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497(c) File Nos. 33-36556 and 811-6154
SUPPLEMENT DATED JANUARY 7, 1998 TO
PROSPECTUS DATED JANUARY 7, 1998
CITIFUNDS(SM) INTERNATIONAL GROWTH
& INCOME PORTFOLIO
Purchase orders will be accepted beginning March 2, 1998.
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497(c) File Nos. 33-36556 and 811-6154
Prospectus January 7, 1998
CitiFunds(SM) International Growth & Income Portfolio
This Prospectus describes CitiFunds(SM) International Growth & Income
Portfolio, a diversified mutual fund in the CitiFunds Family of Funds.
Citibank, N.A. is the investment manager.
Unlike other mutual funds which directly acquire and manage their own
portfolios of securities, the Fund may seek its investment objective by
investing in one or more other investment companies. See "Special Information
Concerning Investment Structure" on page 10.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated January 7, 1998 (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 calling 1-800-625-4554.
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REMEMBER THAT SHARES OF THE FUND:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
Prospectus Summary 3
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Expense Summary 5
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Investment Information 6
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Risk Considerations 8
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Valuation of Shares 11
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Purchases 11
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Exchanges 12
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Redemptions 12
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Dividends and Distributions 13
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Management 13
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Tax Matters 16
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Performance Information 17
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General Information 18
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Appendix -- Permitted Investments and Investment Practices 21
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PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFunds International Growth & Income
Portfolio. The Fund is a diversified mutual fund.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's investment objective is to
provide current income and long-term growth of income accompanied by growth of
capital. Through International Portfolio (the "Portfolio"), the Fund invests
primarily (i.e., at least 65% of its total assets under normal circumstances)
in equity securities of issuers in at least three non-U.S. markets whose
securities are deemed to have superior values. All references in this
Prospectus to the Fund include the Portfolio, except as otherwise noted.
INVESTMENT MANAGER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the
"Manager"), a wholly-owned subsidiary of Citicorp, is the investment manager.
Citibank and its affiliates manage more than $88 billion in assets worldwide.
Citibank has delegated the daily management of the Portfolio to Hotchkis and
Wiley, a division of the Merrill Lynch Capital Management Group, which is an
operating business unit of Merrill Lynch Asset Management, L.P. (the
"Subadviser"). CFBDS, Inc. ("CFBDS" or the "Distributor") is the distributor
of shares of the Fund. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the
Fund through a Service Agent on any day the New York Stock Exchange is open
for trading. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares are subject to a fee of up to
0.25% per annum of the Fund's average daily net assets for distribution, sales
and marketing and shareholder services. See "Purchases" and "Management --
Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of the CitiSelect(R) Portfolios
and other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid semiannually. 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 diversified
investment portfolio offering the opportunity for capital growth while also
providing current income and who are willing to commit a portion of their
assets to non-U.S. investment.
RISK FACTORS: There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. Equity
securities fluctuate in value based on many factors, including actual and
anticipated earnings, changes in management, political and economic
developments and the potential for takeovers and acquisitions. The value of
debt securities generally fluctuates based on changes in the actual and
perceived credit-worthiness of issuers. Also, the value of debt securities
generally goes down when interest rates go up, and vice versa. As a result,
shares may be worth more or less at redemption than at the time of purchase.
The Fund invests primarily 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.
Investors in the Fund should be able to assume the heightened risks and
volatility associated with investment in developing countries, including
greater risks of expropriation, confiscatory taxation and nationalization and
less social, political and economic stability; smaller (and, in many cases,
new) markets resulting in price volatility and illiquidity; national policies
which may restrict investment opportunities; and the absence of developed
legal structures.
Certain investment practices, such as the use of forward non-U.S. currency
exchange contracts, also may entail special risks. See "Risk Considerations"
and the Appendix for more information.
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EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and annual
operating expenses for the Fund.* For more information on costs and expenses,
see "Management" on page 13 and "General Information -- Expenses" on page 19.
CITIFUNDS INTERNATIONAL
GROWTH & INCOME
PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees 1.05%
12b-1 Fees (including service fees) (1) 0.25%
Other Expenses (after fee waivers and reimbursements) (2) 0.35%
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Total Fund Operating Expenses (2) 1.65%
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* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder 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 and reimbursements reflected in the
table will continue at these levels. Because the Fund is newly organized,
all amounts in the table and the example are estimated for the current
fiscal year.
(1) Includes fees for distribution and shareholder servicing. 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.
(2) Absent fee waivers and reimbursements, Other Expenses and Total Fund
Operating Expenses would be 1.11% and 2.41%, respectively.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period indicated below:
ONE THREE
YEAR YEARS
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CITIFUNDS INTERNATIONAL GROWTH & INCOME PORTFOLIO $17 $52
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The Example assumes that all dividends are reinvested. Without waivers and
reimbursements, the amounts in the Example would be $24 and $75, respectively.
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.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE: The investment objective of the Fund is to provide
current income and long-term growth of income accompanied by growth 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.
INVESTMENT POLICIES: The Fund invests primarily (i.e., at least 65% of its
total assets under normal circumstances) in equity securities of issuers in at
least three non-U.S. markets whose securities are deemed to have superior
values. In general, the Fund will emphasize issuers located in the developed
international equity markets, which include markets in Europe as well as
Australia, New Zealand, Japan, Hong Kong, Singapore, Malaysia, Canada and
South Korea. International investments are subject to special risks not
generally present in U.S. equity investments.
In selecting securities that are deemed to have superior value, the Fund will
generally seek equity securities of companies in each country that have such
characteristics as dividend yield greater than the local market average,
earnings yield at least three percentage points greater than the country's 10-
year government bond yield (or low price-to-earnings ratios relative to the
local market), and financial strength.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in income-producing equity securities issued by companies with a record
of earnings and dividends. The remainder of the Fund's assets may be invested
in securities of companies which pay no dividends or interest, but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Fund will not invest in foreign
fixed income securities with a maturity in excess of one year.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such
convertible securities will be securities of an issuer having an outstanding
issue of debt securities rated at least A by Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group or be of comparable quality.
