As filed with the Securities and Exchange Commission on April 28, 2000
File No. 811-8438
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
THE PREMIUM PORTFOLIOS*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ELIZABETHAN SQUARE, GEORGE TOWN, GRAND CAYMAN, CAYMAN ISLANDS, BWI
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(345) 945-1824
SUSAN JAKUBOSKI, ELIZABETHAN SQUARE, GEORGE TOWN,
GRAND CAYMAN, CAYMAN ISLANDS, BWI
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH
BINGHAM DANA LLP,
150 FEDERAL STREET
BOSTON, MA 02110
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* Relates only to Government Income Portfolio.
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EXPLANATORY NOTE
The Premium Portfolios has filed this Registration Statement pursuant to
Section 8(b) of the Investment Company Act of 1940. However, beneficial
interests in Government Income Portfolio are not being registered under the
Securities Act of 1933, since such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Only investment companies, insurance
company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act may make investments in the Portfolio. This
Registration Statement is not an offer to sell, or the solicitation of an offer
to buy, any beneficial interests in the Portfolio.
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PART A
Responses to Items 1, 2, 3, 5 and 9 have been omitted pursuant to General
Instruction B.2(b) of Form N-1A.
Item 4. Investment Objectives, Principal Investment Strategies, and Related
Risks.
PORTFOLIO GOALS
The goals of Government Income Portfolio are to generate current income and
preserve the value of the investment of investors in the Portfolio
The goals of the Portfolio may be changed without approval by the Portfolio's
investors but not without written notice thereof to the Portfolio's investors
at least 30 days prior to implementing the change. Of course, there can be no
assurance that the Portfolio will achieve its goals.
MAIN INVESTMENT STRATEGIES
The Portfolio's principal investment strategies are described below. The
Portfolio may use other strategies and invest in other securities that are
described in Part B to this Registration Statement. However, the Portfolio may
not use all of the strategies and techniques or invest in all of the types of
securities described in this Part A or in Part B to this Registration
Statement. The Portfolio's goals may be changed without investor approval. Of
course, there can be no assurance that the Portfolio will achieve its goals.
The Portfolio invests in debt securities that are backed, as to timely
repayment of principal and interest, by the full faith and credit of the U.S.
government. These include U.S. Treasury bills, notes and bonds, and
obligations, including mortgage-backed securities, issued or guaranteed by U.S.
government agencies or instrumentalities. The Portfolio may also invest in
obligations of foreign governments that are guaranteed by the U.S. government.
Even if the U.S. government or one of its agencies guarantees principal and
interest payments, the market price of the security is not insured and may be
volatile.
Home mortgage loans are typically grouped together into "pools" by banks and
other lending institutions, and interests in these pools are then sold to
investors, allowing the bank or other lending institution to have more money
available to loan to home buyers. When homeowners make interest and principal
payments, these payments are passed on to the investors in the pool. Interest
and principal payments on many mortgage-backed securities are guaranteed by
U.S. government agencies or instrumentalities. Certain types of mortgage-backed
securities are called collateralized mortgage obligations, or CMOs.
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The Portfolio may invest up to 80% of its assets in mortgage-backed securities
that are direct pass-through certificates called "GNMAs" or in collateralized
mortgage obligations that are backed by GNMAs. GNMAs are securities backed by a
pool of mortgages guaranteed as to payment and principal by the Government
National Mortgage Association.
The Portfolio may hold cash pending investment, and may invest in money market
instruments, repurchase agreements and reverse repurchase agreements for cash
management purposes. The Portfolio may also lend its portfolio securities or
sell its securities short, as long as, in the case of a short sale, the
Portfolio owns, or has the right to obtain, the securities being sold short.
DERIVATIVES. The Portfolio may invest in derivatives including financial
futures and options on futures contracts. The Portfolio may use derivatives in
order to protect (or "hedge") against declines in the value of securities held
by the Portfolio or increases in the cost of securities to be purchased in the
future. The Portfolio may also use derivatives, for non-hedging purposes, to
enhance yields, price sensitivity, and potential gain.
The derivatives purchased by the Portfolio are standardized contracts traded on
commodities exchanges or boards of trade. This means that the exchange or board
of trade guarantees counterparty performance. Derivatives may not be available
on terms that make economic sense (for example, they may be too costly).
DEFENSIVE STRATEGIES. The Portfolio may, from time to time, take temporary
defensive positions in attempting to respond to adverse market, political or
other conditions. When doing so, the Portfolio may invest without limit in
money market instruments and other very short-term instruments. The income on
money market and other very short-term instruments is likely to be less than
the income on the debt obligations generally purchased by the Portfolio.
MANAGEMENT STYLE
Managers of mutual funds use different styles when selecting securities to
purchase. In selecting securities to buy for the Portfolio, Citibank first
establishes the overall duration of the portfolio and its yield curve position,
based upon the portfolio managers' outlook on the economy, prospects for
economic growth and inflation, and the U.S. government bond market. The
portfolio managers then allocate the portfolio between the two primary sectors
of the U.S. government securities market, U.S. Treasury and agency obligations,
in an attempt to maximize exposure to securities providing the best relative
values. The portfolio managers then choose individual securities based upon
their relative value within their sector. The portfolio managers use this same
approach when deciding which securities to sell. Securities are sold when the
Portfolio needs cash to meet redemptions, or when the portfolio managers
believe that better opportunities exist or that the security no longer fits
within the managers' overall strategies for achieving the Portfolio's goals.
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The Portfolio is actively managed. Although the portfolio managers attempt to
minimize portfolio turnover, from time to time the Portfolio's annual portfolio
turnover rate may exceed 100%. The sale of securities may produce capital
gains, which, when distributed, are taxable to investors. Active trading may
also increase the amount of commissions or mark-ups the Portfolio pays to
brokers or dealers when it buys and sells securities. For the fiscal years
ended December 31, 1998 and 1999, the Portfolio's portfolio turnover rates were
288% and 201%, respectively.
Citibank may use brokers or dealers for Portfolio transactions who also provide
brokerage and research services to the Portfolio or other accounts over which
Citibank or its affiliates exercise investment discretion. The Portfolio may
"pay up" for brokerage services, meaning that it is authorized to pay a broker
or dealer who provides these brokerage and research services a commission for
executing a portfolio transaction which is higher than the commission another
broker or dealer would have charged. However, the Portfolio will "pay up" only
if Citibank determines in good faith that the higher commission is reasonable
in relation to the brokerage and research services provided, viewed in terms of
either the particular transaction or all of the accounts over which Citibank
exercises investment discretion.
MAIN RISKS
The principal risks of investing in the Portfolio are described below. Please
note that there are many other factors that could adversely affect an
investment and that could prevent the Portfolio from achieving its goals, which
are not described here. More information about risks appears in Part B to this
Registration Statement.
The Portfolio's net asset value will change daily as the value of its
underlying securities change. This means that your interest in the Portfolio
may be worth more or less when you sell it than when you bought it.
MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions. Some securities held
by the Portfolio may be quite volatile, meaning that their prices can change
significantly in a short time.
INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise, although shorter term
obligations are usually less sensitive to interest rate changes. A change in
interest rates could cause the Portfolio's net asset value to go down.
INCOME RISK. If interest rates decline, the amount of income paid to an
investor by the Portfolio as dividends may also decline.
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CREDIT RISK. The Portfolio invests only in securities that are backed by the
full faith and credit of the United States. These securities are generally
thought to have minimal credit risk.
PORTFOLIO SELECTION. The success of the Portfolio's investment strategy depends
in large part on the investment process. The portfolio managers may fail to
pick securities that perform well because they are unable to predict accurately
the direction of interest rates or to assess fundamental changes affecting the
credit quality of issuers or other factors. In that case, an investor may lose
money, or an investment in the Portfolio may not do as well as an investment in
another fixed income fund.
PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by the
Portfolio may be able to call a bond or prepay principal due on the securities,
particularly during periods of declining interest rates. The Portfolio may not
be able to reinvest that principal at attractive rates, reducing income to the
Portfolio, and the Portfolio may lose any premium paid. The Portfolio would
also lose the benefit of falling interest rates on the price of the repaid
bond. On the other hand, rising interest rates may cause prepayments to occur
at slower than expected rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest rate changes and
the Portfolio's net asset value more volatile. Securities subject to prepayment
risk generally offer less potential for gains when interest rates decline, and
may offer a greater potential for loss when interest rates rise.
Mortgage-backed securities, including CMOs, are particularly susceptible to
prepayment risk and their prices may be more volatile than a security having no
prepayment option.
DERIVATIVES. The Portfolio's use of derivatives such as futures and options on
futures contracts, particularly when used for non-hedging purposes, may be
risky. This practice could result in losses that are not offset by gains on
other portfolio assets, causing the Portfolio's net asset value to go down. In
addition, the Portfolio's ability to use derivatives successfully depends on
Citibank's ability to accurately predict movements in interest rates and other
economic factors and the availability of liquid markets. If Citibank's
predictions are wrong, or if the derivatives do not work as anticipated, the
Portfolio could suffer greater losses than if the Portfolio had not used
derivatives.
PLEASE NOTE THAT AN INVESTMENT IN THE PORTFOLIO IS NOT A DEPOSIT OF CITIBANK
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
Item 6. Management, Organization and Capital Structure.
INVESTMENT MANAGERS
The Portfolio draws on the strength and experience of Citibank. Citibank is the
investment manager of the Portfolio, and subject to policies set by the
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Portfolio's Trustees, Citibank makes investment decisions. Citibank has been
managing money since 1822. With its affiliates, it currently manages more than
$351 billion in assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York, New York, is a
wholly-owned subsidiary of Citigroup Inc.
Citibank and its affiliates, including their directors, officers or employees,
may have banking and investment banking relationships with the issuers of
securities that are held in the Portfolio. They may also own the securities of
these issuers. However, in making investment decisions for the Portfolio
Citibank does not obtain or use material inside information acquired by any
division, department or affiliate of Citibank in the course of those
relationships. Citibank and its affiliates may have loans outstanding that are
repaid with proceeds of securities purchased by the Portfolio.
Denise Guetta, a Vice President of Citibank, has served as manager of the
Portfolio since April 1997. Ms. Guetta is a Senior Portfolio Manager
responsible for managing institutional liquidity and short-duration portfolios.
Ms. Guetta has over thirteen years of investment experience. Prior to joining
Citibank in 1996, she was a portfolio manager at Fischer Francis Trees and
Watts, Inc., managing leveraged risk positions in the U.S. Treasury and
Canadian markets.
ADVISORY FEES
For the advisory services Citibank provided to the Portfolio during the fiscal
year ended December 31, 1999, Citibank received a total of 0.35% of the
Portfolio's average daily net assets, after waivers.
CAPITAL STOCK
Investments in the Portfolio have no preference, pre-emptive or conversion
rights and are fully paid and non-assessable, except as set forth below. The
Portfolio is not required and have no current intention to hold annual meetings
of investors, but the Portfolio holds special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Investors have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of investors) the right to communicate with other investors in
connection with requesting a meeting of investors for the purpose of removing
one or more Trustees. Investors also have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified number of
investors. Upon liquidation or dissolution of the Portfolio, investors in the
Portfolio would be entitled to share pro rata in the net assets of the
Portfolio available for distribution to investors.
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The Portfolio is a series of The Premium Portfolios (known as the "Trust"),
which is organized as a trust under the laws of the State of New York. Under
the Declaration of Trust, the Trustees are authorized to issue beneficial
interests in the Portfolio. Each investor is entitled to a vote in proportion
to the value of its investment in the Portfolio. Investments in the Portfolio
may not be transferred, but an investor may withdraw all or any portion of its
investment at any time at net asset value. Investors in the Portfolio (e.g.,
investment companies, insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of the Portfolio.
However, it is not expected that the liabilities of the Portfolio would ever
exceed its assets.
Item 7. Investor Information.
HOW NET INCOME IS CALCULATED
The Portfolio calculates its net asset value (NAV) every day the New York Stock
Exchange is open for trading (Business Day). This calculation is made at the
close of regular trading on the New York Stock Exchange, normally 4:00 p.m.
Eastern time. On days when the financial markets in which the Portfolio invests
close early, NAV will be calculated as of the close of those markets.
The Portfolio's securities are valued primarily on the basis of market
quotations. When market quotations are not readily available, the Portfolio may
price securities at fair value. Fair value is determined in accordance with
procedures approved by the Portfolio's Board of Trustees. When the Portfolio
uses the fair value pricing method, a security may be priced higher or lower
than if the Portfolio had used a market quotation to price the same security.
Short-term obligations (maturing in 60 days or less) are valued at amortized
cost, which is approximately equal to market value.
It is intended that the Portfolio's assets, income and distributions will be
managed in such a way that an investor in the Portfolio will be able to satisfy
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, assuming that the investor invested all of its investable assets in
the Portfolio.
THE PURCHASE AND REDEMPTION OF BENEFICIAL INTERESTS IN THE PORTFOLIO
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933. Only investment companies,
insurance company separate accounts, common or commingled trust funds or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act may invest in the Portfolio. This
Registration Statement is not an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
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An investment in the Portfolio is made without a sales load. All investments
are made at net asset value next determined after an order is received by the
Portfolio. There is no minimum initial or subsequent investment in the
Portfolio. However, since the Portfolio intends to be as fully invested at all
times as is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., moneys credited to the account
of the Portfolio's custodian bank by a U.S. Federal Reserve Bank).
The Portfolio reserves the right to cease accepting investments at any time or
to reject any investment order.
An investor in the Portfolio may withdraw all or any portion of its investment
at any time after a withdrawal request in proper form is received by the
Portfolio from the investor. The proceeds of a withdrawal will be paid by the
Portfolio in federal funds normally on the Business Day the withdrawal is
effected, but in any event within seven days. Investments in the Portfolio may
not be transferred.
Subject to compliance with applicable regulations, the Portfolio may pay the
redemption price of beneficial interests in the Portfolio, either totally or
partially, by a distribution in kind of readily marketable securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the net asset value for the beneficial
interests being redeemed. If a holder of beneficial interests received a
distribution in kind, such holder could incur brokerage or other charges in
converting the securities to cash.
