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497(c) File Nos. 33-5819 and 811-5034
Prospectus March 2, 1998
CitiFunds(SM) National Tax Free Income Portfolio
This Prospectus describes CitiFundsSM National Tax Free Income Portfolio, a
non-diversifed 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
Prospectus Summary 3
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Expense Summary 5
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Condensed Financial Information 6
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Investment Information 7
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Risk Considerations 8
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Valuation of Shares 10
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Purchases 10
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Exchanges 10
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Redemptions 11
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Dividends and Distributions 12
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Management 12
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Tax Matters 15
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Performance Information 16
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General Information 17
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Appendix -- Permitted Investments and Investment Practices 18
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PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
THE FUND: This Prospectus describes CitiFunds(SM) National Tax Free Income
Portfolio.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's investment objective is to
generate high levels of current income exempt from federal 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 income taxes. Investors should be willing to
accept fluctuation in the price of shares of the Fund.
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.
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. As a result, the Fund is more susceptible than more
diversified funds to any single economic, political or regulatory occurrence.
Certain investment practices may also entail special risks. Investors should
read "Risk Considerations" for more information about risk factors.
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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 12 and "General Information -- Expenses" --
page 17.*
CITIFUNDS
NATIONAL 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) 0.40%
12b-1 Fees (including service fees)(2) 0.25%
Other Expenses (after fee waivers and reimbursements)(3) 0.15%
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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
and reimbursements. There can be no assurance that the fee waivers and
reimbursements reflected in the table will continue at these levels. The
information in the table and in the example below is based on the Fund's
expenses for the fiscal year ended December 31, 1997, as revised to
reflect current fees.
(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 and reimbursements, management fees, other expenses
and total fund operating expenses would be 0.75%, 6.56% and 7.56%,
respectively, as revised to reflect the Fund's current fees and expense
structure.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period indicated below:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
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CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO $8 $26 $44 $99
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The Example assumes that all dividends are reinvested, and reflects certain
voluntary fee waivers. If the fee waivers and reimbursements were not made,
the amounts in the example would be $75, $218, $355 and $666. The assumption
of a 5% annual return is required by the Securities and Exchange Commission
for all mutual funds, and is not a prediction of the Fund's future
performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
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CONDENSED FINANCIAL INFORMATION
The following table provides condensed financial information about the Fund
for the periods indicated. The information below should be read in conjunction
with the financial statements appearing in the Fund's Annual Report to
Shareholders, which are incorporated by reference in the Statement of
Additional Information. The financial statements and notes, as well as the
table below, have been audited by Deloitte & Touche LLP, independent
accountants. The report of Deloitte & Touche LLP is included in the Fund's
Annual Report. Copies of the Annual Report may be obtained without charge from
an investor's Service Agent or by calling 1-800-625-4554.
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO -- FINANCIAL HIGHLIGHTS
AUGUST 17, 1995
(COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS) TO
1997 1996 DECEMBER 31, 1995
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Net Asset Value,
beginning of period $10.34 $10.55 $10.00
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Income from
Operations:
Net investment income 0.564 0.562 0.187
Net realized and unrealized
gain (loss) on investments 0.586 (0.232) 0.551
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Total from operations 1.150 0.330 0.738
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Less Dividends From:
Net investment income (0.570) (0.540) (0.188)
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Net Asset Value, end of period $10.92 $10.34 $10.55
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $1,917 $2,060 $1,306
Ratio of expenses to average
net assets 0.14% 0% 0%
Ratio of expenses to average
net assets after fees paid
indirectly(A) 0% 0% 0%
Ratio of net investment income
to average net assets 5.45% 5.42% 5.20%+
Portfolio turnover 55% 52% 0%
Total return 11.45% 3.31% 7.43%**
Note: If certain agents of the Fund had not voluntarily agreed to waive all or
a portion of their fees for the periods indicated and expenses were not
reduced for fees paid indirectly, and had expenses been limited to that
required by state securities laws in 1995, the net investment income per share
and the ratios would have been as follows:
Net investment income
per share $(0.229) $(0.291) $0.098
RATIOS:
Expenses to average
net assets 7.66% 8.23% 2.50%+
Net investment income
to average net assets (2.21)% (2.81)% 2.70%+
+ Annualized. ** Not annualized.
(A) The expense ratios for the year ended December 31, 1995 and the periods
thereafter have been adjusted to reflect a change in reporting
requirements. The new reporting guidelines require the Fund to increase its
expense ratio by the effect of any expense offset arrangements with
its service providers.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE: The investment objective of the Fund is to generate
high levels of current income exempt from federal 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 income taxes including the federal
alternative minimum tax ("tax-exempt Municipal Obligations"). Under normal
circumstances at least 80% of the Fund's assets will be invested in tax-exempt
Municipal Obligations.
The Fund may invest in short-term debt securities that pay interest that is
subject to federal 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.
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 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 weighted average maturity of securities
held by the Fund is in a long-term range (between 10 and 30 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 18. The Fund will not necessarily
invest or engage in each of the investments and investment practices in the
Appendix but reserves the right to do so.
Investment Restrictions. The Statement of Additional Information contains a
list of specific investment restrictions which govern the investment policies
of the Fund, including a limitation that the Fund may borrow money from banks
in an amount not to exceed 1/3 of the Fund's net assets for extraordinary or
emergency purposes (e.g., to meet redemption requests). Except as otherwise
indicated, the Fund's investment 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 Fund's annual portfolio turnover rate appears in the Financial
Highlights for the Fund. See "Condensed Financial Information." 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, 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 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.
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 18.
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 certain fees from the Distributor and/
or the Fund. See "Management -- Distribution Arrangements." Investors should
contact their Service Agents for information on purchases. Each Service Agent
may establish its own terms, conditions and charges with respect to services
it offers to its customers. Charges for these services may include fixed
annual fees and account maintenance fees. The effect of any such fees will be
to reduce the net return on the investment of customers of that Service Agent.
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
From time to time the Distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Fund. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
EXCHANGES
Shares may be exchanged for shares of the CitiSelect Portfolios and certain
other CitiFunds, or may be acquired through an exchange of shares of those
funds.
Shareholders must place exchange orders through the Transfer Agent or, if they
are customers of a Service Agent, through their Service Agent, and may do so
by telephone if their account applications so permit. For more information on
telephone transactions see "Redemptions." All exchanges will be effected based
on the relative net asset values per share next determined after the exchange
order is received and accepted by the Transfer Agent. See "Valuation of
Shares." Shares of the Fund may be exchanged only after payment in federal
funds for the shares has been received by the Transfer Agent.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by Securities and Exchange
Commission rules, and is available only in those jurisdictions where such
exchanges legally may be made. See the Statement of Additional Information for
further details. An exchange is treated as a sale of the shares exchanged and
could result in taxable gain or loss to the shareholder making the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders
to the Fund on behalf of its customers. A Service Agent may establish
requirements or procedures regarding submission of redemption requests by its
customers that are different from those described below. 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.
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.
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.
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, has managed the Fund since June
1997. 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. Prior to joining SunAmerica, he 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's discussion of the Fund's performance is included in the Fund's
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
Management Fees. For its services under the Management Agreement, Citibank
receives fees, which are accrued daily and paid monthly, of 0.75% of the
Fund's average daily net assets on an annualized basis for the Fund's then-
current fiscal year. This fee is higher than the management fee paid by most
mutual funds. Citibank may voluntarily agree to waive a portion of its
management fees.
For the fiscal year ended December 31, 1997, Citibank voluntarily waived its
entire fee under a prior investment advisory agreement for the Fund.
Banking Relationships. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Citibank has informed
the Fund that, in making its investment decisions, it does not obtain or use
material inside information in the possession of any division or department of
Citibank or in the possession of any affiliate of Citibank.
Bank Regulatory Matters. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Fund. Citibank believes that its services
under the Management Agreement and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there
is no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or a Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for
the Fund. Securities may be held by a sub-custodian bank approved by the
Trustees. State Street also provides fund accounting services and calculates
the daily net asset value for the Fund. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: CFBDS, 6 St. James Avenue, Boston, MA 02116
(telephone: (617) 423-1679), is the distributor of the Fund's shares. Under a
Service Plan which has been adopted in accordance with Rule 12b-1 under the
1940 Act, the Fund may pay monthly fees at an annual rate not to exceed 0.25%
of the average daily net assets of the Fund. These fees may be used to make
payments to the Distributor for distribution services and to Service Agents
and others as compensation for the sale of shares of the Fund, for
advertising, marketing or other promotional activity, and for preparation,
printing and distribution of prospectuses, statements of additional
information and reports for recipients other than regulators and existing
shareholders. The Fund also may make payments to the Distributor, Service
Agents and others for providing personal service or the maintenance of
shareholder accounts. In those states where CFBDS is not a registered broker-
dealer, shares of the Fund are sold through Signature Broker-Dealer Services,
Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The Fund and the Distributor provide to the Trustees quarterly a written
report of amounts expended pursuant to the Service Plan and the purposes for
which the expenditures were made.
