As filed with the Securities and Exchange Commission on May 3, 2000
File Nos. 2-87509
811-3893
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 25
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
CITIFUNDS TAX FREE RESERVES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP, 150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on July 14, 2000
pursuant to paragraph (a)(1) of Rule 485.
Tax Free Reserves Portfolio has executed this Registration Statement.
<PAGE>
PROSPECTUS
JULY 14, 2000
CITIMARKETS
MONEY MARKET FUNDS
CITIBANK, N.A., INVESTMENT ADVISER
CITIMARKETS CASH RESERVES
a class of CitiFunds(SM) Cash Reserves
CITIMARKETS U.S. TREASURY RESERVES
a class of CitiFunds(SM) U.S. Treasury Reserves
CITIMARKETS TAX FREE RESERVES
a class of CitiFunds(SM) Tax Free Reserves
CITIMARKETS CALIFORNIA TAX FREE RESERVES
a class of CitiFunds(SM) California Tax Free Reserves
CITIMARKETS CONNECTICUT TAX FREE RESERVES
a class of CitiFunds(SM) Connecticut Tax Free Reserves
CITIMARKETS NEW YORK TAX FREE RESERVES
a class of CitiFunds(SM) New York Tax Free Reserves
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
FUNDS AT A GLANCE..........................................................
CITIMARKETS CASH RESERVES..............................................
CITIMARKETS U.S. TREASURY RESERVES.....................................
CITIMARKETS TAX FREE RESERVES..........................................
CITIMARKETS CALIFORNIA TAX FREE RESERVES...............................
CITIMARKETS CONNECTICUT TAX FREE RESERVES..............................
CITIMARKETS NEW YORK TAX FREE RESERVES.................................
YOUR CITIMARKETS ACCOUNT...................................................
ON-LINE INVESTOR REQUIREMENTS..........................................
HOW TO BUY SHARES......................................................
HOW THE PRICE OF YOUR SHARES IS CALCULATED.............................
HOW TO SELL SHARES.....................................................
EXCHANGES..............................................................
DIVIDENDS..............................................................
TAX MATTERS............................................................
MANAGEMENT OF THE FUNDS....................................................
INVESTMENT ADVISER.....................................................
ADVISORY FEES..........................................................
DISTRIBUTION ARRANGEMENTS..............................................
MORE ABOUT THE FUNDS.......................................................
PRINCIPAL INVESTMENT STRATEGIES........................................
FINANCIAL HIGHLIGHTS....................................................... A-1
APPENDIX................................................................... B-1
TAXABLE EQUIVALENT YIELD TABLES
<PAGE>
FUNDS AT A GLANCE
Each of the Funds described in this prospectus is a money market fund. Money
market funds must follow strict rules about the quality, maturity and other
features of securities they purchase. The Funds also try to maintain a share
price of $1.00 while paying income to shareholders. However, no money market
fund guarantees that you will receive your money back.
Each Fund has its own goals and investment strategies, and each offers a
different mix of investments. Of course, there is no assurance that any Fund
will achieve its investment goals.
The four Tax Free Funds invest primarily in high quality municipal securities
and most of the dividends they pay are exempt from federal and, in certain
cases, state income taxes. These Funds are all non-diversified mutual funds,
which means that they may invest relatively high percentages of their assets in
a limited number of issuers. As a result, these Funds have more risk than
broadly diversified money market funds.
The CitiMarkets Money Market Funds are designed primarily for use as sweep
investments in conjunction with an investor's CitiMarkets customer account.
Customers with a CitiMarkets account may designate one of the Funds for the
investment of cash balances in the account. While customers may purchase shares
of any of the Funds at any time, only one Fund may be designated as the Fund
for sweep investments.
<PAGE>
CITIMARKETS CASH RESERVES
This summary briefly describes CitiMarkets Cash Reserves and the principal
risks of investing in it. For more information, see MORE ABOUT THE FUNDS on
page __.
FUND GOAL
The Fund's goal is to provide shareholders with liquidity and as high a level
of current income as is consistent with preservation of capital. Of course,
there is no assurance that the Fund will achieve its goal.
MAIN INVESTMENT STRATEGIES
Cash Reserves invests only in high quality, short- term money market
instruments denominated in U.S. dollars. These may include:
o obligations of U.S. and non-U.S. banks;
o commercial paper and asset backed securities;
o short-term obligations of the U.S. government and its agencies and
instrumentalities, and repurchase agreements for these obligations;
and
o obligations issued or guaranteed by the governments of Western
Europe, Australia, Japan and Canada.
The Fund invests at least 25%, and may invest up to 100%, of its assets in bank
obligations, such as certificates of deposit, fixed time deposits and bankers'
acceptances.
Please note that the Fund invests in securities through an underlying mutual
fund.
MAIN RISKS
Investing in a mutual fund involves risk. Although Cash Reserves seeks to
preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in this Fund. Please remember that an investment in the
Fund is not a deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer- term instruments.
CREDIT RISK. The Fund invests in debt securities that are rated, when the Fund
buys them, in the highest short term rating category by nationally recognized
rating agencies or, in Citibank's opinion, are of comparable quality. However,
it is possible that some issuers will be unable to make the required payments
on debt securities held by the Fund. Debt securities also fluctuate in value
based on the perceived creditworthiness of issuers. A default on an investment
held by the Fund could cause the value of your investment in the Fund, or its
yield, to decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
FOREIGN SECURITIES. You should be aware that investments in foreign securities
involve risks relating to political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations to
which U.S. and non-U.S. issuers and markets are subject. These risks may
<PAGE>
include expropriation of assets, confiscatory taxation, withholding taxes on
dividends and interest paid on fund investments, fluctuations in currency
exchange rates, currency exchange controls and other limitations on the use or
transfer of assets by the Fund or issuers of securities, and political or
social instability. In addition, foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign
markets may be less liquid and more volatile than U.S. markets. As a result,
there may be rapid changes in the value of foreign securities. Non-U.S. markets
also may offer less protection to investors such as the Fund.
CONCENTRATION IN THE BANKING INDUSTRY. Cash Reserves concentrates in bank
obligations. This means that an investment in the Fund is particularly
susceptible to adverse events affecting the banking industry. Banks are highly
regulated. Decisions by regulators may limit the loans banks make and the
interest rates and fees they charge, and may reduce bank profitability. Banks
also depend on being able to obtain funds at reasonable costs to finance their
lending operations. This makes them sensitive to changes in money market and
general economic conditions. When a bank's borrowers get in financial trouble,
their failure to repay the bank will also affect the bank's financial
situation.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on an investment held by the Fund, or if the
investment declined significantly in value. If this happened, you would own
fewer shares. By investing in the Fund, you agree to this reduction should it
become necessary.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in Cash Reserves if:
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
o You're seeking higher returns than are usually available from U.S.
Treasury money market funds.
Don't invest in the Fund if:
o You're seeking long term growth of capital or high current income and
you can tolerate daily share price fluctuation.
If you are seeking tax-advantaged income, consider the Tax Free Funds.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet 1st Tier Taxable Money Market Funds
Average.
The Fund offers four classes of shares -- CitiMarkets Cash Reserves, Class A,
Class B and Class N. Only CitiMarkets Cash Reserves shares are offered through
this prospectus. The chart and table show the performance of the Fund's Class N
shares because CitiMarkets Cash Reserves shares are newly offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. The Fund's performance reflects certain fee waivers or reimbursements.
If these are reduced or terminated, the Fund's performance may go down. For
current yield information, please call CitiMarkets toll free at 800-625-4554,
or log on to the CitiMarkets website at www.CitiMarkets.com.
CASH RESERVES
ANNUAL TOTAL RETURNS*
1990 7.88%
1991 5.87%
1992 3.30%
1993 2.71%
1994 3.84%
1995 5.59%
1996 4.97%
1997 5.14%
1998 5.05%
1999 4.68%
As of June 30, 2000, Class N shares had a year-to-date return of ____%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets Cash Reserves shares are invested in
the same portfolio of securities, but CitiMarkets Cash Reserves shares have
higher expenses. As a result, CitiMarkets Cash Reserves shares would have had
correspondingly lower annual returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS CoVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year 5 Years 10 Years
Cash Reserves-Class N 4.68% 5.09% 4.89%
iMoneyNet 1st Tier Taxable
Money Market Funds Average 4.58% 4.98% 4.83%
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets Cash Reserves shares.
CITIMARKETS CASH RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on
Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES(1)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.15%
Distribution and Service (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.44%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.09%
* Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets Cash Reserves are 0.85%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time.
(1) The Fund invests in securities through an underlying mutual fund, Cash
Reserves Portfolio. This table reflects the expenses of both the Fund and
Cash Reserves Portfolio.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same -
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
CITIMARKETS CASH RESERVES
1 Year 3 Years 5 Years 10 Years
$111 $347 $601 $1,329
<PAGE>
CITIMARKETS U.S. TREASURY RESERVES
This summary briefly describes CitiMarkets U.S. Treasury Reserves and the
principal risks of investing in it. For more information, see MORE ABOUT THE
FUNDS on page ___.
FUND GOAL
The Fund's goal is to provide its shareholders with liquidity and as high a
level of current income from U.S. government obligations as is consistent with
the preservation of capital. Of course, there is no assurance that the Fund
will achieve its goal.
MAIN INVESTMENT STRATEGIES
U.S. Treasury Reserves may invest in:
o U.S. Treasury bills, notes and bonds;
o Treasury receipts; and
o securities issued by U.S. government agencies and instrumentalities
that are backed by the full faith and credit of the U.S. government.
Although the Fund is permitted to maintain a weighted average maturity of up to
90 days, under normal conditions the Fund will maintain a shorter maturity. In
the event that interest rates decline, the Fund may not generate as high a
yield as other funds with longer weighted average maturities.
Please note that the Fund invests in securities through an underlying mutual
fund.
MAIN RISKS
Investing in a mutual fund involves risk. Although U.S. Treasury Reserves seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in this Fund. Please remember that an investment in the
Fund is not a deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment,
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer-term instruments.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on an investment held by the Fund, or if the
investment declined significantly in value. If this happened, you would own
fewer shares. By investing in the Fund, you agree to this reduction should it
become necessary.
<PAGE>
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in U.S. Treasury Reserves if:
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
o You want the added safety of a fund that invests only in U.S.
government securities.
Don't invest in the Fund if:
o You're seeking long-term growth of capital or high current income and
you can tolerate daily share price fluctuation.
If you are seeking tax-advantaged income, consider the Tax Free Funds.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet 100% U.S. Treasury Rated Money Market
Funds Average.
The Fund offers two classes of shares - CitiMarkets U.S. Treasury Reserves and
Class N. Only CitiMarkets U.S. Treasury Reserves shares are offered through
this prospectus. The chart and table show the performance of the Fund's Class N
shares because CitiMarkets U.S. Treasury Reserves shares are newly offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how the Fund will perform in
the future. The Fund's performance reflects certain fee waivers and
reimbursements. If these are reduced or eliminated, the Fund's performance may
go down. For current yield information, please call CitiMarkets toll free at
800-625-4554, or log on to the CitiMarkets website at www.CitiMarkets.com.
U.S. TREASURY RESERVES
ANNUAL TOTAL RETURNS*
1992 3.16%
1993 2.54%
1994 3.44%
1995 5.09%
1996 4.59%
1997 4.64%
1998 4.50%
1999 4.06%
As of June 30, 2000, Class N shares had a year-to-date return of ___%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets U.S. Treasury Reserves shares are
invested in the same portfolio of securities, but CitiMarkets U.S. Treasury
Reserves shares have higher expenses. As a result, CitiMarkets U.S. Treasury
Reserves shares would have had correspondingly lower annual returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Life of Fund
Since
1 Year 5 Years May 3, 1991
U.S. Treasury Reserves-Class N 4.06% 4.58% 4.09%
iMoneyNet 100% U.S. Treasury Rated 4.14% 4.64% *%
Money Market Funds Average
________________
*Information regarding performance for this period is unavailable.
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets U.S. Treasury Reserves shares.
CITIMARKETS U.S. TREASURY RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES(1)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.15%
Distribution (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.47%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.12%
*Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets U.S. Treasury Reserves are: 0.85%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time.
(1) The Fund invests in securities through an underlying mutual fund, U.S.
Treasury Reserves Portfolio. This table reflects the expenses of both the
Fund and U.S. Treasury Reserves Portfolio.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same -
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
CITIMARKETS U.S. TREASURY RESERVES
1 Year 3 Years 5 Years 10 Years
$114 $356 $617 $1,363
<PAGE>
CITIMARKETS TAX FREE RESERVES
This summary briefly describes CitiMarkets Tax Free Reserves and the principal
risks of investing in it. For more information, see MORE ABOUT THE FUNDS on
page __.
FUND GOALS
The Fund's goals are to provide its shareholders with high levels of current
income exempt from federal income taxes, preservation of capital and liquidity.
Of course, there is no assurance that the Fund will achieve its goals.
MAIN INVESTMENT STRATEGIES
o Under normal market conditions, Tax Free Reserves invests at least
80% of its assets in high quality municipal obligations and in
participation interests in these obligations issued by banks,
insurance companies and other financial institutions. Municipal
obligations are debt securities issued by states, cities and towns
and other public entities or qualifying issuers. The interest paid on
these debt securities is free from federal income tax but is
generally lower than the interest paid on taxable securities.
o The Fund invests more than 25% of its assets in participation
interests in municipal obligations that are secured by bank letters
of credit or guarantees.
o The Fund may invest up to 20% of its assets in high quality
securities that pay interest that is subject to federal income tax or
federal alternative minimum tax.
Please note that the Fund invests in securities through an underlying mutual
fund.
MAIN RISKS
Investing in a mutual fund involves risk. Although Tax Free Reserves seeks to
preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in this Fund. Please remember that an investment in the
Fund is not a deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment,
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer-term instruments.
CREDIT RISK. The Fund invests in high quality debt securities, meaning
securities that are rated, when the Fund buys them, in one of the two highest
short term rating categories by nationally recognized rating agencies or, in
Citibank's opinion, are of comparable quality. However, it is possible that
some issuers will be unable to make the required payments on debt securities
held by the Fund. Debt securities also fluctuate in value based on the
perceived creditworthiness of issuers. A default on an investment held by the
Fund could cause the value of your investment in the Fund, or its yield, to
decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means
that it may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Fund also may invest 25% or
more of its assets in securities of issuers that are located in the same state,
that derive income from similar type projects or that are otherwise related. As
a result, many securities held by the Fund may be adversely affected by a
particular single economic, business, regulatory or political event. You should
consider the risk inherent in this policy when you compare the Fund with a more
diversified mutual fund.
<PAGE>
CONCENTRATION IN THE BANKING INDUSTRY. Tax Free Reserves concentrates in
participation interests in municipal obligations that are issued by banks and
secured by bank letters of credit or guarantees. This means that an investment
in Tax Free Reserves is particularly susceptible to adverse events affecting
the banking industry. Banks are highly regulated. Decisions by regulators may
limit the loans banks make and the interest rates and fees they charge, and may
reduce bank profitability. Banks also depend on being able to obtain funds at
reasonable costs to finance their lending operations. This makes them sensitive
to changes in money market and general economic conditions. When a bank's
borrowers get in financial trouble, their failure to repay the bank will also
affect the bank's financial situation.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on, or significant decline in value of, an
investment held by the Fund. If this happened, you would own fewer shares. By
investing in the Fund, you agree to this reduction should it become necessary.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in Tax Free Reserves if:
o You're seeking federally tax-exempt income from your investment.*
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
Don't invest in the Fund if:
o You don't need your income to be tax-exempt, or you're investing
through a tax-deferred vehicle -- such as an IRA account.
o You're seeking long term growth of capital or high current income and
you can tolerate daily share price fluctuation.
*Some income may be subject to tax. Consult your personal tax adviser.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet General Purpose Tax Free Money Market
Funds Average.
The Fund offers two classes of shares - CitiMarkets Tax Free Reserves and Class
N. Only CitiMarkets Tax Free Reserves shares are offered through this
prospectus. The chart and table show the performance of the Fund's Class N
shares because CitiMarkets Tax Free Reserves shares are newly offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. The Fund's performance reflects certain fee waivers and reimbursements.
If these are reduced or eliminated, the Fund's performance may go down. For
current yield information, please call CitiMarkets toll free at 800-625-4554
toll free, or log on to the CitiMarkets website at www.CitiMarkets.com.
TAX FREE RESERVES
ANNUAL TOTAL RETURNS*
1990 5.39%
1991 4.24%
1992 2.60%
1993 1.92%
1994 2.35%
1995 3.34%
1996 2.91%
1997 3.12%
1998 2.96%
1999 2.72%
As of June 30, 2000, Class N shares had a year-to-date return of ___%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets Tax Free Reserves shares are
invested in the same portfolio of securities, but CitiMarkets Tax Free Reserves
shares have higher expenses. As a result, CitiMarkets Tax Free Reserves shares
would have had correspondingly lower annual returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year 5 Years 10 Years
Tax Free Reserves-Class N 2.72% 3.01% 3.17%
iMoneyNet General Purpose Tax Free
Money Market Funds Average 2.68% 3.02% 3.24%
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets Tax Free Reserves shares.
CITIMARKETS TAX FREE RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES(1)
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.20%
Distribution (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.36%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.06%
*Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets Tax Free Reserves are: 0.80%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time.
(1) The Fund invests in securities through an underlying mutual fund. This
table reflects the expenses of both the Fund and Tax Free Reserves
Portfolio, that underlying fund.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same-
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
CITIMARKETS TAX FREE RESERVES
1 Year 3 Years 5 Years 10 Years
$108 $337 $585 $1,294
<PAGE>
CITIMARKETS CALIFORNIA TAX FREE RESERVES
This summary briefly describes CitiMarkets California Tax Free Reserves and the
principal risks of investing in it. For more information, see MORE ABOUT THE
FUNDS on page __.
FUND GOALS
The Fund's goals are to provide shareholders with high levels of current income
exempt from both federal and California personal income taxes, preservation of
capital and liquidity. Of course, there is no assurance that the Fund will
achieve its goals.
MAIN INVESTMENT STRATEGIES
o Under normal market conditions, California Tax Free Reserves invests at
least 80% of its assets in high quality municipal obligations and in
participation interests in these obligations issued by banks, insurance
companies and other financial institutions. Municipal obligations are
debt securities issued by states, cities and towns and other public
entities or qualifying issuers. The interest paid on these debt
securities is free from federal income tax but is generally lower than
the interest paid on taxable securities.
o Under normal market conditions, the Fund invests at least 65% of its
assets in municipal obligations that pay interest that is exempt from
both federal and California personal income taxes. These may include
obligations of Puerto Rico and other U.S. territories.
o When acceptable California municipal obligations are not available, the
Fund may purchase other municipal obligations. The interest on these
securities may be subject to California personal income taxes.
o The Fund may invest more than 25% of its assets in participation
interests in municipal obligations that are secured by bank letters of
credit or guarantees.
o The Fund may invest up to 20% of its assets in high quality securities
that pay interest that is subject to federal income tax or federal
alternative minimum tax.
MAIN RISKS
Investing in a mutual fund involves risk. Although California Tax Free Reserves
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in this Fund. Please remember that an
investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment,
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer term instruments.
CREDIT RISK. The Fund invests in high quality debt securities, meaning
securities that are rated, when the Fund buys them, in one of the two highest
short term rating categories by nationally recognized rating agencies or, in
Citibank's opinion, are of comparable quality. However, it is possible that
some issuers will be unable to make the required payments on debt securities
held by the Fund. Debt securities also fluctuate in value based on the
perceived creditworthiness of issuers. A default on an investment held by the
Fund could cause the value of your investment in the Fund, or its yield, to
decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
<PAGE>
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means
that it may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Fund invests a large portion of
its assets in California issuers and may invest 25% or more of its assets in
securities of issuers that derive income from similar type projects or that are
otherwise related. As a result, many securities held by the Fund may be
adversely affected by a particular single economic, business, regulatory or
political event. You should consider the risk inherent in this policy when you
compare the Fund with a more diversified mutual fund.
CONCENTRATION IN THE BANKING INDUSTRY. California Tax Free Reserves may
concentrate in participation interests in municipal obligations that are issued
by banks and secured by bank letters of credit or guarantees. This means that
an investment in the Fund may be particularly susceptible to adverse events
affecting the banking industry. Banks are highly regulated. Decisions by
regulators may limit the loans banks make and the interest rates and fees they
charge, and may reduce bank profitability. Banks depend on being able to obtain
funds at reasonable costs to finance their lending operations. This makes them
sensitive to changes in money market and general economic conditions. When a
bank's borrowers get in financial trouble, their failure to repay the bank will
also affect the bank's financial situation.
CALIFORNIA ISSUERS. Because the Fund invests a high percentage of its assets in
municipal obligations of issuers located in California, the Fund is more
exposed to events that adversely affect issuers in California. As a result,
this Fund has more risk than a money market fund that invests in municipal
obligations of issuers in many states.
You should be aware that California has experienced difficulties in recent
years and could do so again in the future. This could cause the Fund to lose
money. If the Fund has difficulty finding high quality California municipal
obligations to purchase, the amount of the Fund's income that is subject to
California taxes could increase.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on an investment held by the Fund, or if the
investment declined significantly in value. If this happened, you would own
fewer shares. By investing in the Fund, you agree to this reduction should it
become necessary.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in California Tax Free Reserves if:
o You're seeking tax-exempt income from your investment.*
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
o Your income is subject to California personal income tax.
Don't invest in the Fund if:
o You don't need your income to be tax-exempt, or you're investing
through a tax-deferred vehicle -- such as an IRA account.
o You're seeking long-term growth of capital or high current income and
you can tolerate daily share price fluctuation.
*Some income may be subject to tax. Consult your personal tax adviser.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet California Tax Free Money Market Funds
Average.
The Fund offers two classes of shares - CitiMarkets California Tax Free
Reserves and Class N. Only CitiMarkets California Tax Free Reserves shares are
offered through this prospectus. The chart and table show the performance of
the Fund's Class N shares because CitiMarkets California Tax Free Reserves
shares are newly offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. The Fund's performance reflects certain fee waivers or reimbursements.
If these are reduced or eliminated, the Fund's performance may go down. For
current yield information, please call CitiMarkets toll free at 800-625-4554,
or log on to the CitiMarkets website at www.CitiMarkets.com.
CALIFORNIA TAX FREE RESERVES
ANNUAL TOTAL RETURNS*
1993 2.30%
1994 2.66%
1995 3.57%
1996 2.93%
1997 3.02%
1998 2.82%
1999 2.52%
As of June 30, 2000, Class N shares had a year-to-date return of ___%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets California Tax Free Reserves shares
are invested in the same portfolio of securities, but CitiMarkets California
Tax Free Reserves shares have higher expenses. As a result, CitiMarkets
California Tax Free Reserves shares would have had correspondingly lower annual
returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Life of Fund
Since
1 Year 5 Years March 10, 1992
California Tax Free Reserves-Class N 2.52% 2.97% 2.82%
iMoneyNet California Tax Free
Money Market Funds Average 2.47% 2.89% *%
_______________
*Information regarding performance for this period is unavailable.
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets California Tax Free Reserves shares.
CITIMARKETS CALIFORNIA TAX FREE RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.20%
Distribution (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.33%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.03%
*Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets California Tax Free Reserves are: 0.80%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same -
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
CITIMARKETS CALIFORNIA TAX FREE RESERVES
1 Year 3 Years 5 Years 10 Years
$105 $328 $569 $1,259
<PAGE>
CITIMARKETS CONNECTICUT TAX FREE RESERVES
This summary briefly describes CitiMarkets Connecticut Tax Free Reserves and
the principal risks of investing in it. For more information, see MORE ABOUT
THE FUNDS on page __.
FUND GOALS
The Fund's goals are to provide its shareholders with high levels of current
income exempt from both federal and Connecticut personal income taxes,
preservation of capital and liquidity. Of course, there is no assurance that
the Fund will achieve its goals.
MAIN INVESTMENT STRATEGIES
o Under normal market conditions, Connecticut Tax Free Reserves invests
at least 80% of its assets in high quality municipal obligations and
in participation interests in these obligations issued by banks,
insurance companies and other financial institutions. Municipal
obligations are debt securities issued by states, cities and towns
and other public entities or qualifying issuers. The interest paid on
these debt securities is free from federal income tax but is
generally lower than the interest paid on taxable securities.
o Under normal market conditions, the Fund invests at least 65% of its
assets in municipal obligations that pay interest that is exempt from
both federal and Connecticut personal income taxes. These may include
obligations of Puerto Rico and other U.S. territories.
o When acceptable Connecticut municipal obligations are not available,
the Fund may purchase other municipal obligations. The interest on
these securities may be subject to Connecticut personal income taxes.
o The Fund may invest more than 25% of its assets in participation
interests in municipal obligations that are secured by bank letters
of credit or guarantees.
o The Fund may invest up to 20% of its assets in high quality
securities that pay interest that is subject to federal income tax or
federal alternative minimum tax.
MAIN RISKS
Investing in a mutual fund involves risk. Although Connecticut Tax Free
Reserves seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in this Fund. Please remember that an
investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment,
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer- term instruments.
CREDIT RISK. The Fund invests in high quality debt securities, meaning
securities that are rated, when the Fund buys them, in one of the two highest
short term rating categories by nationally recognized rating agencies or, in
Citibank's opinion, are of comparable quality. However, it is possible that
some issuers will be unable to make the required payments on debt securities
held by the Fund. Debt securities also fluctuate in value based on the
perceived creditworthiness of issuers. A default on an investment held by the
Fund could cause the value of your investment in the Fund, or its yield, to
decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means
that it may invest a relatively high percentage of its assets in the
<PAGE>
obligations of a limited number of issuers. The Fund invests a large portion of
its assets in Connecticut issuers and may invest 25% or more of its assets in
securities of issuers that derive income from similar type projects or that are
otherwise related. As a result, many securities held by the Fund may be
adversely affected by a particular single economic, business, regulatory or
political event. You should consider the risk inherent in this policy when you
compare the Fund with a more diversified mutual fund.
CONCENTRATION IN THE BANKING INDUSTRY. Connecticut Tax Free Reserves may
concentrate in participation interests in municipal obligations that are issued
by banks and secured by bank letters of credit or guarantees. This means that
an investment in the Fund is particularly susceptible to adverse events
affecting the banking industry. Banks are highly regulated. Decisions by
regulators may limit the loans banks make and the interest rates and fees they
charge, and may reduce bank profitability. Banks depend on being able to obtain
funds at reasonable costs to finance their lending operations. This makes them
sensitive to changes in money market and general economic conditions. When a
bank's borrowers get in financial trouble, their failure to repay the bank will
also affect the bank's financial situation.
CONNECTICUT ISSUERS. Because the Fund invests a high percentage of its assets
in municipal obligations of issuers located in Connecticut, the Fund is more
exposed to events that adversely affect issuers in Connecticut. As a result,
this Fund has more risk than a money market fund that invests in municipal
obligations of issuers in many states.
You should be aware that Connecticut has experienced economic difficulties in
recent years, and could do so again in the future. This could cause the Fund to
lose money. If the Fund has difficulty finding high quality Connecticut
municipal obligations to purchase, the amount of the Fund's income that is
subject to Connecticut taxes could increase.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on an investment held by the Fund, or if the
investment declined significantly in value. If this happened, you would own
fewer shares. By investing in the Fund, you agree to this reduction should it
become necessary.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in Connecticut Tax Free Reserves if:
o You're seeking tax-exempt income from your investment.*
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
o Your income is subject to Connecticut personal income tax.
Don't invest in the Fund if:
o You don't need your income to be tax-exempt, or you're investing
through a tax- deferred vehicle -- such as an IRA account.
o You're seeking long-term growth of capital or high current income and
you can tolerate daily share price fluctuation.
*Some income may be subject to tax. Consult your personal tax adviser.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet Connecticut Tax Free Money Market
Funds Average.
The Fund offers two classes of shares - CitiMarkets Connecticut Tax Free
Reserves and Class N. Only CitiMarkets Connecticut Tax Free Reserves shares are
offered through this prospectus. The chart and table show the performance of
the Fund's Class N shares because CitiMarkets Connecticut Tax Free Reserves
shares are newly offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. The Fund's performance reflects certain fee waivers or reimbursements.
If these are reduced or eliminated, the Fund's performance may go down. For
current yield information, please call CitiMarkets toll free at 800-625-4554,
or log on to the CitiMarkets website at www.CitiMarkets.com.
CONNECTICUT TAX FREE RESERVES
ANNUAL TOTAL RETURNS*
1994 2.80%
1995 3.63%
1996 2.97%
1997 3.00%
1998 2.92%
1999 2.60%
As of June 30, 2000, Class N shares had a year-to-date return of ____%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets Connecticut Tax Free Reserves shares
are invested in the same portfolio of securities, but CitiMarkets Connecticut
Tax Free Reserves shares have higher expenses. As a result, CitiMarkets
Connecticut Tax Free Reserves shares would have had correspondingly lower
annual returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS CoVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Life of Fund
Since
1 Year 5 Years December 1, 1993
Connecticut Tax Free Reserves-Class N 2.60% 3.02% 2.97%
iMoneyNet Connecticut Tax Free
Money Market Funds Average 2.47% 2.83% *%
______________
*Information regarding performance for this period is unavailable.
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets Connecticut Tax Free Reserves shares.
CITIMARKETS CONNECTICUT TAX FREE RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.20%
Distribution (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.36%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.06%
*Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets Connecticut Tax Free Reserves are: 0.80%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same -
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
CITIMARKETS CONNECTICUT TAX FREE RESERVES
1 Year 3 Years 5 Years 10 Years
$108 $337 $585 $1,294
<PAGE>
CITIMARKETS NEW YORK TAX FREE RESERVES
This summary briefly describes CitiMarkets New York Tax Free Reserves and the
principal risks of investing in it. For more information, see MORE ABOUT THE
FUNDS on page ___.
FUND GOALS
The Fund's goals are to provide its shareholders with high levels of current
income exempt from federal, New York State and New York City personal income
taxes, preservation of capital and liquidity. Of course, there is no assurance
that the Fund will achieve its goals.
MAIN INVESTMENT STRATEGIES
o Under normal market conditions, New York Tax Free Reserves invests at
least 80% of its assets in high quality municipal obligations and in
participation interests in these obligations issued by banks,
insurance companies and other financial institutions. Municipal
obligations are debt securities issued by states, cities and towns
and other public entities or qualifying issuers. The interest paid on
these debt securities is free from federal income tax but is
generally lower than the interest paid on taxable securities.
o Under normal market conditions, the Fund invests at least 65% of its
assets in municipal obligations that pay interest that is exempt from
federal, New York State and New York City personal income taxes.
These may include obligations of Puerto Rico and other U.S.
territories.
o When acceptable New York municipal obligations are not available, the
Fund may purchase other municipal obligations. The interest on these
securities may be subject to New York personal income taxes.
o The Fund may invest more than 25% of its assets in participation
interests in municipal obligations that are secured by bank letters
of credit or guarantees.
o The Fund may invest up to 20% of its assets in high quality
securities that pay interest that is subject to federal income tax or
federal alternative minimum tax.
MAIN RISKS
Investing in a mutual fund involves risk. Although New York Tax Free Reserves
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in this Fund. Please remember that an
investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The principal risks of investing in the Fund are described below. Please note
that there are many other factors that could adversely affect your investment,
and that could prevent the Fund from achieving its goals, which are not
described here. More information about risks appears in the Funds' Statement of
Additional Information. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Fund invests in short term money market instruments. As
a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. Investing in
high quality, short-term instruments may result in a lower yield (the income on
your investment) than investing in lower quality or longer-term instruments.
CREDIT RISK. The Fund invests in high quality debt securities, meaning
securities that are rated, when the Fund buys them, in one of the two highest
short term rating categories by nationally recognized rating agencies or, in
Citibank's opinion, are of comparable quality. However, it is possible that
some issuers will be unable to make the required payments on debt securities
held by the Fund. Debt securities also fluctuate in value based on the
perceived creditworthiness of issuers. A default on an investment held by the
Fund could cause the value of your investment in the Fund, or its yield, to
decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Fund investment, or other market
event could cause the value of your investment in the Fund, or its yield, to
decline.
<PAGE>
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means
that it may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Fund invests a large portion of
its assets in New York issuers, and may invest 25% or more of its assets in
securities of issuers that derive income from similar type projects or that are
otherwise related. As a result, many securities held by the Fund may be
adversely affected by a particular single economic, business, regulatory or
political event. You should consider the risk inherent in these policies when
you compare the Fund with a more diversified mutual fund.
CONCENTRATION IN THE BANKING INDUSTRY. New York Tax Free Reserves may
concentrate in participation interests in municipal obligations which are
issued by banks and secured by bank letters of credit or guarantees. This means
that an investment in the Fund is particularly susceptible to adverse events
affecting the banking industry. Banks are highly regulated. Decisions by
regulators may limit the loans banks make and the interest rates and fees they
charge, and may reduce bank profitability. Banks also depend on being able to
obtain funds at reasonable costs to finance their lending operations. This
makes them sensitive to changes in money market and general economic
conditions. When a bank's borrowers get in financial trouble, their failure to
repay the bank will also affect the bank's financial situation.
NEW YORK ISSUERS. Because the Fund invests a high percentage of its assets in
municipal obligations of issuers located in New York, the Fund is more exposed
to events that adversely affect issuers in New York. As a result, this Fund has
more risk than a money market fund that invests in municipal obligations of
issuers in many states.
You should be aware that New York has experienced economic difficulties in
recent years and could do so again in the future. This could cause the Fund to
lose money. If the Fund has difficulty finding high quality New York municipal
obligations to purchase the amount of the Fund's income that is subject to New
York taxes could increase.
$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
the Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on an investment held by the Fund, or if the
investment declined significantly in value. If this happened, you would own
fewer shares. By investing in the Fund, you agree to this reduction should it
become necessary.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in a money market fund is not a
complete investment program. The CitiMarkets Money Market Funds are designed
primarily for use as sweep investments in conjunction with an investor's
CitiMarkets Account, although investors may also directly purchase CitiMarkets
Money Market Funds via their CitiMarkets Account.
You should consider investing in New York Tax Free Reserves if:
o You're seeking tax-exempt income from your investment.*
o You're seeking current income and a stabilized share price.
o You want to be able to convert your investment to cash quickly with
reduced risk to principal.
o Your income is subject to New York State or New York City personal
income taxes.
Don't invest in the Fund if:
o You don't need your income to be tax-exempt, or you're investing
through a tax-deferred vehicle -- such as an IRA account.
o You're seeking long term growth of capital or high current income and
you can tolerate daily share price fluctuation.
*Some income may be subject to tax. Consult your personal tax adviser.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
performance of the Fund. The bar chart shows the Fund's total returns for the
calendar years indicated. The table compares the average annual returns for the
Fund to the performance of the iMoneyNet New York Tax Free Money Market Funds
Average.
The Fund offers two classes of shares - CitiMarkets New York Tax Free Reserves
and Class N. Only CitiMarkets New York Tax Free Reserves shares are offered
through this prospectus. The chart and table show the performance of the Fund's
Class N shares because CitiMarkets New York Tax Free Reserves shares are newly
offered.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. The Fund's performance reflects certain fee waivers and reimbursements.
If these are reduced or eliminated, the Fund's performance may go down. For
current yield information, please call CitiMarkets toll free at 800-625-4554,
or log on to the CitiMarkets website at www.CitiMarkets.com.
NEW YORK TAX FREE RESERVES
ANNUAL TOTAL RETURNS*
1990 5.20%
1991 3.86%
1992 2.38%
1993 1.79%
1994 2.30%
1995 3.31%
1996 2.86%
1997 3.06%
1998 2.91%
1999 2.64%
As of June 30, 2000, Class N shares had a year-to-date return of ___%
*Returns are for Class N shares. Class N shares are not offered in this
prospectus. Class N shares and CitiMarkets New York Tax Free Reserves shares
are invested in the same portfolio of securities, but CitiMarkets New York Tax
Free Reserves shares have higher expenses. As a result, CitiMarkets New York
Tax Free Reserves shares would have had correspondingly lower annual returns.
FUND'S HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
Class N Quarter Ending
Highest _______% _______
Lowest _______% _______
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year 5 Years 10 Years
New York Tax Free Reserves-Class N 2.64% 2.96% 3.03%
iMoneyNet New York Tax Free
Money Market Funds Average 2.61% 2.91% 3.00%
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
CitiMarkets New York Tax Free Reserves shares.
CITIMARKETS NEW YORK TAX FREE RESERVES
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
ANNUAL FUND OPERATING EXPENSES
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
Management Fees 0.20%
Distribution (12b-1) Fees 0.50%
Other Expenses (administrative and other expenses) 0.29%
TOTAL ANNUAL FUND OPERATING EXPENSES* 0.99%
*Certain of the Fund's service providers are voluntarily waiving fees or
reimbursing expenses such that current net annual operating expenses of
CitiMarkets New York Tax Free Reserves are: 0.80%
These voluntary fee waivers and reimbursements may be reduced or terminated at
any time. The Fund's service providers will consider renewal of the contractual
arrangements each year.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you reinvest all dividends;
o you then sell all of your shares at the end of those periods;
o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is
not a prediction of the Fund's future performance; and
o the Fund's operating expenses as shown in the table remain the same -
the example does not include voluntary waivers and fee
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs will be:
CITIMARKETS NEW YORK TAX FREE RESERVES
1 Year 3 Years 5 Years 10 Years
$101 $315 $547 $1,213
<PAGE>
YOUR CITIMARKETS ACCOUNT
ON-LINE INVESTOR REQUIREMENTS
The CitiMarkets shares offered in this Prospectus are available only to on-line
investors that have established a customer account with the CitiMarkets
Program. CitiMarkets shareholders must consent to receive all shareholder
information about the Fund electronically. Shareholder information includes
prospectuses, financial reports, confirmations, proxy solicitations and
financial statements, among other things. CitiMarkets shareholders may also
receive other Fund-related correspondence through their e-mail account. By
purchasing CitiMarkets shares, you certify that you have access to the Internet
and a current e-mail account, you acknowledge that you have the sole
responsibility for providing a correct and operational e-mail address, and you
consent to receiving Fund information electronically. You may incur costs for
on-line access to shareholder documents and maintaining an e-mail account.
If you rescind your consent to receive shareholder information electronically,
fail to maintain an e-mail account, or close your CitiMarkets Account, a Fund
may, to the extent permitted by the federal securities laws, redeem your
position in CitiMarkets shares and, in any event, will prohibit additional
investments in CitiMarkets shares, including the reinvestment of dividends. If
a Fund involuntarily redeems your CitiMarkets shares, you may experience
adverse tax consequences. The Funds reserve the right to deliver paper-based
documents to investors in certain circumstances, at no cost to you.
HOW TO BUY SHARES
CitiMarkets shares are offered continuously and purchases may be made Monday
through Friday, except on certain holidays. Shares may be purchased only
through the CitiMarkets Program by customers that have established a
CitiMarkets Account. To open a CitiMarkets Account, you must complete the
application available through the CitiMarkets website (www.CitiMarkets.com).
The CitiMarkets application may be submitted electronically. You will also be
required to submit a signature guarantee card which will be sent to you by
mail. For more detailed information on how to open a CitiMarkets Account,
please visit the CitiMarkets website at www.CitiMarkets.com. Once you open your
CitiMarkets Account, you will be subject to the general account requirements of
the CitiMarkets Program, as described in the CitiMarkets account application,
and will have access to all the electronic financial services made available
over the Internet by the CitiMarkets Program, including the opportunity to
invest in the Funds.
You may purchase CitiMarkets shares of a Fund either through the automatic
sweep feature or by way of a direct purchase as set forth below. You pay no
sales charge (load) to invest in CitiMarkets shares.
AUTOMATIC SWEEP: CitiMarkets shares are designed for use in conjunction with a
CitiMarkets Account as a sweep investment option. Once your CitiMarkets Account
is set up for automatic sweep, uninvested cash balances in your CitiMarkets
Account will be invested or "swept" automatically each business day into the
Fund you have selected. This feature keeps your money working for you while it
is not invested in other securities.
To set up your CitiMarkets Account for automatic sweep, you should select one
of the Funds in the appropriate section of the CitiMarkets Account application.
While you may purchase shares of any of the Funds at any time, only one Fund
may be designated as your Fund for sweep investments.
Shares are purchased at net asset value (normally $1.00 per share) the next
time it is calculated after your order is received via the automatic sweep
program. Each Fund has the right to reject any purchase order or cease offering
Fund shares at any time.
Checks deposited to your CitiMarkets Account will be automatically invested in
the sweep Fund after the check clears (usually within two business days). Net
proceeds from securities transactions in your CitiMarkets Account will be
automatically invested on the business day following settlement. Dividends and
interest payments from investments in your CitiMarkets Account will be
automatically invested in the sweep Fund on the day they are credited to your
account.
DIRECT ORDERS: You can also place direct orders to purchase CitiMarkets shares
by accessing the CitiMarkets website at www.CitiMarkets.com. When you purchase
shares in the Funds, you will be asked: (1) to confirm your consent to receive
all Fund documentation electronically; and (2) to affirm that you have read the
prospectus. The prospectus is readily available for viewing and printing on the
CitiMarkets website. If you do not consent to receive all Fund documentation
electronically, you will not be able to purchase CitiMarkets shares. Notice of
trade confirmations will be sent electronically to the e-mail address you
provided when you opened your CitiMarkets Account.
<PAGE>
Shares are purchased at net asset value (normally $1.00 per share) the next
time it is calculated after your order is received in proper form. Each Fund
has the right to reject any purchase order or cease offering Fund shares at any
time.
To complete a purchase transaction, you must have sufficient funds in your
CitiMarkets Account. If you transfer funds by check, the funds will not be
available in your CitiMarkets Account until the check clears, usually within
two business days.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
Each Fund calculates its net asset value (NAV) every day the New York Stock
Exchange is open for trading. Cash Reserves calculates its NAV at 3:00 p.m.
Eastern time, and the other Funds calculate their NAV at 12:00 noon Eastern
time. On days when the financial markets in which the Funds invest close early,
NAV may be calculated as of the earlier close of those markets. The Funds'
securities are valued at amortized cost, which is approximately equal to market
value.
HOW TO SELL SHARES
If you invest in a Fund through the automatic sweep program, when you use your
CitiMarkets Account to purchase other investments or make other payments,
shares of your sweep Fund will be sold automatically to cover these
transactions. You may also elect to terminate the automatic sweep program, or
designate a different sweep Fund pursuant to the conditions of your CitiMarkets
Account, in which case shares of your sweep Fund will be sold. As described
above, a Fund may also redeem your CitiMarkets shares if you fail to meet its
on-line investor requirements.
If you have made a direct purchase in a Fund, you may sell (redeem) your shares
on any business day by placing a redemption order on-line at the CitiMarkets
website, or by calling 1-800-625-4554. All redemption requests must be in
proper form, as determined by the CitiMarkets Program. Before you can place a
redemption order, the CitiMarkets website will prompt you for your personal
identification password, and, for your protection, the CitiMarkets Program may
request further documentation, such as a signature guarantee, for large
redemptions or other unusual activity in your CitiMarkets Account.
The price in any redemption of Fund shares will be the NAV (normally $1.00 per
share) the next time it is calculated after your redemption request has been
received, either through the automatic sweep program or directly, by the
CitiMarkets Program. CitiMarkets shares are redeemed without a sales charge.
Your CitiMarkets Account will be credited with your redemption proceeds in
federal funds normally on the business day on which you sell your shares but,
in any event, within seven days. Your redemption proceeds may be delayed for up
to ten days if your purchase was made by check. Your redemption proceeds may
also be delayed, or your right to receive redemption proceeds suspended, if the
New York Stock Exchange is closed (other than on weekends or holidays) or
trading is restricted, or if an emergency exists. Each Fund has the right to
pay your redemption proceeds by giving you securities instead of cash. In that
case, you may incur costs (such as brokerage commissions) converting the
securities into cash. You should be aware that you may have to pay taxes on
your redemption proceeds.
