As filed with the Securities and Exchange Commission on February 16, 1999
File Nos. 33-5819
811-5034
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE
AMENDMENT NO. 23
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 24
CITIFUNDS TAX FREE INCOME TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679
PHILIP W. COOLIDGE, 21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP, 150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective on the 60th day
after the date of filing hereof pursuant to paragraph (a)(1) of Rule 485.
<PAGE>
Prospectus
CITIFUNDSSM CALIFORNIA TAX FREE INCOME PORTFOLIO
Citibank, N.A., investment manager
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has
not approved or disapproved these securities or
passed upon the accuracy of this prospectus,
and any representation to the contrary is a
criminal offense.
_________ __, 1999
<PAGE>
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
TABLE OF CONTENTS
Fund at a Glance
Your CitiFunds Account
Choosing a Share Class
How to Buy Shares
How the Price of Your Shares is Calculated
How to Sell Shares
Reinstating Recently Sold Shares
Exchanges
Dividends
Tax Matters
Management of the Fund
Manager
Management Fees
More About the Fund
Principal Investment Strategies
Risks
Financial Highlights
Appendix
<PAGE>
FUND AT A GLANCE
THIS SUMMARY BRIEFLY DESCRIBES CALIFORNIA TAX FREE INCOME PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN IT. FOR MORE INFORMATION, SEE "MORE ABOUT THE
FUND" ON PAGE _____.
FUND GOAL
The Fund's goal is to generate high levels of current income exempt from
federal and California State personal income taxes and preserve the value of
its shareholders' investment. Of course, there is no assurance that the Fund
will achieve its goal.
MAIN INVESTMENT STRATEGIES
The Fund invests primarily in investment grade California municipal
obligations. These are securities that pay interest that is exempt from federal
as well as California personal income tax. Municipal obligations are debt
securities issued by states, cities and towns and other political or public
entities or agencies or qualifying issuers. Under normal market conditions, the
Fund invests at least 65% of its assets in these California municipal
obligations. Issuers of these securities are usually located in California, but
the securities can also be issued by Puerto Rico and other U.S. territories.
Interest on these obligations is also exempt from the federal alternative
minimum tax.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable California municipal obligations are
not available, the Fund may purchase other municipal obligations. The interest
on these securities may be subject to California State personal income taxes.
However, under normal market conditions, the Fund invests at least 80% of its
assets in municipal obligations that pay interest that is exempt from federal
income taxes including the federal alternative minimum tax.
The Fund may also invest in short-term debt securities that pay interest that
is subject to federal and California State personal income taxes, including
those issued by companies, the U.S. Government or agencies of the U.S.
Government. Except for temporary defensive purposes, no more than 20% of the
Fund's net assets will be invested in debt securities that pay interest subject
to federal income tax.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
<PAGE>
Certain securities held by the Fund may be covered by municipal bond insurance.
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years).
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
securities. The Fund's ability to use futures contracts successfully depends on
a number of factors, including futures contracts being available at prices that
are not too costly, tax considerations, and Citibank accurately predicting
movements in interest rates.
MAIN RISKS
Like all mutual funds, you may lose money if you invest in this Fund. The
principal risks of investing in California Tax Free Income Portfolio are
described below. Please remember that the value of the Fund's shares will
change daily as the value of its underlying securities change. See page ___ for
more information about risks.
o NON-DIVERSIFIED FUND. The Fund is a non-diversified fund, which
means that it may invest a relatively high percentage of its assets
in the securities of a limited number of issuers, including issuers
that derive income from similar type projects or that are otherwise
related. As a result, many securities held by the Fund may be
adversely affected by a particular economic, business, regulatory or
political event.
o CALIFORNIA MUNICIPAL OBLIGATIONS. Because the Fund invests a high
percentage of its assets in municipal obligations of issuers located
in California, the Fund is more exposed to events that adversely
affect issuers in California. As a result, this Fund has more risk
than a broadly diversified fund.
Issuers of California municipal obligations experienced severe
financial difficulties in the early 1990's. Although California's
economy has been recovering, there is no assurance that this will
continue. Recent global economic events have begun to hurt the
earnings of companies in California. If California were to
experience economic difficulties again, the value of your investment
in the Fund could decline. The Fund also could have difficulty in
finding investment grade California municipal obligations available
for investment. This could cause the amount of the Fund's income
that is subject to California tax to increase. Because many
municipal issuers depend on real estate property taxes as a source
of revenue, dislocations in the real estate market may cause a
reduction in revenues, as could any legislative initiatives
resulting in the reduction of state revenues or allocations of
revenues to local governments. A reduction in revenues could
adversely affect a municipal issuer's ability to make payments on
obligations held by the Fund.
o MUNICIPAL MARKET RISK. There are special factors which may affect
the value of municipal securities and, as a result, the Fund's share
price. These factors include political or legislative changes,
uncertainties related to the tax status of the securities or the
<PAGE>
rights of investors in the securities. The Fund may invest in
certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than
ordinary municipal bonds.
o REVENUE OBLIGATION RISK. The Fund may invest in municipal
obligations called revenue obligations that are payable only from
the revenues generated from a specific project or from another
specific revenue source. 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
the Fund's revenue obligations.
o INTEREST RATE RISK. In general, the prices of municipal securities
and other debt securities rise when interest rates fall, and fall
when interest rates rise. Longer term obligations are usually more
sensitive to interest rate changes. A change in interest rates could
cause the Fund's share price to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Fund, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a security
and leading to greater volatility in the price of the security and
in shares of the Fund. If the credit quality of a security
deteriorates below investment grade, the Fund may continue to hold
this security, commonly known as a junk bond. The prices of lower
rated securities, especially junk bonds, often are more volatile
than those of higher rated securities.
o PREPAYMENT RISK. The issuers of debt securities held by the Fund may
be able to prepay principal due on securities, particularly during
periods of declining interest rates. The Fund may not be able to
reinvest that principal at attractive rates, reducing income to the
Fund, and the Fund may lose any premium paid. On the other hand,
rising interest rates may cause prepayments to occur at slower than
expected rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest rate
changes and the Fund's share price more volatile.
o FUTURES CONTRACTS. Futures contracts are commonly referred to as
derivatives. The Fund's use of futures contracts particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets.
Losses would cause the Fund's share price to go down. The Fund's
ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest
rate movements. If Citibank's predictions are wrong, the Fund could
suffer greater losses than if it had not used futures contracts.
Please note that an investment in the Fund is not a deposit of Citibank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
WHO MAY WANT TO INVEST
You should keep in mind that an investment in California Tax Free Income
Portfolio is not a complete investment program.
You should consider investing in California Tax Free Income Portfolio if:
o You seek tax-exempt income from your investments.
o Your investment horizon is at least intermediate term--typically
three years or longer.
o Your income is subject to California State taxes.
Don't invest in California Tax Free Income Portfolio if:
o You don't need your income to be tax exempt, or you're investing
through a tax-deferred vehicle -- such as an IRA account.
o Growth of principal is more important to you than current income.
o You are not prepared to accept daily share price or income
fluctuations.
o Your investment horizon is shorter term -- usually less than three
years.
FUND PERFORMANCE
The Fund began operations in 1998 and does not have a full calendar year of
investment returns at the date of this prospectus. The Fund's total return for
the period from its commencement of operations to December 31, 1998 is provided
in the "Financial Highlights" section of this prospectus.