The Fund may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of portfolio assets or
liabilities.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
Futures. The Fund may use financial futures in order to protect itself from
fluctuations in interest rates (sometimes called "hedging") 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. The Fund also may purchase
stock index and foreign currency futures in order to protect 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. 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, an index of securities or other assets. In
many cases, the futures contracts that may be purchased by the Fund are
standardized contracts traded on commodities exchanges or boards of trade. 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 -- Permitted
Investments and Investment Practices on page 21. The Fund will not necessarily
invest or engage in each of the investments and investment practices described
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 objective 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 objective, without
regard to the length of time a particular security may have been held. The
turnover rate for the Fund is not expected to exceed 30% for the fiscal year
ending October 31, 1998. The amount of brokerage commissions 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, the Subadviser
or their 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 the Fund 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.
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 interest may be worth more or less at redemption than at the
time of purchase. Equity securities fluctuate in response to general market
and economic conditions and other factors, including actual and anticipated
earnings, changes in management, political developments and the potential for
takeovers and acquisitions. During periods of rising interest rates the value
of debt securities generally declines, and during periods of falling rates the
value of these securities generally increases. Changes by recognized rating
agencies in the rating of any debt security, and actual or perceived changes
in an issuer's ability to make principal or interest payments, also affect the
value of these investments.
Credit Risk of Debt Securities. Investors should be aware that 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.
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. Prices at which the Fund may
acquire securities may be affected by trading by persons with material non-
public information and by securities transactions by brokers in anticipation
of transactions by 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 Fund's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. 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 equity and 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; such 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) 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. Such
characteristics can be expected to continue in the future.
Equity securities traded in certain foreign countries may trade at price-
earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of maintaining
custody of securities in non-U.S. countries, frequently are higher than those
involved in U.S. investing. As a result, the operating expense ratio of the
Fund may be higher than that of investment companies investing exclusively in
U.S. securities.
Smaller Companies. Shareholders should be aware that the securities of
companies with small market capitalizations and the securities of certain
growth companies may have more risks than the securities of other companies.
Small cap companies and certain growth companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources.
Further, there is often less publicly available information about small cap
companies and many growth companies than about more established companies. As
a result of these and other factors, the prices of securities issued by small
cap companies and some growth companies may be volatile.
Investment Practices. Certain of the investment practices employed for the
Fund may entail additional risks that are described in the Appendix. See the
Appendix - Permitted Investments and Investment Practices on page 21.
Special Information Concerning Investment Structure. The Fund does not invest
directly in securities. Instead, the Fund is permitted to invest 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 all of its investable assets in the Portfolio, which is a mutual fund
having the same investment objective and policies as the Fund. The Portfolio,
in turn, buys, holds and sells securities in accordance with this objective
and these policies. Of course, there can be no assurance that the Fund or the
Portfolio will achieve its objective. The Trustees of the Fund believe that
the aggregate per share expenses of the Fund and the Portfolio will be less
than or approximately equal to the expenses that the Fund would incur if the
assets of the Fund were invested directly in the types of securities held by
the Portfolio. The Fund may withdraw its investment in the Portfolio at any
time, and will do so if the Trustees believe it to be in the best interest of
the Fund's shareholders. If the Fund were to withdraw its investment in the
Portfolio, the Fund could either invest directly in securities in accordance
with the investment policies described above or invest in another mutual fund
or pooled investment vehicle having the same investment objective and
policies. If the Fund were to withdraw, the Fund could receive securities from
the Portfolio instead of cash, causing the Fund to incur brokerage, tax and
other charges or leaving it with securities which may or may not be readily
marketable or widely diversified.
The Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but
the Portfolio will notify the Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause the Fund to withdraw its investment in the
Portfolio.
Certain investment restrictions of the Portfolio cannot be changed without
approval by the investors in the Portfolio. These policies are described in
the Statement of Additional Information. When the Fund is asked to vote on
certain matters concerning the Portfolio, the Fund will hold a shareholder
meeting and vote in accordance with shareholder instructions. Of course, the
Fund could be outvoted, or otherwise adversely affected, by other investors in
the Portfolio.
The Portfolio may sell interests to investors in addition to the Fund. These
investors may be mutual funds which offer shares to their shareholders with
different costs and expenses than the Fund. Therefore, the investment return
for all investors in funds investing in the Portfolio may not be the same.
These differences in returns are also present in other mutual fund structures.
Information about other holders of interests in the Portfolio is available
from the Fund's distributor, CFBDS, at (617) 423-1679.
VALUATION OF SHARES
Net asset value per share of the Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange
(normally 4:00 p.m. Eastern time) by adding the market value of all securities
and other assets of the Fund (including the Fund's interest in the Portfolio),
then subtracting the Fund's liabilities, and then dividing the result by the
number of the Fund's outstanding shares. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In
light of the non-U.S. nature of the Fund's investments, trading may take place
in securities held by the Fund on days that 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 without a sales load at the shares' 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.
While there is no sales load imposed on shares of the Fund, the Distributor
receives fees from the Fund pursuant to a Service Plan. See "Management --
Distribution Arrangements."
Shares may be purchased through certain financial institutions (which may
include banks), securities dealers and other industry professionals (called
Service Agents) that have entered into service agreements with the
Distributor. Service Agents may receive certain fees from the Distributor and/
or the Fund. See "Management -- Distribution Arrangements." Investors should
contact their Service Agents for information on purchases. Each Service Agent
may establish its own terms, conditions and charges with respect to services
it offers to its customers. Charges for these services may include fixed
annual fees and account maintenance fees. The effect of any such fees will be
to reduce the net return on the investment of customers of that Service Agent.
