As filed with the Securities and Exchange Commission on June 29, 1998
File Nos. 33-5819
811-5034
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE
AMENDMENT NO. 20*
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 21
CITIFUNDS TAX FREE INCOME TRUST**
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
21 MILK STREET, 5th FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 21 MILK STREET, 5th FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP,
150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on September 14,
1998, pursuant to paragraph (a) of Rule 485.
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* This filing relates only to shares of CitiFunds California Tax Free Income
Portfolio.
** Formerly, Landmark Tax Free Income Funds.
<PAGE>
<TABLE>
<CAPTION>
CITIFUNDS TAX FREE INCOME TRUST
(CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO)
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
N-1A
ITEM NO. N-1A ITEM LOCATION
PART A PROSPECTUS
<S> <C> <C>
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... Expense Summary
Item 3. Condensed Financial Information.............. Not Applicable
Item 4. General Description of Registrant............ Investment Information; General
Information; Appendix
Item 5. Management of the Fund....................... Management; Expenses
Item 5A. Management's Discussion of Fund Performance.. Not Applicable
Item 6. Capital Stock and Other Securities........... General Information; Voting and
Other Rights; Purchases;
Exchanges; Redemptions; Dividends
and Distributions; Tax Matters
Item 7. Purchase of Securities Being Offered......... Purchases; Exchanges; Redemptions
Item 8. Redemption or Repurchase..................... Purchases; Exchanges; Redemptions
Item 9. Pending Legal Proceedings.................... Not Applicable
STATEMENT OF
ADDITIONAL
PART B INFORMATION
Item 10. Cover Page................................... Cover Page
Item 11. Table of Contents............................ Table of Contents
Item 12. General Information and History.............. The Trust
Item 13. Investment Objectives and Policies........... Investment Objective and Policies
Item 14. Management of the Fund....................... Management
Item 15. Control Persons and Principal Holders of Management
Securities...................................
Item 16. Investment Advisory and Other Services....... Management
Item 17. Brokerage Allocation and Other Practices..... Portfolio Transactions
Item 18. Capital Stock and Other Securities........... Description of Shares, Voting
Rights and Liabilities
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................ Description of Shares, Voting
Rights and Liabilities;
Determination of Net Asset
Value; Valuation of
Securities; Additional
Redemption Information
Item 20. Tax Status................................... Certain Additional Tax Matters
Item 21. Underwriters................................. Management
Item 22. Calculation of Performance Data.............. Performance Information
Item 23. Financial Statements......................... Independent Accountants and
Financial Statements
</TABLE>
PART C Information required to be included in Part C is
set forth under the appropriate Item, so numbered,
in Part C to this Registration Statement.
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment to the Registrant's Registration Statement
on Form N-1A is being filed with respect to CitiFunds California Tax Free
Income Portfolio, a series of the Registrant.
<PAGE>
Prospectus September __, 1998
CitiFunds SM California Tax Free Income Portfolio
This Prospectus describes CitiFundsSM California Tax Free Income Portfolio, a
non-diversified mutual fund in the CitiFunds Family of Funds. Citibank, N.A. is
the investment manager.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated the date of this Prospectus (and incorporated by reference in
this Prospectus) has been filed with the Securities and Exchange Commission.
Copies of the Statement of Additional Information may be obtained without
charge, and further inquiries about the Fund may be made by contacting the
investor's Service Agent or by calling 1-800-625-4554. The Statement of
Additional Information and other related materials are available on the SEC's
Internet web site (http://www.sec.gov).
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Remember that shares of the Fund:
O ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary 3
Expense Summary 5
Investment Information 6
Risk Considerations 8
Valuation of Shares 10
Purchases 10
Exchanges 11
Redemptions 11
Dividends and Distributions 12
Management 13
Tax Matters 15
Performance Information 16
General Information 17
Appendix -- Permitted Investments and Investment Practices 20
<PAGE>
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFundsSM California Tax Free Income
Portfolio.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's investment objective is to
generate high levels of current income exempt from federal and California State
personal income taxes and preserve the value of its shareholders' investment.
The Fund invests primarily in municipal obligations that pay interest that is
exempt from federal income taxes.
INVESTMENT MANAGER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the
"Manager"), a wholly-owned subsidiary of Citicorp, is the investment manager.
Citibank and its affiliates manage more than $88 billion in assets worldwide.
CFBDS, Inc. ("CFBDS" or the "Distributor") is the distributor of shares of the
Fund. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the Fund
through a Service Agent on any day the New York Stock Exchange is open for
trading. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares are subject to a fee of up to
0.25% per annum of the Fund's average daily net assets for distribution, sales
and marketing and shareholder services. See "Purchases" and "Management --
Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of the CitiSelect(R) Portfolios
and certain other CitiFunds. See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid monthly. Net capital gains,
if any, are distributed annually. See "Dividends and Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares at net asset value. See "Dividends and
Distributions."
WHO SHOULD INVEST: The Fund is designed for investors seeking current income
that is exempt from federal and California State personal income taxes.
Investors should be willing to accept fluctuation in the price of shares of the
Fund and to bear the increased risk of an investment portfolio that is
concentrated in obligations of the State of California and its political
subdivisions.
RISK FACTORS: There can be no assurance that the Fund will achieve its
investment objective. The Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. As a result, an
investor's shares may be worth more or less at redemption than at the time of
purchase.
<PAGE>
The value of fixed income securities, including municipal obligations,
generally goes down when interest rates go up, and vice versa. Changes in
interest rates will generally cause bigger changes in the prices of longer-term
securities than in the prices of shorter-term securities.
Prices of fixed income securities also fluctuate based on changes in the actual
and perceived creditworthiness of issuers. The prices of lower rated securities
often fluctuate more than those of higher rated securities. Also, it is
possible that some issuers will be unable to make required payments on fixed
income securities held by the Fund.
The Fund is a non-diversified mutual fund, which means that it may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers. The Fund's investments are, under normal circumstances,
concentrated in municipal obligations of California issuers. As a result, the
Fund is more susceptible than more diversified funds to any single economic,
political or regulatory occurrence, and the Fund is particularly susceptible to
occurrences affecting California issuers.
Certain investment practices may also entail special risks. Investors should
read "Risk Considerations" for more information about risk factors.
<PAGE>
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and annual
operating expenses for shares of the Fund. For more information on costs and
expenses, see "Management" -- page 13 and "General Information -- Expenses" --
page 18.*
CITIFUNDS
CALIFORNIA
TAX FREE
INCOME
PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee waivers) (1)(3) 0.50%
12b-1 Fees (including service fees) (2) 0.25%
Other Expenses (after fee waivers
and reimbursements) (3) 0.05%
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Total Fund Operating Expenses (after
fee waivers and reimbursements) (3) 0.80%
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* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. The table shows the fees paid to various service
providers after giving effect to expected voluntary partial fee waivers.
There can be no assurance that the fee waivers reflected in the table will
continue at these levels. Because the Fund is newly organized, the
information in the expense table and the example below is estimated for the
current fiscal year.
(1) A combined fee for investment advisory and administrative services.
(2) 12b-1 distribution fees are asset-based sales charges. Long-term
shareholders in the Fund could pay more in sales charges than the economic
equivalent of the maximum front-end sales charges permitted by the National
Association of Securities Dealers, Inc.
(3) Absent fee waivers, management fees, other operating expenses and total
fund operating expenses would be 0.50%, 0.83% and 1.58%, respectively, as
revised to reflect the Fund's current fees and expense structure.
<PAGE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and redemption at the end of each period indicated
below:
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ONE THREE
CITIFUNDS CALIFORNIA TAX FREE INCOME YEAR YEARS
PORTFOLIO
-----------------------------
$8 $26
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The Example assumes that all dividends are reinvested and reflects certain
voluntary fee waivers. If the fee waivers were not made, the amounts in the
example would be $16 and $50, respectively. The assumption of a 5% annual
return is required by the Securities and Exchange Commission for all mutual
funds, and is not a prediction of the Fund's future performance. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE
FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE: The investment objective of the Fund is to generate high
levels of current income exempt from federal and California State personal
income taxes and preserve the value of its shareholders' investment.
The investment objective of the Fund may be changed by its Trustees without
approval by the Fund's shareholders, but shareholders will be given written
notice at least 30 days before any change is implemented. Of course, there can
be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES: The Fund seeks its objective by investing in debt
securities consisting primarily of obligations issued by state and municipal
governments and by other qualifying issuers ("Municipal Obligations") that pay
interest that is exempt from federal and California State personal income taxes
including the federal alternative minimum tax. Under normal circumstances at
least 80% of the Fund's assets will be invested in tax-exempt Municipal
Obligations.
The Fund may invest in Municipal Obligations paying interest that is exempt
from federal income taxes but subject to California State personal income
taxes. The Fund may also invest in short-term debt securities that pay interest
that is subject to federal and California State personal income taxes,
including those issued by companies, the U.S. Government or agencies of the
U.S. Government. Except for temporary defensive purposes, no more than 20% of
the Fund's net assets will be invested in debt securities that pay interest
subject to federal income tax or California State personal income taxes.
Municipal Obligations include municipal bonds, notes and commercial paper
issued by the states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions, agencies
<PAGE>
and instrumentalities, and obligations of other qualifying issuers. The Fund
may invest both in "general obligation" bonds, which are backed by the full
faith, credit and taxing power of the issuer, and in "revenue" bonds, which are
payable only from the revenues generated by a specific project or from another
specific revenue source. Municipal Obligations also include participations in
municipal leases.
The Fund will invest only in cash and in debt securities that either (i) carry
at least a Baa rating from Moody's Investors Service, Inc., or a BBB rating
from Standard & Poor's Ratings Group, or are considered by the Manager to be of
equivalent quality, (ii) are issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities, or (iii) are obligations (including
certificates of deposit, bankers' acceptances and repurchase agreements) of
banks with at least $1 billion of assets.
Securities rated Baa or BBB, while considered "investment grade," have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on securities rated Baa or BBB than is the case for
higher grade securities. Investors should review Appendix B to the Statement of
Additional Information for a description of credit ratings.
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years). For strategic purposes, however, the Fund may invest so that
the weighted average maturity of securities held by the Fund is under 10 years.
While long-term debt securities tend to generate a higher rate of current
income than short-term debt securities, the prices of long-term debt securities
generally fluctuate more in response to interest rate changes and other factors
than the prices of short-term debt securities. Therefore, investors in the Fund
should be willing to accept fluctuation in the price of shares of the Fund.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
TEMPORARY INVESTMENTS. During periods of unusual economic or market conditions
or for temporary defensive purposes or liquidity, the Fund may invest without
limit in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These investments may result in a lower yield than
would be available from investments with a lower quality or longer term and the
interest on these investments may be subject to tax.
OTHER PERMITTED INVESTMENTS. For more information regarding the Fund's
permitted investments and investment practices, see the Appendix -- Permitted
Investments and Investment Practices on page 20. The Fund will not necessarily
invest or engage in each of the investments and investment practices in the
Appendix but reserves the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a
list of specific investment restrictions which govern the investment policies
of the Fund, including a limitation that the Fund may borrow money from banks
<PAGE>
in an amount not to exceed 1/3 of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Except as otherwise
indicated, the Fund's investment objective and policies may be changed without
shareholder approval. If a percentage or rating restriction (other than a
restriction as to borrowing) is adhered to at the time an investment is made, a
later change in percentage or rating resulting from changes in the Fund's
securities will not be a violation of policy.
PORTFOLIO TURNOVER. Securities of the Fund will be sold whenever the Manager
believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The annual portfolio turnover rate is not expected to exceed 100%
during the current fiscal year. The amount of transaction costs and realization
of taxable capital gains will tend to increase as the level of portfolio
activity increases.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's
security transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible.
RISK CONSIDERATIONS
The risks of investing in the Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. The Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. This means that
an investor's shares may be worth more or less at redemption than at the time
of purchase.
INTEREST RATE RISK. The value of fixed income securities, including Municipal
Obligations, generally goes down when interest rates go up, and vice versa.
Furthermore, the value of fixed income securities may vary based on anticipated
or potential changes in interest rates. Changes in interest rates will
generally cause bigger changes in the prices of longer-term securities than in
the prices of shorter-term securities.
CREDIT RISK. Prices of fixed income securities fluctuate based on changes in
the actual and perceived creditworthiness of issuers. The prices of lower rated
securities often fluctuate more than those of higher rated securities. It is
possible that some issuers will be unable to make required payments on fixed
income securities held by the Fund.
"REVENUE" OBLIGATIONS. The Fund may invest in Municipal Obligations that are
payable only from the revenues generated from a specific project or from
another specific revenue source. The Fund may invest more than 25% of its
assets in (i) industrial revenue bonds issued to finance industrial projects,
and (ii) Municipal Obligations issued to finance housing, electrical utilities
and hospitals (although the Fund may not invest more than 25% of its assets at
any time in debt securities financing any one of housing, electrical utilities,
<PAGE>
or hospitals, considered as three separate categories). Projects may suffer
construction delays, increased costs or reduced revenues as a result of
political, regulatory, economic and other factors. As a result projects may not
generate sufficient revenues to pay principal and interest on Municipal
Obligations held by the Fund.
NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means
that it is not subject to any statutory restrictions under the Investment
Company Act of 1940 limiting the investment of its assets in one or relatively
few issuers (although certain diversification requirements are imposed by the
Internal Revenue Code). Since the Fund may invest a relatively high percentage
of its assets in the obligations of a limited number of issuers, the value of
shares of the Fund may be more susceptible to any single economic, political or
regulatory occurrence. The Fund is particularly susceptible to occurrences
affecting California issuers. The Fund also may invest 25% or more of its
assets in securities the issuers of which are located in the same state or the
interest on which is paid from revenues of similar type projects or that are
otherwise related in such a way that a single economic, business or political
development or change affecting one of the securities would also affect other
securities. Investors should consider the greater risk inherent in these
policies when compared with more diversified mutual funds.
CALIFORNIA SECURITIES. The Fund's investments are, under normal circumstances,
concentrated in Municipal Obligations of California issuers. Payment of
interest and principal of these securities is dependent on the continuing
ability of issuers in California to meet their obligations.
Investors in the Fund should consider carefully the special risks inherent in
investing in California Municipal Obligations. The State of California and
other issuers of California Municipal Obligations have experienced severe
financial difficulties. From 1990-1993, the State suffered through a severe
recession, the worst since the 1930's, heavily influenced by large cutbacks in
the defense/aerospace industries and military base closures and a major drop in
real estate construction. In December 1994, Orange County, California and its
pooled investment funds filed for protection under the federal Bankruptcy Code.
Orange County's financial difficulties could continue to adversely affect other
issuers and issuers of California Municipal Obligations. Since the start of
1994, California's economy has been recovering and growing steadily stronger,
to the point where the State's economic growth is outpacing the rest of the
nation. After having been downgraded in 1994 as the result of the financial
difficulties of the State of California, the credit ratings of certain of the
State's obligations have been upgraded by certain rating agencies. There can be
no assurance that the State's economic growth will continue or that credit
ratings on obligations of the State of California and other California
Municipal Obligations will not be downgraded again. Many of the Fund's
Municipal Obligations are likely to be obligations of California governmental
issuers which rely in whole or in part, directly or indirectly, on real
property taxes as a source of revenue.
"Proposition Thirteen" and similar California constitutional and statutory
amendments and initiatives in recent years have restricted the ability of
California taxing entities to increase real property tax revenues. Other
<PAGE>
initiative measures approved by California voters in recent years, through
limiting various other taxes, have resulted in a substantial reduction in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments. Investors in this Fund should consider the
greater risks inherent in the Fund's concentration in these securities when
compared with the safety that comes with a less geographically concentrated
investment portfolio. Further information is set forth in the Statement of
Additional Information.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund
may entail certain risks. These risks are in addition to risks described above
and are described in the Appendix. See the Appendix -- Permitted Investments
and Investment Practices on page 20.
VALUATION OF SHARES
Net asset value per share of the Fund is determined each day the New York Stock
Exchange is open for trading (a "Business Day"). This determination is made
once each day as of the close of regular trading on the Exchange (normally 4:00
p.m. Eastern time) by adding the market value of all securities and other
assets of the Fund, then subtracting the Fund's liabilities, and then dividing
the result by the number of the Fund's outstanding shares. The net asset value
per share is effective for orders received and accepted by the Transfer Agent
prior to its calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value.
PURCHASES
Shares of the Fund are offered continuously and may be purchased on any
Business Day at the public offering price. The public offering price is the net
asset value next determined after an order is transmitted to and accepted by
the Transfer Agent. The Fund and the Transfer Agent reserve the right to reject
any purchase order and to suspend the offering of Fund shares for a period of
time.
Shares may be purchased through certain financial institutions (which may
include banks), securities dealers and other industry professionals (called
Service Agents) that have entered into service agreements with the Distributor.
Service Agents may receive fees from the Distributor and/or the Fund. See
"Management -- Distribution Arrangements." Investors should contact their
Service Agents for information on purchases. Each Service Agent may establish
its own terms, conditions and charges with respect to services it offers to its
customers. Charges for these services may include fixed annual fees and account
maintenance fees. The effect of any such fees will be to reduce the net return
on the investment of customers of that Service Agent. Each Service Agent has
agreed to transmit to its customers who are shareholders of the Fund
appropriate prior written disclosure of any fees that it may charge them
directly. Each Service Agent is responsible for transmitting promptly orders of
its customers.