The right of any investor to receive payment with respect to any withdrawal may
be suspended or the payment of the withdrawal proceeds 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, to the extent otherwise
permitted by the 1940 Act, if an emergency exists.
TAX MATTERS
The Portfolio expects to be treated as a partnership for U.S. federal income
tax purposes. As a result, the Portfolio does not expect to pay any federal
income taxes and, generally, investors in the Portfolio should not have to pay
federal income taxes when they receive distributions or make withdrawals from
the Portfolio. However, each investor in the Portfolio must take into account
its share of the Portfolio's ordinary income, expenses, capital gains and
losses, credits and other items whether or not distributed in determining its
income tax liability.
The Trust also expects that investors in the Portfolio which seek to qualify as
regulated investment companies under the Internal Revenue Code will be able to
look to their proportionate share of the assets and gross income of the
Portfolio for purposes of determining their compliance with the requirements
applicable to such companies.
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The Trust intends to conduct its activities and those of the Portfolio so that
they will not be deemed to be engaged in the conduct of a U.S. trade or
business for U.S. federal income tax purposes. Therefore, it is not anticipated
that an investor in the Portfolio, other than an investor which would be deemed
a "U.S. person" for U.S. federal income tax purposes, will be subject to U.S.
federal income taxation (other than a 30% withholding tax on dividends and
certain interest income) solely by reason of its investment in the Portfolio.
There can be no assurance that the U.S. Internal Revenue Service may not
challenge the above conclusions or take other positions that, if successful,
might result in the payment of U.S. federal income taxes by investors in the
Portfolio.
The foregoing tax discussion is only for an investor's general information, and
does not take account of the special rules applicable to certain investors
(such as tax-exempt investors) or a number of special circumstances. Each
investor should consult its own tax advisers regarding the tax consequences in
its circumstances of an investment in the Portfolio, as well as any state,
local or foreign tax consequences to them of investing in the Portfolio.
Item 8. Distribution Arrangements.
The exclusive placement agent for the Portfolio is CFBDS, Inc. CFBDS receives
no compensation for serving as the Portfolio's exclusive placement agent.
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PART B
Item 10. Cover Page and Table of Contents.
This Part B sets forth information with respect to Government Income
Portfolio, a series of The Premium Portfolios, an investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The date
of this Part B and Part A to the Registration Statement for the Portfolio is
April 28, 2000.
TABLE OF CONTENTS Page
Portfolio History.......................................................B-2
Description of the Portfolio and Its Investments and Risks..............B-2
Management of the Portfolio.............................................B-16
Control Persons and Principal Holders
of Securities.........................................................B-19
Investment Advisory and Other Services..................................B-20
Brokerage Allocation and Other Practices................................B-23
Capital Stock and Other Securities......................................B-24
Purchase, Redemption and Pricing of
Securities............................................................B-26
Taxation of the Portfolio...............................................B-27
Underwriters............................................................B-29
Calculations of Performance Data........................................B-29
Financial Statements....................................................B-29
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Item 11. Portfolio History.
The Premium Portfolios (the "Trust") was organized as a trust under the
laws of the State of New York and Government Income Portfolio was designated as
a series of the Trust on September 13, 1993.
Item 12. Description of the Portfolio and Its Investments and Risks.
The investment objectives of the Portfolio are to generate current income
and preserve the value of the investment of investors in the Portfolio.
The policies described above and those described below are not fundamental
and may be changed without investor approval.
The Portfolio may, but need not, invest in any or all of the investments
and utilize all of the investment techniques described below and in Part A to
this Registration Statement. The selection of investments and the utilization
of investment techniques depend on, among other things, the investment
strategies of Citibank, N.A., the Portfolio's investment adviser ("Citibank" or
the "Adviser"), conditions and trends in the economy and financial markets, and
investments being available on terms that, in Citibank's opinion, make economic
sense.
U.S. GOVERNMENT SECURITIES
The Portfolio invests in debt obligations that are backed, as to the
timely payment of interest and principal, by the full faith and credit of the
U.S. Government.
The debt obligations in which assets of the Portfolio are invested include
(1) U.S. Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: U.S. Treasury bills (maturities of one year
or less), U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years); and (2)
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities. The Portfolio may only invest in obligations
issued or guaranteed by U.S. Government agencies if such obligations are
backed, as to the timely payment of interest and principal, by the full faith
and credit of the U.S. Government, e.g., direct pass-through certificates of
the Government National Mortgage Association.
When and if available, U.S. Government obligations may be purchased at a
discount from face value. However, it is not intended that such securities will
be held to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive.
Although U.S. Government obligations which are purchased for the Portfolio
may be backed, as to the timely payment of interest and principal, by the full
faith and credit of the U.S. Government, interests in the Portfolio are neither
insured nor guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
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The Adviser intends to fully manage the investments of the Portfolio by
buying and selling U.S. Government obligations, and by entering into repurchase
agreements covering such obligations, as well as by holding selected
obligations to maturity. In managing the Portfolio's investments, the Adviser
seeks to maximize the return for the Portfolio by taking advantage of market
developments and yield disparities, which may include use of the following
strategies:
(1) shortening the average maturity of the Portfolio's securities in
anticipation of a rise in interest rates so as to minimize depreciation of
principal;
(2) lengthening the average maturity of the Portfolio's securities in
anticipation of a decline in interest rates so as to maximize appreciation of
principal;
(3) selling one type of U.S. Government obligation (e.g., Treasury bonds)
and buying another (e.g., GNMA direct pass-through certificates) when
disparities arise in the relative values of each; and
(4) changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due to
market factors.
These strategies may result in increases or decreases in the Portfolio's
current income and in the holding for the Portfolio of obligations which sell
at moderate to substantial premiums or discounts from face value. Moreover, if
the Adviser's expectations of changes in interest rates or its valuation of the
normal yield relationship between two obligations proves to be incorrect, the
Portfolio's income, net asset value and potential capital gain may be decreased
or its potential capital loss may be increased.
In order to enhance the stability of the value of interests in the
Portfolio by reducing volatility resulting from changes in interest rates and
other market conditions, the dollar weighted average maturity of the
Portfolio's investment securities is generally three years or less. The
Portfolio is managed to provide an income yield that is generally higher than
those offered by money market funds, which have a share price which is more
stable than the value of an investment in the Portfolio and which have a
portfolio of investments with an average maturity which is shorter than the
Portfolio's securities. It is intended that the Portfolio will have a net asset
value that is more stable than the share price of other fixed income funds that
have a longer term investment focus. Debt securities with longer maturities
than those in which the assets of the Portfolio are invested generally tend to
produce higher yields and are subject to greater market fluctuation as a result
of changes in interest rates than debt securities with shorter maturities. At
the same time, the securities in which the assets of the Portfolio are invested
tend to produce lower yields and are subject to lower market fluctuation as a
result of changes in interest rates than debt securities with longer maturities
that tend to be purchased by longer term bond funds than the Portfolio.
However, since available yields vary over time, no specific level of income can
be assured. The income derived from an investment in the Portfolio increases or
decreases in relation to the income received by the Portfolio from its
investments, which in any case is reduced by the Portfolio's expenses.
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REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by
securities in which the Portfolio may otherwise invest. Repurchase agreements
are agreements by which the Portfolio 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 (frequently overnight and usually not more than seven days) 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 Portfolio'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 Portfolio 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 Portfolio are fully
collateralized, with such collateral being marked to market daily. In the event
of the bankruptcy of the other party to a repurchase agreement, the Portfolio
could experience delays in recovering the securities sold. To the extent that,
in the meantime, the value of the securities sold has increased, the Portfolio
could experience a loss.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements subject to the
Portfolio's investment restriction on borrowing. Reverse repurchase agreements
involve the sale of securities held by the Portfolio and the agreement by the
Portfolio to repurchase the securities at an agreed-upon price, date and
interest payment. When the Portfolio enters into reverse repurchase
transactions, securities of a dollar amount equal in value to the securities
subject to the agreement will be segregated. The segregation of assets could
impair the Portfolio's ability to meet its current obligations or impede
investment management if a large portion of the Portfolio's assets are
involved. Reverse repurchase agreements are considered to be a form of
borrowing by the Portfolio. In the event of the bankruptcy of the other party
to a reverse repurchase agreement, the Portfolio could experience delays in
recovering the securities sold. To the extent that, in the meantime, the value
of the securities sold has changed, the Portfolio could experience a loss.
FUTURES CONTRACTS
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
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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 in the
United States have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. Futures contracts may also be traded on markets outside the
U.S.
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 Portfolio
purchases or sells a futures contract. At the same time such a purchase or sale
is made, the Portfolio 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
Portfolio 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 Portfolio may purchase or sell futures contracts to attempt to protect
itself from fluctuations in interest rates, or to manage the effective maturity
or duration of the Portfolio'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
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as if the Portfolio sold bonds that
it owned, or as if the Portfolio sold longer-term bonds and purchased
shorter-term bonds. If interest rates did increase, the value of the
Portfolio's debt securities would decline, but the value of the futures
contracts would increase, thereby keeping the net asset value of the Portfolio
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 Portfolio avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, the
Portfolio might enter into futures contracts for the purchase of debt
securities. Such a transaction would be intended to have much the same effect
as if the Portfolio purchased bonds, or as if the Portfolio sold shorter-term
bonds and purchased longer-term bonds. If interest rates did decline, the value
of the futures contracts would increase.
Although the use of futures for hedging, if correctly used, should tend to
minimize the risk of loss due to a decline in the value of the hedged position
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(e.g., if the Portfolio sells a futures contract to protect against losses in
the debt securities held by the Portfolio), they do not eliminate the risk of
loss and at the same time the futures contracts limit any potential gain which
might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of the
Portfolio's investments through transactions in futures contracts depends on
the degree to which movements in the value of the debt securities underlying
such contracts correlate with movements in the value of the Portfolio'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 Portfolio's hedging strategy might not be
successful and the Portfolio could sustain losses on these hedging transactions
which would not be offset by gains on the Portfolio's other investments or,
alternatively, the gains on the hedging transaction might not be sufficient to
offset losses on the Portfolio'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
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Similarly, even where the Portfolio 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 Portfolio
would otherwise buy or 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 Portfolio 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 Portfolio, which could require the
Portfolio 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.
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Investments in futures contracts also entail the risk that if the
Adviser's investment judgment about the general direction of interest rates or
other economic factors is incorrect, the Portfolio's overall performance may be
poorer than if any such contract had not been entered into. For example, if the
Portfolio hedged against the possibility of an increase in interest rates which
would adversely affect the price of the Portfolio's bonds and interest rates
decrease instead, part or all of the benefit of the increased value of the
Portfolio's bonds which were hedged will be lost because the Portfolio will
have offsetting losses in its futures positions. Similarly, if the Portfolio
purchases futures contracts expecting a decrease in interest rates and interest
rates instead increased, the Portfolio 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 Portfolio has insufficient cash,
the Portfolio may have to sell bonds from its investments to meet daily
variation margin requirements, possibly at a time when it may be
disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Adviser
does not believe that these trading and position limits would have an adverse
impact on the Portfolio's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that the Portfolio is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Portfolio 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 Portfolio's non-hedging futures positions,
together with any premiums on options on futures contracts (see "Options on
Futures Contracts" below) used for non-hedging purposes, would exceed 5% of the
Portfolio's net assets.
The Portfolio will comply with this CFTC requirement, and the Portfolio
currently intends to adhere to the additional policies described below. First,
an amount of cash or liquid securities will be maintained by the Portfolio in a
segregated account so that the amount so segregated, plus the applicable margin
held on deposit, will be approximately equal to the amount necessary to satisfy
the Portfolio's obligations under the futures contract. The second is that the
Portfolio will not enter into a futures contract if immediately thereafter the
amount of initial margin deposits on all the futures contracts held by the
Portfolio would exceed approximately 5% of the net assets of the Portfolio. The
third is that the aggregate market value of the futures contracts held by the
Portfolio not generally exceed 50% of the market value of the Portfolio'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 potentially exposes the Portfolio to the
effects of "leveraging," which occurs when futures are used so that the
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Portfolio's exposure to the market is greater than it would have been if the
Portfolio had invested directly in the underlying securities. "Leveraging"
increases the Portfolio's potential for both gain and loss. As noted above, the
Portfolio 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 Portfolio.
The use of futures contracts may increase the amount of taxable income of
the Portfolio and may affect the amount, timing and character of the
Portfolio's income for tax purposes, as more fully discussed herein in the
section entitled "Taxation of the Portfolio."
OPTIONS ON FUTURES CONTRACTS
The Portfolio may purchase and write options to buy or sell futures
contracts in which the Portfolio may invest. Such investment strategies may be
used for hedging and 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
Portfolio 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 Portfolio 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
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written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash or securities in a segregated
account. The Portfolio may cover the writing of put options on futures
contracts (a) through sales of the underlying futures contract, (b) through
segregation of cash or liquid 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 Portfolio in cash or liquid securities in a segregated
account. 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 Portfolio, the Portfolio
will be required to sell the underlying futures contract which, if the
Portfolio 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 Portfolio is exercised, the Portfolio will be
required to purchase the underlying futures contract which, if the Portfolio
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 Portfolio 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 Portfolio will retain the full amount
of this option premium, which provides a partial hedge against any decline that
may have occurred in the Portfolio'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 Portfolio writes an option on a futures contract and that
option is exercised, the Portfolio may incur a loss, which loss will be reduced
by the amount of the option premium received, less related transaction costs.
The Portfolio'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 Portfolio and changes in
the value of its futures positions. This correlation cannot be expected to be
exact, and the Portfolio 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 Portfolio to incur a
loss on both the hedging instrument and the futures contract being hedged.
The Portfolio 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 projected changes in interest rates, the Portfolio 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 Portfolio will increase prior to acquisition, due to a
market advance or changes in interest rates, the Portfolio could purchase call
options on futures contracts, rather than purchasing the underlying futures
contracts.
<PAGE>
FURTHER INFORMATION REGARDING DERIVATIVES
Transactions in financial futures and options on futures 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. Financial futures and
options on futures contracts may be used alone or in combinations in order to
create synthetic exposure to securities in which the Portfolio otherwise
invests.