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate 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 CFBDS 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 other
CitiFunds, or may be acquired through an exchange of shares of those funds.
Shareholders may 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 by the Transfer Agent. See "Valuation of Shares." Shares of
the Fund may be exchanged only after payment in federal funds for the shares
has been received by the Transfer Agent.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission rules, and is available only in those jurisdictions where such
exchanges legally may be made. See the Statement of Additional Information for
further details. An exchange is treated as a sale of the shares exchanged and
could result in taxable gain or loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the Fund on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. Shareholders should
consult their Service Agents for details. A redemption is treated as a sale of
the shares redeemed and could result in taxable gain or loss to the
shareholder making the redemption.
Redemptions By Mail. Shareholders may redeem Fund shares by sending written
instructions in proper form (as determined by the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. Shareholders are
responsible for ensuring that a request for redemption is in proper form.
Redemptions By Telephone. Shareholders may redeem or exchange Fund shares by
telephone, if their account applications so permit, by calling the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent.
During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone exchange or redemption. In such an event, another method of
instruction, such as a written request sent via an overnight delivery service,
should be considered. The Fund, the Transfer Agent and each Service Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for the
shareholder's name, address, telephone number, Social Security or taxpayer
identification 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 semiannually.
The Fund's net realized short-term and long-term capital gains, if any, will
be distributed to the Fund's shareholders at least annually. The Fund may also
make additional distributions to its shareholders to the extent necessary to
avoid the application of the 4% non-deductible excise tax on certain
undistributed income and net capital gains of mutual funds.
A shareholder may elect to receive dividends and capital gains distributions
in either cash or additional shares of the Fund issued at net asset value.
MANAGEMENT
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
CitiFunds International Trust. The Portfolio is supervised by the Board of
Trustees of Asset Allocation Portfolios. In each case, a majority of the
Trustees are not affiliated with Citibank. In addition, a majority of the
disinterested Trustees of the Fund are different from a majority of the
disinterested Trustees of the Portfolio. More information on the Trustees and
officers of the Fund and Portfolio appears under "Management" in the Statement
of Additional Information.
Investment Manager. Citibank offers a wide range of banking and investment
services to customers across the United States and throughout the world, and
has been managing money since 1822. Its portfolio managers are responsible for
investing in money market, equity and fixed income securities. Citibank and
its affiliates manage more than $88 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank also serves as investment
adviser to other registered investment companies. Citibank's address is 153
East 53rd Street, New York, New York 10043.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Fund, 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.
Citibank has delegated the daily management of the Portfolio to Hotchkis and
Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles, California 90017.
Hotchkis and Wiley is a division of the Merrill Lynch Capital Management
Group, which is an operating business unit of Merrill Lynch Asset Management,
L.P., a registered investment adviser. Harry W. Hartford and Sarah H. Ketterer
have been responsible for the daily management of the Portfolio since its
inception. Mr. Hartford and Ms. Ketterer manage international equity accounts
and are also responsible for international investment research. Each has
served on the Investment Policy Committee at Hotchkis and Wiley since joining
the firm. Prior to joining the predecessor of Hotchkis and Wiley in 1994, Mr.
Hartford was with The Investment Bank of Ireland, as a Senior Manager, where
he gained 10 years of experience in both international and global equity
management. Prior to joining the predecessor of Hotchkis and Wiley in 1990,
Ms. Ketterer was an associate with Bankers Trust and an analyst at Dean
Witter.
Management Fees. For its services under the Management Agreements with respect
to the Fund and the Portfolio, Citibank receives fees, which are computed
daily and paid monthly, at annual rates equal to 0.25% of the Fund's average
net assets, and 0.80% of the Portfolio's average net assets less the aggregate
amount (if any) payable by Asset Allocation Portfolios pursuant to the
Submanagement Agreement with the Subadviser. These combined management fees
are higher than the management fees paid by most mutual funds. Citibank may
voluntarily agree to waive a portion of its management fees.
The Portfolio pays the Subadviser the following fees, which are accrued daily
and payable monthly and are at the annual rates equal to the percentages
specified below of the aggregate assets of the Portfolio allocated to the Sub-
adviser:
0.60% on first $10 million
0.55% on next $40 million
0.45% on next $100 million
0.35% on next $150 million
0.30% on remaining assets
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 of the
Fund's assets. 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, MA 02110.
Distribution Arrangements. CFBDS, 6 St. James Avenue, Boston, MA 02116
(telephone: (617) 423-1679) is the Distributor of the Fund's shares. Under a
Service Plan which has been adopted in accordance with Rule 12b-1 under the
1940 Act, the Fund may pay monthly fees at an annual rate not to exceed 0.25%
of the average daily net assets of the Fund. These fees may be used to make
payments to the Distributor for distribution services and to Service Agents
and others as compensation for the sale of shares of the Fund, for
advertising, marketing or other promotional activity, and for preparation,
printing and distribution of prospectuses, statements of additional
information and reports for recipients other than regulators and existing
shareholders. The Fund also may make payments to the Distributor, Service
Agents and others for providing personal service or the maintenance of
shareholder accounts. In those states where CFBDS is not a registered broker-
dealer, shares of the Fund are sold through Signature Broker-Dealer Services,
Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The Fund and the Distributor provide to the Trustees quarterly a written
report of amounts expended pursuant to the Service Plan and the purposes for
which the expenditures were made.
During the period they are in effect, the Service Plan and 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 requirements of the Internal Revenue Code applicable
to regulated investment companies so that it will not be liable for any
federal income or excise taxes. The Fund may pay withholding or other taxes to
foreign governments during the year, however, and these taxes will reduce the
Fund's dividends.
