As filed with the Securities and Exchange Commission on June 29, 1998
File Nos. 33-6540
811-5033
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE
AMENDMENT NO. 25*
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26
CITIFUNDS FIXED INCOME TRUST**
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
21 MILK STREET, 5th FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 21 MILK STREET, 5th FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP,
150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on September 14,
1998, pursuant to paragraph (a) of Rule 485.
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* This filing relates only to shares of CitiFunds Diversified Income
Portfolio.
** Formerly, Landmark Fixed Income Funds.
<PAGE>
CITIFUNDS FIXED INCOME TRUST
(CITIFUNDS DIVERSIFIED INCOME PORTFOLIO)
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. N-1A ITEM LOCATION
PART A PROSPECTUS
<S> <C> <C>
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... Expense Summary
Item 3. Condensed Financial Information.............. Not Applicable
Item 4. General Description of Registrant............ Investment Information; General
Information; Appendix
Item 5. Management of the Fund....................... Management; Expenses
Item 5A. Management's Discussion of Fund Performance.. Not Applicable
Item 6. Capital Stock and Other Securities........... General Information; Voting and
Other Rights; Purchases;
Exchanges; Redemptions; Dividends
and Distributions; Tax Matters
Item 7. Purchase of Securities Being Offered......... Purchases; Exchanges; Redemptions
Item 8. Redemption or Repurchase..................... Purchases; Exchanges; Redemptions
Item 9. Pending Legal Proceedings.................... Not Applicable
STATEMENT OF
ADDITIONAL
PART B INFORMATION
Item 10. Cover Page................................... Cover Page
Item 11. Table of Contents............................ Table of Contents
Item 12. General Information and History.............. The Trust
Item 13. Investment Objectives and Policies........... Investment Objective and Policies
Item 14. Management of the Fund....................... Management
Item 15. Control Persons and Principal Holders of Management
Securities...................................
Item 16. Investment Advisory and Other Services....... Management
Item 17. Brokerage Allocation and Other Practices..... Portfolio Transactions
Item 18. Capital Stock and Other Securities........... Description of Shares, Voting
Rights and Liabilities
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................ Description of Shares, Voting
Rights and Liabilities;
Determination of Net Asset Value;
Valuation of Securities;
Additional Redemption Information
Item 20. Tax Status................................... Certain Additional Tax Matters
Item 21. Underwriters................................. Management
Item 22. Calculation of Performance Data.............. Performance Information
Item 23. Financial Statements......................... Financial Statements
</TABLE>
PART C Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this
Registration Statement.
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment to the Registrant's Registration Statement on
Form N-1A is being filed with respect to CitiFunds Diversified Income
Portfolio, a series of the Registrant.
<PAGE>
Prospectus September __, 1998
CitiFundsSM Diversified Income Portfolio
(A member of the CitiFundsSM Family of Funds)
This Prospectus describes CitiFundsSM Diversified 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).
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.
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
Investment Information 6
Risk Considerations 11
Valuation of Shares 13
Purchases 13
Exchanges 14
Redemptions 14
Dividends and Distributions 15
Management 16
Tax Matters 18
Performance Information 19
General Information 20
Appendix -- Permitted Investments and Investment Practices 22
<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFundsSM Diversified Income Portfolio.
INVESTMENT OBJECTIVES AND POLICIES: The Fund's primary investment objective is
to generate a high level of current income. As a secondary objective, the Fund
seeks preservation of capital.
The Fund will allocate its investments primarily among three sectors of the
fixed income securities market: the U.S. fixed income sector, the high yield
sector and the foreign bond sector. As the Fund's investment manager, Citibank
will determine the amount of assets to be allocated to each sector based on its
assessment of risk and available returns. Within these sectors the Fund will
invest in diversified portfolios of fixed income securities of varying
maturities. Because the Fund invests through multiple underlying Portfolios,
all references in this Prospectus to the Fund include its underlying
Portfolios, except as otherwise noted.
INVESTMENT MANAGER AND DISTRIBUTOR: Citibank, N.A., a wholly-owned subsidiary
of Citicorp, is the investment manager. Citibank and its affiliates manage more
than $88 billion in assets worldwide. CFBDS, Inc. 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 money market and other
short-term securities, and who are willing to accept the greater price
fluctuations associated with higher levels of income and the search for
preservation of capital.
<PAGE>
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 goes up when
interest rates go down. Changes in interest rates will generally cause bigger
changes in the prices of longer-term securities than in the prices of
shorter-term securities.
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. The Fund may invest
without limit in higher yielding, lower rated debt securities, commonly known
as "junk bonds." It is possible that some issuers, particularly issuers of junk
bonds, will be unable to make required payments on fixed income securities held
by the Fund. As a result, the Fund may not achieve the expected income from
these securities. Also, the inability (or perceived inability) of issuers to
make timely payments on securities generally will make the values of those
securities more volatile and could limit the Fund's ability to sell those
securities at the values at which the Fund carries them on its books.
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 will, under normal circumstances, 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 (including its share of the expenses
of the underlying Portfolios). For more information on costs and expenses, see
"Management" -- page 16 and "General Information -- Expenses" - page 21.*
CITIFUNDS
DIVERSIFIED
INCOME
PORTFOLIO
SHAREHOLDER TRANSACTION EXPRESS None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (1) 0.95%
12b-1 Fees (including service fees) (2) 0.25%
Other Expenses (after fee waivers) (3) 0.30%
Total Fund Operating Expenses (after fee waivers) (3) 1.50%
(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, other expenses and total fund operating expenses would
be 2.51% and 2.71%, respectively.
* 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 estimated for the Fund's fiscal year ending October 31, 1998.
<PAGE>
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:
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ONE THREE
CITIFUNDS DIVERSIFIED INCOME PORTFOLIO YEAR YEARS
$15 $47
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The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers. If the fee waivers were not made, the amounts in the
example would be $37 and $113. 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.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES: The Fund's primary investment objective is to generate a
high level of current income. As a secondary objective, the Fund seeks
preservation of capital.
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: Fixed income securities include bonds and short-term
obligations. Fixed income securities, in general, offer a fixed stream of cash
flow and may provide good to moderate relative total return benefits over time.
The Fund will allocate its investments primarily among three sectors of the
fixed income securities market:
O the U.S. Fixed Income Sector, consisting of debt securities of U.S.
companies and of the U.S. Government and its agencies and
instrumentalities;
O the High Yield Sector, consisting of high yield, lower rated debt
securities of U.S. and non-U.S. issuers; and
O the Foreign Bond Sector, consisting of debt securities of non-U.S.
companies and of foreign governments and their agencies and
instrumentalities.
As the Fund's investment manager, Citibank allocates Fund assets among various
sectors of the fixed income securities market based on its assessments of the
risks and available returns of those sectors. Citibank believes that there are
periods when securities in particular sectors of the fixed income market
<PAGE>
outperform securities in other sectors. For example, U.S. fixed income
securities generally decline in value when the U.S. dollar declines in value
against foreign currencies, while the bonds of non-U.S. issuers held by U.S.
investors generally increase in value in those circumstances. Also, U.S.
government securities and higher quality fixed income securities generally
increase in value during periods of economic decline, while lower rated
securities tend to decrease in value in those circumstances. Citibank believes
that allocating assets among these sectors may enable the Fund to better
minimize risk while seeking high current income and preservation of capital.
Citibank will determine the amount of assets to be allocated to the three
sectors of the fixed income securities market, and will make adjustments to the
allocations from time to time as it deems appropriate. There are no fixed
percentage allocations to any sector, and there is no requirement that Fund
assets be invested in all three sectors at all times; however, Citibank expects
that, in general and under normal market conditions, a substantial portion of
the Fund's assets will be invested in each sector. In determining allocations,
Citibank considers long-term performance and valuation measures within and
between sectors and the effects of market and economic variables on those
relationships.
The Fund may invest in securities of all maturities, including long bonds (10+
years), intermediate notes (3 to 10 years) and short-term notes (1 to 3 years).
The average maturity of the Fund's investments may vary by sector and will be
adjusted from time to time based on relative yields, expectations of changes in
interest rates and other factors.
The Fund invests in multiple Portfolios, but the Fund may also invest directly
in securities to the extent permitted under the Investment Company Act of 1940,
as amended. Each Portfolio invests directly in securities in a particular
sector of the fixed income securities market, in particular types of securities
or in securities of particular maturities or duration.
Citibank may allocate the Fund's assets without limit to cash and U.S.
dollar-denominated high quality money market instruments if it believes that
market conditions make that allocation advisable or pending investment in other
fixed income securities. These investments may result in a lower yield than
would be available from investments with a lower quality or a longer term. To
the extent the Fund is invested in cash and money market instruments the Fund
will not be pursuing its investment objectives.
THE U.S. FIXED INCOME SECTOR
The Fund will invest those assets allocated to the U.S. Fixed Income Sector in
a diversified portfolio of investment grade debt securities of U.S. companies
and debt securities of the U.S. Government and its agencies and
instrumentalities. Investment grade securities are those rated Baa or better by
Moody's Investors Service, Inc. or BBB by Standard & Poor's Ratings Group or
securities which are not rated by these rating agencies, but are believed to be
of comparable quality. Securities rated Baa or BBB have speculative
<PAGE>
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
on these securities 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.
U.S. Government securities may provide opportunities for income with minimal
credit risk. U.S. Government securities includes 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 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. Fund assets may also be invested 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.
THE HIGH YIELD SECTOR
The Fund will invest those assets allocated to the High Yield Sector in a
diversified portfolio of high yield debt securities of U.S. and non-U.S.
issuers rated in medium or lower rating categories or determined to be of
comparable quality. Medium and low rated and comparable unrated securities
offer yields that fluctuate over time but that generally are superior to the
yields offered by higher rated securities. However, these securities also
involve significantly greater risks, including price volatility and risk of
default in the payment of interest and principal, than higher rated securities.
Certain of the debt securities purchased by the Fund may be rated as low as C
by Moody's or D by S&P or may be comparable to securities with these ratings.
The lower rated bonds in which the Fund may invest are commonly referred to as
"junk bonds."
The debt securities of non-U.S. issuers in the High Yield Sector may be
denominated in foreign currencies and may include debt obligations issued or
guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities,
including Brady Bonds; debt obligations of supranational entities; debt
obligations and other fixed income securities of non U.S. corporate issuers
(both dollar and non-dollar denominated); and non-dollar denominated debt
obligations of U.S. corporate issuers. Non-U.S. issuers may be located in
developing countries. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness. A further description of
Brady Bonds appears in the Statement of Additional Information.
<PAGE>
In light of the risks associated with high yield debt securities, various
factors will be taken into consideration in evaluating the creditworthiness of
an issuer. For corporate debt securities, these factors will typically include
the issuer's financial resources, its sensitivity to economic conditions and
trends, the operating history of the issuer and the experience and track record
of the issuer's management. For sovereign debt instruments, these factors will
typically include the economic and political conditions within the issuer's
<PAGE>
country, the issuer's overall and external debt levels and debt service ratios,
the issuer's access to capital markets and other sources of funding and the
issuer's debt service payment history. The ratings, if any, assigned to the
security by any recognized rating agencies will also be reviewed, although
Citibank's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service.
There are special risks associated with high yield debt securities. See "Risk
Considerations" and the Appendix.
THE FOREIGN BOND SECTOR
The Fund will invest those assets allocated to the Foreign Bond Sector in a
globally diversified portfolio of investment grade debt securities of non-U.S.
companies and of foreign governments and their agencies and instrumentalities.
Investment grade securities are those rated Baa or better by Moody's or BBB or
better by S&P or securities which are not rated by these rating agencies, but
which are believed to be of comparable quality.
Government securities in the Foreign Bond Sector include debt obligations
issued or guaranteed by state-owned enterprises or supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Supranational issued instruments may be denominated in multi-national currency
units.
Not more than 15% of total assets in the Foreign Bond Sector will be invested
in issuers located in any one country.
There are special risks associated with non-U.S. securities. See "Risk
Considerations."
The Fund may engage in foreign currency exchange transactions to manage the
exposure of assets in the Foreign Bond Sector to foreign currency fluctuations.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
FUTURES AND FORWARDS. The Fund may purchase or sell bond and stock index and
foreign currency futures in order to protect (or "hedge") against declines in
the value of portfolio securities or increases in the cost of securities or
other assets to be acquired and, subject to applicable law, to enhance
potential gain. The Fund also may use financial futures in order to hedge
against fluctuations in interest rates without actually buying or selling
securities, or to manage the effective maturity or duration of fixed income
securities in the Fund's investment 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
<PAGE>
settlement based on changes in the value of a security, an index of securities
or other assets. In many cases, the futures contracts that may be purchased or
sold by the Fund are standardized contracts traded on commodities exchanges or
boards of trade. The Fund may also enter into forward contracts, which are
contracts to purchase or sell foreign currencies at a future date, and purchase
and sell foreign currency futures contracts. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements. See the Appendix for more information.
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. 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 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 portfolio turnover rate is not expected to exceed ___% for the current
fiscal year. The amount of transaction costs and realization of taxable capital
gains will tend to increase as the level of portfolio activity increases.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or dealers
for securities transactions for the Fund and the placing of such orders,
brokers or dealers may be selected who also provide brokerage and research
services to the Fund or the other accounts over which Citibank or its
affiliates exercise investment discretion. The Fund is authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if Citibank determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer.
<PAGE>
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 goes up when interest rates go down. 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 OF DEBT SECURITIES. Prices of fixed income securities also
fluctuate based on changes in the actual and perceived creditworthiness of
issuers. The values of lower rated fixed income securities generally 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. As a result, the Fund may not achieve the expected income from these
securities. Also, the inability (or perceived inability) of issuers to make
timely payments on securities generally will make the values of those
securities more volatile and could limit the Fund's ability to sell those
securities at the values at which the Fund carries them on its books.
Securities that are backed by the full faith and credit of the U.S. Government
are generally thought to have minimal credit risk.