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a "when-issued" or on a "forward
delivery" basis, meaning that delivery of the securities occurs beyond normal
settlement times. In general, the Portfolio does not pay for the securities
until received and does not start earning interest until the contractual
settlement date. It is expected that, under normal circumstances, the Portfolio
would take delivery of such securities but the Portfolio may sell them before
the settlement date. When the Portfolio commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it sets up procedures
consistent with Securities and Exchange Commission ("SEC") policies. Since
those policies currently require that an amount of the Portfolio's assets equal
to the amount of the purchase be held aside or segregated to be used to pay for
the commitment, the Portfolio expects always to have cash or liquid securities
sufficient to cover any commitments or to limit any potential risk. However,
even though the Portfolio 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. The when-issued securities are subject to market fluctuation, and no
interest accrues on the security to the purchaser during this period. The
payment obligation and the interest rate that will be received on the
securities are each fixed at the time the purchaser enters into the commitment.
Purchasing obligations on a when-issued basis is a form of leveraging and can
involve a risk that the yields available in the market when the delivery takes
place may actually be higher than those obtained in the transaction itself. In
that case, there could be an unrealized loss at the time of delivery. An
increase in the percentage of the Portfolio's assets committed to the purchase
of securities on a "when-issued" basis may increase the volatility of its net
asset value.
SHORT SALES "AGAINST THE BOX"
In a short sale, the Portfolio sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
Portfolio, in accordance with applicable investment restrictions, may engage in
short sales only if at the time of the short sale it owns or has the right to
obtain, at no additional cost, an equal amount of the security being sold
short. This investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If the Portfolio engages in a short sale, the collateral for the short
position is maintained for the Portfolio by the custodian or qualified
sub-custodian. While the short sale is open, an amount of securities equal in
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kind and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities is maintained in a segregated
account for the Portfolio. These securities constitute the Portfolio's long
position.
The Portfolio does not engage in short sales against the box for
investment purposes. The Portfolio may, however, make a short sale against the
box as a hedge, when it believes that the price of a security may decline,
causing a decline in the value of a security owned by the Portfolio (or a
security convertible or exchangeable for such security). In such case, any
future losses in the Portfolio's long position should be reduced by a gain in
the short position. Conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced depends upon the amount of the security sold short relative to the
amount the Portfolio owns. There are certain additional transaction costs
associated with short sales against the box, but the Portfolio endeavors to
offset these costs with the income from the investment of the cash proceeds of
short sales.
The Adviser does not expect that more than 40% of the Portfolio's total
assets would be involved in short sales against the box. The Adviser does not
currently intend to engage in such sales.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS
The Portfolio may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans, as long as they
are backed by the full faith and credit of the United States Government.
Interests in pools of mortgage-related securities differ from other forms of
debt securities which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. The market value and interest yield of these
instruments can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages.
The Portfolio may purchase mortgage-backed securities issued or guaranteed
by the Government National Mortgage Association ("GNMA"). Obligations of GNMA
are backed by the full faith and credit of the United States Government.
Although GNMA certificates may offer yields higher than those available from
other types of U.S. Government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price to its par value which may result in a loss.
A portion of the Portfolio's assets may be invested in collateralized
mortgage obligations ("CMOs"), which are debt obligations collateralized by
<PAGE>
mortgage loans or mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"); provided, however,
that the CMOs are backed as to the timely payment of interest and principal by
the full faith and credit of the U.S. Government. The Portfolio may also invest
a portion of its assets in multi-class pass-through securities which are
interests in a trust composed of Mortgage Assets; provided, however, that the
Mortgage Assets are backed as to the timely payment of interest and principal
by the full faith and credit of the U.S. Government. CMOs (which include
multi-class pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of or
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multi-class pass-through
securities. In a CMO, a series of bonds or certificates is usually issued in
multiple classes with different maturities. Each class of a CMO, often referred
to as a "tranche," is issued at a specific fixed or floating coupon rate and
has a stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semiannual basis. The principal
of and interest on the Mortgage Assets may be allocated among the several
classes of a series of a CMO in various ways. In a common structure, payments
of principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The prices of mortgage-backed securities may
not increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
This particular risk, referred to as "maturity extension risk," may effectively
convert a security that was considered short or intermediate-term at the time
of purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short or
intermediate-term securities. Thus, rising interest rates would not only likely
decrease the value of the Portfolio's fixed income securities, but would also
increase the inherent volatility of the Portfolio by effectively converting
short-term debt instruments into long-term debt instruments. As a result,
prices of mortgage-backed securities may decrease more than prices of other
debt obligations when interest rates go up.
<PAGE>
Determinations of average maturity of mortgage-backed securities take into
account expectations of prepayments, which may change in different interest
rate environments. The Portfolio will not consider it a violation of policy if
its average maturity deviates from its normal range as a result of actual or
expected changes in prepayments.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, the Portfolio may lend its securities to broker-dealers and
other institutional borrowers. Such loans will usually be made only to member
banks of the U.S. Federal Reserve System and to member firms of the New York
Stock Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents, or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. Either party has the right to call a loan
at any time on customary industry settlement notice (which will not usually
exceed three business days). During the existence of a loan, the Portfolio
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). Where the borrower provides the Portfolio with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Portfolio a fee for use of the borrowed securities. The
Portfolio would not, however, have the right to vote any securities having
voting rights during the existence of the loan, but would call the loan in
anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. However, the loans would be made only to entities deemed by the
Adviser to be of good standing. In addition, the Portfolio could suffer a loss
if the borrower terminates the loan and the Portfolio is forced to liquidate
investments in order to return the cash collateral to the buyer. The Adviser
will make loans only when, in the judgment of the Adviser, the consideration
which can be earned currently from loans of this type justifies the attendant
risk. If the Adviser determines to make loans, it is not intended that the
value of the securities loaned would exceed 30% of the market value of the
Portfolio's total assets.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, the Portfolio may
purchase securities that are not registered 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 ("Rule 144A securities").
However, the Portfolio does not invest more than 15% of its net assets (taken
at market value) in illiquid investments, which include securities for which
there is no readily available market, securities subject to contractual
restrictions on resale and Rule 144A securities, unless, in the case of
restricted securities, the Board of Trustees of the Trust determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Trustees have adopted guidelines and, subject to oversight by the Trustees,
<PAGE>
have delegated to the Adviser the daily function of determining and monitoring
liquidity of Rule 144A securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
The Portfolio 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 Portfolio to sell them promptly at an
acceptable price.
DEFENSIVE STRATEGIES
The Portfolio may, from time to time, take temporary defensive positions
in attempting to respond to adverse market, political or other conditions. When
doing so, the Portfolio may invest without limit in money market instruments
and other very short-term instruments, as long as the instruments purchased are
backed by the full faith and credit of the United States. The income on money
market and other very short-term instruments is likely to be less than the
income on the debt obligations generally purchased by the Portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Portfolio, has adopted the following policies
which may not be changed without approval by holders of a majority of the
outstanding voting securities of the Portfolio, which as used in this Part B
means the vote of the lesser of (i) 67% or more of the outstanding voting
securities of the Portfolio present at a meeting at which the holders of more
than 50% of the outstanding voting securities of the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Portfolio. The term "voting securities" as used in this
paragraph has the same meaning as in the 1940 Act.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate the Portfolio's
assets, except that as a temporary measure for extraordinary or emergency
purposes it may borrow from banks in an amount not to exceed 1/3 of the value
of the Portfolio's net assets, including the amount borrowed, and may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that the Portfolio would borrow money only from
banks and only to accommodate requests for the withdrawal of all or a portion
of a beneficial interest in the Portfolio while effecting an orderly
liquidation of securities), provided that collateral arrangements with respect
to futures contracts, including deposits of initial and variation margin, are
not considered a pledge of assets for purposes of this restriction;
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(2) purchase any security or evidence of interest therein on margin,
except that such short-term credit may be obtained for the Portfolio as may be
necessary for the clearance of purchases and sales of securities and except
that deposits of initial and variation margin may be made for the Portfolio in
connection with the purchase, ownership, holding or sale of futures contracts;
(3) write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent (i) the writing, purchasing or
selling of puts, calls or combinations thereof with respect to U.S. Government
securities or with respect to futures contracts, or (ii) the writing, purchase,
ownership, holding or sale of futures contracts;
(4) underwrite securities issued by other persons and except insofar as
the Trust acting on behalf of the Portfolio may technically be deemed an
underwriter under the Securities Act of 1933 in selling a portfolio security;
(5) make loans to other persons except (a) through the lending of
securities held for the Portfolio and provided that any such loans not exceed
30% of the Portfolio's total assets (taken at market value), (b) through the
use of repurchase agreements or the purchase of short-term obligations, or (c)
by purchasing a portion of an issue of debt securities of types commonly
distributed privately to financial institutions, for which purposes 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;
(6) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures contracts) in the ordinary course of business (the Portfolio
reserves the freedom of action to hold and to sell real estate acquired as a
result of the ownership of securities by the Portfolio);
(7) purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio to hold more than 10% of the voting securities of
such issuer;
(8) purchase securities of any issuer if such purchase at the time thereof
would cause more than 5% of the 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 of either of the foregoing, or any agency or instrumentality of the
United States or of any state or of any political subdivision of any state or
the United States); provided that for purposes of this restriction the issuer
of a futures contract shall not be deemed to be the issuer of the security or
securities underlying such contract;
(9) make short sales of securities or maintain a short position, unless at
all times when a short position is open the Portfolio owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal in
<PAGE>
amount to, the securities sold short, and unless not more than 10% of the
Portfolio's net assets (taken at market value) is held as collateral for such
sales at any one time;
(10) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Portfolio's investment objective,
up to 25% of 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; or
(11) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to futures contracts, including deposits of initial and variation
margin, are not considered to be the issuance of a senior security for purposes
of this restriction.
The Portfolio has also adopted a policy which is fundamental and which
provides that all of the assets of the Portfolio will be invested in
obligations that are backed by the full faith and credit of the U.S.
Government. This policy is not intended to prohibit the use of futures
contracts on fixed income securities or options on futures contracts by the
Portfolio. Investment restriction (9) above applies only to short sales of or
short positions in securities, and does not prevent the writing, purchase,
ownership, holding or sale of futures contracts.
For purposes of restriction (1) above, arrangements with respect to
securities lending are not treated as borrowing.
As an operating policy, the Portfolio will not invest more than 15% of its
net assets in securities for which there is no readily available market. This
policy is not fundamental and may be changed by the Trust without the approval
of the holders of the beneficial interests in the Portfolio.
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in Part A 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 Portfolio will not be considered a
violation of policy. If the value of the Portfolio's holdings of illiquid
securities at any time exceeds the percentage limitation applicable at the time
of acquisition due to subsequent fluctuations in value or other reasons, the
Board of Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
Item 13. Management of the Portfolio.
The Trustees and officers of the Portfolio 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 Portfolio. Unless
<PAGE>
otherwise indicated below, the address of each Trustee and officer is 21 Milk
Street, Boston, Massachusetts 02109. The address of the Portfolio is
Elizabethan Square, George Town, Grand Cayman, Cayman Islands, British West
Indies.
TRUSTEES
ELLIOTT J. BERV; 56 -- President and Chief Executive Officer, Catalyst, Inc.
(Management Consultants) (since June 1992); President and Director, Elliott J.
Berv & Associates (Management Consultants) (since May 1984); Chief Executive
Officer, Rocket City Enterprises (Consulting, Publishing, Internet Services)
(since January 2000). His address is 24 Atlantic Drive, Scarborough, Maine.
PHILIP W. COOLIDGE*; 48 -- President of the Portfolio; Chief Executive Officer
and President, Signature Financial Group, Inc. and CFBDS, Inc.
MARK T. FINN; 56 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Part Owner, FX 500 Ltd. (Commodity Trading
Advisory Firm) (April 1990 to February 1996); General Partner and Shareholder,
Greenwich Ventures LLC (Investment Partnership) (since January 1996);
President, Secretary and Owner, Phoenix Trading Co. (Commodity Trading Advisory
Firm) (since March 1997); Director, Chairman and Owner, Vantage Consulting
Group, Inc. (since October 1988). His address is 3500 Pacific Avenue, P.O. Box
539, Virginia Beach, Virginia.
C. OSCAR MORONG, JR.; 65 -- Chairman of the Board of Trustees of the Portfolio;
Managing Director, Morong Capital Management (since February 1993); Director,
Indonesia Fund (1990 to 1999); Trustee, MAS Funds (since 1993). His address is
1385 Outlook Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 73 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors) (since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985). His address is 35 Farm Road, Sherborn,
Massachusetts.
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (1987 to December 1999). His address is Laurel Road, P.O.
Box 146, Tuxedo Park, New York.
OFFICERS
PHILIP W. COOLIDGE*; 48 -- President of the Portfolio; Chief Executive Officer
and President, Signature Financial Group, Inc. and CFBDS, Inc.
CHRISTINE D. DORSEY*; 29 -- Assistant Secretary and Assistant Treasurer of the
Portfolio; Vice President, Signature Financial Group, Inc. (since January
1996); Paralegal and Compliance Officer, various financial companies (July 1992
to January 1996).
<PAGE>
LINWOOD C. DOWNS*; 38 -- Treasurer of the Portfolio; Chief Financial Officer
and Senior Vice President, Signature Financial Group, Inc.; Treasurer, CFBDS,
Inc.
TAMIE EBANKS-CUNNINGHAM*; 27 -- Assistant Secretary of the Portfolio; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her address
is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I.
SUSAN JAKUBOSKI*; 36 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Portfolio; Vice President, Signature Financial Group (Cayman)
Ltd.
MOLLY S. MUGLER*; 48 -- Assistant Secretary and Assistant Treasurer of the
Portfolio; Vice President, Signature Financial Group, Inc.; Assistant
Secretary, CFBDS, Inc.
JULIE J. WYETZNER*; 40 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Portfolio; Vice President, Signature Financial Group, Inc.