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
<TABLE>
<CAPTION>
<S> <C> <C>
CLASS A CLASS B
Class descriptions begin on page __
SHAREHOLDER FEES (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 4.50% None
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are
deducted from Fund assets):
Management Fees 0.50% 0.50%
Distribution and/or Service (12b-1) Fees 0.25% 0.75%
Other Expenses(3) 0.85% 0.85%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.60% 2.10%
______________________________________________________________________________________________________________
*Because some of the Fund's expenses are expected to be waived or reimbursed, actual total operating expenses
estimated for the current fiscal year would be: 0.80% 1.30%
These fee waivers and reimbursements may be reduced or terminated at any time.
1 Except for investment of $500,000 or more.
2 Class B shares have a contingent deferred sales charge (CDSC) which is deducted from your sale
proceeds if you sell your Class B shares within five years of your original purchase of the shares.
In the first year after purchase, the CDSC is 4.50% of the price at which you purchased your
shares, or the price at which you sold your shares, whichever is less, declining to 1.00% in the fifth
year after purchase.
3 "Other Expenses" are based on estimated amounts for the current fiscal year.
</TABLE>
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods, if you own
Class A shares.
If you own Class B shares, two numbers are given, one showing your expenses if
you sold all your shares at the end of each time period and one if you held
onto your shares.
The example also assumes that:
o each investment has a 5% return each year--the assumption of a 5% return
is required by the SEC for the purpose of this example and is not a
prediction of the Fund's future performance; and
o the Fund's operating expenses shown in the Fund Fees and Expenses Table
remain the same before taking into consideration any fee waivers or
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
______________________________________________________________________________
1 YEAR 3 YEARS
______________________________________________________________________________
Class A $605 $932
Class B
Assuming redemption at end of period $663 $958
Assuming no redemption $213 $658
______________________________________________________________________________
<PAGE>
YOUR CITIFUNDS ACCOUNT
CHOOSING A SHARE CLASS
THE FUND OFFERS TWO SHARE CLASSES, CLASS A AND CLASS B. EACH CLASS
HAS ITS OWN SALES CHARGE AND EXPENSE STRUCTURE. PLEASE READ THE
INFORMATION BELOW CAREFULLY TO HELP YOU DECIDE WHICH SHARE CLASS
IS BEST FOR YOU.
<TABLE>
<CAPTION>
<S> <C>
CLASS A AT A GLANCE: CLASS B AT A GLANCE:
o Front-end load--there is an initial sales o No initial sales charge
charge of 4.50% or less
o Lower sales charge rates for larger o The deferred sales charge declines from
investments 4.50% to 1% over five years, and is
eliminated if you hold your shares for six
years or more
o Annual service fee of up to 0.25% o Annual distribution/service fee of up to
0.75%
o Lower annual expenses than Class B o Automatic conversion to Class A shares
shares after 8 years
</TABLE>
_______________________________________________________________________________
WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/SERVICE FEES that are
paid under a 12B-1 PLAN. These are fees, also called 12B-1 FEES, that are
deducted from Fund assets and are used to compensate those financial
professionals who sell fund shares and provide ongoing services to shareholders
and to pay other marketing and advertising expenses. Because you pay these fees
during the whole period that you own the shares, over time, you may pay more
than if you had paid other types of sales charges. For this reason, you should
consider the effects of 12b-1 fees as well as sales loads when choosing a share
class.
_______________________________________________________________________________
SALES CHARGES--CLASS A SHARES
o Class A shares are sold at net asset value plus a front-end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The chart below shows the
rate of sales charge that you pay, depending on the amount that you
purchase.
o The chart below also shows the amount of broker/dealer compensation
that is paid out of the sales charge. This compensation includes
commissions and other fees that financial professionals who sell
shares of the Fund receive. The distributor keeps up to
approximately 10% of the sales charge imposed on Class A shares.
Financial professionals that sell Class A shares will also receive
the service fee payable on Class A shares at an annual rate equal to
0.25% of the average daily net assets represented by the Class A
shares sold by them.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___________________________________________________________________________________
SALES CHARGE SALES CHARGE BROKER/DEALER
AS A % OF AS A % OF COMMISSION AS
AMOUNT OF OFFERING YOUR A % OF OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
___________________________________________________________________________________
Less than $25,000 4.50% 4.71% 4.05%
___________________________________________________________________________________
$25,000 to less than $50,000 4.00% 4.17% 3.60%
___________________________________________________________________________________
$50,000 to less than $100,000 3.50% 3.63% 3.15%
___________________________________________________________________________________
$100,000 to less than $250,000 2.50% 2.56% 2.25%
___________________________________________________________________________________
$250,000 to less than $500,000 1.50% 1.52% 1.35%
___________________________________________________________________________________
$500,000 or more none* none* up to 1.00%
___________________________________________________________________________________
*A contingent deferred sales charge may apply in certain instances. See
below.
</TABLE>
o After the initial sales charge is deducted from your investment, the
balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain circumstances, as
described in "Sales Charge Waivers or Reductions" below. If you qualify to
purchase Class A shares without a sales load, you should purchase Class A
shares rather than Class B shares because Class A shares pay lower fees.
o If you invest at least $500,000 in the Fund, you do not pay any initial
sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% of the purchase price, or the sale price, whichever is
less, if you sell within the first year. Under certain circumstances,
waivers may apply. Other policies regarding the application of the CDSC are
the same as for Class B shares. Please read the discussion below on Class B
shares for more information.
PLEASE NOTE: If you owned Fund shares prior to January 4, 1999, you may
exchange those shares into Class A shares of other CitiFunds and other
mutual funds managed by Citibank without paying any sales charge, subject
to verification. Shares subject to the waiver include shares purchased
prior to January 4, 1999, and any shares you received through capital
appreciation or through the reinvestment of dividends or capital gains
distributions on those shares.
SALES CHARGES--CLASS B SHARES
o Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a contingent deferred sales charge (CDSC) when you sell
shares within five years of purchase. The rate of CDSC goes down the longer
you hold your shares. The table below shows the rates that you pay, as a
percentage of your original purchase price (or the sales price, whichever
is less), depending upon when you sell your shares.
<PAGE>
_______________________________________________________________
SALE DURING CDSC ON SHARES BEING SOLD
_______________________________________________________________
1st year since purchase 4.50%
_______________________________________________________________
2nd year since purchase 4.00%
_______________________________________________________________
3rd year since purchase 3.00%
_______________________________________________________________
4th year since purchase 2.00%
_______________________________________________________________
5th year since purchase 1.00%
_______________________________________________________________
6th year (or later) since purchase None
_______________________________________________________________
o Financial professionals selling Class B shares receive a commission of
4.00% of the purchase price of the Class B shares that they sell, except
for sales exempt from the CDSC. Financial professionals also receive a
service fee at an annual rate equal to 0.25% of the average daily net
assets represented by the Class B shares that they have sold.
o When you sell your shares, the CDSC will be based on either your original
purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of dividends,
capital gain distributions and shares representing capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Fund will always use
the Class B shares with the lowest CDSC to fill your sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares for
Class B shares of certain CitiFunds - any payment will be deferred until
your Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from another fund
managed or advised by Citibank, the date of your initial investment will be
used as the basis of the CDSC calculations. If the rate of CDSC on the
shares exchanged was higher than the rate of CDSC on your Fund shares, you
will be charged the higher rate when you sell your Fund shares.
From time to time, the Fund's distributor or Citibank may provide additional
promotional bonuses, incentives or payments to dealers that sell shares of the
Fund. These may include payments for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and their guests to locations within and outside the United States for meetings
or seminars of a business nature. In some instances, these bonuses, incentives
or payments may be offered only to dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
The Fund's distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. The
distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments are determined by the
distributor and may vary. Citibank may make similar payments under similar
arrangements.