Securities offering above average yields may at times involve above average
risks. Securities rated Baa by Moody's or BBB by S&P and equivalent securities
may have speculative characteristics. Adverse economic or changing
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case for higher grade obligations. In
addition, under such circumstances the values of lower rated securities may be
more volatile, and the markets for these securities may be less liquid, than
those for higher-rated securities. Therefore, the Fund may as a result find it
more difficult to determine the fair value of lower rated securities. The Fund
may invest without limit in securities rated below Baa or BBB (commonly known
as "junk bonds"). These securities are speculative. All of the risks of
investing in lower rated investment grade securities are heightened by
investing in these securities. See "Lower Rated Debt Securities" in the
Appendix for more information.
ZERO-COUPON AND PAYMENT-IN-KIND BONDS. The Fund also may invest in
"zero-coupon" and "payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest only at
maturity rather than at intervals during the life of the security.
<PAGE>
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Both zero-coupon
bonds and payment-in-kind bonds allow an issuer to avoid the need to generate
cash to meet current interest payments. Accordingly, these bonds may involve
greater credit risks than bonds paying interest in cash currently. The values
of zero-coupon bonds and payment-in-kind bonds are also subject to greater
fluctuation in response to changes in market interest rates than bonds that pay
interest in cash currently. Even though such bonds do not pay current interest
in cash, the Fund nonetheless is required to accrue interest income on these
investments and to distribute the interest income on a current basis. Thus, the
Fund could be required at times to liquidate other investments in order to
satisfy its distribution requirements.
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 Fund may invest in issuers located in developing countries, which are
generally defined as countries in the initial stages of their industrialization
cycles with low per capita income. All of the risks of investing in non-U.S.
securities are heightened by investing in developing countries. Shareholders
should be aware that investing in the fixed income markets of developing
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems which can be expected to have less
stability, than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries with more mature economies; these markets often
have provided higher rates of return, and greater risks, to investors. These
heightened risks include (i) greater risks of expropriation, confiscatory
taxation and nationalization, and less social, political and economic
stability; (ii) the small current size of markets for securities of issuers
based in developing countries and the currently low or non-existent volume of
trading, resulting in a lack of liquidity and in price volatility; (iii)
<PAGE>
certain national policies which may restrict the Fund's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) the absence of
developed legal structures. These characteristics can be expected to continue
in the future.
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 ratio of the Fund may be
higher than that of a fund investing exclusively in U.S. securities.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund
may entail additional risks that are described in the Appendix. See the
Appendix.
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 generally 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
<PAGE>
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.
<PAGE>
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.
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
CitiFunds Fixed Income Trust. Each Portfolio is supervised by the Board of
Trustees of Asset Allocation Portfolios or The Premium Portfolios, as the case
may be. In each case, a majority of the Trustees are not affiliated with
Citibank. More information on the Trustees and officers of the Fund and the
Portfolios 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. Citicorp recently announced its intention to
merge with The Travelers Group. Completion of the merger is subject to the
satisfaction of certain conditions.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Fund and has 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.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank since 1995, has
been the overall portfolio manager of the Fund since its inception and is
responsible for determining asset allocations and supervising and monitoring
the performance of the Citibank personnel described below who are responsible
for the Fund's securities. Prior to joining Citibank in 1995, Mr. Keblusek, who
has more than 25 years experience in the investment management industry, was
Senior Vice President and Director of Portfolio Management for The Northern
Trust Company with responsibility for investment performance in the
organization's High Net Worth, Corporate and Institutional and Mutual Fund
Group. Earlier in his career, Mr. Keblusek held senior investment positions
with Maryland National Bank and the National Bank of Washington.
The following individuals at Citibank are responsible for daily management of
the following kinds of securities of the Fund.
THE U.S. FIXED INCOME SECTOR
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
<PAGE>
a Fixed Income Portfolio Manager with Brown Brothers Harriman & Co. where he
managed fixed income assets for discretionary institutional portfolios.
THE HIGH YIELD SECTOR
[To follow]
THE FOREIGN BOND SECTOR
[To follow]
MANAGEMENT FEES. For the services of Citibank under Management Agreements for
the Fund and the Portfolios, the Fund and the Portfolios pay an aggregate fee,
which is computed daily and paid monthly, of 0.95% of the Fund's average daily
net assets on an annualized basis for the Fund's then-current fiscal year. This
fee is higher than the management fee paid by most mutual funds. Citibank may
voluntarily agree to waive a portion of its management fees.
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.
<PAGE>
DISTRIBUTION ARRANGEMENTS: CFBDS, 21 Milk Street, 5th Floor, Boston,
Massachusetts 02109 (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
<PAGE>
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
<PAGE>
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 diversified 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, CitiFunds Fixed Income Trust was called Landmark
Fixed Income Funds. CitiFunds Fixed Income Trust currently has three active
series.
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 invests in multiple Portfolios. Each Portfolio is a series of Asset
Allocation Portfolios or The Premium Portfolios, New York trusts which are also
investment companies registered under the 1940 Act. Each Portfolio invests
directly in securities in a particular sector of the fixed income securities
market, in particular types of securities or in securities of particular
maturities or duration.
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.
<PAGE>
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.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
YEAR 2000: The Fund could be adversely affected if the computer systems used by
the Fund or its service providers are not programmed to accurately process
information on or after January 1, 2000. The Fund, and its service providers,
are making efforts to resolve any potential Year 2000 issues. While it is
likely that these efforts will be successful, the failure to implement any
necessary modifications to computer systems used by the Fund or its service
providers could result in an adverse impact on the Fund.
COUNSEL AND INDEPENDENT AUDITORS: Bingham Dana LLP, 150 Federal Street, Boston,
MA 02110, is counsel for the Fund. Price Waterhouse LLP, 160 Federal Street,
Boston, MA 02110, serves as independent auditor 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.
<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. 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.
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.
<PAGE>
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.
Additionally mortgage-backed securities are also subject to maturity extension
risk, that is, the possibility that rising interest rates may cause prepayments
to occur at a slower than expected rate. This particular risk may effectively
convert a security that was considered short or intermediate-term at the time
of purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short or
intermediate-term securities. Thus, a rising interest rate would not only
likely decrease the value of the Fund's securities, but would also increase the
inherent volatility of the Fund by effectively converting short term debt
instruments into long term debt instruments.
The Fund may purchase stripped mortgage securities, including interest-only and
principal-only securities. The Fund does not intend to invest more than 10% of
its net assets in interest-only and principal-only securities.
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 Citibank to be of comparable quality. These
securities are backed by pools of assets, including, among other things,
mortgage loans, automobile loans or credit card receivables. These securities
are not backed by the U.S. Government and have special risks, including
inherent difficulties in enforcing rights against the underlying assets.
ZERO-COUPON AND PAYMENT-IN-KIND 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, and payment-in-kind obligations. Zero-coupon obligations pay
no current interest, and payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or in additional
bonds. As a result, prices of these instruments 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.
<PAGE>
LOWER RATED DEBT SECURITIES. The Fund will purchase securities rated Baa by
Moody's or BBB by S&P and securities of comparable quality, which may have poor
protection of payment of principal and interest. These securities are often
considered to be speculative and involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. The market prices of these securities may fluctuate
more than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
The Fund also may purchase securities rated lower than Baa by Moody's or BBB by
S&P or comparable securities (commonly known as "junk bonds"). These lower
rated high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Fund's lower rated fixed income securities
are paid primarily because of the increased risk of loss of principal and
income, arising from such factors as the heightened possibility of default or
bankruptcy of the issuers of such securities. Due to the fixed income payments
of these securities, the Fund may continue to earn the same level of interest
income while its net asset value declines due to portfolio losses. The prices
for these securities may be affected by legislative and regulatory
developments. Changes in the value of securities subsequent to their
acquisition will not affect cash income to the Fund but will be reflected in
the net asset value of shares of the Fund. The market for these lower rated
fixed income securities may be less liquid than the market for investment grade
fixed income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, Citibank's judgment may at times play a greater role in valuing
these securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities at their fair value to meet
redemption requests or to respond to changes in the market.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance
in the convertible security's underlying common stock.
<PAGE>
In general, the market value of a convertible security is at least the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying stock).
As a fixed-income security, a convertible security tends to increase in market
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying common stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
RULE 144A SECURITIES. The Fund may purchase restricted securities that are not
registered for sale to the general public. If it is determined 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 10% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for 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.
COMMERCIAL PAPER. The Fund may invest in commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
<PAGE>
DEPOSITARY RECEIPTS FOR SECURITIES. American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other forms of depositary receipts for securities of non-U.S. issuers provide
an alternative method for the Fund to make non-U.S. investments. These
securities are not usually traded in the same currency as the securities into
which they may be converted. Generally, ADRs, in registered form, are designed
for use in U.S. securities markets and EDRs and GDRs, in bearer form, are
designed for use in European and global securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. EDRs and GDRs are European and global receipts,
respectively, evidencing a similar arrangement.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and regulatory
limitations, assets of the Fund may be invested in shares of other investment
companies. The Fund may invest up to 5% of its assets in closed-end investment
companies which primarily hold securities of non-U.S. issuers.
DOLLAR ROLLS. The Fund may enter into "dollar rolls." A dollar roll is a
transaction pursuant to which the Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, the Fund foregoes principal and
interest paid on the mortgage-backed securities. The Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a specific
type of dollar roll for which the Fund establishes a segregated account with
liquid high grade debt securities equal in value to the securities subject to
repurchase by the Fund. The Fund will invest only in covered rolls.
SWAPS AND RELATED TRANSACTIONS. The Fund may enter into swap agreements with
other institutional investors with respect to foreign currencies and interest
rates and may enter into other types of available swap agreements, such as
caps, collars and floors, for the purpose of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return. In a standard swap
agreement, two parties agree to exchange the returns (or differentials in rates
of return) earned or realized on a particular predetermined investment or
investments.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements
of buying and selling a floor.
<PAGE>
Swap agreements are subject to the Fund's overall limit that not more than 10%
of its net assets may be invested in illiquid securities, and the Fund will not
enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the
Fund's assets.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in Loan Participations
and Assignments. Loan Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. The Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the Lender that
is selling the Participation. In the event of the insolvency of the Lender, the
Fund may be treated as a general creditor of the Lender and may not benefit
from any set-off between the Lender and the borrower. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the loan, except that under certain circumstances such rights may
be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
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 considered to be
"derivatives." 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
<PAGE>
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 Fund'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 Fund'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.
OPTIONS. The Fund may write (sell) covered call and put options and purchase
call and put options on securities. The Fund will write options on securities
for the purpose of increasing its return on such securities and/or to protect
the value of its portfolio. In particular, where the Fund writes an option
which expires unexercised or is closed out by the Fund at a profit, it will
retain the premium paid for the option which will increase its gross income and
will offset in part the reduced value of the portfolio security underlying the
option, or the increased cost of portfolio securities to be acquired. If the
price of the underlying security moves adversely to the Fund's position, the
option may be exercised and the Fund will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium.
<PAGE>
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
The Fund also may purchase 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 non-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 Fund also may buy and write options on
stock indices.
The Fund may purchase and write options to buy or sell interest rate futures
contracts, options on bond and stock index futures contracts and options on
foreign currency futures contracts. Such investment strategies will be used for
hedging and non-hedging purposes, subject to applicable law. Put and call
options on futures contracts may be traded by the Fund in order to protect
against declines in values of portfolio securities or against increases in the
cost of securities to be acquired. Purchase of options on futures contracts may
present less risk in hedging the investment portfolio of the Fund than the
purchase or sale of the underlying futures contracts since the potential loss
is limited to the amount of the premium plus related transaction costs. The
writing of such options, however, does not present less risk than the trading
of futures contracts and will constitute only a partial hedge, up to the amount
of the premium received. In addition, if an option is exercised, the Fund may
suffer a loss on the transaction.
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.
The Fund may also enter into proxy hedges and cross hedges. In a proxy hedge,
which generally is less costly than a direct hedge, the Fund, having purchased
a security, will sell a currency whose value is believed to be closely linked
to the currency in which the security is denominated. Interest rates prevailing
in the country whose currency was sold would be expected to be closer to those
in the U.S. and lower than those of securities denominated in the currency of
the original holding. This type of hedging entails greater risk than a direct
hedge because it is dependent on a stable relationship between the two
currencies paired as proxies and the relationships can be very unstable at
times. The Fund may enter into a cross hedge if a particular currency is
expected to decrease against another currency. The Fund would sell the currency
expected to decrease and purchase a currency which is expected to increase
<PAGE>
against the currency sold in an amount equal to some or all of the Fund's
holdings denominated in the currency sold.
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.
Forward contracts are traded over-the-counter, and not on organized commodities
or securities exchanges. As a result, such contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in the futures and options contracts
described herein.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while forward
contracts may be entered into only in the over-the-counter market. Futures
contracts and options on futures contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission and on foreign
exchanges. The securities underlying options and futures contracts traded by
the Fund may include domestic as well as foreign securities. Investors should
recognize that transactions involving foreign securities or foreign currencies,
and transactions entered into in foreign countries, may involve considerations
and risks not typically associated with investing in U.S. markets.
Transactions in options, futures contracts, options on futures contracts and
forward contracts entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets. For example, the Fund may sell futures contracts on an index of
securities in order to profit from any anticipated decline in the value of the
securities comprising the underlying index. In such instances, any losses on
the futures transactions will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction.