<PAGE>
From time to time the Distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Fund. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
EXCHANGES
Shares may be exchanged for shares of the CitiSelect Portfolios and certain
other CitiFunds, or may be acquired through an exchange of shares of those
funds.
Shareholders must place exchange orders through the Transfer Agent or, if they
are customers of a Service Agent, through their Service Agent, and may do so by
telephone if their account applications so permit. For more information on
telephone transactions see "Redemptions." All exchanges will be effected based
on the relative net asset values per share next determined after the exchange
order is received and accepted by the Transfer Agent. See "Valuation of
Shares." Shares of the Fund may be exchanged only after payment in federal
funds for the shares has been received by the Transfer Agent.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission rules, and is available only in those jurisdictions where such
exchanges legally may be made. See the Statement of Additional Information for
further details. An exchange is treated as a sale of the shares exchanged and
could result in taxable gain or loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the Fund on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. Investors should
consult their Service Agents for details. A redemption is treated as a sale of
the shares redeemed and could result in taxable gain or loss to the shareholder
making the redemption.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written
instructions in proper form (as determined by the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. Shareholders are responsible
for ensuring that a request for redemption is in proper form.
<PAGE>
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by
telephone, if their account applications so permit, by calling the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent. During
periods of drastic economic or market changes or severe weather or other
emergencies, shareholders may experience difficulties implementing a telephone
exchange or redemption. In such an event, another method of instruction, such
as a written request sent via an overnight delivery service, should be
considered. The Fund, the Transfer Agent and each Service Agent will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for his or her
name, address, telephone number, Social Security number, and account number. If
these or other reasonable procedures are not followed, the Fund, the Transfer
Agent or the Service Agent may be liable for any losses to a shareholder due to
unauthorized or fraudulent instructions. Otherwise, the shareholder will bear
all risk of loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds
normally on the next Business Day, but in any event within seven days. If a
shareholder requests redemption of shares which were purchased recently, the
Fund may delay payment until it is assured that good payment has been received.
In the case of purchases by check, this can take up to ten days. See
"Determination of Net Asset Value; Valuation of Securities; Additional
Redemption Information" in the Statement of Additional Information regarding
the Fund's right to pay the redemption price in kind with securities (instead
of cash).
Questions about redemption requirements should be referred to the Transfer
Agent or, for customers of a Service Agent, their Service Agent. The right of
any shareholder to receive payment with respect to any redemption may be
suspended or the payment of the redemption price postponed during any period in
which the New York Stock Exchange is closed (other than weekends or holidays)
or trading on the Exchange is restricted or if an emergency exists.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the Fund's net income from dividends and interest, if any,
is paid to its shareholders of record as a dividend monthly, on or about the
last day of each month.
The Fund's net realized short-term and long-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually, in December. The Fund
may also make additional distributions to its shareholders to the extent
necessary to avoid the application of the 4% non-deductible excise tax on
certain undistributed income and net capital gains of mutual funds.
A shareholder may elect to receive dividends and capital gains distributions in
either cash or additional shares of the Fund issued at net asset value.
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS: The Fund is supervised by the Board of Trustees of
CitiFunds Tax Free Income Trust. A majority of the Trustees are not affiliated
with Citibank. More information on the Trustees and officers of the Fund
appears under "Management" in the Statement of Additional Information.
INVESTMENT MANAGER: Citibank offers a wide range of banking and investment
services to customers across the United States and throughout the world, and
has been managing money since 1822. Its portfolio managers are responsible for
investing in money market, equity and fixed income securities. Citibank and its
affiliates manage more than $88 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp. Citibank also serves as investment adviser
to other registered investment companies. Citibank's address is 153 East 53rd
Street, New York 10043. Citicorp recently announced its intention to merge with
The Travelers Group. Completion of the merger is subject to the satisfaction of
certain conditions.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Fund pursuant to a Management Agreement with the Fund.
Citibank also provides certain administrative services to the Fund. These
administrative services include providing general office facilities and
supervising the overall administration of the Fund. Pursuant to a
sub-administrative services agreement with Citibank, the Distributor performs
such sub-administrative duties for the Fund as from time to time are agreed
upon by Citibank and the Distributor. The Distributor's compensation as
sub-administrator is paid by Citibank.
John C. Mooney, a Vice President of Citibank, is the manager of the Fund. Mr.
Mooney is a Senior Portfolio Manager responsible for managing tax-exempt fixed
income funds. He is also part of the team responsible for fixed-income
strategy, research and trading. Prior to joining Citibank in 1997, Mr. Mooney
served as a tax-exempt portfolio manager at SunAmerica for over three years and
also served as a tax-exempt portfolio manager at First Investors for three
years. His prior experience also includes positions at Alliance Capital
Management L.P. and The Boston Company.
MANAGEMENT FEES. For its services under the Management Agreement, Citibank
receives fees, which are accrued daily and paid monthly, of 0.50% of the Fund's
average daily net assets on an annualized basis for the Fund's then-current
fiscal year. Citibank may voluntarily agree to waive a portion of its
management fees.
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Citibank has informed
the Fund that, in making its investment decisions, it does not obtain or use
<PAGE>
material inside information in the possession of any division or department of
Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Fund. Citibank believes that its services
under the Management Agreement and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there is
no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or a Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for the
Fund. Securities may be held by a sub-custodian bank approved by the Trustees.
State Street also provides fund accounting services and calculates the daily
net asset value for the Fund. The principal business address of State Street is
225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: CFBDS, 21 Milk Street, 5th Floor, Boston, MA 02109
(telephone: (617) 423-1679), is the distributor of the Fund's shares. Under a
Service Plan which has been adopted in accordance with Rule 12b-1 under the
1940 Act, the Fund may pay monthly fees at an annual rate not to exceed 0.25%
of the average daily net assets of the Fund. These fees may be used to make
payments to the Distributor for distribution services and to Service Agents and
others as compensation for the sale of shares of the Fund, for advertising,
marketing or other promotional activity, and for preparation, printing and
distribution of prospectuses, statements of additional information and reports
for recipients other than regulators and existing shareholders. The Fund also
may make payments to the Distributor, Service Agents and others for providing
personal service or the maintenance of shareholder accounts. In those states
where CFBDS is not a registered broker-dealer, shares of the Fund are sold
through Signature Broker-Dealer Services, Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
<PAGE>
The Fund and the Distributor provide to the Trustees quarterly a written report
of amounts expended pursuant to the Service Plan and the purposes for which the
expenditures were made.
During the period they are in effect, the Service Plan and related Distribution
Agreement obligate the Fund to pay fees to the Distributor, Service Agents and
others as compensation for their services, not as reimbursement for specific
expenses incurred. Thus, even if these entities' expenses exceed the fees
provided for under the Service Plan, the Fund will not be obligated to pay more
than those fees and, if their expenses are less than the fees paid to them,
they will realize a profit. The Fund will pay the fees to the Distributor,
Service Agents and others until the Service Plan or Distribution Agreement is
terminated or not renewed. In that event, the Distributor's or Service Agent's
expenses in excess of fees received or accrued through the termination date
will be the Distributor's or Service Agent's sole responsibility and not
obligations of the Fund.
TAX MATTERS
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
FEDERAL INCOME TAXES: The Fund intends to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies so that it will not
be liable for any federal income or excise taxes.
The Fund expects that most of its net income will be attributable to tax-exempt
Municipal Obligations, and, as a result, most of the Fund's dividends to
shareholders will be excludable from shareholders' gross income. However, the
Fund may invest from time to time in taxable securities, and certain Fund
dividends may be subject to the federal alternative minimum tax. Distributions
of capital gains on the sale or other disposition of Fund investments are also
taxable to Fund shareholders. Generally, distributions of short-term net
capital gains will be taxed as ordinary income, and distributions of long-term
net capital gains will be taxed as such regardless of how long the shares of
the Fund have been held. Such capital gains may be taxable to shareholders that
are individuals, estates or trusts at maximum rates of 20%, 25%, or 28%
depending upon the source of the gains. Dividends and distributions are treated
in the same manner for federal tax purposes whether they are paid in cash or as
additional shares.
Any gains realized by a shareholder on the sale or redemption of Fund shares
are subject to tax. If Fund shares are redeemed after tax-exempt income has
accrued but not yet been declared as a dividend, the portion of redemption
proceeds representing that income may be taxed as a capital gain even though it
would have been tax-exempt if it had been declared as a dividend prior to
redemption. In addition, any short-term capital loss realized upon the
redemption of Fund shares within six months of their purchase is disallowed to
the extent of any dividends of tax-exempt income received during that period.
<PAGE>
Fund dividends of tax-exempt income are taken into account in determining the
amount of a shareholder's social security and railroad retirement benefits that
may be subject to federal income tax. No deduction may be claimed for interest
on indebtedness incurred or carried for the purpose of purchasing or holding
Fund shares. Investors who are, or are related to, "substantial users" of
facilities financed by private activity bonds should consult their tax advisers
before buying Fund shares.
By January 31 of each year, the Fund will notify its shareholders of the amount
and tax status of distributions paid to shareholders for the preceding year.
STATE AND LOCAL TAXES: California Taxes. Under existing California law, as long
as at the end of each quarter of the Fund's fiscal 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 assets consist
of California Municipal Obligations, shareholders of the Fund will be able to
exclude from income, for California State personal income tax purposes,
dividends received from the Fund which are derived from income (less related
expenses) from the California Municipal Obligations of the Fund. These
dividends must be designated as such by the Fund by written notice to
shareholders within 60 days after the close of the fiscal year.
The foregoing description is a general, abbreviated summary that relates solely
to the taxation of shareholders subject to California State personal income
tax. 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.
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, and the value of the Fund's shares when redeemed may be more or
less than their original cost.
The Fund may provide its period and average annualized "total rates of return"
and "tax equivalent total rates of return." The "total rate of return" refers
to the change in the value of an investment in the Fund over a stated period,
reflects any change in net asset value per share and is compounded to include
the value of any shares purchased with any dividends or capital gains declared
during such period. Period total rates of return may be "annualized." An
"annualized" total rate of return assumes that the period total rate of return
is generated over a one-year period. The "tax equivalent total rate of return"
refers to the total rate of return that a fully taxable mutual fund would have
to generate in order to produce an after-tax total rate of return equivalent to
that of the Fund. The use of a tax equivalent total rate of return allows
<PAGE>
investors to compare the total rates of return of the Fund, the dividends from
which are expected to be mostly exempt from federal income taxes and from
California State personal income taxes, with the total rates of return of funds
the dividends from which are not so tax-exempt.
The Fund may provide annualized "yield," "effective yield" and "tax equivalent
yield" quotations. The "yield" of the Fund refers to the income generated by an
investment in the Fund over a 30-day or one month period (which period is
stated in any such advertisement or communication). This income is then
annualized; that is, the amount of income generated by the investment over that
period is assumed to be generated each month over a one-year period and is
shown as a percentage of the public offering price on the last day of that
period. The "effective yield" is calculated similarly, but when annualized the
income earned by the investment during that 30-day or one month period is
assumed to be reinvested. The effective yield is slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The "tax
equivalent yield" refers to the yield that a fully taxable fund would have to
generate in order to produce an after-tax yield equivalent to that of the Fund.
The use of a tax equivalent yield allows investors to compare the yield of the
Fund, the dividends from which are expected to be mostly exempt from federal
income taxes and from California State personal income taxes, with yields of
funds the dividends from which are not so tax exempt. A "yield" quotation,
unlike a total rate of return quotation, does not reflect changes in net asset
value.
Of course, any fees charged by a shareholder's Service Agent will reduce that
shareholder's net return on his or her investment. See the Statement of
Additional Information for more information concerning the calculation of yield
and total rate of return quotations for the Fund.
GENERAL INFORMATION
ORGANIZATION: The Fund is a series of CitiFunds Tax Free Income Trust, a
Massachusetts business trust that was organized on May 27, 1986. The Trust is
also an open-end management investment company registered under the 1940 Act.
Prior to March 2, 1998 CitiFunds Tax Free Income Trust was called Landmark Tax
Free Income Funds.
The Fund is a non-diversified mutual fund, which means that it is not limited
by the 1940 Act in the proportion of its assets that may be invested in the
obligations of a single issuer. The Fund intends, however, to comply with
diversification requirements imposed on mutual funds by the Internal Revenue
Code.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
INVESTMENT STRUCTURE: The Fund currently invests directly in securities.
However, in the future, the Fund may invest in securities indirectly through
<PAGE>
one or more investment companies, to the extent permitted by applicable law.
Shareholder approval is not needed to change the Fund's investment structure.
VOTING AND OTHER RIGHTS: CitiFunds Tax Free Income Trust may issue an unlimited
number of shares, may create new series of shares and may divide shares in each
series into classes. Each share of the Fund gives the shareholder one vote in
Trustee elections and other matters submitted to shareholders for vote. All
shares of each series of CitiFunds Tax Free Income Trust have equal voting
rights except that, in matters affecting only a particular series or class,
only shares of that particular series or class are entitled to vote.
At any meeting of shareholders of the Fund, a Service Agent may vote any shares
of which it is the holder of record and for which it does not receive voting
instructions proportionately in accordance with the instructions it receives
for all other shares of which that Service Agent is the holder of record.
As a Massachusetts business trust, CitiFunds Tax Free Income Trust is not
required to hold annual shareholder meetings. Shareholder approval will usually
be sought only for changes in the Fund's fundamental investment restrictions
and for the election of Trustees under certain circumstances. Trustees may be
removed by shareholders under certain circumstances. Each share of the Fund is
entitled to participate equally in dividends and other distributions and the
proceeds of any liquidation of the Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
EXPENSES: In addition to amounts payable under the Management Agreement and
Service Plan, the Fund is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of
Trustees that are not affiliated with Citibank or the Distributor, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
YEAR 2000: The Fund could be adversely affected if the computer systems used by
the Fund or its service providers are not programmed to accurately process
information on or after January 1, 2000. The Fund, and its service providers,
are making efforts to resolve any potential Year 2000 issues. While it is
likely that these efforts will be successful, the failure to implement any
necessary modifications to computer systems used by the Fund or its service
providers could result in an adverse impact on the Fund.
COUNSEL AND INDEPENDENT AUDITORS: Bingham Dana LLP, 150 Federal Street, Boston,
MA 02110, is counsel for the Fund. Deloitte & Touche LLP, 125 Summer Street,
Boston, MA 02110, are the independent auditors for the Fund.
<PAGE>
----------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Fund, including information related to (i)
investment policies and restrictions, (ii) the Trustees, officers and
investment manager, (iii) securities transactions, (iv) the Fund's shares,
including rights and liabilities of shareholders, (v) the method used to
calculate performance information and (vi) the determination of net asset
value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. This Prospectus does not
constitute an offering by the Fund or its distributor in any jurisdiction in
which such offering may not lawfully be made.
<PAGE>
APPENDIX
PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities,
municipalities, municipal agencies and authorities and other qualifying issuers
which generally have a maturity at the time of issue 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, the PABs or the participation
certificates in PABs purchased by the Fund may have liquidity because they
generally will be supported by demand features to "high quality" banks,
insurance companies or other financial institutions.
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. Most 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 principal and interest of the maturing notes will be paid out of proceeds
from notes or bonds to be issued concurrently or at a later date. 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.
PARTICIPATIONS IN MUNICIPAL LEASES. 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 of 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
<PAGE>
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.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. Variable rate
instruments provide for a periodic adjustment in the interest rate paid on the
instrument and usually permit the holder to receive payment of principal and
accrued interest upon a specified number of day's notice. The Fund may invest
in participation interests in Municipal Obligations owned by a bank, insurance
company or other financial institution or affiliated organization
("Participation Interests"). A variable rate instrument or a Participation
Interest may be backed by an irrevocable letter of credit or guarantee of, or a
right to put to, a bank, or an insurance policy of an insurance company. See
"Stand-by Commitments." Purchase of a Participation Interest may involve the
risk that the 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. If interest rates rise or fall, the
rates payable on variable rate instruments will generally be readjusted. As a
result variable rate instruments do not offer the same opportunity for capital
appreciation or loss as fixed rate instruments.
STAND-BY COMMITMENTS. When the Fund purchases Municipal Obligations it may also
acquire stand-by commitments from banks or broker-dealers with respect to the
Municipal Obligations. Under a 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 with
respect to a particular Municipal Obligation. The Fund intends to acquire
stand-by commitments solely to facilitate liquidity. Stand-by commitments are
subject to certain risks, which include the ability of the issuer of the
commitment to pay for the Municipal Obligations at the time the commitment is
exercised, the fact that the commitment is not marketable, and the fact that
the maturity of the underlying security will generally be different from that
of the commitment. In some cases it may not be possible to exercise rights
under a stand-by commitment when the underlying Municipal Obligation is in
default.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. Repurchase agreements are
transactions in which an institution sells the Fund a security at one price,
subject to the Fund's obligation to resell and the selling institution's
obligation to repurchase that security at a higher price normally within a
seven day period. There may be delays and risks of loss if the seller is unable
to meet its obligation to repurchase. Repurchase agreements may involve
Municipal Obligations and other securities.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When the Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
<PAGE>
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, the Fund may lend its
portfolio securities to broker-dealers and other institutional borrowers. Such
loans must be callable at any time and continuously secured by collateral (cash
or U.S. Government securities) in an amount not less than the market value,
determined daily, of the securities loaned. It is intended that the value of
securities loaned by the Fund would not exceed 30% of the Fund's total assets.