<PAGE>
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you qualify for
certain waivers or elect to participate in certain programs. These include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers, including certain
tax-exempt organizations, certain employee benefit plans, certain entities
or persons with a qualifying affiliation or relationship with Citibank, and,
under certain circumstances, investors using the proceeds of a redemption
from another mutual fund for their purchase of Class A shares. Further
information about eligible purchasers may be found in the Appendix to this
prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other retirement
accounts.
o Redemptions made under the Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or reduction and how the
programs work by requesting a copy of the Fund's Statement of Additional
Information, or by consulting with your account representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares approximately eight
years after purchase. If you acquired your shares through an exchange, the date
of your initial investment will be used to determine your conversion date. You
will receive the same dollar amount of Class A shares as the Class B shares
converted. The price of Class A shares may be higher than Class B shares at the
time of conversion, because of the lower expenses of Class A shares. Therefore,
you may receive fewer Class A shares than the number of Class B shares
converted.
HOW TO BUY SHARES
Shares of California Tax Free Income Portfolio are offered continuously and
purchases may be made Monday through Friday, except on certain holidays. Shares
may be purchased from the Fund's distributor or a broker-dealer or financial
institution (called a Service Agent) that has entered into a service agreement
with the distributor concerning the Fund. Please specify whether you are
<PAGE>
purchasing Class A or Class B shares. If you fail to specify, Class A shares
will be purchased for your account. The Fund and the distributor have the right
to reject any purchase order or cease offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is calculated
after your order is received and accepted by the Fund's transfer agent. NAV is
the value of a single share of the Fund. If you are purchasing Class A shares,
the applicable sales charge will be added to the cost of your shares.
Your Service Agent will not transmit your purchase order for Fund shares until
it receives the purchase price in federal or other immediately available funds.
If you pay by check, the Service Agent transmits the order when the check
clears, usually within two business days.
If you are a customer of a Service Agent, your Service Agent will establish and
maintain your account and be the shareholder of record.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
The Fund calculates its NAV every day the New York Stock Exchange is open for
trading. This calculation is made at the close of regular trading on the New
York Stock Exchange, normally 4:00 p.m. Eastern time. NAV is calculated
separately for each class of shares. NAV may be higher for Class A shares
because Class A shares bear lower expenses. On days when the financial markets
in which the Fund invests close early, NAV will be calculated as of the close
of those markets.
The Fund's securities are valued primarily on the basis of market quotations.
When market quotations are not readily available, the Fund may price securities
at fair value. Fair value is determined in accordance with procedures approved
by the Fund's Board of Trustees. When the Fund uses the fair value pricing
method, a security may be priced higher or lower than if the Fund had used a
market quotation to price the same security.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The price will be the
NAV the next time it is calculated after your redemption request in proper form
has been received by the Fund's transfer agent. If your shares are subject to a
CDSC, the applicable charge will be deducted from your sale proceeds.
You may make redemption requests in writing through the Fund's transfer agent
or, if you are a customer of a Service Agent, through your Service Agent. If
your account application permits, you may also make redemption requests by
calling the Fund's transfer agent or, if you are a customer of a Service Agent,
your Service Agent. Each Service Agent is responsible for promptly submitting
redemption requests to the Fund's transfer agent. You are responsible for
making sure your redemption request is in proper form.
The Fund has a Systematic Withdrawal Plan which allows you to automatically
withdraw a specific dollar amount from your account on a regular basis. You
must have at least $10,000 in your account to participate in this program. If
your shares are subject to a CDSC, you may only withdraw up to 10% of the value
<PAGE>
of your account in any year, but you will not be subject to CDSC on the shares
withdrawn under the Plan. For more information, please contact your Service
Agent.
If you own both Class A and Class B shares, and want to sell shares, you should
specify which class of shares you wish to sell. If you fail to specify, Class A
shares will be redeemed first.
When you sell your Class B shares, they will be redeemed so as to minimize your
CDSC. Shares on which the CDSC is not payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions
will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds normally on the
business day after you sell your shares but generally within seven days. Your
redemption proceeds may be delayed for up to ten days if your purchase was made
by check. Your redemption proceeds may also be delayed, or your right to
receive redemption proceeds suspended, if the New York Stock Exchange is closed
(other than on weekends or holidays) or trading is restricted, or if an
emergency exists. The Fund has the right to pay your redemption proceeds by
giving you securities instead of cash. In that case, you may incur costs (such
as brokerage commissions) converting the securities into cash. You should be
aware that you may have to pay taxes on your redemption proceeds.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Fund permits you to
repurchase Class A shares in the Fund, up to the dollar amount of shares
redeemed, without paying any sales charges. To take advantage of this
reinstatement privilege, you must notify the Fund in writing at the time you
wish to repurchase the shares.
EXCHANGES
You may exchange Fund shares for shares of the same class of certain other
CitiFunds. You may also be able to exchange your Class A shares for shares of
certain CitiFunds that offer only a single class of shares unless your Class A
shares are subject to a CDSC. You may not exchange Class B shares for shares of
CitiFunds that offer only a single class of shares. You may also acquire Fund
shares through an exchange from another fund managed by Citibank.
You may place exchange orders through the transfer agent or, if you are a
customer of a Service Agent, through your Service Agent. You may place exchange
orders by telephone if your account application permits. The transfer agent or
your Service Agent can provide you with more information, including a
prospectus for any fund that may be acquired through an exchange.
<PAGE>
The exchange will be based on the relative NAVs of both funds when they are
next determined after your order is accepted by the Fund's transfer agent,
subject to any applicable sales charge. You cannot exchange shares until the
Fund has received payment in federal funds for your shares.
When you exchange your Class A shares, you will generally be required to pay
the difference, if any, between the sales charge payable on the shares to be
acquired in the exchange and the sales charge paid in connection with your
original purchase of Class A shares. However, if your Class A shares were
purchased prior to January 4, 1999, you will not have to pay a sales charge
when you exchange those shares for Class A shares of certain other CitiFunds,
subject to confirmation though a check of appropriate records and
documentation.
When you exchange your Class B shares, you will not pay any initial sales
charge, and no CDSC is imposed when your Class B shares are exchanged for Class
B shares of certain other CitiFunds that are made available by your Service
Agent. However, you may be required to pay a CDSC when you sell those shares.
The length of time that you owned Fund shares will be included in the holding
period of your new Class B shares.
The exchange privilege may be changed or terminated at any time. You should be
aware that you may have to pay taxes on your exchange.
DIVIDENDS
The Fund declares dividends daily of substantially all of its net income (if
any) from dividends and interest. The Fund pays these dividends monthly to its
shareholders of record.
The Fund's net realized short-term and long-term capital gains, if any, will be
distributed to Fund shareholders at least annually. The Fund may also make
additional distributions to 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.
Unless you choose to receive your dividends in cash, you will receive them as
full and fractional additional Fund shares.
TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation, and the status of your
account under state and local laws.
TAXABILITY OF DISTRIBUTIONS; FEDERAL INCOME TAXES. You will not normally have
to pay federal income taxes on distributions the Fund designates as
attributable to interest on municipal obligations, that is, as "tax-exempt"
dividends. Certain "tax-exempt" dividends may be subject to the federal
alternative minimum tax, however. In addition, if you borrow to purchase or
continue to hold Fund shares, you may not be able to deduct the interest you
pay on that debt.
The Fund may also invest from time to time in taxable securities, or realize
gains from transactions in securities. You will normally have to pay federal
income taxes on the distributions not attributable to interest on municipal
<PAGE>
obligations which you receive from the Fund, whether you take the distributions
in cash or reinvest them in additional shares. Distributions designated by the
Fund as capital gain dividends are taxable as long-term capital gains. Other
distributions, not designated as "tax-exempt" dividends, are generally taxable
as ordinary income. Some distributions paid in January may be taxable to you as
if they had been paid the previous December. The IRS Form 1099 that is mailed
to you every January details your distributions for the prior year and how they
are treated for federal tax purposes.