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>
Statement of
Additional Information
September __, 1998
CITIFUNDSSM DIVERSIFIED INCOME PORTFOLIO
(A MEMBER OF THE CITIFUNDS SM FAMILY OF FUNDS)
CitiFunds Diversified Income Portfolio (the "Fund") is a series of CitiFunds
Fixed Income Trust (the "Trust"). The Trust is an investment company which was
organized as a business trust under the laws of the Commonwealth of
Massachusetts on June 23, 1986. The address and telephone number of the Trust
are 21 Milk Street, 5th Floor, Boston, Massachusetts 02109, (617) 423-1679. The
Fund is permitted to invest all or a portion of its assets in one or more other
investment companies. Currently, the Fund invests its assets in High Yield
Portfolio and Hedged International Bond Portfolio, each a series of The Premium
Portfolios, and Intermediate Income Portfolio, a series of Asset Allocation
Portfolios. The address of each of The Premium Portfolios and Asset Allocation
Portfolios (the "Portfolio Trusts") is Elizabethan Square, George Town, Grand
Cayman, British West Indies.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED 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 Objective and Policies...................................... 2
3. Description of Permitted Investments and Investment Practices.......... 3
4. Investment Restrictions................................................25
5. Performance Information................................................27
6. Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information...................................27
7. Management.............................................................29
8. Portfolio Transactions.................................................36
9. Description of Shares, Voting Rights and Liabilities...................37
10. Certain Additional Tax Matters.........................................39
11. Financial Statements...................................................41
12. Appendix I -- Securities Ratings.......................................42
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 September __, 1998. This Statement of Additional Information
should be read in conjunction with the Fund's 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 is a registered management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on June 23, 1986. Prior to March 2, 1998, the Trust was called
Landmark Fixed Income Funds. This Statement of Additional Information describes
shares of CitiFunds Diversified Income Portfolio (the "Fund"), which is one of
three active series of the Trust. References in this Statement of Additional
Information to the "Prospectus" of the Fund are to the Prospectus, dated
September __, 1998, of the Fund.
The Fund is permitted to seek its investment objective by investing all or a
portion of its assets in one or more investment companies to the extent not
prohibited by the Investment Company Act of 1940, the rules and regulations
thereunder, and exemptive orders granted under such Act. Currently, the Fund
invests its assets in High Yield Portfolio, Hedged International Bond Portfolio
and Intermediate Income Portfolio (the "Portfolios"). High Yield Portfolio and
Hedged International Bond Portfolio are series of The Premium Portfolios and
Intermediate Income Portfolio is a series of Asset Allocation Portfolios. The
Portfolios are open-end, diversified management investment companies. All
references in this Statement of Additional Information to the Fund include the
Fund's underlying Portfolios, except as otherwise noted. In addition,
references to the Trust include the Portfolio Trusts, except as otherwise
noted.
Citibank, N.A. ("Citibank" or the "Manager") is the manager of each Portfolio.
Citibank manages the investments of the Portfolios from day to day in
accordance with each Portfolio's investment objective and policies. The
selection of investments for the Portfolios, and the way they are managed,
depend on the conditions and trends in the economy and the financial
marketplaces.
The Boards of Trustees of the Trust and the Portfolio Trusts provide broad
supervision over the affairs of the Fund and the Portfolios, respectively.
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 OBJECTIVE AND POLICIES
The Fund's primary investment objective is to generate a high level of current
income. As a secondary objective, the Fund seeks preservation of capital.
The investment objective 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 objective.
The Fund will allocate its investments primarily among three sectors of the
fixed income securities market: the U.S. fixed income sector, the high yield
sector and the foreign bond sector. As the Fund's investment manager, Citibank
<PAGE>
will determine the amount of assets to be allocated to each sector based on its
assessment of risk and available returns. Within these sectors the Fund will
invest in diversified portfolios of fixed income securities of varying
maturities.
The Fund's 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 objective, policies and techniques of the Fund.
The Trust may withdraw the investment of the Fund from one or more of its
underlying Portfolios 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 above and those described below are not fundamental and may be
changed without shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
OPTIONS
The Fund may write covered call and put options and purchase call and put
options on securities. Call and put options written by the Fund may be covered
in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund
in cash, short-term money market instruments or high quality debt securities in
a segregated account with its custodian. Put and call options written by the
Fund may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
<PAGE>
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of
the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such increase
occurs, the call option will permit the Fund to purchase the securities at the
exercise price, or to close out the options at a profit. The premium paid for
the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
The Fund may write (sell) covered call and put options and purchase call and
put options on stock indices. In contrast to an option on a security, an option
on a stock index provides the holder with the right, but not the obligation, to
make or receive a cash settlement upon exercise of the option, rather than the
right to purchase or sell a security. The amount of this settlement is equal to
(i) the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Fund, are expected to be similar to those
of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that event,
the Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. The Fund may also cover
call options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. The Fund
may cover put options on stock indices by maintaining cash, short-term money
market instruments or high quality debt securities with a value equal to the
exercise price in a segregated account with its custodian, or by holding a put
on the same stock index and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
<PAGE>
quality debt securities in a segregated account with its custodian. Put and
call options on stock indices may also be covered in such other manner as may
be in accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the Fund's stock investments. By writing a put option, the Fund assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge the Fund's
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option does
not increase, the Fund's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options
for this purpose, the Fund will also bear the risk of losing all or a portion
of the premium paid if the value of the index does not rise. The purchase of
call options on stock indices when the Fund is substantially fully invested is
a form of leverage, up to the amount of the premium and related transaction
costs, and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.
The Fund may purchase and write options on foreign currencies in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, will be utilized.
FUTURES CONTRACTS
The Fund may enter into bond and stock index, interest rate and foreign
currency futures contracts. Such investment strategies will be used for hedging
purposes and for nonhedging purposes, subject to applicable law.
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
<PAGE>
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 contract. At the same time such a purchase or sale is made,
the Fund must provide cash or securities as a deposit ("initial deposit") known
as "margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant
to such a contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than the
specific security that provides the standard for the contract. In some (but not
many) cases, securities called for by a futures contract may not have been
issued when the contract was entered into.
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 investment 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
purchase would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
<PAGE>
The Fund may enter into bond and stock index futures contracts to gain bond or
stock market exposure, as applicable, while holding cash available for
investments and redemptions.
The Fund may purchase and sell foreign currency futures contracts to attempt to
protect its current or intended investments from fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of portfolio
securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant.
The Fund may sell futures contracts on a foreign currency, for example, where
it holds securities denominated in such currency and it anticipates a decline
in the value of such currency relative to the dollar. In the event such decline
occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where the Fund purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired
instead decline, the Fund will sustain losses on its futures position which
could reduce or eliminate the benefits of the reduced cost of portfolio
securities to be acquired.
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 contract limits any potential gain
which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of 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
<PAGE>
ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures
contract was originally entered into. 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 Fund's
investment judgment about the general direction of interest rates or bond or
stock prices 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 hedging strategies.
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
<PAGE>
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 exceed
approximately 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."
OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and write options to buy or sell futures contracts in
which the Fund may invest. Such investment strategies will be used for hedging
purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to enter
into a "long" position in the underlying futures contract, in the case of a
call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series, (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profits or loss on the transaction.
<PAGE>
Options on futures contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the CFTC
and the performance guarantee of the exchange clearinghouse. In addition,
options on futures contracts may be traded on foreign exchanges.
The Fund may cover the writing of call options on futures contracts (a) through
purchases of the underlying futures contract, (b) through ownership of the
instrument, or instruments included in the index underlying the futures
contract, or (c) through the holding of a call on the same futures contract and
in the same principal amount as the call written where the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. The Fund may cover the writing of put options on
futures contracts (a) through sales of the underlying futures contract, (b)
through segregation of cash, short-term money market instruments or high
quality debt securities in an amount equal to the value of the security or
index underlying the futures contract, (c) through the holding of a put on the
same futures contract and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. Put and call options on
futures contracts may also be covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Upon the exercise of a call option on a
futures contract written by the Fund, the Fund will be required to sell the
underlying futures contract which, if the Fund has covered its obligation
through the purchase of such contract, will serve to liquidate its futures
position. Similarly, where a put option on a futures contract written by the
Fund is exercised, the Fund will be required to purchase the underlying futures
contract which, if the Fund has covered its obligation through the sale of such
contract, will close out its futures position.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the securities deliverable on exercise of the
futures contract. The Fund will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may
have occurred in the Fund's security holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If
the Fund writes an option on a futures contract and that option is exercised,
the Fund may incur a loss, which loss will be reduced by the amount of the
option premium received, less related transaction costs. The Fund's ability to
hedge effectively through transactions in options on futures contracts depends
on, among other factors, the degree of correlation between changes in the value
of securities held by the Fund and changes in the value of its futures
positions. This correlation cannot be expected to be exact, and the Fund bears
<PAGE>
a risk that the value of the futures contract being hedged will not move in the
same amount, or even in the same direction, as the hedging instrument. Thus it
may be possible for the Fund to incur a loss on both the hedging instrument and
the futures contract being hedged.
The Fund may purchase options on futures contracts for hedging purposes instead
of purchasing or selling the underlying futures contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the
Fund could, in lieu of selling futures contracts, purchase put options thereon.
In the event that such decrease occurs, it may be offset, in whole or part, by
a profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due
to a market advance or changes in interest or exchange rates, the Fund could
purchase call options on futures contracts, rather than purchasing the
underlying futures contracts.
SECURITIES OF NON-U.S. ISSUERS
The Fund may invest in securities of non-U.S. issuers. Investing in securities
of foreign issuers may involve significant risks not present in domestic
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 foreign 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 domestic
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. stock 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, foreign
brokerage commissions are generally higher than commissions on securities
traded in the U.S. and may be non-negotiable. In general, there is less overall
governmental supervision and regulation of non-U.S. securities exchanges,
brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold securities
of non-U.S. issuers may entail the risk that the market value of such
investments may be substantially less than their net asset value and that there
would be duplication of investment management and other fees and expenses.
<PAGE>
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") and other forms of depositary receipts for
securities of non-U.S. issuers provide an alternative method for the Fund to
make non-U.S. investments. These securities are not usually denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets and
EDRs and GDRs, in bearer form, are designed for use in European and global
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs and GDRs are
European and global receipts, respectively, evidencing a similar arrangement.
ADRs, EDRs and GDRs are subject to many of the same risks that apply to other
investments in non-U.S. securities.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
depositary receipts.
The Fund may invest in securities of non-U.S. issuers that impose restrictions
on transfer within the U.S. or to U.S. persons. Although securities subject to
such transfer restrictions may be marketable abroad, they may be less liquid
than securities of non-U.S. issuers of the same class that are not subject to
such restrictions.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased to the extent that the Fund
invests in issuers located in less developed and developing nations, whose
securities markets are sometimes referred to as "emerging securities markets."
Investments in securities located in such countries are speculative and subject
to certain special risks. Political and economic structures in many of these
countries may be in their infancy and developing rapidly, and such countries
may lack the social, political and economic stability characteristic of more
developed countries. Certain of these countries have in the past failed to
recognize private property rights and have at times nationalized and
expropriated the assets of private companies.
In addition, unanticipated political or social developments may affect the
value of Fund's investments in these countries and the availability to the Fund
of additional investments in these countries. The small size, limited trading
volume and relative inexperience of the securities markets in these countries
may make the Fund's investment in such countries illiquid and more volatile
than investments in more developed countries, and the Fund may be required to
establish special custodial or other arrangements before making investments in
these countries. There may be little financial or accounting information
available with respect to issuers located in these countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.
<PAGE>
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Fund may buy and sell securities denominated in currencies other
than the U.S. dollar, and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Fund may enter into foreign currency
exchange transactions to convert U.S. currency to foreign currency and foreign
currency to U.S. currency, as well as convert foreign currency to other foreign
currencies. The Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or uses forward contracts to purchase or sell foreign currencies. The
Fund may also enter into foreign currency hedging transactions (including proxy
hedges and cross hedges) in an attempt to protect the value of the assets of
the Fund 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 other currencies into U.S. dollars on a daily basis.)
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 will be able to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the non-U.S. currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Fund 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 the Fund's securities
denominated in such non-U.S. currency. The precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible since the future value of such securities in non-U.S. currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
<PAGE>
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 Fund believes that it is important to have the flexibility to
enter into such forward contracts when it determines that its best interests
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 Fund securities
at the expiration of the 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 non-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
the adverse movements in exchange rates. However, the benefit to the Fund from
purchases of foreign 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
<PAGE>
sustain losses on transactions in foreign currency options which would require
it to forego 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 objective. For example, where the Fund
anticipates a decline in the value of the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund 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 foreign security to be acquired because of an
increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, the Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the
premium. However, the writing of a currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on currencies, the Fund also may be required to forego 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.
Investing in ADRs and other depositary receipts presents many of the same risks
regarding currency exchange rates as investing directly in securities
denominated in currencies other than the U.S. dollar. Because the securities
underlying these receipts are traded primarily in non-U.S. currencies, changes
in currency exchange rates will affect the value of these receipts. For
example, decline in the U.S. dollar value of another currency in which
securities are primarily traded will reduce the U.S. dollar value of such
securities, even if their value in the other non-U.S. currency remains
constant, and thus will reduce the value of the receipts covering such
securities. The Fund may employ any of the above described foreign currency
hedging techniques to protect the value of its assets invested in depositary
receipts.
Of course, the Fund is not required to enter into the transactions described
above and does not do so unless deemed appropriate by the Fund. 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
<PAGE>
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 Securities
and Exchange Commission ("SEC") concerning forward contracts. Since those
policies currently recommend 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 to always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk.
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.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) which may be converted at a
stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock.
In general, the market value of a convertible security is at least the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying stock).
As a fixed-income security, a convertible security tends to increase in market
<PAGE>
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying common stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, the Fund may purchase
securities that are not registered ("restricted 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 10% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and restricted
securities, unless the Board of Trustees of the Trust determine, based on the
trading markets for the specific restricted security, that it is liquid. The
Trustees have adopted guidelines and delegated to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Trustees, however, retain sufficient oversight and are ultimately responsible
for the determinations.
Since it is not possible to predict with assurance exactly how the market for
restricted securities sold and offered under Rule 144A will develop, the
Trust's Trustees will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information.
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 terminate a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, 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 cash collateral (subject to a
rebate payable to the borrower) or a fee from the borrower in the event the
collateral consists of securities. Where the borrower provides 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
<PAGE>
withholding of its 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 Fund to be of good
standing, and when, in the judgment of the Fund, the consideration which can be
earned currently from loans of this type justifies the attendant risk. In
addition, the Fund could suffer loss if the borrower terminates the loan and
the Fund is forced to liquidate investments in order to return the cash
collateral to the buyer. If the Fund determines to make loans, it is not
intended that the value of the securities loaned would exceed 30% of the value
of the Fund's total assets.