During the period they are in effect, the Service Plan and 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.
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: Fund dividends which are excludable from shareholders'
gross income for federal income tax purposes will not necessarily be exempt
from the income or other tax laws of any state or local taxing authority.
Investors should consult their own tax advisers in this regard.
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
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 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 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 the Fund was called Landmark National Tax Free Income
Fund and 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
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.
For the fiscal year ended December 31, 1997, all expenses of the Fund were
paid by Citibank.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
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.
- -------------------------------------------------------------------------------
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.
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 or facilities. Municipal
leases frequently have special risks not normally associated with general
obligation bonds or revenue bonds. Many leases include "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other periodic
basis. Although the obligations will be secured by the leased equipment or
facilities, the disposition of the property in the event on 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 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 15% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities
for which no institutional market exists. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for the Fund to sell
them promptly at an acceptable price.
"When-Issued" Securities. In order to ensure the availability of suitable
securities, the Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered
to the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the
percentage of a Fund's assets committed to the purchase of securities on a
"when-issued" basis may increase the volatility of its net asset value.
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
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>
CFP/NTFIP 398 [recycle symbol] Printed on recycled paper
<PAGE>
497(c) File Nos. 33-5819 and 811-5034
Prospectus March 2, 1998
CitiFunds(SM) New York Tax Free Income Portfolio
This Prospectus describes CitiFunds(SM) New York 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).
- ------------------------------------------------------------------------------
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
..............................................................................
Condensed Financial Information 6
..............................................................................
Investment Information 8
..............................................................................
Risk Considerations 10
..............................................................................
Valuation of Shares 11
..............................................................................
Purchases 12
..............................................................................
Exchanges 12
..............................................................................
Redemptions 13
..............................................................................
Dividends and Distributions 14
..............................................................................
Management 14
..............................................................................
Tax Matters 16
..............................................................................
Performance Information 17
..............................................................................
General Information 18
..............................................................................
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 CitiFunds(SM) New York Tax Free Income
Portfolio.
INVESTMENT OBJECTIVE AND POLICIES: The Fund's investment objective is to
generate high levels of current income exempt from federal, New York State and
New York City 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, New York State and New York City 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 New York 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.
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 New York 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 New York 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 14 and "General Information -- Expenses" --
page 19.*
CITIFUNDS
NEW YORK
TAX FREE
INCOME
PORTFOLIO
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES,
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee waivers)(1)(3) 0.32%
12b-1 Fees (including service fees)(2) 0.25%
Other Expenses 0.23%
- ------------------------------------------------------------------------------
Total Fund Operating Expenses (after fee waivers)(3) 0.80%
- ------------------------------------------------------------------------------
* This table is intended to assist investors in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly
or indirectly. The table shows the fees paid to various service providers
after giving effect to expected voluntary partial fee waivers. There can be
no assurance that the fee waivers reflected in the table will continue at
these levels. The information in the table and in the example below is based
on the Fund's expenses for the fiscal year ended December 31, 1997, as
revised to reflect current fees.
(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 and total fund operating expenses would
be 0.75% and 1.23%, respectively, as revised to reflect the Fund's current
fees and expense structure.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period indicated below:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------
CITIFUNDS NEW YORK TAX FREE INCOME
PORTFOLIO $8 $26 $44 $99
- ------------------------------------------------------------------------------
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 $13, $39, $68 and $149. 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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table provides condensed financial information about the Fund
for the periods indicated. The information below should be read in conjunction
with the financial statements appearing in the Fund's Annual Report to
Shareholders, which are incorporated by reference in the Statement of
Additional Information. The financial statements and notes, as well as the
table below, have been audited by Deloitte & Touche LLP, independent
accountants. The report of Deloitte & Touche LLP is included in the Fund's
Annual Report. Copies of the Annual Report may be obtained without charge from
an investor's Service Agent or by calling 1-800-625-4554.
<TABLE>
<CAPTION>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOUR MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993(A)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $10.98 $11.25 $10.09 $11.54 $11.44
- -------------------------------------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.594 0.585 0.607 0.566 0.210
Net realized and unrealized gain
(loss) on investments 0.431 (0.267) 1.153 (1.415) 0.076
- -------------------------------------------------------------------------------------------------------------------------------
Total from operations 1.025 0.318 1.760 (0.849) 0.286
- -------------------------------------------------------------------------------------------------------------------------------
Less Dividends From:
Net investment income (0.585) (0.588) (0.600) (0.601) (0.186)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of period $11.42 $10.98 $11.25 $10.09 $11.54
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted) $75,978 $82,182 $90,264 $86,399 $120,824
Ratio of expenses to average net
assets 0.80% 0.80% 0.80% 0.80% 0.80%+
Ratio of net investment income to
average net assets 5.31% 5.34% 5.62% 5.52% 4.84%+
Portfolio turnover 16% 47% 98% 150% 46%
Total return 9.62% 3.01% 17.89% (7.47)% 2.52%**
Note: If certain agents of the Fund had not voluntarily agreed to waive all or a portion of their fees for the periods indicated
and expenses were not reduced for fees paid indirectly for the years ended after December 31, 1994, the net investment income per
share and the ratios would have been as follows:
Net investment income per share $0.540 $0.534 $0.555 $0.508 $0.191
RATIOS:
Expenses to average net assets 1.28% 1.27% 1.27% 1.27% 1.23%+
Net investment income to average
net assets 4.83% 4.87% 5.15% 5.05% 4.40%+
** Not annualized.
+ Annualized.
(A) Effective September 1, 1993, the Fund changed its fiscal year end from August 31 to December 31.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
YEAR ENDED AUGUST 31,
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period $10.82 $10.27 $ 9.77 $ 9.89 $ 9.34 $ 9.49
- -------------------------------------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.567 0.589 0.583 0.565 0.577 0.586
Net realized and unrealized
gain (loss) on investments 0.610 0.541 0.510 (0.117) 0.550 (0.156)
- -------------------------------------------------------------------------------------------------------------------------------
Total from operations 1.177 1.130 1.093 0.448 1.127 0.430
- -------------------------------------------------------------------------------------------------------------------------------
Less Dividends From:
Net investment income (0.557) (0.580) (0.593) (0.568) (0.577) (0.580)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of period $11.44 $10.82 $10.27 $ 9.77 $ 9.89 $9.340
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $111,583 $81,185 $73,884 $76,442 $73,790 $70,050
Ratio of expenses to average
net assets 0.80% 0.80% 0.81% 1.37% 1.42% 1.25%
Ratio of net investment
income to average net assets 5.11% 5.58% 5.82% 5.73% 5.95% 6.34%
Portfolio turnover 149% 143% 337% 170% 204% 107%
Total return 11.19% 11.31% 11.52% 4.66% 12.49% 4.67%
Note: If certain agents of the Fund had not voluntarily agreed to waive all or a portion of their fees for the periods indicated
and expenses were not reduced for fees paid indirectly for the years ended after December 31, 1994, the net investment income per
share and the ratios would have been as follows:
Net investment income per share $0.515 $0.537 $0.540 $0.561 * $0.586
RATIOS:
Expenses to average net assets 1.27% 1.30% 1.24% 1.40% * 1.26%
Net investment income to
average net assets 4.64% 5.09% 5.39% 5.69% * 6.33%
* No waiver or assumption of expenses during the period.
</TABLE>
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE: The investment objective of the Fund is to generate high
levels of current income exempt from federal, New York State and New York City
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, New York State and New York City
personal income taxes including the federal alternative minimum tax ("triple
tax-exempt Municipal Obligations"). 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 New York State and New York City
personal income taxes. The Fund may also invest in short-term debt securities
that pay interest that is subject to federal, New York State and New York City
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 New York State
or New York City 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 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 weighted average maturity of securities
held by the Fund is in a long-term range (between 10 and 30 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
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 Fund's annual portfolio turnover rate appears in the Financial
Highlights for the Fund. See "Condensed Financial Information." 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, 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 New York 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.