STATE AND LOCAL TAXES. Generally, you will have to pay state or local taxes on
Fund dividends and other distributions, although distributions derived from
interest on U.S. government obligations may be exempt from certain state and
local taxes. Except as noted below, Fund dividends that are not taxable to you
for federal income tax purposes may still be subject to tax under the income or
other tax laws of state or local taxing authorities.
As long as at the end of each quarter of the Fund's fiscal year the Fund
continues to qualify for the special federal income tax treatment afforded
regulated investment companies and at least 50% of the value of the Fund's
assets consists of California municipal obligations that, if held by an
individual, would pay interest exempt from California taxation, shareholders of
the Fund will be able to exclude from income, for California personal income
tax purposes, dividends received from the Fund which are derived from income
(less related expenses) from the Fund's California municipal obligations. These
dividends must be designated as such by the Fund by written notice to
shareholders within 60 days after the close of that fiscal year.
The foregoing description is a general, abbreviated summary that relates solely
to the California personal income taxation of dividends received by
shareholders. Accordingly, potential investors, including, in particular,
investors who may be subject to California corporate franchise tax or
California corporate income tax, should consult with their own tax advisers.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of Fund shares will not be deductible for California personal
income tax purposes if the Fund distributes dividends that are exempt from
California taxation.
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of the U.S., the
Fund will withhold U.S. federal income tax payments at the rate of 30% (or any
lower applicable treaty rate) on taxable dividends and other payments subject
to withholding taxes. Distributions received from the Fund by non-U.S. persons
also may be subject to tax under the laws of their own jurisdictions.
BACKUP WITHHOLDING. The account application asks each new investor to certify
that the investor's Social Security or taxpayer identification number is
correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. The Fund may be required to withhold (and
pay over to the IRS for your credit) 31% of certain distributions and proceeds
it pays you if you fail to provide this information or otherwise violate IRS
regulations.
TAXATION OF TRANSACTIONS. If you sell your shares of the Fund, or exchange them
for shares of another fund, it is considered a taxable event. Depending on your
purchase price and the sales price of the shares you sell or exchange, you may
have a gain or loss on the transaction. If you purchased Class A shares and
held your shares in the Fund only a short time, your gain or loss could also be
affected by whether you reinvest the proceeds you receive in shares of the Fund
or another regulated investment company, without having to pay a sales charge
<PAGE>
that would otherwise be due because you paid a sales charge on the shares of
the Fund you sold. If you redeem your Fund shares 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, if you redeem your Fund shares within six months of
their purchase, any short-term capital loss realized on redemption is
disallowed to the extent of any dividends of tax-exempt income received during
that period. You are responsible for any tax liabilities generated by your
transaction.
MANAGEMENT OF THE FUND
MANAGER
California Tax Free Income Portfolio draws on the strength and experience of
Citibank. Citibank is the investment manager of the Fund, and subject to
policies set by the Fund's Trustees, Citibank makes investment decisions.
Citibank, with headquarters at 153 East 53rd Street, New York, New York, has
been managing money since 1822. With its affiliates, it currently manages more
than $290 billion in assets worldwide. Citibank is a wholly-owned subsidiary of
Citicorp, which is, in turn, a wholly-owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of Citicorp and Travelers
Group, Inc., which was completed on October 8, 1998. "CitiFunds" is a service
mark of Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the Fund.
However, in making investment decisions for the Fund, Citibank does not obtain
or use material inside information acquired by any division, department or
affiliate of Citibank in the course of those relationships. Citibank and its
affiliates may have loans outstanding that are repaid with proceeds of
securities purchased by the Fund.
John C. Mooney, a Vice President of Citibank, has managed the Fund since its
inception. 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.
The Fund currently does not employ an investment subadviser, but in the future
the Fund may do so. Citibank would be responsible for recommending the hiring,
termination or replacement of any subadviser and for supervising and monitoring
the subadviser's performance. Certain CitiFunds have applied for exemptive
relief from the Securities and Exchange Commission which would permit them to
employ subadvisers without shareholder approval. The requested exemptive relief
also would permit the terms of sub-advisory agreements to be changed, and the
employment of subadvisers to be continued after events that would otherwise
cause an automatic termination of a sub-advisory agreement, in each case
without shareholder approval if those changes or continuation are approved by
the fund's Board of Trustees. There is no assurance that the SEC will grant the
requested relief. However, if the requested relief is granted, the Fund also
<PAGE>
would be permitted to employ subadvisers without shareholder approval, subject
to compliance with certain conditions. If the Fund adds or changes a
subadviser, this Prospectus would be revised and shareholders notified.
MANAGEMENT FEES
For the management services Citibank provided the Fund, for the Fund's fiscal
year ended December 31, 1998 Citibank received a total of 0% of the Fund's
average daily net assets, after waivers.
MORE ABOUT THE FUND
The Fund's goals, principal investments and risks are summarized in FUND AT A
GLANCE on page ____. More information on investments, investment strategies and
risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's principal investment strategies are the strategies that, in the
opinion of Citibank, are most likely to achieve the Fund's investment goals. Of
course, there can be no assurance that the Fund will achieve its goals. Please
note that the Fund may also use strategies and invest in securities that are
not described below but that are described in the Statement of Additional
Information. Of course, Citibank may decide, as a matter of investment
strategy, not to use the investments and investment techniques described below
and in the Statement of Additional Information at any particular time. The
Fund's goals and strategies may be changed without shareholder approval.
Under normal market conditions, the Fund invests at least 65% of its assets in
municipal obligations that pay interest that is exempt from federal and
California State personal income taxes including the federal alternative
minimum tax.
_______________________________________________________________________________
WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations issued by or on
behalf of states and municipal governments, Puerto Rico and other U.S.
territories, and their authorities, agencies, instrumentalities and political
subdivisions, and by other qualifying issuers. The interest on these
obligations is exempt from federal income tax.
Longer term municipal obligations (municipal bonds) generally are issued to
raise funds for construction or to retire previous debt. Short term obligations
(municipal notes or commercial paper) may be issued to finance short term cash
needs in anticipation of receipt of tax and other revenues.
The Fund invests in both "general obligation" securities, which are backed by
the full faith, credit and taxing power of the issuer, and in "revenue"
securities, which are payable only from revenues from a specific project or
another revenue source.
_______________________________________________________________________________
The Fund invests without limit in different types of municipal obligations,
including general obligation securities, revenue securities, private activity
bonds, industrial revenue bonds and municipal lease obligations. Although the
Fund is non-diversified, it seeks to limit its exposure to the housing,
electrical utilities and hospital sectors by restricting its investment in any
one of these sectors to 25% of the Fund's assets.
<PAGE>
_______________________________________________________________________________
WHAT ARE MUNICIPAL LEASE OBLIGATIONS?
Municipal lease obligations are undivided interests issued by a state or
municipality in a lease or installment purchase which generally relates to
equipment or facilities.
_______________________________________________________________________________
The Fund may invest in participation interests in municipal obligations that
are issued by banks and other financial institutions.
_______________________________________________________________________________
WHAT ARE PARTICIPATION INTERESTS?
In a participation interest, the bank sells undivided interests in a municipal
obligation it owns. These interests may be supported by a bank letter of credit
or guarantee. The interest rate generally is adjusted periodically, and the
holder can sell back to the issuer after a specified period. If interest rates
rise or fall, the rates on participation interests and other variable rate
instruments generally will be readjusted. As a result, these instruments do not
offer the same opportunity for capital appreciation or loss as fixed rate
investments.