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 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 Fund 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).
BANK OBLIGATIONS
The Fund may invest in bank obligations, i.e., certificates of deposit, time
deposits (including Eurodollar time deposits) and bankers' acceptances and
other short-term debt obligations issued by domestic banks, foreign
subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. A bankers' acceptance is a bill of exchange or time draft
drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less. A certificate of deposit is a
negotiable interest-bearing instrument with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange
for the deposit of funds and normally can be traded in the secondary market
prior to maturity. A time deposit is a non-negotiable receipt issued by a bank
in exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
<PAGE>
MORTGAGE-BACKED SECURITIES
The Fund may invest in mortgage-backed securities, which are securities
representing interests in pools of mortgage loans. Interests in pools of
mortgage-related securities differ from other forms of debt securities which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed securities
are the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA"), and Federal Home Loan Mortgage Corporation
("FHLMC"). Obligations of GNMA are backed by the full faith and credit of the
U.S. Government while obligations of FNMA and FHLMC are supported by the
respective agency only. Although GNMA certificates may offer yields higher than
those available from other types of U.S. Government securities, GNMA
certificates may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment feature. For
instance, when interest rates decline, the value of a GNMA certificate likely
will not rise as much as comparable debt securities due to the prepayment
feature. In addition, these prepayments can cause the price of a GNMA
certificate originally purchased at a premium to decline in price to its par
value, which may result in a loss.
The Fund may also invest a portion of its assets in collateralized mortgage
obligations or "CMOs," a type of mortgage-backed security. CMOs are securities
collateralized by mortgages, mortgage pass-through certificates, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired
in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior
to their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed
by U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
<PAGE>
Even if the U.S. government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The price of mortgage-backed securities may
not increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
Additionally mortgage-backed securities are also subject to maturity extension
risk, that is, the possibility that rising interest rates may cause prepayments
to occur at a slower than expected rate. This particular risk may effectively
convert a security that was considered short or intermediate-term at the time
of purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short or
intermediate-term securities. Thus, a rising interest rate would not only
likely decrease the value of the Fund's securities, but would also increase the
inherent volatility of the Fund by effectively converting short term debt
instruments into long term debt instruments.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Fund may enter into mortgage "dollar roll" transactions pursuant to which
it sells mortgage-backed securities for delivery in the future and
simultaneously contracts to repurchase substantially similar securities on a
specified future date. During the roll period, the Fund foregoes principal and
interest paid on the mortgage-backed securities. The Fund is compensated for
the lost principal and interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES
The Fund may invest in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, such as credit card and automobile loan receivables, representing the
obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
<PAGE>
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Fund will not pay any additional or separate fees 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.
LOWER RATED DEBT SECURITIES
The Fund may invest in lower rated fixed income securities (commonly known as
"junk bonds"), to the extent described in its Prospectus. The lower ratings of
certain securities held by the Fund reflect a greater possibility that adverse
changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payment of interest and
principal would likely make the values of such securities held by the Fund more
volatile and could limit the Fund's ability to sell its securities at prices
approximating the values the Fund had placed on such securities. In the absence
of a liquid trading market for securities held by it, the Fund at times may be
unable to establish the fair value of such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate. In addition, the rating assigned to a
security by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group
(or by any other nationally recognized securities rating organization) does not
reflect an assessment of the volatility of the security's market value or the
liquidity of an investment in the security. See Appendix I to this SAI for a
description of security ratings.
<PAGE>
Like those of other fixed-income securities, the values of lower rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of fixed
income securities. Conversely, during periods of rising interest rates, the
value of the Fund's fixed-income securities will generally decline. The values
of lower rated securities may often be affected to a greater extent by changes
in general economic conditions and business conditions affecting the issuers of
such securities and their industries. Negative publicity or investor
perceptions may also adversely affect the values of lower rated securities.
Changes by recognized rating services in their ratings of any fixed-income
security and changes in the ability of an issuer to make payments of interest
and principal may also affect the value of these investments. Changes in the
value of portfolio securities generally will not affect income derived from
these securities, but will affect the Fund's net asset value. The Fund will not
necessarily dispose of a security when its rating is reduced below its rating
at the time of purchase. However, the Manager will monitor the investment to
determine whether its retention will assist in meeting the Fund's investment
objective.
Issuers of lower rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may
not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other funds and
accounts managed by Citibank and its affiliates, holds all or a major portion.
Although Citibank generally considers such securities to be liquid because of
the availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Fund could find it more
difficult to sell these securities when Citibank believes it advisable to do so
or may be able to sell the securities only at prices lower than if they were
more widely held. Under these circumstances, it may also be more difficult to
determine the fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the event of a
default under such securities, the Fund may be required to participate in
various legal proceedings or take possession of and manage assets securing the
issuer's obligations on such securities. This could increase the Fund's
operating expenses and adversely affect the Fund's net asset value. In
addition, the Fund's intention to qualify as a "regulated investment company"
under the Internal Revenue Code may limit the extent to which the Fund may
exercise its rights by taking possession of such assets.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund may not be able
to reinvest the proceeds in securities providing the same investment return as
the securities redeemed.
<PAGE>
The Fund may invest up to 15% of its assets in "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Because
zero-coupon and payment-in kind bonds do not pay current interest in cash,
their value is subject to greater fluctuation in response to changes in market
interest rates than bonds that pay interest currently. Both zero-coupon and
payment-in-kind bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently in cash. The Fund is required
to accrue interest income on such investments and to distribute such amounts at
least annually to shareholders even though such bonds do not pay current
interest in cash. Thus, it may be necessary at times for the Fund to liquidate
investments in order to satisfy its dividend requirements.
To the extent the Fund invests in securities in the lower rating categories,
the achievement of the Fund's objective is more dependent on the Fund's
investment analysis than would be the case if the Fund were investing in
securities in the higher rating categories. This may be particularly true with
respect to tax-exempt securities, as the amount of information about the
financial condition of an issuer of tax-exempt securities may not be as
extensive as that which is made available by corporations whose securities are
publicly traded.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador,
Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland,
Slovenia, Uruguay, and Venezuela. Brady Bonds have been issued only recently,
and for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds, which
may be fixed-rate bonds or floating-rate bonds, are generally collateralized in
full as to principal by U.S. Treasury zero-coupon bonds having the same
maturity as the bonds. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
<PAGE>
SWAPS AND RELATED TRANSACTIONS
The Fund may enter into interest rate swaps, currency swaps, equity swaps and
other types of available swap agreements, such as caps, collars and floors, for
the purpose of attempting to obtain a particular desired return at a lower cost
to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest. An equity swap is an agreement to exchange cash flows on a principal
amount based on changes in the values of the reference index. A currency swap
is an agreement to exchange cash flows on a principal amount based on changes
in the values of the currency exchange rates. In a typical cap or floor
agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. A
collar arrangement combines elements of buying and selling a floor.
The Fund will maintain liquid assets with its custodian to cover its current
obligations under swap transactions. If the Fund enters into a swap agreement
on a net basis (i.e., the two payments streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments), the Fund will maintain liquid assets with its custodian with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on other
than a net basis, it will maintain liquid assets with a value equal to the full
amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the arrangement.
If the Fund is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Fund, the Fund must be prepared to make such payments when due. The Fund
will not enter into any swap unless the Fund deems the counterparty to be
creditworthy. If the counterparty's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. The Fund
anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
LOAN PARTICIPATIONS
By purchasing a loan or loan participation, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a corporate,
government, or other borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buy-outs and other corporate activities. Such loans may be in default
at the time of purchase. Certain of the loan participations acquired by the
Fund may involve revolving credit facilities or other standby financing
<PAGE>
commitments which obligate the Fund to pay additional cash on a certain date or
on demand. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
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 is 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 Fund does not expect that more than 40% of its total assets would be
involved in short sales against the box. The Fund does not currently intend to
engage in such sales.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, and the Portfolio Trusts, on behalf of the
Portfolios, have each adopted the following policies which may not be changed
with respect to the Fund or any Portfolio without approval by holders of a
majority of the outstanding voting securities of the Fund or applicable
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 applicable Portfolio present at a meeting at which the holders of
<PAGE>
more than 50% of the outstanding voting securities of the Fund or applicable
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund or applicable Portfolio. The term
"voting securities" as used in this paragraph has the same meaning as in the
1940 Act.
Neither the Fund nor any of the Portfolios may:
(1) Borrow money, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed 1/3 of the current
value of its net assets, including the amount borrowed, or purchase any
securities at any time at which borrowings exceed 5% of the total assets of the
Fund or Portfolio, taken at market value. It is intended that the Fund or
Portfolio would borrow money only from banks and only to accommodate requests
for the repurchase of shares of the Fund or beneficial interests in the
Portfolio while effecting an orderly liquidation of portfolio securities.
(2) Underwrite securities issued by other persons except that all or any
portion of the assets of the Fund or Portfolio may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the rules
and regulations thereunder, and exemptive orders granted under such Act, and
except insofar as the Fund or Portfolio may technically be deemed an
underwriter under the Securities Act in selling a security.
(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 or
Portfolio's total assets (taken at market value), (b) through the use of
repurchase agreements or fixed time deposits or the purchase of short-term
obligations or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial institutions.
The purchase of short-term commercial paper or a portion of an issue of debt
securities which is part of an issue to the public shall not be considered the
making of a loan.
(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 or
Portfolio from purchasing or selling futures contracts or options thereon, and
the Fund and Portfolio reserves the freedom of action to hold and to sell real
estate acquired as a result of the ownership of securities by the Fund or
Portfolio).
(5) Concentrate its investments in any particular industry, but if it is deemed
appropriate for the achievement of the Fund's or Portfolio's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions in
futures contracts shall not be subject to this restriction.
(6) 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.
<PAGE>
If a percentage restriction or rating 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 or a later
change in the rating of the securities held for the Fund or Portfolio 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 of 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.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical Services,
U.S. 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 per share of the Fund is determined each day 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
<PAGE>
Christmas Day. This determination of net asset value of shares of the Fund is
made once each day as of the close of regular trading on such Exchange
(normally 4:00 p.m. Eastern time) by adding the market value of all securities
and other assets of the Fund (including the Fund's interest in the applicable
Portfolios), 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.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates at the time of valuation. Equity
securities are valued at the last sale price on the exchange on which they are
primarily traded or on the NASDAQ system for unlisted national market issues,
or at the last quoted bid price for securities in which there where no sales
during the day or for unlisted securities not reported on the NASDAQ system.
Securities listed on a foreign exchange are valued at the last quoted sale
price available before the time when net assets are valued. Bonds and other
fixed income securities (other than short-term obligations) are valued on the
basis of valuations furnished by a pricing service, use of which has been
approved by the Board of Trustees of the Trust. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques 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 foreign 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 foreign 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 plus amortization of premiums.
Subject to compliance with applicable regulations, the Trust has reserved the
right to pay the redemption price of shares of the Fund, either totally or
partially, by a distribution in kind of readily marketable securities (instead
<PAGE>
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 and the Portfolio Trusts, their ages and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust or the Portfolio Trusts. Unless otherwise indicated below, the
address of each Trustee and officer is 21 Milk Street, 5th Floor, Boston,
Massachusetts 02109. The address of each Portfolio Trust is Elizabethan Square,
George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
RILEY C. GILLEY (aged 72) -- 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 (aged 58) -- Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 47) -- President, Global Research Associates, Inc.
(Investment Research) (since August 1990); Manager, Rockefeller & Co. (March
1988 to July 1990); Trustee, Mainstay Institutional Funds (since December
1990). Her address is P.O. Box 9572 New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 63) -- Managing Director, Morong Capital Management
(since February 1993); Senior Vice President and Investment Manager, CREF
Investments, Teachers Insurance & Annuity Association (retired, January 1993);
<PAGE>
Director, Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385
Outlook Drive, West, Mountainside, New Jersey.
E. KIRBY WARREN (aged 64) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 78) -- Vice President - Investments, Sun Company,
Inc. (retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV (aged 55) -- 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 Stowaway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
MARK T. FINN (aged 55) -- 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. (aged 63) -- 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 (aged 72) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUSTS
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
CHRISTINE A. DRAPEAU* (aged 28) -- Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; 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).
<PAGE>
TAMIE EBANKS-CUNNINGHAM* (aged 25) -- Assistant Secretary of the Trust and the
Portfolio Trusts; Office Manager, Signature Financial Group (Cayman) Ltd.
(Since April 1995); Administrator, Cayman Islands Primary School (prior to
April 1995). Her address is P.O. Box 2494, Elizabethan Square, George Town,
Grand Cayman, Cayman Islands, B.W.I.
JOHN R. ELDER* (aged 50) -- Treasurer of the Trust and the Portfolio Trusts;
Vice President, Signature Financial Group, Inc. (since April 1995); Treasurer,
CFBDS (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix
Home Life Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON* (aged 33) -- Secretary of the Trust and the Portfolio Trusts;
Vice President, Signature Financial Group, Inc. (since May 1992); Assistant
Secretary, CFBDS (since October 1992).
JOAN R. GULINELLO* (aged 42) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; 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* (aged 51) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 34) -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group (Cayman) Ltd. (since August 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994). Her
address is Suite 193, 12 Church St., Hamilton HM 11, Bermuda.
MOLLY S. MUGLER* (aged 46) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
CLAIR TOMALIN* (aged 29) -- Assistant Secretary of the Trust and the Portfolio
Trusts; Office Manager, Signature Financial Group (Europe) Limited (since
1993). Her address is 117 Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON* (aged 50) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Assistant Vice President, Signature
Financial Group, Inc.
JULIE J. WYETZNER* (aged 39) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Vice President,
Signature Financial Group, Inc.