Fund dividends and capital gains distributions are subject to federal income
tax and may also be subject to state and local taxes. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Generally, distributions from
the Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of distributions from net investment income may be
eligible for the dividends-received deduction available to corporations.
Distributions of long-term net capital gains will be taxed as such regardless
of how long the shares of the Fund have been held. Such capital gains may be
taxable to shareholders that are individuals, estates, or trusts at maximum
rates of 20%, 25%, or 28%, depending upon the source of the gains.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
Early each year, the Fund will notify its shareholders of the amount and tax
status of distributions paid to shareholders for the preceding year. Investors
should consult their own tax advisers regarding the status of their accounts
under state and local laws.
PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and other
communications in terms of yield, effective yield or total rate of return. All
performance information is historical and is not intended to indicate future
performance. Yields and total rates of return fluctuate in response to market
conditions and other factors, and the value of the Fund's shares when redeemed
may be more or less than their original cost.
The Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period, reflects any change in net asset
value per share and is compounded to include the value of any shares purchased
with any dividends or capital gains declared during such period. Period total
rates of return may be "annualized." An "annualized" total rate of return
assumes that the period total rate of return is generated over a one-year
period.
Total returns calculated for the Fund for any period which includes a period
prior to the commencement of operations of the Fund will reflect the
historical performance of the Portfolio, as adjusted for Fund expenses.
The following table sets forth the average annual total returns for the
periods ended December 31, 1997 for the International Fund, a series of the
Hotchkis and Wiley Funds. The International Fund is an existing registered
investment company managed by the Subadviser that began operations on October
1, 1990 and, as of December 31, 1997, had approximately $1 billion in assets.
The investment objective, policies and strategies of the International Fund
are substantially similar to those of the Fund and the Portfolio. The
International Fund is managed in a manner that is in all material respects the
same as the Portfolio is expected to be managed.
The data in the table is provided to illustrate the past performance of the
Subadviser in managing a substantially similar mutual fund and does not
represent the performance of the Fund or Portfolio. Investors should not
consider this performance data as an indication of future performance of the
Fund, the Portfolio or the Subadviser. The performance of the Fund may be
greater or less than the performance of the International Fund due to, among
other things, differences in expenses and cash flows. The Fund's expense ratio
is expected to be higher than that of the International Fund, which would make
the performance of the Fund lower than that of the International Fund. The
Subadviser also manages other accounts with substantially similar investment
objectives and returns to the International Fund, performance for which
accounts has been excluded.
SINCE
INCEPTION
1 YEAR 5 YEARS (10/1/90)
- --------------------------------------------------------------------------------
International Fund* ............ 5.3% 16.1% 13.4%
- ----------
* Average annual total returns reflect changes in share prices and reinvestment
of dividends and distributions and are net of fund expenses.
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 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. The Fund may also provide yield and
effective yield quotations for longer periods.
Of course, any fees charged by a shareholder's Service Agent will reduce that
shareholder's net return on investment. See the Statement of Additional
Information for more information concerning the calculation of yield and total
rate of return quotations for the Fund.
GENERAL INFORMATION
ORGANIZATION: The Fund is a diversified series of CitiFunds International
Trust. CitiFunds International Trust is a Massachusetts business trust
organized on August 7, 1990; it also is an open-end management investment
company registered under the 1940 Act. Prior to January 7, 1998, CitiFunds
International Trust was called Landmark International Funds. CitiFunds
International 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 is permitted to invest all or a portion of its assets in one or more
investment companies. The Fund currently invests in the Portfolio. The
Portfolio is a series of Asset Allocation Portfolios, a New York trust.
VOTING AND OTHER RIGHTS: CitiFunds International 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 International 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 instructions it
receives for all other shares of which that Service Agent is the holder of
record.
As a Massachusetts business trust, CitiFunds International Trust is not
required to hold annual shareholder meetings. Shareholder approval will
usually be sought only for changes in the Fund's or Portfolio's fundamental
investment restrictions and for the election of Trustees under certain
circumstances. Trustees may be removed by shareholders under certain
circumstances. Each share of the Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation of the
Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in the Fund
under one of several tax-sheltered plans. Such plans include IRAs, Keogh or
Corporate Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts,
and certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent 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 are voluntary and may be reduced or terminated at any time.
COUNSEL AND INDEPENDENT AUDITOR: 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 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 net
assets.
In the event of the bankruptcy of the other party to a securities loan or a
repurchase agreement, the Fund could experience delays in recovering either
the securities lent or cash. To the extent that, in the meantime, the value of
the securities lent have increased or the value of the securities purchased
have decreased, the Fund could experience a loss.
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. Convertible securities
are not subject to the rating requirements applicable to the Fund's purchase
of fixed income investments.
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 15% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for 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.
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.
Currency Exchange Contracts. Forward currency exchange contracts may be
entered into for the Fund for the purchase or sale of non-U.S. currency to
hedge against adverse rate changes or otherwise to achieve the Fund's
investment objective. A currency exchange contract allows a definite price in
dollars to be fixed for securities of non-U.S. issuers that have been
purchased or sold (but not settled) for the Fund. Entering into such exchange
contracts may result in the loss of all or a portion of the benefits which
otherwise could have been obtained from favorable movements in exchange rates.
In addition, entering into such contracts means incurring certain transaction
costs and bearing the risk of incurring losses if rates do not move in the
direction anticipated.
Securities Rated Baa or BBB. The Fund may purchase securities rated Baa by
Moody's or BBB by S&P and securities of comparable quality, which may have
poor protection of payment of principal and interest. These securities are
often considered to be speculative and involve greater risk of default or
price changes than securities assigned a higher quality rating 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.