_______________________________________________________________________________
The Fund may purchase municipal obligations under arrangements (called stand-by
commitments) where they can sell the securities at an agreed-upon price and
date under certain circumstances. The Fund can also purchase securities under
arrangements (called when-issued or forward-delivery basis) where the
securities will not be delivered immediately. The Fund will set aside the
assets to pay for these securities at the time of the agreement.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable California municipal obligations are
not available, the Fund may purchase other municipal obligations. The interest
on these securities may be subject to California personal income taxes.
However, under normal market conditions, the Fund invests at least 80% of its
assets in municipal obligations that pay interest that is exempt from federal
income taxes including the federal alternative minimum tax.
The Fund may also invest in short-term debt securities that pay interest that
is subject to federal and California State personal income taxes, including
those issued by companies, the U.S. Government or agencies of the U.S.
Government. Except for temporary defensive purposes, no more than 20% of the
Fund's net assets will be invested in debt securities that pay interest subject
to federal income tax.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
<PAGE>
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
In addition, some of the bonds held in the Fund may be covered by municipal
bond insurance, in which case an insurer may make principal and interest
payments on the securities if the issuer fails to do so.
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years). For strategic purposes, however, the Fund may invest so that
the weighted average maturity of the securities held by the Fund is under 10
years.
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
securities. Futures contracts may not be available on terms that make economic
sense (they may be too costly). The Fund's ability to use futures contracts may
be limited by tax considerations.
See "Risks" for more information about the risks associated with investing in
the Fund.
DEFENSIVE STRATEGIES. The Fund may, from time to time, take temporary defensive
positions that are inconsistent with the Fund's principal investment strategies
in attempting to respond to adverse market, political or other conditions. When
doing so, the Fund may invest without limit in high quality money market and
other short-term instruments, and may not be pursuing its investment goals.
MANAGEMENT STYLE. California Tax Free Income Portfolio is managed by employing
a combination of qualitative and quantitative analysis. Citibank starts by
developing an interest rate forecast and analysis of general economic
conditions for the United States as a whole, with a particular focus on
California. Given this information, Citibank determines whether it believes
short-, intermediate- or long-term bonds will perform best, though it generally
makes only modest adjustments to reflect its interest rate expectations.
Citibank seeks to add value by investing in a range of municipal bonds,
representing different market sectors, structures and maturities. The portfolio
manager uses this approach when deciding when to purchase or sell securities
and which securities to purchase or sell. For more information about the
portfolio manager, see "Manager" on page ___.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the portfolio
manager attempts to minimize portfolio turnover, from time to time the Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to investors.
Active trading may also increase the amount of commissions or mark-ups the Fund
pays to broker or dealers when it buys and sells securities. The "Financial
Highlights" section of this prospectus shows the Fund's historical portfolio
turnover rate.
BROKERAGE. Citibank may use brokers or dealers for Fund transactions who also
provide brokerage and research services to the Fund or other accounts over
which Citibank exercises investment discretion. The Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a broker or dealer who
provides these brokerage and research services a commission for executing a
<PAGE>
portfolio transaction which is higher than the commission another broker or
dealer would have charged. However, the Fund will "pay up" only if Citibank
determines in good faith that the higher commission is reasonable in relation
to the brokerage and research services provided, viewed in terms of either the
particular transaction or all of the accounts over which Citibank exercises
investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Certain of these risks are described below. More
information about risks appears in the Fund's Statement of Additional
Information. The Fund is designed for investors seeking current income that is
exempt from federal and California State personal income taxes. Investors
should be willing to accept fluctuation in the price of Fund shares and to bear
the increased risk of an investment portfolio that is concentrated in
obligations of the State of California and its political subdivisions. Remember
that you may receive little or no return on your investment in the Fund. You
may lose money if you invest in this Fund.
Please remember that an investment in the Fund is not a deposit of Citibank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means
that the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, including issuers that derive
income from similar type projects or that are otherwise related. As a result,
many securities held by the Fund may be adversely affected by a particular
single economic, business, regulatory or political event. You should consider
the greater risk inherent in these policies when compared with a more
diversified mutual fund.
CALIFORNIA MUNICIPAL OBLIGATIONS. The Fund invests a high percentage of its
assets in municipal obligations of issuers located in California. As a result,
the Fund is more exposed to events that adversely affect issuers in California,
and the Fund has more risk than a broadly diversified fund.
You should be aware of special economic factors affecting California before
investing. These factors are summarized in "Fund at a Glance." The Fund has
obtained this information from issuers of California municipal obligations, and
is not responsible for its accuracy or timeliness.
MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities. The Fund
may invest in certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than ordinary
municipal bonds.
REVENUE OBLIGATION RISK. The Fund may invest in municipal obligations called
revenue obligations that are payable only from the revenues generated from a
specific project or from another specific revenue source. Projects may suffer
construction delays, increased costs or reduced revenues as a result of
<PAGE>
political, regulatory, economic and other factors. As a result, projects may
not generate sufficient revenues to pay principal and interest on the Fund's
revenue obligations.
MUNICIPAL LEASE OBLIGATIONS. When the Fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases payments under municipal leases do not have to be
made unless money is specifically approved for that purpose by an appropriate
legislative body.
INTEREST RATE RISK. In general, the prices of municipal securities and other
debt securities rise when interest rates fall, and fall when interest rates
rise. Longer term obligations are usually more sensitive to interest rate
changes. A change in interest rates could cause the Fund's share price to go
down.
CREDIT RISK. Some issuers may not make payments on debt securities held by the
Fund. Or, an issuer may suffer adverse changes in its financial condition that
could lower the credit quality of a security, leading to greater volatility in
the price of the security and in shares of the Fund. If the credit quality of a
security deteriorates below investment grade, the Fund may continue to hold
this security, commonly known as a junk bond. The prices of lower rated
securities, especially junk bonds, often are more volatile than those of higher
rated securities. Lower quality debt securities, especially junk bonds, may be
less liquid and may be more difficult for the Fund to value and sell.
PREPAYMENT RISK. The issuers of debt securities held by the Fund may be able to
prepay principal due on securities, particularly during periods of declining
interest rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund, and the Fund may lose any
premium paid. On the other hand, rising interest rates may cause prepayments to
occur at slower than expected rates. This effectively lengthens the maturities
of the affected securities, making them more sensitive to interest rate changes
and the Fund's share price more volatile.
FUTURES CONTRACTS. Futures contracts are commonly referred to as derivatives.
The Fund's use of futures contracts particularly for non-hedging purposes, may
be risky. This practice could result in losses that are not offset by gains on
other portfolio assets. Losses would cause the Fund's share price to go down.
There is also the risk that the counterparty may fail to honor contract terms.
The Fund's ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest rate
movements. If Citibank's predictions are wrong, the Fund could suffer greater
losses than if it had not used futures contracts.
PARTICIPATION INTERESTS. The Fund's investments in participation interests are
subject to the risk that the Fund will not be considered the owner of the
underlying municipal obligation. In that case, interest paid on the
participation interest may not be exempt from federal, state, and local taxes.
ZERO COUPON OBLIGATIONS. Certain debt securities purchased by the Fund may be
zero coupon obligations. Zero coupon obligations pay no current interest. As a
result, their prices tend to be more volatile than those of securities that
offer regular payments of interest. This makes the Fund's share price more
volatile. In order to pay cash distributions representing income on zero coupon
obligations, the Fund may have to sell other securities on unfavorable terms.
