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497(e) File Nos. 33-5819 and 811-5034
Prospectus March 2, 1998
As Supplemented September 24, 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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<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) 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 daily 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.
<TABLE>
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO -- FINANCIAL HIGHLIGHTS
<CAPTION>
AUGUST 17, 1995
(COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS) TO
1997 1996 DECEMBER 31, 1995
<S> <C> <C> <C>
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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.
</TABLE>
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE: The investment objective of the Fund is to generate
hig9h 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 declared daily and 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.
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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 Logo] Printed on recycled paper
<PAGE>
497(e) File Nos. 33-5819 and 811-5034
Prospectus March 2, 1998
As Supplemented September 24, 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 daily 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.
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>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
<CAPTION>
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>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
<CAPTION>
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 declared daily and 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."
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