Due to increased Internet traffic during periods of dramatic economic or market
changes or due to system failures, you may experience difficulty in
implementing a redemption via the CitiMarkets website. In these situations,
investors may want to consider effecting a redemption transaction by calling
1-800-625-4554. However, investors may experience similar difficulties in
effecting a redemption via telephone during periods of dramatic economic or
market changes.
EXCHANGES
If you designate a different sweep Fund pursuant to the conditions of your
CitiMarkets Account, shares of your sweep Fund will be exchanged for
CitiMarkets shares of the new sweep Fund you have chosen. If you have directly
purchased CitiMarkets shares of a Fund, the shares may be exchanged for
CitiMarkets shares of any other Fund offered in this Prospectus, or for certain
other funds that may be made available through the CitiMarkets program. You can
obtain more information on the CitiMarkets website, or by calling
1-800-625-4554. You may arrange the exchange by accessing the CitiMarkets
website and following the instructions for exchanges, or by calling
1-800-625-4554. There is no sales charge on CitiMarkets shares you get through
an exchange.
The exchange privilege may be changed or terminated at any time. You should be
aware that you may have to pay taxes on your exchange.
<PAGE>
DIVIDENDS
Each business day when each of the Funds determines its NAV, they calculate the
Fund's net income and declare dividends for all shareholders of record. Shares
begin to accrue dividends on the day they are purchased. You will not receive
dividends for the day on which you redeem your shares. Dividends are
distributed once a month, on or before the last business day of the month. You
will receive your dividends as full and fractional additional Fund shares,
unless you make a direct purchase in a Fund and choose to receive your
dividends in cash.
TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation.
TAXATION OF DISTRIBUTIONS: For Cash Reserves and U.S. Treasury Reserves, you
normally will be required to pay federal income tax on any dividends and other
distributions you receive, whether you take distributions in cash or reinvest
them in additional shares. Distributions designated as capital gains dividends
will be taxed as long-term net capital gains. Other distributions are generally
taxable as ordinary income. Some dividends paid in January may be taxable as if
they had been paid the previous December.
Each of the Tax Free Funds expects that most of its net income will be
attributable to interest on municipal obligations and as a result most of the
Fund's dividends to you will not be subject to federal income tax. However,
each Fund may invest from time to time in taxable securities, and certain Fund
dividends may be subject to the federal alternative minimum tax. It is also
possible, but not intended, that a Tax Free Fund may realize short-term or
long-term capital gains or losses. As a result, a Tax Free Fund may designate
some distributions as income or short-term capital gain dividends, generally
taxable to you as ordinary income, or capital gains dividends, taxable to you
as long-term capital gains, whether you take distributions in cash or reinvest
them in additional shares.
Fund dividends which the Fund designates as not taxable are taken into account
in determining the amount of your social security and railroad retirement
benefits, if any, that may be subject to federal income tax. In addition, you
may not claim a deduction for interest on indebtedness you incurred or
continued for the purpose of owning Tax Free Fund shares. Shareholders who are,
or who are related to, "substantial users" of facilities financed by private
activity bonds should consult their tax advisers before buying Tax Free Fund
shares.
STATE AND LOCAL TAXES: Generally, you will have to pay state or local taxes on
Fund dividends and other distributions, although distributions derived from
interest on U.S. government obligations may be exempt from certain state and
local taxes. Except as noted below, Fund dividends that are not taxable to you
for federal income tax purposes may still be subject to tax under the income or
other tax laws of state or local taxing authorities. You should consult your
own tax adviser in this regard.
California Tax Free Reserves: The Fund expects that as long as the Fund meets
certain requirements, including that at least 50% of the value of the Fund's
assets consists of certain qualifying California municipal obligations,
shareholders of the Fund will be able to exclude from income, for California
personal income tax purposes, dividends received from the Fund which are
derived from interest (less related expenses) from such California municipal
obligations of the Fund.
The foregoing description is a general, abbreviated summary that relates solely
to the California personal income taxation of dividends received by
shareholders. Accordingly, potential investors, including, in particular,
investors who may be subject to California corporate franchise tax or
California corporate income tax, should consult with their own tax advisers.
Connecticut Tax Free Reserves: The Fund expects that shareholders will not be
subject to the Connecticut personal income tax on exempt-interest dividends
received from the Fund to the extent that those distributions are derived from
interest on Connecticut municipal obligations. Capital-gain dividends derived
from Connecticut municipal obligations (other than obligations of U.S.
territories or possessions and their political subdivisions) are also free from
this tax. Distributions by the Fund derived from interest income, other than
interest on Connecticut municipal obligations, that are treated as a preference
item for federal income tax purposes may be subject to the net Connecticut
minimum tax in the case of any shareholder subject to the Connecticut personal
income tax and required to pay the federal alternative minimum tax.
New York Tax Free Reserves: The Fund expects that, to the extent that dividends
received from the Fund are derived from interest on New York municipal
obligations, the dividends will also be excluded from the gross income of
individual shareholders who are New York residents for New York State and New
York City personal income tax purposes. Dividends from the Fund are not
excluded in determining New York State or New York City franchise taxes on
corporations and financial institutions (with certain limited exceptions
provided in the New York City Tax on Bank Corporations).
<PAGE>
FOREIGN SHAREHOLDERS: Each Fund will withhold U.S. federal income tax payments
at the rate of 30% (or any lower applicable treaty rate) on taxable dividends
and other payments subject to withholding taxes that are made to persons who
are not citizens or residents of the United States. Distributions received from
a Fund by non-U.S. persons also may be subject to tax under the laws of their
own jurisdictions.
BACKUP WITHHOLDING: The account application asks each new investor to certify
that the investor's Social Security or taxpayer identification number is
correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. A Fund may be required to withhold (and
pay over to the IRS for your credit) 31% of certain distributions it pays you
if you fail to provide this information or otherwise violate IRS regulations.
TAXATION OF TRANSACTIONS: If you sell your shares of a Fund, or exchange them
for shares of another Fund, it is considered a taxable event. Depending on your
purchase price and the sales price of the shares you sell or exchange, you may
have a gain or loss on the transaction. You are responsible for any tax
liabilities generated by your transaction.
<PAGE>
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Each Fund draws on the strength and experience of Citibank. Citibank is the
investment adviser of each Fund, and subject to policies set by the Funds'
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 its headquarters at 153 East 53rd Street, New York, New York, is
a wholly-owned subsidiary of Citicorp, which is, in turn, a wholly-owned
subsidiary of Citigroup Inc. "CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the Funds.
However, in making investment decisions for the Funds, 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 Funds.
ADVISORY FEES
For the Funds' fiscal year ended August 31, 1999 Citibank received the
following investment advisory fees:
Fee, as percentage of average
Fund daily net assets, after waiver
CitiFunds Cash Reserves 0.08%
CitiFunds U.S. Treasury Reserves 0.07%
CitiFunds Tax Free Reserves 0.11%
CitiFunds California Tax Free Reserves 0.12%
CitiFunds Connecticut Tax Free Reserves 0.11%
CitiFunds New York Tax Free Reserves 0.12%
DISTRIBUTION ARRANGEMENTS
The Funds (other than Cash Reserves) offer two classes of shares, Class N
shares and CitiMarkets shares, and Cash Reserves offers four classes of shares,
Class A, Class B, and Class N shares and CitiMarkets shares. These classes have
different expense levels. Only CitiMarkets shares are offered in this
prospectus. The Funds do not charge any sales loads, deferred sales loads or
other fees in connection with the purchase of CitiMarkets shares.
Each Fund has adopted a distribution plan for CitiMarkets shares under rule
12b-1 under the Investment Company Act of 1940. The distribution plan allows a
Fund to pay the distributor, a broker-dealer or financial institution that has
entered into a service agreement with the distributor concerning the Funds, or
others a monthly service fee at an annual rate not to exceed 0.10% of the
average daily net assets represented by CitiMarkets shares. This service fee
may be used to make payments for providing personal service or the maintenance
of shareholder accounts. The distribution plan also allows a Fund to pay the
distributor, a broker-dealer or financial institution, or others a monthly
distribution fee not to exceed 0.40% of the average daily net assets
represented by CitiMarkets shares. This distribution fee may be used as
compensation for the sale of Fund shares, for advertising, marketing or other
promotional activity. Because fees under the plans are paid out of Fund assets,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
The distributor may make payments for distribution and/or shareholder servicing
activities out of its past profits and other available sources. The distributor
may also make payments for marketing, promotional or related expenses to
dealers. The amount of these payments is determined by the distributor and may
be substantial. Citibank may make similar payments under similar arrangements.
<PAGE>
MORE ABOUT THE FUNDS
The Funds' goals, principal investments and risks are summarized in FUNDS AT A
GLANCE. More information on investments and investment strategies appears
below.
PRINCIPAL INVESTMENT STRATEGIES
The Funds' principal investment strategies are the strategies that, in the
opinion of Citibank, are most likely to be important in trying to achieve each
Fund's investment goals. Of course, there can be no assurance that any Fund
will achieve its goals. Please note that each Fund may also use strategies and
invest in securities that are not described below but that are described in the
Statement of Additional Information. A Fund may not use all of the strategies
and techniques or invest in all of the types of securities described in this
Prospectus or in the Statement of Additional Information.
Each Fund has specific investment policies and procedures designed to maintain
a constant net asset value of $1.00 per share. Each Fund also complies with
industry regulations that apply to money market funds. These regulations
require that each Fund's investments mature or be deemed to mature within 397
days from the date purchased and that the average maturity of each Fund's
investments (on a dollar-weighted basis) be 90 days or less. In addition, all
of the Funds' investments must be in U.S. dollar-denominated high quality
securities which have been determined by Citibank to present minimal credit
risks. To be high quality, a security (or its issuer) must be rated in one of
the two highest short-term rating categories by nationally recognized rating
agencies, such as Moody's or Standard & Poor's, or, in Citibank's opinion, be
of comparable quality. Investors should note that within these two rating
categories there may be sub-categories or gradations indicating relative
quality. If the credit quality of a security deteriorates after a Fund buys it,
Citibank will decide whether the security should be held or sold.
WHAT ARE MONEY MARKET INSTRUMENTS?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or
other corporations, or the U.S. or a foreign government and
state or local governments. Money market instruments have
maturity dates of 13 months or less. Money market instruments
may include CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES,
VARIABLE RATE DEMAND NOTES (where the interest rate is reset
periodically and the holder may demand payment from the issuer
at any time), FIXED-TERM OBLIGATIONS, COMMERCIAL PAPER (short
term unsecured debt of corporations), ASSET-BACKED SECURITIES
(which are backed by pools of accounts receivable such as car
installment loans or credit card receivables) and REPURCHASE
AGREEMENTS. In a repurchase agreement, the seller sells a
security and agrees to buy it back at a later date (usually
within seven days) and at a higher price, which reflects an
agreed upon interest rate.
Cash Reserves invests in high quality U.S. dollar- denominated money market
instruments of U.S. and non-U.S. issuers. These obligations include U.S.
government obligations, obligations of U.S. and non-U.S. banks, obligations
issued or guaranteed by the governments of Western Europe, Australia, Japan and
Canada, commercial paper, asset backed securities and repurchase agreements.
The Fund's U.S. government obligations may include U.S. Treasury bills, bonds
and notes and obligations of U.S. government agencies and instrumentalities
that may, but need not, be backed by the full faith and credit of the United
States. While the Fund can invest in all of these types of obligations, the
Fund concentrates in bank obligations, including certificates of deposit, fixed
time deposits and bankers' acceptances. This means that the Fund invests at
least 25% of its assets in bank obligations, and the Fund may invest up to all
of its assets in bank obligations. Except for this concentration policy, the
Fund's investment goals and policies may be changed without a shareholder vote.
Cash Reserves invests only in "first tier" securities. These securities are
rated in the highest short-term rating category by nationally recognized rating
agencies or, in Citibank's opinion, are of comparable quality.
U.S. Treasury Reserves invests in U.S. Treasury bills, bonds, notes and
receipts. Treasury receipts are interest coupons on other U.S. Treasury
obligations. This Fund may also invest in short-term obligations of U.S.
government agencies and instrumentalities, but only if the obligations are
backed by the full faith and credit of the United States. The Fund's investment
goals and policies may be changed without a shareholder vote. ALTHOUGH THE FUND
INVESTS IN U.S. GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE FUND IS NEITHER
INSUREd NOR GUARANTEED BY THE U.S. GOVERNMENT.
Each of the Tax Free Funds -- Tax Free Reserves, California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves -- invests
primarily in high quality municipal obligations, including municipal money
market instruments, and in participation interests in municipal obligations.
<PAGE>
Under normal market conditions, the Tax Free Funds invest at least 80% of their
assets in municipal obligations and participation interests in municipal
obligations. These policies cannot be changed without a shareholder vote.
WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations
issued by or on behalf of states and municipal governments,
Puerto Rico and other U.S. territories, and their authorities,
agencies, instrumentalities and political subdivisions, and by
other qualifying issuers. The interest on these obligations is
exempt from federal income tax, but is generally lower than the
interest paid on taxable securities.
Longer term municipal obligations (municipal bonds) generally
are issued to raise funds for construction or to retire previous
debt. Short term obligations (municipal notes or commercial
paper) may be issued to finance short term cash needs in
anticipation of receipt of tax and other revenues.
Municipal obligations bought by the Funds must be rated in the highest two
rating categories of nationally recognized rating agencies or determined by
Citibank to be of comparable quality.
The Tax Free Funds invest in both "general obligation" securities, which are
backed by the full faith, credit and taxing power of the issuer, and in
"revenue" securities, which are payable only from revenues from a specific
project or another revenue source. The Funds also invest in private activity
bonds, which fund privately operated industrial facilities. Payment on these
bonds generally is made from payments by the operators of the facilities and is
not backed by the taxing authority of the issuing municipality. The Funds
invest in municipal lease obligations, which are undivided interests issued by
a state or municipality in a lease or installment purchase which generally
relates to equipment or facilities. In some cases payments under municipal
leases do not have to be made unless money is specifically approved for that
purpose by an appropriate legislative body.
The Funds may purchase municipal obligations under arrangements (called
stand-by commitments) where they can sell the securities at an agreed-upon
price and date under certain circumstances. The Funds can also purchase
securities under arrangements (called when-issued or forward-delivery basis)
where the securities will not be delivered immediately. The Funds will set
aside the assets to pay for these securities at the time of the agreement.
Tax Free Reserves will, and the other Tax Free Funds may, invest more than 25%
of their assets in participation interests in municipal obligations issued by
banks and other financial institutions and secured by bank letters of credit or
guarantees. In a participation interest, the bank sells undivided interests in
a municipal obligation it owns. These interests may be supported by a bank
letter of credit or guarantee. The interest rate generally is adjusted
periodically, and the holder can sell back to the issuer after a specified
notice period. If interest rates rise or fall, the rates on participation
interests and other variable rate instruments generally will be readjusted.
Under normal market conditions, California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves invest at least 65% of their
assets in municipal obligations that pay interest that is exempt from
California, Connecticut and New York personal income taxes, respectively. When
acceptable municipal obligations of this type are not available, the Funds may
invest in municipal obligations that are not free from these state taxes. This
would cause the amount of each Fund's income that is subject to state tax to
increase.
Each Tax Free Fund may also invest in taxable money market instruments,
particularly if the after-tax return on those securities is greater than the
return on municipal money market instruments. The Funds' taxable investments
will be comparable in quality to their municipal investments. Under normal
circumstances, not more than 20% of a Tax Free Fund's assets are invested in
taxable instruments. Except for its policy to invest in municipal obligations,
each Tax Free Fund's investment goals and policies may be changed without a
shareholder vote.
DEFENSIVE STRATEGIES. The Tax Free Funds may, from time to time, take temporary
defensive positions that are inconsistent with the Funds' principal investment
strategies in attempting to respond to adverse market, political or other
conditions. When doing so, the Funds may invest without limit in high quality
taxable money market instruments, and may not be pursuing their investment
objectives.
MANAGEMENT STYLE. Managers of mutual funds use different styles when selecting
securities to purchase. Citibank's portfolio managers use a "top-down" approach
when selecting securities for the Funds. When using a "top-down" approach, the
portfolio manager looks first at broad economic factors and market conditions,
<PAGE>
such as prevailing and anticipated interest rates. On the basis of those
factors and conditions, the manager selects optimal interest rates and
maturities and chooses certain sectors or industries within the overall market.
The manager then looks at individual issuers within those sectors or industries
to select securities for the investment portfolio.
Since the Funds maintain a weighted average maturity of no more than 90 days,
many of their investments are held until maturity. The manager may sell a
security before maturity when it is necessary to do so to meet redemption
requests. The manager may also sell a security if the manager believes the
issuer is no longer as creditworthy, or in order to adjust the average weighted
maturity of a Fund's portfolio (for example, to reflect changes in the
manager's expectations concerning interest rates), or when the manager believes
there is superior value in other market sectors or industries.
INVESTMENT STRUCTURE. Cash Reserves, U.S. Treasury Reserves and Tax Free
Reserves do not invest directly in securities but instead invest through an
underlying mutual fund having the same goals and strategies. Unless otherwise
indicated, references to these Funds in this Prospectus include the underlying
fund. The other Funds may use this structure in the future. New York Tax Free
Reserves will do so only if its shareholders agree. Each Fund may stop
investing in its corresponding underlying fund at any time, and will do so if
the Fund's Trustees believe that to be in the shareholders' best interests. The
Fund could then invest in another mutual fund or pooled investment vehicle, or
could invest directly in securities.
<PAGE>
FINANCIAL HIGHLIGHTS
CitiMarkets Cash Reserves shares are newly offered. The Fund has offered Class
N shares since August 31, 1984. The table below shows the financial highlights
for Class N shares. Class N shares and CitiMarkets Cash Reserves shares are
invested in the same portfolio of securities, but CitiMarkets Cash Reserves
shares have higher expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, is included in
the annual report which is available upon request.
CITIFUNDS CASH RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of
period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.04536 0.05050 0.04940 0.05039 0.05174
Less dividends from net
investment income (0.04536) (0.05050) (0.04940) (0.05039) (0.05174)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 4.63% 5.17% 5.05% 5.16% 5.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $2,586,388 $2,198,443 $1,827,181 $1,468,177 $931,886
Ratio of expenses to average
net assets+ 0.70% 0.70% 0.70% 0.69% 0.69%
Ratio of net investment income
to average net assets+ 4.53% 5.05% 4.96% 5.02% 5.17%
Note: If agents of the Fund and agents of Cash Reserves Portfolio had not
waived all or a portion of their fees during the periods indicated, the net
investment income per share and the ratios would have been as follows:
Net investment income per share $0.04301 $0.04814 $0.04697 $0.04766 $0.04895
RATIOS:
Expenses to average net assets+ 0.94% 0.94% 0.95% 0.96% 0.97%
Net investment income to
average net assets+ 4.29% 4.81% 4.71% 4.75% 4.89%
</TABLE>
+ Includes the Fund's share of the allocated expenses of Cash Reserves
Portfolio, the underlying fund in which the Fund invests its assets.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CitiMarkets U.S. Treasury Reserves shares are newly offered. The Fund has
offered Class N shares since May 3, 1991. The table below shows the financial
highlights for Class N shares. Class N shares and CitiMarkets U.S. Treasury
Reserves shares are invested in the same portfolio of securities, but
CitiMarkets U.S. Treasury Reserves shares have higher expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is available upon request.
CITIFUNDS U.S. TREASURY RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.03947 0.04552 0.04547 0.04602 0.04751
Less dividends from net investment
income (0.03947) (0.04552) (0.04547) (0.04602) (0.04751)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 4.02% 4.65% 4.64% 4.70% 4.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $343,496 $319,930 $360,717 $317,996 $256,452
Ratio of expenses to average net
assets+ 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment income to
average net assets+ 3.96% 4.55% 4.57% 4.61% 4.77%
Note: If agents of the Fund and agents of U.S. Treasury Reserves Portfolio had
not waived all or a portion of their fees during the periods indicated, the net
investment income per share and the ratios would have been as follows:
Net investment income per share $0.03678 $0.04292 $0.04278 $0.04313 $0.04452
RATIOS:
Expenses to average net assets+ 0.97% 0.96% 0.97% 1.00% 1.00%
Net investment income to average net
assets+ 3.69% 4.29% 4.30% 4.32% 4.47%
</TABLE>
+ Includes the Fund's share of the allocated expenses of U.S. Treasury Reserves
Portfolio, the underlying fund in which the Fund invests its assets.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CitiMarkets Tax Free Reserves shares are newly offered. The Fund has offered
Class N shares since August 31, 1984. The table below shows the financial
highlights for Class N shares. Class N shares and CitiMarkets Tax Free Reserves
shares are invested in the same portfolio of securities, but CitiMarkets Tax
Free Reserves shares have higher expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is available upon request.
CITIFUNDS TAX FREE RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.02626 0.03042 0.03004 0.02973 0.03197
Less dividends from net investment
income (0.02626) (0.03042) (0.03004) (0.02973) (0.03197)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 2.66% 3.08% 3.05% 3.01% 3.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $489,880 $514,771 $422,483 $371,349 $392,172
Ratio of expenses to average net
assets+ 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to
average net assets+ 2.62% 3.04% 3.01% 2.97% 3.22%
Note: If agents of the Fund and agents of Tax Free Reserves Portfolio had not
waived all or a portion of their fees during the periods indicated, the net
investment income per share and the ratios would have been as follows:
Net investment income per share $0.02365 $0.02782 $0.02715 $0.02693 $0.02929
RATIOS:
Expenses to average net assets+ 0.91% 0.92% 0.94% 0.93% 0.92%
Net investment income to average net
assets+ 2.36% 2.77% 2.72% 2.69% 2.95%
</TABLE>
+ Includes the Fund's share of the allocated expenses of Tax Free Reserves
Portfolio, the underlying fund in which the Fund invests its assets.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CitiMarkets California Tax Free Reserves shares are newly offered. The Fund has
offered Class N shares since March 10, 1992. The table below shows the
financial highlights for Class N shares. Class N shares and CitiMarkets
California Tax Free Reserves shares are invested in the same portfolio of
securities, but CitiMarkets California Tax Free Reserves shares have higher
expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is available upon request.
CITIFUNDS CALIFORNIA TAX FREE RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.02473 0.02928 0.02899 0.03089 0.03434
Less dividends from net investment
income (0.02473) (0.02928) (0.02899) (0.03089) (0.03434)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 2.50% 2.97% 2.94% 3.13% 3.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $306,033 $285,628 $207,345 $150,557 $51,832
Ratio of expenses to average net
assets 0.65% 0.65% 0.65% 0.42% 0.30%
Ratio of net investment income to
average net assets 2.47% 2.92% 2.91% 3.05% 3.43%
Note: If agents of the Fund had not waived all or a portion of their fees from
the Fund for the periods indicated and the Administrator had not voluntarily
assumed expenses for the periods before August 31, 1996, and the expenses were
not reduced for the fees paid indirectly for the years after August 31, 1995,
the ratios and net investment income per share would have been as follows:
Net investment income per share $0.02243 $0.02687 $0.02630 $0.02481 $0.02513
RATIOS:
Expenses to average net assets 0.88% 0.90% 0.92% 1.01% 1.21%
Net investment income to average net
assets 2.24% 2.67% 2.64% 2.45% 2.51%
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CitiMarkets Connecticut Tax Free Reserves shares are newly offered. The Fund
has offered Class N shares since December 1, 1993. The table below shows the
financial highlights for Class N shares. Class N shares and CitiMarkets
Connecticut Tax Free Reserves shares are invested in the same portfolio of
securities, but CitiMarkets Connecticut Tax Free Reserves shares have higher
expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is available upon request.
CITIFUNDS CONNECTICUT TAX FREE RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.02550 0.02971 0.02914 0.03135 0.03564
Less dividends from net investment
income (0.02550) (0.02971) (0.02914) (0.03135) (0.03564)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 2.58% 3.01% 2.95% 3.18% 3.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $162,053 $156,552 $169,322 $116,025 $46,556
Ratio of expenses to average net
assets(A) 0.65% 0.66% 0.65% 0.42% 0.22%
Ratio of expenses to average net
assets after fees paid indirectly(A) 0.65% 0.65% 0.65% 0.42% 0.22%
Ratio of net investment income to
average net assets 2.54% 2.98% 2.92% 3.08% 3.60%
Note: If agents of the Fund had not voluntarily waived all or a portion of
their fees from the Fund for the periods indicated and the Administrator had
not voluntarily assumed expenses for the periods before August 31, 1996, and
the expenses were not reduced for the fees paid indirectly for the years after
August 31, 1995, the ratios and net investment income per share would have been
as follows:
Net investment income per share $0.02289 $0.02712 $0.02615 $0.02504 $0.02732
RATIOS:
Expenses to average net assets 0.91% 0.91% 0.95% 1.04% 1.06%
Net investment income to average net
assets 2.28% 2.72% 2.62% 2.46% 2.76%
</TABLE>
(A) The expense ratios for the year ended August 31, 1996 and the periods
thereafter have been adjusted to reflect a change in reporting
requirements. The new report guidelines require the Fund to increase its
expense ratio by the effect of any expense offset arrangements with its
service providers. The expense ratios for the periods ended on or before
August 31, 1995 have not been adjusted to reflect this change.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CitiMarkets New York Tax Free Reserves shares are newly offered. The Fund has
offered Class N shares since November 4, 1985. The table below shows the
financial highlights for Class N shares. Class N shares and CitiMarkets New
York Tax Free Reserves shares are invested in the same portfolio of securities,
but CitiMarkets New York Tax Free Reserves shares have higher expenses.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Class N share. The total returns in the table
represent the rate that an investor would have earned on an investment in Class
N shares of the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
annual report which is available upon request.
CITIFUNDS NEW YORK TAX FREE RESERVES
<TABLE>
<CAPTION>
Class N
Year Ended August 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Net asset value, beginning of
period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income 0.02572 0.02991 0.02949 0.02936 0.03136
Less dividends from net
investment income (0.02572) (0.02991) (0.02949) (0.02936) (0.03136)
Net asset value, end of period $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Total return 2.60% 3.03% 2.99% 2.98% 3.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $1,181,524 $1,094,732 $976,959 $941,691 $767,129
Ratio of expenses to average net
assets 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to
average net assets 2.56% 2.99% 2.95% 2.92% 3.15%
Note: If agents of the Fund had not voluntarily agreed to waive all or a
portion of their fees for the periods indicated and the expenses were not
reduced for the fees paid indirectly for the years after August 31, 1995, the
net investment income per share and ratios would have been as follows:
Net investment income per share $0.02391 $0.02791 $0.02739 $0.02725 $0.02917
RATIOS:
Expenses to average net assets 0.84% 0.85% 0.86% 0.86% 0.87%
Net investment income to average
net assets 2.38% 2.79% 2.74% 2.71% 2.93%
</TABLE>
<PAGE>
APPENDIX
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 2000 UNDER FEDERAL PERSONAL, STATE AND LOCAL INCOME TAX LAW FOR THE
JURISDICTIONS INDICATED
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following tables show the approximate taxable yields which are
equivalent to tax-exempt yields under 2000 federal personal income tax laws,
and under the state and local income personal income laws described in the
tables. If tax laws, rates or brackets are changed, the information in the
table would be out of date. All of the Tax Free Funds expect that a substantial
portion of their dividends will be exempt from federal personal income taxes.
California Tax Free Reserves and Connecticut Tax Free Reserves also expect that
a substantial portion of their dividends will be exempt from California and
Connecticut personal income taxes, respectively. Similarly, New York Tax Free
Reserves expects that a substantial portion of the dividends it pays will be
exempt from New York State and New York City personal income taxes. However, in
reviewing the tables below, you should remember that each of the Tax Free Funds
may also pay dividends which are subject to federal, state and local personal
income taxes.
FEDERAL TAX RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Income* Income Federal Tax-Exempt Yield
Tax
Single 2000 Joint 2000 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
----------- ---------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$0-$26,250 $0 - $43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$26,251-$63,550 $43,851-$105,950 28.0% 2.78% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$63,551-$132,600 $105,951-$161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601-$288,350 $161,451-$288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351&Over $288,351&Over 39.6% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>
* Net amount subject to Federal personal income tax after deductions and
exemptions.
FEDERAL AND CALIFORNIA TAX RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Income* Income California Tax-Exempt Yield
Tax
Single 1999*** Joint 1999*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
-------------- ------------- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$0- $26,250 17.85% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0- $43,850 17.40% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87%
$26,251- $63,550 34.45% 3.05% 3.81% 4.58% 5.34% 6.10% 6.86% 7.63% 8.39% 9.15% 9.92%
$43,851-$105,950 34.06% 3.03% 3.79% 4.55% 5.31% 6.07% 6.82% 7.58% 8.34% 9.10% 9.86%
$63,551-$132,600 $105,951-$161,450 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$132,601-$288,350 $161,451-$288,350 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$288,351&Over $288,351&Over 45.22% 3.65% 4.56% 5.48% 6.39% 7.30% 8.21% 9.13% 10.04% 10.95% 11.87%
</TABLE>
* Net amount subject to Federal and California personal income tax after
deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket.
Combined Federal and California rate assumes itemization of state tax
deduction. California tax rates are based on 1999 information, since at
this time 2000 information is not available.
FEDERAL AND CONNECTICUT TAX RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Income* Income Connecticut Tax-Exempt Yield
Tax
Single 2000*** Joint 2000*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
-------------- ------------- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$0 -$26,250 18.34% 2.45% 3.06% 3.67% 4.29% 4.90% 5.51% 6.12% 6.74% 7.35% 7.96%
$0- $43,850 18.24% 2.45% 3.06% 3.67% 4.28% 4.89% 5.50% 6.12% 6.73% 7.34% 7.95%
$26,251-$63,550 $43,851-$105,950 31.24% 2.91% 3.64% 4.36% 5.09% 5.82% 6.54% 7.27% 8.00% 8.73% 9.45%
$63,551-$132,600 $105,951-$161,450 34.11% 3.04% 3.79% 4.55% 5.31% 6.07% 6.83% 7.59% 8.35% 9.11% 9.86%
$132,601-$288,350 $161,451-$288,350 38.88% 3.27% 4.09% 4.91% 5.73% 6.54% 7.36% 8.18% 9.00% 9.82% 10.63%
$288,351&Over $288,351&Over 42.32% 3.47% 4.33% 5.20% 6.07% 6.93% 7.80% 8.67% 9.54% 10.40% 11.27%
</TABLE>
* Net amount subject to Federal and Connecticut personal income tax after
deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket.
Combined Federal and Connecticut rate assumes itemization of state tax
deduction.
<PAGE>
FEDERAL AND NEW YORK STATE TAX RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Income* Income New York Tax-Exempt Yield
Tax
Single 2000** Joint 2000*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
------------- ------------- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$0-$26,250 19.54% 2.49% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.84% 7.46% 8.08%
$0-$43,850 19.28% 2.48% 3.10% 3.72% 4.34% 4.96% 5.57% 6.19% 6.81% 7.43% 8.05%
$26,251- $63,550 $43,851-$105,950 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$63,551-$132,600 $105,951-$161,450 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$132,601-$288,350 $161,451-$288,350 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$288,351&Over $288,351&Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%
</TABLE>
* Net amount subject to Federal and New York personal income tax after
deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket.
Combined Federal and New York rate assumes itemization of state tax
deduction.
FEDERAL, NEW YORK STATE AND CITY TAX RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Income* Income New York City Tax-Exempt Yield
Tax
Single 2000*** Joint 2000*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
-------------- ------------- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$0- $26,250 22.40% 2.58% 3.22% 3.87% 4.51% 5.15% 5.80% 6.44% 7.09% 7.73% 8.38%
$0- $43,850 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$26,251- $63,550 35.63% 3.11% 3.88% 4.66% 5.44% 6.21% 6.99% 7.77% 8.54% 9.32% 10.10%
$43,851-$105,950 35.62% 3.11% 3.88% 4.66% 5.44% 6.21% 6.99% 7.77% 8.54% 9.32% 10.10%
$63,551-$132,600 $105,951-$161,450 38.37% 3.25% 4.06% 4.87% 5.68% 6.49% 7.30% 8.11% 8.92% 9.74% 10.55%
$132,601-$288,350 $161,451-$288,350 42.83% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$288,351&Over $288,351&Over 46.05% 3.71% 4.63% 5.56% 6.49% 7.41% 8.34% 9.27% 10.19% 11.12% 12.05%
</TABLE>
* Net amount subject to Federal and New York personal income tax after
deductions and exemptions.
** Effective combined federal, state and city tax bracket.
*** State and city rates based on the average state and city rates for the
federal tax bracket. Combined Federal, New York State and New York City
rate assumes itemization of state tax deduction.
<PAGE>
The Statement of Additional Information (SAI) provides more details about the
Funds and their policies. The SAI is incorporated by reference into this
Prospectus and is legally part of it.
Additional information about each Fund's investments is available in that
Fund's Annual and Semi-Annual Reports to Shareholders. In each Fund's Annual
Report, you will find a discussion of the market conditions and investment
strategies that significantly affected that Fund's performance.
To obtain free copies of the SAI and the Annual and Semi- Annual Reports or to
make other inquiries, please call 1-800-625-4554 toll-free. Annual and
Semi-Annual Reports are also available on the CitiMarkets website at
www.CitiMarkets.com.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the EDGAR Database on the SEC Internet site at http://www.sec.gov.
Information about the Funds (including the SAI) can also be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. You can get information
on the operation of the Public Reference Room by calling the SEC at: (202)
942-8090. Copies may also be obtained upon payment of a duplicating fee by
electronic request to public [email protected], or by writing to the SEC's Public
Reference Section, Washington, DC 20549-0102.
SEC File Numbers 811-4052
811-3893
811-4596
<PAGE>
Statement of Additional Information
December 31, 1999
As supplemented July 14, 2000
CITIFUNDS(SM)CASH RESERVES CITIFUNDS(SM)CALIFORNIA TAX FREE RESERVES
CITIFUNDS(SM)U.S. TREASURY RESERVES CITIFUNDS(SM)CONNECTICUT TAX FREE RESERVES
CITIFUNDS(SM)TAX FREE RESERVES CITIFUNDS(SM)NEW YORK TAX FREE RESERVES
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectus, dated December 31, 1999, for CitiFunds(SM) Cash Reserves,
CitiFunds(SM) U.S. Treasury Reserves, CitiFunds(SM) Tax Free Reserves,
CitiFunds(SM) California Tax Free Reserves, CitiFunds(SM) Connecticut Tax Free
Reserves and CitiFunds(SM) New York Tax Free Reserves (the foregoing,
collectively, the "Funds") or the Prospectus dated July 14, 2000, for
CitiMarkets Cash Reserves, CitiMarkets U.S. Treasury Reserves, CitiMarkets Tax
Free Reserves, CitiMarkets California Tax Free Reserves, CitiMarkets
Connecticut Tax Free Reserves and CitiMarkets New York Tax Free Reserves (the
foregoing, collectively, the "CitiMarkets shares"), each a separate class of
the Fund with its corresponding name. This Statement of Additional Information
should be read in conjunction with the Prospectuses. This Statement of
Additional Information incorporates by reference the financial statements
described on page ___ hereof. These financial statements can be found in the
Funds' Annual Reports to Shareholders. An investor may obtain copies of the
Funds' Prospectuses and Annual Reports without charge by contacting the Funds'
Distributor (see back cover for address and phone number).
Cash Reserves and U.S. Treasury Reserves are separate series of CitiFunds
(SM) Trust III. California Tax Free Reserves, Connecticut Tax Free Reserves and
New York Tax Free Reserves are separate series of CitiFunds(SM) Multi- State
Tax Free Trust. The address and telephone number of CitiFunds Trust III,
CitiFunds Multi-State Tax Free Trust and Tax Free Reserves (collectively, the
"Trusts") are 21 Milk Street, Boston, Massachusetts 02109, (617) 423-1679.
CitiFunds Trust III invests all of the investable assets of Cash Reserves
and U.S. Treasury Reserves in Cash Reserves Portfolio and U.S. Treasury
Reserves Portfolio, respectively. Tax Free Reserves invests all of its
investable assets in Tax Free Reserves Portfolio (collectively, with Cash
Reserves Portfolio and U.S. Treasury Reserves Portfolio, the "Portfolios"). The
address and telephone number of Cash Reserves Portfolio are Elizabethan Square,
George Town, Grand Cayman, British West Indies, (345) 945-1824. The address and
telephone number of U.S. Treasury Reserves Portfolio and Tax Free Reserves
Portfolio are 21 Milk Street, Boston, Massachusetts 02109, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS PAGE
1. The Funds........................................................................ __
2. Investment Objectives, Policies and Restrictions................................. __
3. Performance Information.......................................................... __
4. Determination of Net Asset Value................................................. __
5. Management....................................................................... __
6. Additional Information on the Purchase and Sale of Shares........................ __
7. Dealer Commissions and Concessions............................................... __
8. Portfolio Transactions........................................................... __
9. Description of Shares, Voting Rights and Liabilities............................. __
10. Certain Additional Tax Matters.................................................. __
11. Independent Accountants and Financial Statements................................ __
Appendix A -- Ratings of Municipal Obligations...................................... A-1
Appendix B -- Additional Information Concerning California Municipal Obligations.... B-1
Appendix C -- Additional Information Concerning Connecticut Municipal Obligations... C-1
Appendix D -- Additional Information Concerning New York Municipal Obligations...... D-1
Appendix E -- Additional Information Concerning Puerto Rico Municipal Obligations... E-1
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
1. THE FUNDS
CitiFunds Trust III is a diversified, open-end management investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on June 28, 1985 and is the successor to the
business of The Landmark Funds Cash Reserves, Inc., which was incorporated
under the laws of the State of Maryland in 1984. Shares of CitiFunds Trust III
are divided into two separate series, Cash Reserves and U.S. Treasury Reserves.
Prior to January 2, 1998, CitiFunds Trust III was called Landmark Funds III,
and Cash Reserves and U.S. Treasury Reserves were called Landmark Cash Reserves
and Landmark U.S. Treasury Reserves, respectively.
Tax Free Reserves is a no-load, non-diversified, open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on June 21, 1985 and is the successor to the
business of The Landmark Funds Tax Free Reserves, Inc., which was incorporated
under the laws of the State of Maryland in 1983. Prior to January 2, 1998, Tax
Free Reserves was called Landmark Tax Free Reserves.
CitiFunds Multi-State Tax Free Trust is a no-load, non-diversified, open-
end management investment company which was organized as a business trust under
the laws of the Commonwealth of Massachusetts on August 30, 1985. Shares of
CitiFunds Multi-State Tax Free Trust are divided into three separate series,
California Tax Free Reserves, Connecticut Tax Free Reserves and New York Tax
Free Reserves. Prior to January 2, 1998 CitiFunds Multi-State Tax Free Trust
was called Landmark Multi-State Tax Free Funds, and California Tax Free
Reserves, Connecticut Tax Free Reserves and New York Tax Free Reserves were
called Landmark California Tax Free Reserves, Landmark Connecticut Tax Free
Reserves and Landmark New York Tax Free Reserves, respectively.
All references in this Statement of Additional Information to the
activities of the Trusts are intended to include those of the Trusts and their
respective predecessors, if any, unless the context indicates otherwise.
References in this Statement of Additional Information to the Prospectuses are
to the Prospectus, dated December 31, 1999, of the Class N shares of the Funds
and Class A and Class B shares of Cash Reserves and the Prospectus, dated July
14, 2000 of the CitiMarkets shares of the Funds, by which shares of the Funds
are offered.
Each of the Funds is a type of mutual fund called a "money market fund."
Tax Free Reserves is referred to as a "tax-exempt money market fund." Each of
California Tax Free Reserves and Connecticut Tax Free Reserves is a type of
fund commonly referred to as a "double tax-exempt money market fund," and New
York Tax Free Reserves is a type of fund commonly referred to as a "triple
tax-exempt money market fund." The net asset value of each Fund's shares is
expected to remain constant at $1.00, although there can be no assurance that
this will be so on a continuing basis. (See "Determination of Net Asset
Value.")
Each of Tax Free Reserves, California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves is referred to as a "Tax Free
Fund." Each Tax Free Fund is non-diversified.
CitiFunds Trust III seeks the investment objectives of Cash Reserves and
U.S. Treasury Reserves by investing all of their investable assets in Cash
Reserves Portfolio and U.S. Treasury Reserves Portfolio, respectively. Tax Free
Reserves seeks its investment objectives by investing all of its investable
assets in Tax Free Reserves Portfolio. Each of Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio is a diversified, open-end management investment
company. Tax Free Reserves Portfolio is a non-diversified, open-end management
investment company. Each Portfolio has the same investment objectives and
policies as its corresponding Fund.
The Trustees of CitiFunds Trust III and Tax Free Reserves believe that the
aggregate per share expenses of Cash Reserves, U.S. Treasury Reserves and Tax
Free Reserves and their corresponding Portfolios will be less than or
approximately equal to the expenses that each Fund would incur if the assets of
the Fund were invested directly in the types of securities held by its
Portfolio. Each Fund may withdraw its investment in its Portfolio at any time,
and will do so if the Fund's Trustees believe it to be in the best interest of
the Fund's shareholders. If a Fund were to withdraw its investment in its
Portfolio, the Fund could either invest directly in securities in accordance
with the investment policies described below or invest in another mutual fund
or pooled investment vehicle having the same investment objectives and
policies. If a Fund were to withdraw, the Fund could receive securities from
the Portfolio instead of cash, causing the Fund to incur brokerage, tax and
other charges or leaving it with securities which may or may not be readily
marketable or widely diversified.
<PAGE>
Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but a
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause a Fund to withdraw its investment in its Portfolio.
The Portfolios, as New York trusts, are not required to hold and have no
intention of holding annual meetings of investors. However, when a Portfolio is
required to do so by law, or in the judgment of Trustees it is necessary or
desirable to do so, the Portfolio will submit matters to its investors for a
vote. When a Fund is asked to vote on matters concerning its corresponding
Portfolio (other than a vote to continue the Portfolio following the withdrawal
of an investor), the Fund will hold a shareholder meeting and vote in
accordance with shareholder instructions, or otherwise act in accordance with
applicable law. Of course, the Fund could be outvoted, or otherwise adversely
affected, by other investors in the Portfolio.
The Portfolios may sell interests to investors in addition to the Funds.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Funds. Therefore, the investment
returns for all investors in funds investing in a Portfolio may not be the
same. These differences in returns are also present in other mutual fund
structures.
Information about other holders of interests in the Portfolios is
available from the Funds' distributor, CFBDS, Inc. ("CFBDS"), 21 Milk Street,
Boston, Massachusetts 02109, (617) 423-1679.
Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to
each of the Portfolios and to CitiFunds Multi-State Tax Free Trust. The Adviser
manages the investments of each Portfolio, California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves from day to day in
accordance with the investment objectives and policies of that Portfolio or
Fund. The selection of investments for each Portfolio and Fund, and the way
they are managed, depend on the conditions and trends in the economy and the
financial marketplaces.
CFBDS, the Funds' administrator (the "Administrator"), supervises the
overall administration of the Trusts, U.S. Treasury Reserves Portfolio and Tax
Free Reserves Portfolio. Signature Financial Group (Cayman) Ltd. ("SFG")
supervises the overall administration of Cash Reserves Portfolio. The Boards of
Trustees of the Trusts and the Portfolios provide broad supervision over the
affairs of the Trusts and of the Portfolios, respectively.
