract.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Fund
would take delivery of such securities. When the 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 the 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 expects always to have cash, cash
equivalents or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, even though the Fund does
not intend to make such purchases for speculative purposes and intends 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, the
Fund may have to sell assets which have been set aside in order to meet
redemptions. Also, if the Manager determines it is advisable as a matter of
investment strategy to sell the "when-issued" or "forward delivery"
securities, the 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 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 the Fund, political or financial instability or diplomatic and
other developments which would affect such investments. Further, economies of
other countries or areas of the world may differ favorably or unfavorably from
the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. securities markets, while growing in
volume and sophistication, are generally not as developed as those in the
U.S., and securities of some non-U.S. issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. Non-U.S. security trading practices, including
those involving securities settlement where the Fund's assets may be released
prior to receipt of payments, may expose the Fund to increased risk in the
event of a failed trade or the insolvency of a non-U.S. broker-dealer. In
addition, non-U.S. brokerage commissions are generally higher than commissions
on securities traded in the U.S. and may be non-negotiable. In general, there
is less overall governmental supervision and regulation of non-U.S. securities
exchanges, brokers and listed companies than in the U.S.
It is the Trust's policy to invest not more than 5% of the 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 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 Fund's assets in
the securities of foreign issuers. It is the intention of the Trust to limit
the Fund's investments in non-U.S. obligations to securities rated A or better
and securities which, in the opinion of the Manager, are of comparable quality
to such rated securities.
CURRENCY EXCHANGE TRANSACTIONS
Because the 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, the 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 Fund either enters into these transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the currency exchange
markets, or uses forward contracts to purchase or sell non-U.S. currencies.
The Fund may 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
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 Fund speculate in currency
exchange rates or forward contracts.
The Fund may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
currency exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a currency at one rate, while offering a lesser rate of exchange should
the Fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
fees or commissions are charged at any stage for trades.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a non-U.S. currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of non-
U.S. currency involved in the underlying security transaction, the Fund may be
able to protect against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on
which payment is made or received.
When the Manager believes that the currency of a particular country may
suffer a substantial decline against the U.S. dollar, the Fund may enter into
a forward contract to sell, 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 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 Manager believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
The Fund generally would not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, the 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 Fund's
securities at the expiration of a forward contract. Accordingly, it may be
necessary for the Fund to purchase additional non-U.S. currency on the spot
market if the market value of the security is less than the amount of non-U.S.
currency the Fund is obligated to deliver and if a decision is made to sell
the security and make delivery of such currency. Conversely, it may be
necessary to sell on the spot market some of the non-U.S. currency received
upon the sale of the security if its market value exceeds the amount of such
currency the Fund is obligated to deliver.
The 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 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 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 Fund may write options on non-U.S. currencies for hedging purposes or
otherwise to achieve its investment objectives. For example, where the 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 Fund could write a put option on
the relevant currency which, if rates move in the manner projected, will
expire unexercised and allow the Fund to hedge such increased cost up to the
amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may
be exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on currencies, the Fund also may be required to
forgo all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
Put and call options on non-U.S. currencies written by the 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 Fund's dealings in non-U.S. currency contracts are limited to the
transactions described above. Of course, the Fund is not required to enter
into such transactions and does not do so unless deemed appropriate by the
Manager. It should also be realized that these methods of protecting the value
of the 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 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 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, the Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
Fund, 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 the 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 Fund does not engage in short sales against the box for investment
purposes. The 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). 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 Fund endeavors to offset these costs with the income
from the investment of the cash proceeds of short sales.
The Manager does not expect that more than 40% of the Fund's total assets
would be involved in short sales against the box. The Manager does not
currently intend to engage in such sales.
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, certain of the 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
Fund's total assets would be invested in corporate asset-backed securities.
COLLATERALIZED MORTGAGE OBLIGATIONS
As described in the Prospectus, a portion of the Fund's assets may be
invested in collateralized mortgage obligations ("CMOs"), which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. 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").
The Fund may also invest a portion of its assets in multi-class pass-through
securities which are interests in a trust composed of Mortgage Assets. 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, the Fund may lend its securities to broker-dealers and other
institutional borrowers. Such loans will usually be made only to member banks
of the U.S. Federal Reserve System and to member firms of the New York Stock
Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested
in high quality short-term instruments. Either party has the right to call a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and with respect to cash collateral would
also receive compensation based on investment of the collateral (subject to a
rebate payable to the borrower). Where the borrower provides the Fund with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Fund a fee for use of the borrowed securities. The Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to entities deemed by the Manager to be
of good standing, and when, in the judgment of the Manager, the consideration
which can be earned currently from loans of this type justifies the attendant
risk. In addition, the Fund could suffer a loss if the borrower terminates the
loan and the Fund is forced to liquidate investments in order to return the
cash collateral to the buyer. If the Manager determines to make loans, it is
not intended that the value of the securities loaned by the Fund would exceed
30% of the value of its total assets.
RULE 144A SECURITIES
The Fund 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 Fund will not invest more than 15% 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 have adopted guidelines and delegated to the Manager 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 the
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.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund has adopted the following policies which
may not be changed with respect to the Fund without approval by holders of a
majority of the outstanding voting securities of the Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i)
67% or more of the outstanding voting securities of the Fund present at a
meeting at which the holders of more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy, or (ii) more than
50% of the outstanding voting securities of the Fund. The term "voting
securities" as used in this paragraph has the same meaning as in the 1940 Act.
The Fund may not:
(1) Borrow money except that as a temporary measure for extraordinary
or emergency purposes it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed; or
purchase any securities at any time at which borrowings exceed 5% of the
total assets of the Fund, taken at market value. It is intended that the
Fund would borrow money only from banks and only to accommodate requests
for the repurchase of shares of the Fund while effecting an orderly
liquidation of portfolio securities.
(2) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar as the Fund may technically be deemed an
underwriter under the Securities Act of 1933 in selling a portfolio
security.
(3) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or fixed time deposits or the purchase of short-term
obligations or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions. The purchase of short-term commercial paper or a portion of
an issue of debt securities which are part of an issue to the public shall
not be considered the making of a loan.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the foregoing
shall not be deemed to preclude the Fund from purchasing or selling
futures contracts or options thereon, and the Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities by the Fund).
(5) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Fund
more than 10% of the voting securities of such issuer to be held by the
Fund; provided that, for purposes of this restriction, the issuer of an
option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
the Fund may invest all or any portion of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(6) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's total assets more than 5% of
the Fund's assets (taken at market value) to be invested in the securities
of such issuer (other than securities or obligations issued or guaranteed
by the United States, any state or political subdivision thereof, or any
political subdivision of any such state, or any agency or instrumentality
of the United States or of any state or of any political subdivision of
any state); provided that, for purposes of this restriction, the issuer of
any option or futures contract shall not be deemed to be the issuer of the
security or securities underlying such contract; and provided further that
the Fund may invest all or any portion of its assets in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act.