<PAGE>
The Trustees and officers of the Trust and the Portfolio Trusts also hold
comparable positions with certain other funds for which CFBDS, Signature
Financial Group, Inc., or their affiliates serve as the distributor,
administrator or sub-administrator.
The following table shows estimated Trustee compensation for the period
indicated.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Annual from the
Compensation Accrued as Benefits Trust and Fund
from the Fund Part of Fund Upon Complex Paid to
Trustee (1) Expenses Retirement Trustees (1)(2)
<S> <C> <C> <C> <C>
Philip Coolidge $0 None None $0
Riley C. Gilley $891 None None $50,000
Diana R. Harrington $896 None None $57,000
Susan B. Kerley $892 None None $59,000
C. Oscar Morong, Jr. $900 None None $70,000
E. Kirby Warren $892 None None $50,000
William S. Woods, Jr. $896 None None $58,000
</TABLE>
(1) Information is estimated for the fiscal year ending October 31, 1998.
(2) Messrs. Coolidge, Gilley, Morong, Warren and Woods and Mses. Harrington and
Kerley are trustees of 59, 34, 32, 31, 33, 32 and 32 funds and portfolios,
respectively, in the family of open-end registered investment companies advised
or managed by Citibank.
As of the date of this Statement of Additional Information, there are no
outstanding shares of the Fund.
The Declaration of Trust of each of the Trust and the Portfolio Trusts provides
that the Trust or the Portfolio Trust, as the case may be, will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust or a Portfolio Trust, as the case may be, unless, as to liability to the
Trust or such Portfolio Trust or their respective investors, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust or such Portfolio Trust, as the case may be. In the
case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees of the Trust
or such Portfolio Trust or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
MANAGER
Citibank serves as the manager of the Fund and of each Portfolio and provides
certain administrative services to the Trust and the Portfolio Trusts pursuant
to separate management agreements (the "Management Agreements"). Subject to
policies as the Board of Trustees of the Portfolio Trusts may determine,
<PAGE>
Citibank manages the securities of each Portfolio and makes investment
decisions for each Portfolio. The Management Agreements with the Portfolio
Trusts provide that Citibank may delegate the daily management of the
securities of the Portfolios to one or more subadvisers. Citibank furnishes at
its own expense all services, facilities and personnel necessary in connection
with managing each Portfolio's investments and effecting securities
transactions for each Portfolio. The Management Agreement with respect to each
Portfolio will continue in effect until August 7, 2000, and thereafter as long
as such continuance is specifically approved at least annually by the Board of
Trustees of the applicable Portfolio Trust or by a vote of a majority of the
outstanding voting securities of the applicable Portfolio, and, in either case,
by a majority of the Trustees of the applicable Portfolio 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. The
Management Agreement with the Trust with respect to the Fund will continue in
effect until August 7, 2000, 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 and each of the Portfolio Trusts with general
office facilities and supervises the overall administration of the Trust and
each of the Portfolio Trusts, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the Trust's or a Portfolio Trust's independent contractors and
agents; the preparation and filing of all documents required for compliance by
the Trust or a Portfolio Trust with applicable laws and regulations; and
arranging for the maintenance of books and records of the Trust or a Portfolio
Trust. Trustees, officers, and investors in the Trust or a Portfolio Trust are
or may be or may become interested in Citibank, as directors, officers,
employees, or otherwise, and directors, officers and employees of Citibank are
or may become similarly interested in the Trust or a Portfolio Trust.
Each Management Agreement provides that Citibank may render services to others.
Each Management Agreement is terminable without penalty on not more than 60
days' nor less than 30 days' written notice by a Portfolio Trust or the Trust,
as the case may be, when authorized either by a vote of a majority of the
outstanding voting securities of the applicable Portfolio or the Fund or by a
vote of a majority of the Board of Trustees of a Portfolio Trust or the Trust,
or by Citibank on not more than 60 days' nor less than 30 days' written notice,
and will automatically terminate in the event of its assignment. The Management
Agreement with each Portfolio Trust provides that neither Citibank nor its
personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of security transactions for the applicable Portfolio, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Management Agreement with such
Portfolio Trust. The Management Agreement with the Trust provides that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any omission in the administration or management of the Trust or
<PAGE>
the performance of its duties under the Management Agreement, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank for
services under each of the Management Agreements. Citibank may reimburse a
Portfolio or the Fund or waive all or a portion of its management fees.
Pursuant to separate sub-administrative services agreements with Citibank,
CFBDS and Signature Financial Group (Cayman) Ltd. ("SFG") perform such
sub-administrative duties for the Trust and the Portfolio Trusts, respectively,
as from time to time are agreed upon by Citibank, CFBDS and SFG, as
appropriate. For performing such sub-administrative services, CFBDS and SFG
receive compensation as from time to time is agreed upon by Citibank, not in
excess of the amount paid to Citibank for its services under the Management
Agreements with the Trust and the Portfolio Trusts, respectively. All such
compensation is paid by Citibank.
DISTRIBUTOR
CFBDS, 21 Milk Street, 5th Floor, Boston, Massachusetts 02109, serves as the
Distributor of the Fund's shares pursuant to a Distribution Agreement with the
Trust (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 and by 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 the
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
<PAGE>
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 Trust's Trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Service Plan or in any agreement related to such 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
voting securities of the Fund and may not be materially amended in any case
without a vote of the 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.
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 the 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.
Each Portfolio Trust, on behalf of the applicable Portfolio, has entered into a
Custodian Agreement with State Street pursuant to which State Street acts as
custodian for the Portfolio. Each Portfolio Trust, on behalf of the applicable
Portfolio, also has entered into the Fund Accounting Agreement with State
Street Cayman Trust Company, Ltd. ("State Street Cayman") pursuant to which
<PAGE>
State Street Cayman provides fund accounting services for the Portfolio. State
Street Cayman also provides transfer agency services to the Portfolio.
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 Trust, 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 each Portfolio Trust. The address of Price Waterhouse is Suite
3000, Box 82, Royal Trust Towers, Toronto Dominion Center, Toronto, Ontario,
Canada M5K 1G8.
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
objective. Changes in the Fund's investments are made without regard to the
length of time a security has been held or whether a sale would result in the
recognition of a profit or loss. Therefore, the rate of turnover is not a
limiting factor when changes are appropriate. Specific decisions to purchase or
sell securities for the Fund are made by a portfolio manager who is an employee
of Citibank and who is appointed and supervised by its senior officers. Each
portfolio manager may serve other clients of Citibank in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Fund and/or the other
accounts over which Citibank or its affiliates exercise investment discretion.
Citibank is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Fund which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if Citibank determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities which Citibank and its affiliates have with
respect to accounts over which they exercise investment discretion. The
Trustees of the Trust periodically review the commissions paid by the Fund to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits to the Fund.
The investment advisory fees 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
<PAGE>
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 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.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) of
each series and to divide or combine the shares of any series into a greater or
lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such shares
into classes. 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
of the Trust 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 management 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 series or
class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on which
they are entitled to vote. Shareholders in the Trust do not have cumulative
voting rights, and shareholders owning more than 50% of the outstanding shares
of the Trust may elect all of the Trustees of the Trust if they choose to do so
and in such event the other shareholders in the Trust would not be able to
elect any Trustee. The Trust is not required and has no present intention of
holding annual meetings of shareholders but the Trust will hold special
meetings of the Fund's shareholders when in the judgment of the Trust's
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have under certain circumstances (e.g., upon application and
submission of certain specified documents to the Trustees by a specified number
<PAGE>
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 the 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 contains an
express disclaimer of shareholder liability for acts or obligations of the
Trust and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the obligations
of the Trust. The Declaration of Trust also provides that the Trust may
maintain appropriate insurance (e.g., fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of
the Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
High Yield Portfolio and Hedged International Bond Portfolio are series of The
Premium Portfolios and Intermediate Income Portfolio is a series of Asset
Allocation Portfolios. Each of the Portfolio Trusts is organized as a trust
under the laws of the state of New York. Each investor in a Portfolio,
including the 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 a Portfolio is determined
by multiplying the net asset value of the Portfolio by the percentage,
<PAGE>
effective for that day, that represents that investor's share of the aggregate
beneficial interest 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, no U.S. federal
income or excise taxes generally will be required to be paid by the Fund,
although non-U.S. source income earned by the Fund may be subject to non-U.S.
withholding or other 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 income to shareholders. Each Portfolio Trust
believes its Portfolio also will not be required to pay any U.S. federal income
or excise taxes on its income.
The portion of the Fund's ordinary income dividends attributable to dividends
received in respect to equity securities of U.S. issuers is normally eligible
for the dividends received deduction for corporations subject to U.S. federal
income taxes. Availability of the deduction for particular shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax and result in certain basis adjustments. 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
<PAGE>
long-term capital gain realized by an individual shareholder will be eligible
for reduced tax rates if the shares were held for more than eighteen months.
However, any loss realized upon a disposition 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.
Any investment by the Fund in zero-coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Fund to recognize income prior to
the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold
potentially resulting in additional taxable gain or loss to the Fund.
The Fund's transactions in options, futures and forward contracts will be
subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain
positions held by 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
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund intends to limit its activities in options, futures and forward
contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
An investment by the Fund in residual interests of a CMO that has elected to be
treated as a real estate mortgage investment conduit, or "REMIC," can create
complex tax problems, especially if the Fund has state or local governments or
other tax-exempt organizations as shareholders.
The Fund may make non-U.S. investments. Special tax considerations apply with
respect to such investments. Foreign exchange gains and losses realized by the
Fund will generally be treated as ordinary income and loss. Use of non-U.S.
currencies for non-hedging purposes may 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
by the Fund in certain "passive foreign investment companies" may also be
limited in order to avoid a tax on the Fund. Investment income received by the
Fund from non-U.S. securities may be subject to non-U.S. taxes. The U.S. has
entered into tax treaties with many other countries that may entitle the Fund
to a reduced rate of tax or an exemption from tax on such income. The Fund
<PAGE>
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine the Fund's effective rate of non-U.S. tax in
advance since the amount of the Fund's assets to be invested within various
countries is not known.
If the Fund holds more than 50% of its assets in foreign stock and securities
at the close of its taxable year, the Fund may elect to "pass through" to the
Fund's shareholders foreign income taxes paid. If the Fund so elects,
shareholders will be required to treat their pro rata portion of the foreign
income taxes paid by the Fund as part of the amounts distributed to them by the
Fund and thus includable in their gross income for federal income tax purposes.
Shareholders who itemize deductions would then be allowed to claim a deduction
or credit (but not both) on their federal income tax returns for such amounts,
subject to certain limitations. Shareholders who do not itemize deductions
would (subject to such limitations) be able to claim a credit but not a
deduction. No deduction for such amounts will be permitted to individuals in
computing their alternative minimum tax liability. If the Fund does not qualify
or elect to "pass through" to its shareholders foreign income taxes paid by it,
shareholders will not be able to claim any deduction or credit for any part of
the foreign taxes paid by the Fund.
The Fund will withhold tax payments at a rate of 30% (or any lower applicable
tax treaty rate) on taxable dividends and other payments subject to withholding
taxes that are made to persons who are not citizens or residents of the U.S.
Distributions received from 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. The Fund may be required to withhold (and pay over to
the IRS for the shareholder's credit) tax at the rate of 31% on certain
distributions and redemption proceeds paid to shareholders who fail to provide
this information or who otherwise violate IRS regulations.
11. FINANCIAL STATEMENTS
The Fund is newly-organized and has not yet issued financial statements.
<PAGE>
APPENDIX I
SECURITIES RATINGS
THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS FOLLOWS:
MOODY'S INVESTORS SERVICE, INC.
BONDS
Aaa -- Bonds which are rated Aaa rate judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
<PAGE>
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S RATINGS GROUP
BONDS
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only to a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. An obligation rated BBB exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
pay interest and repay principal on obligations in this category than in higher
rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair the capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC ratings category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- Debt rated CC is currently highly vulnerable to nonpayment. The rating CC
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating.
<PAGE>
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but debt service payments are continued.
D -- Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
debt service payments are jeopardized.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
<PAGE>
FITCH IBCA, INC.
AAA -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A -- High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB -- Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB -- Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B -- Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained favorable business and economic environment.
CCC, CC and C -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.
DDD, DD, and D -- Default. Securities are not meeting current obligations and
are extremely speculative. "DDD" designates the highest potential for recovery
of amounts outstanding on any securities involved. For U.S. corporates, for
example, "DD" indicates expected recovery of 50%-90% of such outstandings, and
"D" the lowest recovery potential, i.e., below 50%.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements Included in Part A:
Not applicable.
Financial Statements Included in Part B:
Not applicable.
<TABLE>
<CAPTION>
(b) Exhibits
<S> <C> <C>
* 1(a) Declaration of Trust of Registrant
* 1(b) Amendments to Registrant's Declaration of Trust
1(c) Form of Establishment and Designation of Series of the Registrant
* 2(a) Amended and Restated By-Laws of Registrant
* 2(b) Amendments to Amended and Restated By-Laws of Registrant
5 Form of Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Diversified Income
Portfolio (the "Fund")
6 Form of Amended and Restated Distribution Agreement between the
Registrant and CFBDS, Inc. ("CFBDS"), as distributor
* 8(a) Custodian Contract between the Registrant and State Street Bank
and Trust Company ("State Street"), as custodian
8(b) Form of letter agreement adding the Fund to the Custodian
Contract with State Street
9(a) Form of Amended and Restated Sub-Administrative Services
Agreement between Citibank, N.A. and CFBDS
* 9(b) Transfer Agency and Service Agreement between the Registrant and
State Street, as transfer agent
9(c) Form of letter agreement adding the Fund to the Transfer Agency
and Service Agreement with State Street
* 9(d) Accounting Services Agreement between the Registrant and State
Street, as Fund accounting agent
15 Service Plan of the Registrant
* 25 Powers of Attorney for the Registrant
</TABLE>
- ---------------------
* Incorporated herein by reference to Post-Effective Amendment No. 24
to the Registrant's Registration Statement on Form N-1A (File No.