In the event of the bankruptcy of the other party to a securities loan, a
repurchase agreement or a reverse repurchase agreement, the Fund could
experience delays in recovering either the securities or cash. To the extent
that, in the meantime, the value of the securities loaned or sold has increased
or the value of the securities purchased has decreased, the Fund could
experience a loss.
RULE 144A SECURITIES. The Fund may purchase restricted securities that are not
registered for sale to the general public. If the Manager determines that there
is a dealer or institutional market in the securities, the securities will not
be treated as illiquid for purposes of the Fund's investment limitations. The
Trustees will review these determinations. These securities are known as "Rule
144A securities," because they are traded under SEC Rule 144A among qualified
institutional buyers. Institutional trading in Rule 144A securities is
relatively new, and the liquidity of these investments could be impaired if
trading in Rule 144A securities does not develop or to the extent qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 10% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
COMMERCIAL PAPER. The Fund may invest in commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, the Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
<PAGE>
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and regulatory
limitations, assets of the Fund may be invested in shares of other investment
companies.
FUTURES CONTRACTS. The Fund may use financial futures in order to protect
itself from fluctuations in interest rates (sometimes called "hedging") without
actually buying or selling debt securities, or to manage the effective maturity
or duration of fixed-income securities in the Fund's portfolio in an effort to
reduce potential losses or enhance potential gain. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a security at a specified future time and price, or for making
payment of a cash settlement based on changes in the value of a security or an
index of securities. Because the value of a futures contract changes based on
the price of the underlying security, futures contracts are commonly referred
to as "derivatives." Futures contracts are a generally accepted part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. The futures contracts that may be purchased by the
Fund are standardized contracts traded on commodities exchanges or boards of
trade.
When the Fund purchases or sells a futures contract, it is required to make an
initial margin deposit. Although the amount may vary, initial margin can be as
low as 1% or less of the face amount of the contract. Additional margin may be
required as the contract fluctuates in value. Since the amount of margin is
relatively small compared to the value of the securities covered by a futures
contract, the potential for gain or loss on a futures contract is much greater
than the amount of the Fund's initial margin deposit. The Fund does not
currently intend to enter into a futures contract if, as a result, the initial
margin deposits on all of the Fund's futures contracts would exceed
approximately 5% of the Fund's net assets. Also, the Fund intends to limit its
futures contracts so that the value of the securities covered by its futures
contracts would not generally exceed 50% of the Fund's total assets other than
its futures contracts and to segregate sufficient assets to meet its
obligations under outstanding futures contracts. In any event, the Fund will
not invest in futures contracts to the extent that the investment would be
inconsistent with the Fund's investment policies which provide that, under
normal circumstances, the Fund will invest at least 80% of its assets in
tax-exempt Municipal Obligations.
The ability of the Fund to utilize futures contracts successfully will depend
on the Manager's ability to predict interest rate movements, which cannot be
assured. In addition to general risks associated with any investment, the use
of futures contracts entails the risk that, to the extent the Manager's view as
to interest rate movements is incorrect, the use of futures contracts, even for
hedging purposes, could result in losses greater than if they had not been
used. This could happen, for example, if there is a poor correlation between
<PAGE>
price movements of futures contracts and price movements in the Fund's related
portfolio position. Also, although the Fund will purchase only standardized
futures traded on regulated exchanges, the futures markets may not be liquid in
all circumstances. As a result, in certain markets, the Fund might not be able
to close out a transaction without incurring substantial losses, if at all.
When futures contracts are used for hedging, even if they are successful in
minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result
from an increase in value of such position.
The use of futures contracts potentially exposes the Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases the Fund's potential for
both gain and loss. As noted above, the Fund intends to adhere to certain
policies relating to the use of futures contracts, which should have the effect
of limiting the amount of leverage by the Fund. The use of futures contracts
may increase the amount of taxable income of the Fund and may affect in other
ways the amount, timing and character of the Fund's income for tax purposes, as
more fully discussed in the section entitled "Certain Additional Tax Matters"
in the Statement of Additional Information.
The use of futures by the Fund and some of their risks are described more fully
in the Statement of Additional Information.
SHORT SALES "AGAINST THE BOX." In a short sale, the Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The Fund may engage in short sales only if at the time of
the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." The Fund may make a short sale as a
hedge, when it believes that the value of a security owned by the Fund (or a
security convertible or exchangeable for such security) may decline. Not more
than 40% of the Fund's total assets would be involved in short sales "against
the box."
<PAGE>
Statement of
Additional Information
September __, 1998
CITIFUNDSSM CALIFORNIA TAX FREE INCOME PORTFOLIO
CITIFUNDSSM CALIFORNIA TAX FREE INCOME PORTFOLIO (THE "FUND") IS A SERIES
OF CITIFUNDS TAX FREE INCOME TRUST (THE "TRUST"). THE ADDRESS AND TELEPHONE
NUMBER OF THE TRUST ARE 21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109,
(617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, CITIBANK,
N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
1. The Trust............................................................. 2
2. Investment Objective and Policies..................................... 2
3. Description of Permitted Investments and Investment Practices......... 2
4. Investment Restrictions............................................... 8
5. Performance Information............................................... 9
6. Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information..................................... 10
7. Management............................................................ 11
8. Portfolio Transactions................................................ 17
9. Description of Shares, Voting Rights and Liabilities.................. 18
10. Certain Additional Tax Matters........................................ 19
11. Independent Accountants and Financial Statements...................... 21
Appendix A -- Description of Municipal Obligations......................... 22
Appendix B -- Description of Securities Ratings............................ 24
Appendix C -- Additional Information Concerning California
Municipal Obligations...................................................... 28
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the Fund's
Prospectus, dated September __, 1998. This Statement of Additional Information
should be read in conjunction with the Prospectus, copies of which may be
obtained by an investor without charge by calling 1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Tax Free Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on May 27, 1986. The Trust was called
Landmark New York Tax Free Income Fund until its name was changed to Landmark
Tax Free Income Funds effective October 21, 1993. Effective March 2, 1998, the
Trust's name was changed to CitiFunds Tax Free Income Trust. This Statement of
Additional Information describes CitiFunds California Tax Free Income Portfolio
(the "Fund"), which is a non-diversified separate series of the Trust.
References in this Statement of Additional Information to the "Prospectus" are
to the Fund's Prospectus dated September __ 1998.
Citibank, N.A. ("Citibank" or the "Manager") is the manager of the Fund.
Citibank manages the investments of the Fund from day to day in accordance with
the Fund's investment objective and policies. The selection of investments for
the Fund and the way they are managed depend on the conditions and trends in
the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Fund. Shares of the Fund are continuously sold by CFBDS, Inc.,
the Fund's distributor ("CFBDS" or the "Distributor"). Shares of the Fund are
sold at net asset value. CFBDS may receive distribution fees from the Fund
pursuant to a Service Plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to generate high levels of current
income exempt from federal and California State personal income taxes and
preserve the value of its shareholders' investment. The Fund invests primarily
in municipal obligations that pay interest that is exempt from federal income
taxes.
The investment objective of the Fund may be changed without approval by the
Fund's shareholders, but shareholders will be given written notice at least 30
days before any change is implemented. Of course, there can be no assurance
that the Fund will achieve its investment objective.
As a fundamental policy, the Trust seeks to achieve the investment
objective of the Fund by investing in debt obligations consisting primarily
(i.e., at least 80% of its assets under normal conditions) of municipal bonds
and notes and other debt instruments the interest on which is exempt from
federal and California State personal income taxes. These obligations are
issued primarily by the State of California, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities.
The Fund's investment policies are described in "Investment Information -
Investment Policies" in the Prospectus.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The following supplements the information contained in the Prospectus
concerning the investment objectives, policies and techniques of the Fund. For
a general discussion of Municipal Obligations and the risks associated with
<PAGE>
investment therein, see Appendix A to this Statement of Additional Information.
In determining the tax status of interest on Municipal Obligations, the Manager
relies on opinions of bond counsel who may be counsel to the issuer.
FUTURES CONTRACTS
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts have been
designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when the Fund purchases
or sells a futures contract. At the same time such a purchase or sale is made,
the Fund must provide cash or securities as a deposit ("initial deposit") known
as "margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant
to such a contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than the
specific security that provides the standard for the contract. In some (but not
many) cases, securities called for by a futures contract may not have been
issued when the contract was entered into.
The Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity
or duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as if the Fund sold bonds that it owned, or as if the Fund sold
longer-term bonds and purchased shorter-term bonds. If interest rates did
increase, the value of the Fund's debt securities would decline, but the value
of the futures contracts would increase, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Similar results
could be accomplished by selling bonds, or by selling bonds with longer
maturities and investing in bonds with shorter maturities. However, by using
futures contracts, the Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, the Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
<PAGE>
Although the use of futures for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position (e.g., if the Fund
sells a futures contract to protect against losses in the debt securities held
by the Fund), at the same time the futures contracts limit any potential gain
which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of the
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the debt securities underlying such
contracts correlate with movements in the value of the Fund's securities. If
the security underlying a futures contract is different than the security being
hedged, they may not move to the same extent or in the same direction. In that
event, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by gains
on the Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund's other
investments. It is also possible that there may be a negative correlation
between the security underlying a futures contract and the securities being
hedged, which could result in losses both on the hedging transaction and the
securities. In these and other instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, even
where the Fund enters into futures transactions other than for hedging
purposes, the effectiveness of its strategy may be affected by lack of
correlation between changes in the value of the futures contracts and changes
in value of the securities which the Fund would otherwise buy and sell.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures
contracts was originally entered into. While the Fund will establish a futures
position only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular futures
contract at any specific time. In that event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the futures contract or to meet ongoing
variation margin requirements. The inability to close out futures positions
also could have an adverse impact on the ability effectively to use futures
transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract during
a single trading day and prohibit trading beyond such limits once they have
been reached. The trading of futures contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the Manager's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance may be poorer than if any such contract had not
been entered into. For example, if the Fund hedged against the possibility of
an increase in interest rates which would adversely affect the price of the
<PAGE>
Fund's bonds and interest rates decrease instead, part or all of the benefit of
the increased value of the Fund's bonds which were hedged will be lost because
the Fund will have offsetting losses in its futures positions. Similarly, if
the Fund purchases futures contracts expecting a decrease in interest rates and
interest rates instead increased, the Fund will have losses in its futures
positions which will increase the amount of the losses on the securities in its
portfolio which will also decline in value because of the increase in interest
rates. In addition, in such situations, if the Fund has insufficient cash, the
Fund may have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Manager
does not believe that these trading and position limits would have an adverse
impact on the Fund's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that the Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit the Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions)
if, immediately thereafter, the sum of the amount of initial margin required to
establish the Fund's non-hedging futures positions would exceed 5% of the
Fund's net assets.
The Fund will comply with this CFTC requirement, and the Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by the Fund in a segregated
account with the Fund's custodian so that the amount so segregated, plus the
initial margin held on deposit, will be approximately equal to the amount
necessary to satisfy the Fund's obligations under the futures contract. The
second is that the Fund will not enter into a futures contract if immediately
thereafter the amount of initial margin deposits on all the futures contracts
held by the Fund would exceed approximately 5% of the net assets of the Fund.
The third is that the aggregate market value of the futures contracts held by
the Fund not generally exceed 50% of the market value of the Fund's total
assets other than its futures contracts. For purposes of this third policy,
"market value" of a futures contract is deemed to be the amount obtained by
multiplying the number of units covered by the futures contract times the per
unit price of the securities covered by that contract. Finally, the Fund will
not invest in futures contracts to the extent that such investment would be
inconsistent with the Fund's investment policies which provide that, under
normal circumstances, the Fund will invest at least 80% of its assets in
Municipal Obligations exempt from federal and California State personal income
taxes including the federal alternative minimum tax.
The use of futures contracts may increase the amount of taxable income of
the Fund and may affect the amount, timing and character of the Fund's income
for tax purposes, as more fully discussed herein in the section entitled
"Certain Additional Tax Matters."
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Fund
would take delivery of such securities. When the Fund commits to purchase a
security on a "when-issued" or on a "forward delivery" basis, it sets up
procedures consistent with Securities and Exchange Commission ("SEC") policies.
Since those policies currently require that an amount of the Fund's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, the Fund expects always to have cash, cash equivalents,
<PAGE>
or high quality debt securities sufficient to cover any commitments or to limit
any potential risk. However, even though the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
SEC policies, purchases of securities on such bases may involve more risk than
other types of purchases. For example, the Fund may have to sell assets which
have been set aside in order to meet redemptions. Also, if the Manager
determines it is advisable as a matter of investment strategy to sell the
"when-issued" or "forward delivery" securities, the Fund would be required to
meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale
of the "when-issued" or "forward delivery" securities themselves (which may
have a value greater or less than the Fund's payment obligation).
FLOATING AND VARIABLE RATE OBLIGATIONS
The Fund may invest in floating and variable rate obligations. Floating or
variable rate obligations bear interest at rates that are not fixed, but vary
with changes in specified market rates or indices, such as the prime rate, and
at specified intervals. Certain of the floating or variable rate obligations
that may be purchased by the Fund may carry a demand feature that would permit
the holder to tender them back to the issuer at par value prior to maturity.
Such obligations include variable rate master demand notes, which are unsecured
instruments issued pursuant to an agreement between the issuer and the holder
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. The Fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. The Fund will monitor on an ongoing basis the ability of
an issuer of a demand instrument to pay principal and interest on demand. Some
of the demand instruments purchased by the Fund are not traded in a secondary
market and derive their liquidity solely from the ability of the holder to
demand repayment from the issuer or third party providing credit support. If a
demand instrument is not traded in a secondary market, the Fund will
nonetheless treat the instrument as 'readily marketable' for the purposes of
its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case
the instrument will be characterized as 'not readily marketable' and therefore
illiquid. The Fund's right to obtain payment at par on a demand instrument
could be affected by events occurring between the date the Fund elects to
demand payment and the date payment is due that may affect the ability of the
issuer of the instrument or third party providing credit support to make
payment when due, except when such demand instruments permit same day
settlement. To facilitate settlement, these same day demand instruments may be
held in book entry form at a bank other than the Fund's custodian subject to a
sub-custodian agreement approved by the Fund between that bank and the Fund's
custodian.
PARTICIPATION INTERESTS
The Trust may purchase from banks on behalf of the Fund participation
interests in all or part of specific holdings of Municipal Obligations. The
Trust has the right to sell the participation interest back to the bank and
draw on the letter of credit or guarantee for all or any part of the full
principal amount of the participation interest in the security, plus accrued
interest. In some cases, these rights 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 credit standards at the time of
purchase of the participation interests. Each participation interest is backed
by an irrevocable letter of credit or guarantee of the selling bank.
Participation interests will only be purchased if in the opinion of bond
counsel to the issuer interest income on such interests will be tax-exempt when
distributed as dividends to shareholders of the Fund. Participation interests
include municipal lease obligations which are deemed to be illiquid unless
otherwise determined by the Board of Trustees.
<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to generate
income, the Fund may lend its securities to broker-dealers and other
institutional borrowers. Such loans will usually be made only to member banks
of the U.S. Federal Reserve System and to member firms of the New York Stock
Exchange (and subsidiaries thereof). Loans of securities would be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. Either party has the right to terminate a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and with respect to cash collateral would
also receive compensation based on investment of the collateral (subject to a
rebate payable to the borrower). When the borrower provides the Fund with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Fund a fee for use of the borrowed securities. The Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail financially. However,
the loans would be made only to entities deemed by the Manager to be of good
standing, and when, in the judgment of the Manager, the consideration which can
be earned currently from loans of this type justifies the attendant risk. In
addition, the Fund could suffer loss if the borrower terminates the loan and
the Fund is forced to liquidate the investments in order to return the cash
collateral to the buyer. If the Manager determines to make loans, it is not
intended that the value of the securities loaned by the Fund would exceed 30%
of the value of its total assets.
RULE 144A SECURITIES
The Fund may purchase securities that are not registered ("Rule 144A
securities") under the Securities Act of 1933 (the "Securities Act"), but can
be offered and sold to "qualified institutional buyers" under Rule 144A under
the Securities Act. However, the Fund will not invest more than 10% of its net
assets in illiquid investments, which include securities for which there is no
readily available market, securities subject to contractual restrictions on
resale and Rule 144A securities, unless the Trustees of the Trust determine,
based on the trading markets for a specific Rule 144A security, that it is
liquid. The Trustees have adopted guidelines and delegated to the Manager the
daily function of determining and monitoring liquidity of Rule 144A securities.
The Trustees, however, retain oversight and are ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market
for Rule 144A securities will develop, the Trustees will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such factors, among
others, as valuation, liquidity and availability of information. The liquidity
of investments in Rule 144A securities could be impaired if trading in Rule
144A securities does not develop or if qualified institutional buyers become
for a time uninterested in purchasing Rule 144A securities.
SPECIAL FACTORS AFFECTING CALIFORNIA
The Trust intends to invest a high proportion of the Fund's assets in
Municipal Obligations of the State of California and its political
subdivisions, municipalities, agencies, instrumentalities and public
<PAGE>
authorities. 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.
The fiscal stability of the State of California 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.