Shares of each Fund are continuously sold by CFBDS, each Fund's
distributor (the "Distributor"). Class N shares of each Fund and Class A and
Class B shares of Cash Reserves are available only to investors who are
customers of a financial institution, such as a federal or state-chartered
bank, trust company, savings and loan association or savings bank, or a
securities broker, that has entered into a shareholder servicing agreement with
the appropriate Trust with respect to that Fund (collectively, "Shareholder
Servicing Agents"). CitiMarkets shares are available only to on-line investors
that have established a customer account with the CitiMarkets Program. CFBDS
may receive fees from the Funds pursuant to Distribution Plans adopted in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act").
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of CASH RESERVES is to provide shareholders with
liquidity and as high a level of current income as is consistent with
preservation of capital.
The investment objective of U.S. TREASURY RESERVES is to provide its
shareholders with liquidity and as high a level of current income from U.S.
government obligations as is consistent with the preservation of capital.
The investment objectives of TAX FREE RESERVES are to provide its
shareholders with high levels of current income exempt from federal income
taxes, preservation of capital and liquidity.
The investment objectives of CALIFORNIA TAX FREE RESERVES are to provide
shareholders with high levels of current income exempt from both federal and
California personal income taxes, preservation of capital and liquidity.
The investment objectives of CONNECTICUT TAX FREE RESERVES are to provide
its shareholders with high levels of current income exempt from both federal
and Connecticut personal income taxes, preservation of capital and liquidity.
The investment objectives of NEW YORK TAX FREE RESERVES are to provide its
shareholders with high levels of current income exempt from federal, New York
State and New York City personal income taxes, preservation of capital and
liquidity.
<PAGE>
The investment objectives of each Fund may be changed without approval by
that Fund's shareholders. Of course, there can be no assurance that any Fund
will achieve its investment objectives.
INVESTMENT POLICIES
CitiFunds Trust III seeks the investment objectives of its series by
investing all of the investable assets of Cash Reserves and U.S. Treasury
Reserves in Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio,
respectively. Tax Free Reserves seeks its investment objectives by investing
all of its investable assets in Tax Free Reserves Portfolio. Each Portfolio has
the same investment objectives and policies as its corresponding Fund. The
Prospectus contains a discussion of the principal investment strategies of each
Fund and certain risks of investing in each Fund. The following supplements the
information contained in the Prospectus concerning the investment objectives,
policies and techniques of each Fund and Portfolio, and contains more
information about the various types of securities in which each Fund and each
Portfolio may invest and the risks involved in such investments. Since the
investment characteristics of Cash Reserves, U.S. Treasury Reserves and Tax
Free Reserves will correspond directly to those of the Portfolio in which it
invests, the following is a supplementary discussion with respect to each
Portfolio.
Each of Cash Reserves, U.S. Treasury Reserves and Tax Free Reserves may
withdraw its investment from its corresponding Portfolio at any time, if the
Board of Trustees of the applicable Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, a Fund's assets would
be invested in accordance with the investment policies described below with
respect to its corresponding Portfolio. Except for the concentration policy of
Cash Reserves with respect to bank obligations described in paragraph (1) below
and for the policy of each of the Tax Free Funds with respect to investing in
municipal obligations described below, which may not be changed without the
approval of Cash Reserves' or the applicable Tax Free Fund's shareholders, the
approval of a Fund's shareholders would not be required to change that Fund's
investment objectives or any of its investment policies. Likewise, except for
the concentration policy of Cash Reserves Portfolio with respect to bank
obligations described in paragraph (1) below and for the policy of Tax Free
Reserves Portfolio with respect to investing in municipal obligations described
below, which may not be changed without the approval of Cash Reserves
Portfolio's or Tax Free Reserves Portfolio's investors, as applicable, the
approval of the investors in a Portfolio would not be required to change that
Portfolio's investment objectives or any of its investment policies discussed
below, including those concerning securities transactions. Each Portfolio
would, however, give written notice to its investors at least 30 days prior to
implementing any change in its investment objectives.
CASH RESERVES PORTFOLIO
Cash Reserves Portfolio seeks its investment objective through investments
limited to the following types of high quality U.S. dollar-denominated money
market instruments. All investments by Cash Reserves Portfolio mature or are
deemed to mature within 397 days from the date of acquisition, and the average
maturity of the investments held by the Portfolio (on a dollar-weighted basis)
is 90 days or less. All investments by the Portfolio are in "first tier"
securities (i.e., securities rated in the highest rating category for short-
term obligations by at least two nationally recognized statistical rating
organizations (each, an "NRSRO") assigning a rating to the security or issuer
or, if only one NRSRO assigns a rating, that NRSRO or, in the case of an
investment which is not rated, of comparable quality as determined by the
Adviser) and are determined by the Adviser to present minimal credit risks.
Investments in high quality, short term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or a longer term. Cash Reserves Portfolio may hold
uninvested cash reserves pending investment. Under the 1940 Act, Cash Reserves
and Cash Reserves Portfolio are each classified as "diversified," although in
the case of Cash Reserves, all of its investable assets are invested in the
Portfolio. A "diversified investment company" must invest at least 75% of its
assets in cash and cash items, U.S. government securities, investment company
securities (e.g., interests in the Portfolio) and other securities limited as
to any one issuer to not more than 5% of the total assets of the investment
company and not more than 10% of the voting securities of the issuer.
(1) Bank obligations -- Cash Reserves Portfolio invests at least 25%
of its investable assets, and may invest up to 100% of its assets, in bank
obligations. This concentration policy is fundamental and may not be
changed without the approval of the investors in Cash Reserves Portfolio.
Bank obligations include, but are not limited to, negotiable certificates
of deposit, bankers' acceptances and fixed time deposits. Cash Reserves
Portfolio limits its investments in U.S. bank obligations (including their
non-U.S. branches) to banks having total assets in excess of $1 billion
and which are subject to regulation by an agency of the U.S. government.
The Portfolio may also invest in certificates of deposit issued by banks
the deposits in which are insured by the Federal Deposit Insurance
Corporation ("FDIC"), having total assets of less than $1 billion,
provided that the Portfolio at no time owns more than $100,000 principal
amount of certificates of deposit (or any higher principal amount which in
the future may be fully insured by FDIC insurance) of any one of those
issuers. Fixed time deposits are obligations which are payable at a stated
maturity date and bear a fixed rate of interest. Generally, fixed time
deposits may be withdrawn on demand by the Portfolio, but they may be
subject to early withdrawal penalties which vary depending upon market
<PAGE>
conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions
on the Portfolio's right to transfer a beneficial interest in the deposit
to a third party.
U.S. banks organized under federal law are supervised and examined by
the Comptroller of the Currency and are required to be members of the
Federal Reserve System and to be insured by the FDIC. U.S. banks organized
under state law are supervised and examined by state banking authorities
and are members of the Federal Reserve System only if they elect to join.
However, state banks which are insured by the FDIC are subject to federal
examination and to a substantial body of federal law and regulation. As a
result of federal and state laws and regulations, U.S. branches of U.S.
banks, among other things, are generally required to maintain specified
levels of reserves, and are subject to other supervision and regulation
designed to promote financial soundness.
Cash Reserves Portfolio limits its investments in non-U.S. bank
obligations (i.e., obligations of non-U.S. branches and subsidiaries of
U.S. banks, and U.S. and non-U.S. branches of non-U.S. banks) to U.S.
dollar-denominated obligations of banks which at the time of investment
are branches or subsidiaries of U.S. banks which meet the criteria in the
preceding paragraphs or are branches of non-U.S. banks which (i) have more
than $10 billion, or the equivalent in other currencies, in total assets;
(ii) in terms of assets are among the 75 largest non-U.S. banks in the
world; (iii) have branches or agencies in the United States; and (iv) in
the opinion of the Adviser, are of an investment quality comparable with
obligations of U.S. banks which may be purchased by the Portfolio. These
obligations may be general obligations of the parent bank, in addition to
the issuing branch or subsidiary, but the parent bank's obligations may be
limited by the terms of the specific obligation or by governmental
regulation. The Portfolio also limits its investments in non-U.S. bank
obligations to banks, branches and subsidiaries located in Western Europe
(United Kingdom, France, Germany, Belgium, the Netherlands, Italy,
Switzerland, Denmark, Norway, Sweden), Australia, Japan, the Cayman
Islands, the Bahamas and Canada. Cash Reserves Portfolio does not purchase
any bank obligation of the Adviser or an affiliate of the Adviser.
Since Cash Reserves Portfolio may hold obligations of non-U.S.
branches and subsidiaries of U.S. banks, and U.S. and non-U.S. branches of
non-U.S. banks, an investment in Cash Reserves involves certain additional
risks. Such investment risks include future political and economic
developments, the possible imposition of non-U.S. withholding taxes on
interest income payable on such obligations held by the Portfolio, the
possible seizure or nationalization of non-U.S. deposits and the possible
establishment of exchange controls or other non-U.S. governmental laws or
restrictions applicable to the payment of the principal of and interest on
certificates of deposit or time deposits that might affect adversely such
payment on such obligations held by the Portfolio. In addition, there may
be less publicly-available information about a non-U.S. branch or
subsidiary of a U.S. bank or a U.S. or non-U.S. branch of a non-U.S. bank
than about a U.S. bank and such branches and subsidiaries may not be
subject to the same or similar regulatory requirements that apply to U.S.
banks, such as mandatory reserve requirements, loan limitations and
accounting, auditing and financial record-keeping standards and
requirements.
The provisions of federal law governing the establishment and
operation of U.S. branches do not apply to non-U.S. branches of U.S.
banks. However, Cash Reserves Portfolio may purchase obligations only of
those non-U.S. branches of U.S. banks which were established with the
approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"). As a result of such approval, these branches are
subject to examination by the Board of Governors and the Comptroller of
the Currency. In addition, such non-U.S. branches of U.S. banks are
subject to the supervision of the U.S. bank and creditors of the non-U.S.
branch are considered general creditors of the U.S. bank subject to
whatever defenses may be available under the governing non-U.S. law and to
the terms of the specific obligation. Nonetheless, Cash Reserves Portfolio
generally will be subject to whatever risk may exist that the non-U.S.
country may impose restrictions on payment of certificates of deposit or
time deposits.
U.S. branches of non-U.S. banks are subject to the laws of the state
in which the branch is located or to the laws of the United States. Such
branches are therefore subject to many of the regulations, including
reserve requirements, to which U.S. banks are subject. In addition, Cash
Reserves Portfolio may purchase obligations only of those U.S. branches of
non-U.S. banks which are located in states which impose the additional
requirement that the branch pledge to a designated bank within the state
an amount of its assets equal to 5% of its total liabilities.
Non-U.S. banks in whose obligations Cash Reserves Portfolio may
invest may not be subject to the laws and regulations referred to in the
preceding two paragraphs.
<PAGE>
(2) Obligations of, or guaranteed by, non-U.S. governments. Cash
Reserves Portfolio limits its investments in non-U.S. government
obligations to obligations issued or guaranteed by the governments of
Western Europe (United Kingdom, France, Germany, Belgium, the Netherlands,
Italy, Switzerland, Denmark, Norway, Sweden), Australia, Japan and Canada.
Generally, such obligations may be subject to the additional risks
described in paragraph (1) above in connection with the purchase of non-
U.S. bank obligations.
(3) Commercial paper rated Prime-1 by Moody's Investors Service, Inc.
("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or, if not rated, determined to be of comparable quality by the
Adviser, such as unrated commercial paper issued by corporations having an
outstanding unsecured debt issue currently rated Aaa by Moody's or AAA by
Standard & Poor's. Commercial paper is unsecured debt of corporations
usually maturing in 270 days or less from its date of issuance.
(4) Obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities. These include issues of the U.S. Treasury,
such as bills, certificates of indebtedness, notes, bonds and Treasury
Receipts, which are unmatured interest coupons of U.S. Treasury bonds and
notes which have been separated and resold in a custodial receipt program
administered by the U.S. Treasury, and issues of agencies and
instrumentalities established under the authority of an Act of Congress.
Some of the latter category of obligations are supported by the full faith
and credit of the United States, others are supported by the right of the
issuer to borrow from the U.S. Treasury, and still others are supported
only by the credit of the agency or instrumentality. Examples of each of
the three types of obligations described in the preceding sentence are (i)
obligations guaranteed by the Export-Import Bank of the United States,
(ii) obligations of the Federal Home Loan Mortgage Corporation, and (iii)
obligations of the Student Loan Marketing Association, respectively.
(5) Repurchase agreements, providing for resale within 397 days or
less, covering obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities which may have maturities in excess of 397
days. A repurchase agreement arises when a buyer purchases an obligation
and simultaneously agrees with the vendor to resell the obligation to the
vendor at an agreed-upon price and time, which is usually not more than
seven days from the date of purchase. The resale price of a repurchase
agreement is greater than the purchase price, reflecting an agreed-upon
market rate which is effective for the period of time the buyer's funds
are invested in the obligation and which is not related to the coupon rate
on the purchased obligation. Obligations serving as collateral for each
repurchase agreement are delivered to the Portfolio's custodian or a
subcustodian either physically or in book entry form and the collateral is
marked to the market daily to ensure that each repurchase agreement is
fully collateralized at all times. A buyer of a repurchase agreement runs
a risk of loss if, at the time of default by the issuer, the value of the
collateral securing the agreement is less than the price paid for the
repurchase agreement. If the vendor of a repurchase agreement becomes
bankrupt, Cash Reserves Portfolio might be delayed, or may incur costs or
possible losses of principal and income, in selling the collateral. The
Portfolio may enter into repurchase agreements only with a vendor which is
a member bank of the Federal Reserve System or which is a "primary dealer"
(as designated by the Federal Reserve Bank of New York) in U.S. government
obligations. The Portfolio will not enter into any repurchase agreements
with the Adviser or an affiliate of the Adviser. The restrictions and
procedures described above which govern the Portfolio's investment in
repurchase agreements are designed to minimize the Portfolio's risk of
losses in making those investments. (See "Repurchase Agreements.")
(6) Asset-backed securities, which may include securities such as
Certificates for Automobile Receivables ("CARS") and Credit Card
Receivable Securities ("CARDS"), as well as other asset-backed securities.
CARS represent fractional interests in pools of car installment loans, and
CARDS represent fractional interests in pools of revolving credit card
receivables. The rate of return on asset-backed securities may be affected
by early prepayment of principal on the underlying loans or receivables.
Prepayment rates vary widely and may be affected by changes in market
interest rates. It is not possible to accurately predict the average life
of a particular pool of loans or receivables. Reinvestment of principal
may occur at higher or lower rates than the original yield. Therefore, the
actual maturity and realized yield on asset-backed securities will vary
based upon the prepayment experience of the underlying pool of loans or
receivables. (See "Asset-Backed Securities.")
Cash Reserves Portfolio does not purchase securities which the
Portfolio believes, at the time of purchase, will be subject to exchange
controls or non-U.S. withholding taxes; however, there can be no assurance
that such laws may not become applicable to certain of the Portfolio's
investments. In the event exchange controls or non-U.S. withholding taxes
are imposed with respect to any of the Portfolio's investments, the effect
may be to reduce the income received by the Portfolio on such investments
or to prevent the Portfolio from receiving any value in U.S. dollars from
its investment in non-U.S. securities.
<PAGE>
ASSET-BACKED SECURITIES
As set forth above, Cash Reserves Portfolio may purchase asset-backed
securities that represent fractional interests in pools of retail installment
loans, both secured (such as CARS) and unsecured, or leases or revolving credit
receivables, both secured and unsecured (such as CARDS). These assets are
generally held by a trust and payments of principal and interest or interest
only are passed through monthly or quarterly to certificate holders and may be
guaranteed up to certain amounts by letters of credit issued by a financial
institution affiliated or unaffiliated with the trustee or originator of the
trust.
Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Reinvestment of principal may occur at higher or lower rates than the
original yield. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying loans, leases or
receivables are not realized by the Portfolio because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with its investment objectives and policies, Cash
Reserves Portfolio may invest in other asset-backed securities.
U.S. TREASURY RESERVES PORTFOLIO
U.S. Treasury Reserves Portfolio seeks its investment objective by
investing in obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities including issues of the U.S. Treasury, such as
bills, certificates of indebtedness, notes, bonds and Treasury Receipts, which
are unmatured interest coupons of U.S. Treasury bonds and notes which have been
separated and resold in a custodial receipt program administered by the U.S.
Treasury, and in issues of agencies and instrumentalities established under the
authority of an Act of Congress which are supported by the full faith and
credit of the United States. U.S. Treasury Reserves Portfolio will not enter
into repurchase agreements. All investments by the Portfolio are in "first
tier" securities (i.e., securities rated in the highest rating category for
short-term obligations by at least two NRSRO's assigning a rating to the
security or issuer or, if only one NRSRO assigns a rating, that NRSRO or, in
the case of an investment which is not rated, of comparable quality as
determined by the Adviser) and are determined by the Adviser to present minimal
credit risks. Investments in high quality, short term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or a longer term. U.S. Treasury Reserves
Portfolio may hold uninvested cash reserves pending investment.
THE TAX FREE FUNDS
TAX FREE RESERVES PORTFOLIO
Tax Free Reserves Portfolio seeks its investment objectives by investing
primarily in short-term, high quality fixed rate and variable rate obligations
issued by or on behalf of states and municipal governments, and their
authorities, agencies, instrumentalities and political subdivisions and other
qualifying issuers, the interest on which is exempt from federal income taxes,
including participation interests in such obligations issued by banks,
insurance companies or other financial institutions. (These securities, whether
or not the interest thereon is subject to the federal alternative minimum tax,
are referred to herein as "Municipal Obligations.") In determining the tax
status of interest on Municipal Obligations, the Adviser relies on opinions of
bond counsel who may be counsel to the issuer. Although the Portfolio will
attempt to invest 100% of its assets in Municipal Obligations, the Portfolio
reserves the right to invest up to 20% of its total assets in securities the
interest income on which is subject to federal, state and local income tax or
the federal alternative minimum tax. The Portfolio invests more than 25% of its
assets in participation certificates issued by banks in industrial development
bonds and other Municipal Obligations. In view of this "concentration" in bank
participation certificates, an investment in Tax Free Reserves shares should be
made with an understanding of the characteristics of the banking industry and
the risks which such an investment may entail. (See "Variable Rate Instruments
and Participation Interests" below.) Tax Free Reserves Portfolio may hold
uninvested cash reserves pending investment. Tax Free Reserves Portfolio's
investments may include "when- issued" or "forward delivery" Municipal
Obligations, stand-by commitments and taxable repurchase agreements.
As a non-diversified investment company, Tax Free Reserves Portfolio is
not subject to any statutory restrictions under the 1940 Act with respect to
limiting the investment of its assets in one or relatively few issuers. This
concentration may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order so to qualify under current law, at the close of each
quarter of the Fund's taxable year, at least 50% of the value of the Fund's
total assets must be represented by cash, U.S. government securities,
investment company securities and other securities limited in respect of any
one issuer (or related issuers) to not more than 5% in value of the total
assets of the Fund and not more than 10% of the outstanding voting securities
of such issuer. In addition, and again under current law, at the close of each
quarter of its taxable year, not more than 25% in value of the Fund's total
assets may be invested in securities, other than U.S. government securities, of
one issuer (or related issuers).
<PAGE>
Tax Free Reserves Portfolio may invest 25% or more of its assets in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest
upon which is paid from revenues of similar type projects, or securities the
issuers of which are located in the same state.
All investments by Tax Free Reserves Portfolio mature or are deemed to
mature within 397 days from the date of acquisition and the average maturity of
the Portfolio's securities (on a dollar-weighted basis) is 90 days or less. The
maturities of variable rate instruments held by Tax Free Reserves Portfolio are
deemed to be the longer of the notice period, or the period remaining until the
next interest rate adjustment, although the stated maturities may be in excess
of 397 days. (See "Variable Rate Instruments and Participation Interests"
below.) All investments by Tax Free Reserves Portfolio are "eligible
securities," that is, rated in one of the two highest rating categories for
short-term obligations by at least two NRSROs assigning a rating to the
security or issuer or, if only one NRSRO assigns a rating, that NRSRO, or, in
the case of an investment which is not rated, of comparable quality as
determined by the Adviser on the basis of its credit evaluation of the obligor
or of the bank issuing a participation interest, letter of credit or guarantee,
or insurance issued in support of the Municipal Obligations or participation
interests. (See "Variable Rate Instruments and Participation Interests" below.)
Such instruments may produce a lower yield than would be available from less
highly rated instruments. (See "Ratings of Municipal Obligations" in Appendix A
to this Statement of Additional Information.)
The Portfolio's fundamental policy to invest at least 80% of its assets,
under normal circumstances, in certain Municipal Obligations is described below
in "Municipal Obligations."
CALIFORNIA TAX FREE RESERVES, CONNECTICUT TAX FREE RESERVES AND NEW YORK TAX
FREE RESERVES
Each of California Tax Free Reserves, Connecticut Tax Free Reserves and
New York Tax Free Reserves seeks its investment objectives by investing
primarily in short- term, high quality Municipal Obligations (as defined
above). Each such Fund's fundamental policy to invest at least 80% of its
assets, under normal circumstances, in certain Municipal Obligations is
described below in "Municipal Obligations."
All investments by California Tax Free Reserves, Connecticut Tax Free
Reserves and New York Tax Free Reserves are "eligible securities," that is,
rated in one of the two highest rating categories for short-term obligations by
at least two NRSROs assigning a rating to the security or issuer or, if only
one NRSRO assigns a rating, that NRSRO, or, in the case of an investment which
is not rated, of comparable quality as determined by the Adviser on the basis
of its credit evaluation of the obligor or of the bank issuing a participation
interest, letter of credit or guarantee, or insurance issued in support of the
Municipal Obligations or participation interests. (See "Variable Rate
Instruments and Participation Interests" below.) Such instruments may produce a
lower yield than would be available from less highly rated instruments. (See
"Ratings of Municipal Obligations" in Appendix A to this Statement of
Additional Information.)
In the case of California Tax Free Reserves, in general, dividends paid by
the Fund which are attributable to interest income on tax-exempt obligations of
the State of California and its political subdivisions, of Puerto Rico, other
U.S. territories and their political subdivisions and of other qualifying
issuers ("California Municipal Obligations"), will be exempt from federal and
California personal income taxes. For Connecticut Tax Free Reserves, dividends
paid by the Fund which are treated as exempt-interest dividends for federal
income tax purposes, to the extent derived from interest income on tax-exempt
obligations issued by or on behalf of the State of Connecticut, its political
subdivisions, or public instrumentalities, state or local authorities,
districts or similar public entities created under Connecticut law, obligations
of Puerto Rico, other U.S. territories and their political subdivisions and
other qualifying issuers ("Connecticut Municipal Obligations"), will be exempt
from federal and Connecticut personal income taxes. In the case of New York Tax
Free Reserves, dividends paid by the Fund which are attributable to interest
income on tax-exempt obligations of the State of New York and its political
subdivisions, of Puerto Rico, other U.S. territories and their political
subdivisions and of other qualifying issuers ("New York Municipal
Obligations"), will be exempt from federal, New York State and New York City
personal income taxes. These Funds may purchase Municipal Obligations issued by
other states, their agencies and instrumentalities the interest income on which
will be exempt from federal income tax but will be subject to California,
Connecticut or New York State and New York City personal income taxes, as the
case may be.
In order for California Tax Free Reserves to pay dividends that are exempt
from federal tax and California personal income tax, the Fund must continue to
qualify as a "regulated investment company" for federal income tax purposes. In
addition, in order for California Tax Free Reserves to be eligible to pay
dividends that are exempt from California personal income tax, at the end of
each quarter of its taxable year at least 50% of the Fund's total assets must
be invested in obligations, the interest on which is exempt from California
taxation when received by an individual ("California Exempt-Interest
Securities").
<PAGE>
In determining the tax status of interest on Municipal Obligations, the
Adviser relies on opinions of bond counsel who may be counsel to the issuer.
Under normal circumstances, California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves invest at least 65% of their
assets in California Municipal Obligations, Connecticut Municipal Obligations
and New York Municipal Obligations, respectively, although the exact amount of
a Fund's assets invested in such securities varies from time to time. Although
these Funds attempt to invest 100% of their assets in Municipal Obligations,
each Fund may invest up to 20% of its total assets in securities the interest
income on which is subject to federal, state and local income tax or the
federal alternative minimum tax. Each Fund may invest more than 25% of its
assets in participation interests issued by banks in industrial development
bonds and other Municipal Obligations. In view of this possible "concentration"
in bank participation interests, an investment in these Funds should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. (See "Variable Rate Instruments and
Participation Interests" below.) Uninvested cash reserves may be held
temporarily for the Funds pending investment. The Funds' investments may
include "when-issued" and "forward delivery" Municipal Obligations, stand-by
commitments and taxable repurchase agreements.
All of California Tax Free Reserves', Connecticut Tax Free Reserves' and
New York Tax Free Reserves' investments mature or are deemed to mature within
397 days from the date of acquisition and the average maturity of the
investments in the Funds' respective portfolios (on a dollar-weighted basis) is
90 days or less. The maturities of variable rate instruments held in such
Funds' portfolios are deemed to be the longer of the period remaining until the
next interest rate adjustment or the period until a Fund would be entitled to
payment pursuant to demand rights, a letter of credit, guarantee or insurance
policy or a right to tender or put the instrument, although the stated
maturities may be in excess of 397 days. (See "Variable Rate Instruments and
Participation Interests" below.)
As non-diversified investment companies, California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves are not subject to
any statutory restrictions under the 1940 Act with respect to limiting the
investment of their assets in one or relatively few issuers. This concentration
may present greater risks than in the case of a diversified company. However,
each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In
order so to qualify under current law, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's total assets must be
represented by cash, U.S. government securities, investment company securities
and other securities limited in respect of any one issuer (or related issuers)
to not more than 5% in value of the total assets of the Fund and not more than
10% of the outstanding voting securities of such issuer. In addition, and again
under current law, at the close of each quarter of its taxable year, not more
than 25% in value of the Fund's total assets may be invested in securities,
other than U.S. government securities, of one issuer (or related issuers).
Each Fund may invest 25% or more of its assets in securities that are
related in such a way that an economic, business or political development or
change affecting one of the securities would also affect the other securities
including, for example, securities the interest upon which is paid from
revenues of similar type projects, or securities the issuers of which are
located in the same state.
MUNICIPAL OBLIGATIONS
As a fundamental policy, each of the Tax Free Funds invests at least 80%
of its assets, under normal circumstances, in:
(1) Municipal bonds with remaining maturities of one year (397 days
for California Tax Free Reserves and Connecticut Tax Free Reserves) or
less that are rated within the Aaa or Aa categories at the date of
purchase by Moody's or within the AAA or AA categories by Standard &
Poor's or Fitch (and, for Connecticut Tax Free Reserves, present a minimal
credit risk as determined by the Adviser) or, if not rated by these rating
agencies, are of comparable quality as determined by the Adviser on the
basis of the credit evaluation of the obligor on the bonds or of the bank
issuing a participation interest or guarantee or of any insurance issued
in support of the bonds or the participation interests.
(2) Municipal notes with remaining maturities of one year (397 days
for California Tax Free Reserves and Connecticut Tax Free Reserves) or
less that at the date of purchase are rated MIG 1/VMIG 1 or MIG 2/VMIG 2
by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1 or F-2 by
Fitch (and, for Connecticut Tax Free Reserves, present a minimal credit
risk as determined by the Adviser) or, if not rated by these rating
agencies, are of comparable quality as determined by the Adviser. The
principal kinds of municipal notes are tax and revenue anticipation notes,
tax anticipation notes, bond anticipation notes and revenue anticipation
notes. Notes sold in anticipation of collection of taxes, a bond sale or
receipt of other revenues are usually general obligations of the issuing
municipality or agency.
<PAGE>
(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by
Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1 or F-2 by Fitch
(and, for Connecticut Tax Free Reserves, present a minimal credit risk as
determined by the Adviser) or, if not rated by these rating agencies, is
of comparable quality as determined by the Adviser. Issues of municipal
commercial paper typically represent very short-term, unsecured,
negotiable promissory notes. These obligations are often issued to meet
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases
municipal commercial paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
Subsequent to its purchase by a Tax Free Fund, a rated Municipal
Obligation may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. Neither event requires sale of
such Municipal Obligation by the Fund (other than variable rate
instruments which must be sold if they are not "high quality"), but the
Adviser considers such event in determining whether the Fund should
continue to hold the Municipal Obligation. To the extent that the ratings
given to the Municipal Obligations or other securities held by a Tax Free
Fund are altered due to changes in any of the Moody's, Standard & Poor's
or Fitch ratings systems (see Appendix A to this Statement of Additional
Information for an explanation of these rating systems), the Adviser
adopts such changed ratings as standards for its future investments in
accordance with the investment policies contained above and in the
Prospectus. Certain Municipal Obligations issued by instrumentalities of
the U.S. government are not backed by the full faith and credit of the
U.S. Treasury but only by the creditworthiness of the instrumentality.
CitiFunds Multi-State Tax Free Trust's and Tax Free Reserves Portfolio's
Boards of Trustees have determined that any Municipal Obligation that
depends directly, or indirectly through a government insurance program or
other guarantee, on the full faith and credit of the U.S. government is
considered to have a rating in the highest category. Where necessary to
ensure that the Municipal Obligations are "eligible securities" (e.g.,
within the two highest ratings assigned by Moody's, Standard & Poor's or
Fitch or, if not rated, are of comparable quality as determined by the
Adviser), or where the obligations are not freely transferable, a Tax Free
Fund will require that the obligation to pay the principal and accrued
interest be backed by an unconditional irrevocable bank letter of credit,
a guarantee, insurance policy or other comparable undertaking of an
approved financial institution.
MUNICIPAL BONDS. Municipal bonds are debt obligations of states,
cities, municipalities and municipal agencies and authorities which
generally have a maturity at the time of issuance of one year or more and
which are issued to raise funds for various public purposes, such as
construction of a wide range of public facilities, refunding outstanding
obligations or obtaining funds for institutions and facilities. The two
principal classifications of municipal bonds are "general obligation" and
"revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of
principal and interest. The principal of and interest on revenue bonds are
payable from the income of specific projects or authorities and generally
are not supported by the issuer's general power to levy taxes. In some
cases, revenues derived from specific taxes are pledged to support
payments on a revenue bond.
In addition, certain kinds of private activity bonds ("PABs") are
issued by or on behalf of public authorities to provide funding for
various privately operated industrial facilities, such as warehouse,
office, plant and store facilities and environmental and pollution control
facilities. PABs are, in most cases, revenue bonds. The payment of the
principal and interest on PABs usually depends solely on the ability of
the user of the facilities financed by the bonds or other guarantor to
meet its financial obligations and, in certain instances, the pledge of
real and personal property as security for payment. Many PABs may not be
readily marketable; however, it is expected that the PABs or the
participation certificates in PABs purchased by a Fund will have liquidity
because they generally will be supported by demand features to "high
quality" banks, insurance companies or other financial institutions.
Municipal bonds may be issued as "zero coupon" obligations.
Zero-coupon bonds are issued at a significant discount from their
principal amount in lieu of paying interest periodically. Because
zero-coupon bonds do not pay current interest in cash, their value is
subject to greater fluctuation in response to changes in market interest
rates than bonds that pay interest currently. Zero-coupon bonds allow an
issuer to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit risks than
bonds paying interest currently in cash. Each Tax Free Fund is required to
accrue interest income on such investments and to distribute such amounts
at least annually to shareholders even though zero-coupon bonds do not pay
current interest in cash. Thus, it may be necessary at times for a Fund to
liquidate investments in order to satisfy its dividend requirements.
<PAGE>
MUNICIPAL NOTES. There are four major varieties of state and municipal
notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes
("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes
("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally, to
finance construction. Many TRANs, TANs and RANs are general obligations of the
issuing entity payable from taxes or designated revenues, respectively,
expected to be received within the related fiscal period. BANs are issued with
the expectation that their principal and interest will be paid out of proceeds
from renewal notes or bonds to be issued prior to the maturity of the BANs.
BANs are issued most frequently by both general obligation and revenue bond
issuers usually to finance such items as land acquisition, facility acquisition
and/or construction and capital improvement projects.
For an explanation of the ratings of Municipal Obligations by
Moody's, Standard & Poor's and Fitch, see Appendix A to this Statement of
Additional Information. For a comparison of yields on such Municipal
Obligations and taxable securities, see the Appendix to the Prospectus.
MUNICIPAL LEASE OBLIGATIONS. Participations in municipal leases are
undivided interests in a portion of a lease or installment purchase issued
by a state or local government to acquire equipment or facilities.
Municipal leases frequently have special risks not normally associated
with general obligation bonds or revenue bonds. Many leases include
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body
on a yearly or other periodic basis. Although the obligations will be
secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might, in some
cases, prove difficult. Municipal lease obligations are deemed to be
illiquid unless otherwise determined by the Board of Trustees.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
Each of the Tax Free Funds may purchase variable rate instruments and
participation interests. Variable rate instruments that the Tax Free Funds may
purchase are tax-exempt Municipal Obligations (including municipal notes and
municipal commercial paper) that provide for a periodic adjustment in the
interest rate paid on the instrument and permit the holder to receive payment
upon a specified number of days' notice of the unpaid principal balance plus
accrued interest either from the issuer or by drawing on a bank letter of
credit, a guarantee or an insurance policy issued with respect to such
instrument or by tendering or "putting" such instrument to a third party.
The variable rate instruments in which Tax Free Funds' assets may be
invested are payable upon a specified period of notice which may range from one
day up to one year. The terms of the instruments provide that interest rates
are adjustable at intervals ranging from daily to up to one year and the
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. An
unrated variable rate instrument may be determined to meet a Fund's high
quality criteria if it is backed by a letter of credit or guarantee or a right
to tender or put the instrument to a third party or is insured by an insurer
that meets the high quality criteria for the Fund discussed above or on the
basis of a credit evaluation of the underlying obligor. If the credit of the
obligor is of "high quality," no credit support from a bank or other financial
institution will be necessary. Each unrated variable rate instrument will be
evaluated on a quarterly basis to determine that it continues to meet a Tax
Free Fund's high quality criteria.
Variable rate instruments in which the Tax Free Funds may invest include
participation interests in variable rate, tax-exempt Municipal Obligations
owned by a bank, insurance company or other financial institution or affiliated
organizations. Although the rate of the underlying Municipal Obligations may be
fixed, the terms of the participation interest may result in the Fund receiving
a variable rate on its investment. A participation interest gives a Tax Free
Fund an undivided interest in the Municipal Obligation in the proportion that
the Fund's participation bears to the total principal amount of the Municipal
Obligation and provides the liquidity feature. Each participation may be backed
by an irrevocable letter of credit or guarantee of, or a right to put to, a
bank (which may be the bank issuing the participation interest, a bank issuing
a confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
participation interest) or insurance policy of an insurance company that has
been determined by the Adviser to meet the prescribed quality standards of a
Tax Free Fund. Each Tax Free Fund has the right to sell the participation
interest back to the institution or draw on the letter of credit or insurance
after a specified period of notice, for all or any part of the full principal
amount of the Fund's participation in the security, plus accrued interest. Each
Tax Free Fund intends to exercise the liquidity feature only (1) upon a default
under the terms of the bond documents, (2) as needed to provide liquidity to
the Fund in order to facilitate withdrawals from the Fund, or (3) to maintain a
high quality investment portfolio. In some cases, this liquidity feature may
not be exercisable in the event of a default on the underlying Municipal
Obligations; in these cases, the underlying Municipal Obligations must meet the
Fund's high credit standards at the time of purchase of the participation
interest. Issuers of participation interests will retain a service and letter
of credit fee and a fee for providing the liquidity feature, in an amount equal
to the excess of the interest paid on the instruments over the negotiated yield
at which the participations were purchased on behalf of a Tax Free Fund. With
respect to insurance, each of the Tax Free Funds will attempt to have the
issuer of the participation interest bear the cost of the insurance, although
the applicable Fund may also purchase insurance, in which case the cost of
<PAGE>
insurance will be an expense of the Fund. The Adviser has been instructed by
the Trusts' Boards of Trustees to monitor continually the pricing, quality and
liquidity of the variable rate instruments held by the Tax Free Funds,
including the participation interests, on the basis of published financial
information and reports of the rating agencies and other bank analytical
services to which a Fund may subscribe. Although participation interests may be
sold, each Tax Free Fund intends to hold them until maturity, except under the
circumstances stated above. Participation interests may include municipal lease
obligations. Purchase of a participation interest may involve the risk that a
Fund will not be deemed to be the owner of the underlying Municipal Obligation
for purposes of the ability to claim tax exemption of interest paid on that
Municipal Obligation.
Periods of high inflation and periods of economic slowdown, together with
the fiscal measures adopted to attempt to deal with them, have brought wide
fluctuations in interest rates. When interest rates rise, the value of fixed
income securities generally falls; and vice versa. While this is true for
variable rate instruments generally, the variable rate nature of the underlying
instruments should minimize these changes in value. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation and the risk
of potential capital depreciation is less than would be the case with a
portfolio of fixed interest rate securities. Because the adjustment of interest
rates on the variable rate instruments is made in relation to movements of
various interest rate adjustment indices, the variable rate instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate instruments may be higher or lower than current market rates
for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, when prevailing
interest rates decline each Tax Free Fund's yield will decline and its
shareholders will forgo the opportunity for capital appreciation. On the other
hand, during periods when prevailing interest rates increase, each Tax Free
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate instrument held by a
Tax Free Fund matures within 397 days from the date of its acquisition, the
maturity of the instrument will be deemed to be the longer of (1) the period
required before the Fund is entitled to receive payment of the principal amount
of the instrument after notice or (2) the period remaining until the
instrument's next interest rate adjustment, except that an instrument issued or
guaranteed by the U.S. government or any agency thereof shall be deemed to have
a maturity equal to the period remaining until the next adjustment of the
interest rate. The maturity of a variable rate instrument will be determined in
the same manner for purposes of computing a Fund's dollar-weighted average
portfolio maturity.
In view of the "concentration" of Tax Free Reserves (including Tax Free
Reserves Portfolio for purposes of this discussion) and the possible
concentration of the other Tax Free Funds in bank participation interests in
Municipal Obligations secured by bank letters of credit or guarantees, an
investment in these Funds should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. Banks are subject to extensive governmental regulation which may
limit both the amounts and types of loans and other financial commitments which
may be made and interest rates and fees which may be charged. The profitability
of this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operation of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations under a letter of credit.
<PAGE>
"WHEN-ISSUED" SECURITIES
Each of the Tax Free Funds (including Tax Free Reserves Portfolio for
purposes of this discussion) may purchase securities on a "when-issued" or
"forward delivery" basis. New issues of certain Municipal Obligations
frequently are offered on a "when-issued" or "forward delivery" basis. The
payment obligation and the interest rate that will be received on the Municipal
Obligations are each fixed at the time the buyer enters into the commitment
although settlement, i.e., delivery of and payment for the Municipal
Obligations, takes place beyond customary settlement time (but normally within
45 days after the date of the Fund's commitment to purchase). Although the Tax
Free Funds will only make commitments to purchase "when- issued" or "forward
delivery" Municipal Obligations with the intention of actually acquiring them,
the Funds may sell these securities before the settlement date if deemed
advisable by the Adviser.
Municipal Obligations purchased on a "when-issued" or "forward delivery"
basis and the securities held in a Tax Free Fund's portfolio are subject to
changes in value based upon the market's perception of the credit-worthiness of
the issuer and changes, real or anticipated, in the level of interest rates.
The value of these Municipal Obligations and securities generally change in the
same way, that is, both experience appreciation when interest rates decline and
depreciation when interest rates rise. Purchasing Municipal Obligations on a
"when-issued" or "forward delivery" basis can involve a risk that the yields
available in the market on the settlement date may actually be higher or lower
than those obtained in the transaction itself. A segregated account of a Tax
Free Fund consisting of cash or liquid debt securities equal to the amount of
the "when-issued" or "forward delivery" commitments will be established at the
Fund's custodian bank. For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market
value. If the market value of such securities declines, additional cash or
highly liquid securities will be placed in the account daily so that the value
of the account will equal the amount of the Fund's commitments. On the
settlement date of the "when-issued" or "forward delivery" securities, the Tax
Free Fund's obligations will be met from then-available cash flow, sale of
securities held in the separate account, sale of other securities or, although
not normally expected, from sale of the "when-issued" or "forward delivery"
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from federal
income tax. An increase in the percentage of a Fund's assets committed to the
purchase of securities on a "when-issued" basis may increase the volatility of
its net asset value.
STAND-BY COMMITMENTS
When a Tax Free Fund (including Tax Free Reserves Portfolio for purposes
of this discussion) purchases Municipal Obligations it may also acquire stand-
by commitments from banks with respect to such Municipal Obligations. A Tax
Free Fund also may acquire stand-by commitments from broker-dealers. Under the
stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's
option a specified Municipal Obligation at a specified price. A stand-by
commitment is the equivalent of a "put" option acquired by a Tax Free Fund with
respect to a particular Municipal Obligation held in the Fund's portfolio.
The amount payable to a Tax Free Fund upon the exercise of a stand-by
commitment normally would be (1) the acquisition cost of the Municipal
Obligation (excluding any accrued interest paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the security, plus (2) all interest
accrued on the security since the last interest payment date during the period
the security was owned by the Fund. Absent unusual circumstances relating to a
change in market value, the Fund would value the underlying Municipal
Obligation at amortized cost. Accordingly, the amount payable by a bank or
dealer during the time a stand-by commitment is exercisable would be
substantially the same as the market value of the underlying Municipal
Obligation. Each Tax Free Fund values stand-by commitments at zero for purposes
of computing the value of its net assets.
The stand-by commitments that each Tax Free Fund may enter into are
subject to certain risks, which include the ability of the issuer of the
commitment to pay for the securities at the time the commitment is exercised
and the fact that the commitment is not marketable by the Fund and the maturity
of the underlying security will generally be different from that of the
commitment.
TAXABLE SECURITIES
Although each Tax Free Fund (including Tax Free Reserves Portfolio for
purposes of this discussion) attempts to invest 100% of its net assets in tax-
exempt Municipal Obligations, each Fund may invest up to 20% of the value of
its net assets in securities of the kind described below, the interest income
on which is subject to federal income tax. Circumstances in which a Tax Free
<PAGE>
Fund may invest in taxable securities include the following: (a) pending
investment in the type of securities described above; (b) to maintain liquidity
for the purpose of meeting anticipated withdrawals; and (c) when, in the
opinion of the Fund's investment adviser, it is advisable to do so because of
adverse market conditions affecting the market for Municipal Obligations. The
kinds of taxable securities in which the Tax Free Funds' assets may be invested
are limited to the following short-term, fixed-income securities (maturing in
397 days or less from the time of purchase): (1) obligations of the U.S.
government or its agencies, instrumentalities or authorities; (2) commercial
paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard &
Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks
with assets of $1 billion or more; and (4) repurchase agreements with respect
to any Municipal Obligations or obligations of the U.S. government or its
agencies, instrumentalities, or authorities. Each Tax Free Fund's assets may
also be invested in Municipal Obligations which are subject to an alternative
minimum tax.
REPURCHASE AGREEMENTS
Each of the Tax Free Funds (including Tax Free Reserves Portfolio for
purposes of this discussion) may invest its assets in instruments subject to
repurchase agreements. Repurchase agreements are described in more detail
below. (See "Repurchase Agreements.")
RISK FACTORS AFFECTING INVESTMENT IN CALIFORNIA MUNICIPAL OBLIGATIONS
California Tax Free Reserves intends to invest a high proportion of its
assets in California Municipal Obligations. Payment of interest and
preservation of principal is dependent upon the continuing ability of
California issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. For information
concerning California Municipal Obligations, see Appendix B to this Statement
of Additional Information.