The Trustees and officers of the Portfolio also hold comparable positions
with certain other funds for which Signature Financial Group (Cayman) Ltd.
("SFG" or the "Administrator"), the Portfolio's administrator and a
wholly-owned subsidiary of Signature Financial Group, Inc., or an affiliate
serves as the distributor or administrator. Mr. Coolidge is also a Trustee of
CitiFunds Fixed Income Trust, an open-end investment company, a series of which
is an investor in the Portfolio, and each officer of the Portfolio holds the
same position with CitiFunds Fixed Income Trust.
The Trustees of the Portfolio received the following remuneration from the
sources indicated during its fiscal year ended December 31, 1999:
TRUSTEE COMPENSATION TABLE
Aggregate
Compensation
from Total
Government Compensation
Income from Trust and
Trustee Portfolio (1)(2) Complex (1)(2)
Elliott J. Berv $1,077 $69,500
Philip W. Coolidge $0 $0
Mark T. Finn $1,325 $63,250
C. Oscar Morong, Jr. $835 $92,000
Walter E. Robb, III $1,048 $67,500
<PAGE>
E. Kirby Warren $697 $62,750
(1) Information relates to the fiscal year ended December 31, 1999.
(2) Messrs. Berv, Coolidge, Finn, Morong, Robb and Warren are trustees of 25,
48, 24, 39, 28 and 39, funds, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.
The Portfolio's Declaration of Trust provides that the Portfolio 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 Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Portfolio. 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 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.
Item 14. Control Persons and Principal Holders of Securities.
As of April 18, 2000, CitiFundsSM Short-Term U.S. Government Income
Portfolio owned approximately 47.6 % and CitiFunds Short-Term U.S. Government
Income Portfolio, Ltd. owned approximately 52.4 % of the outstanding interests
in the Portfolio. The address of CitiFunds Short-Term U.S. Government Income
Portfolio, Ltd. is c/o Maples and Calder, P.O. Box 309, Ugland House, George
Town, Grand Cayman, Cayman Islands, British West Indies. The address of
CitiFunds Short-Term U.S. Government Income Portfolio (the "Fund") is 21 Milk
Street, Boston, Massachusetts 02109. The Fund is a series of CitiFunds Fixed
Income Trust. CitiFunds Fixed Income Trust is a Massachusetts business trust
and is registered under the 1940 Act as an investment company.
The Fund and CitiFunds Short-Term U.S. Government Income Portfolio, Ltd.
each control the Portfolio by virtue of owning more than 25% of the outstanding
interests in the Portfolio, as noted above. The Fund has informed the Portfolio
that whenever requested to vote on matters pertaining to the Portfolio (other
than a vote to continue the Portfolio following the withdrawal of an investor)
it will hold a meeting of shareholders and will cast its vote as instructed by
its shareholders when its Trustees deem it to be necessary or advisable.
Notwithstanding the foregoing, 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 received for all other shares of which that service agent
is the holder of record.
<PAGE>
Item 15. Investment Advisory and Other Services.
Citibank manages the assets of the Portfolio pursuant to an investment
advisory agreement (the "Advisory Agreement"). Subject to such policies as the
Board of Trustees may determine, the Adviser manages the Portfolio's securities
and makes investment decisions for the Portfolio. The Adviser furnishes at its
own expense all services, facilities and personnel necessary in connection with
managing the Portfolio's investments and effecting securities transactions for
the Portfolio. The Advisory Agreement continues in effect from year to year as
long as such continuance is specifically approved at least annually by the
Board of Trustees 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
who are not parties to the Advisory Agreement or interested persons of any such
party, at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to
others. The Advisory Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the 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, or by the
Adviser on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. The Advisory
Agreement provides that neither the Adviser nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution 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 Advisory Agreement.
For its services under the Advisory Agreement, the Adviser receives an
investment advisory fee, which is computed daily and paid monthly, at an annual
rate equal to 0.35% of the Portfolio's average daily net assets on an
annualized basis for the Portfolio's then-current fiscal year. The Adviser may
voluntarily agree to waive a portion of its investment advisory fee.
For the fiscal years ended December 31, 1997, 1998 and 1999 the fees paid
to Citibank under the Advisory Agreement with respect to the Portfolio were
$196,529 (of which $5,466 was voluntarily waived), $235,934 and $228,067,
respectively.
Pursuant to an administrative services agreement (the "Administrative
Services Agreement"), SFG (in its capacity under the Administrative Services
Agreement, the "Administrator") provides the Trust with general office
facilities and supervises the overall administration of the Trust, including,
among other responsibilities, the negotiation of contracts and fees with, and
the monitoring of performance and billings of, the Trust's independent
contractors and agents; the preparation and filing of all documents required
for compliance by the Trust with applicable laws and regulations; and arranging
for the maintenance of books and records of the Trust. The Administrative
Services Agreement with SFG continues in effect if such continuance is
specifically approved at least annually by the Board of Trustees or by a vote
of a majority of the outstanding voting securities of the Trust and, in either
<PAGE>
case, by a majority of the Trustees who are not parties to the Administrative
Services Agreement or interested persons of any such party. The Administrator
provides persons satisfactory to the Board of Trustees to serve as Trustees and
officers of the Trust. Such Trustees and officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
the Administrator or its affiliates.
For these services, SFG receives fees accrued daily and paid monthly of
0.05% of the assets of the Portfolio, on an annualized basis for the
Portfolio's then-current fiscal year. However, SFG has voluntarily agreed to
waive a portion of the fees payable to it as necessary to maintain the
projected rate of total operating expenses.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Trust
paid the Administrator $28,076 (of which $27,174 was voluntarily waived),
$33,706 (all of which was voluntarily waived) and $32,582 (all of which was
voluntarily waived), respectively, under the Administrative Services Agreement
with respect to the Portfolio.
The Administrative Services Agreement provides that SFG may render
administrative services to others. The Administrative Services Agreement
terminates automatically if it is assigned and may be terminated without
penalty by vote of a majority of the outstanding voting securities of the Trust
or by either party on not more than 60 days' nor less than 30 days' written
notice. The Administrative Services Agreement also provides that neither SFG,
as the Administrator, nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration or
management of the Trust, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Administrative
Services Agreement.
SFG is a wholly-owned subsidiary of Signature Financial Group, Inc. SFG is
a company organized under the laws of the Cayman Islands. Its principal place
of business is in George Town, Grand Cayman, British West Indies.
Pursuant to a sub-administrative services agreement, Citibank performs
such sub-administrative duties for the Trust as from time to time are agreed
upon by Citibank and SFG. Citibank performs such sub-administrative duties in a
manner consistent with the Operating Policies and Procedures of the Trust.
Citibank's sub-administrative duties may include providing equipment and
clerical personnel necessary for maintaining the Trust's organization,
participation in the preparation of documents required for compliance by the
Trust with applicable laws and regulations, the preparation of certain
documents in connection with meetings of Trustees and investors, and other
functions which would otherwise be performed by the Administrator. For
performing such sub-administrative services, Citibank receives compensation as
from time to time is agreed upon by SFG, not in excess of the amount paid to
SFG for its services under the Administrative Services Agreement with the
Trust. All such compensation is paid by SFG.
<PAGE>
The Trust has adopted an administrative services plan (the "Administrative
Plan") which provides that the Trust may obtain the services of an
administrator, a transfer agent and a custodian, and may enter into agreements
providing for the payment of fees for such services. Under the Administrative
Plan, the administrative services fee payable to the Administrator from the
Portfolio may not exceed 0.05% of the Portfolio's average daily net assets on
an annualized basis for its then-current fiscal year.
The Administrative Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trustees and a majority of the Trustees who are not "interested persons" of the
Portfolio and who have no direct or indirect financial interest in the
operation of the Administrative Plan or in any agreement related to such Plan
("Qualified Trustees"). The Administrative Plan requires that the Trust provide
to the Board of Trustees and the Board of Trustees review, at least quarterly,
a written report of the amounts expended (and the purposes therefor) under the
Administrative Plan. The Administrative Plan may be terminated at any time by a
vote of a majority of the Qualified Trustees or, with respect to the Portfolio,
by a vote of a majority of the outstanding voting securities of the Portfolio.
The Administrative Plan may not be amended to increase materially the amount of
permitted expenses thereunder without the approval of a majority of the
outstanding voting securities of the Trust and may not be materially amended in
any case without a vote of the majority of both the Trustees and the Qualified
Trustees.
In addition to amounts payable under the Advisory Agreement and the
Administrative Services Plan, the Portfolio is responsible for its own
expenses, including, among other things, the costs of securities transactions,
the compensation of Trustees that are not affiliated with Citibank or SFG,
government fees, taxes, accounting and legal fees, expenses of communicating
with investors, interest expense, and insurance premiums. For the fiscal year
ended December 31, 1999, the Portfolio's total expenses were 0.35% of its
average daily net assets for that fiscal year.
The Trust, on behalf of the Portfolio, has entered into a Custodian
Agreement with State Street Bank and Trust Company ("State Street") pursuant to
which State Street acts as custodian to the Portfolio. The Trust, on behalf of
the Portfolio, has also entered into a Fund Accounting Agreement with State
Street Cayman Trust Company, Ltd. ("State Street Cayman") pursuant to which
State Street Cayman performs 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.
PricewaterhouseCoopers LLP are the chartered accountants for the Trust,
providing audit services, and assistance and consultation with respect to the
preparation of filings with the SEC. The address of PricewaterhouseCoopers LLP
is Suite 3000, Box 82, Royal Trust Towers, Toronto Dominion Center, Toronto,
Ontario, Canada M5K 1G8.
<PAGE>
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel to
the Trust.
The Portfolio, the Adviser and CFBDS, Inc., the Portfolio's placement
agent, each have adopted a code of ethics pursuant to Rule 17j-1 under the 1940
Act. Each code of ethics permits personnel subject to such code to invest in
securities, including securities that may be purchased or held by the
Portfolio. However, the codes of ethics contain provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Portfolio. Of course, there can
be no assurance that the codes of ethics will be effective in identifying and
addressing all conflicts of interest relating to personal securities
transactions.
Item 16. Brokerage Allocation and Other Practices.
The Trust trades securities for the Portfolio if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Portfolio's investment objectives. Changes in the Portfolio'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 Portfolio are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. The portfolio manager may serve other
clients of the Adviser in a similar capacity.
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 Portfolio and/or the other
accounts over which Citibank or its affiliates exercise investment discretion.
Citibank is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if Citibank determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities which Citibank and its affiliates have with
respect to accounts over which they exercise investment discretion.
The investment advisory fee that the Portfolio pays to the Adviser will
not be reduced as a consequence of the Adviser's receipt of brokerage and
research services. While such services are not expected to reduce the expenses
of the Adviser, the Adviser would, through the use of the services, avoid the
additional expenses which would be incurred if it should attempt to develop
comparable information through its own staff or obtain such services
independently.
In certain instances there may be securities that are suitable as an
investment for the Portfolio as well as for one or more of the Adviser's other
<PAGE>
clients. Investment decisions for the Portfolio and for the Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable
for the investment objectives of more than one client. When two or more clients
are simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable for the security for the
Portfolio. When purchases or sales of the same security for the Portfolio and
for other portfolios managed by the Adviser occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large volume purchases or sales.
For the fiscal years ended December 31, 1997, 1998 and 1999 the Portfolio
paid no brokerage commissions.
Item 17. Capital Stock and Other Securities.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Trust and to establish series, each of which shall
be a subtrust, the beneficial interests in which shall be separate and distinct
from the beneficial interests in any other series. The Portfolio is a series of
the Trust. Investors in the Portfolio are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of the Portfolio. Upon
liquidation or dissolution of the Portfolio, investors in the Portfolio are
entitled to share pro rata in the Portfolio's net assets available for
distribution to its investors. Interests in the Portfolio have no preference,
pre-emptive, conversion or similar rights and are fully paid and
non-assessable, except as set forth below. Interests in the Portfolio may not
be transferred.
Each investor is entitled to a vote in proportion to its percentage of the
aggregate beneficial interests in the Portfolio. Investors in the Portfolio do
not have cumulative voting rights, and investors holding more than 50% of the
aggregate beneficial interests in the Trust may elect all of the Trustees if
they choose to do so and in such event the other investors in the Trust would
not be able to elect any Trustee. The Trust is not required to hold, and has no
current intention of holding, annual meetings of investors but the Trust will
hold special meetings of investors when it is required to do so by law, or in
the judgment of the Trustees it is necessary or desirable to submit matters for
an investor vote.
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by a vote of a majority, as
defined in the 1940 Act, of the holders of the Trust's outstanding voting
securities voting as a single class, or of the affected series of the Trust, as
the case may be, or if authorized by an instrument in writing without a
meeting, consented to by holders of not less than a majority of the interests
of the affected series. However, if the Trust or the affected series is the
<PAGE>
surviving entity of the merger, consolidation or sale of assets, no vote of
interest holders is required. Any series of the Trust may be dissolved (i) by
the affirmative vote of not less than two-thirds of the outstanding beneficial
interests in such series at any meeting of holders of beneficial interests or
by an instrument in writing signed by a majority of the Trustees and consented
to by not less than two-thirds of the outstanding beneficial interests, (ii) by
the Trustees by written notice to holders of the beneficial interests in the
series or (iii) upon the bankruptcy or expulsion of a holder of a beneficial
interest in the series, unless the remaining holders of beneficial interests,
by majority vote, agree to continue the series. The Trust may be dissolved by
action of the Trustees upon the dissolution of the last remaining series.
The Portfolio is a series of the Trust, organized as a trust under the
laws of the State of New York. Investors in the Portfolio are personally liable
for its obligations and liabilities, subject, however, to indemnification by
the Portfolio in the event that there is imposed upon an investor a greater
portion of the liabilities and obligations of the Portfolio than its
proportionate beneficial interest in the Portfolio. The Declaration of Trust
also provides that the Portfolio shall maintain appropriate insurance (e.g.,
fidelity bonding and errors and omissions insurance) for the protection of the
Portfolio, its investors, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of an investor incurring
financial loss on account of investor liability is limited to circumstances in
which both inadequate insurance existed and the Portfolio itself was unable to
meet its obligations. It is not expected that the liabilities of the Portfolio
would ever exceed its assets.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually 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.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each business day. As of the close of regular trading on the New
York Stock Exchange (the "Exchange"), on days during which the Exchange is open
for trading, 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, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals, which are to be effected on that day, are then effected.