These sales may generate taxable gains for Fund investors.
<PAGE>
YEAR 2000. The Fund could be adversely affected if the computer systems used by
the Fund or its service providers are not programmed to accurately process
information on or after January 1, 2000. The Fund, and its service providers,
are making efforts to resolve any potential Year 2000 problems. While it is
likely these efforts will be successful, the failure to implement any necessary
modifications could have an adverse impact on the Fund. The Fund also could be
adversely affected if the issuers of securities held by the Fund do not solve
their Year 2000 problems, or if it costs them large amounts of money to solve
these problems.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
performance for the fiscal periods indicated. Certain information reflects
financial results for a single Class A Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund, assuming reinvestment of all dividends and
distributions. The information has been audited by Deloitte & Touche LLP whose
report, along with the Fund's financial statements, is included in the Annual
Report which is incorporated by reference into the Statement of Additional
Information and which is available upon request.
<PAGE>
Appendix
CLASS A SHARES - ELIGIBLE PURCHASERS:
Class A shares may be purchased without a sales charge by the following
eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises discretionary
investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees for
acting as custodian
[] directors or trustees (and their immediate families), and retired
directors or trustees (and their immediate families), of any
investment company for which Citibank or any subsidiary or
affiliate of Citibank serves as the investment adviser or as a
service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired employees
of Citibank and its affiliates or CFBDS and its affiliates
(including immediate families of any of the foregoing)
[] investors participating in a fee-based or promotional arrangement
sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances in
selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan offered
to Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by the Fund's Board
<PAGE>
of Trustees or by the Board of Trustees of any other CitiFund or
mutual fund managed or advised by Citibank (all of such funds
being referred to herein as CitiFunds) the terms of which entitle
those shareholders to purchase shares of the Fund or any other
CitiFund at net asset value without a sales charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4, 1999
[] employee benefit plans qualified under Section 401 of the Internal
Revenue Code, including salary reduction plans qualified under
Section 401(k) of the Code, subject to minimum requirements as may
be established by CFBDS with respect to the amount of purchase;
currently, the amount invested by the qualified plan in the Fund
or in any combination of CitiFunds must total a minimum of $1
million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares; however,
a contingent deferred sales charge will be imposed on the
investments in the event of certain share redemptions within 12
months following the share purchase, at the rate of 1% of the
lesser of the value of the shares redeemed (not including
reinvested dividends and capital gains distributions) or the total
cost of the shares; the contingent deferred sales charge on Class
A shares will be waived under the same circumstances as the
contingent deferred sales charge on Class B shares will be waived;
in determining whether a contingent deferred sales charge on Class
A shares is payable, and if so, the amount of the charge:
+ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
+ all investments made during a calendar month will age one
month on the last day of the month and each subsequent month
+ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the redemption
proceeds when the exchanged shares are subsequently redeemed
(assuming the contingent deferred sales charge is then
payable)
+ the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which the
original Class A shares were held
[] subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund (other
than a CitiFund), if:
<PAGE>
+ the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed),
and
+ the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from another
investment firm within six months prior to the date of purchase by
the investor, if:
+ the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative, and
either paid an initial sales charge or was at some time
subject to, but did not actually pay, a deferred sales charge
or redemption fee with respect to the redemption proceeds
+ the redemption is made within 60 days prior to the investment
in the Fund, and
+ the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds
of the redemption
<PAGE>
The Statement of Additional Information (SAI) provides more details about the
Fund and its policies. The SAI is incorporated by reference into this
prospectus and is legally part of it.
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance.
The Annual and Semi-Annual Reports for the Fund list its portfolio holdings and
describe performance.
To obtain free copies of the SAI and the Annual and Semi-Annual Reports or to
make other inquiries, please call toll-free 1-800-625-4554.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can receive
copies of this information by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
SEC file number: 811-5034
<PAGE>
Prospectus
CITIFUNDSSM NATIONAL TAX FREE INCOME PORTFOLIO
Citibank, N.A., investment manager
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has
not approved or disapproved these securities or
passed upon the accuracy of this prospectus,
and any representation to the contrary is a
criminal offense.
_________ __, 1999
<PAGE>
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
TABLE OF CONTENTS
Fund at a Glance
Your CitiFunds Account
Choosing a Share Class
How to Buy Shares
How the Price of Your Shares is Calculated
How to Sell Shares
Reinstating Recently Sold Shares
Exchanges
Dividends
Tax Matters
Management of the Fund
Manager
Management Fees
More About the Fund
Principal Investment Strategies
Risks
Financial Highlights
Appendix
<PAGE>
FUND AT A GLANCE
THIS SUMMARY BRIEFLY DESCRIBES NATIONAL TAX FREE INCOME PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN IT. FOR MORE INFORMATION, SEE "MORE ABOUT THE
FUND" ON PAGE _____.
FUND GOAL
The Fund's goal is to generate high levels of current income exempt from
federal income taxes and preserve the value of its shareholders' investment. Of
course, there is no assurance that the Fund will achieve its goal.
MAIN INVESTMENT STRATEGIES
The Fund invests primarily in investment grade municipal obligations issued by
a variety of states and localities. Municipal obligations are debt securities
issued by states, cities and towns and other political or public entities or
agencies or qualifying issuers. The interest paid on these debt securities is
free from federal income tax.
Under normal market conditions, the Fund invests at least 80% of its assets in
municipal obligations that pay interest that is exempt from federal personal
income taxes including the federal alternative minimum tax. These may include
obligations of Puerto Rico and other U.S. territories.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable municipal obligations are not
available, the Fund may also 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.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
Certain securities held by the Fund may be covered by municipal bond insurance.
Although the Fund also seeks to minimize risk by investing in municipal
securities from a number of different states and localities, the Fund may, from
time to time, invest over 25% of its assets in municipal securities from one
state or region.
<PAGE>
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years).
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
securities. The Fund's ability to use futures contracts successfully depends on
a number of factors, including futures contracts being available at prices that
are not too costly, tax considerations, and Citibank accurately predicting
movements in interest rates.
MAIN RISKS
Like all mutual funds, you may lose money if you invest in this Fund. The
principal risks of investing in National Tax Free Income Portfolio are
described below. Please remember that the value of the Fund's shares will
change daily as the value of its underlying securities change. See page ___ for
more information about risks.
o NON-DIVERSIFIED FUND. The Fund is a non-diversified fund, which
means that it may invest a relatively high percentage of its assets
in the securities of a limited number of issuers. The Fund also may
invest 25% or more of its assets in securities of issuers located in
the same state, that derive income from similar type projects or
that are otherwise related. As a result, many securities held by the
Fund may be adversely affected by a particular economic, business,
regulatory or political event.
o MUNICIPAL MARKET RISK. There are special factors which may affect
the value of municipal securities and, as a result, the Fund's share
price. These factors include political or legislative changes,
uncertainties related to the tax status of the securities or the
rights of investors in the securities. The Fund may invest in
certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than
ordinary municipal bonds.
o REVENUE OBLIGATION RISK. The Fund may invest in municipal
obligations called revenue obligations that are payable only from
the revenues generated from a specific project or from another
specific revenue source. 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
the Fund's revenue obligations.
o INTEREST RATE RISK. In general, the prices of municipal securities
and other debt securities rise when interest rates fall, and fall
when interest rates rise. Longer term obligations are usually more
sensitive to interest rate changes. A change in interest rates could
cause the Fund's share price to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Fund, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a security
and leading to greater volatility in the price of the security and
<PAGE>
in shares of the Fund. If the credit quality of a security
deteriorates below investment grade, the Fund may continue to hold
this security, commonly known as a junk bond. The prices of lower
rated securities, especially junk bonds, often are more volatile
than those of higher rated securities.
o PREPAYMENT RISK. The issuers of debt securities held by the Fund may
be able to prepay principal due on securities, particularly during
periods of declining interest rates. The Fund may not be able to
reinvest that principal at attractive rates, reducing income to the
Fund, and the Fund may lose any premium paid. On the other hand,
rising interest rates may cause prepayments to occur at slower than
expected rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest rate
changes and the Fund's share price more volatile.
o FUTURES CONTRACTS. Futures contracts are commonly referred to as
derivatives. The Fund's use of futures contracts particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets.