33-6540) as filed with the Securities and Exchange Commission on
February 20, 1998.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
Shares of Beneficial Interest As of June 28, 1998
(without par value)
CitiFunds Diversified Income Portfolio 0
Item 27. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, filed as an Exhibit to Post-Effective Amendment No. 24 to its
Registration Statement on Form N-1A; (b) Section 6 of the Distribution
Agreement between the Registrant and CFBDS, filed as an Exhibit hereto; and (c)
the undertaking of the Registrant regarding indemnification set forth in its
Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, a
registered bank holding company. Citibank also serves as investment adviser to
the following registered investment companies (or series thereof): Asset
Allocation Portfolios (Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio
and Short-Term Portfolio), The Premium Portfolios (Growth & Income Portfolio,
Balanced Portfolio, Large Cap Growth Portfolio, International Equity Portfolio,
Government Income Portfolio, Emerging Asian Markets Equity Portfolio and Small
Cap Growth Portfolio), Tax Free Reserves Portfolio, U.S. Treasury Reserves
Portfolio, Cash Reserves Portfolio, CitiFundsSM Multi-State Tax Free Trust
(CitiFundsSM New York Tax Free Reserves, CitiFundsSM Connecticut Tax Free
Reserves and CitiFundsSM California Tax Free Reserves), CitiFundsSM Tax Free
Income Trust (CitiFundsSM National Tax Free Income Portfolio and CitiFundsSM
New York Tax Free Income Portfolio), CitiFundsSM Institutional Trust
(CitiFundsSM Institutional Cash Reserves) and Variable Annuity Portfolios
(CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400,
CitiSelect VIP Folio 500 and CitiFundsSM Small Cap Growth VIP Portfolio).
Citibank and its affiliates manage assets in excess of $88 billion worldwide.
The principal place of business of Citibank is located at 399 Park Avenue, New
York, New York 10043.
John S. Reed is the Chairman of the Board and a Director of Citibank. The
following are Vice Chairmen of the Board and Directors of Citibank: Paul J.
Collins and William R. Rhodes. Other Directors of Citibank are D. Wayne
Calloway, former Chairman and Chief Executive Officer, PepsiCo, Inc.; John M.
Deutch, Institute Professor, Massachusetts Institute of Technology; Reuben
Mark, Chairman and Chief Executive Officer, ColgatePalmolive Company; Richard
D. Parsons, President, Time Warner, Inc.; Rozanne L. Ridgway, Former Assistant
Secretary of State for Europe and Canada; Robert B. Shapiro, Chairman,
President and Chief Executive Officer, Monsanto Company; Frank A. Shrontz,
Chairman Emeritus, The Boeing Company; and Franklin A. Thomas, former
President, The Ford Foundation.
Each of the individuals named above is also a Director of Citicorp. In
addition, the following persons have the affiliations indicated:
<PAGE>
D. Wayne Calloway Director, Exxon Corporation
Director, General Electric Company
Retired Chairman and Chief Executive Officer and
Director, PepsiCo, Inc.
Paul J. Collins Director, Kimberly-Clark Corporation
John M. Deutch Director, Ariad Pharmaceuticals, Inc.
Director, CMS Energy
Director, Palomar Medical Technologies, Inc.
Director, Cummins Engine Company, Inc.
Director, Schlumberger, Ltd.
Reuben Mark Director, Chairman and Chief Executive Officer
ColgatePalmolive Company
Director, New York Stock Exchange
Director, Time Warner, Inc.
NonExecutive Director, Pearson, PLC
Richard D. Parsons Director, Federal National Mortgage Association
Director, Philip Morris Companies Incorporated
Member, Board of Representatives, Time Warner
Entertainment Company, L.P.
Director and President, Time Warner, Inc.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
Rozanne L. Ridgway Director, 3M
Director, Bell Atlantic Corporation
Director, Boeing Company
Director, Emerson Electric Company
Member-International Advisory Board,
New Perspective Fund, Inc.
Director, RJR Nabisco, Inc.
Director, Sara Lee Corporation
Director, Union Carbide Corporation
Robert B. Shapiro Director, Chairman and Chief Executive
Officer, Monsanto Company
Director, Silicon Graphics
Frank A. Shrontz Director, 3M
Director, Baseball of Seattle, Inc.
Director and Chairman Emeritus, Boeing Company
Director, Boise Cascade Corp.
Director, Chevron Corporation
<PAGE>
Franklin A. Thomas Director, Aluminum Company of America
Director, Cummins Engine Company, Inc.
Director, Lucent Technologies
Director, PepsiCo, Inc.
Item 29. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Equity Portfolio, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM
Short-Term U.S. Government Income Portfolio, CitiFundsSM Large Cap Growth
Portfolio, CitiFundsSM Emerging Asian Markets Equity Portfolio, CitiFundsSM
U.S. Treasury Reserves, CitiFundsSM Cash Reserves, CitiFundsSM Premium U.S.
Treasury Reserves, CitiFundsSM Premium Liquid Reserves, CitiFundsSM
Institutional U.S. Treasury Reserves, CitiFundsSM Institutional Liquid
Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Balanced Portfolio, CitiFundsSM Small Cap
Value Portfolio, CitiFundsSM Growth & Income Portfolio, CitiFundsSM Small Cap
Growth Portfolio, CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM
New York Tax Free Income Portfolio, CitiSelect VIP Folio 200, CitiSelect VIP
Folio 300, CitiSelect VIP Folio 400, CitiSelect VIP Folio 500, CitiFundsSM
Small Cap Growth VIP Portfolio, CitiSelect Folio 200, CitiSelect Folio 300,
CitiSelect Folio 400, and CitiSelect Folio 500. CFBDS is also the placement
agent for Large Cap Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term
Portfolio, Growth & Income Portfolio, Large Cap Growth Portfolio, Small Cap
Growth Portfolio, International Equity Portfolio, Balanced Portfolio,
Government Income Portfolio, Emerging Asian Markets Equity Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.
(b) The information required by this Item 29 with respect to each
director and officer of CFBDS is incorporated by reference to Schedule A of
Form BD filed by CFBDS pursuant to the Securities and Exchange Act of 1934
(File No. 8-32417).
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
CFBDS, Inc. 21 Milk Street, 5th Floor
(administrator and distributor) Boston, MA 02109
State Street Bank and Trust Company 1776 Heritage Drive
(transfer agent, custodian and fund accounting agent North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043
<PAGE>
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes, if requested to do so by the record
holders of not less than 10% of the Registrant's outstanding shares,
to call a meeting of shareholders for the purpose of voting upon the
question of removal of a trustee or trustees, and to assist in
communications with other shareholders as required by Section 16(c)
of the Investment Company Act of 1940. The Registrant further
undertakes to furnish to each person to whom a prospectus of the
CitiFunds Diversified Income Portfolio is delivered with a copy of
the Fund's latest Annual Report to Shareholders, upon request without
charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts on the 29th day of June, 1998.
CITIFUNDS FIXED INCOME TRUST
By:Philip W. Coolidge
Philip W. Coolidge
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated below on June 29, 1998.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
Philip W. Coolidge President, Principal Executive Officer and Trustee
- -------------------------------
Philip W. Coolidge
John R. Elder Principal Financial Officer and
- -------------------------------
John R. Elder Principal Accounting Officer
Riley C. Gilley* Trustee
- -------------------------------
Riley C. Gilley
Diana R. Harrington* Trustee
- -------------------------------
Diana R. Harrington
Susan B. Kerley* Trustee
- -------------------------------
Susan B. Kerley
C. Oscar Morong, Jr.* Trustee
- -------------------------------
C. Oscar Morong, Jr.
E. Kirby Warren* Trustee
- -------------------------------
E. Kirby Warren
William S. Woods, Jr.* Trustee
- -------------------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
------------------------
Philip W. Coolidge
Executed by Philip W. Coolidge on behalf of those
indicated pursuant to Powers of Attorney.
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
1(c) Form of Establishment and Designation of Series of the Registrant
5 Form of Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds Diversified Income
Portfolio (the "Fund")
6 Form of Amended and Restated Distribution Agreement between the
Registrant and CFBDS, Inc. ("CFBDS"), as distributor
8(b) Form of letter agreement adding the Fund to the Custodian
Contract with State Street Bank and Trust Company ("State
Street")
9(a) Form of Amended and Restated Sub-Administrative Services
Agreement between Citibank, N.A. and CFBDS
9(c) Form of letter agreement adding the Fund to the Transfer Agency
and Service Agreement with State Street
15 Service Plan of the Registrant
Exhibit 1(c)
CITIFUNDS FIXED INCOME TRUST
FORM OF AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF
SHARES OF BENEFICIAL INTEREST (WITHOUT PAR VALUE)
Pursuant to Section 6.9 of the Declaration of Trust, dated June 23, 1986,
as amended (the "Declaration of Trust"), of CitiFunds Fixed Income Trust
(formerly, Landmark Fixed Income Funds) (the "Trust"), the undersigned, being a
majority of the Trustees of the Trust, do hereby amend and restate the Trust's
existing Establishment and Designation of Series of Shares of Beneficial
Interest (without par value) in order to add an additional series of the Trust.
No other changes to the special and relative rights of the existing series are
intended by this amendment and restatement.
1. The series shall be as follows:
The new series of the Trust shall be designated as "CitiFunds
Diversified Income Portfolio."
The other existing series of the Trust are as follows:
"CitiFunds Intermediate Income Portfolio" and
"CitiFunds Short-Term U.S. Government Income Portfolio."
2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933 to the extent pertaining to the offering of Shares of each series. Each
Share of each series shall be redeemable, shall be entitled to one vote or
fraction thereof in respect of a fractional share on matters on which shares of
that series shall be entitled to vote, shall represent a pro rata beneficial
interest in the assets allocated or belonging to such series, and shall be
entitled to receive its pro rata share of the net assets of such series upon
liquidation of the series, all as provided in Section 6.9 of the Declaration of
Trust.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each series as provided in, Rule 18f-2,
<PAGE>
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each
series as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets and
expenses or to change the designation of any series now or hereafter created or
otherwise to change the special and relative rights of any such series.
IN WITNESS WHEREOF, the undersigned have executed this Establishment and
Designation of Series on separate counterparts this _____ day of __________,
1998.
_____________________________ _____________________________
PHILIP W. COOLIDGE RILEY C. GILLEY
As Trustee and Not Individually As Trustee and Not Individually
_____________________________ _____________________________
DIANA R. HARRINGTON SUSAN B. KERLEY
As Trustee and Not Individually As Trustee and Not Individually
_____________________________ _____________________________
C. OSCAR MORONG, JR. E. KIRBY WARREN
As Trustee and Not Individually As Trustee and Not Individually
_____________________________
WILLIAM S. WOODS, JR.
As Trustee and Not Individually
Exhibit 5
FORM OF MANAGEMENT AGREEMENT
CITIFUNDS FIXED INCOME TRUST
CitiFunds Diversified Income Portfolio
MANAGEMENT AGREEMENT, dated as of __________ __, 1998, by and between
CitiFunds Fixed Income Trust, a Massachusetts business trust (the "Trust"), and
Citibank, N.A., a national banking association ("Citibank" or the "Manager").
W I T N E S S E T H:
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder and any exemptive orders thereunder, the "1940 Act"), and
WHEREAS, the Trust wishes to engage Citibank to provide certain investment
advisory and administrative services for the series of the Trust designated as
CitiFunds Diversified Income Portfolio (the "Fund"), and Citibank is willing to
provide such investment advisory and administrative services for the Fund on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of Citibank. (a) Citibank shall act as the Manager for the Fund
and as such shall furnish continuously an investment program and shall
determine from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of the Fund shall be held uninvested,
subject always to the restrictions of the Trust's Declaration of Trust, dated
as of June 23, 1986, and By-laws, as each may be amended from time to time
(respectively, the "Declaration" and the "By-Laws"), the provisions of the 1940
Act, and the then-current Registration Statement of the Trust with respect to
the Fund. The Manager shall also make recommendations as to the manner in which
voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's portfolio securities shall be exercised. Should the
<PAGE>
Board of Trustees of the Trust at any time, however, make any definite
determination as to investment policy applicable to the Fund and notify the
Manager thereof in writing, the Manager shall be bound by such determination
for the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Manager shall take, on behalf of
the Fund, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders
for the purchase or sale of securities for the Fund's account with the brokers
or dealers selected by it, and to that end the Manager is authorized as the
agent of the Trust to give instructions to the custodian or any subcustodian of
the Fund as to deliveries of securities and payments of cash for the account of
the Fund. In connection with the selection of such brokers or dealers and the
placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Fund and/or the other accounts over
which the Manager or its affiliates exercise investment discretion. The Manager
is authorized to pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for the
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if the Manager determines in
good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities which the Manager and its affiliates have with
respect to accounts over which they exercise investment discretion. In making
purchases or sales of securities or other property for the account of the Fund,
the Manager may deal with itself or with the Trustees of the Trust or the
Trust's underwriter or distributor, to the extent such actions are permitted by
the 1940 Act. In providing the services and assuming the obligations set forth
herein, the Manager may employ, at its own expense, or may request that the
Trust employ at the Fund's expense, one or more subadvisers; provided that in
each case the Manager shall supervise the activities of each subadviser. Any
agreement between the Manager and a subadviser shall be subject to the renewal,
termination and amendment provisions applicable to this Agreement. Any
agreement between the Trust on behalf of the Fund and a subadviser may be
terminated by the Manager at any time on not more than 60 days' nor less than
30 days' written notice to the Trust and the subadviser.