New York Securities. The Fund's investments are, under normal circumstances,
concentrated in Municipal Obligations of New York issuers. Payment of interest
and principal of these securities is dependent on the continuing ability of
issuers in New York to meet their obligations.
Investors in the Fund should consider carefully the special risks inherent in
investing in New York Municipal Obligations. These risks result from the
financial condition of New York State, certain of its public bodies and
municipalities, and New York City. Beginning in early 1975, New York State,
New York City and other State entities faced serious financial difficulties
which jeopardized the credit standing and impaired the borrowing abilities of
such entities and contributed to high interest rates on, and lower market
prices for, debt obligations issued by them. These financial difficulties
caused the credit ratings of certain New York Municipal Obligations to be
downgraded by rating agencies. A recurrence of such financial difficulties or
a failure of certain financial recovery programs could result in defaults or
declines in the market values of various New York Municipal Obligations in
which the Fund may invest. Although the steady growth that has characterized
the New York economy recently continued during the first half of 1997, there
can be no assurance that credit ratings on obligations of New York State, New
York City and other New York governmental authorities will not be downgraded
further. 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.
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.
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.
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.
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, has managed the Fund since June
1997. 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's discussion of the Fund's performance is included in the Fund's
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
Management Fees. For its services under the Management Agreement, Citibank
receives fees, which are accrued daily and paid monthly, of 0.75% of the
Fund's average daily net assets on an annualized basis for the Fund's then-
current fiscal year. This fee is higher than the management fee paid by most
mutual funds. Citibank may voluntarily agree to waive a portion of its
management fees.
For the fiscal year ended December 31, 1997, the management fees paid to
Citibank under its investment advisory agreement were 0.23% of the Fund's
average net assets.
Banking Relationships. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Fund, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Citibank has informed
the Fund that, in making its investment decisions, it does not obtain or use
material inside information in the possession of any division or department of
Citibank or in the possession of any affiliate of Citibank.
Bank Regulatory Matters. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Fund. Citibank believes that its services
under the Management Agreement and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there
is no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers
pursuant to state securities laws. Changes in either federal or state statutes
or regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or a Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian 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, 6 St. James Avenue, Boston, MA 02116
(telephone: (617) 423-1679), is the distributor of the Fund's shares. Under a
Service Plan which has been adopted in accordance with Rule 12b-1 under the
1940 Act, the Fund may pay monthly fees at an annual rate not to exceed 0.25%
of the average daily net assets of the Fund. These fees may be used to make
payments to the Distributor for distribution services and to Service Agents
and others as compensation for the sale of shares of the Fund, for
advertising, marketing or other promotional activity, and for preparation,
printing and distribution of prospectuses, statements of additional
information and reports for recipients other than regulators and existing
shareholders. The Fund also may make payments to the Distributor, Service
Agents and others for providing personal service or the maintenance of
shareholder accounts. In those states where CFBDS is not a registered broker-
dealer, shares of the Fund are sold through Signature Broker-Dealer Services,
Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The Fund and the Distributor provide to the Trustees quarterly a written
report of amounts expended pursuant to the Service Plan and the purposes for
which the expenditures were made.
During the period they are in effect, the Service Plan and 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.
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: NEW YORK TAXES.To the extent that dividends received
from the Fund are derived from interest on triple tax-exempt obligations, the
dividends will be excluded from the gross income of individual shareholders
who are New York residents for New York State and New York City personal
income tax purposes. DIVIDENDS FROM THE FUND ARE NOT EXCLUDED IN DETERMINING
NEW YORK STATE OR NEW YORK CITY FRANCHISE TAXES ON CORPORATIONS AND FINANCIAL
INSTITUTIONS.
Generally. Except as described under "New York Taxes," Fund dividends which
are excludable from shareholders' gross income for federal income tax purposes
will not necessarily be exempt from the income or other tax laws of any state
or local taxing authority. Investors should consult their own tax advisers in
this regard.
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
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 New
York State and New York City 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 New York State and New York City 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 the Fund was called Landmark New York Tax Free Income
Fund and 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
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.
For the fiscal year ended December 31, 1997, the Fund's total expenses were
0.80% of its average daily net assets for that fiscal year.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
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.
- -------------------------------------------------------------------------------
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.
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 the obligations will be secured by the leased equipment or
facilities, the disposition of the property in the event on 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 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.
"When-Issued" Securities. In order to ensure the availability of suitable
securities, the Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered
to the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when-issued" basis may increase the volatility of its net asset value.
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
triple 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
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>
CFP/NYTFIP 398 [recycle symbol] Printed on recycled paper
<PAGE>
497(c) File Nos. 33-5819 and 811-5034
Statement of
Additional Information
March 2, 1998
CITIFUNDS(SM) NATIONAL TAX FREE INCOME PORTFOLIO
CITIFUNDS(SM) NEW YORK TAX FREE INCOME PORTFOLIO
CITIFUNDS(SM) NATIONAL TAX FREE INCOME PORTFOLIO AND CITIFUNDS(SM) NEW
YORK TAX FREE INCOME PORTFOLIO (THE "FUNDS") ARE SERIES OF CITIFUNDS TAX FREE
INCOME TRUST (THE "TRUST"). THE ADDRESS AND TELEPHONE NUMBER OF THE TRUST ARE
6 ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116, (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 Objectives and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ........ 2
4. Investment Restrictions .............................................. 7
5. Performance Information .............................................. 8
6. Determination of Net Asset Value; Valuation of Securities;
Additional Redemption Information .................................... 9
7. Management ........................................................... 10
8. Portfolio Transactions ............................................... 14
9. Description of Shares, Voting Rights and Liabilities ................. 15
10. Certain Additional Tax Matters ....................................... 16
11. Independent Accountants and Financial Statements ..................... 18
Appendix A -- Description of Municipal Obligations ....................... 19
Appendix B -- Description of Securities Ratings .......................... 21
Appendix C -- Additional Information Concerning New York
Municipal Obligations....................................... 24
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Funds' Prospectuses, dated March 2, 1998. This Statement of Additional
Information should be read in conjunction with the Prospectuses, 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 National Tax Free Income Portfolio
(the "National Fund") and CitiFunds New York Tax Free Income Portfolio (the
"New York Fund"), each of which is a non-diversified separate series of the
Trust. Prior to March 2, 1998, the National Fund was called Landmark National
Tax Free Income Fund and the New York Fund was called Landmark New York Tax
Free Income Fund. References in this Statement of Additional Information to
the "Prospectus" of a Fund are to the Prospectus, dated March 2, 1998, of such
Fund.
Citibank, N.A. ("Citibank" or the "Manager") is the manager of each of the
Funds. Citibank manages the investments of the Funds from day to day in
accordance with each Fund's investment objective and policies. The selection
of investments for the Funds 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 Funds. Shares of the Funds are continuously sold by CFBDS,
Inc., the Funds' distributor ("CFBDS" or the "Distributor"). Shares of each
Fund are sold at net asset value. CFBDS may receive distribution fees from
each 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 OBJECTIVES AND POLICIES
The investment objective of the National Fund is to generate high levels
of current income exempt from federal income taxes and preserve the value of
its shareholders' investment.
The investment objective of the New York Fund is to generate high levels
of current income exempt from federal, New York State and New York City
personal income taxes and preserve the value of its shareholders' investment.
The investment objective of each Fund may be changed without approval by
that 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 either Fund will achieve its investment objective.
As a fundamental policy, the Trust seeks to achieve the investment
objective of the National Fund by investing in debt obligations consisting
primarily (i.e., at least 80% of its assets under normal circumstances) of
municipal bonds and notes and other debt instruments the interest on which is
exempt from federal personal income taxes ("Municipal Obligations" or "tax-
exempt securities"). As used in this Statement of Additional Information, the
terms "Municipal Obligations" and "tax-exempt securities" are used
interchangeably to refer to debt instruments 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, or other
qualifying issuers, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is subject to the federal
alternative minimum tax).
As a fundamental policy, the Trust seeks to achieve the investment
objective of the New York 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, New York State and New York City personal income taxes.
These obligations are issued primarily by the State of New York, its political
subdivisions, municipalities, agencies, instrumentalities or public
authorities.
Each 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 Funds.
For a general discussion of Municipal Obligations and the risks associated
with 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 a Fund
purchases or sells a futures contracts. 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.