(7) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions in
futures contracts shall not be subject to this restriction.
(8) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder.
As an operating policy, the Fund will not invest more than 15% of its net
assets in securities for which there is no readily available market. This
policy is not fundamental and may be changed wthout shareholder approval.
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 the Fund is not
considered a violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for the 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.
Any current yield quotation for the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of
the average daily number of shares outstanding during the period that were
entitled to receive dividends and the public offering price per share on the
last day of the period, (b) subtracting 1 from the result, and (c) multiplying
the result by 2.
Any tax equivalent yield quotation of the 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 shares of the
Fund for the periods indicated, assuming that dividends and capital gains
distributions, if any, were reinvested.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
ANNUALIZED OF A HYPOTHETICAL
TOTAL $1,000 INVESTMENT
CITIFUNDS INTERMEDIATE INCOME PORTFOLIO RATE OF RETURN AT THE END OF THE PERIOD
<S> <C> <C>
June 25, 1993 (commencement of operations) to December 31, 1997 5.64% $1,281
One year ended December 31, 1997 8.87% $1,089
</TABLE>
The annualized yield of shares of the Fund for the 30-day period ended
December 31, 1997 was 5.24%.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
the 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 Fund may indicate that investors
should consider diversifying their investment portfolios in order to seek
protection of the value of their assets against inflation. From time to time,
advertising materials for the Fund may refer to or discuss current or past
economic or financial conditions, developments and events. The 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.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES;
ADDITIONAL REDEMPTION INFORMATION
The net asset value per share of the Fund is determined each day during
which the New York Stock Exchange is open for trading ("Business Day"). As of
the date of this Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays (or the days on which
they are observed): New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. This determination is made once each day as of the close of
regular trading on the Exchange (normally 4:00 p.m. Eastern time) by adding
the market value of all securities and other assets of the Fund, then
subtracting the liabilities of the Fund, and then dividing the result by the
number of outstanding shares of the Fund. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.
Bonds and other fixed income securities (other than short-term
obligations) held for the 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 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 the Fund's net asset value is calculated, such securities may be
valued at fair value in accordance with procedures established by and under
the general supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for the Fund is determined
on the basis of interest accrued plus amortization of "original issue
discount" (generally, the difference between issue price and stated redemption
price at maturity) and premiums (generally, the excess of purchase price over
stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued less amortization
of any premiums.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption or repurchase price of shares of the Fund,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a holder of shares received a distribution in
kind, such holder could incur brokerage or other charges in converting the
securities to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of the Fund more than seven days during any period when (a)
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC exists making
disposal of the Fund's investments or determination of its net asset value not
reasonably practicable; (b) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); or (c) the SEC has by order permitted
such suspension.
7. MANAGEMENT
The Trustees and officers of the Trust, their ages and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Asterisks indicate that those Trustees and
officers are "interested persons" (as defined in the 1940 Act) of the Trust.
Unless otherwise indicated below, the address of each Trustee and officer is 6
St. James Avenue, Boston, Massachusetts.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE*; 46 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
RILEY C. GILLEY; 71 -- 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; 57 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 46 -- 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.; 62 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Senior
Vice President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired, January 1993); Director, Indonesia Fund;
Trustee, MAS Funds (since 1993). His address is 1385 Outlook Drive West,
Mountainside, New Jersey.
E. KIRBY WARREN; 63 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 77 -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE*; 46 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU*; 27 -- Assistant Secretary and Assistant Treasurer of
the Trust; Assistant Vice President, Signature Financial Group, Inc. (since
January 1996); Paralegal and Compliance Officer, various financial companies
(July 1992 to January 1996); Graduate Student, Bentley College (prior to
December 1994).
TAMIE EBANKS-CUNNINGHAM*; 25 -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her
address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman,
Cayman Islands, B.W.I.
JOHN R. ELDER*; 49 -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April, 1995); Treasurer, CFBDS (since April
1995); Treasurer of the Phoenix Family of Mutual Funds, Phoenix Home Life
Mutual Insurance Company (1983 to March 1995).
LINDA T. GIBSON*; 32 -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May 1992); Assistant Secretary, CFBDS (since
October 1992).
JOAN R. GULINELLO*; 42 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc. (since October 1993);
Secretary, CFBDS (since October 1995); Vice President and Assistant General
Counsel, Massachusetts Financial Services Company (prior to October 1993).
JAMES E. HOOLAHAN*; 51 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Senior Vice President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI*; 33 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust; Vice President, Signature Financial Group (Cayman)
Ltd. (since August 1994); Fund Compliance Administrator, Concord Financial
Group (November 1990 to August 1994). Her address is Suite 193, 12 Church St.,
Hamilton HM 11, Bermuda.
MOLLY S. MUGLER*; 46 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary,
CFBDS.
CLAIR TOMALIN*; 29 -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited (since 1993). Her address is 117
Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON*; 49 -- Assistant Secretary and Assistant Treasurer of the
Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER*; 38 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Vice President, Signature Financial Group, Inc.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which CFBDS, Signature Financial Group, Inc., or their
affiliates serve as the distributor or administrator.
The following table shows Trustee compensation for the periods indicated.
TRUSTEE COMPENSATION TABLE
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM THE FROM TRUST AND
TRUSTEE FUND (1) COMPLEX (2)
- ------- -------- -----------
H. B. Alvord (3) ........................... $1,170 $32,000
Philip W. Coolidge ......................... $ 0 $ 0
Riley C. Gilley ............................ $2,306 $50,000
Diana R. Harrington ........................ $2,408 $57,000
Susan B. Kerley ............................ $2,422 $59,000
C. Oscar Morong, Jr. ....................... $2,492 $70,000
E. Kirby Warren ............................ $2,325 $50,000
William S. Woods, Jr. ...................... $2,408 $58,000
- ----------
(1) For the fiscal year ended December 31, 1997.
(2) Information relates to the fiscal year ended December 31, 1997. Messrs.
Coolidge, Gilley, Morong, Warren and Woods, and Mses. Harrington and
Kerley are Trustees of 55, 31, 28, 28, 30, 29, and 29 funds and
portfolios, respectively, in the family of open-end registered investment
companies advised or managed by Citibank.
(3) Mr. Alvord retired as a Trustee on May 31, 1997.
As of February 1, 1998 all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Fund. As of the same date, more than
95% of the outstanding shares of the Fund were held of record by Citibank or
its affiliates, as Service Agents of the Fund for the accounts of their
respective clients.