(b) Subject to the direction and control of the Board of Trustees of the
Trust, Citibank shall perform such administrative and management services as
<PAGE>
may from time to time be reasonably requested by the Trust, which shall include
without limitation: (i) providing office space, equipment and clerical
personnel necessary for maintaining the organization of the Trust and for
performing the administrative and management functions herein set forth; (ii)
supervising the overall administration of the Trust, including negotiation of
contracts and fees with and the monitoring of performance and billings of the
Trust's transfer agent, shareholder servicing agents, custodian and other
independent contractors or agents; (iii) preparing and, if applicable, filing
all documents required for compliance by the Trust with applicable laws and
regulations, including registration statements, prospectuses and statements of
additional information, semi-annual and annual reports to shareholders, proxy
statements and tax returns; (iv) preparation of agendas and supporting
documents for and minutes of meetings of Trustees, committees of Trustees and
shareholders; and (v) arranging for maintenance of books and records of the
Trust. Notwithstanding the foregoing, Citibank shall not be deemed to have
assumed any duties with respect to, and shall not be responsible for, the
distribution of shares of beneficial interest in the Fund, nor shall Citibank
be deemed to have assumed or have any responsibility with respect to functions
specifically assumed by any transfer agent, fund accounting agent, custodian or
shareholder servicing agent of the Trust or the Fund. In providing
administrative and management services as set forth herein, Citibank may, at
its own expense, employ one or more subadministrators; provided that Citibank
shall remain fully responsible for the performance of all administrative and
management duties set forth herein and shall supervise the activities of each
subadministrator.
2. Allocation of Charges and Expenses. Citibank shall furnish at its own
expense all necessary services, facilities and personnel in connection with its
responsibilities under Section 1 above. Except as provided in the foregoing
sentence, it is understood that the Trust will pay from the assets of the Fund
all of its own expenses allocable to the Fund including, without limitation,
organization costs of the Fund; compensation of Trustees who are not
"affiliated persons" of Citibank; governmental fees; interest charges; loan
commitment fees; taxes; membership dues in industry associations allocable to
the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
information, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions and to existing shareholders of the Fund;
<PAGE>
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Fund (including but not limited to the fees of independent pricing
services); expenses of meetings of the Fund's shareholders; expenses relating
to the registration and qualification of shares of the Fund; and such
nonrecurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Fund may
be a party and the legal obligation which the Trust may have to indemnify its
Trustees and officers with respect thereto.
3. Compensation of Citibank. For the services to be rendered and the
facilities to be provided by Citibank hereunder, the Trust shall pay to
Citibank from the assets of the Fund a management fee computed daily and paid
monthly at an annual rate equal to the lesser of (i) __% of the Fund's average
daily net assets for the Fund's then-current fiscal year or (ii) the difference
between 0.95% of the Fund's average daily net assets for the Fund's
then-current fiscal year and the aggregate investment management fees allocated
to the Fund for the Fund's then-current fiscal year from the portfolios in
which it invests of which Citibank is the manager. If Citibank provides
services hereunder for less than the whole of any period specified in this
Section 3, the compensation to Citibank shall be accordingly adjusted and
prorated.
4. Covenants of Citibank. Citibank agrees that it will not deal with
itself, or with the Trustees of the Trust or the Trust's principal underwriter
or distributor, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the 1940
Act, will not take a long or short position in shares of beneficial interest in
the Fund except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and By-Laws and the then-current Registration
Statement applicable to the Fund relative to Citibank and its directors and
officers.
5. Limitation of Liability of Citibank. Citibank shall not 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 in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Section 5, the term
"Citibank" shall include directors, officers and employees of Citibank as well
as Citibank itself.
<PAGE>
6. Activities of Citibank. The services of Citibank to the Fund are not to
be deemed to be exclusive, Citibank being free to render investment advisory,
administrative and/or other services to others. It is understood that Trustees,
officers, and shareholders of the Trust are or may be or may become interested
in Citibank, as directors, officers, employees, or otherwise and that
directors, officers and employees of Citibank are or may become similarly
interested in the Trust and that Citibank may be or may become interested in
the Trust as a shareholder or otherwise.
7. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written, shall govern
the relations between the parties hereto thereafter and shall remain in force
until August 7, 2000, on which date it will terminate unless its continuance
after August 7, 2000 is "specifically approved at least annually" (a) by the
vote of a majority of the Trustees of the Trust who are not "interested
persons" of the Trust or of Citibank at a meeting specifically called for the
purpose of voting on such approval, and (b) by the Board of Trustees of the
Trust or by "vote of a majority of the outstanding voting securities" of the
Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by the "vote of a majority of the outstanding voting
securities" of the Fund, or by Citibank, in each case on not more than 60 days'
nor less than 30 days' written notice to the other party. This Agreement shall
automatically terminate in the event of its "assignment."
This Agreement may be amended only if such amendment is approved by the
"vote of a majority of the outstanding voting securities" of the Fund (except
for any such amendment as may be effected in the absence of such approval
without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust under
this Agreement are binding only with respect to the Fund; that any liability of
<PAGE>
the Trust under this Agreement, or in connection with the transactions
contemplated herein, shall be discharged only out of the assets of the Fund;
and that no other series of the Trust shall be liable with respect to this
Agreement or in connection with the transactions contemplated herein.
The undersigned officer of the Trust has executed this Agreement not
individually, but as an officer under the Declaration and the obligations of
this Agreement are not binding upon any of the Trustees, officers or
shareholders of the Trust individually.
8. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts.
9. Use of Name. The Trust hereby acknowledges that any and all rights in
or to the name "Citi" which exist on the date of this Agreement or which may
arise hereafter are, and under any and all circumstances shall continue to be,
the sole property of Citibank; that Citibank may assign any or all of such
rights to another party or parties without the consent of the Trust; and that
Citibank may permit other parties, including other investment companies, to use
the word "Citi" in their names. If Citibank, or its assignee as the case may
be, ceases to serve as the adviser to and administrator of the Trust, the Trust
hereby agrees to take promptly any and all actions which are necessary or
desirable to change its name so as to delete the word "Citi."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
CITIFUNDS FIXED INCOME TRUST CITIBANK, N.A.
By:_________________________ By:___________________________
Title:______________________ Title:________________________
Exhibit 6
FORM OF AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of June 24, 1986, and amended and restated as to
CitiFunds Intermediate Income Portfolio (formerly, Landmark Intermediate Income
Fund) only as of __________ __, 1998, by and between CitiFunds Fixed Income
Trust (formerly, Landmark Fixed Income Funds), a Massachusetts trust (the
"Trust"), and CFBDS, Inc., a Massachusetts corporation ("Distributor").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest ("Shares") are divided
into separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust wishes to retain the services of a distributor for
Shares of each class of each of the Trust's series listed on Exhibit A hereto
(the "Funds") and has registered the Shares of the Funds under the Securities
Act of 1933, as amended (the "1933 Act");
WHEREAS, the Trust has adopted a Service Plan pursuant to Rule 12b1 under
the 1940 Act (the "Service Plan") and may enter into related agreements
providing for the distribution and servicing of Shares of the Funds;
WHEREAS, Distributor has agreed to act as distributor of the Shares of
each class of the Funds for the period of this Agreement;
NOW, THEREFORE, it is hereby agreed between the parties hereto as
follows:
1. Appointment of Distributor.
(a) The Trust hereby appoints Distributor its exclusive agent for the
distribution of Shares of each class of the Funds in jurisdictions wherein such
Shares may be legally offered for sale; provided, however, that the Trust in
its absolute discretion may issue Shares of the Funds in connection with (i)
the payment or reinvestment of dividends or distributions; (ii) any merger or
consolidation of the Trust or of the Funds with any other investment company or
<PAGE>
trust or any personal holding company, or the acquisition of the assets of any
such entity or another Fund of the Trust; or (iii) any offer of exchange
permitted by Section 11 of the 1940 Act.
(b) Distributor hereby accepts such appointment as exclusive agent for the
distribution of Shares of each class of the Funds and agrees that it will sell
the Shares as agent for the Trust at prices determined as hereinafter provided
and on the terms hereinafter set forth, all according to the then-current
prospectus and statement of additional information of each Fund (collectively,
the "Prospectus" and the "Statement of Additional Information"), applicable
laws, rules and regulations and the Declaration of Trust of the Trust.
Distributor agrees to use its best efforts to solicit orders for the sale of
Shares of the Funds, and agrees to transmit promptly to the Trust (or to the
transfer agent of the Funds, if so instructed in writing by the Trust) any
orders received by it for purchase or redemption of Shares.
(c) Distributor may sell Shares of the Funds to or through qualified
securities dealers, financial institutions or others. Distributor will require
each dealer or other such party to conform to the provisions of this Agreement,
the Prospectus, the Statement of Additional Information and applicable law; and
neither Distributor nor any such dealers or others shall withhold the placing
of purchase orders for Shares so as to make a profit thereby.
(d) Distributor shall order Shares of the Funds from the Trust only to the
extent that it shall have received unconditional purchase orders therefor.
Distributor will not make, or authorize any dealers or others to make: (i) any
short sales of Shares; or (ii) any sales of Shares to any Trustee or officer of
the Trust, any officer or director of Distributor or any corporation or
association furnishing investment advisory, managerial or supervisory services
to the Trust, or to any such corporation or association, unless such sales are
made in accordance with the Prospectus and the Statement of Additional
Information.
(e) Distributor is not authorized by the Trust to give any information or
make any representations regarding Shares of the Funds, except such information
or representations as are contained in the Prospectus, the Statement of
Additional Information or advertisements and sales literature prepared by or on
behalf of the Trust for Distributor's use.
<PAGE>
(f) The Trust agrees to execute any and all documents, to furnish any and
all information and otherwise to take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with the
qualification of Shares of each Fund for sale in such states as Distributor and
the Trust agree.
(g) No Shares of any Fund shall be offered by either Distributor or the
Trust under this Agreement, and no orders for the purchase or sale of such
Shares hereunder shall be accepted by the Trust, if and so long as the
effectiveness of the Trust's then current registration statement as to Shares
of that Fund or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current prospectus
for Shares of that Fund as required by Section 10 of the 1933 Act is not on
file with the Securities and Exchange Commission; provided, however, that
nothing contained in this paragraph (g) shall in any way restrict the Trust's
obligation to repurchase any Shares from any shareholder in accordance with the
provisions of the applicable Fund's Prospectus or charter documents.
(h) Notwithstanding any provision hereof, the Trust may terminate, suspend
or withdraw the offering of Shares of any Fund whenever, in its sole
discretion, it deems such action to be desirable.
2. Offering Price of Shares. All Fund Shares sold under this Agreement
shall be sold at the public offering price per Share in effect at the time of
the sale, as described in the Prospectus. The excess, if any, of the public
offering price over the net asset value of the Shares sold by Distributor as
agent, and any contingent deferred sales charge applicable to Shares of any
class of any Fund as set forth in the applicable Fund's Prospectus, shall be
retained by Distributor as a commission for its services hereunder. Out of such
commission Distributor may allow commissions, concessions or agency fees to
dealers or other financial institutions, including banks, and may allow them to
others in its discretion in such amounts as Distributor shall determine from
time to time. Except as may be otherwise determined by Distributor from time to
time, such commissions, concessions or agency fees shall be uniform to all
dealers and other financial institutions. At no time shall the Trust receive
less than the full net asset value of the Shares of each Fund, determined in
the manner set forth in the Prospectus and the Statement of Additional
Information. Distributor also may receive such compensation under the Trust's
Service Plan as may be authorized by the Trustees of the Trust from time to
time.
<PAGE>
3. Furnishing of Information.
(a) The Trust shall furnish to Distributor copies of any information,
financial statements and other documents that Distributor may reasonably
request for use in connection with the sale of Shares of the Funds under this
Agreement. The Trust shall also make available a sufficient number of copies of
the Funds' Prospectus and Statement of Additional Information for use by the
Distributor.
(b) The Trust agrees to advise Distributor immediately in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to any registration statement concerning a Fund or to a
Prospectus or for additional information;
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of any such
registration statement or Prospectus or the initiation of any proceeding
for that purpose;
(iii) of the happening of any event which makes untrue any statement
of a material fact made in any such registration statement or Prospectus
or which requires the making of a change in such registration statement
or Prospectus in order to make the statements therein not misleading; and
(iv) of all actions of the Securities and Exchange Commission with
respect to any amendments to any such registration statement or Prospectus
which may from time to time be filed with the Securities and Exchange
Commission.
4. Expenses.
(a) The Trust will pay or cause to be paid the following expenses:
organization costs of the Funds; compensation of Trustees who are not
"affiliated persons" of the Distributor; governmental fees; interest charges;
loan commitment fees; taxes; membership dues in industry associations allocable
to the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
<PAGE>
information, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions and to existing shareholders of the
Funds; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Funds, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Funds (including but not limited to the fees of independent
pricing services); expenses of meetings of shareholders; expenses relating to
the issuance, registration and qualification of shares; and such non-recurring
or extraordinary expenses as may arise, including those relating to actions,
suits or proceedings to which the Trust may be a party and the legal obligation
which the Trust may have to indemnify its Trustees and officers with respect
thereto.
(b) Except as otherwise provided in this Agreement and except to the
extent such expenses are borne by the Trust pursuant to the Service Plan,
Distributor will pay or cause to be paid all expenses connected with its own
qualification as a dealer under state and federal laws and all other expenses
incurred by Distributor in connection with the sale of Shares of each Fund as
contemplated by this Agreement.
(c) Distributor shall prepare and deliver reports to the Trustees of the
Trust on a regular basis, at least quarterly, showing the expenditures with
respect to each Fund pursuant to the Service Plan and the purposes therefor, as
well as any supplemental reports that the Trustees of the Trust, from time to
time, may reasonably request.
5. Repurchase of Shares. Distributor as agent and for the account of the
Trust may repurchase Shares of the Funds offered for resale to it and redeem
such Shares at their net asset value.
6. Indemnification by the Trust. In the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties
hereunder on the part of Distributor, the Trust agrees to indemnify
Distributor, its officers and directors, and any person which controls
Distributor within the meaning of the 1933 Act against any and all claims,
demands, liabilities and expenses that any such indemnified party may incur
under the 1933 Act, or common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the registration
statement for any Fund, any Prospectus or Statement of Additional Information,
or any advertisements or sales literature prepared by or on behalf of the Trust
for Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, unless such
<PAGE>
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor. Nothing herein contained shall require the Trust to take any
action contrary to any provision of its Declaration of Trust or any applicable
statute or regulation.