For further information concerning California Municipal Obligations, see
Appendix C to this Statement of Additional Information. The summary set forth
above and in Appendix C is included for purposes of providing a general
description of California credit and financial conditions. This summary is
based on information from statements, including preliminary 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.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, has adopted the following policies which
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which, as used in this Statement of
Additional Information, means the lesser of (i) more than 50% of the
outstanding voting securities of the Fund, or (ii) 67% or more of the
outstanding voting securities of the Fund present at a meeting at which holders
of more than 50% of the Fund's outstanding voting securities are represented in
person or by proxy). The term "voting securities" as used in this paragraph has
the same meaning as in the 1940 Act.
The Fund may not:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes it may borrow in an amount not to
exceed 1/3 of the current value of its net assets, including the amount
borrowed or purchase any securities at any time at which borrowings
exceed 5% of the total assets of the Fund, taken at market value. It is
intended that the Fund would borrow money only from banks and only to
accommodate requests for the repurchase of shares of the Fund while
effecting an orderly liquidation of portfolio securities.
(2) Underwrite securities issued by other persons except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under
such Act, and except insofar as the Fund may technically be deemed an
underwriter under the Securities Act in selling a security.
(3) Make loans to other persons except (a) through the lending of
its portfolio securities and provided that any such loans not exceed
30% of the Fund's total assets (taken at market value), (b) through the
use of repurchase agreements or fixed time deposits or the purchase of
<PAGE>
short-term obligations, or (c) by purchasing all or a portion of an
issue of debt securities of types commonly distributed privately to
financial institutions. The purchase of short-term commercial paper or
a portion of an issue of debt securities which is part of an issue to
the public shall not be considered the making of a loan.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the foregoing
shall not be deemed to preclude the Fund from purchasing or selling
futures contracts or options thereon, and the Fund reserves the freedom
of action to hold and to sell real estate acquired as a result of the
ownership of securities by the Fund).
(5) Concentrate its investments in any particular industry, but if
it is deemed appropriate for the achievement of the Fund's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions
in futures contracts shall not be subject to this restriction.
(6) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder.
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 the principal of and interest on the security.
For purposes of restriction (5) above, industries such as telecommunications,
electric utilities and gas utilities will be treated as separate industries.
As an operating policy, the Fund will not invest more than 10% of its net
assets in securities for which there is no readily available market. This
policy is not fundamental and may be changed without shareholder approval.
If a percentage restriction on investment or utilization of assets set forth
above or referred to in the Prospectus is adhered to at the time an investment
is made or assets are so utilized, a later change in percentage resulting from
changes in the value of the securities held for the Fund is not considered a
violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for the Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such period
and with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share on the first day of
such period, and (b) subtracting 1 from the result. Any annualized total rate
of return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting
1 from the result.
<PAGE>
Any current yield quotation of the Fund consists of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a 30 calendar day or one month period and is calculated by (a) raising
to the sixth power the sum of 1 plus the quotient obtained by dividing the
Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the public offering price per share on the last day of
the period, (b) subtracting 1 from the result, and (c) multiplying the result
by 2.
Any tax equivalent yield quotation of the Fund is calculated as follows: If
the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield would be the current yield quotation divided by 1 minus a
stated income tax rate or rates. If a portion of the current yield quotation is
not tax-exempt, the tax equivalent yield would 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.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical Services,
Inc. and other industry sources and publications. From time to time the Fund
may compare its performance against inflation with the performance of other
instruments against inflation, such as FDIC-insured bank money market accounts.
In addition, advertising for the Fund may indicate that investors should
consider diversifying their investment portfolios in order to seek protection
of the value of their assets against inflation. From time to time, advertising
materials for the Fund may refer to or discuss current or past economic or
financial conditions, developments and events.
From time to time, the Fund may use hypothetical tax equivalent yields or
charts in its advertising. These hypothetical yields or charts will be used for
illustrative purposes only and are not indicative of the Fund's past or future
performance.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES;
ADDITIONAL REDEMPTION INFORMATION
The net asset value per share of the Fund is determined each day during
which the New York Stock Exchange is open for trading ("Business Day"). As of
the date of this Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays (or the days on which
they are observed): New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. This determination is made once each day as of the close of
regular trading on the Exchange (normally 4:00 p.m. Eastern time) by adding the
market value of all securities and other assets of the Fund, then subtracting
the liabilities of the Fund, and then dividing the result by the number of
outstanding shares of the Fund. The net asset value per share is effective for
orders received and accepted by the Transfer Agent prior to its calculation.
Bonds and other fixed income securities (other than short-term obligations)
held for the Fund are valued on the basis of valuations furnished by a pricing
service, use of which has been approved by the Board of Trustees. In making
such valuations, the pricing service utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed to
<PAGE>
reflect more accurately the fair value of such securities. Short-term
obligations (maturing in 60 days or less) are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Futures
contracts are normally valued at the settlement price on the exchange on which
they are traded. Securities for which there are no such valuations are valued
at fair value as determined in good faith by or at the direction of the Board
of Trustees.
Interest income on long-term obligations held for the Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premiums.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption or repurchase price of shares of the Fund,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a holder of shares received a distribution in kind,
such holder could incur brokerage or other charges in converting the securities
to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of the Fund more than seven days during any period when (a)
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of the Fund's investments or determination of its net asset value not
reasonably practicable; (b) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); or (c) the SEC has by order permitted
such suspension.
7. MANAGEMENT
The Trustees and officers of the Trust, their ages and their principal
occupations during at least the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust. Unless otherwise indicated below, the address of each Trustee and
officer is 21 Milk Street, 5th Floor, Boston, Massachusetts 02109.
Trustees
ELLIOTT J. BERV; 55 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE*; 47 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN; 55 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); Director, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
RILEY C. GILLEY; 72 -- Vice President and General Counsel, Corporate Property
Investors (November 1988 to December 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
<PAGE>
DIANA R. HARRINGTON; 58 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 47 -- President, Global Research Associates, Inc. (Investment
Research) (since August 1990); Manager, Rockefeller & Co. (March 1988 to July
1990); Trustee, Mainstay Institutional Funds (since December 1990). Her address
is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR.; 63 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Senior Vice
President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired, January 1993); Director, Indonesia Fund;
Director, MAS Funds. His address is 1385 Outlook Drive West, Mountainside, New
Jersey.
WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors)(since 1989);
Trustee of certain registered investment companies in the MFS Family of Funds.
His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 78 -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
Officers of the Trust
PHILIP W. COOLIDGE*; 47 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU*; 28 -- Assistant Secretary and Assistant Treasurer of
Trust; Assistant Vice President, Signature Financial Group, Inc. (since January
1996); Paralegal and Compliance Officer, various financial companies (July 1992
to January 1996); Graduate Student, Bentley College (prior to December 1994).
TAMIE EBANKS-CUNNINGHAM*; 25 -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (Since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her address
is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I.
JOHN R. ELDER*; 50 -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April 1995); Treasurer, CFBDS (since April 1995);
Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual Insurance
Company) (1983 to March 1995).
LINDA T. GIBSON*; 33 -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May 1992); Assistant Secretary, CFBDS (since
October 1992).
<PAGE>
JOAN R. GULINELLO*; 42 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc. (since October 1993);
Secretary, CFBDS (since October 1995); Vice President and Assistant General
Counsel, Massachusetts Financial Services Company (prior to October 1993).
JAMES E. HOOLAHAN*; 51 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Senior Vice President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI*; 34 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust (since August 1994); Vice President, Signature Financial
Group (Cayman) Ltd. (since August 1994); Fund Compliance Administrator, Concord
Financial Group (November 1990 to August 1994). Her address is Suite 193, 12
Church Street, Hamilton HM 11, Bermuda.
MOLLY S. MUGLER*; 46 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary,
CFBDS.
CLAIR TOMALIN*; 29 -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited (since 1993). Her address is 117
Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON*; 50 -- Assistant Secretary and Assistant Treasurer of the
Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER*; 39 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Vice President, Signature Financial Group, Inc.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which CFBDS, Signature Financial Group, Inc., or their
affiliates serve as distributor, administrator or sub-administrator.
The following table shows estimated Trustee compensation for the period
indicated:
<TABLE>
<CAPTION>
Trustee Compensation Table
Total
Pension or Compensation
Retirement Estimated from the
Benefits Annual Trust and
Aggregate Accrued as Part Benefits Fund Complex
Compensation of Fund Upon Paid to
from the Fund (1) Expenses Retirement Trustees(1)(2)
<S> <C> <C> <C> <C>
Elliott J. Berv $889 None None $57,000
Philip W. Coolidge $0 None None $0
Mark T. Finn $888 None None $54,000
Riley C. Gilley $891 None None $50,000
Diana R. Harrington $896 None None $57,000
Susan B. Kerley $892 None None $59,000
C. Oscar Morong, Jr. $900 None None $70,000
Walter E. Robb, III $889 None None $56,000
E. Kirby Warren $892 None None $50,000
William S. Woods, Jr. $896 None None $58,000
</TABLE>
(1) Information is estimated for the fiscal year ending December 31, 1998.
<PAGE>
(2) As of the date of this Statement of Additional Information, Messrs. Berv,
Coolidge, Finn, Gilley, Morong, Robb, Warren and Woods, and Mses.
Harrington and Kerley are Trustees of 33, 59, 28, 34, 32, 26, 31, 33, 32,
and 32 funds and portfolios, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.
As of the date of this Statement of Additional Information, there are no
outstanding shares of the Fund.
The Trust's Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust unless, as to liability to the Trust or its investors, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees of the Trust, or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
MANAGER
Citibank manages the assets of the Fund and provides certain administrative
services to the Trust pursuant to a management agreement (the "Management
Agreement"). Subject to such policies as the Board of Trustees of the Trust may
determine, Citibank manages the securities of the Fund and makes investment
decisions for the Fund. Citibank furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the Fund's
investments and effecting securities transactions for the Fund. The Management
Agreement with the Trust provides that Citibank may delegate the daily
management of the securities of the Fund to one or more subadvisers. The
Management Agreement with the Trust will continue in effect until August 7,
2000, and thereafter as long as such continuance is specifically approved at
least annually by the Board of Trustees of the Trust or by a vote of a majority
of the outstanding voting securities of the Fund, and, in either case, by a
majority of the Trustees of the Trust who are not parties to the Management
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Management Agreement.
Citibank provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's independent contractors
and agents; the preparation and filing of all documents required for compliance
by the Trust with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trust. Trustees, officers, and
investors in the Trust are or may be or may become interested in Citibank, as
directors, officers, employees, or otherwise and directors, officers and
employees of Citibank are or may become similarly interested in the Trust.
The Management Agreement provides that Citibank may render services to
others. The Management Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the Trust when authorized
either by a vote of a majority of the outstanding voting securities of the Fund
or by a vote of a majority of the Board of Trustees of the Trust, or by
Citibank on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. The Management
<PAGE>
Agreement with the Trust provides that neither Citibank nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of security
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence or reckless disregard of its or their obligations and duties under
the Management Agreement with the Trust.
The Prospectus contains a description of the fees payable to Citibank for
services under the Management Agreement. Citibank may reimburse the Fund for or
waive all or a portion of its management fees.
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust as from time to time are
agreed upon by Citibank and CFBDS. For performing such sub-administrative
services, CFBDS receives compensation as from time to time is agreed upon by
Citibank, not in excess of the amount paid to Citibank for its services under
the Management Agreement with the Trust. All such compensation is paid by
Citibank.
DISTRIBUTOR
CFBDS, 21 Milk Street, 5th Floor, Boston, Massachusetts 02109, serves as
the Distributor of the Fund's shares pursuant to a Distribution Agreement with
the Trust (the "Distribution Agreement"). Unless otherwise terminated the
Distribution Agreement will continue from year to year upon annual approval by
the Trust's Board of Trustees, or by the vote of a majority of the outstanding
voting securities of the Fund and by the vote of a majority of the Board of
Trustees of the Trust who are not parties to the Distribution Agreement or
interested persons of any party to the Distribution Agreement, cast in person
at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate in the event of its assignment, as
defined in the 1940 Act.
Under a Service Plan for shares of the Fund (the "Service Plan") which has
been adopted in accordance with Rule 12b-1 under the 1940 Act, the Fund may pay
monthly fees at an annual rate not to exceed 0.25% of the average daily net
assets of the Fund. Such fees may be used to make payments to the Distributor
for distribution services, to securities dealers and other industry
professionals (called Service Agents) that have entered into service agreements
with the Distributor and others in respect of the sale of shares of the Fund,
and to other parties in respect of the sale of shares of the Fund, and to make
payments for advertising, marketing or other promotional activity, and payments
for preparation, printing, and distribution of prospectuses, statements of
additional information and reports for recipients other than regulators and
existing shareholders. The Fund also may make payments to the Distributor,
Service Agents and others for providing personal service or the maintenance of
shareholder accounts. The Fund and the Distributor provide to the Trustees
quarterly a written report of amounts expended pursuant to Service Plan and the
purposes for which the expenditures were made.
The Service Plan obligates the Fund to pay fees to the Distributor, Service
Agents and others as compensation for their services, not as reimbursement for
specific expenses incurred. Thus, even if their expenses exceed the fees
provided for by the Service Plan for the Fund, the Fund will not be obligated
to pay more than those fees and, if their expenses are less than the fees paid
to them, they will realize a profit. The Fund will pay the fees to the
Distributor, Service Agents and others until the Service Plan or Distribution
Agreement is terminated or not renewed. In that event, the Distributor's or
Service Agent's expenses in excess of fees received or accrued through the
<PAGE>
termination date will be the Distributor's or Service Agent's sole
responsibility and not obligations of the Fund. In their annual consideration
of the continuation of the Service Plan for each of the series of the Trust,
the Trustees will review the Service Plan and the expenses for each series
separately.
From time to time the Distributor may make payments for distribution out of
its past profits or any other sources available to it.
The Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's Trustees
and a majority of the Trustees who are not "interested persons" of the Trust
and who have no direct or indirect financial interest in the operation of the
Service Plan or in any agreement related to the Plan (for purposes of this
paragraph "Qualified Trustees"). The Service Plan requires that the Trust and
the Distributor provide to the Board of Trustees, and the Board of Trustees
review, at least quarterly, a written report of the amounts expended (and the
purposes therefor) under the Service Plan. The Service Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of the disinterested Trustees (as defined in the 1940 Act) then in
office. The Service Plan may be terminated with respect to the Fund at any time
by a vote of a majority of the Trust's Qualified Trustees or by a vote of a
majority of the outstanding voting securities of the Fund. The Service Plan may
not be amended to increase materially the amount of the Fund's permitted
expenses thereunder without the approval of a majority of the outstanding
securities of the Fund and may not be materially amended in any case without a
vote of a majority of both the Trustees and Qualified Trustees. The Distributor
will preserve copies of any plan, agreement or report made pursuant to the
Service Plan for a period of not less than six years, and for the first two
years the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Service Plan, CFBDS acts as the agent of the Trust
in connection with the offering of shares of the Fund pursuant to the
Distribution Agreement. The Fund's Prospectus contains a description of fees
payable to the Distributor under the Distribution Agreement.
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents out of the
distribution fees received by the Distributor and out of the Distributor's past
profits or any other source available to it.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for the Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
the Fund. See "Transfer Agent, Custodian and Fund Accountant" in the Prospectus
for additional information.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110.
AUDITORS
Deloitte & Touche LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Deloitte & Touche LLP is
125 Summer Street, Boston, Massachusetts 02110.
<PAGE>
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, acts as
counsel for the Trust.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for the Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in the Fund's investments are made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of turnover is not
a limiting factor when changes are appropriate. Specific decisions to purchase
or sell securities for the Fund are made by a portfolio manager who is an
employee of Citibank and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of Citibank in a
similar capacity.
The primary consideration in placing portfolio securities transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Citibank attempts to achieve this result by selecting broker-dealers
to execute transactions on behalf of the Fund and other clients of Citibank on
the basis of their professional capability, the value and quality of their
brokerage services, and the level of their brokerage commissions. In the case
of securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or markdown),
Citibank normally seeks to deal directly with the primary market makers, unless
in its opinion, best execution is available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities generally
includes a fixed underwriting commission or concession. From time to time,
soliciting dealer fees are available to Citibank on the tender of the Fund's
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by Citibank. At present no other
recapture arrangements are in effect.
Under the Management Agreement, in connection with the selection of such
brokers or dealers and the placing of such orders, Citibank is directed to seek
for the Fund in its best judgment, prompt execution in an effective manner at
the most favorable price. Subject to this requirement of seeking the most
favorable price, securities may be bought from or sold to broker-dealers who
have furnished statistical, research and other information or services to
Citibank or the Fund, subject to any applicable laws, rules and regulations.
The management fee that the Fund pays to Citibank will not be reduced as a
consequence of Citibank's receipt of brokerage and research services. While
such services are not expected to reduce the expenses of Citibank, Citibank
would, through the use of the services, avoid the additional expenses which
would be incurred if it should attempt to develop comparable information
through its own staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for the Fund as well as for one or more of Citibank's other clients.