The Declaration of Trust of the Trust provides that the Trust 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, unless, as to liability to the Trust or its 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. 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 in a written
opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
MANAGER
Citibank manages the assets of the Fund and provides certain
administrative services to the Trust pursuant to a management agreement (the
"Management Agreement"). Subject to such policies as the Board of Trustees of
the Trust may determine, Citibank manages the securities of the Fund and makes
investment decisions for the Fund. Citibank furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
Fund's investments and effecting securities transactions for the Fund. The
Management Agreement provides that Citibank may delegate the daily management
of the securities of the Fund to one or more subadvisers. The Management
Agreement will continue in effect until August 8, 1999 and thereafter 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 Fund, and, in either case, by a majority of the Trustees of
the Trust who are not parties to the Management Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on
the Management Agreement.
Citibank provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's independent contractors
and agents; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; and arranging
for the maintenance of books and records of the Trust. Trustees, officers, and
investors in the Trust are or may be or may become interested in Citibank, as
directors, officers, employees, or otherwise and directors, officers and
employees of Citibank are or may become similarly interested in the Trust.
The Management Agreement provides that Citibank may render services to
others. The Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the Trust when
authorized either by a vote of a majority of the outstanding voting securities
of the Fund or by a vote of a majority of the Board of Trustees of the Trust,
or by Citibank on not more than 60 days' nor less than 30 days' written
notice, and will automatically terminate in the event of its assignment. The
Management Agreement provides that neither Citibank nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of securities
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence or reckless disregard of its or their obligations and duties under
the Management Agreement.
The Prospectus contains a description of the fees payable to Citibank for
services under the Management Agreement. Citibank may reimburse the Fund for
or waive all or a portion of its management fees.
For the fiscal years ended December 31, 1995, 1996 and 1997, the fees
payable from the Fund to Citibank under a prior investment advisory agreement
were $171,213 (of which $115,475 was voluntarily waived), $162,525 (of which
$80,994 was voluntarily waived) and $137,525 (of which $82,010 was voluntarily
waived), respectively.
For the fiscal years ended December 31, 1995, 1996 and 1997, the fees
payable from the Fund to CFBDS under a prior administrative services agreement
were $97,836 (of which $38,337 was voluntarily waived), $116,090 (of which
$72,966 was voluntarily waived) and $98,232 (of which $75,116 was voluntarily
waived), respectively.
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust as from time to time are
agreed upon by Citibank and CFBDS. For performing such sub-administrative
services, CFBDS receives compensation as from time to time is agreed upon by
Citibank, not in excess of the amount paid to Citibank for its services under
the Management Agreement with the Trust. All such compensation is paid by
Citibank.
DISTRIBUTOR
CFBDS, 6 St. James Avenue, Boston, MA 02116, serves as the Distributor of
the Fund's shares pursuant to a Distribution Agreement with the Trust for
shares of the Fund (the "Distribution Agreement"). Unless otherwise terminated
the Distribution Agreement will continue 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 Fund and by the vote of a majority of the
Board of Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons of any party to the Distribution Agreement,
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement will terminate in the event of its assignment, as
defined in the 1940 Act.
Under a Service Plan for shares of the Fund (the "Service Plan") which has
been adopted in accordance with Rule 12b-1 under the 1940 Act, the Fund may
pay monthly fees at an annual rate not to exceed 0.25% of the average daily
net assets of the Fund. Such fees may be used to make payments to the
Distributor for distribution services, to securities dealers and other
industry professionals (called Service Agents) that have entered into service
agreements with the Distributor and others in respect of the sale of shares of
the Fund, and to other parties in respect of the sale of shares of the Fund,
and to make payments for advertising, marketing or other promotional activity,
and payments for preparation, printing, and distribution of prospectuses,
statements of additional information and reports for recipients other than
regulators and existing shareholders. The Fund also may make payments to the
Distributor, Service Agents and others for providing personal service or the
maintenance of shareholder accounts. The Fund and the Distributor provide to
the Trustees quarterly a written report of amounts expended pursuant to
Service Plan and the purposes for which the expenditures were made.
The Service Plan obligates the Fund to pay fees to the Distributor,
Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if their expenses
exceed the fees provided for by the Service Plan for the Fund, the Fund will
not be obligated to pay more than those fees and, if their expenses are less
than the fees paid to them, they will realize a profit. The Fund will pay the
fees to the Distributor, Service Agents and others until the Service Plan or
Distribution Agreement is terminated or not renewed. In that event, the
Distributor's or Service Agent's expenses in excess of fees received or
accrued through the termination date will be the Distributor's or Service
Agent's sole responsibility and not obligations of the Fund.
From time to time the Distributor may make payments for distribution out
of its past profits or any other sources available to it.
The Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's
Trustees and a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Service Plan or in any agreement related to the Plan (for
purposes of this paragraph "Qualified Trustees"). The Service Plan requires
that the Trust and the Distributor provide to the Board of Trustees, and the
Board of Trustees review, at least quarterly, a written report of the amounts
expended (and the purposes therefor) under the Service Plan. The Service 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 Service Plan may be terminated with respect
to the 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
the Fund. The Service Plan may not be amended to increase materially the
amount of the Fund's permitted expenses thereunder without the approval of a
majority of the outstanding securities of the 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 the Service Plan for a period of not less
than six years, and for the first two years the Distributor will preserve such
copies in an easily accessible place.
As contemplated by the Service Plan, CFBDS acts as the agent of the Trust
in connection with the offering of shares of the Fund pursuant to the
Distribution Agreement. The Prospectus contains a description of fees payable
to the Distributor under the Distribution Agreement. For the fiscal years
ended December 31, 1995, 1996 and 1997, the fees payable to CFBDS under a
prior distribution agreement with respect to the Fund were $24,459 (all of
which was voluntarily waived), $69,654 (of which $67,679 was voluntarily
waived) and $58,940 (all of which was voluntarily waived), respectively.
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents out of the
distribution fees received by the Distributor and out of the Distributor's
past profits or any other source available to it.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for the Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street,
pursuant to which custodial and fund accounting services, respectively, are
provided for the Fund. See "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.
AUDITORS
Deloitte & Touche LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Deloitte & Touche LLP is
125 Summer Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel
for the Fund.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for the Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objectives. Changes in the Fund's investments are made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of turnover
is not a limiting factor when changes are appropriate. Specific decisions to
purchase or sell securities for the Fund are made by a portfolio manager who
is an employee of Citibank and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of Citibank 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. Citibank attempts to achieve this result by selecting broker-dealers
to execute transactions on behalf of the Fund and other clients of Citibank 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),
Citibank 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 Citibank 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 Citibank. At present no other
recapture arrangements are in effect.
Under the Management Agreement, in connection with the selection of such
brokers or dealers and the placing of such orders, Citibank is directed to
seek for the 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
Citibank or the Fund, subject to any applicable laws, rules and regulations.