Losses would cause the Fund's share price to go down. The Fund's
ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest
rate movements. If Citibank's predictions are wrong, the Fund could
suffer greater losses than if it had not used futures contracts.
Please note that an investment in the Fund is not a deposit of Citibank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in National Tax Free Income
Portfolio is not a complete investment program.
You should consider investing in National Tax Free Income Portfolio if:
o You seek tax-exempt income from your investments.
o Your investment horizon is at least intermediate term--typically
three years or longer.
Don't invest in National Tax Free Income Portfolio if:
o You don't need your income to be tax exempt, or you're investing
through a tax-deferred vehicle such as an IRA account.
o Growth of principal is more important to you than current income.
o You are not prepared to accept daily share price or income
fluctuations.
o Your investment horizon is shorter term--usually less than three
years.
<PAGE>
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks of investing
in the Fund, and how its returns have varied over time.
o The bar chart shows changes in the Fund's performance from year to year
over the last three calendar years. The chart and related information do
not take into account any sales charges that you may be required to pay.
Any sales charges will reduce your return.
o The table compares the Fund's average annual returns for the periods
indicated to those of a broad measure of market performance. Please
remember that unlike the Fund, the market index does not include the costs
of buying and selling securities and other Fund expenses.
o In both the chart and table, the returns shown for the Fund are for periods
before the creation of share classes on January 4, 1999. All existing Fund
shares were designated Class A shares on that date. Prior to that date,
there were no sales charges on the purchase or sale of Fund shares. The
returns for Class A in the table, but not the bar chart, have been adjusted
to reflect the maximum front-end sales charge currently applicable to the
Class A shares.
o The Class B shares were newly offered on January 4, 1999. Class B
performance would have been lower than that shown for Class A shares,
because of higher fund expenses and the effects of the contingent deferred
sales charge.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future.
<PAGE>
TOTAL RETURN
(per calendar year - Class A)
1996 1997 1998
___________________
[bar chart - for calendar years 1996
through 1998]
1996. . . . . . . . . . . . . . . . 3.31%
1997. . . . . . . . . . . . . . . . 11.45%
1998. . . . . . . . . . . . . . . .
__________________________________________________
HIGHEST AND LOWEST RETURNS
For Calendar Quarters Covered by the Bar Chart
__________________________________________________
Quarter Ending
__________________________________________________
Highest _____% _____
__________________________________________________
Lowest _____% _____
__________________________________________________
________________________________________________________________________
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1998
________________________________________________________________________
1 Year Life of Fund
Since
August 17,
1995
________________________________________________________________________
Class A _____ % _____ %
________________________________________________________________________
Class B _____ % N/A
________________________________________________________________________
Lehman Municipal 4 Years Plus Bond Index _____ % _____ %
________________________________________________________________________
Current yield (for 30 day period ending December 31, 1998): _____
Tax equivalent yield (for 30 day period ending December 31, 1998): _____
For up-to-date yield information, please call 800-625-4554 toll free, or
contact your account representative.
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
<TABLE>
<CAPTION>
<S> <C> <C>
CLASS A CLASS B
Class descriptions begin on page ___
SHAREHOLDER FEES (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 4.50% None
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are
deducted from Fund assets):
Management Fees 0.75% 0.75%
Distribution and/or Service (12b-1) Fees 0.25% 0.75%
Other Expenses 0.37% 0.37%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.37% 1.87%
_______________________________________________________________________________________________________________
*Because some of the Fund's expenses were waived or reimbursed, actual total operating expenses for the prior
year were (or, in the case of Class B shares,would have been): 0.80% 1.30%
These fee waivers and reimbursements may be reduced or terminated at any time.
1 Except for investment of $500,000 or more.
2 Class B shares have a contingent deferred sales charge (CDSC) which is deducted from your sale
proceeds if you sell your Class B shares within five years of your original purchase of the shares. In the
first year after purchase, the CDSC is 4.50% of the price at which you purchased your shares, or the
price at which you sold your shares, whichever is less, declining to 1.00% in the fifth year after
purchase.
</TABLE>
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods, if you own
Class A shares.
If you own Class B shares, two numbers are given, one showing your expenses if
you sold all your shares at the end of each time period and one if you held
onto your shares. The example also shows the effects of the conversion of Class
B shares to Class A shares after 8 years.
The example also assumes that:
o each investment has a 5% return each year--the assumption of a 5% return
is required by the SEC for the purpose of this example and is not a
prediction of the Fund's future performance; and
o the Fund's operating expenses shown in the Fund Fees and Expenses Table
remain the same before taking into consideration any fee waivers or
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
_______________________________________________________________________________
1 YEAR 3 YEARS 5 YEARS 10 YEARS
_______________________________________________________________________________
Class A $583 $864 $1,166 $2,022
Class B
Assuming redemption at end of period $640 $888 $1,111 $1,953
Assuming no redemption $190 $588 $1,011 $1,953
_______________________________________________________________________________
<PAGE>
YOUR CITIFUNDS ACCOUNT
CHOOSING A SHARE CLASS
THE FUND OFFERS TWO SHARE CLASSES, CLASS A AND CLASS B. EACH CLASS
HAS ITS OWN SALES CHARGE AND EXPENSE STRUCTURE. PLEASE READ THE
INFORMATION BELOW CAREFULLY TO HELP YOU DECIDE WHICH SHARE CLASS
IS BEST FOR YOU.
<TABLE>
<CAPTION>
<S> <C>
CLASS A AT A GLANCE: CLASS B AT A GLANCE:
o Front-end load--there is an initial sales o No initial sales charge charge
of 4.50% or less
o Lower sales charge rates for larger o The deferred sales charge declines from
investments 4.50% to 1% over five years, and is
eliminated if you hold your shares for six
years or more
o Annual service fee of up to 0.25% o Annual distribution/service fee of up to
0.75%
o Lower annual expenses than Class B o Automatic conversion to Class A
shares shares after 8 years
</TABLE>
_______________________________________________________________________________
WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/SERVICE FEES that are
paid under a 12B-1 PLAN. These are fees, also called 12B-1 FEES, that are
deducted from Fund assets and are used to compensate those financial
professionals who sell fund shares and provide ongoing services to shareholders
and to pay other marketing and advertising expenses. Because you pay these fees
during the whole period that you own the shares, over time, you may pay more
than if you had paid other types of sales charges. For this reason, you should
consider the effects of 12b-1 fees as well as sales loads when choosing a share
class.
_______________________________________________________________________________
SALES CHARGES--CLASS A SHARES
o Class A shares are sold at net asset value plus a front-end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The chart below shows the
rate of sales charge that you pay, depending on the amount that you
purchase.
o The chart below also shows the amount of broker/dealer compensation
that is paid out of the sales charge. This compensation includes
commissions and other fees that financial professionals who sell
shares of the Fund receive. The distributor keeps up to approximately
10% of the sales charge imposed on Class A shares. Financial
professionals that sell Class A shares will also receive the service
fee payable on Class A shares at an annual rate equal to 0.25% of the
average daily net assets represented by the Class A shares sold by
them.