Investment decisions for the Fund and for Citibank's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. Some simultaneous transactions are inevitable when
<PAGE>
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could adversely affect the price of or the size of the
position obtainable in a security for the Fund. When purchases or sales of the
same security for the Fund and for other portfolios managed by Citibank occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large volume purchases or sales.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value)
of each series and to divide or combine the shares of any series into a greater
or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such series
into classes. The Trust has reserved the right to create and issue additional
series and classes of shares. Each share of the Fund represents an equal
proportionate interest in the Fund with each other share. Shares of each series
of the Trust participate equally in the earnings, dividends and distribution of
net assets of the particular series upon liquidation or dissolution. Shares of
each series are entitled to vote separately to approve advisory agreements or
changes in investment policy, but shares of all series may vote together in the
election or selection of Trustees and accountants for the Trust. In matters
affecting only a particular series or class only shares of that particular
series or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required to hold, and
has no present intention of holding, annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have, under certain circumstances (e.g., upon the application and
submission of certain specified documents to the Trustees by a specified number
of shareholders), the right to communicate with other shareholders in
connection with requesting a meeting of shareholders for the purpose of
removing one or more Trustees. Shareholders also have under certain
circumstances the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of shareholders. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of each
series affected by the amendment. (See "Investment Restrictions.")
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares would be sufficient. The Trust or any
series of the Trust, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Trust or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
Share certificates will not be issued.
<PAGE>
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust of the Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust of the Trust also provides
that the Trust may maintain appropriate insurance (e.g., fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust of the Trust protects a Trustee
against any liability to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office.
10. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of both the Fund's
income and its tax-exempt income), and the composition of the Fund's portfolio
assets. Provided all such requirements are met and all of the Fund's net
investment income and 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 the Fund
should fail to qualify as a "regulated investment company" for any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income
to shareholders.
The portion of the 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 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 the Fund on their federal income tax returns.
<PAGE>
Shareholders of the Fund will generally have to pay federal income taxes on
the balance of the Fund's distributions of net investment income and on any
distributions from net short-term capital gains, whether the distributions are
made in cash or in additional shares. Distributions of net capital gains (i.e.,
the excess of net long-term capital gains over net short-term capital losses),
whether made in cash or in additional shares, are taxable to shareholders as
long-term capital gains without regard to the length of time the shareholders
have held their shares. Such capital gains may be taxable to shareholders that
are individuals, estates, or trusts at maximum rates of 20%, 25%, or 28%,
depending upon the source of the gains.
Any Fund dividend that is declared in October, November or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. Any
Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution other than
an exempt-interest dividend may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
In general, any gain or loss realized upon a taxable disposition of shares
of the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual shareholder will be eligible
for reduced tax rates if the shares were held for more than 18 months. However,
any loss realized upon a redemption of shares in the Fund held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received with respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to wash
sales.
Any investment in certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments with
respect to those securities. In order to distribute this income and avoid a
tax, the Trust may be required to liquidate securities of the Fund that it
might otherwise have continued to hold and thereby potentially cause the Fund
to realize additional taxable gain or loss.
The Fund's transactions in short sales and options, futures contracts and
forward contracts, if any, will be subject to special tax rules that may affect
the amount, timing, and character of Fund income and distributions to holders
of beneficial interests. For example, certain positions held by the Trust on
behalf of the Fund on the last business day of each taxable year will be marked
to market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Trust on behalf
of the Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute straddles, and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of securities held by the Trust on behalf of the Fund and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles which may alter the effects of these rules. The Trust will
limit its investment activities in options, futures contracts and forward
contracts on behalf of the Fund to the extent necessary to meet the
requirements of Subchapter M of the Code.
The Fund will withhold tax payments at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
subject to withholding taxes that are made to persons who are not citizens or
residents of the United States.
<PAGE>
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. If a shareholder fails to provide this information,
or otherwise violates IRS regulations, the Fund may be required to withhold tax
at the rate of 31% on certain distributions and redemption proceeds paid to
that shareholder.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The Fund is newly organized and has not yet issued financial statements.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL OBLIGATIONS
Municipal Obligations include bonds, notes and commercial paper issued by
or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the
personal income taxes of any state). Municipal Obligation bonds are issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, industrial facilities, sports facilities, convention or
trade show facilities, airport, mass transit, port or parking facilities, air
or water pollution control facilities, hazardous waste treatment or disposal
facilities, and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such obligations are included within the term
Municipal Obligations if the interest paid thereon qualifies as exempt from
federal income tax. Other types of industrial development bonds, the proceeds
of which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute
Municipal Obligations, although the current federal tax laws place substantial
limitations on the size of such issues.
The two principal classifications of Municipal Obligation bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its good faith, credit and taxing power for the
payment of principal and interest. The payment of the principal of and interest
on such bonds may be dependent upon an appropriation by the issuer's
legislative body. The characteristics and enforcement of general obligation
bonds vary according to the law applicable to the particular issuer. Revenue
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Industrial development bonds which are Municipal
Obligations are in most cases revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending on numerous factors.
Municipal Obligation notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
Obligation notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
operational needs of municipalities. Generally, they are issued in anticipation
of the receipt of various tax revenues, such as property, income, sales, use
and business taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of dedicated revenues, such as state aid or federal
revenues available under federal revenue sharing programs.
3. Tax and Revenue Anticipation Notes. Tax and Revenue Anticipation Notes are
issued by a state or municipality to fund its day-to-day operations and certain
local assistance payments to its municipalities and school districts. Such
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Notes are issued in anticipation of the receipt of various taxes and revenues,
such as personal income taxes, business taxes and user taxes and fees.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. Long-term
bonds or renewal Bond Anticipation Notes provide the money for the repayment of
the Notes.
Issues of commercial paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by agencies of state
and local governments to finance 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 Obligation commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions
of the Municipal Obligation market, size of a particular offering, the maturity
of the obligation and rating (if any) of the issue. 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 Municipal 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.
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P") and FITCH IBCA, Inc. ("Fitch") represent their
opinions as to the quality of various debt securities. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently, debt
securities with the same maturity, coupon and rating may have different yields
while debt securities of the same maturity and coupon with different ratings
may have the same yield. The ratings below are as described by the rating
agencies. Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so.
Description of Moody's Investors Service, Inc.'s
Four Highest Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa. 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 general rating category.
Description of Standard & Poor's Ratings Group's
Four Highest Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
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A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of FITCH IBCA, Inc.'s
Four Highest International Long-Term Credit Ratings
When assigning ratings, Fitch 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 the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. "A" ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term 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
<PAGE>
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 Standard & Poor's Ratings Group's
Two Highest Ratings of State and Municipal Notes
An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing 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 the issue depends on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are 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
Ratings of Tax-exempt Demand Bonds
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
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, note 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 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.
<PAGE>
F-1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F-2 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.
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 are 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.
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 Commercial Paper Ratings
An S&P 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 S&P.
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
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.
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION CONCERNING
CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in California Municipal Obligations from the information statement
of the State of California dated October 1, 1997. 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. The summary does not
purport to be a complete description and is current as of the date of the
information statement. CitiFunds California Tax Free Income Portfolio is not
responsible for the accuracy or timeliness of this information.
RECENT DEVELOPMENTS
From 1990-1993, the State suffered through a severe recession, the worst
since the 1930's, heavily influenced by large cutbacks in defense/aerospace
industries and military base closures and a major drop in real estate
construction. California's economy has been recovering and growing steadily
stronger since the start of 1994, to the point where the State's economic
growth is outpacing the rest of the nation. More than 300,000 nonfarm jobs were
added in the State in 1996, while personal income grew by more than $55
billion. Another 380,000 jobs are expected to be created in 1997. The
unemployment rate, while still higher than the national average, fell to the
low 6% range in mid-1997, compared to over 10% at the worst of the recession.
California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture/television production; growth is also strong
in business services, export trade, and manufacturing, with even the aerospace
sector now showing increased employment. The State's economy is now much more
balanced and diversified than it was during the 1980's. Nonresidential real
estate construction has grown rapidly in response to the growth in the economy.
Residential construction has been growing slowly since the depths of the
recession, but remains much lower (as measured by annual new unit permits) than
the late 1980's.
Moody's, Standard and Poor's and Fitch assigned their municipal bond
ratings of Al, 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.
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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 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. 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.
<PAGE>
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 recent recession, 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 will repay
$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 and thereafter have resulted or will
result 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 22% from the level
in place from 1991-92 through 1993-94, and is estimated at about $5,150 per ADA
in 1997-98. A significant amount of the "extra" Proposition 98 monies in the
last few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. There are also new initiatives
for reading skills and to upgrade technology in high schools.
SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.
PERSONAL INCOME TAX
The California personal income tax, which in 1995-96 contributed about 44
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. Legislation enacted in July 1991
added two new marginal tax rates, at 10 percent and 11 percent, effective for
tax years 1991 through 1995. After 1995, the maximum personal income tax rate
returned to 9.3 percent, and the AMT rate dropped from 8.5 percent to 7
percent.
<PAGE>
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 34
percent of General Fund revenue in 1995-96. 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.
BANK AND CORPORATION TAX
Bank and corporation tax revenues, which comprised about 13 percent of
General Fund revenue in 1995-96, are derived from the following taxes:
1. The franchise tax and the corporate income tax are levied at a 8.84
percent rate on profits for income years beginning on or after January 1, 1997.
The former is imposed on corporations for the privilege of doing business in
California, while the latter is imposed on corporations which do not do
business in the State but which derive income from California sources.
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
effective for income years beginning on or after January 1, 1997.
4. 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
2.4 percent of General Fund revenues in 1995-96.
In November, 1988, voters approved Proposition 103, which mandated
reductions and rebates for certain property and casualty insurance premiums.
The measure also directed the State Board of Equalization to adjust the gross
premiums tax rate to compensate for any resultant decrease in insurance tax
revenue through the 1990 tax year. As a result, the State Board of Equalization
increased the gross premiums tax rate from 2.35 percent to 2.37 percent for the
1989 tax year and to 2.46 percent for the 1990 tax year. For 1991 and beyond,
<PAGE>
the rate returned to 2.35 percent. Implementation of the offset rates used for
Proposition 103 resulted in a lawsuit which has now been settled. The Board of
Equalization anticipates claims of $33 million from this case will be paid by
the State.
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 2.6 percent of General Fund revenues in the 1995-96 Fiscal Year.
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 (for example, oil and gas royalties).
Motor vehicle related taxes and fees accounted for about 60 percent of all
Special Fund revenue in 1995-96. Principal sources of this income are motor
vehicle fuel taxes, registration and weight fees and vehicle license fees.
During the 1995-96 Fiscal Year, $7.7 billion was derived from the ownership or
operation of motor vehicles. About $3.3 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.
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. The
Legislature, as part of the 1994-95 and 1995-96 Budget Acts, redirected part of
the Proposition 99 funds to indigent health care. These actions have been
blocked by court orders, and are currently before the appellate court, after
the State lost in trial court.
PRIOR FISCAL YEARS' FINANCIAL RESULTS
FISCAL YEARS PRIOR TO 1995-96
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions and growth of the
largest General Fund Programs -- K14 education, health, welfare and corrections
- -- at rates faster than the revenue base. These pressures could continue as the
State's overall population and school age population continue to grow, and as
the State's corrections program responds to a "Three Strikes" law enacted in
1994, which requires mandatory life prison terms for certain third-time felony
offenders. In addition, the State's health and welfare programs are in a
transition period as a result of recent federal and State welfare reform
initiatives.
<PAGE>
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfer of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the
1991-92 Fiscal Year budget), most of which were for a short duration.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to retire it in one year, so a
two-year program was implemented, using the issuance of revenue anticipation
warrants to carry a portion of the deficit over the end of the fiscal year.
When the economy failed to recover sufficiently in 1993-94, a second two-year
plan was implemented in 1994-95, again using cross-fiscal year revenue
anticipation warrants to partly finance the deficit into the 1995-96 fiscal
year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier. The
last and largest of these borrowings was $4.0 billion of revenue anticipation
warrants which were issued in July, 1994 and matured on April 25, 1996.
1995-96 AND 1996-97 FISCAL YEARS
With the end of the recession, and a growing economy starting in 1994, the
State's financial condition improved markedly in the last two fiscal years,
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 last of the recession-induced budget deficits was
repaid, allowing the State's budget reserve (the "SFEU") to post a positive
cash balance for only the second time in the 1990's, totaling $281 million as
<PAGE>
of June 30, 1997. The State's cash position also returned to health, as cash
flow borrowing was limited to $3 billion in 1996-97, and no deficit borrowing
has occurred over the end of these last two fiscal years.
In each of these two fiscal years, the State budget contained the following
major features:
1. Expenditures for K-14 schools grew significantly, as the new
revenues were directed to school spending under Proposition 98. This new
money allowed several new education initiatives to be funded, and raised
K-12 per-pupil spending to around $4,900 by Fiscal Year 1996-97.
2. The budgets restrained health and welfare spending levels, holding
to the reduced benefit levels enacted in earlier years, and attempted to
reduce General Fund spending by calling for greater support from the
federal government. The State also attempted to shift to the federal
government a larger share of the cost of incarceration and social services
for illegal aliens. Some of these efforts were successful, and federal
welfare reform also helped, but as a whole the federal support never
reached the levels anticipated when the budgets were enacted. These funding
shortfalls were, however, filled by the strong revenue collections, which
exceeded expectations.
3. General Fund support for the University of California and
California State Universities grew by an average of 5.2 percent and 3.3
percent per year, respectively, and there were no increases in student
fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were approved
for construction, however.
5. There were no tax increases, and starting January 1, 1997, there
was a 5 percent cut in corporate taxes. The suspension of the Renter's Tax
Credit, first taken as a cost-saving measure during the recession, was
continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96 and $1.6 billion in 1996-97) 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. As a result, there was
not any dramatic increase in budget reserves, although the accumulated budget
deficit from the recession years was finally eliminated in the past fiscal
year.
CURRENT STATE BUDGET
The discussion below of the 1997-98 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 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. See
"Economic Considerations" below.
<PAGE>
1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget for the
1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
General Fund revenues and transfers of about $50.7 billion, and proposed
expenditures of $50.3 billion, which would leave a budget reserve in the SFEU
of about $550 million. The Proposed Budget included provisions for a further
10% cut in Bank and Corporation Taxes, which ultimately was not enacted by the
Legislature.
At the time of the May Revision, released on May 14, 1997, the Department
of Finance increased its revenue estimate for the upcoming fiscal year by $1.3
billion, in response to the continued strong growth in the State's economy.
Budget negotiations continued into the summer, with major issues to be resolved
including final agreement on State welfare reform, increase in State employee
salaries and consideration of a tax cut proposed by the Governor. In May, 1997,
action was taken by the California Supreme Court in an ongoing lawsuit, PERF v.
Wilson, which made final a judgment against the State requiring an immediate
payment from the General Fund to the Public Employees Retirement Fund ("PERF")
to make up certain deferrals in annual retirement fund contributions which had
been legislated in earlier years for budget savings, and which the courts found
to be unconstitutional. On July 30, 1997, following a direction from the
Governor, the Controller transferred $1.235 billion from the General Fund to
the PERF in satisfaction of the judgment, representing the principal amount of
the improperly deferred payments from 1995-96 and 1996-97.
Fiscal Year 1997-98 Budget Act
Once the pension payment eliminated essentially all the "increased" revenue
in the budget, final agreement was reached within a few weeks on the welfare
package and the remainder of the budget. The Legislature passed the Budget Bill
on August 11, 1997, along with numerous related bills to implement its
provisions. On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds.
The Budget Act anticipates General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97
levels). On a budgetary basis, the budget reserve (SFEU) is projected to
decrease from $408 million at June 30, 1997 to $112 million at June 30, 1998.
The Budget Act also includes Special Fund expenditures of $14.4 billion (as
against estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act,
the State implemented its normal annual cash flow borrowing program, issuing $3
billion of notes which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education under Proposition 98, reflecting
strong revenues which have exceeded initial budgeted amounts. Part of the
nearly $1.75 billion in increased spending is allocated to prior fiscal
years. Funds are provided to fully pay for the cost-of-living-increase
component of Proposition 98, and to extend the class size reduction and
reading initiatives.
2. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional
payments relating to this court case.
<PAGE>
3. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the
General Fund for the University of California and California State
University has increased by about 6 percent ($121 million and $107 million,
respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the
new CalWORKs program.
6. Unlike prior years, this Budget Act does not depend on uncertain
federal budget actions. About $300 million in federal funds, already
included in the federal Fiscal Year 1997 and 1998 budgets, are included in
the Budget Act, to offset incarceration costs for illegal aliens.
7. The Budget Act contains no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately
$500 million.
Prior to the end of the Legislative Session on September 13, 1997, the
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Governor
signed several bills implementing a new education testing program, and is
expected to sign the bill to restore the funding. The Legislature also passed a
bill to restore $48 million of welfare cost savings which had been part of
earlier legislation vetoed by the Governor. This bill was signed by the
Governor in early October.
Also prior to the end of the Legislative Session, the Legislature passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the package are a
variety of phased-in tax cuts, conformity with certain provisions of the
federal tax reform law passed earlier in the year, and reform of funding for
county trial courts, with the State to assume greater financial responsibility.
The Governor signed most of these bills in early October. The Department of
Finance estimates that the major impact of these fiscal reforms will occur in
Fiscal Year 1998-99 and subsequent years. The Department further estimates that
a small projected revenue loss in Fiscal Year 1997-98 will be more than offset
by increased Personal Income Tax receipts which will be generated by the new,
more favorable federal and state capital gains tax rates.
ECONOMIC CONSIDERATIONS
The State's economy is continuing to experience strong, sustained growth.
Nonfarm wage and salary employment increased at an annual rate of 400,000 jobs
in this year's first quarter. The March 1997 unemployment rate of 6.5 percent
was a full percentage point lower than a year ago.