Futures. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are commonly
referred to as "derivatives." Futures contracts are a generally accepted part
of modern portfolio management and are regularly utilized by many mutual funds
and other institutional investors. When the Fund purchases or sells a futures
contract, it is required to make an initial margin deposit. Although the
amount may vary, initial margin can be as low as 1% or less of the face amount
of the contract. Additional margin may be required as the contract fluctuates
in value. Since the amount of margin is relatively small compared to the value
of the securities covered by a futures contract, the potential for gain or
loss on a futures contract is much greater than the amount of the Fund's
initial margin deposit. The Fund does not currently intend to enter into a
futures contract if, as a result, the initial margin deposits on all of the
Fund's futures contracts would exceed approximately 5% of the Fund's net
assets. Also, the Fund intends to limit its futures contracts so that the
value of the securities covered by its futures contracts would not generally
exceed 50% of the Fund's other assets 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, stock price or currency
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, stock price or currency
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, 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. As noted, the Fund may also enter
into transactions in futures contracts for other than hedging purposes
(subject to applicable law), including speculative transactions, which involve
greater risk. In particular, in entering into such transactions, the Fund may
experience losses which are not offset by gains on other portfolio positions,
thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, which could increase
the risks incurred by the Fund in entering into such transactions.
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.
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.
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 and options on stock index 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.
The Fund may enter into forward foreign currency contracts for the purchase or
sale of a fixed quantity of a foreign currency at a future date at a price set
at the time of the contract. The Fund may enter into forward contracts for
hedging and non-hedging purposes including transactions entered into for the
purpose of profiting from anticipated changes in foreign currency exchange
rates. The Fund has established procedures consistent with statements of the
SEC and its staff regarding the use of forward contracts by registered
investment companies, which require use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
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.
Swaps and Related Transactions. The Fund may enter into swap agreements with
other institutional investors with respect to foreign currencies, interest
rates and securities indexes 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.
Swap agreements are subject to the Fund's overall limit that not more than 15%
of its net assets may be invested in illiquid securities, 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.
Options, futures contracts, options on futures contracts, forward contracts
and swaps may be used alone or in combinations in order to create synthetic
exposure to securities in which the Fund otherwise invests, such as non-U.S.
government securities. In such instances, the Fund will also be subject to the
risks associated with theses types of securities, such as counterparty risk in
swap transactions.
<PAGE>
CFCP/INS 198 [recycle symbol] Printed on recycled paper
<PAGE>
497(c) File Nos. 33-36556 and 811-6154
Statement of
Additional Information
January 7, 1998
CITIFUNDS(SM) INTERNATIONAL GROWTH & INCOME PORTFOLIO
(A Member of the CitiFunds(SM) Family of Funds)
CitiFunds International Trust (the "Trust") is an investment company which
was organized as a business trust under the laws of the Commonwealth of
Massachusetts on August 7, 1990. The Trust offers shares of CitiFunds
International Growth & Income Portfolio (the "Fund"), to which this Statement
of Additional Information relates, as well as shares of two other active
series. The address and telephone number of the Trust are 6 St. James Avenue,
Boston, Massachusetts 02116, (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 International Portfolio (the
"Portfolio"), which is a series of Asset Allocation Portfolios (the "Portfolio
Trust"). The address of the Portfolio Trust is Elizabethan Square, George
Town, Grand Cayman, British West Indies.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED 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 ........ 2
4. Investment Restrictions .............................................. 13
5. Performance Information .............................................. 14
6. Determination of Net Asset Value; Valuation of Securities; Additional
Redemption Information ............................................... 15
7. Management ........................................................... 16
8. Portfolio Transactions ............................................... 21
9. Description of Shares, Voting Rights and Liabilities ................. 22
10. Certain Additional Tax Matters ....................................... 23
11. Financial Statements ................................................. 25
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 January 7, 1998. This Statement of Additional
Information should be read in conjunction with the Prospectus, a copy of which
may be obtained by an investor without charge by calling 1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY
AN EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds International Trust is an investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on August
7, 1990. Prior to January 7, 1998, the Trust was called Landmark International
Funds. This Statement of Additional Information describes shares of CitiFunds
International Growth & Income Portfolio, which is one of three active series
of the Trust. References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 7, 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 International Portfolio. The Portfolio is a series of
Asset Allocation Portfolios and is an open-end, diversified management
investment company. The Portfolio has the same investment objective and
policies as the Fund. Because the Fund invests through the Portfolio, all
references in this Statement of Additional Information to the Fund include the
Portfolio, except as otherwise noted. In addition, references to the Trust
include the Portfolio Trust, except as otherwise noted.
Citibank, N.A. ("Citibank" or the "Manager") is the Manager of the
Portfolio. Citibank has delegated the daily management of the Portfolio to
Hotchkis and Wiley, a division of the Merrill Lynch Capital Management Group,
which is an operating business unit of Merrill Lynch Asset Management, L.P.
(the "Subadviser"). The Subadviser manages the investments of the Portfolio
from day to day in accordance with the Portfolio's investment objective and
policies. The selection of investments for the Portfolio, 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 Trust provide broad
supervision over the affairs of the Fund and the Portfolio, 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 a distribution fee 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 investment objective of the Fund is current income and long-term
growth of income accompanied by growth of capital. The Fund invests primarily
(i.e., at least 65% of its total assets under normal circumstances) in equity
securities of issuers in at least three non-U.S. markets whose securities are
deemed to have superior values.
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 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 the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the
best interests of the Fund to do so. Upon any such withdrawal, the Fund's
assets would continue to be invested in accordance with the investment
policies described herein with respect to the Fund. The policies described
above and those described below are not fundamental and may be changed without
shareholder approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
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.
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.
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
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 Subadviser 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. 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 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
Subadviser. It should also be realized that these methods of protecting the
value of the Fund's securities against a decline in the value of a currency do
not eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The Fund has established procedures consistent with policies of the
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.
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.
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 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 15% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and
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 or
to a subadviser 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.
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.