A 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, a 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.
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 a 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 a 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 a 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 a 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 a Fund hedged against the
possibility of an increase in interest rates which would adversely affect the
price of the Fund's bonds and interest rates decrease instead, part or all of
the benefit of the increased value of the Fund's bonds which were hedged will
be lost because the Fund will have offsetting losses in its futures positions.
Similarly, if a 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 a 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.
Each Fund will comply with this CFTC requirement, and each Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or cash equivalents will be maintained by each 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 a 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
a 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, a Fund will
not invest in futures contracts to the extent that such investment would be
inconsistent with such Fund's investment policies which provide that, under
normal circumstances, the National Tax Free Income Fund will invest at least
80% of its assets in tax-exempt Municipal Obligations and the New York Tax
Free Income Fund will invest at least 80% of its assets in triple tax-exempt
Municipal Obligations (that is, obligations that pay interest that is exempt
from federal, New York State and New York City personal income taxes including
the federal alternative minimum tax).
The use of futures contracts may increase the amount of taxable income of
a Fund and may affect the amount, timing and character of a Fund's income for
tax purposes, as more fully discussed herein in the section entitled "Certain
Additional Tax Matters."
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
applicable Fund would take delivery of such securities. When a 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 a Fund's
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Fund expects always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, even though the Funds do
not intend to make such purchases for speculative purposes and intend 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, a Fund
may have to sell assets which have been set aside in order to meet
redemptions. Also, if the Adviser 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).
VARIABLE AND FLOATING RATE OBLIGATIONS
Investments in floating or variable rate securities normally involve
industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate, such as
rates on Treasury Bonds or Bills or the prime rate at a major commercial bank,
and that a bondholder can demand payment of the obligations on short notice at
par plus accrued interest. While there is usually no established secondary
market for issues of this type of security, the dealer that sells an issue of
such securities frequently also offers to repurchase such securities at any
time, at a repurchase price which varies and may be more or less than the
amount the bondholder paid for them.
The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before a Fund is entitled to receive payment of the obligation
upon demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by a Fund through the demand feature, the
obligations mature on a specified date which may range up to 30 years from the
date of issuance.
PARTICIPATION INTERESTS
The Trust may purchase from banks on behalf of each 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 Funds' 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 counsel
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders of the Funds. The Trust will not invest more than 5%
of either Fund's total assets (taken at the greater of cost or market value)
in participation interests. Participation interests include municipal lease
obligations which are deemed to be illiquid unless otherwise determined by the
Board of Trustees.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers
and other institutional borrowers. Such loans will usually be made only to
member banks of the U.S. Federal Reserve System and to member firms of the New
York Stock Exchange (and subsidiaries thereof). Loans of securities would be
secured continuously by collateral in cash, cash equivalents or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested
in high quality short-term instruments. Either party has the right to
terminate a loan at any time on customary industry settlement notice (which
will not usually exceed three business days). During the existence of a loan,
a Fund 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 a 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. A 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, a 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 either Fund would exceed 30% of the value of its total
assets.
RULE 144A SECURITIES
Each of the Funds 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 National Fund and New York Fund will
not invest more than 15% and 10%, respectively, of their 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
each 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 NEW YORK
The Trust intends to invest a high proportion of the New York Fund's
assets in Municipal Obligations of the State of New York and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. Payment of interest and preservation of principal is dependent
upon the continuing ability of New York issuers and/or obligors of state,
municipal and public authority debt obligations to meet their obligations
thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State
agencies, authorities and localities have issued large amounts of bonds and
notes either guaranteed or supported by the State through lease-purchase
arrangements, other contractual arrangements or moral obligation provisions.
While debt service is normally paid out of revenues generated by projects of
such State agencies, authorities and localities, the State has had to provide
special assistance in recent years, in some cases of a recurring nature, to
enable such agencies, authorities and localities to meet their financial
obligations and, in some cases, to prevent or cure defaults. To the extent
State agencies and local governments require State assistance to meet their
financial obligations, the ability of the State to meet its own obligations as
they become due or to obtain additional financing could be adversely affected.
For further information concerning New York 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 New York State and New York City credit and financial
conditions. This summary is based on information from statements, including
preliminary statements, of issuers of New York Municipal Obligations and does
not purport to be complete. The Trust is not responsible for the accuracy or
timeliness of this information.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of each Fund, has adopted the following policies
which cannot be changed without the approval of the holders of a majority of
the applicable 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.
None of the Funds may:
(1) Borrow money, except that as a temporary measure for extraordinary
or emergency purposes it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed or purchase
any securities at any time at which borrowings exceed 5% of the total
assets of the Fund, 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 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.
As an operating policy, each of the National Fund and the New York Fund
will not invest more than 15% and 10%, respectively, 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 a Fund is not
considered a violation of policy.
5. PERFORMANCE INFORMATION
A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day
of the period and the net asset value per share on the last day of the period
of shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such
period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the public offering price per share on the first
day of such period, and (b) subtracting 1 from the result. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
Any current yield quotation of a 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 a 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.
Set forth below is total rate of return information for the shares of each
Fund for the periods indicated, assuming that dividends and capital gains
distributions, if any, were reinvested.
REDEEMABLE VALUE
OF A HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL AT THE END
RATE OF RETURN OF THE PERIOD
-------------- -----------------
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
Ten years ended December 31, 1997 7.57% $2,074
Five years ended December 31, 1997 5.78% $1,325
One year ended December 31, 1997 5.23% $1,052
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
August 17, 1995 (commencement of operations)
to December 31, 1997 7.50% $1,165
One year ended December 31, 1997 6.99% $1,070
The yields for the 30-day period ended December 31, 1997 were 4.66% for
the New York Fund and 5.00% for the National Fund.
The New York Fund's tax equivalent yield for the 30-day period ended
December 31, 1997 was 8.77% (assuming (i) a combined New York State, New York
City and federal tax bracket of 46.88% and (ii) that 100% of the New York
Fund's assets were invested in New York Municipal Obligations).
The National Fund's tax equivalent yield for the 30-day period ended
December 31, 1997 was 8.28% (assuming a federal tax bracket of 39.60%).
Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
a 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 Funds 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 Funds may refer to or discuss current or past
economic or financial conditions, developments and events.
From time to time, each 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 either 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 each 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 a 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 each 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 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 a 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 a 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 a 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 a 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 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 6
St. James Avenue, Boston, Massachusetts.
TRUSTEES
ELLIOTT J. BERV; 54 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 15 Stornoway Drive, Cumberland
Foreside, Maine.
PHILIP W. COOLIDGE*; 46 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN; 54 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); Director, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
RILEY C. GILLEY; 71 -- Vice President and General Counsel, Corporate Property
Investors (November 1988 to December 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
DIANA R. HARRINGTON; 57 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (since March 1997). Her address is 120
Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 46 -- President, Global Research Associates, Inc. (Investment
Research) (since August 1990); Manager, Rockefeller & Co. (March 1988 to July
1990); Trustee, Mainstay Institutional Funds (since December 1990). Her
address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR.; 62 -- 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; 71 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors)(since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 63 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 77 -- 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*; 46 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU*; 27 -- 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*; 49 -- 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*; 32 -- Secretary of the Trust; Vice President, Signature
Financial Group, Inc. (since May 1992); Assistant Secretary, CFBDS (since
October 1992).
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*; 33 -- 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*; 49 -- Assistant Secretary and Assistant Treasurer of the
Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER*; 38 -- 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 or administrator.
The Trustees of the Trust received the following remuneration from the
Trust for the periods indicated:
TRUSTEE COMPENSATION TABLE
AGGREGATE AGGREGATE TOTAL
COMPENSATION COMPENSATION COMPENSATION
FROM THE NEW FROM THE NATIONAL FROM TRUST AND
TRUSTEE YORK FUND (1) FUND (1) COMPLEX (2)
- ---- -------- ---------- ---------
H. B. Alvord (3) ........ $1,121 $ 558 $32,000
Elliott J. Berv ......... $1,916 $ 889 $57,000
Philip W. Coolidge ...... $ 0 $ 0 $ 0
Mark T. Finn ............ $1,858 $ 888 $54,000
Riley C. Gilley ......... $2,000 $ 891 $50,000
Diana R. Harrington ..... $2,196 $ 896 $57,000
Susan B. Kerley ......... $2,225 $ 897 $59,000
C. Oscar Morong, Jr. .... $2,357 $ 900 $70,000
Walter E. Robb, III ..... $1,924 $ 889 $56,000
E. Kirby Warren ......... $2,038 $ 892 $50,000
William S. Woods, Jr. ... $2,200 $ 896 $58,000
- ----------
(1) For the fiscal year ended December 31, 1997.