The management fee that the Fund pays to Citibank will not be reduced as a
consequence of Citibank's receipt of brokerage and research services. While
such services are not expected to reduce the expenses of Citibank, Citibank
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 or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for the Fund as well as for one or more of Citibank's other
clients. Investment decisions for the Fund and for Citibank'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 the
Fund. When purchases or sales of the same security for the Fund and for other
portfolios managed by Citibank occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large volume purchases or sales.
For the fiscal years ended December 31, 1995, 1996 and 1997, the Fund paid
no brokerage commissions.
9. 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. The Trust has
reserved the right to create and issue additional series and classes of
shares. Each share of the Fund represents an equal proportionate interest in
the Fund with each other share. Shares of each series participate equally in
the earnings, dividends and distribution of net assets of the particular
series upon liquidation or dissolution. 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 series or class, only shares of that particular series or class
are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required 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 Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's (or the
affected series') outstanding shares would be sufficient. The Trust or any
series of the Trust, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Trust or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, 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.
10. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition of the Fund's
portfolio assets. Provided all such requirements are met and all of the Fund's
net investment income and net 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. taxes and 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 the 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.
Shareholders of the Fund will generally have to pay federal income taxes
and any state or local taxes on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any
distributions from net short-term capital gains are taxable to shareholders as
ordinary income for federal income tax purposes, whether the distributions are
made in cash or in additional shares. Because the 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 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. Such capital gains may be taxable to shareholders that are
individuals, estates, or trusts at maximum rates of 20%, 25%, or 28%,
depending upon the source of the gains. 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 the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual shareholder will be eligible
for reduced tax rates if the shares were held for more than 18 months.
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.
Any investments in zero coupon bonds and certain securities purchased at a
market discount will cause the Fund to recognize income prior to the receipt
of cash payments with respect to those securities. In order to distribute this
income and avoid a tax, the Trust may be required to liquidate securities of
the Fund that it might otherwise have continued to hold and thereby
potentially cause the Fund to realize additional taxable gain or loss. 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 the Fund has tax exempt entities as shareholders.
The Fund's transactions in options, short sales "against the box," futures
contracts and forward contracts will be subject to special tax rules that may
affect the amount, timing, and character of Fund income and distributions to
holders of beneficial interests. For example, certain positions held by the
Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Fund that substantially diminish
its risk of loss with respect to other positions in its portfolio may
constitute straddles, and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of securities held
by the Fund and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles which may alter the effects of these
rules. The Fund 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.
Special tax considerations apply with respect to foreign investments of
the Fund. Foreign exchange gains and losses realized by the Fund will
generally be treated as ordinary income and losses. The Fund's use of non-U.S.
currencies for non-hedging purposes may be limited in order to avoid a tax on
the Fund. Investment by the Fund in certain "passive foreign investment
companies" may also be limited in order to avoid a tax on the Fund. The Fund
may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each taxable year. This election may cause the
Fund to recognize ordinary income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold. Investment income received by
the Fund from non-U.S. securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties with
many other countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income. The Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the
respective assets to be invested within various countries is not known. The
Fund generally does 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.
The Fund will withhold tax payments at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
subject to withholding taxes that are made to persons who are not citizens or
residents of the United States. Distributions received from the Fund by non-
U.S. persons also may be subject to tax under the laws of their own
jurisdiction.
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. If a shareholder fails to provide this information,
or otherwise violates IRS regulations, the Fund may be required to withhold
tax at the rate of 31% on certain distributions and redemption proceeds paid
to that shareholder.
Distributions of the Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but not
generally from capital gains realized upon the dispositions of such
obligations) may be exempt from state and local taxes. Shareholders are urged
to consult their tax advisers regarding the possible exclusion of such portion
of their dividends for state and local income tax purposes.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The audited financial statements of the Fund (Portfolio of Investments at
December 31, 1997, Statement of Assets and Liabilities at December 31, 1997,
Statement of Operations for the year ended December 31, 1997, Statement of
Changes in Net Assets for the years ended December 31, 1997 and 1996,
Financial Highlights for each of the years in the four-year period ended
December 31, 1997 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 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 accountants, on behalf of the
Fund.
A copy of the Annual Report to Shareholders of the Fund accompanies this
Statement of Additional Information.
<PAGE>
APPENDIX
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.
The ratings below are 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.
MOODY'S INVESTORS SERVICE, INC.
FOUR HIGHEST BOND RATINGS
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
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than 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: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
STANDARD & POOR'S RATINGS GROUP
FOUR HIGHEST BOND RATINGS
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
PLUS (+) OR MINUS (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
497(c) File Nos. 33-6540 and 811-5033
Statement of
Additional Information
March 2, 1998
CITIFUNDS(SM) SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO
CITIFUNDS(SM) SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO (the "Fund") is
a series of CitiFunds Fixed Income Trust (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
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
1. The Trust ............................................................. 2
2. Investment Objectives and Policies .................................... 2
3. Description of Permitted Investments and Investment Practices ......... 2
4. Investment Restrictions ............................................... 8
5. Performance Information ............................................... 10
6. Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information ................................... 11
7. Management ............................................................ 11
8. Portfolio Transactions ................................................ 18
9. Description of Shares, Voting Rights and Liabilities .................. 18
10. Certain Additional Tax Matters ........................................ 20
11. Independent Accountants and Financial Statements ...................... 21
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Fund's Prospectus, dated March 2, 1998, by which shares of the Fund 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 Fund's distributor, CFBDS, Inc., at
6 St. James Avenue, Boston, MA 02116, (617) 423-1679.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Fixed Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on June 23, 1986. The Trust was called
Landmark U.S. Government Income Fund until its name was changed to Landmark
Fixed Income Funds effective June 11, 1992. Effective March 2, 1998, the
Trust's name was changed to CitiFunds Fixed Income Trust. This Statement of
Additional Information describes CitiFunds Short-Term U.S. Government Income
Portfolio (the "Fund"), a series of the Trust. Prior to March 2, 1998, the
Fund was called Landmark U.S. Government Income Fund. References in this
Statement of Additional Information to the "Prospectus" are to the Prospectus,
dated March 2, 1998, of the Fund.
The Trust seeks the investment objectives of the 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 Fund. Because the Fund invests
through the Portfolio, all references in this Statement of Additional
Information to the Fund include the Portfolio, except as otherwise noted. In
addition, references to the Trust, include the Portfolio Trust, except as
otherwise noted.
Citibank, N.A. ("Citibank" or the "Adviser") is investment adviser to the
Portfolio. The Adviser manages the investments of the Portfolio from day to
day in accordance with the Portfolio's investment objectives and policies. The
selection of investments for the Portfolio and the way it is managed depend on
the conditions and trends in the economy and the financial marketplaces.