The more vigorous national economy and strong first-quarter California job
growth has resulted in an upward revision to the California forecast. This
year, the state is on course to add 380,000 new jobs, 50,000 more than in the
January budget. In 1998, the State is expected to create an additional 300,000
<PAGE>
jobs, up from 250,000 in the January forecast. Thus, employment growth for the
next two years has been increased by 100,000 over the January budget, to a gain
of 680,000 new jobs.
The revised 1997 unemployment rate of 6.3 percent is a half-percent lower
than the January forecast, and the revised 1998 rate of 5.8 percent is nearly a
full percentage point lower than was forecast in January. Personal income
growth is revised up by 0.2 percentage point in both 1997 and 1998, a rate that
continues to outpace the nation's growth rate.
The State is benefiting from a unique industry mix that includes a wide
array of high-technology manufacturing and service sectors, including
electronic components, computers, instruments, software, motion pictures,
multimedia and biotechnology. Growth in these industries has more than offset
losses resulting from severe cuts in the nation's defense budget, which
contributed to a 67-percent drop in aerospace employment between 1988 and 1995.
From the recession's low point in late 1993, California's economy has
created more than one million new jobs through March 1997, and has eclipsed the
previous May 1990 employment peak by nearly 300,000. The State's economy is
marking another milestone this year: gross state product is now exceeding the
one trillion dollar level -- the first time any state has achieved this
magnitude of economic output.
Many of the new high-growth industries are also high-wage industries. Wages
in computer manufacturing average more than $64,000 per year; in software and
multimedia industries, more than $68,000; in biotechnology, more than $60,000;
and in motion picture production, more than $65,000. Growth in these high-wage
jobs resulted in total wages increasing by more than double the rise in total
employment in 1996.
Employment in manufacturing increased by 3.3 percent in 1996 -- a gain of
almost 60,000 jobs. This represents the best job gain since 1984 and is in
sharp contrast to a loss of nearly 250,000 factory jobs in the other 49 states.
The long decline in aerospace appears to have bottomed out -- the industry
added 1,400 jobs over the past year reflecting a pickup in the commercial
segment of the business.
International trade also contributes to the State's economic growth. In
spite of a stronger dollar and sluggish economic performance by many industrial
trading partners, foreign trade through California ports continued to expand in
1996 -- with total trade volume of just under $300 billion. Exports shipped via
California ports grew by 6.3 percent and imports rose by 2.9 percent over 1995.
Importantly, exports of California-made goods -- shipped from California and
elsewhere -- rose more than 8 percent in 1997, nearly double the growth of
exports nationwide.
California inflation has been revised down 0.4 percentage point compared to
the January forecast. This is less than the revision to national inflation and
is due to housing cost pressures in the Bay Area.
Highlights of the California forecast include:
O Employment is projected to grow faster than the nation for the next two
years, with an increase of 3 percent in 1997 and 2.3 percent in 1998 --
680,000 new jobs over the next two years. Unemployment is expected to drop
to 6 percent by the end of 1997.
O Personal income growth is expected to remain strong - increasing by 6.8
percent in 1997 and 6.1 percent in 1998.
<PAGE>
O Inflation will remain below the national average. Consumer prices in
California are expected to increase by 2.3 percent in 1997 and 1998. Real
purchasing power, therefore, will rise by an average of more than 4 percent
per year over the next two years.
O Homebuilding is forecast to increase moderately to 110,000 units this year
and 122,000 in 1998. Stronger job-generated demand is being offset by a
forecast of higher interest rates. In response to low office and industrial
vacancy rates, nonresidential construction is expected to show strong
growth -- with last year's double-digit growth continuing in 1997 and 1998.
LITIGATION
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. Following are some of the more significant
lawsuits against the State:
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
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; the issuance
of a final consolidated decision is anticipated sometime in early 1997. To
date, the Legislature has not appropriated funds. The liability to the State,
if all potentially eligible school districts pursue timely claims, has been
estimated by the Department of Finance at over $1 billion.
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. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to a sample of plaintiffs. The State's potential liability to the
remaining 3,000 plaintiffs from claims filed ranges from $800 million to $1.5
billion. An appeal has been filed.
The State is a defendant in California State Employees Association v.
Wilson, where the petitioners are challenging several budget appropriations in
the 1994 and 1995 Budget Acts. The appropriations mandate the transfer of funds
from the State Highway Account to the General Fund to reimburse the General
Fund for debt service costs on two rail bond measures. The petitioners contend
that the transfers violate the bond acts themselves and are requesting the
monies be returned. The loss to the State's General Fund could be up to $227
million.
In a similar case, Professional Engineers in California Government v.
Wilson, the petitioners are challenging several appropriations in the 1993,
1994, and 1995 Budget Acts. The appropriations mandate the transfer of
approximately $262 million from the State Highway Account and $113 million from
the Motor Vehicle Account to the General Fund and appropriate approximately $6
million from the State Highway Account to fund a highway-grade crossing program
<PAGE>
administered by the Public Utilities Commission. Petitioners contend that the
transfers violate several constitutional provisions and request that the monies
be returned to the State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the General Fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax for
approximately $166 million.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al, where the plaintiffs are challenging the legality of various budget action
transfers and appropriations from particular special funds for years ended June
30, 1995, and June 30, 1996. The plaintiffs allege that the transfers and
appropriations are contrary to the substantive law establishing the funds and
providing for interest accruals to the fund, violate the single subject
requirement of the State Constitution, and is an invalid "special law."
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan ("Beno")
and Welch vs. Anderson ("Welch"), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek
to invalidate AFDC grant reductions and in the Welch case, plaintiffs contend
that AFDC grant reductions are not authorized by state law. The Beno case
concerns the total grant reductions while the Welch case concerns the period of
time the State did not have a waiver for those reductions. The State's
potential liability for retroactive AFDC grant reductions is estimated at $831
million if the plaintiffs are awarded the full amount in both cases.
The State was a defendant in California Teachers Association v. Russell S.
Gould, et al., where the petitioners challenged a recharacterization of $1.1
billion of appropriations for the 1991-92 fiscal year and $190 million in the
1992-93 fiscal year as emergency loans rather than Proposition 98 funds. The
Petitioners were seeking a declaration that all appropriated funds are
Proposition 98 funds and, therefore, must be included in the minimum funding
guarantee for schools. The trial court ruled that the appropriations are not
Proposition 98 funds and should not be included in the minimum funding
calculation in future years.
The petitioners also challenged the Legislature's appropriation of $973
million to schools in the 1992-93 fiscal year and $787 million to schools in
the 1993-94 fiscal year. The appropriations, which the Legislature called
"emergency loans," were in excess of the Proposition 98 guarantee of minimum
funding; the Legislature explicitly excluded those excess funds from being
included in the future Proposition 98 minimum funding guarantee. The trial
court found that amounts which the State appropriated to schools as loans in
excess of the Proposition 98 guarantee were considered to be Proposition 98
funding and were required to be used to calculate the Proposition 98
requirement in future years. Moreover, the trial court found that the State
cannot require schools to repay the appropriations which were characterized as
loans. The parties have reached a settlement which provides that both the State
and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.8 billion in loans, the State will repay $935 million
by forgiveness of the amount owed, while schools will repay $825 million, the
$935 million forgiveness of the amount owed is included as 1995-96 fiscal year
expenditures of the General Fund. The State's 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.
<PAGE>
In the case of Board of Administration, California Public Employees Retirement
System, et al. v. Pete Wilson, Governor et al., plaintiffs challenged the
constitutionality of legislation which deferred payment of the State's employer
contribution to the Public Employees' Retirement System beginning in Fiscal
Year 1992-93. On January 11, 1995, the Sacramento County Superior Court entered
a judgment finding that the legislation unconstitutionally impaired the vested
contract rights of PERS members. The judgment provides for issuance of a writ
of mandate directing State defendants to disregard the provisions of the
legislation, to implement the statute governing employer contributions that
existed before the changes in the legislation found to be unconstitutional, and
to transfer to PERS the contributions that were unpaid to date. On February 19,
1997, the State Court of Appeal affirmed the decision of the Superior Court,
and the Supreme Court subsequently refused to hear the case, making the Court
of Appeals' ruling final. On July 30, 1997, the Controller transferred $1.235
billion from the General Fund to PERS in repayment of the principal amount
determined to have been improperly deferred. Subsequent State payments to PERS
will be made on a quarterly basis. No prejudgment interest has been paid in
accordance with the trial court ruling that there was insufficient evidence
that money for that purpose had been appropriated and was available. No
post-judgment interest was ordered.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements Included in Part A:
Not applicable.
Financial Statements Included in Part B:
Not applicable.
<TABLE>
<CAPTION>
(b) Exhibits
<S> <C>
* 1(a) Declaration of Trust of Registrant
* 1(b) Amendments to Registrant's Declaration of Trust
1(c) Form of Establishment and Designation of Series of the Registrant
* 2(a) Amended and Restated By-Laws of Registrant
* 2(b) Amendments to Amended and Restated By-Laws of Registrant
5 Form of Management Agreement between the Registrant and Citibank, N.A.,
as manager to CitiFunds California Tax Free Income Portfolio (the "Fund")
6 Form of Amended and Restated Distribution Agreement between the Registrant
and CFBDS, Inc. ("CFBDS"), as distributor
* 8(a) Custodian Contract between the Registrant and State Street Bank and Trust
Company ("State Street"), as custodian
8(b) Form of letter agreement adding the Fund to the Custodian Contract with
State Street
9(a) Form of Amended and Restated Sub-Administrative Services Agreement between
Citibank, N.A. and CFBDS
* 9(b) Transfer Agency and Service Agreement between the Registrant and State
Street, as transfer agent
9(c) Form of letter agreement adding the Fund to the Transfer Agency and Service
Agreement with State Street
15 Service Plan of the Registrant
* 25 Powers of Attorney for the Registrant
</TABLE>
- ---------------------
* Incorporated herein by reference to Post-Effective Amendment No. 19 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as filed
with the Securities and Exchange Commission on February 20, 1998.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
Shares of Beneficial Interest As of June 28, 1998
(without par value)
CitiFunds California Tax Free Income Portfolio 0
Item 27. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, filed as an Exhibit to Post-Effective Amendment No. 19 to its
Registration Statement on Form N-1A; (b) Section 6 of the Distribution
Agreement between the Registrant and CFBDS, filed as an Exhibit hereto; and (c)
the undertaking of the Registrant regarding indemnification set forth in its
Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, a
registered bank holding company. Citibank also serves as investment adviser to
the following registered investment companies (or series thereof): Asset
Allocation Portfolios (Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio
and Short-Term Portfolio), The Premium Portfolios (Growth & Income Portfolio,
Balanced Portfolio, Large Cap Growth Portfolio, Government Income Portfolio,
International Equity Portfolio, Emerging Asian Markets Equity Portfolio and
Small Cap Growth Portfolio), Tax Free Reserves Portfolio, U.S. Treasury
Reserves Portfolio, Cash Reserves Portfolio, CitiFundsSM Multi-State Tax Free
Trust (CitiFundsSM New York Tax Free Reserves, CitiFundsSM Connecticut Tax Free
Reserves and CitiFundsSM California Tax Free Reserves), CitiFundsSM
Institutional Trust (CitiFundsSM Institutional Cash Reserves), CitiFundsSM
Fixed Income Trust ( CitiFundsSM Intermediate Income Portfolio) and Variable
Annuity Portfolios (CitiSelect VIP Folio 200, CitiSelect VIP Folio 300,
CitiSelect VIP Folio 400, CitiSelect VIP Folio 500 and CitiFundsSM Small Cap
Growth VIP Portfolio). Citibank and its affiliates manage assets in excess of
$88 billion worldwide. The principal place of business of Citibank is located
at 399 Park Avenue, New York, New York 10043.
John S. Reed is the Chairman of the Board and a Director of Citibank. The
following are Vice Chairmen of the Board and Directors of Citibank: Paul J.
Collins and William R. Rhodes. Other Directors of Citibank are D. Wayne
Calloway, former Chairman and Chief Executive Officer, PepsiCo, Inc.; John M.
Deutch, Institute Professor, Massachusetts Institute of Technology; Reuben
Mark, Chairman and Chief Executive Officer, ColgatePalmolive Company; Richard
D. Parsons, President, Time Warner, Inc.; Rozanne L. Ridgway, Former Assistant
Secretary of State for Europe and Canada; Robert B. Shapiro, Chairman,
President and Chief Executive Officer, Monsanto Company; Frank A. Shrontz,
Chairman Emeritus, The Boeing Company; and Franklin A. Thomas, former
President, The Ford Foundation.
Each of the individuals named above is also a Director of Citicorp. In
addition, the following persons have the affiliations indicated:
<PAGE>
D. Wayne Calloway Director, Exxon Corporation
Director, General Electric Company
Retired Chairman and Chief Executive Officer and
Director, PepsiCo, Inc.
Paul J. Collins Director, Kimberly-Clark Corporation
John M. Deutch Director, Ariad Pharmaceuticals, Inc.
Director, CMS Energy
Director, Palomar Medical Technologies, Inc.
Director, Cummins Engine Company, Inc.
Director, Schlumberger, Ltd.
Reuben Mark Director, Chairman and Chief Executive Officer
ColgatePalmolive Company
Director, New York Stock Exchange
Director, Time Warner, Inc.
NonExecutive Director, Pearson, PLC
Richard D. Parsons Director, Federal National Mortgage Association
Director, Philip Morris Companies Incorporated
Member, Board of Representatives, Time Warner
Entertainment Company, L.P.
Director and President, Time Warner, Inc.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
Rozanne L. Ridgway Director, 3M
Director, Bell Atlantic Corporation
Director, Boeing Company
Director, Emerson Electric Company
Member-International Advisory Board,
New Perspective Fund, Inc.
Director, RJR Nabisco, Inc.
Director, Sara Lee Corporation
Director, Union Carbide Corporation
Robert B. Shapiro Director, Chairman and Chief Executive
Officer, Monsanto Company
Director, Silicon Graphics
Frank A. Shrontz Director, 3M
Director, Baseball of Seattle, Inc.
Director and Chairman Emeritus, Boeing Company
Director, Boise Cascade Corp.
Director, Chevron Corporation
<PAGE>
Franklin A. Thomas Director, Aluminum Company of America
Director, Cummins Engine Company, Inc.
Director, Lucent Technologies
Director, PepsiCo, Inc.
Item 29. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Equity Portfolio, CitiFundsSM Emerging Asian Markets Equity Portfolio,
CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves, CitiFundsSM
Premium U.S. Treasury Reserves, CitiFundsSM Premium Liquid Reserves,
CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM Institutional
Liquid Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM
Short-Term U.S. Government Income Portfolio, CitiFundsSM Balanced Portfolio,
CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth & Income Portfolio,
CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM Small Cap Growth Portfolio,
CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM New York Tax Free
Income Portfolio, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300,
CitiSelect VIP Folio 400, CitiSelect VIP Folio 500, CitiFundsSM Small Cap
Growth VIP Portfolio, CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect
Folio 400, and CitiSelect Folio 500. CFBDS is also the placement agent for
Large Cap Value Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term Portfolio,
Growth & Income Portfolio, Large Cap Growth Portfolio, Small Cap Growth
Portfolio, International Equity Portfolio, Balanced Portfolio, Government
Income Portfolio, Emerging Asian Markets Equity Portfolio, Tax Free Reserves
Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio
(b) The information required by this Item 29 with respect to each
director and officer of CFBDS is incorporated by reference to Schedule A of
Form BD filed by CFBDS pursuant to the Securities and Exchange Act of 1934
(File No. 8-32417).
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
CFBDS, Inc. 21 Milk Street, 5th Floor
(administrator and distributor) Boston, MA 02109
State Street Bank and Trust Company 1776 Heritage Drive
(custodian and transfer agent) North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043
<PAGE>
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes, if requested to do so by the record
holders of not less than 10% of the Registrant's outstanding shares,
to call a meeting of shareholders for the purpose of voting upon the
question of removal of a trustee or trustees, and to assist in
communications with other shareholders as required by Section 16(c)
of the Investment Company Act of 1940. The Registrant further
undertakes to furnish to each person to whom a prospectus of
CitiFunds California Tax Free Income Portfolio is delivered with a
copy of the Fund's latest Annual Report to Shareholders, upon request
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts on the 29th day of June, 1998.
CITIFUNDS TAX FREE INCOME TRUST
By: Philip W. Coolidge
-----------------------------
Philip W. Coolidge, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to this Registration Statement has been signed below
by the following persons in the capacities indicated below June 29, 1998.
Signature Title
Philip W. Coolidge President, Principal Executive Officer and Trustee
-----------------------
Philip W. Coolidge
John R. Elder Principal Financial Officer and Principal
-----------------------
John R. Elder Accounting Officer
Elliott J. Berv* Trustee
-----------------------
Elliott J. Berv
Mark T. Finn* Trustee
-----------------------
Mark T. Finn
Riley C. Gilley* Trustee
-----------------------
Riley C. Gilley
Diana R. Harrington* Trustee
-----------------------
Diana R. Harrington
Susan B. Kerley* Trustee
-----------------------
Susan B. Kerley
C. Oscar Morong, Jr.* Trustee
-----------------------
C. Oscar Morong, Jr.
Walter E. Robb, III* Trustee
-----------------------
Walter E. Robb, III
E. Kirby Warren* Trustee
-----------------------
E. Kirby Warren
William S. Woods, Jr.* Trustee
-----------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
-----------------------
Philip W. Coolidge
Executed by Philip W. Coolidge on behalf of
those indicated pursuant to Powers
of Attorney.