(2) Information relates to the fiscal year ended December 31, 1997. Messrs.
Berv, Coolidge, Finn, Gilley, Morong, Robb, Warren and Woods, and Mses.
Harrington and Kerley are Trustees of 31, 55, 26, 31, 28, 24, 28, 30, 29,
and 29 funds and portfolios, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.
(3) Mr. Alvord retired as a Trustee on May 31, 1997.
As of February 1, 1998, all Trustees and officers as a group owned less
than 1% of the outstanding shares of each Fund. As of the same date, more than
95% of the outstanding shares of each Fund were held of record by Citibank, or
its affiliates, as Service Agents for the accounts of their respective
clients.
The Declaration of Trust of the 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 each Fund and provides certain
administrative services to the Trust pursuant to separate management
agreements (the "Management Agreements"). Subject to such policies as the
Board of Trustees of the Trust may determine, Citibank manages the securities
of each Fund and makes investment decisions for each Fund. Citibank furnishes
at its own expense all services, facilities and personnel necessary in
connection with managing each Fund's investments and effecting securities
transactions for each Fund. The Management Agreements with the Trust provide
that Citibank may delegate the daily management of the securities of each Fund
to one or more subadvisers. The Management Agreements with the Trust will
continue in effect until August 8, 1999 and thereafter as long as such
continuance is specifically approved at least annually by the Board of
Trustees of the Trust or by a vote of a majority of the outstanding voting
securities of the applicable 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.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the Trust when
authorized either by a vote of a majority of the outstanding voting securities
of the applicable 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 Agreements with the Trust provide that neither
Citibank nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution of security transactions for the applicable Fund,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Management
Agreements with the Trust.
The Prospectus contains a description of the fees payable to Citibank for
services under each of the Management Agreements. Citibank may reimburse any
Fund for or waive all or a portion of its management fees.
For the fiscal years ended December 31, 1995, 1996 and 1997, the fees paid
to Citibank by the New York Fund under a prior investment advisory agreement,
after waivers, were $163,096, $88,585 and $181,270, respectively. For the
fiscal period from August 17, 1995 (commencement of operations) to December
31, 1995 and for the fiscal years ended December 31, 1996 and 1997, Citibank
waived all investment advisory fees for the National Fund.
For the fiscal years ended December 31, 1995, 1996 and 1997, the fees
payable from the New York Fund to CFBDS under a prior administrative services
agreement were $177,067 (of which $48,777 was voluntarily waived), $214,125
(of which $18,284 was voluntarily waived) and $194,607 (of which $124,928 was
voluntarily waived), respectively.
For the period August 17, 1995 (commencement of operations) to December
31, 1995 and for the fiscal years ended December 31, 1996 and 1997, the fees
payable from the National Fund to CFBDS under a prior administrative services
agreement were $862, $7,598 and $7,777, respectively (all of which were
voluntarily waived).
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 Agreements with the Trust. All such compensation is paid by
Citibank.
DISTRIBUTOR
CFBDS, 6 St. James Avenue, Boston, MA 02116, serves as the Distributor of
each 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 particular 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 Funds (the "Service Plan") which
has been adopted in accordance with Rule 12b-1 under the 1940 Act, the Funds
may pay monthly fees at an annual rate not to exceed 0.25% of the average
daily net assets of each 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 Funds, and to other parties in respect of the sale of shares of the Funds,
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 Funds also may make payments to the
Distributor, Service Agents and others for providing personal service or the
maintenance of shareholder accounts. The Funds 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 Funds 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 any 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. Each 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. In their annual
consideration of the continuation of the Service Plan for each Fund, the
Trustees will review the Service Plan and the expenses for each Fund
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 any 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
that Fund. The Service Plan may not be amended to increase materially the
amount of a Fund's permitted expenses thereunder without the approval of a
majority of the outstanding securities of that 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 Funds pursuant to the
Distribution Agreement. The Prospectus contains a description of fees payable
to the Distributor under the Distribution Agreement. For the fiscal years
ended December 31, 1994, 1995 and 1996, the Distributor waived all fees
payable from the New York Fund under a prior distribution agreement. For the
year ended December 31, 1997, the distribution fee for the New York Fund, net
of waivers, amounted to $1,860. For the period from August 17, 1995
(commencement of operations) to December 31, 1995 and for the fiscal years
ended December 31, 1996 and 1997, the Distributor waived all fees payable from
the National Fund under a prior 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 and Trust Company ("State Street") pursuant to which State Street
acts as transfer agent for each 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 each 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.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, acts as counsel
for the Trust.
8. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in a 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 each 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 each 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 a 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 Agreements, in connection with the selection of such
brokers or dealers and the placing of such orders, Citibank is directed to
seek for each 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 Funds, subject to any applicable laws, rules and regulations.
The management fee that each 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 a Fund as well as for one or more of Citibank's other clients.
Investment decisions for each Fund and for Citibank's other clients are made
with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for a Fund.
When purchases or sales of the same security for a 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.
For the fiscal years ended December 31, 1995, 1996 and 1997, the New York
Fund paid no brokerage commissions. For the period August 17, 1995
(commencement of operations) to December 31, 1995 and for the fiscal years
ended December 31, 1996 and 1997, the National Fund paid no brokerage
commissions.
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 a 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.
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 each 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
Each 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 a Fund's net
investment income and realized capital gains are distributed to shareholders
in accordance with the timing requirements imposed by the Code, no federal
income or excise taxes generally will be required to be paid by the Fund. If a
Fund should fail to qualify as a "regulated investment company" for any year,
the Fund would incur a regular corporate federal income tax upon its taxable
income and Fund distributions would generally be taxable as ordinary dividend
income to shareholders.
The portion of each 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 a 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 each Fund on their
federal income tax returns.
Shareholders of a Fund will generally have to pay federal income taxes on
the balance of each 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 a 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 a 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 applicable 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 a Fund
that it might otherwise have continued to hold and thereby potentially cause
the Fund to realize additional taxable gain or loss.
Each 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 a 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 a 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 Funds to the extent necessary to meet the
requirements of Subchapter M of the Code.
Each 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.
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, a 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 audited financial statements of the New York Fund (Portfolio of
Investments at December 31, 1997, Statement of Assets and Liabilities at
December 31, 1997, Statement of Operations for the year ended December 31,
1997, Statement of Changes in Net Assets for the years ended December 31, 1997
and 1996, the Financial Highlights for each of the years in the four-year
period ended December 31, 1997, the four months ended December 31, 1993, and
the year ended August 31, 1993, Notes to Financial Statements and Independent
Auditors' Report), each of which is included in the Annual Report to
Shareholders of the New York Fund, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, on behalf
of the New York Fund.
The audited financial statements of the National Fund (Portfolio of
Investments at December 31, 1997, Statement of Assets and Liabilities at
December 31, 1997, Statement of Operations for the year ended December 31,
1997, Statement of Changes in Net Assets for the years ended December 31, 1997
and 1996, Financial Highlights for each of the years in the two-year period
ended December 31, 1997 and for the period August 17, 1995 (commencement of
operations) to December 31, 1995, Notes to Financial Statements and
Independent Auditors' Report), each of which is included in the Annual Report
to Shareholders of the National Fund, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, on behalf
of the National Fund.
Copies of the Annual Report for each Fund accompany this Statement of
Additional Information.
<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 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 B. 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.
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
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.
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
NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or
other difficulties experienced by New York State (the "State") and certain of
its municipalities and public authorities. This information does not purport
to be a complete description and is based on information from official
statements, including preliminary official statements, relating to securities
offerings of New York issuers. CitiFunds New York Tax Free Income Portfolio is
not responsible for the accuracy or timeliness of this information.
NEW YORK STATE
The factors affecting the State's financial condition are complex and the
following description constitutes only a summary.
CURRENT ECONOMIC OUTLOOK
At the national level, although the current projection is for a faster
annual growth rate for 1998 as a whole and slower annual growth for 1999 than
expected in the earlier forecast, growth in both years is still expected to be
substantially slower than it was during 1997. The revised forecast projects
real Gross Domestic Product ("GDP") growth of 2.6 percent in 1998, which is
more than a full percentage point lower than the estimated 1997 growth rate.