Thereafter, the investor's percentage of the aggregate beneficial interests in
the Portfolio is 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 same time 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 following business day of the Portfolio.
<PAGE>
Item 18. Purchase, Redemption and Pricing of Securities.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act. Investments in the Portfolio may
only be made by investment companies, common or commingled trust funds or
similar organizations or entities which are "accredited investors" within the
meaning of Regulation D under the Securities Act. This Registration Statement
does not constitute an offer to sell, or the solicitation of an offer to buy,
any "security" within the meaning of the Securities Act.
The net asset value of the Portfolio (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued)
is determined each day during which the New York Stock Exchange is open for
trading ("Business Day"). As of the date of this Registration Statement, 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 the Portfolio is made once each day as of the close of regular trading on
the Exchange (normally 4:00 p.m. Eastern time). As set forth in more detail
below, purchases and withdrawals will be effected at the time of determination
of net asset value next following the receipt of any purchase or withdrawal
order.
For the purpose of calculating the Portfolio's net asset value, bonds and
other fixed income securities held for the Portfolio (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 that 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.
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.
Interest income on long-term obligations held for the Portfolio is
determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued less amortization of
premium.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption price of beneficial interests in the Portfolio,
<PAGE>
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 beneficial interests being sold. If a holder of beneficial interests
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 beneficial interests in the Portfolio more than seven days during
any period when (a) trading in the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the
SEC, exists making disposal of the Portfolio's investments or determination of
its net asset value not reasonably practicable; (b) the New York Stock Exchange
is closed (other than customary weekend and holiday closings); or (c) the SEC
has by order permitted such suspension.
Item 19. Taxation of the Portfolio.
The Trust is organized as a trust under New York law. The Trust has
determined that the Portfolio is properly treated as a separate partnership for
U.S. federal and New York State income tax purposes. Accordingly, under those
tax laws, the Portfolio is not subject to any income tax. The Portfolio's
taxable year ends December 31. Although the Portfolio is not subject to U.S.
federal income tax, it files appropriate U.S. federal income tax returns.
Each investor in the Portfolio must take into account its share of the
Portfolio's ordinary income, expenses, capital gains and losses, credits and
other items in determining its income tax liability. The determination of such
share is made in accordance with the governing instruments of the Trust and the
U.S. Internal Revenue Code of 1986, as amended (the "Code"), and regulations
promulgated thereunder. Withdrawals by an investor are generally not taxable.
However, to the extent the cash proceeds of any withdrawal exceed an investor's
adjusted tax basis in its partnership interest in the Portfolio, the investor
will generally realize gain for U.S. federal income tax purposes. If, upon a
complete withdrawal (i.e., a redemption of its entire interest in the
Portfolio), the investor's adjusted tax basis in its partnership interest in
the Portfolio exceeds the proceeds of the withdrawal, the investor will
generally realize a loss for federal income tax purposes. An investor's
adjusted tax basis in its partnership interest in the Portfolio will generally
be the aggregate price paid therefor, increased by the amounts of its
distributive shares of items of realized net income and gain (including income,
if any, exempt from U.S. Federal income tax), and reduced, but not below zero,
by the amounts of its distributive shares of items of net loss and the amounts
of any distributions received by the investor. This discussion does not address
any distributions by the Portfolio in kind (i.e., any distributions of readily
marketable securities or other non-cash property), which will be subject to
special tax rules and may have consequences different from those described in
this paragraph.
<PAGE>
The Trust believes that, in the case of an investor in the Portfolio that
seeks to qualify as a regulated investment company ("RIC") under the Code, the
investor should be treated for U.S. federal income tax purposes as an owner of
an undivided interest in the assets and operations of the Portfolio, and
accordingly should be deemed to own a proportionate share of each of the assets
of the Portfolio and be entitled to treat as earned by it the portion of the
Portfolio's gross income attributable to that share. Each investor should
consult its tax advisers regarding whether, in light of its particular tax
status and any special tax rules applicable to it, this approach applies to its
investment in the Portfolio, or whether the Portfolio should be treated, as to
it, as a separate entity as to which the investor has no direct interest in
Portfolio assets or operations.
In order to enable an investor in the Portfolio that is otherwise eligible
to qualify as a RIC under the Code to so qualify, the Trust intends that the
Portfolio will satisfy the requirements of Subchapter M of the Code relating to
the nature of the Portfolio's gross income and the composition
(diversification) of the Portfolio's assets as if those requirements were
directly applicable to the Portfolio and to allocate and permit withdrawals of
its net investment income and any net realized capital gains in a manner that
will enable an investor that is a RIC to comply with the qualification
requirements imposed by Subchapter M of the Code.
Any investment in zero coupon bonds, certain stripped securities, and
certain securities purchased at a market discount will cause the Portfolio to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to enable an investor that is a RIC to distribute this
income and avoid a tax on the investor, the Portfolio may be required to
liquidate Portfolio securities that it might otherwise have continued to hold.
The Portfolio's short sales "against the box" and transactions in futures
contracts and options will be subject to special tax rules that may affect the
amount, timing, and character of Portfolio income and distributions to
investors. For example, certain positions held by the Portfolio on the last
business day of each taxable year will be marked to market (i.e., treated as if
sold) 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 Portfolio that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute "straddles,"
and may be subject to special tax rules that would cause deferral of Portfolio
losses, adjustments in the holding periods of Portfolio 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 Portfolio
will limit its activities in futures contracts and options to the extent
necessary to enable any investor that is a RIC to meet the requirements of
Subchapter M of the Code.
Portfolio income allocated to investors that is derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities (but generally not from capital gains realized upon the
disposition of such obligations) may be exempt from state and local taxes. The
<PAGE>
Portfolio intends to advise investors of the extent, if any, to which its
income consists of such interest. Investors are urged to consult their tax
advisers regarding the possible exclusion of such portion of the income
allocated to them by the Portfolio for state and local income tax.
There are certain tax issues which will be relevant to only certain
investors, specifically, investors which are segregated asset accounts and
investors who contribute assets other than cash to the Portfolio. It is
intended that such segregated asset accounts will be able to satisfy
diversification requirements applicable to them and that such contributions of
assets will not be taxable provided certain requirements are met. Such
investors are advised to consult their own tax advisers as to the tax
consequences of an investment in the Portfolio.
The Trust intends to conduct its activities and those of the Portfolio so
that they will not be deemed to be engaged in the conduct of a U.S. trade or
business for U.S. federal income tax purposes. Therefore, it is not anticipated
that an investor in the Portfolio, other than an investor which would be deemed
a "U.S. person" for U.S. federal income tax purposes, will be subject to U.S.
federal income taxation (other than a 30% withholding tax on dividends and
certain interest income) solely by reason of its investment in the Portfolio.
There can be no assurance that the U.S. Internal Revenue Service may not
challenge the above conclusions or take other positions that, if successful,
might result in the payment of U.S. federal income taxes by investors in the
Portfolio.
The above discussion does not address the special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions, or the state, local, or non-U.S. tax laws that may
be applicable to certain investors. Investors should consult their own tax
advisers with respect to the special tax rules that may apply in their
particular situations, as well as the state, local, or non-U.S. tax
consequences to them of investing in the Portfolio.
Item 20. Underwriters.
The exclusive placement agent for the Portfolio is CFBDS, Inc., which
receives no compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
Item 21. Calculation of Performance Data.
Not applicable.
Item 22. Financial Statements.
The financial statements contained in the Annual Report of the Portfolio,
as filed with the Securities and Exchange Commission on March 1, 2000
(Accession Number 0000930413-00-000420), for the fiscal year ended December 31,
1999 are incorporated by reference into this Part B.
<PAGE>
A copy of the Annual Report of the Portfolio accompanies this Part B.
<PAGE>
PART C
Item 23. Exhibits.
*** a(1) The Declaration of Trust of the Trust
*, *** and a(2) Amendments to the Declaration of Trust of the Trust
filed
herewith
*** b By-laws of the Trust
*** d Investment Advisory Agreement between the Registrant
and Citibank, N.A., as investment adviser
*** e Placement Agency Agreement between the Registrant and
CFBDS, Inc. (formerly known as The Landmark Funds
Broker-Dealer Services, Inc.), as exclusive placement
agent
** g Custodian Contract between the Registrant and State
Street Bank and Trust Company, as custodian
*** h(1) Administrative Services Agreement between the
Registrant and Signature Financial Group (Cayman) Ltd.
("SFG"), as administrator
*** h(2) Amended and Restated Administrative Services Plan of
the Registrant
** h(3) Accounting Services Agreement between the Registrant
and State Street Cayman Trust Company, Ltd.
p(1) Code of Ethics for the Registrant
p(2) Code of Ethics for CFBDS, Inc.
- -------------------
* Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form N-1A of the Registrant relating to Government Income
Portfolio File No. 811-8438, filed April 29, 1996.
<PAGE>
**Incorporated herein by reference to Amendment No. 3 to the Registration
Statement on Form N-1A of the Registrant relating to Government Income
Portfolio File No. 811-8438, filed March 2, 1998.
***Incorporated herein by reference to Amendment No. 4 to the Registration
Statement on Form N-1A of the Registrant relating to Government Income
Portfolio File No. 811-8438, filed April 29, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to Article V of the Declaration of Trust
(incorporated herein by reference as Exhibits a(1) and a(2) to this
Registration Statement).
The Trustees and officers of the Trust and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940,
as amended.
Item 26. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, which is,
in turn, a wholly owned subsidiary of Citigroup Inc. Citibank also serves as
investment adviser to the following registered investment companies (or series
thereof): Asset Allocation Portfolios (Large Cap Value Portfolio, Small Cap
Value Portfolio, International Portfolio and Foreign Bond Portfolio), The
Premium Portfolios (Large Cap Growth Portfolio, Small Cap Growth Portfolio,
High Yield Portfolio, U.S. Fixed Income Portfolio and International Equity
Portfolio), Tax Free Reserves Portfolio, U.S. Treasury Reserves Portfolio, Cash
Reserves Portfolio, CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves and
CitiFundsSM California Tax Free Reserves), CitiFundsSM Tax Free Income Trust
(CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM New York Tax Free
Income Portfolio and CitiFundsSM California Tax Free Income Portfolio),
CitiFundsSM Institutional Trust (CitiFundsSM Institutional Cash Reserves) and
Variable Annuity Portfolios (CitiSelect VIP Folio 200 Conservative, CitiSelect
<PAGE>
VIP Folio 300 Balanced, CitiSelect VIP Folio 400 Growth, CitiSelect VIP Folio
500 Growth Plus and CitiFundsSM Small Cap Growth VIP Portfolio). Citibank and
its affiliates manage assets in excess of $351 billion worldwide. The principal
place of business of Citibank is located at 399 Park Avenue, New York, New York
10043.
Victor J. Menezes is the Chairman and a Director of Citibank. William R.
Rhodes and H. Onno Ruding are Vice Chairmen and Directors of Citibank. The
other Directors of Citibank are Paul J. Collins, Vice Chairman of Citigroup
Inc. and Robert I. Lipp, Chairman and Chief Executive Officer of The Travelers
Insurance Group Inc. and of Travelers Property Casualty Corp.
In addition, the following persons have the affiliations indicated:
Paul J. Collins Director, Kimberly-Clark Corporation
Director, Nokia Corporation
Robert I. Lipp Chairman, Chief Executive Officer and President,
Travelers Property Casualty Corp.
William R. Rhodes Director, Private Export Funding
Corporation
Director, Conoco, Inc.
H. Onno Ruding Supervisory Director, Amsterdamsch
Trustees Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated
Item 27. Principal Underwriters.