CFBDS, Inc. ("CFBDS" or the "Administrator"), the administrator of the
Fund, and Signature Financial Group (Cayman) Ltd. ("SFG"), the administrator
of the Portfolio (the "Portfolio Administrator"), supervise the overall
administration of the Fund and the Portfolio, respectively. The Boards of
Trustees of the Trust and the Portfolio Trust provide broad supervision over
the affairs of the Fund and the Portfolio, respectively. Shares of the Fund
are continuously sold by CFBDS, the Fund's 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 Trust (collectively, "Shareholder Servicing
Agents"). Shares of the Fund are sold at net asset value. CFBDS may receive
distribution fees from the Fund pursuant to a Distribution Plan adopted with
respect to shares of the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to generate current income and
preserve the value of its shareholders' investment.
The investment objectives of the 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 the Fund will achieve its investment objectives.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The Prospectus contains a discussion of the various types of securities in
which the 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
the Fund.
The Trust may withdraw the investment of the 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 Fund to do so. Upon any such withdrawal, the Fund's
assets would continue to be invested in accordance with the investment
policies described herein with respect to the Fund. The policies described
below are not fundamental and may be changed without shareholder approval.
U.S. GOVERNMENT SECURITIES
The Fund invests 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 Fund 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 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 Fund 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 Fund are neither
insured nor guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
The Adviser intends to fully manage the investments of the Portfolio by
buying and selling U.S. Government obligations, and by entering into
repurchase agreements covering such obligations, as well as by holding
selected obligations to maturity. In managing the Portfolio's investments, the
Adviser seeks to maximize the return for the Portfolio by taking advantage of
market developments and yield disparities, which may include use of the
following strategies:
(1) shortening the average maturity of the Portfolio's securities in
anticipation of a rise in interest rates so as to minimize depreciation of
principal;
(2) lengthening the average maturity of the Portfolio's securities in
anticipation of a decline in interest rates so as to maximize appreciation
of principal;
(3) selling one type of U.S. Government obligation (e.g., Treasury
bonds) and buying another (e.g., GNMA direct pass-through certificates)
when disparities arise in the relative values of each; and
(4) changing from one U.S. Government obligation to an essentially
similar U.S. Government obligation when their respective yields are
distorted due to market factors.
In order to enhance the stability of the value of the beneficial interests in
the Portfolio by reducing volatility resulting from changes in interest rates
and other market conditions, the dollar weighted average maturity of the
Portfolio's investment securities is generally three years or less. These
strategies may result in increases or decreases in the Portfolio's current
income and in the holding for the Portfolio of obligations which sell at
moderate to substantial premiums or discounts from face value. Moreover, if
the Adviser's expectations of changes in interest rates or its valuation of
the normal yield relationship between two obligations proves to be incorrect,
the Portfolio's income, net asset value and potential capital gain may be
decreased or its potential capital loss may be increased.
The Portfolio is managed to provide an income yield that is generally
higher than those offered by money market funds (which have a share price
which is more stable than the value of an investment in the Portfolio and
which have a portfolio of investments with an average maturity which is
shorter than the Portfolio's securities) with a value of an investment in the
Portfolio that is more stable than the share price of other fixed income funds
that have a longer term investment focus. Debt securities with longer
maturities than those in which the assets of the Portfolio are invested
generally tend to produce higher yields and are subject to greater market
fluctuation as a result of changes in interest rates than debt securities with
shorter maturities. At the same time, the securities in which the assets of
the Portfolio are invested tend to produce lower yields and are subject to
lower market fluctuation as a result of changes in interest rates than debt
securities with longer maturities that tend to be purchased by longer term
bond funds than the Portfolio. However, since available yields vary over time,
no specific level of income can be assured. The income derived from an
investment in the Portfolio increases or decreases in relation to the income
received by the Portfolio from its investments, which in any case is reduced
by the Portfolio's expenses.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements collateralized by securities
in which the Fund may otherwise invest. Repurchase agreements are agreements
by which the 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. The 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 the 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 Fund are fully collateralized, with such collateral being marked to
market daily.
FUTURES CONTRACTS
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are
very seldom made. Generally, a futures contract is terminated by entering into
an offsetting transaction. Brokerage fees will be incurred when the Fund
purchases or sells a futures contracts. At the same time such a purchase or
sale is made, the Fund must provide cash or securities as a deposit ("initial
deposit") known as "margin." The initial deposit required will vary, but may
be as low as 1% or less of a contract's face value. Daily thereafter, the
futures contract is valued through a process known as "marking to market," and
the Fund may receive or be required to pay additional "variation margin" as
the futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into.
The Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity
or duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities.
For example, if interest rates were expected to increase, the Fund might enter
into futures contracts for the sale of debt securities. Such a sale would have
much the same effect as if the Fund sold bonds that it owned, or as if the
Fund sold longer-term bonds and purchased shorter-term bonds. If interest
rates did increase, the value of the Fund's debt securities would decline, but
the value of the futures contracts would increase, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have.
Similar results could be accomplished by selling bonds, or by selling bonds
with longer maturities and investing in bonds with shorter maturities.
However, by using futures contracts, the Fund avoids having to sell its
securities.
Similarly, when it is expected that interest rates may decline, the Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if the
Fund sells a futures contract to protect against losses in the debt securities
held by the Fund), at the same time the futures contracts limit any potential
gain which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of the
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the debt securities underlying such
contracts correlate with movements in the value of the Fund's securities. If
the security underlying a futures contract is different than the security
being hedged, they may not move to the same extent or in the same direction.
In that event, the Fund's hedging strategy might not be successful and the
Fund could sustain losses on these hedging transactions which would not be
offset by gains on the Fund's other investments or, alternatively, the gains
on the hedging transaction might not be sufficient to offset losses on the
Fund's other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, even where the Fund enters into futures transactions
other than for hedging purposes, the effectiveness of its strategy may be
affected by lack of correlation between changes in the value of the futures
contracts and changes in value of the securities which the Fund would
otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures contracts was originally entered into. While the Fund will
establish a futures position only if there appears to be a liquid secondary
market therefor, there can be no assurance that such a market will exist for
any particular futures contract at any specific time. In that event, it may
not be possible to close out a position held by the Fund, which could require
the Fund to purchase or sell the instrument underlying the futures contract or
to meet ongoing variation margin requirements. The inability to close out
futures positions also could have an adverse impact on the ability effectively
to use futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. The trading of futures contracts also is subject to the
risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Investments in futures contracts also entail the risk that if the
Adviser's investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance may be poorer than if any such
contract had not been entered into. For example, if the Fund hedged against
the possibility of an increase in interest rates which would adversely affect
the price of the Fund's bonds and interest rates decrease instead, part or all
of the benefit of the increased value of the Fund's bonds which were hedged
will be lost because the Fund will have offsetting losses in its futures
positions. Similarly, if the Fund purchases futures contracts expecting a
decrease in interest rates and interest rates instead increased, the Fund will
have losses in its futures positions which will increase the amount of the
losses on the securities in its portfolio which will also decline in value
because of the increase in interest rates. In addition, in such situations, if
the Fund has insufficient cash, the Fund may have to sell bonds from its
investments to meet daily variation margin requirements, possibly at a time
when it may be disadvantageous
to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Adviser
does not believe that these trading and position limits would have an adverse
impact on the Fund's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions)
if, immediately thereafter, the sum of the amount of initial margin required
to establish the Fund's non-hedging futures positions would exceed 5% of the
Fund's net assets.