The summary set forth in Appendix B is included for the purpose of
providing a general description of the State of California credit and financial
conditions. This summary is based on information from statements of issuers of
California Municipal Obligations and does not purport to be complete. The Trust
is not responsible for the accuracy or timeliness of this information.
RISK FACTORS AFFECTING INVESTMENT IN CONNECTICUT MUNICIPAL OBLIGATIONS
Connecticut Tax Free Reserves intends to invest a high proportion of its
assets in Connecticut Municipal Obligations. Payment of interest and
preservation of principal is dependent upon the continuing ability of
Connecticut issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. For information
concerning Connecticut Municipal Obligations, see Appendix C to this Statement
of Additional Information.
The summary set forth in Appendix C is included for the purpose of
providing a general description of the State of Connecticut credit and
financial conditions. This summary is based on information from statements of
issuers of Connecticut Municipal Obligations and does not purport to be
complete. The Trust is not responsible for the accuracy or timeliness of this
information.
RISK FACTORS AFFECTING INVESTMENT IN NEW YORK MUNICIPAL OBLIGATIONS
New York Tax Free Reserves intends to invest a high proportion of the its
assets in Municipal Obligations of the State of New York and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. Payment of interest and preservation of principal is dependent
upon the continuing ability of New York issuers and/or obligors of state,
municipal and public authority debt obligations to meet their obligations
thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to
obtain additional financing could be adversely affected.
<PAGE>
For further information concerning New York Municipal Obligations, see
Appendix D to this Statement of Additional Information. The summary set forth
above and in Appendix D is included for the purpose of providing a general
description of New York State and New York City credit and financial
conditions. This summary is based on information from statements of issuers of
New York Municipal Obligations and does not purport to be complete. The Trust
is not responsible for the accuracy or timeliness of this information.
CERTAIN ADDITIONAL RISK FACTORS
Each of California Tax Free Reserves, Connecticut Tax Free Reserves, and
New York Tax Free Reserves may invest a portion of its assets in the
obligations of the governments of Puerto Rico and other U.S. territories and
their political subdivisions. Payment of interest and preservation of principal
is dependent upon the continuing ability of such issuers and/or obligors of
territorial, municipal and public authority debt obligations to meet their
obligations thereunder. For information concerning the economy of Puerto Rico,
see Appendix E of this Statement of Additional Information.
The summary set forth in Appendix E is included for the purpose of
providing a general description of the economy of Puerto Rico. This summary is
based on information from statements of the Government of Puerto Rico and does
not purport to be complete. The Trust is not responsible for the accuracy or
timeliness of this information.
REPURCHASE AGREEMENTS
Each of the Funds and Portfolios (other than U.S. Treasury Reserves and
U.S. Treasury Reserves Portfolio, which may not invest in repurchase
agreements) may invest its assets in repurchase agreements only with member
banks of the Federal Reserve System or "primary dealers" (as designated by the
Federal Reserve Bank of New York) in U.S. government securities. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to
the risk that the seller may fail to repurchase the security. All repurchase
agreements entered into by the Funds shall be fully collateralized at all times
during the period of the agreement in that the value of the underlying security
shall be at least equal to the amount of the loan, including the accrued
interest thereon, and the Fund or its custodian or sub- custodian shall have
control of the collateral, which the Adviser believes will give the applicable
Fund a valid, perfected security interest in the collateral. This might become
an issue in the event of the bankruptcy of the other party to the transaction.
In the event of default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not owned by the Fund
but only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, a Fund may suffer time delays and incur costs in
connection with the disposition of the collateral. The Adviser believes that
the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned
by the Funds. Repurchase agreements will give rise to income which will not
qualify as tax-exempt income when distributed by the Funds. A Fund will not
invest in a repurchase agreement maturing in more than seven days if any such
investment together with illiquid securities held by the Fund exceed 10% of the
Fund's total net assets. Repurchase agreements are also subject to the same
risks described herein with respect to stand-by commitments.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds and Portfolios may lend its securities to
broker-dealers and other institutional borrowers. Such loans will usually be
made only to member banks of the U.S. Federal Reserve System and to member
firms of the New York Stock Exchange (and subsidiaries thereof). Loans of
securities would be secured continuously by collateral in cash, cash
equivalents, or U.S. Treasury obligations maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The cash
collateral would be invested in high quality short-term instruments. Either
party has the right to terminate a loan at any time on customary industry
settlement notice (which will not usually exceed three business days). During
the existence of a loan, a Fund or Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and/or with respect to cash collateral would receive compensation based
on investment of the collateral (subject to a rebate payable to the borrower).
The borrower alternatively may pay the Fund or Portfolio a fee for use of the
borrowed securities. The Fund or 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, and when, in the
judgment of the Adviser, the consideration which can be earned currently from
loans of this type justifies the attendant risk. In addition, a Fund or
Portfolio could suffer loss if the borrower terminates the loan and the Fund or
Portfolio is forced to liquidate investments in order to return the cash
<PAGE>
collateral to the buyer. If the Adviser determines to make loans, it is not
intended that the value of the securities loaned by a Fund or Portfolio would
exceed 33 1/3% of the value of its net assets.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
Each Fund and Portfolio may invest up to 10% of its net assets in
securities for which there is no readily available market. These illiquid
securities may include privately placed restricted securities for which no
institutional market exists. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for a Fund or Portfolio to sell them
promptly at an acceptable price.
INVESTMENT RESTRICTIONS
The Trusts, on behalf of the Funds, and the Portfolios have each adopted
the following policies which may not be changed without approval by holders of
a "majority of the outstanding shares" of the applicable Fund or Portfolio,
which as used in this Statement of Additional Information means the vote of the
lesser of (i) 67% or more of the outstanding voting securities of the Fund or
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding "voting securities" of the Fund or Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding "voting
securities" of the Fund or the Portfolio. The term "voting securities" as used
in this paragraph has the same meaning as in the 1940 Act.
Whenever a Trust is requested to vote on a change in the investment
restrictions or fundamental policies of a Portfolio in which a Fund invests,
the Trust will hold a meeting of the corresponding Fund's shareholders and will
cast its vote as instructed by the shareholders, or will otherwise vote Fund
interests in a Portfolio in accordance with applicable law. Each Fund will vote
the shares held by its shareholders who do not give voting instructions in the
same proportion as the shares of that Fund's shareholders who do give voting
instructions. Shareholders of the Funds who do not vote will have no effect on
the outcome of these matters.
CASH RESERVES
CitiFunds Trust III, on behalf of Cash Reserves, may not:
(1) Invest in equity securities (e.g., common stock, preferred stock,
options, warrants, puts, calls), voting securities, restricted securities,
corporate debt securities (e.g., bonds, debentures) other than those bank
securities and commercial paper referred to under "Investment Policies,"
local or state government securities (e.g., municipal bonds, state bonds),
commodities or commodity contracts, real estate, or securities of other
investment companies, except that the Trust may invest all or a portion of
the Fund's assets in a diversified, open-end management investment company
with substantially the same investment objective, policies and
restrictions as the Fund. The Trust, on behalf of the Fund, will not sell
securities short, write put or call options, engage in underwriting, or
invest in companies for the purpose of exercising control. The Trust, on
behalf of the Fund, will not make loans to other persons except that it
may acquire debt securities as discussed under "Investment Policies;'"
(2) Purchase securities or obligations of any one issuer (other than
securities issued by the U.S. government, its agencies and
instrumentalities and repurchase agreements covering such securities) if
immediately after such purchase more than 5% of the value of its assets
would be invested in that issuer except that the Trust may invest all or a
portion of the Fund's assets in a diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund;
(3) Borrow money except from banks as a temporary measure for
extraordinary or emergency purposes (not for leveraging) or in order to
meet unexpectedly heavy redemption requests in an amount not exceeding 15%
of the value of the Fund's assets and will not purchase any securities at
any time when the Fund's total outstanding borrowings from banks exceed 5%
of the Fund's gross assets. The Trust, on behalf of the Fund, will not
pledge its assets except to secure borrowings. While the Trust, on behalf
of the Fund, may borrow from its Custodian for the foregoing purposes, any
borrowing from the Custodian will be on terms no less favorable to the
Fund than those offered by the Custodian to comparable borrowers and on
terms which the Trust believes are not less favorable than those readily
obtainable elsewhere;
(4) Concentrate the Fund's investments in any particular industry,
but if it is deemed appropriate to the achievement of the Fund's
<PAGE>
investment objective, up to 25% of the assets of the Fund (taken at market
value at the time of each investment) may be invested in any one industry,
provided that, if the Trust withdraws the Fund's investment from an
open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund, it will
invest at least 25%, and may invest up to 100%, of the assets of the Fund
in bank obligations; and provided, further, that nothing in this
Investment Restriction is intended to affect the Trust's ability to invest
100% of the Fund's assets in a diversified, open-end management investment
company with substantially the same investment objective, policies and
restrictions as the Fund;
(5) There is no limitation on investing in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
repurchase agreements covering those securities, except that the Trust, on
behalf of the Fund, will not acquire securities that are not readily
marketable or repurchase agreements calling for resale within more than 7
days if, as a result thereof, more than 10% of the value of its net assets
would be invested in such securities. The Trust, on behalf of the Fund,
may not invest in fixed time deposits maturing in more than seven calendar
days, and fixed time deposits maturing from two business days through
seven calendar days may not exceed 10% of the Fund's net assets.
Cash Reserves Portfolio may not:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes the Portfolio may borrow from banks in
an amount not to exceed 1/3 of the value of the net assets of the
Portfolio, including the amount borrowed (moreover, the Portfolio may not
purchase any securities at any time at which borrowings exceed 5% of its
total assets (taken at market value))(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);
(2) Purchase any security or evidence of interest therein on margin,
except that the Portfolio may obtain such short term credit as may be
necessary for the clearance of purchases and sales of securities;
(3) Underwrite securities issued by other persons, except insofar as
the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933 in selling a security;
(4) Make loans to other persons except (a) through the lending of
securities held by the Portfolio, but not in excess of 33 1/3% of the
Portfolio's net assets, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions; for purposes of
this paragraph 4 the purchase of short term commercial paper or a portion
of an issue of debt securities which are part of an issue to the public
shall not be considered the making of a loan;
(5) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the 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);
(6) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of its investment objective, up
to 25% of the assets of the Portfolio (taken at market value at the time
of each investment) may be invested in any one industry, except that the
Portfolio will invest at least 25% of its assets and may invest up to 100%
of its assets in bank obligations; or
(7) 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, except as appropriate to
evidence a debt incurred without violating Investment Restriction (1)
above.
U.S. TREASURY RESERVES
Neither CitiFunds Trust III, on behalf of U.S. Treasury Reserves, nor U.S.
Treasury Portfolio may:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes either the Trust or the Portfolio may
borrow from banks in an amount not to exceed 1/3 of the value of the net
assets of the Fund or the Portfolio, respectively, including the amount
borrowed (moreover, neither the Trust (on behalf of the Fund) nor the
Portfolio may purchase any securities at any time at which borrowings
exceed 5% of the total assets of the Fund or the Portfolio, respectively
(taken in each case at market value)) (it is intended that the Fund and
<PAGE>
the Portfolio would borrow money only from banks and only to accommodate
requests for the repurchase of shares of the Fund or the withdrawal of all
or a portion of a beneficial interest in the Portfolio while effecting an
orderly liquidation of securities);
(2) Purchase any security or evidence of interest therein on margin,
except that either the Trust, on behalf of the Fund, or the Portfolio may
obtain such short term credit as may be necessary for the clearance of
purchases and sales of securities;
(3) Underwrite securities issued by other persons, except that all
the assets of the Fund may be invested in the Portfolio and except insofar
as either the Trust or the Portfolio may technically be deemed an
underwriter under the Securities Act of 1933 in selling a security;
(4) Make loans to other persons except (a) through the lending of
securities held by either the Fund or the Portfolio, but not in excess of
33 1/3% of the Fund's or the Portfolio's net assets, as the case may be,
(b) through the use of repurchase agreements or the purchase of short term
obligations, or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions; for purposes of this paragraph 4 the purchase of 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;
(5) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the Fund and the
Portfolio reserve the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities by the Fund or the
Portfolio);
(6) Concentrate its investments in any particular industry; provided,
that nothing in this Investment Restriction is intended to affect the
ability to invest 100% of the Fund's assets in the Portfolio; or
(7) 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, except as appropriate to
evidence a debt incurred without violating Investment Restriction (1)
above.
TAX FREE RESERVES
Tax Free Reserves may not:
(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Fund may invest all of its assets in
a diversified, open-end management investment company with substantially
the same investment objectives, policies and restrictions as the Fund);
(2) Borrow money. This restriction shall not apply to borrowings from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on
borrowings will reduce net income;
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes;
(4) Sell securities short or purchase securities on margin, or engage
in the purchase and sale of put, call, straddle or spread options or in
writing such options, except to the extent that securities subject to a
demand obligation and stand-by commitments may be purchased as set forth
under "Investment Policies" above;
<PAGE>
(5) Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security (provided, however, that the Fund may
invest all of its assets in a diversified, open-end management investment
company with substantially the same investment objectives, policies and
restrictions as the Fund);
(6) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Fund from investing in Municipal
Obligations secured by real estate or interests in real estate;
(7) Make loans to others, except through the purchase of Fund
investments, including repurchase agreements, as described under
"Investment Policies" above;
(8) Invest more than 5% of the value of its total assets in the
securities of issuers where the entity providing the revenues from which
the issue is to be paid has a record, including predecessors, of fewer
than three years of continuous operation, except obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities
(provided, however, that the Fund may invest all of its assets in a
diversified, open-end management investment company with substantially the
same investment objectives, policies and restrictions as the Fund);
(9) Invest more than 25% of its assets in the securities of "issuers"
in any single industry, provided that there shall be no limitation on the
purchase of Municipal Obligations or on obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities. In addition,
the Fund reserves the freedom of action to invest more than 25% of its
assets in instruments (including without limitation participation
interests) issued by U.S. branches of domestic banks; or
(10) Invest in securities of other investment companies, except the
Fund may purchase unit investment trust securities where such unit trusts
meet the investment objectives and policies of the Fund and then only up
to 5% of the Fund's net assets, except as they may be acquired as part of
a merger, consolidation or acquisition of assets (provided, however, that
the Fund may invest all of its assets in a diversified, open-end
management investment company with substantially the same investment
objectives, policies and restrictions as the Fund).
Tax Free Reserves has adopted the following non-fundamental policy,
which may be changed without approval by a majority of the outstanding
shares of the Fund. Tax Free Reserves will not invest in a repurchase
agreement maturing in more than seven days or other illiquid securities if
as a result thereof the Fund's total illiquid assets (including repurchase
agreements maturing in more than seven days) would exceed 10% of the
Fund's net assets.
Tax Free Reserves Portfolio may not:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes the Portfolio may borrow from banks in
an amount not to exceed 1/3 of the value of the net assets of the
Portfolio, including the amount borrowed (moreover, the Portfolio may not
purchase any securities at any time at which borrowings exceed 5% of its
total assets (taken at market value)) (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);
(2) Purchase any security or evidence of interest therein on margin,
except that the Portfolio may obtain such short term credit as may be
necessary for the clearance of purchases and sales of securities;
(3) Underwrite securities issued by other persons, except insofar as
the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933 in selling a security;
(4) Make loans to other persons except (a) through the lending of
securities held by the Portfolio, but not in excess of 33 1/3% of the
Portfolio's net assets, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions; for purposes of
this paragraph (4) the purchase of short term commercial paper or a
portion of an issue of debt securities which are part of an issue to the
public shall not be considered the making of a loan;
<PAGE>
(5) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the Portfolio
reserves the freedom of action to hold and to sell real estate acquired as
a result of the ownership of securities by the Fund or the Portfolio);
(6) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of its investment objective, up
to 25% of the assets of the Portfolio (taken at market value at the time
of each investment) may be invested in any one industry, except that the
Portfolio will invest at least 25% of its assets and may invest up to 100%
of its assets in bank obligations; or
(7) 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, except as appropriate to
evidence a debt incurred without violating the investment restriction in
paragraph (1) above.
For purposes of the investment restriction in paragraph (6) above,
"bank obligations" shall include bank participation interests in Municipal
Obligations.
CALIFORNIA TAX FREE RESERVES
CitiFunds Multi-State Tax Free Trust may not with respect to California
Tax Free Reserves:
(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objective and policies and
substantially the same investment restrictions as the Fund).
(2) Borrow money. This restriction shall not apply to borrowings from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Trust will not make any investments on behalf of the Fund.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's
assets, except in an amount up to 15% of the value of the Fund's total
assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage
in the purchase and sale of put, call, straddle or spread options or in
writing such options, except to the extent that securities subject to a
demand obligation and stand-by commitments may be purchased as set forth
under "Investment Policies" above.
(5) Underwrite the securities of other issuers, except insofar as the
Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security of the Fund (provided, however, that the
Trust may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund).
(6) The Trust will not invest on behalf of the Fund in a repurchase
agreement maturing in more than seven days if any such investment together
with other illiquid securities held by the Fund exceed 10% of the Fund's
total net assets.
(7) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Trust from investing in Municipal
Obligations secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.
(9) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
<PAGE>
control, except that the Trust may invest all or substantially all of the
Fund's assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as the Fund.
(10) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust may invest more
than 25% of the Fund's assets in bank participation interests and there
shall be no limitation on the purchase of those Municipal Obligations and
other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, except that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. When the
assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and
revenues of the entity, the entity would be deemed to be the sole issuer
of the security. Similarly, in the case of a private activity bond, if
that bond is backed only by the assets and revenues of the non-
governmental user, then such non-governmental user would be deemed to be
the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate
obligor, guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit would be considered a separate security and
would be treated as an issue of such government, other entity or bank.
(11) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Trust may invest
all or substantially all of the Fund's assets in another registered
investment company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. As of the date
of this Statement of Additional Information, the Trust has no intention of
investing in unit investment trust securities on behalf of the Fund.
For purposes of the investment restrictions described in (9) and (10)
above, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of principal of
and interest on the security. If, however, the creating government or some
other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a Letter of Credit, such a
guarantee or Letter of Credit may, in accordance with applicable
Securities and Exchange Commission ("SEC") rules, be considered a separate
security and treated as an issue of such government, other entity or bank.
CONNECTICUT TAX FREE RESERVES
CitiFunds Multi-State Tax Free Trust may not with respect to Connecticut
Tax Free Reserves:
(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objective and policies and
substantially the same investment restrictions as the Fund).
(2) Borrow money. This restriction shall not apply to borrowings from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Trust will not make any investments on behalf of the Fund.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's
assets, except in an amount up to 15% of the value of the Fund's total
assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage
in the purchase and sale of put, call, straddle or spread options or in
writing such options, except to the extent that securities subject to a
demand obligation and stand-by commitments may be purchased as set forth
under "Investment Policies" above.
<PAGE>
(5) Underwrite the securities of other issuers, except insofar as the
Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security of the Fund (provided, however, that the
Trust may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund).
(6) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Trust from investing in Municipal
Obligations secured by real estate or interests in real estate.
(7) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.
(8) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
control, except that the Trust may invest all or substantially all of the
Fund's assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as the Fund.
(9) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust reserves the
right to invest more than 25% of the Fund's assets in bank participation
interests and there shall be no limitation on the purchase of those
Municipal Obligations and other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, except that the Trust
may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund.
When the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the assets
and revenues of the entity, the entity would be deemed to be the sole
issuer of the security. Similarly, in the case of a private activity bond,
if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government
or some other entity, such as an insurance company or other corporate
obligor, guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit may, in accordance with applicable SEC
rules, be considered a separate security and could be treated as an issue
of such government, other entity or bank.
(10) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Trust may invest
all or substantially all of the Fund's assets in another registered
investment company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. As of the date
of this Statement of Additional Information, the Trust has no intention of
investing in unit investment trust securities on behalf of the Fund.
(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, except as appropriate to
evidence a debt incurred without violating Investment Restriction (2)
above.
For purposes of the investment restrictions described in (8) and (9)
above, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of principal of
and interest on the security. If, however, the creating government or some
other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a Letter of Credit, such a
guarantee or Letter of Credit may, in accordance with applicable SEC
rules, be considered a separate security and treated as an issue of such
government, other entity or bank.
In addition, as a matter of non-fundamental policy, the Trust will
not invest on behalf of the Fund in securities that are not readily
marketable, such as fixed time deposits and repurchase agreements maturing
in more than seven days, if such investments together with other illiquid
securities held by the Fund exceed 10% of the Fund's total net assets.
<PAGE>
NEW YORK TAX FREE RESERVES
CitiFunds Multi-State Tax Free Trust may not with respect to New York Tax
Free Reserves:
(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies.
(2) Borrow money. This restriction shall not apply to borrowings from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Trust will not make any investments on behalf of the Fund.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's
assets, except in an amount up to 15% of the value of the Fund's total
assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage
in the purchase and sale of put, call, straddle or spread options or in
writing such options, except to the extent that securities subject to a
demand obligation and stand-by commitments may be purchased as set forth
under "Investment Policies" above.
(5) Underwrite the securities of other issuers, except insofar as the
Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security of the Fund.
(6) Purchase securities subject to restrictions on disposition under
the Securities Act of 1933 ("restricted securities"). The Trust will not
invest on behalf of the Fund in a repurchase agreement maturing in more
than seven days if any such investment together with securities that are
not readily marketable held by the Fund exceed 10% of the Fund's total net
assets.
(7) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Trust from investing in Municipal
Obligations secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.
(9) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
control.
(10) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust may invest more
than 25% of the Fund's assets in bank participation interests and there
shall be no limitation on the purchase of those Municipal Obligations and
other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate
from those of the government creating the issuing entity and a security is
backed only by the assets and revenues of the entity, the entity would be
deemed to be the sole issuer of the security. Similarly, in the case of a
private activity bond, if that bond is backed only by the assets and
revenues of the non-governmental user, then such non-governmental user
would be deemed to be the sole issuer. If, however, in either case, the
creating government or some other entity, such as an insurance company or
other corporate obligor, guarantees a security or a bank issues a letter
of credit, such a guarantee or letter of credit would be considered a
separate security and would be treated as an issue of such government,
other entity or bank.
<PAGE>
(11) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. As of the date of this Statement
of Additional Information, the Trust has no intention of investing in unit
investment trust securities on behalf of the Fund.
For purposes of the investment restrictions described above, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of principal of and interest on the security. If,
however, the creating government or some other entity, such as an insurance
company or other corporate obligor, guarantees a security or a bank issues a
Letter of Credit, such a guarantee or Letter of Credit may, in accordance with
applicable SEC rules, be considered a separate security and treated as an issue
of such government, other entity or bank.
If a percentage restriction or a rating restriction (other than a
restriction as to borrowing) on investment or utilization of assets set forth
above or referred to in the Prospectus is adhered to at the time an investment
is made or assets are so utilized, a later change in percentage resulting from
changes in the value of the securities held by a Fund or a Portfolio or a later
change in the rating of a security held by a Fund or a Portfolio is not
considered a violation of policy.
3. PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of yield, effective yield, tax equivalent yield,
total rate of return or tax equivalent total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yields and total rates of return fluctuate in response to market conditions and
other factors.
From time to time, in reports or other communications to shareholders or
in advertising or sales materials, performance of Fund shares may be compared
with current or historical performance of other mutual funds or classes of
shares of other mutual funds, as listed in the rankings prepared by Lipper
Analytical Services, Inc. or similar independent services that monitor the
performance of mutual funds, financial indices such as the S&P 500 Index or
other industry or financial publications, including, but not limited to, Bank
Rate Monitor, iMoneyNet's Money Fund Report, Morningstar, Inc. and Thomson
Financial Bank Watch. A Fund may also present statistics on current and
historical rates of Money Market Deposit Accounts and Statement Savings,
Certificates of Deposit (CDs) and other bank or depository products prepared by
outside services such as Bank Rate Monitor, Inc., and compare this performance
to the current or historical performance of the Fund. Any given "performance"
or performance comparison should not be considered as representative of any
performance in the future. In addition, there may be differences between a Fund
and the various indexes and products which may be compared to the Fund. In
particular, mutual funds differ from bank deposits or other bank products in
several respects. For example, a fund may offer greater liquidity or higher
potential returns than CDs, but a fund does not guarantee your principal or
your returns, and fund shares are not FDIC insured.
Each Fund may provide annualized yield and effective yield quotations. The
yield of a Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
week over a 365-day period and is shown as a percentage of the investment. Any
current yield quotation of a Fund which is used in such a manner as to be
subject to the provisions of Rule 482(d) under the Securities Act of 1933, as
amended, consists of an annualized historical yield, carried at least to the
nearest hundredth of one percent, based on a specific seven calendar day period
and is calculated by dividing the net change in the value of an account having
a balance of one share at the beginning of the period by the value of the
account at the beginning of the period and multiplying the quotient by 365/7.
For this purpose the net change in account value would reflect the value of
additional shares purchased with dividends declared on the original share and
dividends declared on both the original share and any such additional shares,
but would not reflect any realized gains or losses as a result of a Fund's
investment in a Portfolio or from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. The effective yield is
calculated similarly, but when annualized the income earned by the investment
during that seven-day period is assumed to be reinvested. The effective yield
is slightly higher than the yield because of the compounding effect of this
assumed reinvestment. Any effective yield quotation of a Fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the sum
to a power equal to 365/7, and subtracting 1 from the result.
<PAGE>
U.S. Treasury Reserves and each Tax Free Fund may provide tax equivalent
yield quotations. The tax equivalent yield refers to the yield that a fully
taxable money market fund would have to generate in order to produce an
after-tax yield equivalent to that of a Fund. The use of a tax equivalent yield
allows investors to compare the yield of the Fund, the dividends from which may
be exempt from federal or state personal income tax, with yields of funds the
dividends from which are not tax exempt. Any tax equivalent yield quotation of
a Fund is calculated as follows: If the entire current yield quotation for such
period is tax-exempt, the tax equivalent yield will be the current yield
quotation divided by 1 minus a stated income tax rate or rates. If a portion of
the current yield quotation is not tax-exempt, the tax equivalent yield will be
the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus
a stated income tax rate or rates and (b) the portion of the yield which is not
tax-exempt. A Fund also may provide yield, effective yield and tax equivalent
yield quotations for longer periods.
Each Fund may provide its period and average annualized total rates of
return. The total rate of return refers to the change in the value of an
investment in a Fund over a stated period and is compounded to include the
value of any shares purchased with any dividends or capital gains declared
during such period. A total rate of return quotation for a Fund is calculated
for any period by (a) dividing (i) the sum of the net asset value per share on
the last day of the period and the net asset value per share on the last day of
the period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and
capital gains distributions, by (ii) the public offering price on the first day
of such period, and (b) subtracting 1 from the result. Period total rate of
return may be annualized. An annualized total rate of return assumes that the
period total rate of return is generated over a one-year period. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
U.S. Treasury Reserves and each Tax Free Fund may provide tax equivalent
total rates of return. The tax equivalent total rate of return refers to the
total rate of return that a fully taxable money market fund would have to
generate in order to produce an after-tax total rate of return equivalent to
that of a Fund. The use of a tax equivalent total rate of return allows
investors to compare the total rates of return of a Fund, the dividends from
which may be exempt from federal or state personal income taxes, with the total
rates of return of funds the dividends from which are not tax exempt. Any tax
equivalent total rate of return quotation of a Fund is calculated as follows:
If the entire current total rate of return quotation for such period is
tax-exempt, the tax equivalent total rate of return will be the current total
rate of return quotation divided by 1 minus a stated income tax rate or rates.
If a portion of the current total rate of return quotation is not tax-exempt,
the tax equivalent total rate of return will be the sum of (a) that portion of
the total rate of return which is tax-exempt divided by 1 minus a stated income
tax rate or rates and (b) the portion of the total rate of return which is not
tax-exempt.
Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for each
Fund for the periods indicated. The Class A and B shares of Cash Reserves were
newly offered in 1999. Performance results for the Class A and Class B shares
of Cash Reserves after class inception on January 4, 1999 are based on actual
performance, whereas performance results before that date are based on Class N
performance, adjusted to reflect differences in sales charges (but not the
differences in fees and expenses). All outstanding shares of U.S. Treasury
Reserves, Tax Free Reserves, California Tax Free Reserves, Connecticut Tax Free
Reserves, and New York Tax Free Reserves were designated Class N shares on
_________ __, 2000. CitiMarkets shares of each Fund are newly offered and have
no investment history. Performance results include any applicable fee waivers
or expense subsidies in place during the time period, which may cause the
results to be more favorable than they would otherwise have been.
<TABLE>
<CAPTION>
<S> <C> <C>
REDEEMABLE VALUE
ANNUALIZED OF A HYPOTHETICAL
TOTAL $1,000 INVESTMENT
PERIOD RATE OF RETURN AT THE END OF THE PERIOD
CASH RESERVES
CLASS N
Ten years ended August 31, 1999.................. 5.00% $1,629.66
Five years ended August 31, 1999................. 5.06% $1,280.03
One year ended August 31, 1999................... 4.63% $1,046.32
CLASS A
Ten years ended August 31, 1999.................. 5.00% $1,629.66
Five years ended August 31, 1999................. 5.06% $1,280.03
One year ended August 31, 1999................... 4.63% $1,046.32
<PAGE>
CLASS B
Ten years ended August 31, 1999.................. 4.22% $1,512.27
Five years ended August 31, 1999................. 4.28% $1,233.07
One year ended August 31, 1999................... 3.85% $1,038.53
U.S. TREASURY RESERVES
CLASS N
May 3, 1991 (commencement of operations)
to August 31, 1999............................ 4.09% $1,396.12
Five years ended August 31, 1999................. 4.57% $1,250.54
One year ended August 31, 1999................... 4.02% $1,040.19
TAX FREE RESERVES
CLASS N
Ten years ended August 31, 1999.................. 3.26% $1,378.38
Five years ended August 31, 1999................. 3.01% $1,159.79
One year ended August 31, 1999................... 2.66% $1,026.58
CALIFORNIA TAX FREE RESERVES
CLASS N
March 10, 1992 (commencement of operations)
to August 31, 1999............................ 2.83% $1,231.92
Five years ended August 31, 1999................. 3.01% $1,159.56
One year ended August 31, 1999................... 2.50% $1,025.02
CONNECTICUT TAX FREE RESERVES
CLASS N
December 1, 1993 (commencement of operations)
to August 31, 1999............................ 2.98% $1,183.71
Five years ended August 31, 1999................. 3.07% $1,159.56
One year ended August 31, 1999................... 2.58% $1,025.80
NEW YORK TAX FREE RESERVES
CLASS N
Ten years ended August 31, 1999.................. 3.11% $1,358.81
Five years ended August 31, 1999................. 2.96% $1,156.80
One year ended August 31, 1999................... 2.60% $1,026.03
</TABLE>
The following table shows the annualized yield and effective compound
annualized yield for each Fund for the seven-day period ended August 31,
1999:
<TABLE>
<CAPTION>
<S> <C> <C>
COMPOUND
ANNUALIZED YIELD ANNUALIZED YIELD
Cash Reserves, Class N.................... 4.69% 4.80%
Cash Reserves, Class A.................... 4.69% 4.80%
Cash Reserves, Class B.................... 3.94% 4.01%
U.S. Treasury Reserves, Class N........... 3.99% 4.07%
Tax Free Reserves, Class N................ 2.65% 2.69%
California Tax Free Reserves, Class N..... 2.41% 2.44%
Connecticut Tax Free Reserves, Class N.... 2.53% 2.56%
New York Tax Free Reserves, Class N....... 2.58% 2.61%
</TABLE>
The annualized tax equivalent yields for the seven-day period ended August
31, 1999 were as follows for Class N shares of the Tax Free Funds: U.S.
Treasury Reserves 4.50% (assuming a combined state and local tax rate of
11.307% for New York City residents); Tax Free Reserves 4.39% (assuming a
federal tax bracket of 39.60%); California Tax Free Reserves 3.39% (assuming
(i) a combined California State and federal tax bracket of 45.22% and (ii) that
77.08% of the Fund's assets were invested in California Municipal Obligations);
Connecticut Tax Free Reserves 3.40% (assuming (i) a combined Connecticut State
and federal tax bracket of 42.32% and (ii) that 77.43% of the Fund's assets
<PAGE>
were invested in Connecticut Municipal Obligations); and New York Tax Free
Reserves 3.83% (assuming (i) a combined New York State, New York City and
federal tax bracket of 46.43% and (ii) that 79.45% of the Fund's assets were
invested in New York Municipal Obligations).
For advertising and sales purposes, the Funds will generally use the
performance of Class N shares. All outstanding Cash Reserves shares were
designated Class N shares on January 4, 1999, and all outstanding shares of the
other Funds were designated Class N shares on __________ __, 2000. Cash
Reserves commenced offering Class A and Class B shares on January 4, 1999, and
Cash Reserves and the other Funds commenced offering CitiMarkets shares on
_________ __, 2000. If the performance of Cash Reserves' Class A or Class B
shares or of any Fund's CitiMarkets shares is used for advertising and sales
purposes, performance after the class inception date will be actual
performance, while performance prior to that date will be Class N performance,
adjusted to reflect the differences in sales charges (if any) but not the
differences in fees and expenses among the classes. For the purposes of
calculating the performance of Class B shares of Cash Reserves, it will be
assumed that the maximum contingent deferred sales charge applicable to the
Class B shares is deducted at the times, in the amount, and under the terms
stated in the Prospectus. The performance of Class B shares of Cash Reserves
generally will be lower than Class A or Class N performance of Cash Reserves
because the expenses attributable to Class B shares are higher than the
expenses attributable to the Class A and Class N shares. The performance of
CitiMarkets shares of any Fund generally would have been lower than Class N
performance, because the expenses attributable to the CitiMarkets shares are
higher than the expenses attributable to the Class N shares. Fund performance
may also be presented in advertising and sales literature without the inclusion
of sales charges.
4. DETERMINATION OF NET ASSET VALUE
The net asset value of each share of each class of the Funds is determined
on each day on which the New York Stock Exchange is open for trading. This
determination is normally made once during each such day as of 3:00 p.m.,
Eastern time, for Cash Reserves and 12:00 noon, Eastern time, for the other
Funds. Net asset value is calculated for each class of a Fund by dividing the
value of the Fund's net assets (i.e., the value of its assets attributable to a
class, including its investment in its underlying Portfolio, if any, less its
liabilities, including expenses payable or accrued) by the number of the shares
of the class outstanding at the time the determination is made. On days when
the financial markets in which the Funds invest close early, each Fund's net
asset value is determined as of the close of these markets if such time is
earlier than the time at which the net asset value is normally calculated. As
of the date of this Statement of Additional Information, the Exchange is open
for trading every weekday except for the following holidays (or the days on
which they are observed): New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. It is anticipated that the net asset value
of each share of each Fund will remain constant at $1.00 and, although no
assurance can be given that they will be able to do so on a continuing basis,
as described below, the Funds and Portfolios employ specific investment
policies and procedures to accomplish this result.
The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued)
is determined at the same time and on the same days as the net asset value per
share of the corresponding Fund is determined. The net asset value of a Fund's
investment in the corresponding Portfolio is equal to the Fund's pro rata share
of the total investment of the Fund and of other investors in the Portfolio
less the Fund's pro rata share of the Portfolio's liabilities.
The securities held by a Fund or Portfolio are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium. If fluctuating interest rates cause the market value of the securities
held by the Fund or Portfolio to deviate more than 1/2 of 1% from their value
determined on the basis of amortized cost, the applicable Trust's or
Portfolio's Board of Trustees will consider whether any action should be
initiated, as described in the following paragraph. Although the amortized cost
method provides certainty in valuation, it may result in periods during which
the stated value of an instrument is higher or lower than the price the Fund or
Portfolio would receive if the instrument were sold.
Pursuant to the rules of the SEC, the Trusts' and the Portfolios' Boards
of Trustees have established procedures to stabilize the value of the Funds'
and Portfolios' net assets within 1/2 of 1% of the value determined on the
basis of amortized cost. These procedures include a review of the extent of any
such deviation of net asset value, based on available market rates. Should that
deviation exceed 1/2 of 1% for a Fund or Portfolio, the applicable Trust's or
Portfolio's Board of Trustees will consider whether any action should be
initiated to eliminate or reduce material dilution or other unfair results to
investors in the Fund or Portfolio. Such action may include withdrawal in kind,
selling securities prior to maturity and utilizing a net asset value as
determined by using available market quotations. The Funds and Portfolios
maintain a dollar-weighted average maturity of 90 days or less, do not purchase
any instrument with a remaining maturity greater than 397 days or (in the case
of all Funds and Portfolios other than U.S. Treasury Reserves and U.S. Treasury
Reserves Portfolio which may not invest in repurchase agreements) subject to a
repurchase agreement having a duration of greater than 397 days, limit their
<PAGE>
investments, including repurchase agreements, to those U.S. dollar-denominated
instruments that are determined by the Adviser to present minimal credit risks
and comply with certain reporting and recordkeeping procedures. The Trusts and
Portfolios also have established procedures to ensure that securities purchased
by the Funds and Portfolios meet high quality criteria. (See "Investment
Objectives, Policies and Restrictions -- Investment Policies.")
Because of the short-term maturities of the portfolio investments of each
Fund, the Funds do not expect to realize any material long-term capital gains
or losses. Any net realized short-term capital gains will be declared and
distributed to the Funds' shareholders annually after the close of each Fund's
fiscal year. Distributions of short-term capital gains are taxable to
shareholders as described in "Certain Additional Tax Matters." Any realized
short-term capital losses will be offset against short-term capital gains or,
to the extent possible, utilized as capital loss carryover. Each Fund may
distribute short-term capital gains more frequently then annually, reduce
shares to reflect capital losses or make distributions of capital if necessary
in order to maintain the Fund's net asset value of $1.00 per share.
It is expected that each Fund (and each class of a Fund) will have a
positive net income at the time of each determination thereof. If for any
reason a Fund's or a class' net income is a negative amount, which could occur,
for instance, upon default by an issuer of a portfolio security, the Fund would
first offset the negative amount with respect to each shareholder account in
that Fund or class from the dividends declared during the month with respect to
those accounts. If and to the extent that negative net income exceeds declared
dividends at the end of the month, the Fund would reduce the number of
outstanding Fund shares of that Fund or class by treating each shareholder as
having contributed to the capital of the Fund that number of full and
fractional shares in the shareholder's account which represents the
shareholder's share of the amount of such excess. Each shareholder would be
deemed to have agreed to such contribution in these circumstances by investment
in the Fund.
5. MANAGEMENT
Each Fund and Portfolio is supervised by a Board of Trustees. In each
case, a majority of the Trustees are not affiliated with the Adviser. In
addition, a majority of the disinterested Trustees of Cash Reserves, U.S.
Treasury Reserves and Tax Free Reserves are different from a majority of the
disinterested Trustees of their corresponding Portfolios.
The Trustees and officers of the Trusts and the Portfolios, their ages and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
a Trust or a Portfolio. Unless otherwise indicated below, the address of each
Trustee and officer is 21 Milk Street, Boston, Massachusetts. The address of
Cash Reserves Portfolio is Elizabethan Square, George Town, Grand Cayman,
British West Indies. The address of U.S. Treasury Reserves Portfolio and Tax
Free Reserves Portfolio is 21 Milk Street, Boston, Massachusetts.
TRUSTEES OF CITIFUNDS TRUST III AND TAX FREE RESERVES
PHILIP W. COOLIDGE; 48* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.
C. OSCAR MORONG, JR.; 65 -- Chairman of the Boards of Trustees of the Trusts;
Managing Director, Morong Capital Management (since February, 1993); Director,
Indonesia Fund (from 1990 to 1999); Director, 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 (from 1987 to 1999). His address is Laurel Road, P.O. Box
146, Tuxedo Park, New York 10987.
TRUSTEES OF CITIFUNDS MULTI-STATE TAX FREE TRUST
ELLIOTT J. BERV; 57 -- President and Chief Executive Officer, Catalyst, Inc.
(Management Consultants) (since June, 1992); President and Director, Elliott J.
<PAGE>
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 Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.
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.
RILEY C. GILLEY; 73 -- Vice President and General Counsel, Corporate Property
Investors (November, 1988 to December, 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
DIANA R. HARRINGTON; 60 -- Professor, Babson College (since 1994); Trustee, The
Highland Family of Funds (March, 1997 to March, 1998). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 48 -- Consultant, Global Research Associates, Inc. (Investment
Research) (since September, 1990); Director, Mainstay Institutional Funds
(since December, 1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR.; 65 -- Chairman of the Boards of Trustees of the Trusts;
Managing Director, Morong Capital Management (since February, 1993); Director,
Indonesia Fund (from 1990 to 1999); Director, 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 (from 1987 to 1999). His address is Laurel Road, P.O. Box
146, Tuxedo Park, New York 10987.
TRUSTEES OF THE PORTFOLIOS
ELLIOTT J. BERV; 57 -- 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 Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.
RILEY C. GILLEY; 73 -- Vice President and General Counsel, Corporate Property
Investors (November, 1988 to December, 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
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.
OFFICERS OF THE TRUSTS AND PORTFOLIOS
PHILIP W. COOLIDGE; 48* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc., and CFBDS.
<PAGE>
CHRISTINE D. DORSEY; 29* -- Assistant Secretary and Assistant Treasurer of
Trusts and the Portfolios; Vice President, Signature Financial Group, Inc.
(since January, 1996); Paralegal and Compliance Officer, various financial
companies (July, 1992 to January, 1996).
LINWOOD C. DOWNS; 38* -- Treasurer of the Trusts and the Portfolios; Chief
Financial Officer and Senior Vice President, Signature Financial Group, Inc.,
Treasurer, CFBDS.
TAMIE EBANKS-CUNNINGHAM; 27* -- Assistant Secretary of the Trusts and the
Portfolios; 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 Trusts and the Portfolios; Vice President, Signature Financial
Group (Cayman) Ltd (since July 1994).
MOLLY S. MUGLER; 48* -- Assistant Secretary and Assistant Treasurer of the
Trusts and the Portfolios; Vice President, Signature Financial Group, Inc.;
Assistant Secretary, CFBDS.
JULIE J. WYETZNER; 40* -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trusts and the Portfolios; Vice President, Signature Financial
Group, Inc.
The Trustees and officers of the Trusts and the Portfolios also hold comparable
positions with certain other funds for which CFBDS or an affiliate serves as
the distributor or administrator.
TRUSTEES COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL
COMPENS-
AGGREGATE AGGREGATE AGGREGATE PENSION OR ATION FROM
AGGREGATE COMPENS- AGGREGATE COMPENS- AGGREGATE COMPENS- RETIREMENT THE TRUSTS
COMPENS- ATION FROM COMPENS- ATION FROM COMPENS- ATION FROM BENEFITS ESTIMATED AND FUND
ATION FROM U.S. ATION FROM CALIFORNIA ATION FROM NEW YORK ACCRUED AS ANNUAL COMPLEX
CASH TREASURY TAX FREE TAX FREE CONNECTICUT TAX FREE PART OF BENEFITS PAID TO
RESERVES RESERVES RESERVES RESERVES TAX FREE RESERVES FUND UPON TRUSTEES
TRUSTEE (1) (1) (1) (1) RESERVES (1) (1) EXPENSES RETIREMENT (1)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Elliott J. Berv..... N/A N/A N/A $1,313 $1,011 $4,242 None None $69,500
Philip W. Coolidge.. $0 $0 $0 $0 $0 $0 None None $0
Mark T. Finn........ N/A N/A N/A $2,472 $1,647 $8,788 None None $63,250
Riley C. Gilley..... N/A N/A N/A $1,121 $905 $3,480 None None $65,250
Diana R. Harrington. N/A N/A N/A $1,904 $1,325 $6,479 None None $71,250
Susan B. Kerley..... N/A N/A N/A $1,853 $1,299 $6,292 None None $69,750
C. Oscar Morong, Jr. $16,133 $3,303 $5,094 $2,506 $1,644 $8,763 None None $92,000
Walter E. Robb, III(3). $3,344 $1,299 $1,978 $1,175 $936 $3,706 None None $67,500
E. Kirby Warren..... $7,997 $2,225 $3,398 $1,498 $1,107 $4,925 None None $62,750
William S. Woods, Jr.(4) $3,588 $793 $1,211 $2,420 $1,609 $3,508 None None $66,000
</TABLE>
(1) Information is for the fiscal year ended August 31, 1999.