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
1(c) Form of Establishment and Designation of Series of the Registrant
5 Form of Management Agreement between the Registrant and
Citibank, N.A., as manager to CitiFunds California Tax Free
Income Portfolio (the "Fund")
6 Form of Amended and Restated Distribution Agreement between the
Registrant and CFBDS, Inc. ("CFBDS"), as distributor
8(b) Form of letter agreement adding the Fund to the Custodian
Contract with State Street
9(a) Form of Amended and Restated Sub-Administrative Services Agreement
between Citibank, N.A. and CFBDS
9(c) Form of letter agreement adding the Fund to the Transfer Agency
and Service Agreement with State Street
15 Service Plan of the Registrant
Exhibit 1(c)
CITIFUNDS TAX FREE INCOME TRUST
FORM OF AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF
SHARES OF BENEFICIAL INTEREST (WITHOUT PAR VALUE)
Pursuant to Section 6.9 of the Declaration of Trust, dated May 27, 1986,
as amended (the "Declaration of Trust"), of CitiFunds Tax Free Income Trust
(formerly, Landmark Tax Free Income Funds) (the "Trust"), the undersigned,
being a majority of the Trustees of the Trust, do hereby amend and restate the
Trust's existing Establishment and Designation of Series of Shares of
Beneficial Interest (without par value) in order to add an additional series of
Shares (as defined in the Declaration of Trust) of the Trust. No other changes
to the special and relative rights of the existing series are intended by this
amendment and restatement.
1. The series shall be as follows:
The new series of the Trust shall be designated as "CitiFunds
California Tax Free Income Portfolio."
The other existing series of the Trust are as follows:
"CitiFunds National Tax Free Income Portfolio" and
"CitiFunds New York Tax Free Income Portfolio."
2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933 to the extent pertaining to the offering of Shares of each series. Each
Share of each series shall be redeemable, shall be entitled to one vote or
fraction thereof in respect of a fractional share on matters on which shares of
that series shall be entitled to vote, shall represent a pro rata beneficial
interest in the assets allocated or belonging to such series, and shall be
entitled to receive its pro rata share of the net assets of such series upon
liquidation of the series, all as provided in Section 6.9 of the Declaration of
Trust.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each series as provided in, Rule 18f-2,
<PAGE>
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each
series as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets and
expenses or to change the designation of any series now or hereafter created or
otherwise to change the special and relative rights of any such series.
IN WITNESS WHEREOF, the undersigned have executed this Establishment and
Designation of Series on separate counterparts this ____ day of __________,
1998.
- ------------------------------ -------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually
- ------------------------------ -------------------------------
MARK T. FINN RILEY C. GILLEY
As Trustee and Not Individually As Trustee and Not Individually
- ------------------------------ -------------------------------
DIANA R. HARRINGTON SUSAN B. KERLEY
As Trustee and Not Individually As Trustee and Not Individually
- ------------------------------ -------------------------------
C. OSCAR MORONG, JR. WALTER E. ROBB, III
As Trustee and Not Individually As Trustee and Not Individually
- ------------------------------ -------------------------------
E. KIRBY WARREN WILLIAM S. WOODS, JR.
As Trustee and Not Individually As Trustee and Not Individually
Exhibit 5
FORM OF MANAGEMENT AGREEMENT
CITIFUNDS TAX FREE INCOME TRUST
CitiFunds California Tax Free Income Portfolio
MANAGEMENT AGREEMENT, dated as of ________ __, 1998, by and between
CitiFunds Tax Free Income Trust, a Massachusetts business trust (the "Trust"),
and Citibank, N.A., a national banking association ("Citibank" or the
"Manager").
W I T N E S S E T H:
WHEREAS, the Trust engages in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder and any exemptive orders thereunder, the "1940 Act"), and
WHEREAS, the Trust wishes to engage Citibank to provide certain
investment advisory and administrative services for the series of the Trust
designated as CitiFunds California Tax Free Income Portfolio (the "Fund"), and
Citibank is willing to provide such investment advisory and administrative
services for the Fund on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of Citibank. (a) Citibank shall act as the Manager for the Fund
and as such shall furnish continuously an investment program and shall
determine from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of the Fund shall be held uninvested,
subject always to the restrictions of the Trust's Declaration of Trust, dated
as of May 27, 1986, and By-laws, as each may be amended from time to time
(respectively, the "Declaration" and the "By-Laws"), the provisions of the 1940
Act, and the then-current Registration Statement of the Trust with respect to
the Fund. The Manager shall also make recommendations as to the manner in which
voting rights, rights to consent to corporate action and any other rights
<PAGE>
pertaining to the Fund's portfolio securities shall be exercised. Should the
Board of Trustees of the Trust at any time, however, make any definite
determination as to investment policy applicable to the Fund and notify the
Manager thereof in writing, the Manager shall be bound by such determination
for the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Manager shall take, on behalf of
the Fund, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders
for the purchase or sale of securities for the Fund's account with the brokers
or dealers selected by it, and to that end the Manager is authorized as the
agent of the Trust to give instructions to the custodian or any subcustodian of
the Fund as to deliveries of securities and payments of cash for the account of
the Fund. In connection with the selection of such brokers or dealers and the
placing of such orders, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Fund and/or the other accounts over
which the Manager or its affiliates exercise investment discretion. The Manager
is authorized to pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for the
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if the Manager determines in
good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities which the Manager and its affiliates have with
respect to accounts over which they exercise investment discretion. In making
purchases or sales of securities or other property for the account of the Fund,
the Manager may deal with itself or with the Trustees of the Trust or the
Trust's underwriter or distributor, to the extent such actions are permitted by
the 1940 Act. In providing the services and assuming the obligations set forth
herein, the Manager may employ, at its own expense, or may request that the
Trust employ at the Fund's expense, one or more subadvisers; provided that in
each case the Manager shall supervise the activities of each subadviser. Any
agreement between the Manager and a subadviser shall be subject to the renewal,
termination and amendment provisions applicable to this Agreement. Any
agreement between the Trust on behalf of the Fund and a subadviser may be
terminated by the Manager at any time on not more than 60 days' nor less than
30 days' written notice to the Trust and the subadviser.
<PAGE>
(b) Subject to the direction and control of the Board of Trustees of the
Trust, Citibank shall perform such administrative and management services as
may from time to time be reasonably requested by the Trust, which shall include
without limitation: (i) providing office space, equipment and clerical
personnel necessary for maintaining the organization of the Trust and for
performing the administrative and management functions herein set forth; (ii)
supervising the overall administration of the Trust, including negotiation of
contracts and fees with and the monitoring of performance and billings of the
Trust's transfer agent, shareholder servicing agents, custodian and other
independent contractors or agents; (iii) preparing and, if applicable, filing
all documents required for compliance by the Trust with applicable laws and
regulations, including registration statements, prospectuses and statements of
additional information, semi-annual and annual reports to shareholders, proxy
statements and tax returns; (iv) preparation of agendas and supporting
documents for and minutes of meetings of Trustees, committees of Trustees and
shareholders; and (v) arranging for maintenance of books and records of the
Trust. Notwithstanding the foregoing, Citibank shall not be deemed to have
assumed any duties with respect to, and shall not be responsible for, the
distribution of shares of beneficial interest in the Fund, nor shall Citibank
be deemed to have assumed or have any responsibility with respect to functions
specifically assumed by any transfer agent, fund accounting agent, custodian or
shareholder servicing agent of the Trust or the Fund. In providing
administrative and management services as set forth herein, Citibank may, at
its own expense, employ one or more subadministrators; provided that Citibank
shall remain fully responsible for the performance of all administrative and
management duties set forth herein and shall supervise the activities of each
subadministrator.
2. Allocation of Charges and Expenses. Citibank shall furnish at its own
expense all necessary services, facilities and personnel in connection with its
responsibilities under Section 1 above. Except as provided in the foregoing
sentence, it is understood that the Trust will pay from the assets of the Fund
all of its own expenses allocable to the Fund including, without limitation,
organization costs of the Fund; compensation of Trustees who are not
"affiliated persons" of Citibank; governmental fees; interest charges; loan
commitment fees; taxes; membership dues in industry associations allocable to
the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
information, shareholder reports, notices, proxy statements and reports to
<PAGE>
governmental officers and commissions and to existing shareholders of the Fund;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of the Fund (including but not limited to the fees of independent pricing
services); expenses of meetings of the Fund's shareholders; expenses relating
to the registration and qualification of shares of the Fund; and such
nonrecurring or extraordinary expenses as may arise, including those relating
to actions, suits or proceedings to which the Trust on behalf of the Fund may
be a party and the legal obligation which the Trust may have to indemnify its
Trustees and officers with respect thereto.
3. Compensation of Citibank. For the services to be rendered and the
facilities to be provided by Citibank hereunder, the Trust shall pay to
Citibank from the assets of the Fund a management fee computed daily and paid
monthly at an annual rate equal to 0.50% of the Fund's average daily net assets
for the Fund's then-current fiscal year. If Citibank provides services
hereunder for less than the whole of any period specified in this Section 3,
the compensation to Citibank shall be accordingly adjusted and prorated.
4. Covenants of Citibank. Citibank agrees that it will not deal with
itself, or with the Trustees of the Trust or the Trust's principal underwriter
or distributor, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the 1940
Act, will not take a long or short position in shares of beneficial interest in
the Fund except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and By-Laws and the then-current Registration
Statement applicable to the Fund relative to Citibank and its directors and
officers.
5. Limitation of Liability of Citibank. Citibank shall not be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of securities
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Section 5, the term
"Citibank" shall include directors, officers and employees of Citibank as well
as Citibank itself.
<PAGE>
6. Activities of Citibank. The services of Citibank to the Fund are not
to be deemed to be exclusive, Citibank being free to render investment
advisory, administrative and/or other services to others. It is understood that
Trustees, officers, and shareholders of the Trust are or may be or may become
interested in Citibank, as directors, officers, employees, or otherwise and
that directors, officers and employees of Citibank are or may become similarly
interested in the Trust and that Citibank may be or may become interested in
the Trust as a shareholder or otherwise.
7. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written, shall govern
the relations between the parties hereto thereafter and shall remain in force
until __________ __, 2000, on which date it will terminate unless its
continuance after __________ __, 2000 is "specifically approved at least
annually" (a) by the vote of a majority of the Trustees of the Trust who are
not "interested persons" of the Trust or of Citibank at a meeting specifically
called for the purpose of voting on such approval, and (b) by the Board of
Trustees of the Trust or by "vote of a majority of the outstanding voting
securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by the "vote of a majority of the outstanding voting
securities" of the Fund, or by Citibank, in each case on not more than 60 days'
nor less than 30 days' written notice to the other party. This Agreement shall
automatically terminate in the event of its "assignment."
This Agreement may be amended only if such amendment is approved by the
"vote of a majority of the outstanding voting securities" of the Fund (except
for any such amendment as may be effected in the absence of such approval
without violating the 1940 Act).
The terms "specifically approved at least annually," "vote of a majority
of the outstanding voting securities," "assignment," "affiliated person," and
"interested persons," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Fund; that any
liability of the Trust under this Agreement, or in connection with the
<PAGE>
transactions contemplated herein, shall be discharged only out of the assets of
the Fund; and that no other series of the Trust shall be liable with respect to
this Agreement or in connection with the transactions contemplated herein.
The undersigned officer of the Trust has executed this Agreement not
individually, but as an officer under the Declaration and the obligations of
this Agreement are not binding upon any of the Trustees, officers or
shareholders of the Trust individually.
8. Governing Law. This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts.
9. Use of Name. The Trust hereby acknowledges that any and all rights in
or to the name "Citi" which exist on the date of this Agreement or which may
arise hereafter are, and under any and all circumstances shall continue to be,
the sole property of Citibank; that Citibank may assign any or all of such
rights to another party or parties without the consent of the Trust; and that
Citibank may permit other parties, including other investment companies, to use
the word "Citi" in their names. If Citibank, or its assignee as the case may
be, ceases to serve as the adviser to and administrator of the Trust, the Trust
hereby agrees to take promptly any and all actions which are necessary or
desirable to change its name so as to delete the word "Citi."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
CITIFUNDS TAX FREE
INCOME TRUST CITIBANK, N.A.
By:__________________________ By:__________________________
Title:_______________________ Title:_______________________
Exhibit 6
FORM OF AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of June 24, 1986, and amended and restated as of
__________ __, 1998, by and between CitiFunds Tax Free Income Trust (formerly
known as Landmark Tax Free Income Funds), a Massachusetts trust (the "Trust"),
and CFBDS, Inc., a Massachusetts corporation ("Distributor").
WHEREAS, the Trust engages in business as an openend management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest ("Shares") are divided
into separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust wishes to retain the services of a distributor for
Shares of each class of each of the Trust's series listed on Exhibit A hereto
(the "Funds") and has registered the Shares of the Funds under the Securities
Act of 1933, as amended (the "1933 Act");
WHEREAS, the Trust has adopted a Service Plan pursuant to Rule 12b1 under
the 1940 Act (the "Service Plan") and may enter into related agreements
providing for the distribution and servicing of Shares of the Funds;
WHEREAS, Distributor has agreed to act as distributor of the Shares of
each class of the Funds for the period of this Agreement;
NOW, THEREFORE, it is hereby agreed between the parties hereto as
follows:
1. Appointment of Distributor.
(a) The Trust hereby appoints Distributor its exclusive agent for the
distribution of Shares of each class of the Funds in jurisdictions wherein such
Shares may be legally offered for sale; provided, however, that the Trust in
its absolute discretion may issue Shares of the Funds in connection with (i)
the payment or reinvestment of dividends or distributions; (ii) any merger or
consolidation of the Trust or of the Funds with any other investment company or
trust or any personal holding company, or the acquisition of the assets of any
<PAGE>
such entity or another Fund of the Trust; or (iii) any offer of exchange
permitted by Section 11 of the 1940 Act.
(b) Distributor hereby accepts such appointment as exclusive agent for
the distribution of Shares of each class of the Funds and agrees that it will
sell the Shares as agent for the Trust at prices determined as hereinafter
provided and on the terms hereinafter set forth, all according to the
then-current prospectus and statement of additional information of each Fund
(collectively, the "Prospectus" and the "Statement of Additional Information"),
applicable laws, rules and regulations and the Declaration of Trust of the
Trust. Distributor agrees to use its best efforts to solicit orders for the
sale of Shares of the Funds, and agrees to transmit promptly to the Trust (or
to the transfer agent of the Funds, if so instructed in writing by the Trust)
any orders received by it for purchase or redemption of Shares.
(c) Distributor may sell Shares of the Funds to or through qualified
securities dealers, financial institutions or others. Distributor will require
each dealer or other such party to conform to the provisions of this Agreement,
the Prospectus, the Statement of Additional Information and applicable law; and
neither Distributor nor any such dealers or others shall withhold the placing
of purchase orders for Shares so as to make a profit thereby.
(d) Distributor shall order Shares of the Funds from the Trust only to
the extent that it shall have received unconditional purchase orders therefor.
Distributor will not make, or authorize any dealers or others to make: (i) any
short sales of Shares; or (ii) any sales of Shares to any Trustee or officer of
the Trust, any officer or director of Distributor or any corporation or
association furnishing investment advisory, managerial or supervisory services
to the Trust, or to any such corporation or association, unless such sales are
made in accordance with the Prospectus and the Statement of Additional
Information.
(e) Distributor is not authorized by the Trust to give any information or
make any representations regarding Shares of the Funds, except such information
or representations as are contained in the Prospectus, the Statement of
Additional Information or advertisements and sales literature prepared by or on
behalf of the Trust for Distributor's use.
(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
<PAGE>
necessary in the discretion of the Trust's officers in connection with the
qualification of Shares of each Fund for sale in such states as Distributor and
the Trust agree.
(g) No Shares of any Fund shall be offered by either Distributor or the
Trust under this Agreement, and no orders for the purchase or sale of such
Shares hereunder shall be accepted by the Trust, if and so long as the
effectiveness of the Trust's then current registration statement as to Shares
of that Fund or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current prospectus
for Shares of that Fund as required by Section 10 of the 1933 Act is not on
file with the Securities and Exchange Commission; provided, however, that
nothing contained in this paragraph (g) shall in any way restrict the Trust's
obligation to repurchase any Shares from any shareholder in accordance with the
provisions of the applicable Fund's Prospectus or charter documents.
(h) Notwithstanding any provision hereof, the Trust may terminate,
suspend or withdraw the offering of Shares of any Fund whenever, in its sole
discretion, it deems such action to be desirable.
2. Offering Price of Shares. All Fund Shares sold under this Agreement
shall be sold at the public offering price per Share in effect at the time of
the sale, as described in the Prospectus. The excess, if any, of the public
offering price over the net asset value of the Shares sold by Distributor as
agent, and any contingent deferred sales charge applicable to Shares of any
class of any Fund as set forth in the applicable Fund's Prospectus, shall be
retained by Distributor as a commission for its services hereunder. Out of such
commission Distributor may allow commissions, concessions or agency fees to
dealers or other financial institutions, including banks, and may allow them to
others in its discretion in such amounts as Distributor shall determine from
time to time. Except as may be otherwise determined by Distributor from time to
time, such commissions, concessions or agency fees shall be uniform to all
dealers and other financial institutions. At no time shall the Trust receive
less than the full net asset value of the Shares of each Fund, determined in
the manner set forth in the Prospectus and the Statement of Additional
Information. Distributor also may receive such compensation under the Trust's
Service Plan as may be authorized by the Trustees of the Trust from time to
time.