The Fund will comply with this CFTC requirement, and the Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by the Fund in a segregated
account with the Fund's custodian so that the amount so segregated, plus the
initial margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract. The
second is that the Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by
the Fund not generally exceed 50% of the market value of the Fund's total
assets other than its futures contracts. For purposes of this third policy,
"market value" of a futures contract is deemed to be the amount obtained by
multiplying the number of units covered by the futures contract times the per
unit price of the securities covered by that contract.
The use of futures contracts may increase the amount of taxable income of
the Fund and may affect the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed herein in the section entitled
"Certain Additional Tax Matters."
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Fund
would take delivery of such securities. When the 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 the 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 expects always to have cash, cash
equivalents or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, even though the Fund does
not intend to make such purchases for speculative purposes and intends 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, the
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, the 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).
SHORT SALES "AGAINST THE BOX"
In a short sale, the Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
Fund, 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 the 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 Fund does not engage in short sales against the box for investment
purposes. The 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). 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 Fund endeavors 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 the Fund's total assets
would be involved in short sales against the box. The Adviser does not
currently intend to engage in such sales.
COLLATERALIZED MORTGAGE OBLIGATIONS
As described in the Prospectus, a portion of the 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 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").
The Fund may also invest a portion of its assets in multi-class pass-through
securities which are interests in a trust composed of Mortgage Assets;
provided, however, that 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, the Fund may lend its securities to broker-dealers and other
institutional borrowers. Such loans will usually be made only to member banks
of the U.S. Federal Reserve System and to member firms of the New York Stock
Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested
in high quality short-term instruments. Either party has the right to call a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and with respect to cash collateral would
also receive compensation based on investment of the collateral (subject to a
rebate payable to the borrower). Where the borrower provides the Fund with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Fund a fee for use of the borrowed securities. The Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to entities deemed by the 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. In addition, the Fund could suffer a loss if the borrower terminates the
loan and the Fund is forced to liquidate investments in order to return the
cash collateral to the buyer. If the Adviser determines to make loans, it is
not intended that the value of the securities loaned by the Fund would exceed
30% of the value of its total assets.
RULE 144A SECURITIES
The Fund 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 Fund will not invest more than 15% 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 have adopted guidelines and delegated 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 the
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.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, and the Portfolio Trust, on behalf of
the Portfolio, have each adopted the following policies which may not be
changed with respect to the Fund or the Portfolio without approval by holders
of a majority of the outstanding voting securities of the Fund or Portfolio,
which as used in this Statement of Additional Information means the vote of
the lesser of (i) 67% or more of the outstanding voting securities of the Fund
or Portfolio present at a meeting at which the holders of more than 50% of the
outstanding voting securities of the Fund or Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Fund or Portfolio. The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.
Neither the Fund 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.
(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 the 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, or (c) by purchasing a portion of
an issue of debt securities of types commonly distributed privately to
financial institutions. The purchase of short-term commercial paper or a
portion of an issue of debt securities which 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) 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
Fund may be invested in a Qualifying Portfolio.
(8) 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 any political subdivision of the United States or any
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.
(9) 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.
(10) 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.
(11) 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 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 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 Fund may be invested in a
Qualifying Portfolio all of whose assets will be invested in obligations that
are backed by the full faith and credit of the U.S. Government. This policy is
not intended to prohibit the use of futures contracts on fixed income
securities by the Fund. Investment Restriction (9) above applies only to short
sales of or short positions in securities, and does not prevent the writing,
purchase, ownership, holding or sale of futures contracts.
As an operating policy, the Fund will not invest more than 15% of its net
assets in securities for which there is no readily available market. This
policy is not fundamental and may be changed without shareholder approval.
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 the Fund is not
considered a violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for the 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.
Any current yield quotation for the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of
the average daily number of shares outstanding during the period that were
entitled to receive dividends and the public offering price per share on the
last day of the period, (b) subtracting 1 from the result, and (c) multiplying
the result by 2.
Any tax equivalent yield quotation of the 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 shares of the Fund
for the periods indicated, assuming that dividends and capital gains
distributions, if any, were reinvested.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
ANNUALIZED OF A HYPOTHETICAL
TOTAL $1,000 INVESTMENT
CITIFUNDS SHORT-TERM U.S. GOVERNMENT INCOME PORTFOLIO RATE OF RETURN AT THE END OF THE PERIOD
<S> <C> <C>
Ten years ended December 31, 1996 6.80% $1,930
Five years ended December 31, 1996 4.59% $1,251
One year ended December 31, 1996 4.52% $1,045
</TABLE>
The annualized yield of shares of the Fund for the 30-day period ended
December 31, 1997 was 5.03%.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
the 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 Fund may indicate that investors
should consider diversifying their investment portfolios in order to seek
protection of the value of their assets against inflation. From time to time,
advertising materials for the Fund may refer to or discuss current or past
economic or financial conditions, developments and events.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES;
ADDITIONAL REDEMPTION INFORMATION
The net asset value of each share of the Fund is determined each day
during which the New York Stock Exchange is open for trading (a "Business
Day"). As of the date of this Statement of Additional Information, the
Exchange is open for trading every weekday except for the following holidays
(or the days on which they are observed): New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. This determination is made once each
day as of the close of regular trading on the Exchange (normally 4:00 p.m.
Eastern time) by adding the market value of all securities and other assets
attributable to shares of the Fund (including its interest in the Portfolio),
then subtracting the liabilities charged to the shares, and then dividing the
result by the number of outstanding shares. The net asset value per share 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 Fund is determined. The net asset value of the 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 the 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.
Interest income on long-term obligations held for the 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 Fund 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 the 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 the 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.
7. MANAGEMENT
The Trustees and officers of the Trust and the Portfolio Trust, their ages
and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
that those Trustees and officers are "interested persons" (as defined in the
1940 Act) of the Trust or the Portfolio Trust. Unless otherwise indicated
below, the address of each Trustee and officer is 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
PHILIP W. COOLIDGE*; 46 -- President of the Trust and the Portfolio Trust;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
RILEY C. GILLEY; 71 -- 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; 57 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 46 -- 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.; 62 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Senior
Vice President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired January 1993); Director, Indonesia Fund; Trustee,
MAS Funds (since 1993). His address is 1385 Outlook Drive West, Mountainside,
New Jersey.