(2) Messrs. Berv, Coolidge, Finn, Gilley, Morong, Robb, Warren and Woods and
Mses. Harrington and Kerley are trustees of 27, 49, 26, 33, 40, 30, 40,
26, 28 and 28 funds and portfolios, respectively, in the family of
open-end registered investment companies advised or managed by Citibank.
(3) Mr. Robb was appointed as a trustee of CitiFunds Trust III and Tax Free
Reserves as of September 1, 1998.
(4) Effective December 31, 1999, Mr. Woods became a Trustee Emeritus of
CitiFunds Multi-State Tax Free Trust. Per the terms of the Trust's Trustee
Emeritus Plan, Mr. Woods serves the Board of Trustees in an advisory
capacity. As a Trustee Emeritus, Mr. Woods is paid 50% of the annual
retainer fee and meeting fees otherwise applicable to Trustees, together
with reasonable out-of-pocket expenses for each meeting attended.
As of __________ __, 2000, all Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares. As of the same date, more than 95%
of the outstanding shares of each Fund were held of record by Citibank or an
affiliate, as a Shareholder Servicing Agent of the Funds, for the accounts of
their respective clients.
The Declaration of Trust of each of the Trusts and the Portfolios provides
that such Trust or Portfolio, as the case may be, will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
<PAGE>
litigation in which they may be involved because of their offices with such
Trust or Portfolio, as the case may be, unless, as to liability to such Trust
or Portfolio or its respective investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to
any other matter it is finally adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best interests of such
Trust or Portfolio, as the case may be. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees of such Trust or Portfolio, or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ADVISER
Citibank manages the assets of each Portfolio and CitiFunds Multi-State
Tax Free Trust pursuant to separate investment advisory agreements (the
"Advisory Agreements"). Subject to such policies as the Board of Trustees of
the Portfolios or Trust, as applicable, may determine, the Adviser manages the
securities of each Portfolio and California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves and makes investment decisions for
each Portfolio and such Funds. The Adviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing each
Portfolio's and California Tax Free Reserves', Connecticut Tax Free Reserves'
and New York Tax Free Reserves' investments and effecting securities
transactions for each Portfolio and such Funds. Each of the Advisory Agreements
will continue in effect as long as such continuance is specifically approved at
least annually by the Board of Trustees of the applicable Portfolio or Trust or
by a vote of a majority of the outstanding voting securities of the applicable
Portfolio or Fund, and, in either case, by a majority of the Trustees of the
applicable Portfolio or Trust who are not parties to such Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement.
Each Advisory Agreement provides that the Adviser may render services to
others. Each Advisory Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the applicable Portfolio or
Trust when authorized either by a vote of a majority of the outstanding voting
securities of the applicable Portfolio or Fund or by a vote of a majority of
the Board of Trustees of the applicable Portfolio or Trust, or by the Adviser
on not more than 60 days' nor less than 30 days' written notice, and will
automatically terminate in the event of its assignment. Each Advisory Agreement
provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of security transactions
for the applicable Portfolio or Fund, 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 Agreements, the Adviser receives
investment advisory fees, which are accrued daily and paid monthly, of 0.15% of
Cash Reserves Portfolio's and U.S. Treasury Reserves Portfolio's average daily
net assets and 0.20% of Tax Free Reserves Portfolio's, California Tax Free
Reserves', Connecticut Tax Free Reserves' and New York Tax Free Reserves'
average daily net assets, in each case on an annualized basis for the Fund's or
Portfolio's then-current fiscal year. The Adviser has voluntarily agreed to
waive a portion of its investment advisory fee.
CASH RESERVES PORTFOLIO: For the fiscal years ended August 31, 1997, 1998
and 1999, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $4,395,286, $6,739,206 and $9,422,276, respectively.
U.S. TREASURY RESERVES PORTFOLIO: For the fiscal years ended August 31,
1997, 1998 and 1999, the fees paid to Citibank under the Advisory Agreement,
after waivers, were $494,339, $578,350 and $614,718, respectively.
TAX FREE RESERVES PORTFOLIO: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $506,142, $659,288 and $824,462, respectively.
CALIFORNIA TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $187,339, $292,561 and $383,383, respectively.
CONNECTICUT TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $141,986, $173,117 and $186,539, respectively.
NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $1,144,036, $1,316,731 and $1,436,852, respectively.
Citibank and its affiliates may have deposit, loan and other relationships
with the issuers of securities purchased on behalf of the Funds, including
<PAGE>
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities so purchased. Citibank has informed the Funds that,
in making its investment decisions, it does not obtain or use material inside
information in the possession of any division or department of Citibank or in
the possession of any affiliate of Citibank.
ADMINISTRATORS
Pursuant to Administrative Services Agreements (the "Administrative
Services Agreements"), CFBDS provides the Trusts, U.S. Treasury Reserves
Portfolio and Tax Free Reserves Portfolio, and SFG provides Cash Reserves
Portfolio, with general office facilities, and CFBDS supervises the overall
administration of the Trusts, U.S. Treasury Reserves Portfolio and Tax Free
Reserves Portfolio and SFG supervises the overall administration of Cash
Reserves Portfolio, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
independent contractors and agents of the Trusts and the Portfolios; the
preparation and filing of all documents required for compliance by the Trusts
and the Portfolios with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trusts and the Portfolios. CFBDS and
SFG provide persons satisfactory to the Board of Trustees of the Trusts and the
Portfolios to serve as Trustees and officers of the Trusts and the Portfolios.
Such Trustees and officers may be directors, officers or employees of CFBDS,
SFG or their affiliates.
For these services, the Administrators receive fees accrued daily and paid
monthly of 0.35% of the average daily net assets of Cash Reserves and U.S.
Treasury Reserves, 0.25% of the average daily net assets of each Tax Free Fund
and 0.05% of the assets of each Portfolio, in each case on an annualized basis
for the Fund's or the Portfolio's then-current fiscal year. However, each of
the Administrators may voluntarily agree to waive a portion of the fees payable
to it.
CASH RESERVES: For the fiscal years ended August 31, 1997, 1998 and 1999,
the fees paid to CFBDS from the Fund under the Administrative Services
Agreement, after waivers, were $4,429,870, $5,538,777 and $7,935,090,
respectively. For the fiscal years ended August 31, 1997, 1998 and 1999, the
fees payable to SFG under the Administrative Services Agreement were
voluntarily waived.
U.S. TREASURY RESERVES: For the fiscal years ended August 31, 1997, 1998
and 1999, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $897,971, $846,110 and
$842,720, respectively. For the fiscal years ended August 31, 1997, 1998 and
1999, the fees payable to CFBDS under the Administrative Services Agreement
with the Portfolio were voluntarily waived.
TAX FREE RESERVES: For the fiscal years ended August 31, 1997, 1998 and
1999, the fees paid to CFBDS from the Fund under the Administrative Services
Agreement with the Trust, after waivers, were $522,829, $784,522 and $873,949,
respectively. For the fiscal year ended August 31, 1997, the fee payable to
CFBDS under the Administrative Services Agreement with the Portfolio, after
waivers, was $79,252. For the fiscal years ended August 31, 1998 and 1999, the
fees payable to CFBDS under the Administrative Services Agreement with the
Portfolio were voluntarily waived.
CALIFORNIA TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $301,183, $422,331 and
$537,738, respectively.
CONNECTICUT TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $234,859, $253,409 and
$268,250, respectively.
NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $1,711,547, $1,872,505
and $2,187,095, respectively.
By Agreement, the Trusts acknowledge that the name CitiFunds is the
property of Citigroup Inc. and provide that if Citibank ceases to serve as the
Adviser of the Trusts, the Trusts and the Funds will change their respective
names so as to delete the word CitiFunds. The Agreements with the Trusts also
provide that Citibank may permit other investment companies in addition to the
Trusts to use the word "CitiFunds" in their names.
The Administrative Services Agreements with the Trusts and the Portfolios
provide that CFBDS or SFG, as the case may be, may render administrative
services to others. The Administrative Services Agreements with the Trusts and
the Portfolios continue in effect as to a Fund or Portfolio, as applicable, if
<PAGE>
such continuance is specifically approved at least annually by the respective
Trust's or Portfolio's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the applicable Fund or Portfolio and, in
either case, by a majority of the Trustees of the Trust or Portfolio who are
not interested parties of the Trust, Portfolio or CFBDS. The Administrative
Services Agreements with the Trusts and the Portfolios terminate automatically
if they are assigned and may be terminated as to a Fund or Portfolio by the
applicable Trust or Portfolio without penalty by vote of a majority of the
outstanding voting securities of the Fund or Portfolio, as applicable, or by
either party thereto on not more than 60 days' nor less than 30 days' written
notice. The Administrative Services Agreements with the Trusts and the
Portfolios also provide that neither CFBDS 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 Trusts or the Portfolios, 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 Agreements.
CFBDS and SFG are wholly-owned subsidiaries of Signature Financial Group,
Inc.
Pursuant to Sub-Administrative Services Agreements (the
"Sub-Administrative Agreements"), Citibank performs such sub-administrative
duties for the Trusts and the Portfolios as are from time to time agreed upon
by Citibank and, as the case may be, CFBDS or SFG. Citibank's
sub-administrative duties may include providing equipment and clerical
personnel necessary for maintaining the organization of the Trusts and the
Portfolios, participation in preparation of documents required for compliance
by the Trusts and the Portfolios with applicable laws and regulations,
preparation of certain documents in connection with meetings of Trustees and
shareholders of the Trusts and Portfolios, and other functions which would
otherwise be performed by CFBDS as set forth above. For performing such
sub-administrative services, Citibank receives such compensation as is from
time to time agreed upon by Citibank and, as the case may be, CFBDS or SFG not
in excess of the amount paid to CFBDS or SFG for its services under the
applicable Administrative Services Agreement. All such compensation is paid by
CFBDS or SFG, as the case may be.
DISTRIBUTOR
Each of the Trusts has adopted Distribution Plans ("Distribution Plans")
in accordance with Rule 12b-1 under the 1940 Act after having concluded that
there is a reasonable likelihood such Distribution Plans will benefit the
applicable Funds and their shareholders.
Each Distribution Plan with respect to Class N shares of the Funds
provides that the applicable Trust shall pay a distribution fee to the
Distributor at an annual rate not to exceed 0.10% of the average daily net
assets of each Fund (exclusive of any advertising expenses incurred by the
Distributor in connection with the sale of shares of each Fund). The
Distribution Plans with respect to Class N shares also permit each Fund to pay
the Distributor an additional fee (not to exceed 0.10% per annum of the average
daily net assets) in anticipation of, or as reimbursement for, print or
electronic media advertising expenses incurred in connection with the sale of
Fund shares. No payments under a Distribution Plan are made to Shareholder
Servicing Agents, although Shareholder Servicing Agents receive payments under
the Administrative Services Plans referred to below.
The Distribution Plans for the Class A and Class B shares of Cash Reserves
provide that the Class A and Class B shares shall pay a distribution and/or
service fee at an annual rate not to exceed 0.20% and 0.75%, respectively, of
the average daily net assets of Cash Reserves represented by Class A and Class
B shares.
The Distribution Plans for the CitiMarkets shares of the Funds allow a
Fund to pay the Distributor, a broker-dealer or financial institution that has
entered into a service agreement with the Distributor concerning the Funds, or
others a monthly service fee at an annual rate not to exceed 0.10% of the
average daily net assets represented by CitiMarkets shares. The Distribution
Plans for the CitiMarkets shares also allow a Fund to pay the Distributor, a
broker-dealer or financial institution, or others a monthly distribution fee
not to exceed 0.40% of the average daily net assets represented by CitiMarkets
shares.
Each Distribution Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
applicable Trust's Trustees and a majority of the Trust's Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any agreement related to the Plan ("Qualified Trustees"). Each
Distribution Plan requires that the applicable Trust and the Distributor shall
provide to the Board of Trustees, and the Board of Trustees shall review, at
least quarterly, a written report of the amounts expended (and the purposes
therefor) under the Distribution Plan. Each Distribution Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of the Qualified Trustees then in office who are not interested
Trustees of the Trust. Each Distribution Plan may be terminated with respect to
any Fund at any time by a vote of a majority of the applicable Trust's
Qualified Trustees or by a vote of a majority of the outstanding voting
securities of the applicable class. A Distribution Plan may not be amended to
increase materially the amount of a class' permitted expenses thereunder
without the approval of a majority of the outstanding voting securities of that
class, and may not be materially amended in any case without a vote of the
majority of both the Trustees and the Qualified Trustees. The Distributor will
preserve copies of any plan, agreement or report made pursuant to a
Distribution Plan for a period of not less than six years from the date of the
<PAGE>
Plan, and for the first two years the Distributor will preserve such copies in
an easily accessible place.
As contemplated by each Distribution Plan, CFBDS acts as the agent of the
Funds in connection with the offering of shares of the Funds pursuant to a
Distribution Agreement (the "Distribution Agreement"). Under the Distribution
Agreements, CFBDS is obligated to use its best efforts to sell shares of each
class of each Fund. After the prospectus and periodic reports have been
prepared, set in type and mailed to existing shareholders, the Distributor pays
for the printing and distribution of copies of the prospectuses and periodic
reports which are used in connection with the offering of shares of the each of
the Funds to prospective investors. The Prospectus contains a description of
fees payable to the Distributor under the Distribution Agreements. During the
period they are in effect, each Distribution Plan and Distribution Agreement
obligates the applicable Funds to pay distribution fees to CFBDS as
compensation for its distribution activities, not as reimbursement for specific
expenses incurred. Thus, even if CFBDS's expenses exceed its distribution fees
for any Fund, the Fund will not be obligated to pay more than those fees and,
if CFBDS's expenses are less than such fees, it will retain its full fees and
realize a profit. Each Fund will pay distribution fees to CFBDS until either
its applicable Distribution Plan or Distribution Agreement is terminated or not
renewed. In that event, CFBDS's expenses in excess of distribution fees
received or accrued through the termination date will be CFBDS's sole
responsibility and not obligations of the Fund. The Distributor has voluntarily
agreed to waive a portion of the fees payable to it by Connecticut Tax Free
Reserves and New York Tax Free Reserves on a month-to-month basis.
Fees paid under the Distribution Plans with respect to CitiMarkets shares
may be used to make payments to the Distributor for distribution services, to a
broker-dealer or financial institution that has entered into a service
agreement with the Distributor concerning the Funds, or others in respect of
the sale of CitiMarkets shares, and to make payments for advertising, marketing
or other promotional activity, and payments for preparation, printing and
distribution of prospectuses, statements of additional information and reports
for recipients other than regulators and existing shareholders. Fees also may
be used to make payments to the Distributor, a broker-dealer or financial
institution that has entered into a service agreement with the Distributor
concerning the Funds, or others for providing personal service or the
maintenance of shareholder accounts. The amounts paid by the Distributor to
each recipient may vary based upon certain factors, including, among other
things, the levels of sales of CitiMarkets shares and/or shareholder services
provided.
CASH RESERVES: For the fiscal years ended August 31, 1997, 1998 and 1999,
the fees paid from the Fund to the Distributor under the Distribution Agreement
for Class N shares, after waivers, were $996,306, $1,262,825 and $496,472,
respectively, none of which was applicable to print or electronic media
advertising. For the period from January 4, 1999 (commencement of operations)
to August 31, 1999, the fees due to the Distributor under the Distribution
Agreement for Class A and Class B shares were voluntarily waived.
U.S. TREASURY RESERVES: For the fiscal years ended August 31, 1997, 1998
and 1999, the fees paid from the Fund to the Distributor under the Distribution
Agreement for Class N shares, after waivers, were $194,657, $184,159 and
$176,612, respectively, none of which was applicable to print or electronic
media advertising.
TAX FREE RESERVES: For the fiscal years ended August 31, 1997, 1998 and
1999, the fees paid from the Fund to the Distributor under the Distribution
Agreement for Class N shares, after waivers, were $162,993, $273,142 and
$308,091, respectively, none of which was applicable to print or electronic
media advertising.
CALIFORNIA TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid from the Fund to the Distributor under the
Distribution Agreement for Class N shares, after waivers, were $23,302, $38,266
and $74,694, respectively, none of which was applicable to print or electronic
media advertising.
CONNECTICUT TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid from the Fund to the Distributor under the
Distribution Agreement for Class N shares, after waivers, were $1,483, $15,904
and $22,263, respectively, none of which was applicable to print or electronic
media advertising.
NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1997,
1998 and 1999, the fees paid from the Fund to the Distributor under the
Distribution Agreement for Class N shares, after waivers, were $470,746,
$536,134 and $620,394, respectively, none of which was applicable to print or
electronic media advertising.
CODE OF ETHICS
The Trusts, the Portfolios, the Adviser and the Distributor each have
adopted a code of ethics pursuant to Rule 17j-1 under the Investment Company
Act of 1940, as amended. Each code of ethics permits personnel subject to such
<PAGE>
code to invest in securities, including securities that may be purchased or
held by a Fund. 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 Funds. 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.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trusts have each adopted an Administrative Services Plan
("Administrative Plan") relating to each class of the Funds other than the
CitiMarkets class which provides that the applicable Trust may obtain the
services of an administrator, a transfer agent, a custodian, a fund accountant
and one or more Shareholder Servicing Agents, and may enter into agreements
providing for the payment of fees for such services. Under the Administrative
Services Plans, the total of the fees paid to each Administrator and
Shareholder Servicing Agent and the distribution fee paid to the Distributor
(other than any fee concerning electronic or other media advertising) may not
exceed 0.70% of the average daily net assets attributable to Class N shares of
Cash Reserves and U.S. Treasury Reserves or 0.60% of the average daily net
assets attributable to Class N shares of a Tax Free Fund, in each case on an
annualized basis for the Fund's then-current fiscal year; and such fees with
respect to the Class A and Class B shares of Cash Reserves, excluding any
distribution or service fees, may not exceed 0.70% of the Fund's average daily
net assets attributable to the appropriate class on an annualized basis for the
Fund's then-current fiscal year. Within this overall limitation, individual
fees may vary. Each Administrative Plan continues in effect if such continuance
is specifically approved at least annually by a vote of both a majority of the
applicable Trust's Trustees and a majority of the Trust's Trustees who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Administrative Plan or in any agreement
related to such Plan ("Qualified Trustees"). Each Administrative Plan requires
that at least quarterly the applicable Trust provide to its Board of Trustees
and the Board of Trustees review a written report of the amounts expended (and
the purposes therefor) under the Administrative Plan. Each Administrative Plan
may be terminated with respect to a Fund or a class at any time by a vote of a
majority of the applicable Trust's Qualified Trustees or by a vote of a
majority of the outstanding voting securities of the Fund or the class, as the
case may be. An Administrative Plan may not be amended to increase materially
the amount of a Fund's or a class' permitted expenses thereunder without the
approval of a majority of the outstanding voting securities of the Fund or the
class, as the case may be, and may not be materially amended in any case
without a vote of the majority of both the applicable Trust's Trustees and
Qualified Trustees.
Each Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent pursuant to which
that Shareholder Servicing Agent provides shareholder services, including
answering customer inquiries, assisting in processing purchase, exchange and
redemption transactions and furnishing Fund communications to shareholders. For
services provided under each Servicing Agreement, each Shareholder Servicing
Agent receives fees from each class of the Funds other than the CitiMarkets
class at an annual rate of 0.25% of the average daily net assets of the Fund
attributable to that class represented by shares owned by investors for whom
such Shareholder Servicing Agent maintains a servicing relationship. Some
Shareholder Servicing Agents may impose certain conditions on their customers
in addition to or different from those imposed by the Funds, such as requiring
a minimum initial investment or charging their customers a direct fee for their
services. Each Shareholder Servicing Agent has agreed to transmit to its
customers who are shareholders of a Fund appropriate prior written disclosure
of any fees that it may charge them directly and to provide written notice at
least 30 days prior to imposition of any transaction fees. For the fiscal years
ended August 31, 1997, 1998 and 1999, aggregate fees paid to Shareholder
Servicing Agents under the Servicing Agreements, after waivers, were as
follows: Cash Reserves Class N $4,065,240, $5,026,036 and $6,231,978,
respectively; U.S. Treasury Reserves Class N $848,485, $797,572 and $816,578,
respectively; Tax Free Reserves Class N $1,008,233, $1,194,360 and $1,291,979,
respectively; California Tax Free Reserves Class N $459,224, $619,577 and
$769,975, respectively; Connecticut Tax Free Reserves Class N $77,265, $377,316
and $410,689, respectively; and New York Tax Free Reserves Class N $2,405,573,
$2,634,965 and $2,937,943, respectively. For the period from January 4, 1999
(commencement of operations) to August 31, 1999, Cash Reserves Class A paid
$8,629 to the Shareholder Servicing Agents. Class B fees were voluntarily
waived.
Each Trust and Portfolio has entered into a Transfer Agency and Service
Agreement and a Custodian Agreement with State Street Bank and Trust Company
("State Street") pursuant to which State Street (or its affiliate State Street
Canada, Inc.) acts as transfer agent and custodian and performs fund accounting
services. State Street (or its affiliate State Street Canada, Inc.) calculates
the daily net asset value for the Funds and the Portfolios. Securities held for
a Fund or Portfolio may be held by a sub-custodian bank approved by the
applicable Trust's or Portfolio's Trustees.
The Portfolios also have adopted Administrative Services Plans (the
"Portfolio Administrative Plans") which provide that the Portfolios may obtain
the services of an administrator, a transfer agent, a custodian and a fund
accountant, and may enter into agreements providing for the payment of fees for
such services. Under the Portfolio Administrative Plans, the administrative
services fee payable to either CFBDS or SFG, as the case may be, may not exceed
<PAGE>
0.05% of a Portfolio's average daily net assets on an annualized basis for its
then-current fiscal year. Each Portfolio Administrative Plan continues in
effect if such continuance is specifically approved at least annually by a vote
of both a majority of the applicable Portfolio's Trustees and a majority of the
Portfolio's Trustees who are not "interested persons" of the Portfolio and who
have no direct or indirect financial interest in the operation of the Portfolio
Administrative Plan or in any agreement related to such Plan ("Qualified
Trustees"). Each Portfolio Administrative Plan requires that the applicable
Portfolio provide to its Board of Trustees and the Board of Trustees review, at
least quarterly, a written report of the amounts expended (and the purposes
therefor) under the Portfolio Administrative Plan. Each Portfolio
Administrative Plan may be terminated at any time by a vote of a majority of
the Portfolio's Qualified Trustees or by a vote of a majority of the
outstanding voting securities of the applicable Portfolio. Neither Portfolio
Administrative Plan may be amended to increase materially the amount of
permitted expenses thereunder without the approval of a majority of the
outstanding voting securities of the applicable Portfolio and may not be
materially amended in any case without a vote of the majority of both the
Portfolio's Trustees and the Portfolio's Qualified Trustees.
6. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE OF SHARES
As described in the Prospectuses for the Funds, Cash Reserves offers four
classes of shares, Class A, Class B, Class N, and CitiMarkets shares, and each
other Fund offers two classes of shares, Class N and CitiMarkets shares.
Each class of shares of a Fund represents an interest in the same
portfolio of investments. Each class is identical in all respects except that
each class bears its own class expenses, including distribution and service
fees, and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per share
and dividends per share will vary for each class of shares. There are no
conversion, preemptive or other subscription rights.
Shareholders of each class will share expenses proportionately for
services that are received equally by all shareholders. A particular class of
shares will bear only those expenses that are directly attributable to that
class, where the type or amount of services received by a class varies from one
class to another. The expenses that may be borne by specific classes of shares
may include (i) transfer agency fees attributable to a specific class of
shares, (ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class of shares, (iii) SEC and
state securities registration fees incurred by a specific class, (iv) the
expense of administrative personnel and services required to support the
shareholders of a specific class of shares, (v) litigation or other legal
expenses relating to a specific class of shares, (vi) accounting expenses
relating to a specific class of shares and (vii) any additional incremental
expenses subsequently identified and determined to be properly allocated to one
or more classes of shares.
When you place purchase orders, please specify what class you are eligible
for. If you own shares of more than one class in the Fund, and want to sell
shares, you should specify which class of shares you wish to sell. If you fail
to specify, Class N shares will be redeemed first followed by CitiMarkets
shares, Class A shares (if applicable), and then Class B shares (if
applicable).
CLASS N SHARES
o Class N shares are generally available for any purchases that are not
made through an exchange. All Cash Reserves shares held prior to January 4,
1999 have been redesignated Class N shares, and all shares of the other Funds
held prior to _________ __, 2000 have been redesignated Class N shares.
o Class N shares are sold at net asset value without an initial sales
charge. There are no fees or deferred sales charges when you sell your shares.
o Class N shares may pay up to 0.10% of the average daily net assets
represented by Class N shares to compensate the Funds' Distributor for its
distribution activities. Class N shares may pay up to an additional 0.10% of
the average daily net assets represented by Class N shares in anticipation of
or as reimbursement for certain advertising expenses. Class N shares of the
Funds have lower annual expenses than CitiMarkets shares.
CITIMARKETS SHARES
o CitiMarkets shares are available only to on-line investors that have
established a customer account with the CitiMarkets Program and are designed
primarily as sweep investments, in conjunction with an investor's CitiMarkets
customer account.
o CitiMarkets shares are sold at net asset value without an initial sales
charge. There are no fees or deferred sales charges when you sell your shares.
<PAGE>
o CitiMarkets shares may pay distribution and service fees of up to 0.50%
of the average daily net assets represented by CitiMarkets shares. CitiMarkets
shares of the Funds have higher annual expenses than Class N shares.
CLASS A SHARES OF CASH RESERVES
o Class A shares of Cash Reserves are available only to holders of Class A
shares of other CitiFunds that wish to exchange their shares for shares of Cash
Reserves. This class may therefore be convenient for shareholders seeking a
temporary investment vehicle pending an investment in the same class of shares
of another fund in the CitiFunds family.
o Class A shares of Cash Reserves are sold at net asset value without an
initial sales charge. There are no fees or deferred sales charges when you sell
your shares, unless you received your Class A shares in exchange for Class A
shares of another CitiFund on which there was a deferred sales charge.
o Class A shares of Cash Reserves may pay distribution and service fees of
up to 0.20% of the average daily net assets represented by Class A shares.
CLASS B SHARES OF CASH RESERVES
Class B shares of Cash Reserves are available only to holders of Class B
shares of other CitiFunds that wish to exchange their Class B shares for shares
of Cash Reserves. This class may therefore be convenient for shareholders
seeking a temporary investment vehicle pending an investment in the same class
of shares of another fund in the CitiFunds family.
o Class B shares of Cash Reserves are sold at net asset value without
a front-end sales charge, but they are subject to a contingent deferred
sales charge when you sell your shares.
o Class B shares of Cash Reserves pay distribution and service fees
of up to 0.75% of the average daily net assets represented by the Class B
shares. Class A, Class N shares, and CitiMarkets shares of Cash Reserves
have lower annual expenses than Class B shares of Cash Reserves.
o Class B shares of Cash Reserves have a contingent deferred sales
charge (CDSC) that goes down the longer you hold your Class B shares. Your
CDSC is based on the CDSC applicable to the Class B shares of the CitiFund
that you owned before exchanging into Cash Reserves. If you have exchanged
your Class B shares more than once, you will be charged the highest CDSC
applicable to your shares. See the chart below for the maximum amount of
the sales charge. The sales charge is deducted from your sale proceeds if
you sell your Class B shares within five years of purchasing them.
REDEMPTION DURING CDSC ON SHARES BEING SOLD
1st year since purchase........................... 5%
2nd year since purchase........................... 4%
3rd year since purchase........................... 3%
4th year since purchase........................... 2%
5th year since purchase........................... 1%
6th year since purchase........................... None
o The CDSC is based on the original purchase price or the current
market value of the shares being sold, whichever is less.
o There is no CDSC on Class B shares representing capital
appreciation or on Class B shares acquired through reinvestment
of dividends or capital gains distributions.
o When you sell your Class B shares, shares on which the CDSC is
not payable, i.e.
[] shares representing capital appreciation and
[] shares representing the reinvestment of dividends and
capital gains distributions will be sold first followed by
shares held for the longest period of time, in order to
minimize your CDSC.
<PAGE>
o The holding period of your Class B shares acquired through an
exchange with another CitiFund will be calculated from the date
that the Class B shares were initially acquired in the other
CitiFund, and Class B shares being redeemed will be considered
to represent, as applicable, capital appreciation or dividend
and capital gains distribution reinvestments in the other fund.
o Class B shares automatically convert to Class A shares of the
Fund approximately eight years after issuance, together with a
pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares.
Shares are converted based on the relative net asset values per
share of the two classes on the first business day of the month
in which the eighth anniversary of the issuance of the Class B
shares occurs.
CLASS B SHARES OF CASH RESERVES -- CDSC ELIMINATION
o Reinvestment. There is no CDSC on shares representing capital
appreciation or on shares acquired through reinvestment of
dividends or capital gains distributions.
o Waivers. The CDSC will be waived in connection with:
[] exchanges into certain CitiFunds
[] a total or partial redemption made within one year of the
death of the shareholder; this waiver is available where
the deceased shareholder is either the sole shareholder or
owns the shares with his or her spouse as a joint tenant
with right of survivorship, and applies only to redemption
of shares held at the time of death
[] a lump sum or other distribution in the case of an
Individual Retirement Account (IRA), a self-employed
individual retirement plan (Keogh Plan) or a custodian
account under Section 403(b) of the Internal Revenue Code,
in each case following attainment of age 59 1/2
[] a total or partial redemption resulting from any
distribution following retirement in the case of a
tax-qualified retirement plan
[] a redemption resulting from a tax-free return of an excess
contribution to an IRA
EXCHANGES
o You may exchange your Class A or Class B shares of Cash Reserves
for shares of the same class (if available) of certain other
CitiFunds or other funds managed by Citibank. Class A shares of
Cash Reserves that are not subject to a contingent deferred
sales charge may also be exchanged for shares of certain
CitiFunds or other funds managed by Citibank that offer only a
single class of shares. Class N shares of the Funds may be
exchanged for shares of certain CitiFunds or other funds managed
by Citibank. CitiMarkets shares of a Fund may be exchanged for
CitiMarkets shares of any other Fund offered in this Statement
of Additional Information, or for certain other funds that may
be made available through the CitiMarkets program.
o Generally, there is no sales charge on shares you get through an
exchange. However, if you are exchanging shares of a Fund for
shares of another fund that are subject to an initial sales
charge, and if the initial sales charge for the shares being
exchanged into is greater than the sales charge you paid to
acquire the Fund shares being exchanged, you will have to pay an
initial sales charge at a rate equal to the difference.
o When you exchange Class B shares of Cash Reserves for Class B
shares of another fund, you do not have to pay a contingent
deferred sales charge. You may have to pay a contingent deferred
sales charge when you redeem the Class B shares of the other
fund.
o If you exchange your shares of a Fund for shares subject to an
initial sales charge, you may qualify for elimination or
reduction of the sales charge if you meet any of the following
conditions:
[] You held the Fund shares being exchanged as of January 4,
1999.
[] The Fund shares being exchanged were purchased with a sales
charge or acquired through a previous exchange from shares
purchased with a sales charge.
<PAGE>
[] The Fund shares being exchanged represent capital
appreciation or the reinvestment of dividends or capital
gains distributions.
To qualify for this reduction or elimination of the sales
charge, you must notify your Shareholder Servicing Agent at the time
of exchange. You may need to provide documentation to confirm your
entitlement to the sales charge elimination or reduction.
o The exchange privilege may be changed or terminated at any time.
You should be aware that you may have to pay taxes on your
exchange.
ADDITIONAL PURCHASE AND SALE INFORMATION
Shareholders may redeem Class A, Class B, and Class N shares by sending
written instructions in proper form (as determined by a shareholder's
Shareholder Servicing Agent) to their Shareholder Servicing Agents.
Shareholders may redeem or exchange Class A, Class B and Class N shares by
telephone, if their account applications so permit, by calling their
Shareholder Servicing Agents. Shareholders who have made a direct purchase in
CitiMarkets shares may redeem their shares by placing a redemption order in
proper form (as determined by the CitiMarkets Program) on-line at the
CitiMarkets website or by calling 1-800-625-4554. Shareholders are responsible
for ensuring that a request for redemption is in proper form.
During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone or Internet exchange or redemption. In such an event, another method
of instruction, if available, such as a written request sent via an overnight
delivery service, in the case of Class A, Class B or Class N shares, should be
considered. The Funds, each Shareholder Servicing Agent, and the CitiMarkets
Program will employ reasonable procedures to confirm that instructions
communicated by telephone or Internet are genuine. These procedures may include
recording of the telephone or Internet instructions and verification of a
shareholder's identity by asking for the shareholder's name, address, telephone
number, Social Security number, account number, or password identification
number. If these or other reasonable procedures are not followed, the Fund, the
Shareholder Servicing Agent, or the CitiMarkets Program may be liable for any
losses to a shareholder due to unauthorized or fraudulent instructions.
Otherwise, the shareholders will bear all risk of loss relating to a redemption
or exchange by telephone or Internet.
Subject to compliance with applicable regulations, the Trust and the
Portfolios have each reserved the right to pay the redemption price of shares
of the Funds or beneficial interests in the Portfolios, either totally or
partially, by a distribution in kind of securities (instead of cash). The
securities so distributed would be valued at the same amount as that assigned
to them in calculating the net asset value for the shares or beneficial
interests being sold. If a holder of shares or beneficial interests received a
distribution in kind, such holder could incur brokerage or other charges in
converting the securities to cash.
The Trusts and the Portfolios may suspend the right of redemption or
postpone the date of payment for shares of a Fund or beneficial interests in a
Portfolio more than seven days during any period when (a) trading in the
markets the Fund or Portfolio normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the SEC, exists making disposal of
the Fund's or Portfolio's investments or determination of its net asset value
not reasonably practicable; (b) the New York Stock Exchange is closed (other
than customary weekend and holiday closings); or (c) the SEC has by order
permitted such suspension.
7. DEALER COMMISSIONS AND CONCESSIONS
From time to time, the Funds' Distributor or Citibank, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers that sell or arrange for the sale of shares of the
Funds. Such concessions provided by the Funds' Distributor or Citibank may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/or other dealer-sponsored events.
From time to time, the Funds' Distributor or Citibank may make expense
reimbursements for special training of a dealer's registered representatives
and other employees in group meetings or to help pay the expenses of sales
contests. Other concessions may be offered to the extent not prohibited by
state laws or any self-regulatory agency, such as the NASD.
<PAGE>
8. PORTFOLIO TRANSACTIONS
The Portfolios' and CitiFunds Multi-State Tax Free Trust's purchases and
sales of portfolio securities usually are principal transactions. Portfolio
securities normally are purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases. The Portfolios and CitiFunds Multi-State
Tax Free Trust do not anticipate paying brokerage commissions. Any transaction
for which a Portfolio or a Fund pays a brokerage commission will be effected at
the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include
the spread between the bid and asked price.
Allocation of transactions, including their frequency, to various dealers
is determined by the Adviser in its best judgment and in a manner deemed to be
in the best interest of investors in the applicable Portfolio or Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner at the most favorable price.
Investment decisions for each Portfolio and for CitiFunds Multi-State Tax
Free Trust will be made independently from those for any other account, series
or investment company that is or may in the future become managed by the
Adviser or its affiliates. If, however, a Portfolio or Fund and other
investment companies, series or accounts managed by the Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by the Portfolio or Fund or the size of the position obtainable for
the Portfolio or Fund. In addition, when purchases or sales of the same
security for a Portfolio or Fund and for other investment companies or series
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
Portfolio transactions may be executed with the Adviser, or with any
affiliate of the Adviser, acting either as principal or as broker, subject to
applicable law. No commissions on portfolio transactions were paid by any
Portfolio or by CitiFunds Multi-State Tax Free Trust during the fiscal year
ended August 31, 1999 to the Adviser or any affiliate of the Adviser.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Trust's Declaration of Trust permits the Trust's Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
(without par value) of each series and to divide or combine the shares of any
series into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series and to divide
such series into classes. Currently, the Funds are the only series of shares of
each of the Trusts. Each share of each class represents an equal proportionate
interest in a Fund with each other share of that class. Upon liquidation or
dissolution of a Fund, the Fund's shareholders are entitled to share pro rata
in the Fund's net assets available for distribution to its shareholders. The
Trust reserves the right to create and issue additional series and classes of
shares. Shares of each series participate equally in the earnings, dividends
and distribution of net assets of the particular series upon the liquidation or
dissolution (except for any differences among classes of shares of a series).
Shares of each series are entitled to vote separately to approve advisory
agreements or changes in investment policy, but shares of all series may vote
together in the election or selection of Trustees and accountants for the
Trust. In matters affecting only a particular series or class, only shares of
that particular series or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of a Trust may elect all of the Trustees of that Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trusts are not required and have no
current intention to hold annual meetings of shareholders, but the Trusts will
hold special meetings of a Fund's shareholders when in the judgment of the
Trust's Trustees it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees. Shareholders also have the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to a
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of its outstanding shares.
Each Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Trust or of any series of the Trust, a Shareholder
Servicing Agent may vote any shares of which it is the holder of record and for
which it does not receive voting instructions proportionately in accordance
with the instructions it receives for all other shares of which it is the
holder of record. Shares have no preference, pre-emptive, conversion or similar
<PAGE>
rights. Shares, when issued, are fully paid and non-assessable, except as set
forth below.
Each Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares would be sufficient. A Trust or any series
of the Trust, as the case may be, may be terminated (i) by a vote of a majority
of the outstanding voting securities of the Trust or the affected series or
(ii) by the Trustees by written notice to the shareholders of the Trust or the
affected series. If not so terminated, each Trust will continue indefinitely.
Share certificates will not be issued.
Each Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, each Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
applicable Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. Each Declaration of Trust also provides that the
applicable Trust shall maintain appropriate insurance (e.g., fidelity bonding
and errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the applicable Trust itself was unable to meet
its obligations.
Each Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
Each Portfolio is organized as a trust under the laws of the State of New
York. Each Portfolio's Declaration of Trust provides that investors in the
Portfolio (e.g., other investment companies (including the corresponding Fund),
insurance company separate accounts and common and commingled trust funds) are
each liable for all obligations of the Portfolio. However, the risk of a Fund
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the applicable
Portfolio itself was unable to meet its obligations. It is not expected that
the liabilities of any Portfolio would ever exceed its assets.
Each investor in a Portfolio, including the corresponding Fund, may add to
or reduce its investment in the Portfolio on each business day. At 3:00 p.m.,
Eastern time, for Cash Reserves Portfolio, and 12:00 noon, Eastern time, for
U.S. Treasury Reserves Portfolio and Tax Free Reserves Portfolio, on each such
business day, the value of each investor's interest in the Portfolio is
determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio effective for that day. Any additions or
withdrawals, which are to be effected on that day, are then effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio is
then re-computed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Portfolio as of 3:00
p.m. Eastern time, for Cash Reserves Portfolio, and 12:00 noon, Eastern time,
for U.S. Treasury Reserves Portfolio and Tax Free Reserves Portfolio, 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 3:00 p.m., Eastern time, for Cash Reserves Portfolio, and 12:00
noon, Eastern time, for U.S. Treasury Reserves Portfolio and Tax Free Reserves
Portfolio, 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 3:00
p.m., Eastern time, for Cash Reserves Portfolio, and 12:00 noon, Eastern time,
for U.S. Treasury Reserves Portfolio and Tax Free Reserves Portfolio, on the
following business day of the Portfolio.
10. CERTAIN ADDITIONAL TAX MATTERS
Each of the Funds has elected to be treated and intends to qualify each
year as a "regulated investment company" under Subchapter M of the Code, by
meeting all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of Fund distributions (as
a percentage of a Tax Free Fund's overall income and its tax-exempt income) and
<PAGE>
the composition of the Fund's portfolio assets. Provided all such requirements
are met and all of a Fund's net investment income and realized capital gains
are distributed to shareholders in accordance with the timing requirements
imposed by the Code, no federal income or excise taxes generally will be
required to be paid by the Fund. If a Fund should fail to qualify as a
regulated investment company for any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary dividend income to shareholders. Each of
the Portfolios believes that it will not be required to pay any federal income
or excise taxes.
Investment income received by Cash Reserves from non-U.S. investments may
be subject to foreign income taxes withheld at the source; Cash Reserves does
not expect to be able to pass through to shareholders any foreign tax credits
or deductions with respect to those foreign taxes. The United States has
entered into tax treaties with many foreign countries that may entitle Cash
Reserves to a reduced rate of tax or an exemption from tax on these
investments. It is not possible to determine Cash Reserves' effective rate of
foreign tax in advance since that rate depends upon the proportion of the Cash
Reserves Portfolio's assets ultimately invested within various countries.
The portion of a Tax Free Fund's distributions of net investment income
that is attributable to interest from tax-exempt securities will be designated
by the Fund as an "exempt-interest dividend" under the Code and will generally
be exempt from federal income tax in the hands of shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may increase
a corporate shareholder's alternative minimum tax. Unless the Tax Free Fund
provides shareholders with actual monthly percentage breakdowns, the percentage
of income designated as tax-exempt will be applied uniformly to all
distributions by the Fund of net investment income made during each fiscal year
of the Fund and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from a Tax Free Fund on their federal
income tax returns.
Because each Fund expects to earn primarily interest income, it is
expected that no Fund distributions will qualify for the dividends received
deduction for corporations.
With respect to California Tax Free Reserves, under existing California
law, if, at the close of each quarter of its taxable year, the Fund continues
to qualify for the special federal income tax treatment afforded regulated
investment companies and at least 50% of the value of the Fund's total assets
consist of California Exempt-Interest Securities, then "California exempt-
interest dividends" attributable to such securities will be exempt from
California personal income tax. A "California exempt-interest dividend" is any
dividend distributed by California Tax Free Reserves to the extent that it is
derived from the interest received by the Fund from California Exempt-Interest
Securities (less related expenses) and designated as such by written notice to
shareholders. Distributions other than "California exempt-interest dividends"
by California Tax Free Reserves to California residents will be subject to
California personal income tax. Interest on indebtedness incurred or continued
by a shareholder in connection with the purchase of Fund shares will not be
deductible for California personal income tax purposes if the Fund distributes
dividends that are exempt from California taxation. The foregoing is only a
brief summary of some of the important tax considerations generally affecting
the taxation of dividends received by shareholders that are subject to
California personal income tax. Potential investors, including, in particular,
investors who may be subject to other taxes, such as California corporate
franchise tax, California corporate income tax or taxes of other jurisdictions,
should consult with their own tax advisers.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP are the independent and chartered accountants
for Cash Reserves and Cash Reserves Portfolio, respectively, providing audit
services and assistance and consultation with respect to the preparation of
filings with the SEC. Deloitte & Touche LLP are the independent accountants for
U.S. Treasury Reserves, U.S. Treasury Reserves Portfolio, Tax Free Reserves
Portfolio and each of the Tax Free Funds, providing audit services and
assistance and consultation with respect to the preparation of filings with the
SEC.