In 1999, real GDP growth is expected to fall even further to 2.0 percent. The
growth of nominal GDP is projected to decline from 5.8 percent in 1997 to 4.8
percent in 1998 and 4.3 percent in 1999. The inflation rate is expected to
drop to 2.2 percent in 1998 before rising to 2.5 percent in 1999. The annual
rate of job growth is expected to be 2.3 percent in 1998, equaling the strong
growth rate experienced in 1997. In 1999, however, employment growth is
forecast to slow markedly to 1.3 percent. Growth in personal income and wages
is expected to slow in 1998 and again in 1999.
At the State level, moderate growth is projected to continue in 1998 and
1999 for employment, wages, and personal income, although the growth rates
will lessen gradually during the course of the two years. Personal income is
estimated to grow by 5.4 percent in 1997, fueled in part by a continued large
increase in financial sector bonus payments, and is projected to grow 4.7
percent in 1998 and 4.4 percent in 1999. Increases in bonus payments at year-
end 1998 are projected to be modest, a substantial change from the rate of
increase of the last few years. Overall employment growth is expected to
continue at a modest rate, reflecting the slowing growth in the national
economy, continued spending restraint in government, and restructuring in the
health care, social service, and banking sectors.
1997-98 FISCAL YEAR
The adopted 1997-98 budget projects an increase in General Fund
disbursements of $1.7 billion or 5.2 percent over 1996-97 levels. The average
annual growth rate over the last three fiscal years is approximately 1.2
percent. State Funds disbursements (excluding federal grants) are projected to
increase by 5.4 percent from the 1996-97 fiscal year. All Governmental Funds
projected disbursements increase by 7.0 percent over the 1996-97 fiscal year.
The 1997-98 State Financial Plan is projected to be balanced on a cash
basis. The Financial Plan projections include a reserve for future needs of
$530 million. As compared to the Governor's Executive Budget as amended in
February 1997, the State's adopted budget for 1997-98 increases General Fund
spending by $1.7 billion, primarily from increases for local assistance ($1.3
billion). Resources used to fund these additional expenditures include
increased revenues projected for the 1997-98 fiscal year, increased resources
produced in the 1996-97 fiscal year that will be utilized in 1997-98,
reestimates of social service, fringe benefit and other spending, and certain
non-recurring resources. Total non-recurring resources included in the 1997-98
Financial Plan are projected by the State Division of the Budget ("DOB") to be
$270 million, or 0.7 percent of total General Fund receipts.
The 1997-98 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax
relief, utility gross receipts tax reductions, permanent reductions in the
State sales tax on clothing, and the elimination of assessments on medical
providers. These reductions are intended to reduce the overall level of State
and local taxes in New York and to improve the State's competitive position
vis-a-vis other states. The various elements in the State and local tax and
assessment reductions have little or no impact on the 1997-98 Financial Plan,
and do not begin to materially affect the outyear projections until the
State's 1999-2000 fiscal year. The adopted 1997-98 budget also makes
significant investments in education, and proposes a new $2.4 billion general
obligation bond proposal for school facilities to be submitted to the voters
in November 1997.
The 1997-98 Financial Plan also includes: a projected balance of $332
million in the Tax Stabilization Reserve Fund ("TSRF"); and a projected $65
million balance in the Contingency Reserve Fund ("CRF").
1998-99 FISCAL YEAR (EXECUTIVE BUDGET FORECAST)
The Governor presented his 1998-99 Executive Budget to the Legislature on
January 20, 1998. The Executive Budget contains financial projections for the
State's 1997-98 through 2000-01 fiscal years, detailed estimates of receipts
and a proposed Capital Program and Financing Plan for the 1997-98 through
2002-03 fiscal years. It is expected that the Governor will prepare amendments
to his Executive Budget as permitted under law and that these amendments will
be reflected in a revised Financial Plan to be released on or before February
19, 1998. There can be no assurance that the Legislature will enact into law
the Executive Budget as proposed by the Governor, or that the State's adopted
budget projections will not differ materially and adversely from the
projections set forth herein.
The 1998-99 Financial Plan is projected to be balanced on a cash basis in
the General Fund. Total General Fund receipts, including transfers from other
funds, are projected to be $36.22 billion, an increase of $1.02 billion over
projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the State Financial Plan, the
Executive Budget proposes year-to-year growth in General Fund spending of 2.89
percent. State Funds spending (i.e., General Funds plus other dedicated funds,
with the exception of federal aid) is projected to grow by 8.5 percent.
Spending from All Governmental Funds (excluding transfers) is proposed to
increase by 7.6 percent from the prior fiscal year.
Current law and programmatic requirements are primarily responsible for
the year-to-year growth in General Fund spending. These include a current law
increase in school aid ($607 million), cost and enrollment growth in
handicapped education ($91 million) and Medicaid ($212 million), and employee
contract increases of $84 million for corrections programs to cover new
capacity demands and $152 million for mental health programs to finance
current law increases and the expansion of community beds. Other spending
growth reflects a requested increase of $108 million for the Judiciary and
$117 million for long-term debt service. New spending is partially offset by
reductions of $453 million for long-term debt service. New spending is
partially offset by reductions of $453 million in capital projects transfers
due to the financing of Community Enhancement Facilities Assistance Program
("CEFAP") from resources available in 1997-98, $37 million in welfare
assistance savings, $36 million from lower spending in General State charges,
and $68 million in welfare assistance savings, $36 million from lower spending
in General State charges, and $68 million in lower transfers primarily due to
the elimination of the Lottery transfer made in 1997-98.
The 1998-99 Financial Plan projects that the State will end 1998-99 with a
closing balance in the General Fund of $500 million, which reflects $400
million in the TSRF and $100 million in the CRF, following an anticipated
deposit of $35 million in the latter fund during the year.
1996-97 FISCAL YEAR
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of
approximately $1.4 billion. The cash surplus was derived primarily from
higher-than-expected revenues and lower-than-expected spending for social
services programs. The Governor in his Executive Budget applied $1.05 billion
of the cash surplus amount to finance the 1997-98 Financial Plan, and the
additional $373 million is available for use in financing the 1997-98
Financial Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the
event of any future General Fund deficit, as provided under the State
Constitution and State Finance Law. In addition, $41 million remains on
deposit in the CRF. This fund assists the State in financing any extraordinary
litigation costs during the fiscal year. The remaining $75 million reflects
amounts on deposit in the Community Projects Fund. This fund was created to
fund certain legislative initiatives. The General Fund closing fund balance
does not include $1.86 billion in the tax refund reserve account, of which
$521 million was made available as a result of the Local Government Assistance
Corporation ("LGAC") financing program and was required to be on deposit as of
March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the
previous fiscal year (excluding deposits into the tax refund reserve account).
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7 percent from the 1995-96
fiscal year.
1995-96 FISCAL YEAR
The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus as reported by DOB, of $445 million. Of that amount, $65
million was deposited into the TSRF, and $380 million was used to reduce
1996-97 Financial Plan liabilities.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9
million deposit to the Revenue Accumulation Fund. The closing fund balance
included $237 million on deposit in the TSRF. In addition, $41 million was on
deposit in the CRF. The remaining $9 million reflected amounts then on deposit
in the Revenue Accumulation Fund. The General Fund closing balance does not
include $678 million in the tax refund reserve account of which $521 million
was made available as a result of the LGAC financing program and was required
to be on deposit as of March 31, 1996.
General Fund receipts and transfers from other funds totaled $32.81
billion, a decrease of 1.1 percent from 1994-95 levels. General Fund
disbursements and transfers to other funds totaled $32.68 billion for the
1995-96 fiscal year, a decrease of 2.2 percent from 1994-95 levels.
1994-95 FISCAL YEAR
The State ended its 1994-95 fiscal year with the General Fund in balance.
The $241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million
to the TSRF. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited to continue the process
of restructuring the State's cash flow as part of the LGAC program. The
closing fund balance of $158 million reflects $157 million in the TSRF and $1
million in the CRF.
General Fund receipts and transfers from other funds totaled $33.16
billion, an increase of 2.9 percent from 1993-94 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
Rating Agencies Actions: On February 8, 1993, Fitch assigned its municipal
bond rating of A+ to the State's general obligation bonds. Moody's assigned
its municipal bond rating of A2 on February 10, 1997, and as of August 28,
1997, S&P assigned its rating of A 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.