E. KIRBY WARREN; 63 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 77 -- 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; 54 -- 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*; 46 -- President of the Trust and the Portfolio Trust;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
MARK T. FINN; 54 -- 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.
C. OSCAR MORONG, JR.; 62 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Senior
Vice President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired January 1993); Director, Indonesia Fund; Trustee,
MAS Funds (since 1993). His address is 1385 Outlook Drive West, Mountainside,
New Jersey.
WALTER E. ROBB, III; 71 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors)(since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE*; 46 -- President of the Trust and the Portfolio Trust;
Chief Executive Officer and President, Signature Financial Group, Inc. and
CFBDS.
CHRISTINE A. DRAPEAU*; 27 -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc. (since January 1996); Paralegal and Compliance Officer,
various financial companies (July 1992 to January 1996); Graduate Student,
Bentley College (prior to December 1994).
TAMIE EBANKS-CUNNINGHAM*; 25 -- Assistant Secretary of the Trust and the
Portfolio Trust; Office Manager, Signature Financial Group (Cayman) Ltd.
(Since April 1995); Administrator, Cayman Islands Primary School (prior to
April 1995). Her address is P.O. Box 2494, Elizabethan Square, George Town,
Grand Cayman, Cayman Islands, B.W.I.
JOHN R. ELDER*; 49 -- Treasurer of the Trust and the Portfolio Trust; Vice
President, Signature Financial Group, Inc. (since April, 1995); Treasurer,
CFBDS (since April 1995); Treasurer of the Phoenix Family of Mutual Funds,
Phoenix Home Life Mutual Insurance Company (1983 to March 1995).
LINDA T. GIBSON*; 32 -- Secretary of the Trust and the Portfolio Trust; Vice
President, Signature Financial Group, Inc. (since May 1992); Assistant
Secretary, CFBDS (since October 1992).
JOAN R. GULINELLO*; 42 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trust; Vice President, Signature Financial Group, Inc.
(since October 1993); Secretary, CFBDS (since October 1995); Vice President
and Assistant General Counsel, Massachusetts Financial Services Company (prior
to October 1993).
JAMES E. HOOLAHAN*; 51 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trust; Senior Vice President,
Signature Financial Group, Inc.
SUSAN JAKUBOSKI*; 33 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust and the Portfolio Trust; Vice President, Signature
Financial Group (Cayman) Ltd. (since August 1994);
Fund Compliance Administrator, Concord Financial Group (November 1990 to
August 1994). Her address is Suite 193, 12 Church St., Hamilton HM 11,
Bermuda.
MOLLY S. MUGLER*; 46 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trust; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
CLAIR TOMALIN*; 29 -- Assistant Secretary of the Trust and the Portfolio
Trust; Office Manager, Signature Financial Group (Europe) Limited (since
1993). Her address is 117 Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON*; 49 -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trust; Assistant Vice President, Signature Financial
Group, Inc.
JULIE J. WYETZNER*; 38 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trust; Vice President, Signature
Financial Group, Inc.
The Trustees and officers of the Trust and the Portfolio Trust also hold
comparable positions with certain other funds for which CFBDS, SFG or their
affiliates serve as the distributor or administrator.
The following table shows Trustee compensation for the periods indicated.
TRUSTEE COMPENSATION TABLE
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM THE FROM TRUST AND
TRUSTEE FUND (1) COMPLEX (2)
H. B. Alvord(3) .............................. $ 730 $32,000
Philip W. Coolidge ........................... $ 0 $ 0
Riley C. Gilley .............................. $1,440 $50,000
Diana R. Harrington .......................... $1,501 $57,000
Susan B. Kerley .............................. $1,510 $59,000
C. Oscar Morong, Jr. ......................... $1,553 $70,000
E. Kirby Warren .............................. $1,451 $50,000
William S. Woods, Jr. ........................ $1,500 $58,000
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(1) For the fiscal year ended December 31, 1997.
(2) Information relates to the fiscal year ended December 31, 1997. Messrs.
Coolidge, Gilley, Morong, Warren and Woods, and Mses. Harrington and
Kerley are Trustees of 55, 31, 28, 28, 30, 29, and 29 funds or portfolios,
respectively, in the family of open-end registered investment companies
advised or managed by Citibank.
(3) Mr. Alvord retired as a Trustee on May 31, 1997.
As of February 1, 1998, all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Fund. As of the same date, more than
95% of the outstanding shares of the Fund were held of record by Citibank,
N.A. or its affiliates, as Shareholder Servicing Agents of the Fund for the
accounts of their respective clients.
The Declaration of Trust of each of the Trust and the Portfolio Trust
provides that the Trust or the Portfolio Trust, as the case may be, will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust or 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 Portfolio pursuant to an investment
advisory agreement (the "Advisory Agreement"). Subject to such policies as the
Board of Trustees of the Portfolio Trust, may determine, the Adviser manages
the securities of the Portfolio and makes investment decisions for the
Portfolio. The Adviser furnishes at its own expense all services, facilities
and personnel necessary in connection with managing the Portfolio's
investments and effecting securities transactions for the Portfolio. The
Advisory Agreement will continue in effect 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 provides that the Adviser may render services to
others. The Advisory Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the Portfolio Trust, when
authorized either by a vote of a majority of the outstanding voting securities
of the Portfolio or by a vote of a majority of the Board of Trustees of the
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. The 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 Portfolio, 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 Agreement. For the fiscal years ended December
31, 1995, 1996 and 1997 the fees payable to the Adviser under the Portfolio's
Advisory Agreement were $179,525 (of which $1,055 was voluntarily waived),
$198,024 (of which $2,044 was voluntarily waived) and $196,529 (of which
$5,466 was voluntarily waived), respectively.
ADMINISTRATOR
Pursuant to administrative services agreements (the "Administrative
Services Agreements"), CFBDS and SFG provide the Trust and the Portfolio
Trust, respectively, with general office facilities and CFBDS 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 CFBDS, 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 years ended December 31, 1995, 1996 and
1997, the fees payable to CFBDS from the Fund under the Administrative
Services Agreement were $72,047 (all of which was voluntarily waived), $74,177
(all of which was voluntarily waived) $58,254 (all of which was voluntarily
waived), respectively. For the fiscal years ended December 31, 1995, 1996 and
1997, the fees payable to SFG from the Portfolio under the Administrative
Services Agreement with the Portfolio Trust were $25,646 (of which $18,221 was
voluntarily waived), $28,289 (of which $27,649 was voluntarily waived) $28,076
(of which $27,174 was voluntarily waived), respectively.
The Administrative Services Agreement with the Trust continues in effect
with respect to the 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 CFBDS, 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.
CFBDS 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, CFBDS 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, CFBDS or SFG, not in excess of the amount paid
to CFBDS or SFG for its respective services under the Administrative Services
Agreements with the Trust and the Portfolio Trust. All such compensation is
paid by CFBDS or SFG.