The audited financial statements of Cash Reserves (Statement of Assets and
Liabilities at August 31, 1999, Statement of Operations for the year ended
August 31, 1999, Statement of Changes in Net Assets for the years ended August
31, 1999 and 1998, Financial Highlights for each of the years in the five-year
period ended August 31, 1999, Notes to Financial Statements and Independent
Auditors' Report) and of Cash Reserves Portfolio (Portfolio of Investments at
August 31, 1999, Statement of Assets and Liabilities at August 31, 1999,
Statement of Operations for the year ended August 31, 1999, Statement of
Changes in Net Assets for the years ended August 31, 1999 and 1998, Financial
Highlights for each of the years in the five-year period ended August 31, 1999,
Notes to Financial Statements and Independent Auditors' Report), each of which
is included in the Annual Report to Shareholders of Cash Reserves, are
incorporated by reference into this Statement of Additional Information and
have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, as experts in accounting and auditing.
<PAGE>
The audited financial statements of U.S. Treasury Reserves (Statement of
Assets and Liabilities at August 31, 1999, Statement of Operations for the year
ended August 31, 1999, Statement of Changes in Net Assets for the years ended
August 31, 1999 and 1998, Financial Highlights for each of the years in the
five-year period ended August 31, 1999, Notes to Financial Statements and
Independent Auditors' Report) and of U.S. Treasury Reserves Portfolio
(Portfolio of Investments at August 31, 1999, Statement of Assets and
Liabilities at August 31, 1999, Statement of Operations for the year ended
August 31, 1999, Statement of Changes in Net Assets for the years ended August
31, 1999 and 1998, Financial Highlights for each of the years in the five-year
period ended August 31, 1999, Notes to Financial Statements and Independent
Auditors' Report), each of which is included in the Annual Report to
Shareholders of U.S. Treasury Reserves, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, as experts
in accounting and auditing.
The audited financial statements of Tax Free Reserves (Statement of Assets
and Liabilities at August 31, 1999, Statement of Operations for the year ended
August 31, 1999, Statement of Changes in Net Assets for the years ended August
31, 1999 and 1998, Financial Highlights for each of the years in the five-year
period ended August 31, 1999, Notes to Financial Statements and Independent
Auditors' Report) and of Tax Free Reserves Portfolio (Portfolio of Investments
at August 31, 1999, Statement of Assets and Liabilities at August 31, 1999,
Statement of Operations for the year ended August 31, 1999, Statement of
Changes in Net Assets for the years ended August 31, 1999 and 1998, Financial
Highlights for each of the years in the five-year period ended August 31, 1999,
Notes to Financial Statements and Independent Auditors' Report), each of which
is included in the Annual Report to Shareholders of Tax Free Reserves, are
incorporated by reference into this Statement of Additional Information and
have been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent accountants, as experts in accounting and auditing.
The audited financial statements of California Tax Free Reserves
(Portfolio of Investments at August 31, 1999, Statement of Assets and
Liabilities at August 31, 1999, Statement of Operations for the year ended
August 31, 1999, Statement of Changes in Net Assets for the years ended August
31, 1999 and 1998, Financial Highlights for each of the years in the five-year
period ended August 31, 1999, Notes to Financial Statements and Independent
Auditors' Report), which are included in the Annual Report to Shareholders of
California Tax Free Reserves, are incorporated by reference into this Statement
of Additional Information and have been so incorporated in reliance upon the
report of Deloitte & Touche LLP, independent accountants, as experts in
accounting and auditing.
The audited financial statements of Connecticut Tax Free Reserves
(Portfolio of Investments at August 31, 1999, Statement of Assets and
Liabilities at August 31, 1999, Statement of Operations for the year ended
August 31, 1999, Statement of Changes in Net Assets for the years ended August
31, 1999 and 1998, Financial Highlights for each of the years in the five-year
period ended August 31, 1999, Notes to Financial Statements and Independent
Auditors' Report), which are included in the Annual Report to Shareholders of
Connecticut Tax Free Reserves, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, as experts
in accounting and auditing.
The audited financial statements of New York Tax Free Reserves (Portfolio
of Investments at August 31, 1999, Statement of Assets and Liabilities at
August 31, 1999, Statement of Operations for the year ended August 31, 1999,
Statement of Changes in Net Assets for the years ended August 31, 1999 and
1998, Financial Highlights for each of the years in the five-year period ended
August 31, 1999, Notes to Financial Statements and Independent Auditors'
Report), which are included in the Annual Report to Shareholders of New York
Tax Free Reserves, are incorporated by reference into this Statement of
Additional Information and have been so incorporated in reliance upon the
report of Deloitte & Touche LLP, independent accountants, as experts in
accounting and auditing.
A copy of each of the Annual Reports accompanies this Statement of
Additional Information.
<PAGE>
APPENDIX A
RATINGS OF MUNICIPAL OBLIGATIONS*
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings
Group and Fitch IBCA, Inc. represent their opinions as to the quality of
various debt obligations. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, Municipal Obligations with the
same maturity, coupon and rating may have different yields while Municipal
Obligations of the same maturity and coupon with different ratings may have the
same yield.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST LONG-TERM DEBT
RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the generic
rating classifications Aa and A. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES:
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Issues or the features associated
with MIG or VMIG ratings are identified by date of issue, date of maturity or
maturities or rating expiration date and description to distinguish each rating
from other ratings. Each rating designation is unique with no implication as to
any other similar issue of the same obligor. MIG ratings terminate at the
retirement of the obligation while VMIG rating expiration will be a function of
each issue's specific structural or credit features.
MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST SHORT-TERM DEBT
RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (1) leading
market positions in well established industries; (2) high rates of return on
funds employed; (3) conservative capitalization structure with moderate
reliance on debt and ample asset protection; (4) broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and (5)
well established access to a range of financial markets and assured sources of
alternate liquidity.
_______________________
* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time to
time revise such ratings, they undertake no obligation to do so.
<PAGE>
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT
RATINGS:
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitments on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial obligations
is very strong.
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
Plus (+) or Minus (-): The AA and A ratings may be modified by the
addition of a plus or minus sign to show relative standing within the
applicable rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES:
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
-- Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols and definitions are as follows:
SP-1 -- Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given
a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over the term
of the notes.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER
RATINGS:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days.
A-1 -- A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S RATINGS OF TAX-EXEMPT DEMAND
BONDS:
Standard & Poor's assigns "dual" ratings to all debt issues that have a
put option or demand feature as part of their structure.
<PAGE>
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, Standard & Poor's rating
symbols are used with the commercial paper rating symbols (for example,
"SP-1+/A-1+").
DESCRIPTION OF FITCH IBCA, INC.'S TWO HIGHEST INTERNATIONAL LONG-TERM CREDIT
RATINGS:
When assigning ratings, Fitch IBCA considers the historical and
prospective financial condition, quality of management, and the operating
performance of the issuer and of any guarantor, any special features of a
specific issue or guarantee, the issue's relationship to other obligations of
the issuer, as well as developments in the economic and political environment
that might affect the issuer's financial strength and credit quality.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/ F1+". The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
AAA -- Highest credit quality. "AAA" ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA -- Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
Plus (+) or Minus (-): "+" or "-" may be appended to a rating of "AA" to
denote relative status within the rating category.
DESCRIPTION OF FITCH IBCA, INC.'S TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT
RATINGS:
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 -- Highest credit quality. Indicates the best capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 -- Good Credit Quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING
CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in California Municipal Obligations. The sources of payment for
such obligations and the marketability thereof may be affected by financial or
other difficulties experienced by the State of California (the "State") and
certain of its municipalities and public authorities. This information does not
purport to be a complete description and is based on information from
statements relating to offerings of California issuers. CitiFunds California
Tax Free Reserves is not responsible for the accuracy or timeliness of this
information.
RECENT DEVELOPMENTS
In the Governor's Budget released on January 10, 2000, the Department of
Finance projected that the California economy will continue to show strong
growth in 2000, followed by more moderate gains in 2001. The projection also
assumes continued growth in the stock market, although at lower rates than the
past two years. The economic expansion has been marked by strong growth in high
technology business services (including software, computer programming and the
Internet), nonresidential construction, and tourism-related industries. The
Asian economic crisis, which dampened growth in high technology manufacturing
much of 1998 and 1999, appears to have ended. California made exports advanced
10.2 percent in the third quarter of 1999 over the comparable 1998 period, led
by a 48.5 percent increase in sales to East Asia (excluding Japan). As a
result, employment in several electronics manufacturing industries began to
recover in the latter months of 1999. Continued improvement in Asia, ongoing
strength in NAFTA partners Mexico and Canada, and stronger growth in Europe are
expected to further increase California-made exports in 2000 and 2001.
Nonresidential construction has been strong for the past four years. New
residential construction has increased since lows of the early 1990's
recession, but remains lower than during the previous economic expansion in the
1980's.
Moody's, Standard and Poor's and Fitch IBCA assigned their municipal bond
ratings of A1, A+ and AA-, respectively, to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating
agency, and an explanation of the significance of such rating may be obtained
from such rating agency. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised or withdrawn
entirely by such rating agency if, in the judgment of such rating agency,
circumstances so warrant. A downward revision or withdrawal of any such rating
may have an adverse effect on the market price of the State's general
obligation bonds.
CONSTITUTIONAL LIMITS ON SPENDING AND TAXES
STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject
to limitation" in excess of the Appropriations Limit. "Appropriations subject
to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most State subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels,
and appropriations of certain special taxes imposed by initiative (e.g.,
cigarette and tobacco taxes). The Appropriations Limit may also be exceeded in
cases of emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State per capita personal
<PAGE>
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government or any transfer of the financial source for the provisions
of services from tax proceeds to non tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
The Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year period
above the combined Appropriations Limits for those two years is divided equally
between transfers to K-14 districts and refunds to taxpayers.
PROPOSITION 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are
guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used in
any year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percentage has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit
to K-14 schools.
During the recession in the early 1990's, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. By implementing these actions, per-pupil funding
from Proposition 98 sources stayed almost constant at approximately $4,200 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1999-00 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets. Because of the State's increasing revenues, per-pupil funding
at the K-12 level has increased by about 50 percent from the level in place in
1991-92, and is estimated at about $6,313 per ADA in 2000-01. A significant
amount of the "extra" Proposition 98 monies in the last few years have been
allocated to special programs, including an initiative to increase the number
of computers in schools throughout the State. Furthermore, since General Fund
revenue growth is expected to continue in 2000-01, the Governor has also
proposed new initiatives to improve student achievement, provide better teacher
recruitment and training, and provide schools with advanced technology and the
opportunity to form academic partnerships to help them meet increased
expectations.
SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.
<PAGE>
PERSONAL INCOME TAX
The California personal income tax, which in 1998-99 contributed about 53
percent of General Fund revenues, is closely modeled after the federal income
tax law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1 to 9.3 percent.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
("AMT") which is much like the federal AMT.
Taxes on capital gains realizations, which have in part been linked to
stock market performance, have become a larger component of personal income
taxes in the last few years. For the 1999 tax year, capital gains are projected
to be 17 percent of the total personal income tax liability compared to an
average of 8.5 percent for the period 1985-94.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
SALES TAX
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Sales tax accounted for about 32
percent of General Fund revenue in 1998-99. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas delivered
through mains and electricity. Other exemptions provide relief for a variety of
sales ranging from custom computer software to aircraft. Pursuant to federal
law, sales over the Internet are not taxed by the State at this time.
BANK AND CORPORATION TAX
Bank and corporation tax revenues, which comprised about 10 percent of
General Fund revenues and transfers in 1998-99, are derived from the
following taxes:
1. The franchise tax and the corporate income tax are levied at an 8.84
percent rate on profits. The former is imposed on corporations for the
privilege of doing business in California, while the latter is imposed on
corporations that derive income from California sources but are not
sufficiently present to be classified as doing business in the State.
2. Banks and other financial corporations are subject to the franchise tax
plus an additional tax at the rate of 2.0 percent on their net income. This
additional tax is in lieu of personal property taxes and business license
taxes.
3. The alternative minimum tax ("AMT") is similar to that in federal law.
In general, the AMT is based on a higher level of net income computed by adding
back certain tax preferences. This tax is imposed at a rate of 6.65 percent.
4. A minimum franchise tax of up to $800 is imposed on corporations
subject to the franchise tax but not on those subject to the corporate income
tax. Beginning in 2000, all new corporations are exempted from the minimum
franchise tax for the first two years of incorporation.
5. Sub-Chapter S corporations are taxed at 1.5 percent of profits.
INSURANCE TAX
The majority of insurance written in California is subject to a 2.35
percent gross premium tax. For insurers, this premium tax takes the place of
all other State and local taxes except those on real property and motor
vehicles. Exceptions to the 2.35 percent rate are certain pension and profit-
sharing plans which are taxed at the lesser rate of 0.50 percent, surplus lines
and nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent
of underwriting profits. Insurance taxes comprised approximately 2.1 percent of
General Fund revenues and transfers in 1998-99.
OTHER TAXES
Other General Fund major taxes and license revenues include: Estate,
Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes, Horse
Racing Revenues and trailer coach license fees. These other sources totaled
approximately 2.3 percent of General Fund revenues and transfers in the 1998-99
Fiscal Year.
<PAGE>
SPECIAL FUND REVENUES
The California Constitution, codes and statutes specify the uses of
certain revenue. Such receipts are accounted for in various Special Funds. In
general, Special Fund revenues comprise three categories of income:
1. Receipts from tax levies which are allocated to specified functions,
such as motor vehicle taxes and fees and certain taxes on tobacco products.
2. Charges for special services to specific functions, including such
items as business and professional license fees.
3. Rental royalties and other receipts designated for particular purposes
(e.g., oil and gas royalties).
Motor vehicle related taxes and fees accounted for about 55 percent of all
Special Fund revenues and transfers in 1998-99. Principal sources of this
income are motor vehicle fuel taxes, registration and weight fees and vehicle
license fees. During the 1998-99 Fiscal Year, $8.6 billion was derived from the
ownership or operation of motor vehicles. About $4.7 billion of this revenue
was returned to local governments. The remainder was available for various
State programs related to transportation and services to vehicle owners. These
amounts include the additional fees and taxes derived from the passage of
Proposition 111 in June 1990.
Chapter 322, Statutes of 1998 established a vehicle license fee offset
program. Pursuant to this chapter, vehicle license fees were reduced by 25
percent beginning January 1, 1999. In addition, Chapter 74, Statutes of 1999,
provided a one-time expansion of the offset program by an additional 10 percent
for the 2000 calendar year only, and Chapter 76, Statutes of 1999, allowed a
one-year reduction in vehicle license fees for certain commercial motor
vehicles. For 1999-00 and 2000-01, the offset program is expected to reduce
revenues by $1.350 billion and $1.712 billion, respectively. This loss of local
revenue is replaced by the State's General Fund.
Vehicle license fees, over and above the costs of collection and refunds
authorized by law, are constitutionally defined local revenues. A continuous
appropriation from the General Fund replaces the vehicle license fee revenue
that local governments would otherwise lose due to the fee reductions. If in
any year the Legislature fails to appropriate enough funds to fully offset the
then applicable vehicle license fee reduction, the percentage offset will be
reduced to assure that local governments are not disadvantaged.
In addition to the initial 25 percent reduction, Chapter 322 also sets out
a series of "trigger" levels, so that the percentage fee reduction could be
increased in annual stages up to a maximum of 67.5 percent in 2003 depending on
whether future General Fund revenues reach the target levels. In order for the
next 10 percent fee reduction, which will result in a cumulative 35 percent cut
from 1998 base levels, to go into effect permanently beginning calendar year
2001, General Fund revenues in FY 2000-01 would need to reach about $65.5
billion. Based on the current revenue forecast, the 35 percent offset will go
into effect in the 2001 calendar year.
On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and
a new, equivalent excise tax on other tobacco products. The initiative requires
that funds from this tax be allocated to anti-tobacco education and research
and indigent health services, and environmental and recreation programs.
Legislation enacted in 1993 added an additional 2 cents per pack excise tax for
the purpose of funding breast cancer research.
Proposition 10, approved in 1998, increased the excise tax imposed on
distributors selling cigarettes in California to 87 cents per pack effective
January 1, 1999. At the same time, this proposition imposed a new excise tax on
cigars, chewing tobacco, pipe tobacco, and snuff at a rate equivalent to the
tax increase on cigarettes of 50 cents per pack. In addition, the higher excise
tax on cigarettes automatically triggered an additional increase in the tax on
other tobacco products effective July 1, 1999, with the proceeds going to the
Cigarette and Tobacco Products Surtax Fund. Thus, this proposition increased
the total excise tax on other tobacco products by an amount equivalent to an
increase in the cigarette tax of one dollar per pack.
TOBACCO LITIGATION
In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in
the future. Tobacco manufacturers agreed to billions of dollars in payments and
restrictions in marketing activities. Under the settlement, the companies will
pay California governments a total of approximately $25 billion over a period
of 25 years. In addition, payments of approximately $1 billion per year will
continue in perpetuity. Under the settlement, half of the moneys will be paid
to the State and half to local governments (all counties and the cities of San
Diego, Los Angeles, San Francisco and San Jose). The State's revised 1999-2000
<PAGE>
Budget includes receipt of $517 million of settlement money to the General
Fund. The Governor's Budget for 2000-01 projects receipt of $388 million of
settlement money to the General Fund.
The specific amount to be received by the State and local governments is
subject to adjustment. Details in the settlement allow reduction of the
companies' payments because of federal government actions, or reductions in
cigarette sales. Settlement payments can increase due to inflation or increases
in cigarette sales. The "second initial" payment, received in December 1999,
was 14 percent lower than the base settlement amount due to reduced sales.
Future payment estimates have been reduced by a similar percentage. In the
event that any of the companies goes into bankruptcy, the State could seek to
terminate the agreement with respect to those companies filing bankruptcy
actions thereby reinstating all claims against those companies. The State may
then pursue those claims in the bankruptcy litigation, or as otherwise provided
by law. Also, several parties have brought a lawsuit challenging the settlement
and seeking damages; see "Litigation" below.
PRIOR YEARS' FINANCIAL RESULTS
Following a severe recession beginning in 1990, the State's financial
condition improved markedly during the fiscal years starting in 1995-96, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken
in earlier years. The State's cash position also improved, and no external
deficit borrowing has occurred over the end of the last four fiscal years.
The economy grew strongly during the fiscal years beginning in 1995-96,
and as a result, the General Fund took in substantially greater tax revenues
(around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in
1997-98 and $1.7 billion in 1998-99) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives.
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element was a bill which
provided for a phased-in reduction of the Vehicle License Fee ("VLF"). Since
the VLF is transferred to cities and counties under existing law, the bill
provided for the General Fund to replace the lost revenues. Starting on January
1, 1999, the VLF has been reduced by 25 percent, at a cost to the General Fund
of approximately $500 million in the 1998-99 Fiscal Year and about $1 billion
annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million).
2. Proposition 98 funding for K-14 schools was increased by $1.7 billion
in General Fund moneys over revised 1997-98 levels, over $300 million higher
than the minimum Proposition 98 guarantee. Of the 1998-99 funds, major new
programs included money for instructional and library materials, deferred
maintenance, support for increasing the school year to 180 days and reduction
of class sizes in Grade 9. The Budget also included $250 million as repayment
of prior years' loans to schools, as part of the settlement of the CTA v. Gould
lawsuit.
3. Funding for higher education increased substantially above the actual
1997-98 level. General Fund support was increased by $340 million (15.6
percent) for the University of California and $267 million (14.1 percent) for
the California State University system. In addition, Community Colleges funding
increased by $300 million (6.6 percent).
4. The Budget included increased funding for health, welfare and social
services programs. A 4.9 percent grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years.
5. Funding for the judiciary and criminal justice programs increased by
about 11 percent over 1997-98, primarily to reflect increased State support for
local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State realized
savings of $433 million from a reduction in the State's contribution to the
State Teacher's Retirement System in 1998-99.
<PAGE>
Final tabulation of revenues and expenditures contained in the 2000-01
Governor's Budget, released on January 10, 2000, reveals that stronger than
expected economic conditions in the State produced total 1998-99 General Fund
revenues of about $58.6 billion, almost $1.6 billion above the 1998 Budget Act
estimates. Actual General Fund expenditures were $57.8 billion, the amount
estimated at the 1998 Budget Act. Some of this additional revenue will be
directed to K-14 schools pursuant to Proposition 98. The Governor's Budget
reports a balance in the SFEU at June 30, 1999, of approximately $3.1 billion
on a budgetary basis.
CURRENT STATE BUDGET
The discussion below of the 1999-00 Fiscal Year budget is based on
estimates and projections of revenues and expenditures for the current fiscal
year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions in the 1999 Budget Act which may
be affected by numerous factors, including future economic conditions in the
State and the nation, and there can be no assurance that the estimates will be
achieved.
1999-00 FISCAl YEAR BUDGET
On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that general fund revenues for FY 1998-99 and FY 1999-00
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of general fund expenditures in FY 1999-00, with a $415 million SFEU
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget
Act occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The 1999 Budget
Act anticipates normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1990-00 funds,
major new programs included money for reading improvement, new textbooks,
school safety, improving teacher quality, funding teacher bonuses,
providing greater accountability for school performance, increasing
preschool and after school care programs and funding deferred maintenance
of school facilities. The Budget also includes $310 million as repayment
of prior years' loans to school, as part of the settlement of the CTA v.
Gould lawsuit.
2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million
(7.3 percent) for the University of California and $126 million (5.9
percent) for the California State University system. In addition,
Community Colleges funding increased by $324.3 million (6.6 percent). As a
result, undergraduate fees at UC and CSU will be reduced for the second
consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the general fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for a new prison in the
Central Valley, additional equipment for train and ferry service, and
payment of deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about
<PAGE>
$250 million in each of fiscal year 1999-00 and 2000-01 to make up lost
funding to local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the legislation
adopted last year. Several other targeted tax cuts, primarily for
businesses, were also approved, at a cost of $54 million in 1999-00.
6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the
early 1990's. Additionally, an ongoing $50 million was appropriated as a
subvention to cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is taken to a
county detention facility.
ADDITIONAL CONSIDERATIONS
California Municipal Obligations may also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from
California State personal income taxes. Accordingly, the Fund may be
adversely affected by local political and economic conditions and
developments within Puerto Rico and certain other U.S. territories
affecting the issuers of such obligations. For information concerning the
economy of Puerto Rico, please see Appendix E of this Statement of
Additional Information.
YEAR 2000
The State's Department of Information Technology has received no reports
that the State experienced any interruption in the delivery of mission critical
services as a result of the date change to the Year 2000 or during the leap
year period of February 28-29 and March 1, 2000.
LITIGATION
The State is a party to numerous legal proceedings. The following are the
most significant pending proceedings, as reported by the Office of the Attorney
General.
On December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to school
districts beginning in 1993-94 is a reimbursable state mandated cost. The test
claim was heard on October 29, 1998, and the Commission on State Mandates found
in favor of the State. In October, 1999, the Superior Court of Sonoma County
overturned the Commission's decision. The State has appealed and briefing will
be completed by the end of June 2000. Should the final decision on this matter
be in favor of the counties, the impact to the State General Fund could be as
high as $10.0 billion. In addition, there would be an annual Proposition 98
General Fund cost of at least $3.75 billion. This cost would grow in accordance
with the annual assessed value growth rate.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the
trial court issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-99, with
certain limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August
5, 1998, the Court of Appeal denied the plaintiffs' request to reconsider the
stay. Also on July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of Appeal. Briefs
have been submitted; no date has yet been set for oral agreement.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to State-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates ("Commission")). The Board of
Control decided in favor of local school districts' claims for reimbursement
<PAGE>
for special education programs for handicapped students. The case was then
brought to the trial court by the State and later remanded to the Commission
for redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions. To date, the
Legislature has not appropriated funds. The Commission issued a decision in
December 1998 determining that a small number of components of the State's
special education program are state mandated local costs. The administrative
proceeding is in the "parameters and guidelines" stage where the Commission is
considering whether and to what extent the costs associated with the state
mandated components of the special education program are offset by funds that
the State already allocates to that program. The State's position is that all
costs are offset by existing funding. The State has the option to seek judicial
review of the mandate findings. Potential liability of the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance to be in excess of $1.5 billion, if the State is
not credited for its existing funding of the program.
In January of 1997, California experienced major flooding with preliminary
estimates of property damage of approximately $1.6 to $2.0 billion. In McMahon
v. State, a substantial number of plaintiffs have joined suit against the
State, local agencies, and private companies and contractors seeking
compensation for the damages they suffered as a result of the 1997 flooding.
After various pre-trial proceedings, the State filed its answer to the
plaintiffs' complaint in January of 2000. No trial date has been set. The State
is vigorously defending the action.
The State is a defendant in Ceridian Corporation v. Franchise Tax Board,
which challenges the constitutionality of a Revenue & Taxation Code section
which limits deductions for insurance dividends to those dividends paid from
earnings previously subject to California taxation. On August 13, 1998, the
trial court issued a judgment against the Franchise Tax Board. The Franchise
Tax Board has appealed the judgment. Briefing has been completed. The State has
taken the position that, if the challenged section of the Revenue & Taxation
Code is struck down, all deductions relating to dividends would be eliminated
and the result would be additional income to the State. Plaintiffs, however,
contend that if they prevail, the deduction should be extended to all dividends
which would result in a one-time liability for open years of approximately $60
million, including interest, and an annual revenue loss of approximately $10
million.
The State is also a defendant in First Credit Bank etc. v. Franchise Tax
Board which challenges a Revenue & Taxation Code section similar to the one
challenged in the Ceridian case, but applicable to a different group of
corporate taxpayers. The State's motion for summary judgment is currently
pending and a trial date has been set in April 2000. A decision in the Ceridian
case could impact the outcome of this case. The State has taken the position
that, if the challenged section of the Revenue & Taxation Code is struck down,
all deductions relating to dividends would be eliminated and the result would
be additional income to the State. Plaintiffs, however, contend that if they
prevail, the deduction should be extended to all dividends which would result
in a one-time liability for open years of approximately $385 million, including
interest, and an annual revenue loss of approximately $60 million.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr. et al., the State is seeking recovery for
the past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts resulting in significant findings
of liability against the State as owner, operator, and generator of wastes
taken to the site. The State has appealed the rulings. Present estimates of the
cleanup range from $400 million to $600 million. Potential State liability
falls within this same range. However, all or a portion of any judgment against
the State could be satisfied by recoveries from the State's insurance carriers.
The State has filed a suit against certain of these carriers. The trial is
expected to begin in early 2001.
The State is a defendant in Paterno v. State of California, a coordinated
action involving 3,000 plaintiffs seeking recovery for damages caused by the
Yuba River flood of February 1986. The trial court found liability in inverse
condemnation and awarded damages of $500,000 to a sample of plaintiffs. The
State's potential liability to the remaining plaintiffs ranges from $800
million to $1.5 billion. In 1992, the State and plaintiffs filed appeals. In
August 1999, the court of appeal issued a decision reversing the trial court's
judgment against the State and remanding the case for retrial on the inverse
condemnation cause of action. The California Supreme Court denied plaintiffs'
petition for review. No trial date has been set.
Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated
the damages to be several hundred million dollars. The State is vigorously
defending these cases, as well as related federal cases addressing the
calculation of Medi-Cal reimbursement rates in the future.
The State is involved in two refund actions, Cigarettes Cheaper!, et al v.
Board of Equalization, et al. and California Assn. Of Retail Tobacconists
(CART) et al v. Board of Equalization, et al., that challenge the
constitutionality of Proposition 10, approved by the voters in 1998. Plaintiffs
allege that Proposition 10, which increases the excise tax on tobacco products,
<PAGE>
violates 11 sections of the California Constitution and related provisions of
law. Plaintiffs Cigarettes Cheaper! seek declaratory and injunctive relief and
a refund over $4 million. The CART case filed by retail tobacconists in San
Diego seeks a refund of $5million. The State is vigorously contesting these
cases. If the statute is declared unconstitutional, exposure may include the
entire $750 million collected annually with interest.
The State is involved in two cases challenging the constitutionality of
the interest offset provisions of the Revenue and Taxation Code: Hunt-Wesson,
Inc., v. Franchise Tax Board and F.W. Woolworth Co. and Kinney Shoe Corporation
v. Franchise Tax Board. In both cases, the Franchise Tax board prevailed in
California Court of Appeal and the California Supreme Court denied taxpayers'
petitions for review. In both cases, the United States Supreme Court granted
certiorari. On February 22, 2000, the United States Supreme Court reversed and
remanded the Hunt-Wesson case to the California Court of Appeal for further
proceedings. Although the Court did not take similar action in the Woolworth
Co. case, it is anticipated that it will do so. The Franchise Tax Board
recently estimated that the adverse decisions in these cases will result in a
reduction in state revenues of approximately $15 million annually, with past
year collection and interest exposure of approximately $85 million.
Guy F. Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system tax credit
provided for under the Revenue & Taxation Code. The case went to trial May 1998
and the trial court entered judgment in favor of the Franchise Tax Board. The
taxpayer has filed an appeal to the California Court of Appeal and briefing is
completed. The Franchise Tax Board estimates that the cost would be $150
million annually if the plaintiff prevails. Allowing refunds for all open years
would entail a refund of at least $500 million.
Jordan et al. v. Department of Motor Vehicles, et al., challenges the
validity of the Vehicle Smog Impact Fee, a $300 fee which is collected by the
Department of Motor Vehicles from vehicle registrants when a vehicle without a
California new vehicle certification is first registered in California. The
plaintiffs contend that the fee violates the interstate commerce and equal
protection clauses of the United States Constitution as well as Article XIX of
the State Constitution. In October, 1999 the Court of Appeal upheld a trial
court judgment for the plaintiffs and the State has declined to appeal further.
Although refunds through the court actions could be limited by a three year
statute of limitations, with a potential liability of about $350 million, the
Governor has proposed refunding fees collected back to the initiation of these
fees in 1990. The 2000-01 Governor's Budget proposes expenditures of $562
million as a supplemental appropriation in 1999-2000 to pay these claims (see
"Current State Budget - 1999-2000 Fiscal year Budget").
PTI, Inc., et al. v. Philip Morris, et al. was filed by five distributors
in the cigarette import-/re-entry business, seeking to overturn the tobacco
Master Settlement Agreement (MSA) entered between 46 states and the tobacco
industry in November, 1998. See "State Finances - Tobacco Litigation" above.
The primary focus of the complaint is the provision of the MSA encouraging
participating states to adopt a statute requiring nonparticipating
manufacturers to either become participating manufacturers and share the
financial obligations under the MSA or pay money into an escrow account.
Plaintiffs seek compensatory and punitive damages against the state and state
officials and an order placing tobacco settlement funds into a trust to be
administered by the court for the treatment of medical expenses of persons
injured by tobacco products. Plaintiffs have filed an amended complaint and the
State has filed a motion to dismiss the amended complaint. A hearing on the
State's motion to dismiss is set for May 8, 2000. The potential fiscal impact
of an adverse ruling is largely unknown, but could exceed the full amount of
the settlement (estimated to be $1 billion annually, of which 50 percent will
go directly to the State's General Fund and the other 50 percent directly to
the State's 58 counties and 4 largest cities).
In FORCES Action Project et al. v. State of California et al., various
smokers rights groups challenge the tobacco settlement as it pertains to
California, Utah and the City and County of San Francisco. Plaintiffs assert a
variety of constitutional challenges, including that the settlement represents
an unlawful tax on smokers. Motions to dismiss by all defendants, including the
tobacco companies, were eventually converted to summary judgment motions by the
court and heard on September 17, 1999. On January 5, 2000, the court dismissed
the complaint for lack of subject matter jurisdiction because the plaintiffs
lacked standing to sue. The court also concluded that the plaintiffs' claims
against the State and its officials are barred by the 11th Amendment.
Plaintiffs have appealed. Briefing is expected to be complete by July, 2000.
Louis Bolduc et al. v. State of California et al. is a class action filed
on July 13, 1999 by six Medi-Cal beneficiaries who have received medical
treatment for smoking-related diseases. Plaintiffs allege the State owes them
an unspecified portion of the tobacco settlement monies under a federal
regulation that requires a state to turn over to an injured Medicaid
beneficiary any monies the state recovers from a third party tortfeasor in
excess of the costs of the care provided. The State moved to dismiss the
complaint on September 8, 1999. On February 29, 2000, the court denied the
State's motion to dismiss, but struck the Plaintiffs' class action allegations.
The State intends to appeal that portion of the court's order denying its
motion to dismiss.
Arnett v. California Public Employees Retirement System, et. al. was filed
by seven former employees of the State of California and local agencies,
<PAGE>
seeking back wages, damages and injunctive relief. Plaintiffs are former public
safety members who began employment after the age of 40 and are recipients of
Industrial Disability Retirement ("IDR") benefits. Plaintiffs contend that the
formula which determines the amount of IDR benefits violates the federal Age
Discrimination in Employment Act of 1967 ("ADEA"). Plaintiffs contend that, but
for their ages at hire, they would receive increased monthly IDR benefits
similar to their younger counterparts who began employment before the age of
40. CalPERS has estimated the liability to the State as approximately $315.5
million were the plaintiffs to prevail. The District Court dismissed the
complaint for failure to state a claim. On August 17, 1999, the Ninth Circuit
Court of Appeals reversed the District Court's dismissal of the complaint. The
State sought further review in the United States Supreme Court. On January 11,
2000, the United States Supreme Court in Kimel v. Florida Board of Regents,
held that Congress did not abrogate the sovereign immunity of the states when
it enacted the ADEA. Thereafter, on January 18, 2000, the Supreme Court granted
the petition for writ of certiorari in Arnett, vacated the judgment of the
Ninth Circuit, and remanded the case to the Ninth Circuit for further
proceedings consistent with Kimel. It now appears that the District Court will
dismiss the State Defendants from the lawsuit.
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION CONCERNING
CONNECTICUT MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in Connecticut Municipal Obligations. The sources of payment for
such obligations and the marketability thereof may be affected by financial or
other difficulties experienced by Connecticut (the "State") and certain of its
municipalities and public authorities. This summary does not purport to be a
complete description and is based on information from statements relating to
offerings of Connecticut bond issues. CitiFunds Connecticut Tax Free Reserves
is not responsible for the accuracy or timeliness of this information.
CERTAIN ECONOMIC CONSIDERATIONS
Connecticut is a highly developed and urbanized state. It is situated
directly between the financial centers of Boston and New York. More than
one-quarter of the total population of the United States and approximately 60%
of the Canadian population live within 500 miles of the State. The State's
population grew at a rate which exceeded the United States' rate of population
growth during the period 1940 to 1970, and slowed substantially during later
decades. The State provides extensive transportation and utility services to
support its economy.
Connecticut's economic performance is measured by personal income which
has been and is expected to remain among the highest in the nation; gross state
product (the market value of all final goods and services produced by labor and
property located within the State) which demonstrated stronger output growth
than the nation in general during the 1980s, slower growth for a few years in
the early 1990s and steadily increasing growth during the rest of the 1990s;
employment which fell during the early 1990s but has risen steadily during the
rest of the decade to the levels achieved in the late 1980s; and the
unemployment rate, which is the lowest in a decade and lower than the regional
and national rate.
Manufacturing has traditionally been of prime economic importance to
Connecticut but has declined during the last decade. Connecticut has a diverse
manufacturing sector, with the construction of transportation equipment
(primarily aircraft engines, helicopters and submarines) being the dominant
industry. The State is also a leading produce of military and civilian
helicopters. Employment in the transportation equipment sector is followed by
fabricated metals, nonelectrical machinery, and electrical equipment for the
total number employed in 1998.
During the past ten years, Connecticut's manufacturing employment was at
its highest in 1989 at over 359,260 workers. Since that year, employment in
manufacturing was on a downward trend until 1997. A number of factors, such as
the overvalued dollar of the mid-1980s, heightened foreign competition, a sharp
decrease in defense spending, and improved productivity played a significant
role in affecting the overall level of manufacturing employment. Total
manufacturing jobs in Connecticut rebounded in 1997 and continued to improve in
1998, registering a gain of 3,590 jobs or 1.3% over the recent low of 274,750
recorded in 1996.
Over the past several decades the non-manufacturing sector of the State's
economy has risen in economic importance, from just over 50% of total State
employment in 1950 to approximately 83% by 1998. This trend has decreased the
State's dependence on manufacturing. The State's non-manufacturing sector
expanded by 2.3% in 1998 as compared to 2.1% in both 1997 and 1996. Services,
retail and wholesale trade, state and local government, as well as finance,
insurance and real estate ("FIRE"), collectively comprise approximately 90% of
the State's employment in the non-manufacturing sector.
FISCAL CONDITION IN RECENT YEARS
The State finances most of its operations through its General Fund. The
major components of General Fund revenues are State taxes, including the
personal income tax, the sales and use tax and the corporation business tax.
Miscellaneous fees, receipts, transfers and unrestricted federal grants account
for most of the other General Fund revenue.
The adopted budget for 1998-99 anticipated General Fund revenues of
$9,992.0 million and General Fund expenditures of $9,972.1 million, resulting
in a projected surplus of $19.9 million. The adopted budget for the 1999-2000
fiscal year anticipated General Fund revenues of $10,646.0 million and General
Fund expenditures of $10,581.6 million resulting in a projected surplus of
$64.4 million. By statute, the State's fiscal position is reported monthly by
<PAGE>
the Comptroller. This report compares revenues already received and the
expenditures already made to estimated revenues to be collected and estimated
expenditures to be made during the balance of the fiscal year. This report
estimates 1999-2000 fiscal year General Fund revenues of $10,958.9 million,
General Fund expenditures of $10,717.5 million and an estimated operating
surplus of $241.4 million. Estimated revenues have been revised upward by
$312.9 million from the enacted budget plan and estimated expenditures have
been revised upward by $135.9 million. In addition, this report no longer
reflects the statewide savings that were projected to be achieved due to the
proposed information technology partnership with a private vendor. In order to
mitigate the projected increase in expenditures above the adopted budget, the
Governor has instituted a statewide hiring freeze and has initiated a plan for
agency allotment reductions. These are expected to result in savings of $21.2
million.
The adopted budget for fiscal year 2000-01 anticipates General Fund
revenues of $11,090.0 million and General Fund expenditures of $11,085.2
million for a surplus of $4.8 million. The adopted budget is within the
expenditure limits prescribed by the Constitution of the State of Connecticut
in conjunction with Section 2-33a of the General Statutes, $68.6 million below
the cap in fiscal year 1999-2000 and $59.3 million below the cap in fiscal year
2000-01.
The adopted budget makes several modifications to the State's tax law.
These changes total approximately $105 million in fiscal year 1999-2000 and
$170 million in fiscal year 2000-01. Over the biennium the most significant
change is the increase in the income tax credit for property taxes paid from
the $350 per filer to $425 per filer in taxable year 1999 and $500 per filer in
taxable year 2000. Other major changes included a reduction in taxes paid by
hospitals and the exemption of various items from the sales tax. Finally, the
adopted budget anticipates that a portion of the proceeds from the tobacco case
settlement will be deposited into the General Fund. Over the biennium, the
State's anticipated receipts from the settlement are projected to total
approximately $300 million of which $78.0 million will be deposited into the
General Fund in fiscal year 1999-2000 and $150.3 million will be deposited into
the General Fund in fiscal year 2000-01.
The adopted budget anticipates significant expenditure changes in several
areas. State support of local education spending is anticipated to increase by
a total of $128 million by the second year of the biennium primarily through an
increase in formula driven grants and funding aimed at reducing racial
isolation while improving urban education. An additional $42 million above
fiscal year 1998-99 is anticipated for the assessment, evaluation and ultimate
care of neglected and abused children. Expenditures are anticipated to increase
$62 million through the second year of the biennium in the Department of
Corrections to support the increase in length of prison sentences and an almost
$21 million increase in the Department of Public Safety for new state troopers
and support staff. Fringe benefit costs related to state employees are
projected to increase due to higher health insurance costs and the transfer of
fringe benefit costs related to the patrol function from the Transportation
Fund. Finally, debt service expenditures will increase by approximately $94
million in the first year of the biennium and $64 million in the second year of
the biennium, driven significantly by the State's commitment to funding
education related capital expenditures and a change in the methodology of
funding local school construction projects. The adopted budget also achieves
significant savings across the biennium in the areas of Medicaid services and
state sponsored pharmacy programs. In addition, the adopted budget anticipates
$50 million in savings in each year of the biennium for the proposed
information technology partnership with a private vendor.
The State imposes a personal income tax on the income of residents of the
State (including resident trusts and estates), part-year residents and certain
non-residents who have taxable income derived from or connected with sources
within Connecticut. The tax imposed is at the maximum rate of 4.5% on
Connecticut taxable income. Depending on federal income tax filing status, the
taxable year and Connecticut adjusted gross income, personal exemptions ranging
from $12,000 to $24,000 are available to taxpayers. In addition, tax credits
ranging from 1% to 75% of a taxpayer's Connecticut tax liability are also
available depending upon federal income tax filing status, the taxable year and
Connecticut adjusted gross income. Such exemptions and tax credits are phased
out at certain higher income levels. Neither the personal exemption nor the tax
credit described above is available to a trust or an estate. Legislation
enacted in 1995 effected a graduated rate structure beginning in tax year 1996.
Under this revised structure, the top rate remains at 4.5% with a rate of 3%
applicable to taxable income up to certain amounts. Subsequent legislation has
increased the amount of taxable income subject to the lower 3% rate. By tax
year 1999, the first $20,000 of taxable income for a joint filer and the first
$10,000 of taxable income for a single filer will be taxed at the 3% rate. In
addition, an income tax credit for property taxes paid has been increased to a
maximum of $425 per filer in taxable year 1999, rising to $500 in taxable year
2000 and thereafter. Taxpayers are also subject to a Connecticut minimum tax
based on their liability, if any, for payment of the federal alternative
minimum tax.
The Sales Tax is imposed, subject to certain limitations, on the gross
receipts from certain transactions within the State of persons engaged in
business in the State, including (a) sales at retail of tangible personal
property, (b) the rendering of certain services, (c) the leasing or rental of
tangible personal property, (d) the producing, fabricating, processing,
printing, or imprinting of tangible personal property to special order or with
materials furnished by the consumer, (e) the furnishing, preparing or serving
of food, meals, or drinks, and (f) the transfer of occupancy of hotel or
lodging house rooms for a period not exceeding thirty consecutive calendar
days. The Use Tax is imposed on the consideration paid for certain services or
purchases or rentals of tangible personal property used within the State
pursuant to a transaction not subject to the Sales Tax. A separate rate of 12%
is charged on the occupancy of hotel rooms. The tax rate for the Sales and Use
Taxes is six percent. Various exemptions from the Sales and Use Taxes are
provided, based on the nature, use or price of the property or services
<PAGE>
involved or the identity of the purchaser. Tax returns and accompanying
payments with respect to revenues from these taxes are generally due monthly on
or before the last day of the month next succeeding the taxable month.
The Corporation Business Tax is imposed on any corporation, joint stock
company or association, any dissolved corporation that continues to conduct
business, any electric distribution company or fiduciary of any of the
foregoing which carries on or has the right to carry on business within the
State or owns or leases property or maintains an office within the State or is
a general partner in a partnership or a limited partner in a limited
partnership, except an investment partnership, that does business, owns or
leases property or maintains an office within the State. Certain financial
services companies are exempt from this tax. For taxable years commencing on or
after January 1, 1999, this exemption extends to domestic insurance companies.
The Corporation Business Tax provides for three methods of computation. The
taxpayer's liability is the greatest amount computed under any of the three
methods. The first method of computation is a tax measured by the net income of
a taxpayer (the "Income-Base Tax"). Net income, except as applied to insurance
companies, means federal gross income with limited variations less certain
deductions, most of which correspond to the deductions allowed under the
Internal Revenue Code of 1986, as amended from time to time. In the case of
life insurance companies subject to the Corporation Business Tax, net income
means life insurance company taxable income, as determined for federal income
tax purposes, with certain adjustments. The Income-Base Tax had been levied at
the rate of 10.5% until January 1, 1998 when it was decreased to 9.5%.