<PAGE>
3. Furnishing of Information.
(a) The Trust shall furnish to Distributor copies of any information,
financial statements and other documents that Distributor may reasonably
request for use in connection with the sale of Shares of the Funds under this
Agreement. The Trust shall also make available a sufficient number of copies of
the Funds' Prospectus and Statement of Additional Information for use by the
Distributor.
(b) The Trust agrees to advise Distributor immediately in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to any registration statement concerning a Fund or to a
Prospectus or for additional information;
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of any such
registration statement or Prospectus or the initiation of any proceeding
for that purpose;
(iii) of the happening of any event which makes untrue any statement
of a material fact made in any such registration statement or Prospectus
or which requires the making of a change in such registration statement
or Prospectus in order to make the statements therein not misleading; and
(iv) of all actions of the Securities and Exchange Commission with
respect to any amendments to any such registration statement or
Prospectus which may from time to time be filed with the Securities and
Exchange Commission.
4. Expenses.
(a) The Trust will pay or cause to be paid the following expenses:
organization costs of the Funds; compensation of Trustees who are not
"affiliated persons" of the Distributor; governmental fees; interest charges;
loan commitment fees; taxes; membership dues in industry associations allocable
to the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
information, shareholder reports, notices, proxy statements and reports to
<PAGE>
governmental officers and commissions and to existing shareholders of the
Funds; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Funds, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Funds (including but not limited to the fees of independent
pricing services); expenses of meetings of shareholders; expenses relating to
the issuance, registration and qualification of shares; and such non-recurring
or extraordinary expenses as may arise, including those relating to actions,
suits or proceedings to which the Trust may be a party and the legal obligation
which the Trust may have to indemnify its Trustees and officers with respect
thereto.
(b) Except as otherwise provided in this Agreement and except to the
extent such expenses are borne by the Trust pursuant to the Service Plan,
Distributor will pay or cause to be paid all expenses connected with its own
qualification as a dealer under state and federal laws and all other expenses
incurred by Distributor in connection with the sale of Shares of each Fund as
contemplated by this Agreement.
(c) Distributor shall prepare and deliver reports to the Trustees of the
Trust on a regular basis, at least quarterly, showing the expenditures with
respect to each Fund pursuant to the Service Plan and the purposes therefor, as
well as any supplemental reports that the Trustees of the Trust, from time to
time, may reasonably request.
5. Repurchase of Shares. Distributor as agent and for the account of the
Trust may repurchase Shares of the Funds offered for resale to it and redeem
such Shares at their net asset value.
6. Indemnification by the Trust. In the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties
hereunder on the part of Distributor, the Trust agrees to indemnify
Distributor, its officers and directors, and any person which controls
Distributor within the meaning of the 1933 Act against any and all claims,
demands, liabilities and expenses that any such indemnified party may incur
under the 1933 Act, or common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the registration
statement for any Fund, any Prospectus or Statement of Additional Information,
or any advertisements or sales literature prepared by or on behalf of the Trust
for Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, unless such
statement or omission was made in reliance upon and in conformity with
<PAGE>
information furnished to the Trust in connection therewith by or on behalf of
Distributor. Nothing herein contained shall require the Trust to take any
action contrary to any provision of its Declaration of Trust or any applicable
statute or regulation.
7. Indemnification by Distributor. Distributor agrees to indemnify the
Trust, its officers and Trustees and any person which controls the Trust within
the meaning of the 1933 Act against any and all claims, demands, liabilities
and expenses that any such indemnified party may incur under the 1933 Act, or
common law or otherwise, arising out of or based upon (i) any alleged untrue
statement of a material fact contained in the registration statement for any
Fund, any Prospectus or Statement of Additional Information, or any
advertisements or sales literature prepared by or on behalf of the Trust for
Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor; and (ii) any act or deed of Distributor or its sales
representatives that has not been authorized by the Trust in any Prospectus or
Statement of Additional Information or by this Agreement.
8. Term and Termination.
(a) Unless terminated as herein provided, this Agreement shall continue
in effect as to each Fund until May __, 1999 and shall continue in effect for
successive periods of one year thereafter, but only so long as each such
continuance is specifically approved by votes of a majority of both the
Trustees of the Trust and the Trustees of the Trust who are not parties to this
Agreement or interested persons (as defined in the 1940 Act) of any such party
and who have no direct or indirect financial interest in this Agreement or in
the operation of the Service Plan or in any agreement related thereto
("Independent Trustees"), cast in person at a meeting called for the purpose of
voting on such approval.
(b) This Agreement may be terminated as to any Fund on not less than
thirty days' nor more than sixty days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act).
<PAGE>
9. Limitation of Liability. The obligations of the Trust hereunder shall
not be binding upon any of the Trustees, officers or shareholders of the Trust
personally, but shall bind only the assets and property of the particular Fund
or Funds in question, and not any other Fund or series of the Trust. The term
"CitiFunds Tax Free Income Trust" means and refers to the Trustees from time to
time serving under the Declaration of Trust of the Trust, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement has been authorized by the Trustees, and this
Agreement has been signed on behalf of the Trust by an authorized officer of
the Trust, acting as such and not individually, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the assets and property of the
Trust as provided in the Declaration of Trust.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CitiFunds Tax Free Income Trust
By:_______________________________
CFBDS, Inc.
By:_______________________________
<PAGE>
Exhibit A
Funds
CitiFunds National Tax Free Income Portfolio
CitiFunds New York Tax Free Income Portfolio
CitiFunds California Tax Free Income Portfolio
Exhibit 8(b)
CitiFunds Tax Free Income Trust
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
__________ __, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: CitiFunds Tax Free Income Trust - Custodian Contract
Ladies and Gentlemen:
Pursuant to Section 12 of the Custodian Contract dated as of June 24,
1986 (the "Contract"), between CitiFunds Tax Free Income Trust (formerly known
as "Landmark New York Tax Free Income Fund") (the "Trust") and State Street
Bank and Trust Company (the "Custodian"), we hereby request that CitiFunds
California Tax Free Income Portfolio (the "Fund") be added to the list of
series of the Trust to which the Custodian renders services as custodian under
the terms of the Contract.
Please sign below to evidence your agreement to render such services as
custodian on behalf of the Fund and to add the Fund as a beneficiary under the
Contract.
CITIFUNDS TAX FREE INCOME TRUST
By:_____________________________
Title:__________________________
Agreed:
STATE STREET BANK AND TRUST COMPANY
By:_____________________________
Title:__________________________
Exhibit 9(a)
FORM OF AMENDED AND RESTATED
SUB-ADMINISTRATIVE SERVICES AGREEMENT
SUB-ADMINISTRATIVE SERVICES AGREEMENT, dated as of December 31, 1997, and
amended and restated as of __________ __, 1998, by and between CFBDS, INC., a
Massachusetts corporation (the "Sub-Administrator"), and CITIBANK, N.A., a
national banking association ("Citibank").
W I T N E S S E T H :
WHEREAS, Citibank has been retained by certain registered open-end
management investment companies under the Investment Company Act of 1940, as
amended (the "1940 Act"), as listed on Schedule A hereto (each individually a
"Trust" and collectively the "Trusts"), to provide administrative services to
its investment portfolios, as listed on Schedule A hereto (each individually a
"Fund" and collectively the "Funds"), pursuant to separate Management
Agreements (each a "Management Agreement"), and
WHEREAS, as permitted by Section 1 of each Management Agreement, Citibank
desires to subcontract some or all of the performance of its obligations
thereunder to Sub-Administrator, and Sub-Administrator desires to accept such
obligations; and
WHEREAS, Citibank wishes to engage Sub-Administrator to provide certain
administrative services on the terms and conditions hereinafter set forth, so
long as Citibank shall have found Sub-Administrator to be qualified to perform
the obligations sought to be subcontracted.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties as Sub-Administrator. Subject to the supervision and direction
of Citibank, Sub-Administrator will assist in supervising various aspects of
each Trust's administrative operations and undertakes to perform the following
specific services, from and after the effective date of this Agreement:
<PAGE>
(a) To the extent requested by Citibank, furnish Trust secretarial
services;
(b) To the extent requested by Citibank, furnish Trust treasury
services, including the review of financial data, tax and other
regulatory filings and audit requests;
(c) To the extent requested by Citibank, provide the services of certain
persons who may be appointed as officers or Trustees of the Trust by
the Trust's Board;
(d) To the extent requested by Citibank, participate in the preparation
of documents required for compliance by the Trust with applicable
laws and regulations, including registration statements,
prospectuses, semi-annual and annual reports to shareholders and
proxy statements;
(e) To the extent requested by Citibank, prepare agendas and supporting
documents for and minutes of meetings of the Trustees, Committees of
Trustees and shareholders;
(f) Maintain books and records of the Trust;
(g) To the extent requested by Citibank, provide advice and counsel to
the Trust with respect to regulatory matters, including monitoring
regulatory and legislative developments which may affect the Trust
and assisting the Trust in routine regulatory examinations or
investigations of the Trust, and working closely with outside
counsel to the Trust in connection with litigation in which the
Trust is involved;
(h) To the extent requested by Citibank, generally assist in all aspects
of Trust's operations and provide general consulting services on a
day to day, as needed basis;
(i) In connection with the foregoing activities, maintain office
facilities (which may be in the offices of Sub-Administrator or its
corporate affiliate); and
(j) In connection with the foregoing activities, furnishing clerical
services, and internal executive and administrative services,
stationery and office supplies.
<PAGE>
Notwithstanding the foregoing, Sub-Administrator under this Agreement
shall not be deemed to have assumed any duties with respect to, and shall not
be responsible for, the management of a Trust, or the distribution of
beneficial interests in a Trust, nor shall Sub-Administrator be deemed to have
assumed or have any responsibility with respect to functions specifically
assumed by any transfer agent or custodian of a Trust.
In performing all services under this Agreement, Sub-Administrative shall
(a) act in conformity with the Trust's charter documents and bylaws, the 1940
Act and other applicable laws, as the same may be amended from time to time,
(b) consult and coordinate with legal counsel for the Trust, as necessary or
appropriate, and (c) advise and report to the Trust and its legal counsel, as
necessary or appropriate, with respect to any material compliance or other
matters that come to its attention.
In performing its services under this Agreement, Sub-Administrator shall
cooperate and coordinate with Citibank as necessary and appropriate and shall
provide such information as its reasonably necessary or appropriate for
Citibank to perform its obligations to the Trust. Sub-Administrator shall
perform its obligations under this Agreement in a conscientious and diligent
manner consistent with prevailing industry standards.
2. Compensation of Sub-Administrator. For the services to be rendered and
the facilities to be provided by Sub-Administrator hereunder, Sub-Administrator
shall be paid an administrative fee as may from time to time be agreed to
between Citibank and Sub-Administrator.
3. Additional Terms and Conditions. The parties may amend this agreement
and include such other terms and conditions as may from time to time be agreed
to by both Citibank and Sub-Administrator.
4. Termination. This Agreement may be terminated by Citibank at any time,
in its entirety or as to one or more Funds, with or without cause. This
Agreement may be terminated by the Sub-Administrator, in its entirety or as to
one or more Funds, with or without cause, provided that Sub-Administrator has
notified Citibank of such termination in writing at least 90 days prior to the
effective date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
CFBDS, INC. CITIBANK, N.A.
By:__________________________ By:_____________________________
Title:_______________________ Title:__________________________
<PAGE>
Schedule A
to Sub-Administrative Services Agreement
Between
CFBDS, Inc.
and
Citibank, N.A.
Trust Series
CitiFunds Fixed Income Trust CitiFunds Intermediate Income
Portfolio
CitiFunds Diversified Income
Portfolio
CitiFunds Tax Free Income Trust CitiFunds National Tax Free Income
Portfolio
CitiFunds New York Tax Free Income
Portfolio
CitiFunds California Tax Free Income
Portfolio
Exhibit 9(c)
CitiFunds Tax Free Income Trust
21 Milk Street, 5th Floor
Boston, Massachusetts 02109
__________ __, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: CitiFunds Tax Free Income Trust - Transfer Agency and
Service Agreement
Ladies and Gentlemen:
This letter serves as notice that CitiFunds California Tax Free Income
Portfolio (the "Fund") is added to the list of series of CitiFunds Tax Free
Income Trust (formerly known as "Landmark New York Tax Free Income Fund") (the
"Trust") to which State Street Bank and Trust Company ("State Street") renders
services as transfer agent pursuant to the terms of the Transfer Agency and
Service Agreement dated as of September 8, 1986 (the "Agreement") between the
Trust and State Street.
Please sign below to acknowledge your receipt of this notice adding the
Fund as a beneficiary under the Agreement.
CITIFUNDS TAX FREE INCOME TRUST
By:__________________________
Title:_______________________
Acknowledgment:
STATE STREET BANK AND TRUST COMPANY
By:___________________________
Title:________________________
Exhibit 15
SERVICE PLAN
SERVICE PLAN of Landmark Tax Free Income Funds, a Massachusetts business
trust (the "Trust"), with respect to shares of beneficial interest ("Shares")
of its series Landmark National Tax Free Income Fund, Landmark New York Tax
Free Income Fund, and any other series of the Trust adopting this plan (the
"Series").
WHEREAS, the Trust engages in business as an openend management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust intends to distribute Shares in accordance with Rule
12b-1 under the 1940 Act, and wishes to adopt this Plan as a plan of
distribution pursuant to Rule 12b-1;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have
no direct or indirect financial interest in the operation of this Plan or in
any agreement relating hereto (the "NonInterested Trustees"), having
determined, in the exercise of reasonable business judgment and in light of
their fiduciary duties under state law and under Section 36(a) and (b) of the
1940 Act, that there is a reasonable likelihood that this Plan will benefit the
Trust and the shareholders of the Series, have approved this Plan by votes cast
at a meeting called for the purpose of voting hereon and on any agreements
related hereto;
NOW, THEREFORE, the Trust hereby adopts this Plan as a plan of
distribution in accordance with Rule 12b-1 under the 1940 Act, with the terms
of the Plan being as follows:
1. Distribution and Servicing Activities. Subject to the supervision of
the Trustees of the Trust, the Trust may:
(a) engage, directly or indirectly, in any activities primarily
intended to result in the sale of Shares of the Series, which activities
may include, but are not limited to (i) payments to the Trust's
Distributor for distribution services, (ii) payments to securities
<PAGE>
dealers, financial institutions (which may include banks) and others in
respect of the sale of Shares of the Series, (iii) payments for
advertising, marketing or other promotional activity, and (iv) payments
for preparation, printing, and distribution of prospectuses and
statements of additional information and reports of the Trust for
recipients other than regulators and existing shareholders of the Trust;
and
(b) make payments, directly or indirectly, to the Trust's
Distributor, securities dealers, financial institutions (which may
include banks) and others for providing personal service and/or the
maintenance of shareholder accounts.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Maximum Expenditures. The expenditures to be made by the Trust
pursuant to this Plan shall be determined by the Trustees of the Trust, but in
no event may such expenditures exceed an amount calculated at the rate of 0.25%
per annum of the average daily net assets of each Series attributable to Shares
of that Series. Payments pursuant to this Plan may be made directly by the
Trust or to other persons with which the Trust has entered into agreements
related to this Plan. For purposes of determining the fees payable under this
Plan, the value of each Series' average daily net assets attributable to Shares
shall be computed in the manner specified in the applicable Series'
then-current prospectus and statement of additional information.
3. Trust's Expenses. The Trust shall pay all expenses of its operations,
including the following, and such expenses shall not constitute expenditures
under this Plan: organization costs of each series; compensation of Trustees;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Series; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Series,
including safekeeping of funds and securities and maintaining required books
<PAGE>
and accounts; expenses of calculating the net asset value of the Series
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
4. Term and Termination. (a) This Plan shall become effective as to a
Series on October 24, 1997, provided that the following have occurred: (i)
approval by a vote of at least a majority of the outstanding voting securities
(as defined in the 1940 Act) of Shares of the particular Series, and (ii)
approval by a majority of the Trustees of the Trust and a majority of the
Non-Interested Trustees cast in person at a meeting called for the purpose of
voting on this Plan. Unless terminated as herein provided, this Plan shall
continue until August 8, 1998, and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both the Trustees of the Trust
and the Non-Interested Trustees, cast in person at a meeting called for the
purpose of voting on such approval.
(b) This Plan may be terminated at any time with respect to any Series by
a vote of a majority of the NonInterested Trustees or by a vote of a majority
of the outstanding voting securities, as defined in the 1940 Act, of Shares of
the applicable Series.
5. Amendments. This Plan may not be amended to increase materially the
maximum expenditures permitted by Section 2 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities, as
defined in the 1940 Act, of Shares of the applicable Series, and no material
amendment to this Plan shall be made unless approved in the manner provided for
annual renewal of this Plan in Section 4(a) hereof.
6. Selection and Nomination of Trustees. While this Plan is in effect,
the selection and nomination of the Non-Interested Trustees of the Trust shall
be committed to the discretion of such Non-Interested Trustees.
7. Quarterly Reports. The Treasurer of the Trust shall provide to the
Trustees of the Trust and the Trustees shall review quarterly a written report
<PAGE>
of the amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
8. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 7 hereof, for a
period of not less than six years from the date of this Plan. Any such related
agreement or such reports for the first two years will be maintained in an
easily accessible place.
9. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