7. Indemnification by Distributor. Distributor agrees to indemnify the
Trust, its officers and Trustees and any person which controls the Trust within
the meaning of the 1933 Act against any and all claims, demands, liabilities
and expenses that any such indemnified party may incur under the 1933 Act, or
common law or otherwise, arising out of or based upon (i) any alleged untrue
statement of a material fact contained in the registration statement for any
Fund, any Prospectus or Statement of Additional Information, or any
advertisements or sales literature prepared by or on behalf of the Trust for
Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor; and (ii) any act or deed of Distributor or its sales
representatives that has not been authorized by the Trust in any Prospectus or
Statement of Additional Information or by this Agreement.
8. Term and Termination.
(a) Unless terminated as herein provided, this Agreement shall continue in
effect as to each Fund until _________ and shall continue in effect for
successive periods of one year thereafter, but only so long as each such
continuance is specifically approved by votes of a majority of both the
Trustees of the Trust and the Trustees of the Trust who are not parties to this
Agreement or interested persons (as defined in the 1940 Act) of any such party
and who have no direct or indirect financial interest in this Agreement or in
the operation of the Service Plan or in any agreement related thereto
("Independent Trustees"), cast in person at a meeting called for the purpose of
voting on such approval.
(b) This Agreement may be terminated as to any Fund on not less than
thirty days' nor more than sixty days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act).
<PAGE>
9. Limitation of Liability. The obligations of the Trust hereunder shall
not be binding upon any of the Trustees, officers or shareholders of the Trust
personally, but shall bind only the assets and property of the particular Fund
or Funds in question, and not any other Fund or series of the Trust. The term
"CitiFunds Fixed Income Trust" means and refers to the Trustees from time to
time serving under the Declaration of Trust of the Trust, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement has been authorized by the Trustees, and this
Agreement has been signed on behalf of the Trust by an authorized officer of
the Trust, acting as such and not individually, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the assets and property of the
Trust as provided in the Declaration of Trust.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CitiFunds Fixed Income Trust
By:_______________________________
CFBDS, Inc.
By:_______________________________
<PAGE>
Exhibit A
Funds
CitiFunds Intermediate Income Portfolio
CitiFunds Diversified Income Portfolio
Exhibit 8(b)
CitiFunds Fixed Income Trust
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
__________ __, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: CitiFunds Fixed Income Trust - Custodian Contract
Ladies and Gentlemen:
Pursuant to Section 17 of the Custodian Contract dated as of September 1,
1997(the "Contract"), between CitiFunds Fixed Income Trust (formerly known as
Landmark Fixed Income Funds) (the "Trust") and State Street Bank and Trust
Company (the "Custodian"), we hereby request that CitiFunds Diversified Income
Portfolio (the "Fund") be added to the list of series of the Trust to which the
Custodian renders services as custodian under the terms of the Contract.
Please sign below to evidence your agreement to render services as
custodian on behalf of the Fund and to add the Fund as a beneficiary under the
Contract.
CITIFUNDS FIXED INCOME TRUST
By:______________________________
Title:___________________________
Agreed:
STATE STREET BANK AND TRUST COMPANY
By:_____________________________
Title:__________________________
Exhibit 9(a)
FORM OF AMENDED AND RESTATED
SUB-ADMINISTRATIVE SERVICES AGREEMENT
SUB-ADMINISTRATIVE SERVICES AGREEMENT, dated as of December 31, 1997, and
amended and restated as of __________ __, 1998, by and between CFBDS, INC., a
Massachusetts corporation (the "Sub-Administrator"), and CITIBANK, N.A., a
national banking association ("Citibank").
W I T N E S S E T H :
WHEREAS, Citibank has been retained by certain registered open-end
management investment companies under the Investment Company Act of 1940, as
amended (the "1940 Act"), as listed on Schedule A hereto (each individually a
"Trust" and collectively the "Trusts"), to provide administrative services to
its investment portfolios, as listed on Schedule A hereto (each individually a
"Fund" and collectively the "Funds"), pursuant to separate Management
Agreements (each a "Management Agreement"), and
WHEREAS, as permitted by Section 1 of each Management Agreement, Citibank
desires to subcontract some or all of the performance of its obligations
thereunder to Sub-Administrator, and Sub-Administrator desires to accept such
obligations; and
WHEREAS, Citibank wishes to engage Sub-Administrator to provide certain
administrative services on the terms and conditions hereinafter set forth, so
long as Citibank shall have found Sub-Administrator to be qualified to perform
the obligations sought to be subcontracted.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties as Sub-Administrator. Subject to the supervision and direction
of Citibank, Sub-Administrator will assist in supervising various aspects of
each Trust's administrative operations and undertakes to perform the following
specific services, from and after the effective date of this Agreement:
<PAGE>
(a) To the extent requested by Citibank, furnish Trust secretarial
services;
(b) To the extent requested by Citibank, furnish Trust treasury
services, including the review of financial data, tax and other
regulatory filings and audit requests;
(c) To the extent requested by Citibank, provide the services of certain
persons who may be appointed as officers or Trustees of the Trust by
the Trust's Board;
(d) To the extent requested by Citibank, participate in the preparation
of documents required for compliance by the Trust with applicable
laws and regulations, including registration statements,
prospectuses, semi-annual and annual reports to shareholders and
proxy statements;
(e) To the extent requested by Citibank, prepare agendas and supporting
documents for and minutes of meetings of the Trustees, Committees of
Trustees and shareholders;
(f) Maintain books and records of the Trust;
(g) To the extent requested by Citibank, provide advice and counsel to
the Trust with respect to regulatory matters, including monitoring
regulatory and legislative developments which may affect the Trust
and assisting the Trust in routine regulatory examinations or
investigations of the Trust, and working closely with outside
counsel to the Trust in connection with litigation in which the
Trust is involved;
(h) To the extent requested by Citibank, generally assist in all aspects
of Trust's operations and provide general consulting services on a
day to day, as needed basis;
(i) In connection with the foregoing activities, maintain office
facilities (which may be in the offices of Sub-Administrator or its
corporate affiliate); and
(j) In connection with the foregoing activities, furnishing clerical
services, and internal executive and administrative services,
stationery and office supplies.
<PAGE>
Notwithstanding the foregoing, Sub-Administrator under this Agreement
shall not be deemed to have assumed any duties with respect to, and shall not
be responsible for, the management of a Trust, or the distribution of
beneficial interests in a Trust, nor shall Sub-Administrator be deemed to have
assumed or have any responsibility with respect to functions specifically
assumed by any transfer agent or custodian of a Trust.
In performing all services under this Agreement, Sub-Administrative shall
(a) act in conformity with the Trust's charter documents and bylaws, the 1940
Act and other applicable laws, as the same may be amended from time to time,
(b) consult and coordinate with legal counsel for the Trust, as necessary or
appropriate, and (c) advise and report to the Trust and its legal counsel, as
necessary or appropriate, with respect to any material compliance or other
matters that come to its attention.
In performing its services under this Agreement, Sub-Administrator shall
cooperate and coordinate with Citibank as necessary and appropriate and shall
provide such information as its reasonably necessary or appropriate for
Citibank to perform its obligations to the Trust. Sub-Administrator shall
perform its obligations under this Agreement in a conscientious and diligent
manner consistent with prevailing industry standards.
2. Compensation of Sub-Administrator. For the services to be rendered and
the facilities to be provided by Sub-Administrator hereunder, Sub-Administrator
shall be paid an administrative fee as may from time to time be agreed to
between Citibank and Sub-Administrator.
3. Additional Terms and Conditions. The parties may amend this agreement
and include such other terms and conditions as may from time to time be agreed
to by both Citibank and Sub-Administrator.
4. Termination. This Agreement may be terminated by Citibank at any time,
in its entirety or as to one or more Funds, with or without cause. This
Agreement may be terminated by the Sub-Administrator, in its entirety or as to
one or more Funds, with or without cause, provided that Sub-Administrator has
notified Citibank of such termination in writing at least 90 days prior to the
effective date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
CFBDS, INC. CITIBANK, N.A.
By:__________________________ By:_____________________________
Title:_______________________ Title:__________________________
<PAGE>
Schedule A
to Sub-Administrative Services Agreement
Between
CFBDS, Inc.
and
Citibank, N.A.
Trust Series
CitiFunds Fixed Income Trust CitiFunds Intermediate Income
Portfolio
CitiFunds Diversified Income
Portfolio
CitiFunds Tax Free Income Trust CitiFunds National Tax Free Income
Portfolio
CitiFunds New York Tax Free Income
Portfolio
CitiFunds California Tax Free Income
Portfolio
Exhibit 9(c)
CitiFunds Fixed Income Trust
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
__________ __, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: CitiFunds Fixed Income Trust - Transfer Agency and
Service Agreement
Ladies and Gentlemen:
This letter serves as notice that CitiFunds Diversified Income Portfolio
(the "Fund") is added to the list of series of CitiFunds Fixed Income Trust
(formerly known as "Landmark U.S. Government Income Fund") (the "Trust") to
which State Street Bank and Trust Company ("State Street") renders services as
transfer agent pursuant to the terms of the Transfer Agency and Service
Agreement dated as of August 21, 1986 (the "Agreement") between the Trust and
State Street.
Please sign below to acknowledge your receipt of this notice adding the
Fund as a beneficiary under the Agreement.
CITIFUNDS FIXED INCOME TRUST
By:____________________________
Title:_________________________
Acknowledgment:
STATE STREET BANK AND TRUST COMPANY
By:____________________________
Title:_________________________
Exhibit 15
SERVICE PLAN
SERVICE PLAN of Landmark Fixed Income Funds, a Massachusetts business
trust (the "Trust"), with respect to shares of beneficial interest ("Shares")
of its series Landmark Intermediate Income Fund and any other series of the
Trust adopting this plan (the "Series").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust intends to distribute Shares in accordance with Rule
12b-1 under the 1940 Act, and wishes to adopt this Plan as a plan of
distribution pursuant to Rule 12b-1;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have
no direct or indirect financial interest in the operation of this Plan or in
any agreement relating hereto (the "NonInterested Trustees"), having
determined, in the exercise of reasonable business judgment and in light of
their fiduciary duties under state law and under Section 36(a) and (b) of the
1940 Act, that there is a reasonable likelihood that this Plan will benefit the
Trust and the shareholders of the Series, have approved this Plan by votes cast
at a meeting called for the purpose of voting hereon and on any agreements
related hereto;
NOW, THEREFORE, the Trust hereby adopts this Plan as a plan of
distribution in accordance with Rule 12b-1 under the 1940 Act, with the terms
of the Plan being as follows:
1. Distribution and Servicing Activities. Subject to the supervision of
the Trustees of the Trust, the Trust may:
(a) engage, directly or indirectly, in any activities primarily intended
to result in the sale of Shares of the Series, which activities may
include, but are not limited to (i) payments to the Trust's Distributor
for distribution services, (ii) payments to securities dealers, financial
institutions (which may include banks) and others in respect of the sale
<PAGE>
of Shares of the Series, (iii) payments for advertising, marketing or other
promotional activity, and (iv) payments for preparation, printing, and
distribution of prospectuses and statements of additional information and
reports of the Trust for recipients other than regulators and existing
shareholders of the Trust; and
(b) make payments, directly or indirectly, to the Trust's Distributor,
securities dealers, financial institutions (which may include banks) and
others for providing personal service and/or the maintenance of
shareholder accounts.
The Trust is authorized to engage in the activities listed above either directly
or through other persons with which the Trust has entered into agreements
related to this Plan.
2. Maximum Expenditures. The expenditures to be made by the Trust pursuant
to this Plan shall be determined by the Trustees of the Trust, but in no event
may such expenditures exceed an amount calculated at the rate of 0.25% per
annum of the average daily net assets of each Series attributable to Shares of
that Series. Payments pursuant to this Plan may be made directly by the Trust
or to other persons with which the Trust has entered into agreements related to
this Plan. For purposes of determining the fees payable under this Plan, the
value of each Series' average daily net assets attributable to Shares shall be
computed in the manner specified in the applicable Series' then-current
prospectus and statement of additional information.
3. Trust's Expenses. The Trust shall pay all expenses of its operations,
including the following, and such expenses shall not constitute expenditures
under this Plan: organization costs of each series; compensation of Trustees;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Series; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Series,
including safekeeping of funds and securities and maintaining required books
<PAGE>
and accounts; expenses of calculating the net asset value of the Series
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
4. Term and Termination. (a) This Plan shall become effective as to a
Series on October 24, 1997, provided that the following have occurred: (i)
approval by a vote of at least a majority of the outstanding voting securities
(as defined in the 1940 Act) of Shares of the particular Series, and (ii)
approval by a majority of the Trustees of the Trust and a majority of the
Non-Interested Trustees cast in person at a meeting called for the purpose of
voting on this Plan. Unless terminated as herein provided, this Plan shall
continue until August 8, 1998, and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both the Trustees of the Trust
and the Non-Interested Trustees, cast in person at a meeting called for the
purpose of voting on such approval.
(b) This Plan may be terminated at any time with respect to any Series by
a vote of a majority of the NonInterested Trustees or by a vote of a majority
of the outstanding voting securities, as defined in the 1940 Act, of Shares of
the applicable Series.
5. Amendments. This Plan may not be amended to increase materially the
maximum expenditures permitted by Section 2 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities, as
defined in the 1940 Act, of Shares of the applicable Series, and no material
amendment to this Plan shall be made unless approved in the manner provided for
annual renewal of this Plan in Section 4(a) hereof.
6. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of the Non-Interested Trustees of the Trust shall be
committed to the discretion of such Non-Interested Trustees.
7. Quarterly Reports. The Treasurer of the Trust shall provide to the
Trustees of the Trust and the Trustees shall review quarterly a written report
<PAGE>
of the amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
8. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 7 hereof, for a
period of not less than six years from the date of this Plan. Any such related
agreement or such reports for the first two years will be maintained in an
easily accessible place.
9. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