Legislation enacted in 1993 and subsequent years instituted a phase down in the
corporation tax rate so that by the taxable year commencing on or after January
1, 2000 the corporate rate is 7.5%. The second method of computing the
Corporation Business Tax, from which domestic insurance companies are exempted,
is an alternative tax on capital. This alternative tax is determined either as
a specific maximum dollar amount or at a flat rate on a defined base, usually
related in whole or part to its capital stock and balance sheet surplus, profit
and deficit. The third method of computing the Corporation Business Tax is the
minimum tax which is a flat $250. Corporations must compute their tax under all
three methods and pay the tax under the highest computation.
Other tax revenues are derived from inheritance taxes, taxes on gross
receipts of hospital and public service corporations, taxes on net direct
premiums of insurance companies, taxes on oil companies, cigarette and
alcoholic beverage excise taxes, real estate conveyance taxes and other
miscellaneous tax sources.
Federal grants in aid are normally conditioned to some degree, depending
upon the particular program being funded, on resources provided by the State.
More than 99% of unrestricted federal grant revenue is expenditure driven. The
largest federal grants in fiscal 1999 were made for the purposes of providing
medical assistance payments to the indigent and temporary assistance to needy
families. The State also receives certain restricted federal grants which are
not reflected in annual appropriations but which nonetheless are accounted for
in the General Fund. In addition, the State receives certain federal grants
which are not accounted for in the General Fund but are allocated to the
Transportation Fund, various Capital Project Funds and other funds.
Other non-tax revenues are derived from special revenue transfers; Indian
gaming payments; licenses, permits and fees; sales of commodities and services;
rents, fines and escheats; investment income; other miscellaneous revenue
sources; and designated Tobacco Settlement Revenues.
In November 1992, electors approved an amendment to the State Constitution
providing that the amount of general budget expenditures authorized for any
fiscal year shall not exceed the estimated amount of revenue for such fiscal
year. This amendment also provides a framework for a cap on budget
expenditures. The General Assembly is precluded from authorizing an increase in
general budget expenditures for any fiscal year above the amount of general
budget expenditures authorized for the previous fiscal year by a percentage
which exceeds the greater of the percentage increase in personal income or the
percentage increase in inflation, unless the Governor declares an emergency or
the existence of extraordinary circumstances and at least three-fifths of the
members of each house of the General Assembly vote to exceed such limit for the
purposes of such emergency or extraordinary circumstances. The constitutional
limitation on general budget expenditures does not include expenditures for the
payment of bonds, notes or other evidences of indebtedness. There is no
statutory or constitutional prohibition against bonding for general budget
expenditures.
By statute, no bonds, notes or other evidences of indebtedness for
borrowed money payable from General Fund tax receipts of the State shall be
authorized by the General Assembly except as shall not cause the aggregate
amount of (1) the total amount of bonds, notes or other evidences of
indebtedness payable from General Fund tax receipts authorized by the General
Assembly but which have not been issued and (2) the total amount of such
indebtedness which has been issued and remains outstanding, to exceed 1.6 times
the total estimated General Fund tax receipts of the State for the fiscal year
in which any such authorization will become effective or in which such
indebtedness is issued, as estimated for such fiscal year by the joint standing
committee of the General Assembly having cognizance of finance, revenue and
<PAGE>
bonding. As a result, the State had a debt incurring margin as of January 1,
2000 of $2,441,000,792.
ADDITIONAL CONSIDERATIONS
The classification of CitiFunds Connecticut Tax Free Reserves under the
Investment Company Act of 1940 as a "non-diversified" investment company allows
it to invest more than 5% of its assets in the securities of any issuer,
subject to satisfaction of certain tax requirements. Because of the relatively
small number of issuers of Connecticut obligations, the Fund is likely to
invest a greater percentage of its assets in the securities of a single issuer
than is an investment company which invests in a broad range of Municipal
Obligations. Therefore, the Fund would be more susceptible than a diversified
fund to any single adverse economic or political occurrence or development
affecting Connecticut issuers. The Fund will also be subject to an increased
risk of loss if the issuer is unable to make interest or principal payments or
if the market value of such securities declines. It is also possible that there
will not be sufficient availability of suitable Connecticut tax-exempt
obligations for the Fund to achieve its objective of providing income exempt
from Connecticut taxes.
CitiFunds Connecticut Tax Free Reserves may invest 25% or more of its
assets in Connecticut Municipal Obligations of the same type, including,
without limitation, the following: general obligations of the State of
Connecticut and its political subdivisions; lease rental obligations of state
and local authorities; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities; or
industrial development or pollution control bonds issued for hospitals,
electric utility systems, steel companies, life care facilities or other
purposes. This may make the Fund more susceptible to adverse economic,
political, or regulatory occurrences affecting a particular category of
issuers.
Connecticut Municipal Obligations also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from Connecticut
State personal income taxes. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico and
certain other U.S. territories affecting the issuers of such obligations.
Please see Appendix E of this Statement of Additional Information for
information concerning the economy of Puerto Rico.
YEAR 2000
All mission critical systems and technology infrastructure components are
operating with no Year 2000 impacts. During the rollover period through January
3, 2000, 14 systems incidents were reported to the Department of Information
Technology ("DOIT"). Only 2 incidents were actual Year 2000 failures, and none
directly impacted the public in any way.
The State Legislature approved $15.0 million in bonding in 1997-98 for
equipment and related costs of the Year 2000 issue. An additional $80 million
was appropriated to DOIT as part of the 1998-1999 Midterm Budget Adjustments.
In June, 1999, the State Legislature approved an additional $15.0 million in
appropriations from unexpended 1998-99 general funds.
As of December 31, 1999, 43 agencies had received a total of $99.0 million
in transfer funds from DOIT. Approximately $92.2 million had been recorded in
spending or commitments against these funds, as of that same date.
The State presently believes that the Year 2000 problem will not pose
significant operations problems for the State's computer systems because it has
completed modifications to existing software and conversions to new software,
where warranted. While the State completed its Year 2000 plan on a timely
basis, there is still a risk that testing for all failure scenarios did not
satisfactorily reveal all Year 2000 software or hardware problems. Also, there
can be no assurance that the systems of other companies on which the State's
systems or service commitments may rely were tested and completed in a timely
fashion. If the necessary remediations were not adequately tested, the Year
2000 problem may have a material impact on the operations of the State.
RECENT RATINGS OF CERTAIN GENERAL OBLIGATION BONDS
Moody's, Standard & Poor's and Fitch IBCA assigned their municipal bond
ratings of Aa3, AA- and AA, respectively, to the outstanding general obligation
bonds of the State. Each such rating reflects only the views of the respective
rating agency, and an explanation of the significance of such rating may be
obtained from such rating agency. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by the rating agency if, in the judgment of such rating
agency, circumstances so warrant. A downward revision or withdrawal of any such
rating may have an adverse effect on the market price of the State's general
obligation bonds.
<PAGE>
LITIGATION
The State, its officers and employees are defendants in numerous lawsuits.
The ultimate disposition and fiscal consequences of these lawsuits are not
presently determinable. The Attorney General's Office has reviewed the status
of pending lawsuits and reports that it is the opinion of the Attorney General
that such pending litigation will not be finally determined so as to result
individually or in the aggregate in a final judgment against the State which
would materially adversely affect its financial position, except that in the
cases described below the fiscal impact of an adverse decision might be
significant but is not determinable at this time. The cases described in this
section generally do not include any individual case where the fiscal impact of
an adverse judgment is expected to be less than $15 million, but adverse
judgments in a number of such cases could, in the aggregate and in certain
circumstances, have a significant impact.
Sheff v. O'Neill is a Superior Court action brought in 1989 on behalf of
black and Hispanic school children in the Hartford school district. The
plaintiffs sought a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and
are inherently unequal to their detriment. They also sought injunctive relief
against state officials to provide them with an "integrated education." On
April 12, 1995, the Superior Court entered judgment for the State. On July 9,
1996, the State Supreme Court reversed the Superior Court judgment and remanded
the case with direction to render a declaratory judgment in favor of the
plaintiffs. The Court directed the legislature to develop appropriate measures
to remedy the racial and ethnic segregation in the Hartford public schools. The
Supreme Court also directed the Superior Court to retain jurisdiction of this
matter. The 1997 General Assembly enacted P.A. 97-290, An Act Enhancing
Educational Opportunities, in response to the Supreme Court decision. In
response to a motion filed by the plaintiffs, the Superior Court in 1998
ordered the State to show cause as to whether there has been compliance with
the Supreme Court's ruling. In a Memorandum of Decision issued March 3, 1999,
the Superior Court found that the State complied with the 1996 decision of the
Supreme Court. The Superior Court noted that the plaintiffs failed to allow the
State enough time to take additional steps in its remedial process. Therefore,
the plaintiffs may be able to pursue their claim at a later date.
The Connecticut Traumatic Brain Injury Association, Inc. v. Hogan is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the mentally ill and that placement in those hospitals
violates their constitutional rights. The plaintiffs seek relief which would
require that the plaintiff classmembers be transferred to community residential
settings with appropriate support services. This case has been settled as to
all persons with mental retardation by their eventual discharge from Norwich
and Fairfield Hills Hospital. The case is still proceeding as to those persons
with traumatic brain injury and the class of plaintiffs has been expanded to
include persons with acquired brain injury who are in the custody of the
Department of Mental Health and Addiction Services. The Court in 1998 expanded
the class of plaintiffs to include persons who are or have been in the custody
of the Department of Mental Health and Addiction Services at any time during
the pendency of the case without reference to a particular facility.
Johnson v. Rowland is a Superior Court action brought in 1998 in the name
of several public school students and the Connecticut municipalities in which
the students reside, seeking a declaratory judgment that the State's current
system of financing public education through local property taxes and State
payments to municipalities determined under a statutory Education Cost Sharing
("ECS") formula violates the Connecticut Constitution. Additionally, the suit
seeks various injunctive orders requiring the State to, among other things,
cease implementation of the present system, modify the ECS formula, and fund
the ECS formula at the level contemplated in the original 1988 public act which
established the ECS.
Donald P. Karp, Administrator of the Estate of Leslie J. Karp v. State of
Connecticut is a Superior Court action brought in 1999, pursuant to a grant of
permission to sue by the legislature, seeking money damages for the death of
Leslie J. Karp, M.D. who was killed in a head on collision with a vehicle
operated by Edward Kiley. The plaintiff alleges that the death of his decedent
was caused by the carelessness and negligence of the State through the Office
of Adult Probation in their supervision of Kiley who was placed in the
suspended prosecution program.
Hospital Tax Cases. In 1999 several hospitals appealed to the Superior
Court from the Commissioner of Revenue Services' denial of their claims for
partial refunds of the hospital tax imposed on a hospital's gross earnings. The
hospitals claim that the hospital tax should not be imposed on tangible
property transferred incidental to the provision of patient care services.
Refunds are claimed for the last three years. It is anticipated that other
hospitals in the State may bring similar suits.
PTI, Inc. v. Philip Morris et al. was filed in the Federal Court for the
Central District of California in 1999 against the State of Connecticut and the
Attorney General in his official and individual capacities. The plaintiffs
reimport and distribute cigarettes that have previously been sold by their
<PAGE>
manufacturers to foreign markets. The plaintiffs challenge certain provisions
of the 1998 Master Settlement Agreement (MSA) entered into by virtually all
states and territories to resolve litigation by the respective states against
the major domestic tobacco companies. The plaintiffs further challenge certain
state statutes, including those banning the sale of re-imported cigarettes,
so-called Non Participating Manufacturer statutes, that would decrease the
price advantage that re-imported cigarettes enjoy over other cigarettes. The
plaintiffs claim that various provisions of the MSA and these state statutes
violate the federal constitution, antitrust and civil rights laws. The
plaintiffs seek declaratory and injunctive relief, compensatory, special and
punitive damages, plus attorneys fees and costs.
While the various cases described in this paragraph involving alleged
Indian Tribes do not claim significant monetary damages from the State, the
cases are mentioned because they claim sovereignty over land areas that are
part of the State of Connecticut. Several suits have been filed since 1977 in
the Federal District Court and the Connecticut Superior Court on behalf of
alleged Indian Tribes in various parts of the State, claiming monetary recovery
as well as ownership of land in issue. Some of these suits have been settled or
dismissed. The plaintiff group in the remaining suits is the alleged Golden
Hill Paugussett Tribe and the lands involved are generally located in
Bridgeport, Trumbull, Orange, Shelton and Seymour. There may be additional
suits filed by other alleged Indian Tribes claiming ownership of land located
in the State of Connecticut but to which the State is not a party. One such
claim involves the alleged Schaghticoke Indian Tribe claiming privately and
town held lands in the Town of Kent. The State has also challenged the decision
of the Federal Department of the Interior which allows the Mashantucket Pequot
Tribe to add trust lands to the land holdings of the Tribe outside of its
reservation. The added land was not part of the Tribe's original reservation
designated under the Federal Settlement Act with the Tribe. The additional land
was purchased by the Tribe.
<PAGE>
APPENDIX D
ADDITIONAL INFORMATION CONCERNING
NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by New York State (the "State") and certain of its
municipalities and public authorities. This information does not purport to be
a complete description and is based on information from official statements
relating to securities offerings of New York issuers. CitiFunds New York Tax
Free Reserves is not responsible for the accuracy or timeliness of this
information.
NEW YORK STATE
The factors affecting the State's financial condition are complex and the
following description constitutes only a summary.
CURRENT ECONOMIC OUTLOOK
The State Financial Plan is based upon a June 1999 projection by The
Division of Budget ("DOB") of national and State economic activity. The
information in this section summarizes the State economic situation and outlook
upon which projections of receipts and certain disbursements were made for the
1999-2000 Financial Plan.
The State economy has continued to expand, with over 600,000 jobs added
since late 1992. Employment growth has been slower than in the nation during
this period, although the State's relative performance has improved in the last
two years. Growth in average wages in New York has generally outperformed the
nation, while growth in personal income per capita has kept pace with the
nation.
Continued growth is projected for 2000 and 2001 for employment, wages, and
personal income, although the growth in employment will moderate from the 1999
pace. Personal income is estimated to have grown by 4.7 percent in 1999, fueled
in part by a large increase in financial sector bonus payments at the year's
end. Personal income is projected to grow 5.5 percent in 2000 and 4.8 percent
in 2001. Total bonus payments are projected to increase by 11 percent in 2000
and 10.5 percent in 2001. Overall employment growth is expected to continue at
a more modest pace than in 1999, reflecting the slower growth in the national
economy, continued spending restraint by government employers, and
restructuring in the manufacturing, health care, social service, and banking
sectors.
Many uncertainties exist in any forecast of the national and State
economies. Given the recent volatility in the international and domestic
financial markets, such uncertainties are particularly present at this time.
The timing and impact of changes in economic conditions are difficult to
estimate with a high degree of accuracy. Unforeseeable events may occur. The
actual rate of change in any, or all, of the concepts that are forecasted may
differ substantially and adversely from the outlook described herein.
1998-99 FISCAL YEAR
The State ended its 1998-99 fiscal year on March 31, 1999 in balance on a
cash basis, with a General Fund cash surplus as reported by the DOB of $1.82
billion. The cash surplus was derived primarily from higher-than-projected tax
collections as a result of continued economic growth, particularly in the
financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000 of which $521 million was made available as a result of
the Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
<PAGE>
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.74 billion,
an increase of 6.34 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.49 billion for the 1998-99 fiscal year, an
increase of 6.23 percent from 1997-98 levels.
1997-98 FISCAL YEAR
The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by DOB of approximately $2.04 billion.
The cash surplus was derived primarily from higher-than-anticipated receipts
and lower spending on welfare, Medicaid, and other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an additional deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a $27 million
deposit from the surplus. The CPF closed the fiscal year with a balance of $170
million. The General Fund closing balance did not include $2.39 billion in the
tax refund reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit on March
31, 1998.
General Fund receipt and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.55 billion,
an annual increase of 4.57 percent over 1996-97. General Fund disbursements and
transfers to other funds were $34.35 billion, an annual increase of 4.41
percent.
1996-97 FISCAL YEAR
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of
approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing fund balance was $433 million, an increase of
$146 million from the 1995-96 fiscal year. The balance included $317 million in
the TSRF, after a required deposit of $15 million and an additional deposit of
$65 million in 1996-97. In addition, $41 million remained on deposit in the
CRF. The remaining $75 million reflected amounts then on deposit in the
Community Projects Fund. The General Fund closing fund balance did not include
$1.86 billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1996-97 fiscal year totaled $33.04 billion,
an increase of 0.7 percent from the previous fiscal year. General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
PUBLIC AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities, meaning public benefit corporations
created pursuant to State law, other than local authorities. Public authorities
are not subject to the constitutional restrictions on the incurrence of debt
that apply to the State itself and may issue bonds and notes within the amounts
and restrictions set forth in legislative authorization. The State's access to
the public credit markets could be impaired, and the market price of its
outstanding debt may be materially and adversely affected, if any of its public
authorities were to default on their respective obligations, particularly those
using the financing techniques referred to as State-supported or State-related
debt. As of December 31, 1998, there were 17 public authorities that had
outstanding debt of $100 million or more, and the aggregate outstanding debt,
including refunding bonds, of these State public authorities was $94 billion,
only a portion of which constitutes State-supported or State related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authorities generally pay their operating expenses
and debt service costs from revenues generated by the projects they finance or
operate, such as tolls charged for the use of highways, bridges or tunnels,
charges for public power, electrical gas utility services, rentals charged for
housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
<PAGE>
local assistance payments, otherwise payable to localities, to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, the affected localities could seek additional State assistance if
local assistance payments are diverted.
Some authorities also receive moneys from State appropriations to pay for
the operating costs of certain of their programs. As described below, the
Metropolitan Transportation Authority ("MTA") receives the bulk of this money
in order to provide transit and commuter services.
Beginning in 1998, the Long Island Power Authority ("LIPA") assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of August
24, 1999, LIPA has issued over $5 billion in bonds secured solely by ratepayer
charges. LIPA's debt is not considered either State-supported or State-related
debt.
METROPOLITAN TRANSPORTATION AUTHORITY
The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA"). The MTA operates
certain commuter rail and bus services in the New York Metropolitan area
through MTA's subsidiaries, the Long Island Rail Road Company, the Metro- North
Commuter Railroad Company, and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare revenues
are not sufficient to finance the mass transit portion of these operations, the
MTA has depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax -- that provide revenues for mass transit purposes, including assistance to
the MTA. Since 1987 State law has required that the proceeds of a one-quarter
of 1 percent mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. In 1993, the State dedicated a portion of
certain additional State petroleum business tax receipts to fund operating or
capital assistance to the MTA. The 1999-2000 enacted budget provides State
assistance to the MTA totaling approximately $1.4 billion, an increase of $55
million over the 1998-99 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program and
subsequently amended it in August 1997 and in March 1999. The MTA plan now
totals $12.55 billion. The 1995-99 Capital Program is the fourth capital plan
since the Legislature authorized procedures for the adoption, approval and
amendment of MTA capital programs and is designed to upgrade the performance of
the MTA's transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The currently approved 1995-99 Capital Program assumes
the issuance of an estimated $5.2 billion in bonds under this $6.5 billion
aggregate bonding authority. The remainder of the plan is projected to be
financed with assistance from the federal government, the State, the City of
New York, and from various other revenues generated from actions taken by the
MTA.
The MTA has proposed a $17.5 billion capital program for 2000 through
2004. There can be no assurance that the proposed capital plan will be approved
by the Capital Program Review Board without significant modifications, that the
plan as adopted will be adequate to finance the MTA's capital needs over the
plan period, or that funding sources identified in the approved plan will not
be reduced or eliminated.
LOCALITIES
THE CITY Of NEW YORK
The fiscal health of the State may also be affected by the fiscal health
of New York City (the "City"), which continues to require significant financial
<PAGE>
assistance from the State. State aid contributes to the City's ability to
balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public
credit markets. The City has achieved balanced operating results for each of
its fiscal years since 1981 as measured by the GAAP standards in force at the
time.
FISCAL OVERSIGHT
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
("NYC MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New
York ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986 during which the
City was subject to certain statutorily-prescribed fiscal controls. The Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met. State law requires the Control Board to reimpose a Control Period
upon the occurrence or "substantial likelihood and imminence" of the occurrence
of certain events, including (but not limited to) a City operating budget
deficit of more than $100 million or impaired access to the public credit
markets.
Currently, the City and its Covered Organizations (i.e., those which
receive or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "Financial Plan")
which the City prepares annually and periodically updates. The City's Financial
Plan summarizes its capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions
and contingencies, some of which are uncertain and may not materialize.
Unforeseen developments and changes in major assumptions could significantly
affect the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs, as well as for seasonal financing
needs. In fiscal year 1998 and again in fiscal year 2000, the State
constitutional debt limit would have prevented the City from entering into new
capital contracts. To prevent these disruptions in the capital program, two
entities were created to issue debt to increase the City's capital financing
capacity: (i) the State Legislature created the Transitional Finance Authority
("TFA") in 1997, and (ii) the City created the Tobacco Settlement Asset
Securitization Corporation in 1999. Despite these actions, the City, in order
to continue its capital program, will need additional financing capacity in
fiscal year 2002, which could be provided through increasing the borrowing
authority of the TFA or amending the State constitutional debt limit.
MONITORING AGENCIES
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax
revenues and generated a substantial surplus for the City in City fiscal year
1997-98. Recent staff reports also indicate that the City projects a surplus
for City fiscal year 1998-99. Although several sectors of the City's economy
have expanded over the last several years, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the performance of the
national economy. In addition, the size of recent tax reductions has increased
to over $2 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110.
Staff reports have indicated that recent City budgets have been balanced in
part through the use of non-recurring resources and that the City's Financial
Plan relies in part on actions outside its direct control. These reports have
also indicated that the City has not yet brought its long-term expenditure
growth in line with recurring revenue growth and that the City is likely to
continue to face substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or increased
revenues. In addition to these monitoring agencies, the Independent Budget
Office ("IBO") has been established pursuant to the City Charter to provide
analysis to elected officials and the public on relevant fiscal and budgetary
issues affecting the City. Copies of the most recent staff reports by the
Control Board, OSDC, City Comptroller, and IBO are available by contacting the
Control Board at 270 Broadway, 21st Floor, New York, NY, 10007, Attention:
Executive Director; OSDC at 270 Broadway, 23rd Floor, New York, NY 10007,
Attention: Deputy Comptroller; the City Comptroller at Municipal Building, Room
517, One Centre Street, New York, NY 10007, Attention: Deputy Comptroller for
Public Finance; and the IBO at 110 William Street, 14th Floor, New York, NY
10038, Attention: Director.
<PAGE>
OTHER LOCALITIES
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional oversight or financial assistance
is not included in the projections of the State's receipts and disbursements
for the State's 1999-2000 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to
agree on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State, other than New York City, was
approximately $21.0 billion. A small portion (approximately $80 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units (other than New York City) authorized by State law to
issue debt to finance deficits during the period that such deficit financing is
outstanding. Twenty-two localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1997.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs, which in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-
scale potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
New York Municipal Obligations may also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from New York
State and New York City personal income taxes. Accordingly, the Fund may be
adversely affected by local political and economic conditions and developments
within Puerto Rico and certain other U.S. territories affecting the issuers for
such obligations. For information concerning the economy of Puerto Rico, please
see Appendix E of this Statement of Additional Information.
YEAR 2000 COMPLIANCE
To date, the State has experienced no significant Year 2000 computer
disruptions. Monitoring will continue over the next few months to identify and
correct any problems that may arise. However, there can be no assurance that
outside parties who provide goods and services to the State will not experience
computer problems related to Year 2000 programming in the future, or that such
disruptions, if they occur, will not have an adverse impact on State operations
or finances.
LITIGATION
GENERAL
The legal proceedings noted below involve State finances, and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1999-2000
fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which
there are unanticipated, unfavorable and material judgments, or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
<PAGE>
1999-2000 Financial Plan. The State believes that the 1999-2000 Financial Plan
includes sufficient reserves to offset the costs associated with the payment of
judgments that may be required during the 1999-2000 fiscal year. These reserves
include (but are not limited to) amounts, appropriated for court of claims
payments and projected fund balances in the General Fund. In addition, any
amounts ultimately required to be paid by the State may be subject to
settlement or may be paid over a multi-year period. There can be no assurance,
however, that adverse decisions in legal proceedings against the State would
not exceed the amount of all potential 1999-2000 Financial Plan resources
available for the payment of judgments and, could therefore, affect the ability
of the State to maintain a balanced 1999-2000 Financial Plan. In its General
Purpose Financial Statements, the State reports its estimated liability for
awarded and anticipated unfavorable judgments.
STATE FINANCE POLICIES
TAX LAW
In New York Association of Convenience Stores et al. v. Urbach, et al.,
petitioners New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. are
seeking to compel respondents, the Commissioner of Taxation and Finance and the
Department of Taxation and Finance, to enforce sales and excise taxes pursuant
to Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations. In orders dated August 13, 1996
and August 24, 1996, the Supreme Court, Albany County, ordered, inter alia,
that there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, inter alia, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners' motion for leave to cross-appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco. On July 9, 1998, the New York Court of Appeals reversed the order of
the Appellate Division, Third Department, and remanded the matter to the
Supreme Court, Albany County, for further proceedings. The Court held that the
petitioners had standing to assert an equal protection claim, but that their
claim did not implicate racial discrimination. The Court remanded the case to
Supreme Court, Albany County, for resolution of the question of whether there
was a rational basis for the Tax Department's policy of non-enforcement of the
sales and excise taxes on reservation sales of cigarettes and motor fuel to
non-Indians. In a footnote, the Court stated that, in view of its disposition
of the case, petitioners' cross-appeal regarding the statewide suspension of
the taxes is "academic." By decision and judgment dated July 9, 1999, the
Supreme Court, Albany County, granted judgment dismissing the petition. On
September 2, 1999, petitioners appealed to the Appellate Division, Third
Department, from the July 9, 1999 decision and order.
LINE ITEM VETO
In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the Court denied the
State's motion to dismiss. On January 27, 1999, the State appealed that order.
On September 9, 1999, the Appellate Division, Third Department, heard the
appeal.
STATE PROGRAMS
MEDICAID
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry
Nursing Home et al. v. Pataki, et al. Plaintiffs allege that the changes in
methodology have been adopted in violation of procedural and substantive
requirements of State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
<PAGE>
Department of Social Services ("DSS") in June 1992 of a home assessment
resource review instrument ("HARRI"), which is to be used by DSS to determine
eligibility for and the nature of home care services for Medicaid recipients,
and challenge the policy of DSS of limiting reimbursable hours of service until
a patient is assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New
York County). In a related case, Rodriguez v. DeBuono, on April 19, 1999, the
United States District Court for the Southern District of New York enjoined the
State's use of task based assessment, which is similar to the HARRI, unless the
State assesses safety monitoring as a separate task based assessment, on the
grounds that its use without such additional assessment violated federal
Medicaid law and the Americans with Disabilities Act. The State appealed from
the April 19, 1999 order and on July 12, 1999 argued the appeal before the
Second Circuit. By order dated October 6, 1999, the Second Circuit reversed the
April 19, 1999 order and vacated the injunction. On October 20, 1999,
petitioners filed a request for rehearing en banc.
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September 5,
1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. In a decision
entered December 15, 1998, the Appellate Division, First Department, dismissed
the remaining cases in accordance with the result in Matter of New York State
Radiological Society v. Wing. By decision dated July 8, 1999, the Court of
Appeals denied leave to appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss.2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997, enforced
the terms of the decision. The State appealed that order. By decision and order
dated August 31, 1998, the Appellate Division, Second Department, affirmed that
order. On September 30, 1998, the State moved for re-argument or, in the
alternative, for a certified question for the Court of Appeals to review. By
order dated January 7, 1999, the motion was denied. A final order was entered
in Supreme Court on January 26, 1999. On February 23, 1999, the State appealed
that order to the Court of Appeals. In a decision entered December 16, 1999,
the Court of Appeals reversed the decision below and upheld the
constitutionality of the assessments.
In Dental Society, et al. v. Pataki, et al. (United States District Court,
Northern District of New York, commenced February 2, 1999), plaintiffs
challenge the State's reimbursement rates for dental care provided under the
State's dental Medicaid program. Plaintiffs claim that the State's Medicaid fee
schedule violates Title XIX of the Social Security Act (42 U.S.C. ss. 1396a et
seq.) and the federal and State Constitutions. On June 25, 1999, the State
filed its answer.
SHELTER ALLOWANCE
In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing.
In a decision dated April 16, 1997, the Court held that the shelter
allowance promulgated by the Legislature and enforced through DSS regulations
is not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York City. A judgment was entered on
July 25, 1997, directing, inter alia, that the State (i) submit a proposed
schedule of shelter allowances (for the Aid to Dependent Children program and
any successor program) that bears a reasonable relation to the cost of housing
in New York City; and (ii) compel the New York City Department of Social
Services to pay plaintiffs a monthly shelter allowance in the full amount of
their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State appealed to the Appellate Division, First
Department, from each and every provision of this judgment except that portion
directing the continued provision of interim relief. By decision and order
dated May 6, 1999, the Appellate Division, First Department, affirmed the July
25, 1997 judgment. By order dated July 8, 1999, the Appellate Division denied
the State's motion for leave to appeal to the Court of Appeals from the May 6,
1999 decision and order. By order dated October 14, 1999, the Court of Appeals
dismissed the State's leave to appeal.
<PAGE>
CIVIL RIGHTS CLAIMS
In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to
develop and comply with a remedial educational improvement plan ("EIP I"). On
January 19, 1989, the District Court granted motions by Yonkers and the NAACP
to add the State Education Department, the Yonkers Board of Education, and the
State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school system
continued to exist in Yonkers. On March 27, 1995, the District Court made
factual findings regarding the role of the State and the other State defendants
(the "State") in connection with the creation and maintenance of the dual
school system, but found no legal basis for imposing liability. On September 3,
1996, the United States Court of Appeals for the Second Circuit, based on the
District Court's factual findings, held the State defendants liable under 42
USC ss.1983 and the Equal Educational Opportunity Act, 20 USC ss.ss.1701, et
seq., for the unlawful dual school system, because the State, inter alia, had
taken no action to force the school district to desegregate despite its actual
or constructive knowledge of de jure segregation. By order dated October 8,
1997, the District Court held that vestiges of the prior segregated school
system continued to exist and that, based on the State's conduct in creating
and maintaining that system, the State is liable for eliminating segregation
and its vestiges in Yonkers and must fund a remedy to accomplish that goal.
Yonkers presented a proposed educational improvement plan ("EIP II") to
eradicate these vestiges of segregation. The October 8, 1997 order of the
District Court ordered that EIP II be implemented and directed that, within 10
days of the entry of the Order, the State make available to Yonkers $450,000 to
support planning activities to prepare the EIP II budget for 1997-98 and the
accompanying capital facilities plan. A final judgment to implement EIP II was
entered on October 14, 1997. On November 7, 1997, the State appealed that
judgment to the Second Circuit. The appeal is pending. Additionally, the Court
adopted a requirement that the State pay to Yonkers approximately $9.85 million
as its pro rata share of the funding of EIP I for the 1996-97 school year. The
requirement for State funding of EIP I was reduced to an order on December 2,
1997 and reduced to a judgment on February 10, 1998. The State appealed that
order to the Second Circuit on December 31, 1997 and amended the notice of
appeal after entry of the judgment. By decision dated June 22, 1999, as
discussed below, the Second Circuit affirmed the District Court's order
requiring the State to pay one-half the cost of EIP I for the 1996-97 school
year and remanded the case to the District Court for further proceedings
consistent with its decision.
On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06. That opinion was
reduced to an order on July 27, 1998. The order directed the State to pay $37.5
million by August 1, 1998 for estimated EIP costs for the 1997-98 school year.
The State made this payment, as directed. On August 24, 1998, the State
appealed that order to the Second Circuit. The city of Yonkers and the Yonkers
Board of Education cross appealed to the Second Circuit from that order. By
stipulation of the parties approved by the Second Circuit on November 19, 1998,
the appeals from the July 27, 1998 order were withdrawn without prejudice to
reinstatement upon determination of the State's appeal of the October 14, 1997
judgment discussed above.
On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million by
May 1, 1999, as the State's remaining share of EIP costs for the 1997-98 school
year. The second order directed the State to pay to Yonkers $69.1 million as
its share of the estimated EIP costs for the 1998-99 school year. The State
made both payments on April 30, 1999.
In a decision dated June 22, 1999, the Second Circuit found no basis for
the District Court's findings that vestiges of a dual system continued to exist
in Yonkers and reversed the order directing the implementation of EIP II. The
Second Circuit also affirmed the District Court's order requiring the State to
pay one-half of the cost of EIP I for the 1996-97 school year and remanded the
case to the District Court for further proceedings consistent with its
decision. On July 2, 1999 the NAACP filed a petition for rehearing of the June
22, 1999 decision before the Second Circuit, en banc. The State has joined in
the City of Yonker's motion to stay further implementation of EIP II pending
the decision on the petition for rehearing. By order dated August 5, 1999, the
Second Circuit granted the motion staying further implementation of EIP II
pending appeal.
On July 27, 1999, the City of Yonkers moved in the District Court to
modify the July 27, 1998 order to require the State to make payments for EIP
expenses each month from July 1999 through April 2000 of $9.22 million per
month instead of paying $92.2 million by May 1, 2000. By memorandum and order
dated July 29, 1999, the District Court denied this motion.
In a decision dated November 16, 1999, the Second Circuit vacated its June
22, 1999 decision. In this decision, the Second Circuit again affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP I
for the 1996-97 school year. The Second Circuit also found no basis for the
District Court's findings that vestiges of a dual system continued to exist in
Yonkers, and therefore vacated the District Court's EIP II order. The Second
Circuit, however, remanded to the District Court for the limited purpose of
<PAGE>
making further findings on the existing record as to whether any other vestiges
of the dual system remain in the Yonkers public schools.
REAL PROPERTY CLAIMS
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795.
At the same time, however, the Court reversed the Second Circuit by holding
that a third-party claim by the counties against the State for indemnification
was not properly before the federal courts. The case was remanded to the
District Court for an assessment of damages, which action is still pending. The
counties may still seek indemnification in the State courts.
In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims
for 250,000 acres, to add the State as a defendant, and to certify a class made
up of all individuals who currently purport to hold title within said 250,000
acre area. These motions were argued March 29, 1999 and are still awaiting
determination. The District Court has not yet rendered a decision. By order
dated February 24, 1999, the District Court appointed a federal settlement
master. A conference scheduled by the District Court for May 26, 1999 to
address the administration of this case has been adjourned indefinitely.
Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New
York, et al., both in the United States District Court for the Northern
District of New York and Seneca Nation of Indians, et al. v. State, et al. in
the United States District Court for the Western District of New York. The
Supreme Court's holding in Oneida Indian Nation of New York may impair or
eliminate certain of the State's defenses to these actions but may enhance
others. In the Cayuga Indian Nation of New York case, by order dated March 29,
1999, the United States District Court for the Northern District of New York
appointed a federal settlement master. In October 1999, the District Court
granted the Federal Government's motion to have the State held jointly and
severally liable for any damages owed to the plaintiffs. The damages phase of
the trial of this case is underway. In the Canadian St. Regis Band of Mohawk
Indians case, the United States District Court for the Northern District of New
York has directed the parties to rebrief outstanding motions to dismiss brought
by the defendants. The State filed its brief on July 1, 1999. The motions were
argued in September 1999. No decision has been rendered on these motions. In
Seneca Nation of Indians, by order dated November 22, 1999, the District Court
confirmed the July 12, 1999 magistrate's report, which recommended granting the
State's motion to dismiss the portion of the action relating to the right of
way where the New York State Thruway crosses the Cattaraugus Reservation in
Erie and Chatauqua Counties and denying the State's motion to dismiss the
Federal Government's damage claims. The District Court has set a trial date of
October 17, 2000 for that portion of the case related to the plaintiff's claim
of ownership of the islands of the Niagara River.
<PAGE>
APPENDIX E
ADDITIONAL INFORMATION CONCERNING
PUERTO RICAN MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in Puerto Rican Municipal Obligations. The sources of payment for
such obligations and the marketability thereof may be affected by financial or
other difficulties experienced by Puerto Rico and certain of its municipalities
and public authorities. This information does not purport to be a complete
description and is based on information from statements relating to Puerto
Rico's economy published by the Government of Puerto Rico. Neither CitiFunds
California Tax Free Reserves, CitiFunds Connecticut Tax Free Reserves, nor
CitiFunds New York Tax Free Reserves is responsible for the accuracy or
timeliness of this information.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors (including finance and tourism). Investment in fixed capital, including
public infrastructure, private development and construction, and purchases of
equipment and machinery accounted for approximately 25.1% of Puerto Rico's
gross domestic product in 1998. The economic growth of Puerto Rico was 3.1% in
fiscal year 1998, slightly lower than the average growth of highly developed
countries such as the US, Canada and the UK, which ranged between 3.2% and
3.7%. A key element in 1998's economic growth was the level of internal
investments in fixed capital (including public infrastructure, private
development projects and purchase of equipment), which increased 5.4%, as well
as the manufacturing and services sectors that have traditionally dominated
Puerto Rico's economy. The economy of Puerto Rico expanded moderately during
the early 1990s, with gross domestic product increasing at rates between 0.8%
and 0.9%. Over the past several years, however, Puerto Rico has experienced
more significant annual increases in gross domestic product, ranging from a
2.5% in fiscal year 1994 to a record high of 3.4% in fiscal year 1995. Annual
increases in Puerto Rico's gross domestic product for fiscal years 1996, 1997
and 1998 were 3.3%, 3.2% and 3.1%, respectively. The balance of net sales
(exports and imports) is negative, yet exports (tourism included) of goods and
services experienced an aggressive growth rate of 21.6% in the fiscal year
1998. Such growth in exports is considered an important aspect of Puerto Rico's
economic growth. Although Puerto Rico's unemployment rate increased from 13.1%
in fiscal year 1997 to 13.6% in fiscal year 1998, the unemployment rate was
still lower than the 14.5% average for the last six years.
During the first quarter of the fiscal year 1999, Hurricane George hit the
island of Puerto Rico, causing severe damage. This hurricane is considered one
of most destructive in Puerto Rico's history, damaging almost all of the
country's infrastructure and effecting nearly every sector in the economy. As a
result of the pattern of growth of Puerto Rico's economy over the last six
years, coupled with the substantial federal and international aid received by
the Puerto Rican government, however, authorities project that the hurricane
will not have a large impact on Puerto Rico's trend of economic growth. The
government has made economic-growth projections under three potential
scenarios: minimal growth, base growth and maximum growth. Under the minimal-
growth scenario, Puerto Rico's economy is expected to grow 2.7% in fiscal year
1999 and 2.5% in fiscal year 2000, compared to growth rates of 3.0% and 2.7%
under the base-growth scenario and 3.4% and 3.0% under the maximum growth-
scenario in fiscal years 1999 and 2000, respectively. These growth projections
are based on an increasing rate of personal consumption, stable interest rates,
declining oil prices and policies of the Government of Puerto Rico.
<PAGE>
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CITIFUNDSSM CALIFORNIA TAX FREE RESERVES
CITIFUNDSSM CONNECTICUT TAX FREE RESERVES
CITIFUNDSSM NEW YORK TAX FREE RESERVES
INVESTMENT ADVISER
Citibank, N.A.
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ADMINSTRATOR AND DISTRIBUTOR
CFBDS, Inc.
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TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
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AUDITORS
(FOR CITIFUNDSSM CASH RESERVES)
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(FOR CITIFUNDSSM U.S. TREASURY, TAX FREE,
NEW YORK TAX FREE, CALIFORNIA TAX FREE AND
CONNECTICUT TAX FREE RESERVES)
Deloitte & Touche LLP
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LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
- ----------------------------------------------------
SHAREHOLDER SERVICING AGENTS
FOR CITIBANK NEW YORK RETAIL BANKING AND
BUSINESS AND PROFESSIONAL CUSTOMERS:
Citibank N.A.
450 West 33rd Street, New York, NY 10001
(212) 564-3456 or (800) 846-5300
FOR CITIGOLD CLIENTS:
Citigold
P.O. Box 5130, New York, NY 10126-5130
Call Your Citigold Executive or in NY or CT (800) 285-1701,
or for all other states, (800) 285-1707
FOR PRIVATE BANKING CLIENTS:
Citibank, N.A.
The Citibank Private Bank
153 East 53rd Street, New York, NY 10043
Call Your Citibank Private Banking Account Officer,
Registered Representative or (212) 559-5959
<PAGE>
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS:
Citibank, N.A.
Citibank Global Asset Management
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FOR NORTH AMERICAN INVESTOR SERVICES CLIENTS:
Citibank, N.A.
111 Wall Street, New York, NY 10043
Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS:
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Call Your Investment Consultant or (800) 846-5200
(212) 736-8170 in New York City
FOR CITIBANK CASH MANAGEMENT CLIENTS:
Citibank Cash Management
One Penns Way
New Castle, DE 19720
<PAGE>
PART C
Item 23. Exhibits.
* a(1) Declaration of Trust of the Registrant
*, *** a(2) Amendments to Declaration of Trust of the Registrant
* b(1) Amended and Restated By-Laws of the Registrant
*, ** b(2) Amendments to Amended and Restated By-Laws of the Registrant
e(1) Form of Amended and Restated Distribution Agreement between
the Registrant and CFBDS, Inc. ("CFBDS"), as distributor
with respect to Class N shares
e(2) Form of Distribution Agreement between the Registrant and
CFBDS, as distributor with respect to CitiMarkets Tax Free
Reserves shares
* g Custodian Contract between the Registrant and State Street
Bank and Trust Company ("State Street"), as custodian
* h(1) Amended and Restated Administrative Services Plan of the
Registrant
h(2) Form of Amendment to the Amended and Restated Administrative
Services Plan of the Registrant
* h(3) Administrative Services Agreement between the Registrant and
CFBDS, as administrator
* h(4) Sub-Administrative Services Agreement between Citibank, N.A.
and CFBDS
* h(5)(i) Form of Shareholder Servicing Agreement between the
Registrant and Citibank, N.A., as shareholder servicing
agent
* h(5)(ii) Form of Shareholder Servicing Agreement between the
Registrant and a federal savings bank, as shareholder
servicing agent
* h(5)(iii) Form of Shareholder Servicing Agreement between the
Registrant and CFBDS, as shareholder servicing agent
* h(6) Transfer Agency and Service Agreement between the Registrant
and State Street, as transfer agent
* h(7) Amended and Restated Exchange Privilege Agreement between
the Registrant, certain other investment companies and
CFBDS, as distributor
* i Opinion and consent of counsel
j Independent Accountants' consent
m(1) Form of Amended and Restated Distribution Plan of the
Registrant with respect to Class N shares
m(2) Form of Distribution Plan of the Registrant with respect to
CitiMarkets Tax Free Reserves shares
n Form of Multiple Class Plan of the Registrant
p(1) Code of Ethics of the Registrant and Tax Free Reserves
Portfolio
p(2) Code of Ethics of CFBDS
*** q(1) Powers of Attorney for the Registrant
*** q(2) Powers of Attorney for Tax Free Reserves Portfolio
- ------------------
* Incorporated herein by reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A (File No. 2-87509) as
filed with the Securities and Exchange Commission on August 29, 1996.
** Incorporated herein by reference to Post-Effective Amendment No. 20 to the
Registrant's Registration Statement on Form N-1A (File No. 2-87509) as
filed with the Securities and Exchange Commission on December 23, 1997.