(a) CFBDS, the Registrant's placement agent, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Growth Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash
Reserves, CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium
Liquid Reserves, CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM
Institutional Liquid Reserves, CitiFundsSM Institutional Cash Reserves,
CitiFundsSM Tax Free Reserves, CitiFundsSM Institutional Tax Free Reserves,
CitiFundsSM California Tax Free Reserves, CitiFundsSM Connecticut Tax Free
Reserves, CitiFundsSM New York Tax Free Reserves, CitiFundsSM Intermediate
Income Portfolio, CitiFundsSM Short-Term U.S. Government Income Portfolio,
CitiFundsSM New York Tax Free Income Portfolio, CitiFundsSM National Tax Free
Income Portfolio, CitiFundsSM California Tax Free Income Portfolio, CitiFundsSM
Small Cap Value Portfolio, CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM
Small Cap Growth Portfolio, CitiFundsSM Balanced Portfolio, CitiSelect Folio
100 Income, CitiSelect Folio 200 Conservative, CitiSelect Folio 300 Balanced,
<PAGE>
CitiSelect Folio 400 Growth, CitiSelect Folio 500 Growth Plus, CitiSelect VIP
Folio 200 Conservative, CitiSelect VIP Folio 300 Balanced, CitiSelect VIP Folio
400 Growth, CitiSelect VIP Folio 500 Growth Plus and CitiFundsSM Small Cap
Growth VIP Portfolio. CFBDS is also the placement agent for Large Cap Growth
Portfolio, Small Cap Growth Portfolio, High Yield Portfolio, U.S. Fixed Income
Portfolio, International Equity Portfolio, Large Cap Value Portfolio, Small Cap
Value Portfolio, International Portfolio, Foreign Bond Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio. CFBDS also serves as the distributor for the following funds: The
Travelers Fund U for Variable Annuities, The Travelers Fund VA for Variable
Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD
II for Variable Annuities, The Travelers Fund BD III for Variable Annuities,
The Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for
Variable Annuities, The Travelers Fund ABD II for Variable Annuities, The
Travelers Separate Account PF for Variable Annuities, The Travelers Separate
Account PF II for Variable Annuities, The Travelers Separate Account QP for
Variable Annuities, The Travelers Separate Account TM for Variable Annuities,
The Travelers Separate Account TM II for Variable Annuities, The Travelers
Separate Account Five for Variable Annuities, The Travelers Separate Account
Six for Variable Annuities, The Travelers Separate Account Seven for Variable
Annuities, The Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL II for Variable
Annuities, The Travelers Variable Life Insurance Separate Account One, The
Travelers Variable Life Insurance Separate Account Two, The Travelers Variable
Life Insurance Separate Account Three, The Travelers Variable Life Insurance
Separate Account Four, The Travelers Separate Account MGA, The Travelers
Separate Account MGA II, The Travelers Growth and Income Stock Account for
Variable Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The Travelers Timed
Growth and Income Stock Account for Variable Annuities, The Travelers Timed
Short-Term Bond Account for Variable Annuities, The Travelers Timed Aggressive
Stock Account for Variable Annuities, The Travelers Timed Bond Account for
Variable Annuities, Small Cap Fund, Government Fund, Growth Fund, Growth and
Income Fund, International Equity Fund, Mid Cap Fund, Municipal Bond Fund,
Select Small Cap Portfolio, Select Government Portfolio, Select Growth
Portfolio, Select Growth and Income Portfolio, Select Mid Cap Portfolio,
Balanced Investments, Emerging Markets Equity Investments, Government Money
Investments, High Yield Investments, Intermediate Fixed Income Investments,
International Equity Investments, International Fixed Income Investments, Large
Capitalization Growth Investments, Large Capitalization Value Equity
Investments, Long- Term Bond Investments, Mortgage Backed Investments,
Municipal Bond Investments, S&P 500 Index Investments, Small Capitalization
Growth Investments, Small Capitalization Value Equity Investments, Multi-Sector
Fixed Income Investments, Multi-Strategy Market Neutral Investments,
<PAGE>
Appreciation Portfolio, Diversified Strategic Income Portfolio, Emerging Growth
Portfolio, Equity Income Portfolio, Equity Index Portfolio, Growth & Income
Portfolio, Intermediate High Grade Portfolio, International Equity Portfolio,
Money Market Portfolio, Total Return Portfolio, Smith Barney Adjustable Rate
Government Income Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund Inc., Smith Barney Arizona Municipals Fund Inc., Smith Barney
California Municipals Fund Inc., Balanced Portfolio, Conservative Portfolio,
Growth Portfolio, High Growth Portfolio, Income Portfolio, Global Portfolio,
Select Balanced Portfolio, Select Conservative Portfolio, Select Growth
Portfolio, Select High Growth Portfolio, Select Income Portfolio, Concert
Social Awareness Fund, Smith Barney Large Cap Blend Fund, Smith Barney
Fundamental Value Fund Inc., Large Cap Value Fund, Short-Term High Grade Bond
Fund, U.S. Government Securities Fund, Smith Barney Balanced Fund, Smith Barney
Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney
Exchange Reserve Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund, Smith Barney Premium Total Return Fund, Smith Barney Total
Return Bond Fund, Cash Portfolio, Government Portfolio, Municipal Portfolio,
Concert Peachtree Growth Fund, Smith Barney Contrarian Fund, Smith Barney
Government Securities Fund, Smith Barney Hansberger Global Small Cap Value
Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Investment Grade
Bond Fund, Smith Barney Premier Selections Fund, Smith Barney Small Cap Value
Fund, Smith Barney Small Cap Growth Fund, Smith Barney Intermediate Maturity
California Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund, Smith Barney Large Capitalization Growth Fund, Smith Barney
S&P 500 Index Fund, Smith Barney Mid Cap Blend Fund, Smith Barney EAFE Index
Fund, Smith Barney US 5000 Index Fund, Smith Barney Managed Governments Fund
Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts
Municipals Fund, Cash Portfolio, Government Portfolio, Retirement Portfolio,
California Money Market Portfolio, Florida Portfolio, Georgia Portfolio,
Limited Term Portfolio, National Portfolio, Massachusetts Money Market
Portfolio, New York Money Market Portfolio, New York Portfolio, Pennsylvania
Portfolio, Smith Barney Municipal Money Market Fund, Inc., Smith Barney Natural
Resources Fund Inc., Smith Barney Financial Services Fund, Smith Barney Health
Sciences Fund, Smith Barney Technology Fund, Smith Barney New Jersey Municipals
Fund Inc., Smith Barney Oregon Municipals Fund, Zeros Plus Emerging Growth
Series 2000, Smith Barney Security and Growth Fund, Smith Barney Small Cap
Blend Fund, Inc., Smith Barney Telecommunications Income Fund, Income and
Growth Portfolio, Reserve Account Portfolio, U.S. Government/High Quality
Securities Portfolio, Emerging Markets Portfolio, European Portfolio, Global
Government Bond Portfolio, International Equity Portfolio, Pacific Portfolio,
AIM Capital Appreciation Portfolio, Smith Aggressive Growth Portfolio, Smith
Mid Cap Portfolio, Alliance Growth Portfolio, INVESCO Global Strategic Income
Portfolio, MFS Total Return Portfolio, Putnam Diversified Income Portfolio,
Smith Barney High Income Portfolio, Smith Barney Large Cap Value Portfolio,
<PAGE>
Smith Barney International Equity Portfolio, Smith Barney Large Capitalization
Growth Portfolio, Smith Barney Money Market Portfolio, Smith Barney Pacific
Basin Portfolio, Travelers Managed Income Portfolio, Van Kampen Enterprise
Portfolio, Centurion U.S. Equity Fund, Centurion International Equity Fund,
Centurion U.S. Contra Fund, Centurion International Contra Fund, Global
High-Yield Bond Fund, International Equity Fund, Emerging Opportunities Fund,
Core Equity Fund, Long-Term Bond Fund, Global Dimensions Fund L.P., Citicorp
Private Equity L.P., AIM V.I. Capital Appreciation Fund, AIM V.I. Government
Series Fund, AIM V.I. Growth Fund, AIM V.I. International Equity Fund, AIM V.I.
Value Fund, Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio,
Fidelity VIP Equity Income Portfolio, Fidelity VIP Overseas Portfolio, Fidelity
VIP II Contrafund Portfolio, Fidelity VIP II Index 500 Portfolio, MFS World
Government Series, MFS Money Market Series, MFS Bond Series, MFS Total Return
Series, MFS Research Series, MFS Emerging Growth Series, Salomon Brothers
Institutional Money Market Fund, Salomon Brothers Cash Management Fund, Salomon
Brothers New York Municipal Money Market Fund, Salomon Brothers National
Intermediate Municipal Fund, Salomon Brothers U.S. Government Income Fund,
Salomon Brothers High Yield Bond Fund, Salomon Brothers International Equity
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Large Cap Growth
Fund, Salomon Brothers Balanced Fund, Salomon Brothers Asia Growth Fund,
Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Value Fund Inc,
Salomon Brothers Opportunity Fund Inc, Salomon Brothers Institutional High
Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund,
Salomon Brothers Variable Investors Fund, Salomon Brothers Variable Capital
Fund, Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable
High Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon
Brothers Variable U.S. Government Income Fund, Salomon Brothers Variable Asia
Growth Fund, and Salomon Brothers Variable Small Cap Growth Fund.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS, Inc. is incorporated by reference to Schedule A of Form
BD filed by CFBDS, Inc. pursuant to the Securities and Exchange Act of 1934
(File No. 8-32417).
(c) Not applicable.
Item 28. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Name Address
Signature Financial Group Elizabethan Square, George Town,
(Cayman) Ltd. Grand Cayman, Cayman Islands, BWI
(administrator)
State Street Bank and Trust Company 225 Franklin Street
(custodian) Boston, MA 02110
State Street Cayman Trust P.O. Box 2508 GT
Company, Ltd. Grand Cayman
(accounting services agent) British West Indies
Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043
<PAGE>
CFBDS, Inc. c/o Signature Financial Group
(placement agent) (Cayman) Ltd.
Elizabethan Square
George Town, Grand Cayman
Cayman Islands BWI
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City and State of New York, on the 27th day of April, 2000.
THE PREMIUM PORTFOLIOS
on behalf of Government Income Portfolio
By: Susan Jakuboski
---------------------------------
Susan Jakuboski
Assistant Secretary of
The Premium Portfolios
<PAGE>
EXHIBIT INDEX
Exhibit No.: Description:
a(2) Amendments to the Declaration of Trust of the Trust
p(1) Code of Ethics for the Registrant
p(2) Code of Ethics for CFBDS, Inc.
Exhibit a(2)
THE PREMIUM PORTFOLIOS
AMENDMENT TO
DECLARATION OF TRUST
The undersigned, constituting a majority of the Trustees of The Premium
Portfolios (the "Trust"), a trust organized under the laws of the State of New
York, pursuant to the Trust's Declaration of Trust dated as of September 13,
1993, as amended (the "Declaration"), do hereby amend Article III of the
Declaration to provide that Section 3.12 of the Declaration shall not apply
from and after January 1, 1999.
Elliott J. Berv Philip W. Coolidge
- ------------------------------- -----------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually
Mark T. Finn C. Oscar Morong, Jr.
- ------------------------------- -----------------------------------
MARK T. FINN C. OSCAR MORONG, JR.
As Trustee and Not Individually As Trustee and Not Individually
Walter E. Robb, III E. Kirby Warren
- ------------------------------- -----------------------------------
WALTER E. ROBB, III E. KIRBY WARREN
As Trustee and Not Individually As Trustee and Not Individually
<PAGE>
THE PREMIUM PORTFOLIOS
AMENDMENT TO
DECLARATION OF TRUST
The undersigned, constituting a majority of the Trustees of The Premium
Portfolios (the "Trust"), a trust organized under the laws of the State of New
York, pursuant to a Declaration of Trust dated September 13, 1993, as amended
(the "Declaration"), subject to approval by the investors in Balanced
Portfolio, a series of the Trust, in accordance with the Declaration, do hereby
amend Section 3.2 of the Declaration as follows:
By deleting paragraph (d) of Section 3.2 of the Declaration and replacing
it in its entirety with the following:
(d) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without
any requirement of approval by investors to either invest all or a portion
of the Trust Property of each Series of the Trust (other than the Series
designated as Government Income Portfolio, International Equity Portfolio
and Emerging Asian Markets Equity Portfolio), or sell all or a portion of
such Trust Property and invest the proceeds of such sales, in one or more
investment companies to the extent not prohibited by the 1940 Act and
exemptive orders granted under such Act.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the 26th day of May, 1999.
Elliott J. Berv Philip W. Coolidge
- ------------------------------- -----------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually
Mark T. Finn C. Oscar Morong, Jr.
- ------------------------------- -----------------------------------
MARK T. FINN C. OSCAR MORONG, JR.
As Trustee and Not Individually As Trustee and Not Individually
Walter E. Robb, III E. Kirby Warren
- ------------------------------- -----------------------------------
WALTER E. ROBB, III E. KIRBY WARREN
As Trustee and Not Individually As Trustee and Not Individually
Exhibit p(1)
AMENDED AND RESTATED
CODE OF ETHICS
FEBRUARY 4, 2000
This Amended and Restated Code of Ethics has been duly adopted by the
Board of Trustees, including a majority of the Disinterested Trustees (as
defined below in this Code of Ethics), of each investment company listed in
Appendix I hereto (each, an "Investment Company" and collectively, the
"Investment Companies"), pursuant to Rule 17j-1 under the Investment Company
Act of 1940, as amended (the "1940 Act").
I. RULES APPLICABLE TO ACCESS PERSONS
A. Definitions
1. "Access Person" means
(i) any trustee, officer or Advisory Person (as defined below) of any
Investment Company or investment adviser thereof, or
(ii) any director or officer of a principal underwriter of an Investment
Company who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or
sale of securities for the Investment Company for which the
principal underwriter so acts or whose functions or duties as part
of the ordinary course of his or her business relate to the making
of any recommendation to such Investment Company regarding the
purchase or sale of securities, or
(iii) notwithstanding the provisions of clause (i) above, where the
investment adviser is primarily engaged in a business or businesses
other than advising registered investment companies or other
advisory clients (as determined in accordance with Rule 17j-1 under
the 1940 Act), any director, officer or Advisory Person of the
investment adviser who, with respect to any Investment Company,
makes any recommendation, participates in the determination of
which recommendation shall be made, or whose principal function or
duties relate to the determination of which recommendation shall be
made to any Investment Company, or who, in connection with his or
her duties, obtains any information concerning securities
recommendations being made by such investment adviser to any
Investment Company.
2. An "Advisory Person" is any employee of an Investment Company or of the
Investment Company's investment adviser (or of any company in a control
relationship to the Investment Company or its investment adviser) who, in
<PAGE>
connection with his or her regular functions or duties, makes, participates in
or obtains information regarding the purchase or sale of securities by an
Investment Company or whose functions relate to any recommendations with
respect to such purchases or sales, and any natural person in a control
relationship with the Investment Company or adviser who obtains information
regarding the purchase or sale of securities by the Investment Company.
3. "Beneficial Ownership" shall be interpreted subject to the provisions
of Rule 16a-1(a)(exclusive of Section (a)(1) of such Rule) of the Securities
Exchange Act of 1934, as amended, but without regard to any provision in such
Rule limiting its application only to equity securities.
4. "Control" shall have the meaning set forth in Section 2(a)(9) of the
1940 Act.
5. "Disinterested Trustee" of an Investment Company means a Trustee who is
not an "interested person" of that Investment Company within the meaning of
Section 2(a)(19) of the 1940 Act. An "interested person" of an Investment
Company includes any person who is a trustee, director, officer, employee or
owner of 5% or more of the outstanding stock of the investment adviser or
principal underwriter, if any, of such Investment Company. Affiliates of
brokers or dealers are also "interested persons" of such Investment Company,
except as provided in Rule 2a19-1 under the 1940 Act.
6. "Portfolio Manager" means the person or persons who have or share
direct responsibility and authority to make investment decisions affecting an
Investment Company.
7. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or sale of
a future or index on a security or option thereon.
8. "Review Officer" means, with respect to an Investment Company, the
Secretary of such Investment Company or such other person as may be designated
by the Board of Trustees of such Investment Company, except that with respect
to Advisory Persons who are employees of the investment adviser of an
Investment Company, Review Officer shall mean such person or persons as such
investment adviser shall designate from time to time.