PUBLIC AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities, meaning public benefit corporations
created pursuant to State law, other than local authorities. Public
authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds and
notes within the amounts, and restrictions set forth in legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of its public authorities were to default on their
respective obligations, particularly those using the financing techniques
referred to as State-supported or State-related debt. As of September 30,
1996, there were 17 public authorities that had outstanding debt of $100
million or more, and the aggregate outstanding debt, including refunding
bonds, of all State public authorities was $73.4 billion, only a portion of
which constitutes State-supported or State related debt.
There are numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments, otherwise payable to localities, to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive moneys from State appropriations to pay for
the operating costs of certain of their programs. As described below, the
Metropolitan Transportation Authority ("MTA") receives the bulk of this money
in order to provide transit and commuter services.
METROPOLITAN TRANSPORTATION AUTHORITY
The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and
Bronx Surface Transit Operating Authority (collectively, the "TA"). The MTA
operates certain commuter rail and bus services in the New York Metropolitan
area through MTA's subsidiaries, the Long Island Rail Road Company, the Metro-
North Commuter Railroad Company, and the Metropolitan Suburban Bus Authority.
In addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"),
the MTA operates certain intrastate toll bridges and tunnels. Because fare
revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended, and will continue to depend on operating
support from the State, local governments and TBTA and, to the extent
available, federal operating assistance, including loans, grants and
subsidies. If current revenue projections are not realized and/or operating
expenses exceed current projections, the TA or commuter railroads may be
required to seek additional State assistance, raise fares or take other
actions.
Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax--
that provide revenues for mass transit purposes, including assistance to the
MTA. Since 1987 State law has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance
to the MTA. For the 1997-98 State fiscal year, total State assistance to the
MTA is projected to total approximately $1.2 billion, an increase of $76
million over the 1996-97 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program, which
supercedes the overlapping portion of the MTA's 1992-96 Capital Program. The
1995-99 Capital Program is the fourth capital plan since the Legislature
authorized procedures for the adoption, approval and amendment of MTA capital
programs and is designed to upgrade the performance of the MTA's
transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.1 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York,
and from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. Should funding
levels fall below current projections, the MTA would have to revise its
1995-99 Capital Program accordingly. If the 1995-99 Capital Program is delayed
or reduced, ridership and fare revenues may decline, which could, among other
things, impair the MTA's ability to meet its operating expenses without
additional assistance.
LOCALITIES
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal health of
New York City ("the City"), which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State could
also be affected by the ability of the City and certain entities issuing debt
for the benefit of the City to market their securities successfully in the
public credit markets. The City has achieved balanced operating results for
each of its fiscal years since 1981 as reported in accordance with the then-
applicable GAAP standards.
FISCAL OVERSIGHT
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New
York ("NYC MAC") to provide financing assistance to the City; the New York
State Financial Control Board (the "Control Board") to oversee the City's
financial affairs; and the Office of the State Deputy Comptroller for the City
of New York ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986 during which
the City was subject to certain statutorily-prescribed fiscal controls.
Although the Control Board terminated the Control Period in 1986 when certain
statutory conditions were met and suspended certain Control Board powers, upon
the occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to the public credit markets, the
Control Board is required by law to reimpose a Control Period.
Currently, the City and its Covered Organizations (i.e., those which
receive or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "Financial Plan")
which the City prepares annually and periodically updates. The City's
Financial Plan includes its capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps.
The City's projections set forth in the Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
Implementation of the Financial Plan is also dependent upon the ability of
the City and certain entities issuing debt for the benefit of the City to
market their securities successfully. The City issues securities to finance,
refinance and rehabilitate infrastructure and other capital needs, as well as
for seasonal financing needs. In order to help the City to avoid exceeding its
State Constitutional general debt limit, the State created the New York City
Transitional Finance Authority to finance a portion of the City's capital
program. Despite this additional financing mechanism, the City currently
projects that if no action is taken, it will reach its debt limit in City
fiscal year 1999-2000. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. If such legislation were voided,
projected contracts for City capital projects would exceed the City's debt
limit during fiscal year 1997-98. Future developments concerning the City or
entities issuing debt for the benefit of the City, and public discussion of
such developments, as well as prevailing market conditions and securities
credit ratings, may affect the ability or cost to sell securities issued by
the City or such entities and may also affect the market for their outstanding
securities.
MONITORING AGENCIES
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements for, and Financial Plan compliance by, the City and its Covered
Organizations. According to recent staff reports, while economic recovery in
New York City has been slower than in other regions of the country, a surge in
Wall Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in City fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industries and the course of
the national economy. These reports have also indicated that recent City
budgets have been balanced in part through the use of non-recurring resources;
that the City's Financial Plan tends to rely on actions outside its direct
control; that the City has not yet brought its long-term expenditure growth in
line with recurring revenue growth; and that the City is therefore likely to
continue to face substantial gaps between forecast revenues and expenditures
in future years that must be closed with reduced expenditures and/or increased
revenues. Copies of the most recent Control Board, OSDC and City Comptroller,
and IBO staff reports are available by contacting the Control Board at 270
Broadway, 21st Floor, New York, NY, 10007, Attention: Executive Director; OSDC
at 270 Broadway, 23nd Floor, New York, NY 10007, Attention: Deputy
Comptroller; the City Comptroller at Municipal Building, Room 517, One Centre
Street, New York, NY 10007, Attention: Deputy Comptroller, Finance; and the
IBO at 110 William Street, 14th Floor, New York, NY 10038, Attention:
Director.
OTHER LOCALITIES
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during
the last several State fiscal years The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1997-98
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the re-
establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the
City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations.
The legislation creating Troy MAC prohibits the City of Troy from seeking
federal bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC
has issued bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities aid that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million
will be dispersed among all cities, towns and villages, a 3.97 percent
increase in General Purpose State Aid.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1995, the total indebtedness of all localities in
the State other than New York City was approximately $19.0 billion. A small
portion (approximately $102.3 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in
the future.
LITIGATION
GENERAL
The legal proceedings noted below involve State finances, and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1997-98
fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which
there are unanticipated, unfavorable and material judgments, or the initiation
of new proceedings could affect the ability of the State to maintain a
balanced 1997-98 Financial Plan. The State believes that the 1997-98 Financial
Plan includes sufficient reserves to offset the costs associated with the
payment of judgments that may be required during the 1997-98 fiscal year.
There can be no assurance, however, that adverse decisions in legal
proceedings against the State would not exceed the amount of all potential
1997-98 Financial Plan resources available for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced
1997-98 Financial Plan. In its General Purpose Financial Statements, the State
reports its estimated liability for awarded and anticipated unfavorable
judgments. The General Purpose Financial Statements for the 1996-97 fiscal
year report estimated probable awarded and anticipated unfavorable judgments
of $364 million, of which $134 million is expected to be paid during the
1997-98 fiscal year.
Adverse developments in the proceedings described below, other proceedings
for which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to
maintain a balanced 1997-98 Financial Plan. The State believes that the
proposed 1997-98 Financial Plan includes sufficient reserves to offset the
costs associated with the payment of judgments that may be required during the
1997-98 fiscal year. These reserves include (but are not limited to) projected
fund balances in the General Fund. In addition, any amounts ultimately
required to be paid by the State may be subject to settlement or may be paid
over a multi-year period. There can be no assurance, however, that adverse
decisions in legal proceedings against the State would not exceed the amount
of all potential 1997-98 Financial Plan resources available for the payment of
judgments, and could therefore affect the ability of the State to maintain a
balanced 1997-98 Financial Plan.
STATE FINANCE POLICIES
INSURANCE LAW
Proceedings have been brought by two groups of petitioners challenging
regulations promulgated by the Superintendent of Insurance that established
excess medical malpractice premium rates for the 1986-87 through 1995-96 and
1996-97 fiscal years, respectively (New York State Health Maintenance
Organization Conference, Inc., et al. v. Muhl et al. ["HMO"], and New York
State Conference of Blue Cross and Blue Shield Plans, et al. v. Muhl, et al.
["Blue Cross "I" and "II" "], Supreme Court, Albany County). By Order filed
January 22, 1997, the Court in Blue Cross I permitted the plaintiffs in HMO to
intervene, and dismissed the challenges to the rates for the period prior to
1995-96. By decision dated July 24, 1997, the Court in Blue Cross I held that
the determination made by the Superintendent in establishing the 1995-96 rate
was arbitrary and capricious and directed that premiums paid pursuant to that
determination should be returned to the payors. The State has appealed this
decision.