<PAGE>
*** Incorporated herein by reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A (File No. 2-87509) as
filed with the Securities and Exchange Commission on October 16, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, incorporated by reference herein as an Exhibit to the Registrant's
Registration Statement on Form N-1A; (b) Section 4 of the Distribution
Agreement relating to Class N shares and Section 6 of the Distribution
Agreement relating to CitiMarkets Tax Free Reserves shares between the
Registrant and CFBDS, incorporated by reference herein and filed herewith as an
Exhibit to the Registrant's Registration Statement on Form N-1A; and (c) the
undertaking of the Registrant regarding indemnification set forth in its
Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 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 (High Yield Portfolio, U.S. Fixed Income Portfolio, Large
Cap Growth Portfolio, International Equity Portfolio, Government Income
Portfolio, Growth & Income Portfolio and Small Cap Growth Portfolio), Tax Free
Reserves Portfolio, U.S. Treasury Reserves Portfolio, Cash Reserves Portfolio,
CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM New York Tax Free Reserves,
CitiFundsSM Connecticut Tax Free Reserves and CitiFundsSM California Tax Free
Reserves), CitiFundsSM Tax Free Income Trust (CitiFundsSM National Tax Free
Income Portfolio, 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(R) VIP Folio 200 Conservative, CitiSelect(R) VIP Folio 300
Balanced, CitiSelect(R) VIP Folio 400 Growth, CitiSelect(R) 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 S. Collins, Vice Chairman of Citigroup,
Inc. and Robert I. Lipp, Chairman and Chief Executive Officer of Travelers
Insurance Group and of Travelers Property Casualty Corp.
<PAGE>
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 Distributor, 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 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 Growth & Income Portfolio, CitiFundsSM Large Cap Growth Portfolio,
CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM Balanced Portfolio,
CitiSelect(R) Folio 100 Income, CitiSelect(R) Folio 200 Conservative,
CitiSelect(R) Folio 300 Balanced, CitiSelect(R) Folio 400 Growth, CitiSelect(R)
Folio 500 Growth Plus, CitiSelect(R) VIP Folio 200 Conservative, CitiSelect(R)
VIP Folio 300 Balanced, CitiSelect(R) VIP Folio 400 Growth, CitiSelect(R) VIP
Folio 500 Growth Plus and CitiFundsSM Small Cap Growth VIP Portfolio. CFBDS is
also the placement agent for High Yield Portfolio, Government Income Portfolio,
International Equity Portfolio, Large Cap Growth Portfolio, Small Cap Growth
Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Growth & Income Portfolio, U.S. Fixed Income
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
<PAGE>
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, 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
<PAGE>
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, 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 Fund.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD
filed by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No.
8-32417).
(c) Not applicable.
Item 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
CFBDS, Inc. 21 Milk Street, 5th Floor
(administrator and distributor) Boston, MA 02109
<PAGE>
State Street Bank and Trust 1776 Heritage Drive
Company (transfer agent and North Quincy, MA 02171
custodian)
Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043
SHAREHOLDER SERVICING AGENTS
Citibank, N.A. 450 West 33rd Street
New York, NY 10001
Citibank, N.A. - Citigold Citicorp Mortgage Inc. - Citigold
15851 Clayton Road
Ballwin, MO 63011
Citibank, N.A. - The Citibank 153 East 53rd Street
Private Bank New York, NY 10043
Citibank, N.A. - Citibank Global 153 East 53rd Street
Asset Management New York, NY 10043
Citibank, N.A. - North American 111 Wall Street
Investor Services New York, NY 10094
Citicorp Investment Services One Court Square
Long Island City, NY 11120
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts on the 2nd day of May, 2000.
CITIFUNDS TAX FREE RESERVES
By Philip W. Coolidge
-----------------------
Philip W. Coolidge
President
Pursuant to the requirements of the Securities Act this Post-Effective
Amendment to the Registration Statement on Form N-1A has been signed below by
the following persons in the capacities indicated below on May 2, 2000.
Signature Title
Philip W. Coolidge President, Principal Executive Officer
----------------------- and Trustee
Philip W. Coolidge
Linwood C. Downs Principal Financial Officer and
----------------------- Principal Accounting Officer
Linwood C. Downs
C. Oscar Morong, Jr.* Trustee
-----------------------
C. Oscar Morong, Jr.
Walter E. Robb, III* Trustee
-----------------------
Walter E. Robb, III
E. Kirby Warren* Trustee
-----------------------
Kirby Warren
*By: Philip W. Coolidge
-----------------------
Philip W. Coolidge
Executed by Philip W. Coolidge on
behalf of those indicated pursuant to
Powers of Attorney.
<PAGE>
SIGNATURES
Tax Free Reserves Portfolio has duly caused this Post-Effective Amendment
to the Registration Statement on Form N-1A of CitiFunds Tax Free Reserves to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 2nd day of May,
2000.
TAX FREE RESERVES PORTFOLIO
By Philip W. Coolidge
-----------------------
Philip W. Coolidge
President
This Post-Effective Amendment to the Registration Statement on Form N-1A
of CitiFunds Tax Free Reserves has been signed below by the following persons
in the capacities indicated below on May 2, 2000.
Signature Title
Philip W. Coolidge President, Principal Executive Officer
----------------------- and Trustee
Philip W. Coolidge
Linwood C. Downs Principal Financial Officer and
----------------------- Principal Accounting Officer
Linwood C. Downs
Elliott J. Berv* Trustee
-----------------------
Elliott J. Berv
Riley C. Gilley* Trustee
-----------------------
Riley C. Gilley
Walter E. Robb, III* Trustee
-----------------------
Walter E. Robb, III
*By: Philip W. Coolidge
----------------------
Philip W. Coolidge
Executed by Philip W. Coolidge on
behalf of those indicated pursuant to
Powers of Attorney.
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
e(1) Form of Amended and Restated Distribution Agreement between
the Registrant and CFBDS, Inc. ("CFBDS"), as distributor
with respect to Class N shares
e(2) Form of Distribution Agreement between the Registrant and
CFBDS as distributor with respect to CitiMarkets Tax Free
Reserves shares
h(2) Form of Amendment to the Amended and Restated
Administrative Services Plan of the Registrant
j Independent Accountants' consent
m(1) Form of Amended and Restated Distribution Plan of the
Registrant with respect to Class N shares
m(2) Form of Distribution Plan of the Registrant with respect to
CitiMarkets Tax Free Reserves shares
n Form of Multiple Class Plan of the Registrant
p(1) Code of Ethics of the Registrant and Tax Free Reserves
Portfolio
p(2) Code of Ethics of CFBDS
Exhibit e(1)
FORM OF
AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of August 20, 1985, amended and restated
as of December 2, 1988, and further amended and restated as of _________ __,
2000, by and between CITIFUNDS TAX FREE RESERVES (formerly know as Landmark Tax
Free Reserves), a Massachusetts business trust (the "Trust"), and CFBDS, INC.
(formerly known as The Landmark Funds Broker-Dealer Services, Inc.), a
Massachusetts corporation ("CFBDS" or the "Distributor"). This Agreement
relates solely to Shares of Beneficial Interest of the Trust that are
designated "Class N" ("Shares").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, the Board of Trustees of the Trust has adopted an Amended and
Restated Distribution Plan, dated as of August 20, 1985, and amended and
restated as of _________ __, 2000 (the "Distribution Plan"), which is
incorporated herein by reference and pursuant to which the Trust desires to
enter into this Distribution Agreement; and
WHEREAS, the Trust wishes to engage CFBDS to provide certain services with
respect to the distribution of shares, and CFBDS is willing to provide such
services to the Trust on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. The Trust grants to the Distributor the right, as agent of the Trust,
to sell Shares upon the terms hereinbelow set forth during the term of this
Agreement. While this Agreement is in force, the Distributor agrees to use its
best efforts to find purchasers for Shares.
The Distributor shall have the right, as agent of the Trust, to order from
the Trust the Shares needed, but not more than the Shares needed (except for
clerical errors and errors of transmission), to fill unconditional orders for
Shares placed with the Distributor by any dealer, all such orders to be made in
the manner set forth in the Trust's then-current prospectus (the "Prospectus")
and then-current statement of additional information (the "Statement of
<PAGE>
Additional Information") relating to such Shares. The price which shall be paid
to the Trust for the Shares so purchased shall be the net asset value per Share
as determined in accordance with the provisions of the Trust's Declaration of
Trust and By-Laws, as each may from time to time be amended (collectively, the
"Governing Instruments"). The Distributor shall notify the Custodian of the
Trust (currently State Street Bank and Trust Company), at the end of each
business day, or as soon thereafter as the orders placed with the Distributor
have been compiled, of the number of Shares and the prices thereof which have
been ordered through the Distributor since 12:00 noon on the previous business
day.
The right granted to the Distributor to place orders for Shares with the
Trust shall be exclusive, except that this exclusive right shall not apply to
Shares issued in the event that an investment company (whether a regulated or
private investment company or a personal holding company) is merged with and
into or consolidated with the Trust or in the event that the Trust acquires, by
purchase or otherwise, all (or substantially all) the assets or the outstanding
shares of any such company; nor shall it apply to Shares issued by the Trust as
a dividend or stock split. The exclusive right to place orders for Shares
granted to the Distributor may be waived by the Distributor by notice to the
Trust in writing, either unconditionally or subject to such conditions and
limitations as may be set forth in such notice to the Trust. The Trust hereby
acknowledges that the Distributor may render distribution and other services to
other parties, including other investment companies. In connection with its
duties hereunder, the Distributor shall also arrange for computation of
performance statistics with respect to the Trust and arrange for publication of
current price information in newspapers and other publications.
2. The Shares may be sold by the Distributor on behalf of the Trust to or
through any dealer having a sales agreement with the Distributor upon the
following terms and conditions: The public offering price of Shares, i.e., the
price per Share at which the Distributor or dealer purchasing Shares through
the Distributor may sell shares to the public, shall be the net asset value of
such Shares.
The net asset value of Shares shall be determined by the Trust, or by an
agent of the Trust, as of 12:00 noon on each day on which the New York Stock
Exchange is open for trading (and on such other days as the Trustees deem
necessary in order to comply with Rule 22c-1 under the 1940 Act), in accordance
with the method established pursuant to the Governing Instruments. The Trust
shall have the right to suspend the sale of Shares if, because of some
extraordinary condition, the New York Stock Exchange shall be closed, or if
conditions existing during the hours when the Exchange is open render such
action advisable or for any other reason deemed adequate by the Trust.
3. The Trust agrees that it will, from time to time, but subject to the
necessary approval, if any, of its shareholders, take all necessary action to
register such number of Shares under the Securities Act of 1933, as amended
(the "1933 Act"), as the Distributor may reasonably be expected to sell.
<PAGE>
The Distributor shall be an independent contractor and neither the
Distributor nor any of its Directors, officers or employees as such, is or
shall be an employee of the Trust. It is understood that Trustees, officers and
shareholders of the Trust are or may become interested in the Distributor, as
Directors, officers, employees, or otherwise and that Directors, officers and
employees of the Distributor are or may become similarly interested in the
Trust and that the Distributor may be or become interested in the Trust as a
shareholder or otherwise. The Distributor is responsible for its own conduct
and the employment, control and conduct (but only with respect to the duties
and obligations of the Distributor hereunder) of its agents and employees and
for any injury to any of such agents or employees or to others through its
agents or employees. The Distributor assumes full responsibility for its agents
and employees under applicable statutes and agrees to pay all employer taxes
thereunder.
4. The Distributor covenants and agrees that, in selling Shares, it will
use its best efforts in all respects duly to conform with the requirements of
all state and federal laws and the Conduct Rules of the National Association of
Securities Dealers, Inc. relating to the sale of Shares, and will indemnify and
hold harmless the Trust and each of its Trustees and officers and each person,
if any, who controls the Trust within the meaning of Section 15 of the Act (the
"Indemnified Parties") against all losses, liabilities, damages or expenses
(including the reasonable cost of investigating or defending any alleged loss,
liability, damages, claim or expense and reasonable counsel fees incurred in
connection therewith) arising from any claim, demand, action or suit
(collectively, "Claims"), arising by reason of any persons acquiring any of the
Shares through the Distributor, which may be based upon the 1933 Act or any
other statute or common law, on account of any wrongful act of the Distributor
or any of its employees (including any failure to conform with any requirement
of any state or federal law or the Conduct Rules of the National Association of
Securities Dealers, Inc. relating to the sale of Shares) or on the ground that
the registration statement under the 1933 Act, including all amendments thereto
(the "Registration Statement"), or Prospectus or previous prospectus or
Statement of Additional Information or previous statement of additional
information, includes or included an untrue statement of a material fact or
omits or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, if and only
if any such act, statement or omission was made in reliance upon information
furnished by the Distributor to the Trust; provided, however, that in no case
(i) is the indemnity of the Distributor in favor of any Indemnified Party to be
deemed to protect any such Indemnified Party against liability to which such
Indemnified Party would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its or his duties or by
reason of its or his reckless disregard of its or his obligations and duties
under this Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this Section 4 with respect to any Claim made
against any Indemnified Party unless such Indemnified Party shall have notified
the Distributor in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the Claim shall have
been served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify the Distributor of any such Claim shall not relieve it from any
<PAGE>
liability which it may have to any Indemnified Party otherwise than on account
of its indemnity agreement contained in this Section 4. The Distributor shall
be entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any such Claim,
and, if the Distributor elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to each Indemnified Party.
In the event that the Distributor elects to assume the defense of any such suit
and retain such counsel, each Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it but, in case the Distributor
does not elect to assume the defense of any such suit, it shall reimburse the
Indemnified Parties for the reasonable fees and expenses of any counsel
retained by them. Except with the prior written consent of the Distributor, no
Indemnified Party shall confess any Claim or make any compromise in any case in
which the Distributor will be asked to indemnify such Indemnified Party. The
Distributor agrees promptly to notify the Trust of the commencement of any
litigation or proceeding against it in connection with the issuance and sale of
any of the Shares.
Neither the Distributor nor any dealer nor any other person is authorized
to give any information or to make any representation on behalf of the Trust,
other than those contained in the Registration Statement or Prospectus or
Statement of Additional Information.
5. The Trust will pay, or cause to be paid -
(i) all costs and expenses of the Trust, including fees and
disbursements of its counsel, in connection with the preparation and
filing of the Registration Statement, Prospectus and Statement of
Additional Information, and preparing and mailing to shareholders
Prospectuses, Statements of Additional Information, statements and
confirmations and periodic reports (including the expense of setting
in type the Registration Statement, Prospectus and Statement of
Additional Information or any periodic report);
(ii) the cost of preparing temporary or permanent certificates
for Shares;
(iii) the cost and expenses of delivering to the Distributor at
its office in Boston, Massachusetts all Shares purchased through it
as agent hereunder;
(iv) a distribution fee to the Distributor at an annual rate not
to exceed 0.10% of the Trust's average daily net assets for its
then-current fiscal year, plus an additional fee at an annual rate
not to exceed 0.10% of the Trust's average daily net assets for its
<PAGE>
then-current fiscal year in anticipation of, or as reimbursement for,
expenses incurred by the Distributor in connection with print or
electronic media advertising in connection with the sale of Shares,
subject to the Distribution Plan;
(v) all fees and disbursements of the Transfer Agent and
Custodian with respect to the Trust, subject to the Trust's
Administrative Services Plan;
(vi) a fee to each Shareholder Servicing Agent (pursuant to a
shareholder servicing agreement with each such Agent), subject to the
Trust's Administrative Services Plan;
(vii) a fee to the Administrator of the Trust (pursuant to the
Administrative Services Agreement), subject to the Trust's
Administrative Services Plan; and
(viii) a fee to the investment adviser of the Trust (pursuant to
the Investment Advisory Agreement with such adviser).
The Distributor agrees that, with respect to the sale of Shares, after the
Prospectus and Statement of Additional Information and periodic reports with
respect to such Fund have been set in type, it will bear the expense (other
than the cost of mailing to shareholders of the Trust) of printing and
distributing any copies thereof which are to be used in connection with the
offering or sale of Shares to any dealer or prospective investor. The
Distributor further agrees that it will bear the expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by any dealer in connection with the offering of the
Shares for sale to the public and any expense of sending confirmations and
statements to any dealer having a sales agreement with the Distributor. The
Distributor will also bear the cost of any compensation paid to dealers in
connection with the sale of Shares. The Distributor also agrees to bear the
expenses of qualification of Shares for sale in the various states and, if
necessary or advisable in connection therewith, of qualifying the Trust as a
broker or dealer in any such state.
6. If, at any time during the term of this Agreement, the Trust shall deem
it necessary or advisable in the best interests of the Trust that any amendment
of this Agreement be made in order to comply with any recommendation or
requirement of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under Massachusetts or federal tax laws,
it shall notify the Distributor of the form of amendment which it deems
necessary or advisable and the reasons therefor. If the Distributor declines to
assent to such amendment (after a reasonable time), the Trust may terminate
this Agreement forthwith by written notice to the Distributor without payment
of any penalty. If, at any time during the term of this Agreement, the
Distributor requests the Trust to make any change in its Governing Instruments
or in its methods of doing business which are necessary in order to comply with
<PAGE>
any requirement of federal law or regulations of the Securities and Exchange
Commission or of a national securities association of which the Distributor is
or may become a member, relating to the sale of Shares, and the Trust fails
(after a reasonable time) to make any such change as requested, the Distributor
may terminate this Agreement forthwith by written notice to the Trust without
payment of any penalty.
7. The Distributor agrees that it will not take any long or short position
in the Shares and that, so far as it can control the situation, it will prevent
any of its Directors or officers from taking any long or short position in the
Shares, except as permitted by the Governing Instruments.
8. This Agreement shall become effective upon its execution and shall
continue in force indefinitely, provided that such continuance is specifically
approved at least annually (i) by the vote of a majority of the Trustees of the
Trust who are not "interested persons" of the Trust or of the Distributor at a
meeting specifically called for the purpose of voting on such approval, and
(ii) by the Board of Trustees of the Trust, or by the "vote of a majority of
the outstanding voting securities" of the Trust. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually"
shall be construed in a manner consistent with the 1940 Act.
This Agreement may be terminated at any time by either party without
payment of any penalty on not more than 60 days' nor less than 30 days' written
notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
9. CFBDS may subcontract for the performance of its obligations hereunder
with any one or more persons; provided, however, that CFBDS shall not enter
into any such subcontract unless the Trustees of the Trust shall have found the
subcontracting party to be qualified to perform the obligations sought to be
subcontracted; and provided, further, that, unless the Trust otherwise
expressly agrees in writing, CFBDS shall be as fully responsible to the Trust
for the acts and omissions of any subcontractor as it would be for its own acts
or omissions.
10. The terms "vote of a majority of the outstanding voting securities",
"interested person", "assignment" and "specifically approved at least annually"
shall have the respective meanings specified in, and shall be construed in a
manner consistent with, the 1940 Act, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission thereunder, and
provided, however, that the term "assignment" shall include (without
limitation) any sale, transfer or conversion of a controlling interest of any
class of voting stock of CFBDS or of any entity which holds a controlling
interest of any class of voting stock of CFBDS or another such entity.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names on their behalf by the undersigned,
<PAGE>
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first above written. The undersigned Trustee of the
Trust has executed this Agreement not individually, but as Trustee under the
Trust's Declaration of Trust, dated June 21, 1985, as amended, and the
obligations of this Agreement are not binding upon any of the Trustees or
shareholders of the Trust individually, but bind only the Trust estate.
CITIFUNDS TAX CFBDS, INC.
FREE RESERVES
By:_______________________ By:__________________________
Title: Title:
Exhibit e(2)
FORM OF
DISTRIBUTION AGREEMENT
AGREEMENT , dated as of _________ __, 2000, by and between CitiFunds Tax
Free Reserves , a Massachusetts business trust (the "Trust"), and CFBDS, Inc.,
a Massachusetts corporation ("Distributor"), with respect to shares of
beneficial interest of the Trust designated as CitiMarkets Tax Free Reserves
Shares ("Shares").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust wishes to retain the services of a distributor for
Shares and has registered the Shares under the Securities Act of 1933, as
amended (the "1933 Act");
WHEREAS, the Trust has adopted a Distribution Plan pursuant to Rule 12b1
under the 1940 Act (the "Distribution Plan") and may enter into related
agreements providing for the distribution and servicing of Shares;
WHEREAS, Distributor has agreed to act as distributor of the Shares for
the period of this Agreement;
NOW, THEREFORE, it is hereby agreed between the parties hereto as follows:
1. Appointment of Distributor.
(a) The Trust hereby appoints Distributor its exclusive agent for the
distribution of Shares in jurisdictions wherein Shares may be legally offered
for sale; provided, however, that the Trust in its absolute discretion may
issue Shares in connection with (i) the payment or reinvestment of dividends or
distributions; (ii) any merger or consolidation of the Trust with any other
investment company or trust or any personal holding company, or the acquisition
of the assets of any such entity or another series of the Trust; or (iii) any
offer of exchange permitted by Section 11 of the 1940 Act.
(b) Distributor hereby accepts such appointment as exclusive agent for the
distribution of Shares and agrees that it will sell the Shares as agent for the
Trust at prices determined as hereinafter provided and on the terms hereinafter
set forth, all according to the then-current prospectus and statement of
<PAGE>
additional information of the Shares (the "Prospectus" and the "Statement of
Additional Information"), applicable laws, rules and regulations and the
Declaration of Trust of the Trust. Distributor agrees to use its best efforts
to solicit orders for the sale of Shares, and agrees to transmit promptly to
the Trust (or to the transfer agent of the Trust, if so instructed in writing
by the Trust) any orders received by it for purchase or redemption of Shares.
(c) Distributor may sell Shares to or through qualified securities
dealers, financial institutions or others. Distributor will require each dealer
or other such party to conform to the provisions of this Agreement, the
Prospectus, the Statement of Additional Information and applicable law; and
neither Distributor nor any such dealers or others shall withhold the placing
of purchase orders for Shares so as to make a profit thereby.
(d) Distributor shall order Shares from the Trust only to the extent that
it shall have received unconditional purchase orders therefor. Distributor will
not make, or authorize any dealers or others to make: (i) any short sales of
Shares; or (ii) any sales of Shares to any Trustee or officer of the Trust, any
officer or director of Distributor or any corporation or association furnishing
investment advisory, managerial or supervisory services to the Trust, or to any
such corporation or association, unless such sales are made in accordance with
the Prospectus and the Statement of Additional Information.
(e) Distributor is not authorized by the Trust to give any information or
make any representations regarding Shares, except such information or
representations as are contained in the Prospectus, the Statement of Additional
Information or advertisements and sales literature prepared by or on behalf of
the Trust for Distributor's use.
(f) The Trust agrees to execute any and all documents, to furnish any and
all information and otherwise to take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with the
qualification of Shares for sale in such states as Distributor and the Trust
agree.
(g) No Shares shall be offered by either Distributor or the Trust under
this Agreement, and no orders for the purchase or sale of Shares hereunder
shall be accepted by the Trust, if and so long as the effectiveness of the
Trust's then current registration statement as to Shares or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus with respect to Shares as
required by Section 10 of the 1933 Act is not on file with the Securities and
<PAGE>
Exchange Commission; provided, however, that nothing contained in this
paragraph (g) shall in any way restrict the Trust's obligation to repurchase
any Shares from any shareholder in accordance with the provisions of the
Trust's Prospectus or charter documents.
(h) Notwithstanding any provision hereof, the Trust may terminate, suspend
or withdraw the offering of Shares whenever, in its sole discretion, it deems
such action to be desirable.
2. Offering Price of Shares. All Shares sold under this Agreement shall be
sold at the public offering price per Share in effect at the time of the sale,
as described in the Prospectus. The excess, if any, of the public offering
price over the net asset value of the Shares sold by Distributor as agent, and
any contingent deferred sales charge applicable to Shares as set forth in the
Trust's Prospectus, shall be retained by Distributor as a commission for its
services hereunder. Out of such commission Distributor may allow commissions,
concessions or agency fees to dealers or other financial institutions,
including banks, and may allow them to others in its discretion in such amounts
as Distributor shall determine from time to time. Except as may be otherwise
determined by Distributor from time to time, such commissions, concessions or
agency fees shall be uniform to all dealers and other financial institutions.
At no time shall the Trust receive less than the full net asset value of the
Shares, determined in the manner set forth in the Prospectus and the Statement
of Additional Information. Distributor also may receive such compensation under
the Trust's Distribution Plan as may be authorized by the Trustees of the Trust
from time to time.
3. Furnishing of Information.
(a) The Trust shall furnish to Distributor copies of any information,
financial statements and other documents that Distributor may reasonably
request for use in connection with the sale of Shares under this Agreement. The
Trust shall also make available a sufficient number of copies of the Trust's
Prospectus and Statement of Additional Information for use by the Distributor.
(b) The Trust agrees to advise Distributor immediately in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to any registration statement concerning the Trust or to a
Prospectus or for additional information;
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of any such
<PAGE>
registration statement or Prospectus or the initiation of any proceeding
for that purpose;
(iii) of the happening of any event which makes untrue any statement
of a material fact made in any such registration statement or Prospectus
or which requires the making of a change in such registration statement or
Prospectus in order to make the statements therein not misleading; and
(iv) of all actions of the Securities and Exchange Commission with
respect to any amendments to any such registration statement or Prospectus
which may from time to time be filed with the Securities and Exchange
Commission.
4. Expenses.
(a) The Trust will pay or cause to be paid the following expenses:
compensation of Trustees who are not "interested persons" of the Trust;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Trust; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Trust,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of calculating the net asset value of the Trust
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
(b) Except as otherwise provided in this Agreement and except to the
extent such expenses are borne by the Trust pursuant to the Distribution Plan,
Distributor will pay or cause to be paid all expenses connected with its own
qualification as a dealer under state and federal laws and all other expenses
<PAGE>
incurred by Distributor in connection with the sale of Shares as contemplated
by this Agreement.
(c) Distributor shall prepare and deliver reports to the Trustees of the
Trust on a regular basis, at least quarterly, showing the expenditures with
respect to Shares pursuant to the Distribution Plan and the purposes therefor,
as well as any supplemental reports that the Trustees of the Trust, from time
to time, may reasonably request.
5. Repurchase of Shares. Distributor as agent and for the account of the
Trust may repurchase Shares offered for resale to it and redeem Shares at their
net asset value.
6. Indemnification by the Trust. In the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties
hereunder on the part of Distributor, the Trust agrees to indemnify
Distributor, its officers and directors, and any person which controls
Distributor within the meaning of the 1933 Act against any and all claims,
demands, liabilities and expenses that any such indemnified party may incur
under the 1933 Act, or common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the registration
statement for the Trust, any Prospectus or Statement of Additional Information,
or any advertisements or sales literature prepared by or on behalf of the Trust
for Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, unless such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor. Nothing herein contained shall require the Trust to take any
action contrary to any provision of its Declaration of Trust or any applicable
statute or regulation.
7. Indemnification by Distributor. Distributor agrees to indemnify the
Trust, its officers and Trustees and any person which controls the Trust within
the meaning of the 1933 Act against any and all claims, demands, liabilities
and expenses that any such indemnified party may incur under the 1933 Act, or
common law or otherwise, arising out of or based upon (i) any alleged untrue
statement of a material fact contained in the registration statement for the
Trust, any Prospectus or Statement of Additional Information, or any
advertisements or sales literature prepared by or on behalf of the Trust for
Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor; and (ii) any act or deed of Distributor or its sales
<PAGE>
representatives that has not been authorized by the Trust in any Prospectus or
Statement of Additional Information or by this Agreement.
8. Term and Termination.
(a) Unless terminated as herein provided, this Agreement shall continue in
effect until _________ __, 2001 and shall continue in full force and effect as
to Shares for successive periods of one year thereafter, but only so long as
each such continuance is approved (i) by either the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of Shares of the Trust, or (ii) by vote of a majority of the Trustees of
the Trust who are not parties to this Agreement or interested persons (as
defined in the 1940 Act) of any such party and who have no direct or indirect
financial interest in this Agreement or in the operation of the Distribution
Plan or in any agreement related thereto ("Independent Trustees"), cast at a
meeting called for the purpose of voting on such approval.
(b) This Agreement may be terminated as to the Trust on not less than
thirty days' nor more than sixty days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act).
9. Limitation of Liability. The obligations of the Trust hereunder shall
not be binding upon any of the Trustees, officers or shareholders of the Trust
personally, but shall bind only the assets and property of the Trust. The term
"CitiFunds Tax Free Reserves" means and refers to the Trustees from time to
time serving under the Declaration of Trust of the Trust, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement has been authorized by the Trustees, and this
Agreement has been signed on behalf of the Trust by an authorized officer of
the Trust, acting as such and not individually, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the assets and property of the
Trust as provided in the Declaration of Trust.
10. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts and the provisions of the 1940
Act.
<PAGE>
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CitiFunds Tax Free Reserves
By:_______________________________
CFBDS, Inc.
By:_______________________________
Exhibit h(2)
Form of
Amendment to Administrative Services Plan
CitiFunds Tax Free Reserves
_________ __, 2000
Pursuant to Section 9 of the Amended and Restated Administrative Services
Plan (the "Plan") of CitiFunds Tax Free Reserves (formerly, Landmark Tax Free
Reserves) (the "Trust"), dated as of August 20, 1985 and amended and restated
as of April 15, 1993, as amended, the Plan is hereby further amended by adding
the following new section to the end thereof:
"16. It is understood and agreed that the shares of each Fund may be
divided into classes, and, for each Fund whose shares are so divided into
classes, notwithstanding any other provision of this Plan:
(i) the Trust shall pay the Transfer Agent and each Shareholder
Servicing Agent, from the assets represented by each class of shares of
such Fund, such compensation as may from time to time be agreed by the
Trust and the Transfer Agent or such Shareholder Servicing Agent, as the
case may be, and such compensation may differ from class to class of such
Fund;
(ii) the aggregate fee limitation in Section 5 of this Plan shall be
calculated separately for each class of shares of such Fund, and for all
classes of shares other than Class N shares, the aggregate fee limitation
shall be calculated without regard to any fees payable under the
distribution or service plan of the Trust for such shares;
(iii) this Plan may be amended to increase materially the amount to
be expended from the assets of such Fund represented by a particular class
of shares, or terminated as to a particular class of shares, only by vote
of a "majority of the outstanding voting securities" of such class of such
Fund, or, in the case of termination, by vote of a majority of the
Qualified Trustees; and
(iv) the shares of any class of a Fund that includes the name
"CitiMarkets" in its designation shall not be subject to this Plan."
This Amendment was approved by a majority of the Trustees of the Trust and
the Qualified Trustees of the Trust (as defined in the Plan) at a meeting held
on May 5, 2000.
Exhibit j
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post Effective Amendment
No. 25 to Registration Statement No. 2-87509 of CitiFunds Tax Free Reserves and
Tax Free Reserves Portfolio of our reports each dated October 4, 1999, appearing
in the annual reports to shareholders for the year ended August 31, 1999 and to
the references to us under the headings "Financial Highlights" in the Prospectus
and "Independent Accountants and Financial Statements" in the Statement of
Additional Information, both of which are part of such Registration Statement.
Deloitte & Touche LLP
Boston, Massachusetts
May 2, 2000
Exhibit m(1)
FORM OF
AMENDED AND RESTATED
DISTRIBUTION PLAN
DISTRIBUTION PLAN, dated as of August 20, 1985 and amended and restated
effective as of ______ __, 2000, of CitiFunds Tax Free Reserves, a
Massachusetts business trust (the "Fund"). This Plan relates solely to shares
of beneficial interest of the Fund that are designated "Class N" ("Shares").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940
(collectively with the rules and regulations promulgated thereunder, the "1940
Act"); and
WHEREAS, the Fund intends to distribute the Shares of the Fund in
accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to
adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to
such Rule; and
WHEREAS, the Fund desires to engage CFBDS, Inc., a Massachusetts
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Fund desires to enter into a distribution agreement (in such
form as may from time to time be approved by the Board of Trustees of the Fund
in the manner specified in Rule 12b-1) with the Distributor, whereby the
Distributor will provide facilities and personnel and render services to the
Fund in connection with the offering and distribution of the Shares (the
"Distribution Agreement"); and
WHEREAS, the Board of Trustees, in considering whether the Fund should
adopt and implement this Plan, has evaluated such information as it deemed
necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of the Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Board of Trustees hereby adopts this Plan for the Fund
as a plan for distribution in accordance with Rule 12b-1, on the following
terms and conditions:
<PAGE>
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the offering and
sale of the Shares to customers of financial institutions which have entered
into shareholder servicing agreements with the Fund. Among other things, the
Distributor shall be responsible for all expenses of printing (excluding
typesetting) and distributing prospectuses to prospective shareholders and
providing such other related services as are reasonably necessary in connection
therewith.
2. The Distributor shall bear all distribution-related expenses described
in paragraph 1, including, without limitation, the compensation of personnel
necessary to provide such services and all costs of travel, office expenses
(including rent and overhead), equipment, printing, delivery and mailing costs.
3. As consideration for all services performed and expenses incurred in
the performance of its obligation under the Distribution Agreement, except in
connection with print or electronic media advertising, the Fund shall pay the
Distributor a distribution fee (the "Basic Distribution Fee") periodically at
an annual rate of 0.10% of the Funds average daily net assets for its
then-current fiscal year. The Fund shall pay the Distributor an additional fee
at an annual rate not to exceed 0.10% of the Fund's average daily net assets
for its then-current fiscal year in anticipation of, or as reimbursement for,
expenses incurred by the Distributor in connection with print or electronic
media advertising in connection with the sale of Shares.
4. The Fund shall pay all fees and expenses of any independent auditor,
legal counsel, administrator, transfer agent, custodian, shareholder servicing
agent, registrar or dividend disbursing agent of the Fund; expenses of
distributing and redeeming Shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Fund, except that the Distributor shall be responsible for
the expenses of printing (excluding typesetting) and distributing prospectuses
to prospective shareholders as provided in paragraphs 1 and 2 hereof; expenses
connected with the execution, recording and settlement of portfolio security
transactions; insurance premiums; expenses of calculating the net asset value
of Shares; expenses of shareholder meetings; and expenses relating to the
issuance, registration and qualification of Shares.
5. Nothing herein contained shall be deemed to require the Fund to take
any action contrary to its Articles of Incorporation or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
6. This Plan shall become effective upon (a) approval by a vote of at
least a majority of the outstanding voting securities of the Fund, and (b)
approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not interested persons of the Fund and who have no direct or
<PAGE>
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
7. This Plan shall continue in effect indefinitely; provided, however,
that such continuance is subject to annual approval by a vote of the Board of
Trustees and a majority of the Qualified Trustees, such votes to be cast in
person at a meeting called for the purpose of voting on continuance of this
Plan. If such annual approval is not obtained, this Plan shall expire on the
date which is 15 months after the date of the last approval.
8. This Plan may be amended at any time by the Board of Trustees of the
Fund, provided that (a) any amendment to increase materially the amount to be
spent for the services described herein shall be effective only upon approval
by a vote of a majority of the outstanding voting securities of the Fund, and
(b) any material amendment of this Plan shall be effective only upon approval
by a vote of the Board of Trustees and a majority of the Qualified Directors,
such votes to be cast in person at a meeting called for the purpose of voting
on such amendment. This Plan may be terminated at any time by vote of a
majority of the Qualified Trustees or by a vote of a majority of the
outstanding voting securities of the Fund.
9. The Fund and the Distributor each shall provide the Board of Trustees,
and the Board of Trustees shall review, at least quarterly, a written report of
the amounts expended under the Plan and the purposes for which such
expenditures were made.
10. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not interested persons of the Fund.
11. For the purposes of this Plan, the terms, interested persons and
majority of the outstanding voting securities are used as defined in the 1940
Act. In addition, for purposes of determining the fees payable to the
Distributor, the value of the Fund's net assets shall be computed in the manner
specified in the Fund's then-current prospectus for computation of the net
asset value of the Fund's Shares.
12. The Fund shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 9 hereof (collectively,
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such Record shall be kept in an easily
accessible place for the first two years of said record-keeping.
13. This Plan shall be construed in accordance with the laws of the
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
14. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
Exhibit m(2)
FORM OF
DISTRIBUTION PLAN
DISTRIBUTION PLAN, dated as of _________, 2000 of CitiFunds Tax Free
Reserves, a Massachusetts business trust (the "Trust"). This Plan relates
solely to shares of beneficial interest of the Trust which are designated
"CitiMarkets Tax Free Reserves" ("Shares").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust intends to distribute Shares in accordance with Rule
12b-1 under the 1940 Act, and wishes to adopt this Plan as a plan of
distribution pursuant to Rule 12b-1;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have
no direct or indirect financial interest in the operation of this Plan or in
any agreement relating hereto (the "NonInterested Trustees"), having
determined, in the exercise of reasonable business judgment and in light of
their fiduciary duties under state law and under Section 36(a) and (b) of the
1940 Act, that there is a reasonable likelihood that this Plan will benefit the
Trust and its shareholders, have approved this Plan by votes cast at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
NOW, THEREFORE, the Trust hereby adopts this Plan as a plan of
distribution in accordance with Rule 12b-1 under the 1940 Act, with the terms
of the Plan being as follows:
1. Distribution and Servicing Activities. Subject to the supervision of
the Trustees of the Trust, the Trust may:
(a) engage, directly or indirectly, in any activities primarily
intended to result in the sale of Shares of the Trust, which activities
may include, but are not limited to (i) payments to CFBDS, Inc., the
Trust's distributor (the "Distributor") for distribution services, (ii)
payments to securities dealers, financial institutions (which may include
banks) and others in respect of the sale of Shares, (iii) payments for
advertising, marketing or other promotional activity, and (iv) payments
<PAGE>
for preparation, printing, and distribution of prospectuses and statements
of additional information and reports of the Trust for recipients other
than regulators and existing shareholders of the Trust; and
(b) make payments, directly or indirectly, to the Trust's
Distributor, securities dealers, financial institutions (which may include
banks) and others for providing personal service and/or the maintenance of
shareholder accounts.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Maximum Expenditures. The expenditures to be made by the Trust pursuant
to this Plan and the basis upon which payment of such expenditures will be made
shall be determined by the Trustees of the Trust, but (a) in no event may such
expenditures for the purposes set forth in Section 1(a) above exceed an amount
calculated at the rate of 0.40% per annum of the average daily net assets
attributable to the Shares of the Trust, and (b) in no event may such
expenditures for the purposes set forth in Section 1(b) above exceed an amount
calculated at the rate of 0.10% per annum of the average daily net assets
attributable to the Shares of the Trust. Payments pursuant to this Plan may be
made directly by the Trust to the Distributor or to other persons with which
the Trust has entered into agreements related to this Plan. For purposes of
determining the fees payable under this Plan, the value of the Trust's average
daily net assets shall be computed in the manner specified in the Trust's
then-current prospectus and statement of additional information.
3. Trust's Expenses. The Trust shall pay all expenses of its operations,
including the following, and such expenses shall not constitute expenditures
under this Plan: organization costs of the Trust; compensation of Trustees;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Trust; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Trust,
<PAGE>
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of calculating the net asset value of the Trust
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
4. Term and Termination. (a) This Plan shall become effective upon (i)
approval by a vote of at least a majority of the outstanding voting securities
(as defined in the 1940 Act) of Shares of the Trust, and (ii) approval by a
majority of the Trustees of the Trust and a majority of the Non-Interested
Trustees cast in person at a meeting called for the purpose of voting on this
Plan. Unless terminated as herein provided, this Plan shall continue in effect
for one year from the date hereof and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both the Trustees of the Trust
and the Non-Interested Trustees, cast in person at a meeting called for the
purpose of voting on such approval.
(b) This Plan may be terminated at any time by a vote of a majority of the
NonInterested Trustees or by a vote of a majority of the outstanding voting
securities, as defined in the 1940 Act, of Shares of the Trust.
5. Amendments. This Plan may not be amended to increase materially the
maximum expenditures permitted by Section 2 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities, as
defined in the 1940 Act, of Shares of the Trust, and no material amendment to
this Plan shall be made unless approved in the manner provided for annual
renewal of this Plan in Section 4(a) hereof.
6. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of the Non-Interested Trustees of the Trust shall be
committed to the discretion of such Non-Interested Trustees.
7. Quarterly Reports. The Treasurer of the Trust shall provide to the
Trustees of the Trust and the Trustees shall review quarterly a written report
of the amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
8. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 7 hereof, for a
period of not less than six years from the date of this Plan. Any such related
<PAGE>
agreement or such reports for the first two years will be maintained in an
easily accessible place.
9. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
Exhibit n
CITIFUNDS TAX FREE RESERVES
FORM OF
MULTIPLE CLASS PLAN
MULTIPLE CLASS PLAN, dated as of _________ __, 2000, of CitiFunds Tax Free
Reserves, a Massachusetts business trust (the "Trust").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the shares of beneficial interest (without par value) of the
Trust (the "Shares") may be divided into one or more separate classes;
WHEREAS, the Trust desires to adopt this Multiple Class Plan (the "Plan")
as a plan pursuant to Rule 18f-3 in order that the Trust may issue multiple
classes of Shares;
WHEREAS, the Board of Trustees of the Trust, in considering whether the
Trust should adopt and implement this Plan, has evaluated such information and
considered such pertinent factors as it deemed necessary to an informed
evaluation of this Plan and determination as to whether this Plan should be
adopted and implemented, and has determined that the adoption and
implementation of this Plan, including the expense allocation contemplated
herein, are in the best interests of each class of Shares individually, as well
as the best interests of the Trust;
NOW THEREFORE, the Trust hereby adopts this Plan pursuant to Rule 18f-3
under the 1940 Act, on the following terms and conditions:
1. The Trust may issue Shares in one or more classes (each, a "Class" and
collectively, the "Classes"). Shares so issued will have the rights and
preferences set forth in the Establishment and Designation of Classes and the
Trust's then current registration statement.
2. Shares issued in Classes will be issued subject to and in accordance
with the terms of Rule 18f-3 under the 1940 Act, including, without limitation:
<PAGE>
(a) Each Class shall have a different arrangement for shareholder
services or the distribution of securities or both, and shall pay all of
the expenses of that arrangement;
(b) Each Class may pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred
in a different amount by that Class, or if the Class receives services of
a different kind or to a different degree than other Classes;
(c) Each Class shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement;
(d) Each Class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one Class differ from
the interests of any other Class; and
(e) Except as otherwise permitted under Rule 18f-3 under the 1940
Act, each Class shall have the same rights and obligations as each other
Class.
3. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Board of Trustees of the responsibility for
and control of the conduct of the affairs of the Trust.
4. This Plan shall become effective upon the later to occur of (a)
approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust (the "Qualified
Trustees"), and (b) ________ __, 2000.
5. This Plan shall continue in effect indefinitely unless terminated by a
vote of the Board of Trustees of the Trust. This Plan may be terminated by a
vote of the Board of Trustees of the Trust. This Plan supercedes any and all
other multiple class plans heretofore approved by the Board of Trustees of the
Trust.
6. This Plan may be amended at any time by the Board of Trustees of the
Trust, provided that any material amendment of this Plan shall be effective
only upon approval by a vote of the Board of Trustees of the Trust and a
majority of the Qualified Trustees.
<PAGE>
7. This Plan shall be construed in accordance with the laws of the
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
8. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
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
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
<PAGE>
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.
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
<PAGE>
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
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:
<PAGE>
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:
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
<PAGE>
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
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:
<PAGE>
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;
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):
<PAGE>
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:
(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.
<PAGE>
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:
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
<PAGE>
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
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;
<PAGE>
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;
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:
<PAGE>
(a) Is or has been held by the Fund; or
(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;
<PAGE>
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
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);
<PAGE>
(iii) the price at which the transaction was effected;
(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.
<PAGE>
B. RECORDS
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
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
- -------------------------------------------------------------------------------