9. "Security" shall have the meaning as set forth in Section 2(a)(36) of
the 1940 Act, except that it shall not include:
(i) direct obligations of the Government of the United States;
(ii) bankers acceptances, bank certificates of deposit, commercial paper
and high quality short-term debt instruments (meaning instruments
having a maturity at issuance of less than 366 days and that are
rated in one of the two highest rating categories by a Nationally
Recognized Statistical Rating Organization), including repurchase
agreements; and
(iii) shares of registered open-end investment companies.
<PAGE>
10. A security is "being considered for purchase or sale" when, among
other circumstances, the assigned analyst or Portfolio Manager is seriously
considering a change in the rating of the security.
11. Nothwithstanding any other provision hereof, the terms Access Person,
Advisory Person and Portfolio Manager shall not include any person who is
subject to provisions of a code of ethics adopted by an investment adviser or
principal underwriter of an Investment Company in compliance with Rule 17j-1
under the 1940 Act and approved by the Board of Trustees of each Investment
Company, so long as the investment adviser or principal underwriter complies
with Section V of this Code.
B. Statement of General Principles on Personal Investment Activities
Personal investment activities engaged in by an Access Person shall be
subject to the following general principles:
1. No personal investment activities shall conflict with the duty to place
the interests of the Investment Company before any personal interests;
2. All personal investment activities shall be conducted consistent with
the requirements and standards set forth in this Code and in such a manner as
to avoid any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility; and
3. No Access Person shall, directly or indirectly, otherwise take
inappropriate advantage of his or her position with the Investment Company.
C. Avoiding Conflicts of Interest
Without limiting the foregoing Section I-B, no Access Person shall enter
into or engage in a security transaction or business activity or relationship
which may result in any financial or other conflict of interest between such
person and an Investment Company and each such person shall at all times and in
all matters endeavor to place the interests of the Investment Company before
his or her personal interests.
D. Prohibited Activities
1. Blackout Periods: No Access Person shall purchase or sell, directly or
indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership:
a. and which to his or her knowledge at the time of such purchase or
sale is being considered for purchase or sale, or is to be purchased
or sold, by the Investment Company; or
<PAGE>
b. on a day during which, to his or her knowledge, the Investment
Company has a pending "buy" or "sell" order in that same security
until that order is executed or withdrawn.
No Portfolio Manager of an Investment Company shall purchase or sell,
directly or indirectly, any security in which he or she has, or by reason of
such transaction acquires, any direct or indirect Beneficial Ownership within
seven (7) calendar days before or after that Investment Company trades in that
security.
2. Interested Transactions: No Access Person shall recommend any
securities transactions by the Investment Company without having disclosed his
or her interest, if any, in such securities or the issuer thereof, including
without limitation:
a. any direct or indirect Beneficial Ownership of any securities of such
issuer;
b. any contemplated transaction by such person in such securities;
c. any position with such issuer or its affiliates; and
d. any present or proposed business relationship between such issuer or
its affiliates and such person or any party in which such person has
a significant interest.
3. Initial Public Offerings: No Advisory Person shall acquire any
securities in an initial public offering for his or her personal account.
4. Private Placements: No Advisory Person shall acquire, directly or
indirectly, Beneficial Ownership of any securities in a private placement
without the prior approval of the Review Officer, who has been provided by such
Advisory Person with full details of the proposed transaction (including
written certification that the investment opportunity did not arise by virtue
of the Advisory Person's activities on behalf of the Investment Company) and
has concluded after consultation with other investment advisory personnel of
the Investment Company that the Investment Company has no foreseeable interest
in purchasing such securities.
5. Short-Term Trading Profits: No Advisory Person shall profit from the
purchase and sale, or sale and purchase, of the same (or equivalent) securities
of which such Advisory Person has Beneficial Ownership within sixty (60)
calendar days. Any profit so realized shall, unless the Investment Company's
Board approves otherwise, be paid over to the Investment Company or to a
charitable organization of the Advisory Person's choosing.
6. Gifts: No Advisory Person shall receive any gift or other things of
more than de minimis value from any person or entity that does business with or
on behalf of the Investment Company; provided, however, that the foregoing
shall not prohibit receipt of:
<PAGE>
a. an occasional breakfast, luncheon, dinner or reception, ticket to a
sporting event or the theater, or comparable entertainment, attended
in the company of the giver of the entertainment in question, that is
not so frequent, costly or extensive as to raise any question of
impropriety;
b. a breakfast, luncheon, dinner, reception or cocktail party in
conjunction with a bona fide business meeting;
c. a promotional item, such as a mug, pen or other article bearing the
logo or advertising of any such person or entity, having a value not
in excess of $100; or
d. a gift approved in writing by the Review Officer.
7. Service as a Director: No Advisory Person shall serve on the board of
directors of any publicly traded company without prior authorization from the
Review Officer based upon a determination that such board service would be
consistent with the interests of the Investment Company and its shareholders.
E. Exempted Transactions
The prohibitions of Sections I-D(1) and I-D(5) above shall not apply to:
1. purchases or sales effected in any account over which such person has
no direct or indirect influence or control;
2. purchases or sales which are nonvolitional on the part of the person or
an Investment Company;
3. purchases which are part of an automatic dividend reinvestment plan;
4. purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such rights
were acquired from such issuer, and sales of such rights so acquired;
5. purchases and sales previously approved in writing by the Review
Officer (a) as only remotely potentially harmful to an Investment Company
because they would be very unlikely to affect a highly institutional market or
because they clearly are not economically related to the securities to be
purchased or sold or held by an Investment Company or client or (b) as not
representing any danger of the abuses proscribed by Rule 17j-1 under the 1940
Act;
6. purchases or sales of securities which are not eligible for purchase or
sale by an Investment Company.
II. COMPLIANCE PROCEDURES
<PAGE>
A. Preclearance
An Advisory Person may directly or indirectly, acquire or dispose of
Beneficial Ownership of a security only if (1) such purchase or sale has been
approved by the Review Officer, (2) the approved transaction is completed
within two (2) business days of the day approval is received and (3) the Review
Officer has not rescinded such approval prior to execution of the transaction.
The requirements of this Section II-A shall not apply to transactions described
in Sections I-E(1), (2) and (3). THE FACT THAT PRECLEARANCE OF A TRANSACTION IS
OBTAINED PURSUANT TO THIS SECTION II-A DOES NOT RENDER THE OTHER PROHIBITIONS,
RESTRICTIONS AND PROVISIONS OF THIS CODE INAPPLICABLE TO THE TRANSACTION.
B. Reporting
1. Except as otherwise provided in paragraph 2 of this Section II-B, each
Access Person of an Investment Company must report to the Review Officer as
follows:
a. Initial Holdings Reports. Not later than 10 days after the person
becomes an Access Person, the following information:
o the title, number of shares and principal amount of each security
in which the Access Person had any direct or indirect beneficial
ownership when the person became an Access Person;
o the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any securities were held for the
direct or indirect benefit of the Access Person as of the date the
person became an Access Person; and
o the date that the report is submitted by the Access Person.
b. Quarterly Transaction Reports. Not later than 10 days after the end of
each calendar quarter, the following information:
(i) With respect to any transaction during the quarter in a security
in which the Access Person had any direct or indirect beneficial
ownership:
o the date of the transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the
principal amount of each security involved;
o the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
o the price of the security at which the transaction was effected;
<PAGE>
o the name of the broker, dealer or bank with or through which the
transaction was effected; and
o the date that the report is submitted by the Access Person.
(ii) With respect to any account established by the Access Person in
which any securities were held during the quarter for the direct
or indirect benefit of the Access Person:
o the name of the broker, dealer or bank with whom the Access Person
established the account;
o the date that the account was established; and
o the date that the report is submitted by the Access Person.
In the event that no reportable transactions occurred during the quarter,
the report should so state, and should be returned signed and dated.
c. Annual Holdings Reports. Not later than January 31 of each year, the
following information (which information must be current as of the
immediately preceding December 31):
o the title, number of shares and principal amount of each security
in which the Access Person had any dirtect or indirect beneficial
ownership;
o the name of any broker, dealer or bank with whom the Access Person
maintains an account in which any securities are held for the
direct or indirect benefit of the Access Person; and
o the date on which the report is submitted by the Access Person.
d. Brokerage Statements. Copies of all of such person's brokerage
statements shall be furnished to the Review Officer on a quarterly basis.
2. The following are exceptions to the reporting requirements outlined in
Section II-B(1):
a. An Access Person need not make any report required under Section II-B
(1)(a)-(c) with respect to transactions effected for, and securities
held in, any account over which the person has no direct influence or
control, including such an account in which the person has any
beneficial ownership.
b. A Disinterested Trustee who would be required to make the reports
required under Section II-B(1) solely by reason of being a trustee of
an Investment Company need not file with or deliver to the Review
Officer:
<PAGE>
(i) an initial holdings report or an annual holdings report; or
(ii) a quarterly transaction report unless the Disinterested Trustee
knew or, in the ordinary course of fulfilling his or her official
duties as a Trustee of the Investment Company, should have known,
that during the 15-day period immediately before or after the
Trustee's transaction in a security, the Investment Company
purchased or sold the security or the security was being
considered for purchase or sale by the Investment Company or a
series thereof; or
(iii) copies of his or her brokerage statements.
c. An Access Person need not make a quarterly transaction report under
Section II-B(1) if the report would duplicate information contained in
broker trade confirmations or account statements received by the Review
Officer with respect to the person in the time period required under
Section II-B(1), if all of the information required under Section
II-B(1) is contained in the broker trade confirmations or account
statements or in the records of the Investment Company.
3. Any report delivered pursuant to Section II-B may contain a statement
that the report shall not be construed as an admission by the person making
such report that he or she has any direct or indirect beneficial ownership in
the securities to which the report relates.
4. Each Access Person must certify annually (no later than January 31 of
each year) that he or she has read and understands this Code of Ethics and has
complied with its provisions. Such certificates and reports are to be given to
the Review Officer.
C. Review
The Review Officer shall review all of the reports delivered under Section
II-B to determine whether a violation of this Code of Ethics may have occurred.
In reviewing transactions, the Review Officer shall take into account the
exemptions allowed under Section I-E above. Before making a determination that
a violation has been committed by a Trustee, the Review Officer shall give such
person an opportunity to supply additional information regarding the
transaction in question.
III. REVIEW BY THE BOARD OF TRUSTEES
The Review Officer of each Investment Company, each Investment Company's
investment adviser or advisers and each Investment Company's principal
underwriter shall furnish a written report to the Board of Trustees of each
Investment Company, at least annually, that:
<PAGE>
A. describes any issues arising under the Code of Ethics or
procedures of such entity since the last report to the Board of
Trustees, including, but not limited to, information about
material violations of its Code of Ethics or procedures and
sanctions imposed in response to the material violations;
B. describes any recommended changes to the Code or procedures; and
C. certifies that the Investment Company, investment adviser or
principal underwriter, as applicable, has adopted procedures
reasonably necessary to prevent its Access Persons from
violating its Code of Ethics.
The first such report pursuant to this Code shall be delivered to the
Board of Trustees not later than September, 1, 2000.
IV. SANCTIONS
A. Sanctions for Violations by Access Persons
If the Review Officer determines that an Access Person (other than a
Disinterested Trustee) has violated this Code, he or she shall so advise the
respective Board of Trustees and such persons may be subject to sanctions,
including, inter alia, a letter of censure or suspension or termination of the
employment of the violator. As provided in Section I-D(5) above, any financial
profits realized by an Advisory Person through the prohibited personal trading
activities described in such Section may be required to be disgorged. All
violations of the Code and any sanctions imposed as a result thereof shall be
reported to the respective Board of Trustees at least quarterly.
B. Sanctions for Violations by Disinterested Trustees
If the Review Officer determines that any Disinterested Trustee has
violated this Code, he or she shall so advise the President of an Investment
Company and also the Disinterested Trustees (other than the person whose
transaction is at issue) and shall provide such persons with the report, the
record of pertinent actual or contemplated portfolio transactions of an
Investment Company and any additional information supplied by such person. The
Disinterested Trustees, at their option, shall either impose such sanctions as
they deem appropriate or refer the matter to the full Board of Trustees of an
Investment Company, which shall impose such sanctions as it deems appropriate.
V. Other Codes of Ethics
Each investment adviser and principal underwriter of an Investment Company
shall:
1. submit to the Board of Trustees of each Investment Company a copy of
the Code of Ethics adopted by such person pursuant to Rule 17j-1, which Code of
Ethics shall comply with the recommendations of the Investment Company
<PAGE>
Institute's Advisory Group on Personal Investing or be accompanied by a
statement explaining any difference and supplying the rationale therefor;
2. promptly report to the Board of Trustees of each Investment Company in
writing any material amendments to such Code of Ethics;
3. promptly furnish to the Board of Trustees of each Investment Company,
upon request, copies of any reports made pursuant to such Code of Ethics by any
person who would be an Access Person or Portfolio Manager hereunder if such
person were not subject to such other Code of Ethics; and
4. immediately furnish to the Board of Trustees of each Investment Company
all material information regarding any violation of such Code of Ethics by any
person who would be an Access Person or Portfolio Manager hereunder if such
person were not subject to such other Code of Ethics.
VI. MISCELLANEOUS
A. Access Persons
The Review Officer of each Investment Company will identify all Access
Persons who are under a duty to make reports to the Investment Company and will
inform such persons of such duty. Any failure by the Review Officer to notify
any person of his or her duties under this Code shall not relieve such person
of his or her obligations hereunder.