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 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 Subadviser to be of good standing, and when, in the
judgment of the Subadviser, 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 Subadviser 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 Subadviser 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).
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
counterparty 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.
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 Subadviser, are expected to be
similar to those of the underlying index, or by having an absolute and
immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities in
its portfolio. Where 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 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 interest rate futures contracts, stock index
futures contracts 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
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.
The Fund may enter into stock index futures contracts to gain stock market
exposure 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 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 securities underlying such
contracts correlate with movements in the value of the Fund's securities. If
the security underlying a futures contract is different than the security
being hedged, they may not move to the same extent or in the same direction.
In that event, the Fund's hedging strategy might not be successful and the
Fund could sustain losses on these hedging transactions which would not be
offset by gains on the Fund's other investments or, alternatively, the gains
on the hedging transaction might not be sufficient to offset losses on the
Fund's other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, even where the Fund enters into futures transactions
other than for hedging purposes, the effectiveness of its strategy may be
affected by lack of correlation between changes in the value of the futures
contracts and changes in value of the securities which the Fund would
otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures 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
Subadviser's investment judgment about the general direction of interest rates
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
and the Subadviser do 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 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.
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 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.
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 Manager or the Subadviser 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
Manager or Subadviser 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.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, and the Portfolio Trust, on behalf of
the Portfolio, have each adopted the following policies which may not be
changed with respect to the Fund or Portfolio without approval by holders of a
majority of the outstanding voting securities of the Fund or Portfolio, which
as used in this Statement of Additional Information means the vote of the
lesser of (i) 67% or more of the outstanding voting securities of the Fund or
Portfolio present at a meeting at which the holders of more than 50% of the
outstanding voting securities of the Fund or Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Fund or Portfolio. The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.
Neither the Fund nor the Portfolio may:
(1) Borrow money, 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 and Portfolio would borrow money only from banks
and only to accommodate requests for the repurchase of shares of the Fund
or beneficial interests in the Portfolio while effecting an orderly
liquidation of portfolio securities.
(2) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of
the Fund's or Portfolio's total assets (taken at market value), (b)
through the use of repurchase agreements or fixed time deposits or the
purchase of short-term obligations or (c) by purchasing all or a portion
of an issue of debt securities of types commonly distributed privately to
financial institutions. The purchase of short-term commercial paper or a
portion of an issue of debt securities which is part of an issue to the
public shall not be considered the making of a loan.
(3) Purchase securities of any issuer if such purchase at the time
thereof would cause with respect to 75% of the total assets of the Fund or
Portfolio more than 10% of the voting securities of such issuer to be held
by the Fund or Portfolio; provided that, for purposes of this restriction,
the issuer of an option or futures contract shall not be deemed to be the
issuer of the security or securities underlying such contract; and
provided further that the Fund and Portfolio may invest all or any portion
of their respective assets in one or more investment companies, to the
extent not prohibited by the 1940 Act, the rules and regulations
thereunder, and exemptive orders granted under such Act.
(4) Purchase securities of any issuer if such purchase at the time
thereof would cause as to 75% of the Fund's or Portfolio's total assets
more than 5% of the Fund's or Portfolio's assets (taken at market value)
to be invested in the securities of such issuer (other than securities or
obligations issued or guaranteed by the United States, any state or
political subdivision thereof, or any political subdivision of any such
state, or any agency or instrumentality of the United States or of any
state or of any political subdivision of any state); provided that, for
purposes of this restriction, the issuer of an option or futures contract
shall not be deemed to be the issuer of the security or securities
underlying such contract; and provided further that the Fund and Portfolio
may invest all or any portion of its assets in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act.
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's or Portfolio's
investment objective, up to 25% of its assets, at market value at the time
of each investment, may be invested in any one industry, except that
positions in futures contracts shall not be subject to this restriction.
(6) Underwrite securities issued by other persons, except that all or
any portion of the assets of the Fund or Portfolio may be invested in one
or more investment companies, to the extent not prohibited by the 1940
Act, the rules and regulations thereunder, and exemptive orders granted
under such Act, and except insofar as the Fund or Portfolio may
technically be deemed an underwriter under the Securities Act in selling a
security.
(7) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the foregoing
shall not be deemed to preclude the Fund or Portfolio from purchasing or
selling futures contracts or options thereon, and the Fund and Portfolio
reserve the freedom of action to hold and to sell real estate acquired as
a result of the ownership of securities by the Fund or Portfolio).
(8) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder.
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 on the first day of
such period, and (b) subtracting 1 from the result. Any annualized total rate
of return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting
1 from the result.
Total returns calculated for the Fund for any period which includes a
period prior to the commencement of operations of the Fund will reflect the
historical performance of the Portfolio, as adjusted for Fund expenses.
A current yield quotation for the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of
the average daily number of shares outstanding during the period that were
entitled to receive dividends and the maximum public offering price per share
on the last day of the period, (b) subtracting 1 from the result, and (c)
multiplying the result by 2.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
the Fund may compare its performance against inflation with the performance of
other instruments against inflation, such as FDIC-insured bank money market
accounts. In addition, advertising for the Fund may indicate that investors
should consider diversifying their investment portfolios in order to seek
protection of the value of their assets against inflation. From time to time,
advertising materials for the Fund may refer to or discuss current or past
economic or financial conditions, developments and events. The Fund's
advertising materials also may refer to the integration of the world's
securities markets, discuss the investment opportunities available worldwide
and mention the increasing importance of an investment strategy including non-
U.S. investments.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF
SECURITIES; ADDITIONAL REDEMPTION INFORMATION
The net asset value per share of the Fund is determined each day which the
New York Stock Exchange is open for trading ("Business Day"). As of the date
of this Statement of Additional Information, the Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination 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 Portfolio),
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 were 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
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 Trust, their ages
and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
that those Trustees and officers are "interested persons" (as defined in the
1940 Act) of the Trust or the Portfolio Trust. Unless otherwise indicated
below, the address of each Trustee and officer is 6 St. James Avenue, Boston,
Massachusetts. The address of the Portfolio Trust is Elizabethan Square,
George Town, Grand Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (aged 46) -- President of the Trust and the Portfolio
Trust; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
RILEY C. GILLEY (aged 71) -- Vice President and General Counsel, Corporate
Property Investors (November 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 57) -- Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 46) -- President, Global Research Associates, Inc.