OFFICE OF MENTAL/HEALTH PATIENT-CARE COSTS
Two actions, Balzi, et al. v. Surles, et al., commenced in November 1985
in the United States District Court for the Southern District of New York, and
Brogan, et al. v. Sullivan, et al., commenced in May 1990 in the United States
District Court for the Western District of New York, now consolidated,
challenge the practice of using patients' Social Security benefits for the
costs of care of patients of State Office of Mental Health facilities. The
cases have been settled by a stipulation and order dated January 7, 1998.
STATE PROGRAMS
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April
1, 1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New
York Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry
Nursing Home et al. v. Pataki, et al. Plaintiffs allege that the changes in
methodology have been adopted in violation of procedural and substantive
requirements of State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services ("DSS") in June 1992 of a home assessment
resource review instrument ("HARRI"), which is to be used by DSS to determine
eligibility for and the nature of home care services for Medicaid recipients,
and challenge the policy of DSS of limiting reimbursable hours of service
until a patient is assessed using the HARRI (Dowd, et al. v. Bane, Supreme
Court, New York County).
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical
Supplies v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State
Podiatric Medical Association v. Wing and New York State Psychiatric
Association v. Wing. These cases were commenced after the State's
reimbursement methodology was held invalid in New York City Health and
Hospital Corp. v. Perales. The State contends that these claims are time-
barred.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law (S)2807-d, which imposes a gross receipts tax on the gross
receipts hospitals and residential health care facilities receive from all
patient care services. Plaintiffs allege that the tax assessments were not
uniformly applied, in violation of federal regulations. In a decision dated
June 30, 1997, the Court held that the 1.2 percent and 3.8 percent assessments
on gross receipts imposed pursuant to Public Health Law (S)(S) 2807-d(2)(b)
(ii) and 2807-d(2)(b)(iii), respectively, are unconstitutional. An order
entered August 27, 1997 enforced the terms of the decision. The State has
appealed that order.
SHELTER ALLOWANCE
In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing. In a decision dated April 16,
1997, the Court held that the shelter allowance promulgated by the Legislature
and enforced through Department of Social Services regulations is not
reasonably related to the cost of rental housing in New York City and results
in homelessness to families in New York City. A judgment was entered on July
25, 1997, directing, inter alia, that the State (i) submit a proposed schedule
of shelter allowances (for the Aid to Dependent Children program and any
successor program) that bears a reasonable relation to the cost of housing in
New York City; and (ii) compel the New York City Department of Social Services
to pay plaintiffs a monthly shelter allowance in the full amount of their
contract rents, provided they continue to meet the eligibility requirements
for public assistance, until such time as a lawful shelter allowance is
implemented, and provide interim relief to other eligible recipients of Aid to
Dependent Children under the interim relief system established in this case.
The State has sought relief from each and every provision of this judgment
except that portion directing continued provision of interim relief.
TAX LAW
In Matter of the Petition of Consolidated Rail Corporation v. Tax Appeals
Tribunal (Appellate Division, Third Department, commenced December 22, 1995),
petitioner rail freight corporation, that purchases diesel motor fuel out of
State and imports the fuel into the State for use, distribution, storage or
sale in the State, contends that the assessment of the petroleum business tax
pursuant to Tax Law (S)301-a to such fuel purchases violated the Commerce
Clause of the United States Constitution. Petitioner contended that the
application of Section 301-a to the interstate transaction, but not to
purchasers who purchase fuel within the State for use, distribution, storage
or sale within the State discriminates against interstate commerce. In a
decision dated July 17, 1997, the Appellate Division, Third Department,
dismissed the petition. Petitioner appealed to the Court of Appeals. On
December 4, 1997, the Court of Appeals dismissed the appeal, sua sponte, upon
the ground that no substantial Constitutional question was directly involved.
In New York Association of Convenience Stores et al. v. Urbach, et al.,
petitioners New York Association of Convenience Stores, National Association
of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc.
seek to compel respondents, the Commissioner of Taxation and Finance and the
Department of Taxation and Finance, to enforce sales and excise taxes pursuant
to Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations. In orders dated August 13, 1996
and August 24, 1996, the Supreme Court, Albany County, ordered, inter alia,
that there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department and invoked CPLR 5519(a)(1), which provides that the taking
of the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May
8, 1997, the Third Department modified the orders by deleting the portion
thereof that provided for the statewide suspension of the enforcement and
collection of the sales and excise taxes on motor fuel and tobacco products.
The Third Department held, inter alia, that petitioners had not sought such
relief in their petition and that it was an error for the Supreme Court to
have awarded such undemanded relief without adequate notice of its intent to
do so. On May 22, 1997, respondents appealed to the Court of Appeals on other
grounds, and again invoked the statutory stay. On October 23, 1997, the Court
of Appeals granted petitioners' motion for leave to cross appeal from the
portion of the Third Department's decision that deleted the statewide
suspension of the enforcement and collection of the sales and excise taxes on
motor fuel and tobacco.
EDUCATION LAW
In New York State Association of Counties v. Pataki, et al., commenced May
29, 1996 (Supreme Court, Albany County), plaintiff seeks reimbursement from
the State for certain costs incurred prior to the 1995-96 school year arising
out of the provision of preschool services and programs for children with
handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law. Chapter 642 of the Laws of 1996 provided that the 1996-97
preschool special education appropriation would be used first to pay all such
prior year costs approved by the State Education Department as of July 1,
1996. Because the costs that were the subject of this lawsuit were paid, this
case was adjourned on August 16, 1996.
CLEAN WATER/CLEAN AIR BOND ACT OF 1996
In Robert L. Schulz et al. v. The New York State Executive et al. (Supreme
Court, Albany County, commenced October 16, 1996), plaintiffs challenge the
enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and
forbidding incorporation of other statutes by reference.
CIVIL RIGHTS CLAIMS
In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to
develop and comply with a remedial educational improvement plan ("EIPI"). On
January 19, 1989, the District Court granted motions by Yonkers and the NAACP
to add the State Education Department, the Yonkers Board of Education, and the
State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school
system continued to exist in Yonkers. On March 27, 1995, the District Court
made factual findings regarding the role of the State and other State
defendants (the "State") in connection with the creation and maintenance of
the dual school system, but found no legal basis for imposing liability. On
September 3, 1996, the Court of Appeals, based on the District Court's factual
findings, held the State defendants liable under 42 USC (S) 1983 and the Equal
Educational Opportunity Act, 20 USC (S)(S) 1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to
force the school district to desegregate despite its actual or constructive
knowledge of de jure segregation. By order dated October 8, 1997, the District
Court held that the vestiges of the prior segregated school system continued
to exist and that, based on the State's conduct in creating and maintaining
that system, the State is liable for eliminating segregation and its vestiges
in Yonkers and must find a remedy to accomplish that goal. Yonkers presented a
proposed educational improvement plan ("EIP II") to eradicate these vestiges
of segregation. The October 8, 1997 Order of the District Court ordered that
EIP II be implemented and directed that, within 10 days of the entry of the
Order, the State make available to Yonkers $450,000 to support planning
activities to prepare the EIP II budget for 1997-98 and the accompanying
capital facilities plan. A final judgment to implement EIP II was entered on
October 14, 1997. The State intends to appeal that judgment. Additionally, the
Court adopted a requirement that the State pay to Yonkers $9 million as its
pro rata share of the Funding of EIP I for the 1996-97 school year. The
requirement for State funding of EIP I has not yet been reduced to an order.
REAL PROPERTY CLAIMS
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795.
At the same time, however, the Court reversed the Second Circuit by holding
that a third-party claim by the counties against the State for indemnification
was not properly before the federal courts. The case was remanded to the
District Court for an assessment of damages, which action is still pending.
The counties may still seek indemnification in the State courts.
Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New
York, et al., both in the United States District Court for the Northern
District of New York. The Supreme Court's holding in Oneida Indian Nation of
New York may impair or eliminate certain of the State's defenses to these
actions but may enhance others.
CONTRACT AND TORT CLAIMS
In Inter-Power of New York, Inc. v. State of New York, commenced November 16,
1994 in the Court of Claims, plaintiff alleged that by reason of the failure
of the State's Department of Environmental Conservation to provide in a timely
manner accurate and complete data, plaintiff was unable to complete by the
projected completion date a cogeneration facility, and thereby suffered
damages. The parties have agreed to settle this case for $29 million.