B. Records
The administrator or any sub-administrator of an Investment Company shall
maintain records in the manner and to the extent set forth below, which records
may be maintained on microfilm under the conditions described in Rule 31a-2(f)
under the 1940 Act, and shall be available for examination by representatives
of the Securities and Exchange Commission:
1. a copy of this Code and any other code which is, or at any time within
the past five years has been, in effect shall be preserved in an easily
accessible place;
2. a record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in
which the violation occurs;
3. a copy of each report made pursuant to this Code shall be preserved for
a period of not less than five years from the end of the fiscal year in which
it is made, the first two years in an easily accessible place;
4. a list of all persons who are required, or within the past five years
have been required, to make reports pursuant to this Code shall be maintained
in an easily accessible place;
<PAGE>
5. copy of each report required under Section II shall be preserved for a
period of not less than five years from the end of the fiscal year in which it
is made, the first two years in an early accessible place; and
6. record of any decision, and the reasons supporting the decision, to
approve the acquisition by Advisory Persons of securities under Section I-D(3)
or (4) shall be preserved for a period of not less than five years from the end
of the fiscal year in which the approval is granted.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential, except that the same
may be disclosed to the Board of Trustees of the Investment Companies, to any
regulatory or self-regulatory authority or agency upon its request, or as
required by law or court or administrative order.
D. Interpretation of Provisions
The Board of Trustees of an Investment Company may from time to time adopt
such interpretations of this Code as it deems appropriate.
<PAGE>
APPENDIX I
CITIFUNDS TRUST I
CITIFUNDS TRUST II
CITIFUNDS TRUST III
CITIFUNDS FIXED INCOME TRUST
CITIFUNDS PREMIUM TRUST
CITIFUNDS MULTI-STATE TAX FREE TRUST
CITIFUNDS INSTITUTIONAL TRUST
CITIFUNDS TAX FREE INCOME TRUST
CITIFUNDS TAX FREE RESERVES
CITIFUNDS INTERNATIONAL TRUST
CASH RESERVES PORTFOLIO
TAX FREE RESERVES PORTFOLIO
U.S. TREASURY RESERVES PORTFOLIO
THE PREMIUM PORTFOLIOS
ASSET ALLOCATION PORTFOLIOS
VARIABLE ANNUITY PORTFOLIOS
VAP MASTER PORTFOLIOS
Exhibit p(2)
CODE OF ETHICS FOR
SIGNATURE BROKER-DEALER SERVICES, INC.
Signature Broker-Dealer Services, Inc. and its affiliates (collectively
"SBDS"), have each adopted this Code of Ethics (the "Code") to specify and
prohibit certain types of personal securities transactions deemed to create a
conflict of interest and to establish reporting requirements and preventive
procedures pursuant to the provisions of Rule 17j1(c)(1) under the Investment
Company Act of 1940 (the "1940 Act").
I. DEFINITIONS
A. An "Access Person" means any employee, Director or officer of SBDS
who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or sale
of Covered Securities for a Fund for which SBDS acts as distributor or
whose functions or duties as a part of the ordinary course of his or
her business relate to the making of any recommendation to such Fund
regarding the purchase or sale of securities or who serves as an
officer or Trustee/Director for any such Fund All Access Persons of
SBDS shall be advised they are considered such by the Review Officer.
B. "Beneficial Ownership" shall be interpreted subject to the provisions
of Rule 16a-1(a) (exclusive of Section (a)(1) of such Rule) of the
Securities Exchange Act of 1934, a copy of which is attached hereto.
C. "Control" shall have the same meaning as set forth in Section 2(a)(9)
of the 1940 Act.
D. "Covered Security" means a security as defined in section 2(a)(36) of
the Act, except that it does not include:
1. Direct obligations of the Government of the United States;
2. Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements; and
3. Shares issued by open-end Funds.
E. A "Covered Security Held or to be Acquired by a Fund" means:
1. Any Covered Security which, within the most recent 15 days:
(a) Is or has been held by the Fund; or
<PAGE>
(b) Is being or has been considered by the Fund or its investment
adviser for purchase by the Fund; and
2. Any option to purchase or sell, and any security convertible into
or exchangeable for, a Covered Security described in (i) of this
section.
F. "Fund" means an investment company registered under the 1940 Act.
G. "Holdings Reports" are reports filed by Access Persons and contain the
following information:
1. the title, number of shares and principal amount of each Covered
Security in which the Access Person has any direct or indirect
beneficial ownership; and
2. the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any securities were held for the
direct or indirect benefit of the Access Person; and
3. the date the report is submitted by the Access Person.
H. The "Review Officer" is the person designated by SBDS' Board of
Directors to monitor the overall compliance with this Code. Included
in the duties of the Review Officer is the review of all initial and
annual Holdings Reports and quarterly transaction reports and the
maintenance of the list of Access Persons. In the absence of any such
designation, the Review Officer shall be the General Counsel of SBDS
or Molly S. Mugler.
I. "Purchase or sale of a Covered Security" includes, among other things,
the writing of an option to purchase or sell a Covered Security
II. STATEMENT OF GENERAL PRINCIPLES
The following general fiduciary principles shall govern the personal
investment activities of all Access Persons.
Each Access Person shall:
A. at all times, place the interests of Funds SBDS distributes before his
or her personal interests;
<PAGE>
B. conduct all personal securities transactions in a manner consistent
with this Code, so as to avoid any actual or potential conflicts of
interest, or an abuse of position of trust and responsibility; and
C. not take any inappropriate advantage of his or her position with SBDS
with respect to any Fund SBDS distributes.
It is unlawful for any affiliated person of or principal underwriter for a
Fund, or any affiliated person of a principal underwriter for a Fund, in
connection with the purchase or sale, directly or indirectly, by the
person of a Covered Security Held or to be Acquired by the Fund: (1) To
employ any device, scheme or artifice to defraud the Fund; (2) To make any
untrue statement of a material fact to the Fund or omit to state a
material fact necessary in order to make the statements made to the Fund,
in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice or course of business that operates or
would operate as a fraud or deceit on the Fund; or (4) To engage in any
manipulative practice with respect to the Fund.
III. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES.
A. BLACKOUT PERIODS
No Access Person shall purchase or sell, directly or indirectly, any
Covered Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership on a
day during which he or she knows or should have known a Fund has a
pending "buy" and "sell" order in that same security until that order
is executed or withdrawn.
B. EXEMPTED TRANSACTIONS
The prohibitions of Section III shall not apply to:
1. purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control;
2. purchases or sales that are non-volitional on the part of the
Access Person, including mergers, recapitalizations or similar
transactions;
3. purchases which are part of an automatic dividend reinvestment
plan;
4. purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the
extent such rights were acquired from such issuer, and sales of
such rights so acquired; and
<PAGE>
5. purchases and sales that receive prior approval in writing by the
Review Officer as (a) only remotely potentially harmful to a Fund
because they would be very unlikely to affect a highly
institutional market, (b) clearly not economically related to the
securities to be purchased or sold or held by a Fund or client,
and (c) not representing any danger of the abuses proscribed by
Rule 17j-1, but only if in each case the prospective purchaser has
identified to the Review Officer all factors of which he or she is
aware which are potentially relevant to a conflict of interest
analysis, including the existence of any substantial economic
relationship between his or her transaction and securities held or
to be held by a Fund.
IV. COMPLIANCE PROCEDURES
A. REPORTING
1. Quarterly Transaction Reports
(a) Coverage of Quarterly Transaction Reports: Each Access Person
shall, unless otherwise exempted, file with the Review Officer
confidential quarterly reports containing the information
required in section (b) below, with respect to all
transactions during the preceding quarter in --- any Covered
Securities in which such person has, or by reason of such
transaction acquires, any direct or indirect beneficial
ownership. All such Access Persons shall file reports, even
when no transactions have been effected, representing that no
transactions subject to reporting requirements were effected.
(b) Filing of Quarterly Transaction Reports: Every report shall be
made no later than 10 days after the end of the calendar
quarter in which the transaction to which the report relates
was effected, and shall contain the following information:
(i) the date of the transaction, the title, the interest
rate and maturity (if applicable), the number of shares,
and the principal amount of each Covered Security
involved;
(ii) the nature of the transaction (i.e., purchase, sale or
any other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
<PAGE>
(iv) the name of the broker, dealer or bank with or through
whom the transaction was effected;
(v) the date that the report is submitted by the Access
Person; and
(vi) with respect to any account established by the Access
Person in which securities were held during the quarter
for the direct or indirect benefit of the Access Person,
the name of the broker, dealer or bank with whom the
Access Person established the account, the date the
account was established and the date the report is
submitted by the Access Person.
(c) Broker Confirmations/Account Statements: An Access Persons may
direct his or her brokers to supply the Review Officer on a
timely basis, duplicate copies of confirmations of all
personal transactions in Covered Securities. An Access Person
need not make a quarterly transaction report if the report
would duplicate information contained in duplicate information
contained in broker trade confirmations or account statements
received by the Review Officer in the time period required if
all the information required is contained in the broker trade
confirmations or account statements or in the records of the
Review Officer.
2. Initial Holdings Reports: All persons who become Access Persons
must file an initial Holdings Report with the Review Officer
within ten days after that person becomes an Access Person. The
information contained in the initial Holdings Report must be
current as of the date the person became and Access Person.
3. Annual Holdings Reports: All Access Persons, unless exempted, must
file an annual Holdings Report by the later of September 1 of each
year or such earlier time as requested by the Review Officer. The
information contained in the annual Holdings Report must be
current as of a date no more than 30 days before the report is
submitted.
4. Exceptions from Reporting Requirements: No Access Person shall be
required to report transactions effected for any account over
which such Access Person has no direct or indirect influence or
control (except that such an Access Person must file a written
certification stating that he or she has no direct or indirect
influence or control over the account in question).
<PAGE>
B. REVIEW
The Review Officer shall be responsible for reviewing transactions.
Before making a determination that a violation has been committed by
an Access Person, the Review Officer shall give such person an
opportunity to supply additional information regarding the transaction
in question.
V. REVIEW BY THE PRESIDENT
At least annually, the Review Officer shall report to the President
regarding:
A. All existing procedures concerning Access Persons' personal trading
activities and any procedural changes made during the past year;
B. Any recommended changes to the Code or procedures; and
C. A summary of any violations which occurred during the past year with
respect to which significant remedial action was taken.
VI. SANCTIONS FOR VIOLATIONS BY ACCESS PERSONS
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the President who may advise the Board
of Directors and the President or the Board may impose such sanctions as
he or she or it deems appropriate, including, inter alia, disgorgement of
profits, censure, suspension or termination of the employment of the
violator. All material violations of the Code and any sanctions imposed as
a result thereto shall be reported periodically to the Board of Directors.
VII. MISCELLANEOUS
A. ACCESS PERSONS
The Review Officer will identify all Access Persons who are under a
duty to make reports to SBDS and will inform such persons of such
duty. Any failure by the Review Officer to notify any person of his or
her duties under this Code shall not relieve such person of his or her
obligations hereunder.
B. RECORDS
<PAGE>
SBDS shall maintain records in the manner and to the extent set forth
below, which records may be maintained on microfilm under the
conditions described in Rule 31a2(f) under the 1940 Act, and shall be
available for examination by representatives of the Securities and
Exchange Commission ("SEC"):
1. a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
2. a record of any violation of this Code and of any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. a copy of each report made pursuant to this Code shall be
preserved for a period of not less than five years from the end of
the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. a list of all persons who are required, or within the past five
years have been required, to make reports pursuant to this Code
shall be maintained in an easily accessible place.
C. CONFIDENTIALITY
All reports of Covered Securities transactions and any other
information filed pursuant to this Code shall be treated as
confidential, except to the extent required by law.
D. INTERPRETATION OF PROVISIONS
The Board of Directors of SBDS may from time to time adopt such
interpretations of this Code as it deems appropriate. SFG293b
<PAGE>
SFG293c
SIGNATURE BROKER-DEALER SERVICES, INC. AND ITS AFFILIATES
TRANSACTIONS REPORT
To: Molly S. Mugler, Senior Legal Counsel
From:
(Your Name)
This Transaction Report (the "Report") is submitted pursuant to the Code
of Ethics (the "Code") of Signature Broker-Dealer Services, Inc. and its
affiliates ("SBDS") and supplies (below) information with respect to
transactions in any security in which I may be deemed to have, or by reason of
such transaction acquire, any direct or indirect beneficial ownership interest
(whether or not such security is a security held or to be acquired by an
investment company administered or distributed by SBDS) for the calendar
quarter ended ____________.
Unless the context otherwise requires, all terms used in the Report shall
have the same meaning as set forth in the Code. For purposes of the Report,
beneficial ownership shall be interpreted subject to the provisions of the Code
and Rule 16a-1(a) (exclusive of Section (a)(1) of such Rule) of the Securities
Exchange Act of 1934.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Nature of
Transaction
(Whether Name of the
Purchase, Principal Broker, Dealer
Sale, or Amount of Price at Or Bank with
Other Type of Securities Which the Whom the Nature of
Name of Title of Date of Disposition Acquired or Transaction Transaction Ownership of
Fund Securities Transaction Or Acquisition Disposed of Was Effected Was Effected Securities*
Name of Covered Securities Account Established in Last Quarter Date Account was Established
</TABLE>
I HEREBY CERTIFY THAT I (1) HAVE READ AND UNDERSTAND THE CODE OF SBDS, (2)
RECOGNIZE THAT I AM SUBJECT TO THE CODE, (3) HAVE DISCLOSED ALL SECURITIES
HOLDINGS AS REQUIRED, AND (4) THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION
FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
NAME (Print) _____________________________ DATE ____________________
SIGNATURE _________________________________________________
* If appropriate, you may disclaim beneficial ownership of any security listed
in this report.
<PAGE>
SIGNATURE BROKER-DEALER SERVICES, INC.
ACCESS PERSONS AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
NAME DATE BECAME REASON DESIGNATED AS ACCESS PERSON
ACCESS PERSON
- -----------------------------------------------------------------------------------------
MOLLY S. MUGLER PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- -----------------------------------------------------------------------------------------
PHILIP W. COOLIDGE PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- -----------------------------------------------------------------------------------------
CHRISTINE D. DORSEY PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- -----------------------------------------------------------------------------------------
JAMES E. HOOLAHAN PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- -----------------------------------------------------------------------------------------
LINWOOD C. DOWNS PRE-2000 OFFICER OF CITIFUNDS
- -----------------------------------------------------------------------------------------
SUSAN JAKUBOSKI PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- -----------------------------------------------------------------------------------------
</TABLE>