(Investment Research) (since August 1990); Manager, Rockefeller & Co. (March
1988 to July 1990); Trustee, Mainstay Institutional Funds (since December
1990). Her address is P.O. Box 9572 New Haven, Connecticut.
C. OSCAR MORONG, JR. (aged 62) -- Managing Director, Morong Capital Management
(since February 1993); Senior Vice President and Investment Manager, CREF
Investments, Teachers Insurance & Annuity Association (retired, January 1993);
Director, Indonesia Fund; Trustee, MAS Funds (since 1993). His address is 1385
Outlook Drive, West, Mountainside, New Jersey.
E. KIRBY WARREN (aged 63) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 77) -- Vice President - Investments, Sun Company,
Inc. (retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.
TRUSTEES OF THE PORTFOLIO TRUST
ELLIOTT J. BERV (aged 54) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 15 Stowaway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE* (aged 46) -- President of the Trust and the Portfolio
Trust; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
MARK T. FINN (aged 54) -- President and Director, Delta Financial, Inc. (since
June 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); Director, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
C. OSCAR MORONG, JR. (aged 62) -- 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 71) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE* (aged 46) -- President of the Trust and the Portfolio
Trust; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
CHRISTINE A. DRAPEAU* (aged 27) -- Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc. (since January 1996); Paralegal and Compliance Officer,
various financial companies (July 1992 to January 1996); Graduate Student,
Bentley College (prior to December 1994).
JOHN R. ELDER* (aged 49) -- Treasurer of the Trust and the Portfolio Trust;
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 32) -- Secretary of the Trust and the Portfolio Trust;
Vice President, Signature Financial Group, Inc. (since May 1992); Assistant
Secretary, CFBDS (since October 1992).
JOAN R. GULINELLO* (aged 42) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Vice President, Signature Financial Group,
Inc. (since October 1993); Secretary, CFBDS (since October 1995); Vice
President and Assistant General Counsel, Massachusetts Financial Services
Company (prior to October 1993).
JAMES E. HOOLAHAN* (aged 50) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trust; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 33) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trust; Vice President,
Signature Financial Group (Cayman) Ltd. (since August 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994). Her
address is Suite 193, 12 Church St., Hamilton HM 11, Bermuda.
MOLLY S. MUGLER* (aged 46) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Vice President, Signature Financial Group,
Inc.; Assistant Secretary, CFBDS.
SHARON M. WHITSON* (aged 49) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trust; Assistant Vice President, Signature
Financial Group, Inc.
JULIE J. WYETZNER* (aged 38) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trust; Vice President,
Signature Financial Group, Inc.
The Trustees and officers of the Trust and the Portfolio Trust also hold
comparable positions with certain other funds for which CFBDS, Signature
Financial Group, Inc., or their affiliates serve as the distributor or
administrator.
The following table shows estimated Trustee compensation for the period
indicated.
<TABLE>
TRUSTEES COMPENSATION TABLE
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT FROM THE
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL REGISTRANT AND
COMPENSATION FROM AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
TRUSTEE FUND(1) EXPENSES RETIREMENT TO TRUSTEES(1)(2)
- ------- ------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
Philip W. Coolidge ............................... $ 0 None None $ 0
Riley C. Gilley .................................. $1,355 None None $46,000
Diana R. Harrington .............................. $1,435 None None $47,250
Susan B. Kerley .................................. $1,429 None None $45,250
C. Oscar Morong, Jr. ............................. $1,439 None None $58,875
E. Kirby Warren .................................. $1,410 None None $47,375
William S. Woods, Jr. ............................ $1,442 None None $47,000
- ----------
(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 55, 31, 28, 28, 30, 29
and 29 funds, respectively, in the family of open-end registered investment companies advised or managed by Citibank.
</TABLE>
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 Trust
provides that the Trust or the Portfolio Trust, as the case may be, will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust or the Portfolio Trust, as the case may be, unless, as
to liability to the Trust or the Portfolio Trust or their respective
investors, it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Trust or the Portfolio Trust,
as the case may be. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination, based
upon a review of readily available facts, by vote of a majority of
disinterested Trustees of the Trust or the Portfolio Trust or in a written
opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
MANAGER
Citibank serves as the manager of the Portfolio and provides certain
administrative services to the Trust and the Portfolio Trust pursuant to
separate management agreements (the "Management Agreements"). Subject to
policies as the Board of Trustees of the Portfolio Trust may determine,
Citibank manages the securities of the Portfolio and makes investment
decisions for the Portfolio. The Management Agreement with the Portfolio Trust
provides that Citibank may delegate the daily management of the securities of
the Portfolio to one or more subadvisers. Citibank furnishes at its own
expense all services, facilities and personnel necessary in connection with
managing the Portfolio's investments and effecting securities transactions for
the Portfolio. The Management Agreement with the Portfolio Trust will continue
in effect until August 8, 1999 and thereafter as long as such continuance is
specifically approved at least annually by the Board of Trustees of the
Portfolio Trust or by a vote of a majority of the outstanding voting
securities of the Portfolio, and, in either case, by a majority of the
Trustees of the Portfolio Trust who are not parties to the 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 will continue in effect until November 14, 1999 and thereafter as
long as such continuance is specifically approved at least annually by the
Board of Trustees of the Trust or by a vote of a majority of the outstanding
voting securities of the Fund, and, in either case, by a majority of the
Trustees of the Trust who are not parties to the Management Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Management Agreement.