DISTRIBUTOR
CFBDS serves as the Distributor of the Fund's shares pursuant to a
Distribution Agreement with the Trust. 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 Fund 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 party to the Distribution Agreement, 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 (the "Distribution Plan") in
accordance with Rule 12b-1 under the 1940 Act with respect to shares of the
Fund after concluding that there is a reasonable likelihood that the
Distribution Plan will benefit the Fund and its shareholders. The Distribution
Plan provides that the Fund shall pay a distribution fee to the Distributor at
an annual rate not to exceed 0.15% of the Fund's average daily net assets.
The Distributor receives the distribution fees for its services under the
Distribution Agreement in connection with the distribution of the Fund's
shares (exclusive of any advertising expenses incurred by the Distributor in
connection with the sale of shares of the 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 Fund and other distribution-related expenses.
The Distribution Plan permits the Fund to pay the Distributor an
additional fee (not to exceed 0.05% of the average daily net assets of the
Fund) in anticipation of or as reimbursement for print or electronic media
advertising expenses incurred in connection with the sale of shares.
The Distribution Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trust's Trustees and a majority of the Trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Distribution Plan or in any agreement related to the Plan
(for purposes of this paragraph "Qualified Trustees"). The 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. The
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 Plan
may be terminated 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
the Fund. The Distribution Plan may not be amended to increase materially the
amount of the Fund's permitted expenses thereunder without the approval of a
majority of the outstanding securities of the 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 the 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 Plan, CFBDS acts as the agent of the
Trust in connection with the offering of shares of the Fund pursuant to the
Distribution Agreement. After the prospectuses and periodic reports of the
Fund 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 Fund to prospective
investors. The Prospectus contains a description of fees payable to the
Distributor under the Distribution Agreement. For the fiscal years ended
December 31, 1995, 1996 and 1997, the fees payable to the Distributor by the
Fund under the Distribution Agreement were $22,576 (all of which was
voluntarily waived), $44,506 (all of which was voluntarily waived) and $34,953
(all of which was voluntarily waived), respectively, no portion of which was
applicable to reimbursement for expenses incurred in connection with print or
electronic media advertising.
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 Fund and its
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 the 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 are
included in this expense limitation. 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 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 Fund. The
Administrative Services Plan with respect to the 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 the Fund. The Trust
has entered into a Custodian Agreement and a Fund Accounting Agreement with
State Street pursuant to which custodial and fund accounting services,
respectively, are provided for the 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
years ended December 31, 1995, 1996 and 1997, aggregate fees payable to
Shareholder Servicing Agents by the Fund under the Administrative Services
Plan were $180,611 (of which $67,730 was voluntarily waived), $74,177 and
$58,254, 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 the
Fund. The Portfolio Trust, on behalf of the Portfolio has entered into a
Custodian Agreement with State Street pursuant to which State Street acts as
custodian for the Portfolio. The Portfolio Trust, on behalf of the Portfolio
also has entered into a Fund Accounting Agreement with State Street Cayman
Trust Company, Ltd. ("State Street Cayman") pursuant to which State Street
Cayman provides fund accounting services for the Portfolio. State Street
Cayman also provides transfer agency services to the Portfolio Trust. 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 State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
AUDITORS
Price Waterhouse LLP are the independent accountants for the 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, Box 82, Royal Trust Towers, Toronto Dominion Center, Toronto,
Ontario, Canada M5X 1G8.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel
for the Fund.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for the Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objectives. Changes in the Fund's investments are made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of turnover
is not a limiting factor when changes are appropriate. Specific decisions to
purchase or sell securities for the 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 the 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 the
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 Agreement, in connection with the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed to
seek for the 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 Fund, subject to any applicable laws, rules and
regulations.
The investment advisory fee that the 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 or obtain such services
independently.
In certain instances there may be securities that are suitable as an
investment for the Fund as well as for one or more of the Adviser's other
clients. Investment decisions for the 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 the Fund. When purchases or sales of the same security for the
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 December 31, 1995, 1996 and 1997, the Portfolio
paid no brokerage commissions.
9. 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. The Trust has
reserved the right to create and issue additional series and classes of
shares. Each share of each class of each series represents an equal
proportionate interest in the series 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 series or class, only shares of
that particular series or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required 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 Restrictions.") At any
meeting of shareholders of any series, 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 (or the
affected series') outstanding shares would be sufficient. The Trust or any
series of the Trust, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Trust or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, 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 the 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 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 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 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.
10. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition of the Fund's
portfolio assets. Provided all such requirements are met and all of the Fund's
net investment income and net 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. taxes. If the 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 the Fund will generally have to pay federal income taxes
and any state or local taxes on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any
distributions from net short-term capital gains are taxable to shareholders as
ordinary income for federal income tax purposes, whether the distributions are
made in cash or in additional shares. Because the Fund expects to earn
primarily interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations. 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. Such capital gains may
be taxable to shareholders that are individuals, estates, or trusts at maximum
rates of 20%, 25% or 28%, depending upon the sources of the gains. 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 the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual shareholder will be eligible
for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a redemption of shares in the 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.
The Fund's and the Portfolio's transactions in options, short sales
"against the box," 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 the 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 the 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. The Fund 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.
The Fund will withhold tax payments at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
subject to withholding taxes that are made to persons who are not citizens or
residents of the United States. Distributions received from the Fund by non-
U.S. persons also may be subject to tax under the laws of their own
jurisdiction.
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. If a shareholder fails to provide this information,
or otherwise violates IRS regulations, the Fund may be required to withhold
tax at the rate of 31% on certain distributions and redemption proceeds paid
to that shareholder.
Distributions of the Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but not
generally from capital gains realized upon the dispositions of such
obligations) may be exempt from state and local taxes. Shareholders are urged
to consult their tax advisers regarding the possible exclusion of such portion
of their dividends for state and local income tax purposes.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The audited financial statements of the Fund (Statement of Assets and
Liabilities at December 31, 1997, Statement of Operations for the year ended
December 31, 1997, Statement of Changes in Net Assets for the years in the
two-year period ended December 31, 1997 and Financial Highlights for each of
the years in the four-year period ended December 31, 1997, for the four-month
period ended December 31, 1993 and 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 Fund, are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the report of Price Waterhouse LLP, on behalf of
the Fund.
The audited financial statements of the Portfolio (Portfolio of
Investments at December 31, 1997, Statement of Assets and Liabilities at
December 31, 1997, Statement of Operations for the year ended December 31,
1997, Statement of Changes in Net Assets for the years in the two-year period
ended December 31, 1997 and Financial Highlights for each of the years in the
three-year period ended December 31, 1997 and 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 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.
Copies of the Annual Report to Shareholders of the Fund accompany this
Statement of Additional Information.