Citibank provides the Trust and the Portfolio Trust with general office
facilities and supervises the overall administration of the Trust and the
Portfolio Trust, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of,
the Trust's or the Portfolio Trust's independent contractors and agents; the
preparation and filing of all documents required for compliance by the Trust
or the Portfolio Trust with applicable laws and regulations; and arranging for
the maintenance of books and records of the Trust or the Portfolio Trust.
Trustees, officers, and investors in the Trust and the Portfolio Trust are or
may be or may become interested in Citibank, as directors, officers,
employees, or otherwise and directors, officers and employees of Citibank are
or may become similarly interested in the Trust and the Portfolio Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the 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 Portfolio or Fund or by a vote of
a majority of the Board of Trustees of the 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 the 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 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 the Portfolio
Trust. The Management Agreement with the Trust provides that neither Citibank
nor its personnel shall be liable for any error of judgment or mistake of law
or for any omission in the administration or management of the Trust or the
performance of its duties under the Management Agreement, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or
their obligations and duties under the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank for
services under each of the Management Agreements. Citibank may reimburse the
Fund or Portfolio 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 Trust, respectively, as
from time to time are agreed upon by Citibank, CFBDS and SFG, as appropriate.
For performing such sub-administrative services, CFBDS and SFG receive
compensation as from time to time is agreed upon by Citibank, not in excess of
the amount paid to Citibank for its services under the Management Agreements
with the Trust and the Portfolio Trust, respectively. All such compensation is
paid by Citibank.
The Portfolio Trust has entered into a Submanagement Agreement with the
Subadviser. The Subadviser's compensation is described in the Prospectus and
is payable by the Portfolio Trust from the assets of the Portfolio.
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for its allocated assets of the Fund, and to place the
purchase and sales orders for securities transactions concerning those assets,
subject in all cases to the general supervision of Citibank. The Subadviser
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the assets of the Fund allocated to it and
effecting securities transactions concerning those assets.
The Submanagement Agreement will continue in effect until May 9, 1999, and
thereafter as long as such continuance is specifically approved at least
annually by the Board of Trustees of the Portfolio Trust or by a vote of a
majority of the outstanding voting securities of the Portfolio, and, in either
case, by a majority of the Trustees of the Portfolio Trust who are not parties
to the Submanagement Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Submanagement Agreement.
The Submanagement Agreement provides that the Subadviser may render
services to others. The Submanagement Agreement is terminable without penalty
on not more than 60 days' nor less than 30 days' written notice by the
Portfolio Trust, when authorized either by a vote of a majority of the
outstanding voting securities of the Portfolio or by a vote of a majority of
the Board of Trustees of the Portfolio Trust, 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 Submanagement Agreement may be
terminated by the Subadviser on not less than 90 days' written notice. Upon
termination of the Submanagement Agreement, Citibank will maintain
responsibility for managing those assets formerly managed by the Subadviser.
The Submanagement Agreement provides that neither the Subadviser nor its
personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of security transactions for the Portfolio, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or
their obligations and duties under the Submanagement Agreement.
DISTRIBUTOR
CFBDS, 6 St. James Avenue, Boston, MA 02116, 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, or by the vote of a majority of the outstanding voting
securities of the Fund 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 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 a Fund Accounting Agreement with State Street,
pursuant to which custodial and fund accounting services, respectively, are
provided for the Fund. See "Transfer Agent, Custodian and Fund Accountant" in
the Prospectus for additional information.
The Portfolio Trust, on behalf of the Portfolio, has entered into a
Custodian Agreement with State Street pursuant to which State Street acts as
custodian for the Portfolio. The Portfolio Trust, on behalf of the Portfolio,
also has entered into a Fund Accounting Agreement with State Street Cayman
Trust Company, Ltd. ("State Street Cayman") pursuant to which State Street
Cayman provides fund accounting services for the Portfolio. State Street
Cayman also provides transfer agency services to the Portfolio.
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 the 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 or by the Subadviser. The portfolio manager or Subadviser may serve
other clients of Citibank in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Fund and/or the other
accounts over which Citibank, the Subadviser or their affiliates exercise
investment discretion. Citibank and Subadviser are 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 or the Subadviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which Citibank, the Subadviser and their
affiliates have with respect to accounts over which they exercise investment
discretion. The Trustees of the Trust periodically review the commissions paid
by 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 which would be incurred if it should attempt to develop
comparable information through its own staff or obtain such services
independently.
In making purchases or sales of securities and other property for the
account of the Portfolio, the Subadviser may deal with itself or with the
Trustees of the Trust or the Trust's underwriter or distributor, to the extent
permitted by the 1940 Act.
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 or the
Subadviser's other clients. Investment decisions for the Fund and for
Citibank's and the Subadviser'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 or
the Subadviser 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 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.
The Portfolio is a series of the Portfolio Trust, which is organized as a
trust under the laws of the state of New York. Each investor in the Portfolio,
including the Fund, may add to or withdraw from its investment in the
Portfolio on each Business Day. As of the close of regular trading on each
Business Day, the value of each investor's beneficial interest in the
Portfolio is determined by multiplying the net asset value of the Portfolio by
the percentage, effective for that day, that represents that investor's share
of the aggregate beneficial 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. The Portfolio Trust
believes the 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
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.
Special tax considerations apply with respect to non-U.S. investments of
the Fund. 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 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>
CITIFUNDS INTERNATIONAL GROWTH & INCOME PORTFOLIO
INVESTMENT MANAGER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043
DISTRIBUTOR
CFBDS, Inc.
6 St. James Avenue, Boston, MA 02116
(617) 423-1679
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
AUDITORS
Price Waterhouse LLP
160 Federal Street, Boston, MA 02110
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