<PAGE>
______________________________________________________________________________
SALES CHARGE SALES CHARGE BROKER/DEALER
AS A % OF AS A % OF COMMISSION AS
AMOUNT OF OFFERING YOUR A % OF OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
______________________________________________________________________________
Less than $25,000 4.50% 4.71% 4.05%
______________________________________________________________________________
$25,000 to less than $50,000 4.00% 4.17% 3.60%
______________________________________________________________________________
$50,000 to less than $100,000 3.50% 3.63% 3.15%
______________________________________________________________________________
$100,000 to less than $250,000 2.50% 2.56% 2.25%
______________________________________________________________________________
$250,000 to less than $500,000 1.50% 1.52% 1.35%
______________________________________________________________________________
$500,000 or more none* none* up to 1.00%
______________________________________________________________________________
*A contingent deferred sales charge may apply in certain instances.
See below.
o After the initial sales charge is deducted from your investment, the
balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain circumstances, as
described in "Sales Charge Waivers or Reductions" below. If you qualify to
purchase Class A shares without a sales load, you should purchase Class A
shares rather than Class B shares because Class A shares pay lower fees.
o If you invest at least $500,000 in the Fund, you do not pay any initial
sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% of the purchase price, or the sale price, whichever is
less, if you sell within the first year. Under certain circumstances,
waivers may apply. Other policies regarding the application of the CDSC are
the same as for Class B shares. Please read the discussion below on Class B
shares for more information.
PLEASE NOTE: If you owned Fund shares prior to January 4, 1999, you may
exchange those shares into Class A shares of other CitiFunds and other
mutual funds managed by Citibank without paying any sales charge, subject
to verification. Shares subject to the waiver include shares purchased
prior to January 4, 1999, and any shares you received through capital
appreciation or through the reinvestment of dividends or capital gains
distributions on those shares.
SALES CHARGES--CLASS B SHARES
o Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a contingent deferred sales charge (CDSC) when you sell
shares within five years of purchase. The rate of CDSC goes down the longer
you hold your shares. The table below shows the rates that you pay, as a
percentage of your original purchase price (or the sale price, whichever is
less), depending upon when you sell your shares.
<PAGE>
_______________________________________________________________
SALE DURING CDSC ON SHARES BEING SOLD
_______________________________________________________________
1st year since purchase 4.50%
_______________________________________________________________
2nd year since purchase 4.00%
_______________________________________________________________
3rd year since purchase 3.00%
_______________________________________________________________
4th year since purchase 2.00%
_______________________________________________________________
5th year since purchase 1.00%
_______________________________________________________________
6th year (or later) since purchase None
_______________________________________________________________
o Financial professionals selling Class B shares receive a commission of
4.00% of the purchase price of the Class B shares that they sell, except
for sales exempt from the CDSC. Financial professionals also receive a
service fee at an annual rate equal to 0.25% of the average daily net
assets represented by the Class B shares that they have sold.
o When you sell your shares, the CDSC will be based on either your original
purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of dividends,
capital gain distributions and shares representing capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Fund will always use
the Class B shares with the lowest CDSC to fill your sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares for
Class B shares of certain CitiFunds - any payment will be deferred until
your Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from another fund
managed or advised by Citibank, the date of your initial investment will be
used as the basis of the CDSC calculations. If the rate of CDSC on the
shares exchanged was higher than the rate of CDSC on your Fund shares, you
will be charged the higher rate when you sell your Fund shares.
From time to time, the Fund's distributor or Citibank may provide additional
promotional bonuses, incentives or payments to dealers that sell shares of the
Fund. These may include payments for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and their guests to locations within and outside the United States for meetings
or seminars of a business nature. In some instances, these bonuses, incentives
or payments may be offered only to dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
The Fund's distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. The
distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments are determined by the
distributor and may vary. Citibank may make similar payments under similar
arrangements.
<PAGE>
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you qualify for
certain waivers or elect to participate in certain programs. These include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers, including certain
tax-exempt organizations, certain employee benefit plans, certain entities
or persons with a qualifying affiliation or relationship with Citibank, and,
under certain circumstances, investors using the proceeds of a redemption
from another mutual fund for their purchase of Class A shares. Further
information about eligible purchasers may be found in the Appendix to this
prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other retirement
accounts.
o Redemptions made under the Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or reduction and how the
programs work by requesting a copy of the Fund's Statement of Additional
Information, or by consulting with your account representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares approximately eight
years after purchase. If you acquired your shares through an exchange, the date
of your initial investment will be used to determine your conversion date. You
will receive the same dollar amount of Class A shares as the Class B shares
converted. The price of Class A shares may be higher than Class B shares at the
time of conversion, because of the lower expenses of Class A shares. Therefore,
you may receive fewer Class A shares than the number of Class B shares
converted.
HOW TO BUY SHARES
Shares of National Tax Free Income Portfolio are offered continuously and
purchases may be made Monday through Friday, except on certain holidays. Shares
may be purchased from the Fund's distributor or a broker-dealer or financial
institution (called a Service Agent) that has entered into a service agreement
with the distributor concerning the Fund. Please specify whether you are
<PAGE>
purchasing Class A or Class B shares. If you fail to specify, Class A shares
will be purchased for your account. The Fund and the distributor have the right
to reject any purchase order or cease offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is calculated
after your order is received and accepted by the Fund's transfer agent. NAV is
the value of a single share of the Fund. If you are purchasing Class A shares,
the applicable sales charge will be added to the cost of your shares.
Your Service Agent will not transmit your purchase order for Fund shares until
it receives the purchase price in federal or other immediately available funds.
If you pay by check, the Service Agent transmits the order when the check
clears, usually within two business days.
If you are a customer of a Service Agent, your Service Agent will establish and
maintain your account and be the shareholder of record.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
The Fund calculates its NAV every day the New York Stock Exchange is open for
trading. This calculation is made at the close of regular trading on the New
York Stock Exchange, normally 4:00 p.m. Eastern time. NAV is calculated
separately for each class of shares. NAV may be higher for Class A shares
because Class A shares bear lower expenses. On days when the financial markets
in which the Fund invests close early, NAV will be calculated as of the close
of those markets.
The Fund's securities are valued primarily on the basis of market quotations.
When market quotations are not readily available, the Fund may price securities
at fair value. Fair value is determined in accordance with procedures approved
by the Fund's Board of Trustees. When the Fund uses the fair value pricing
method, a security may be priced higher or lower than if the Fund had used a
market quotation to price the same security.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The price will be the
NAV the next time it is calculated after your redemption request in proper form
has been received by the Fund's transfer agent. If your shares are subject to a
CDSC, the applicable charge will be deducted from your sale proceeds.
You may make redemption requests in writing through the Fund's transfer agent
or, if you are a customer of a Service Agent, through your Service Agent. If
your account application permits, you may also make redemption requests by
calling the Fund's transfer agent or, if you are a customer of a Service Agent,
your Service Agent. Each Service Agent is responsible for promptly submitting
redemption requests to the Fund's transfer agent. You are responsible for
making sure your redemption request is in proper form.
The Fund has a Systematic Withdrawal Plan which allows you to automatically
withdraw a specific dollar amount from your account on a regular basis. You
must have at least $10,000 in your account to participate in this program. If
your shares are subject to a CDSC, you may only withdraw up to 10% of the value
of your account in any year, but you will not be subject to CDSC on the shares
withdrawn under the Plan. For more information, please contact your Service
Agent.
<PAGE>
If you own both Class A and Class B shares, and want to sell shares, you should
specify which class of shares you wish to sell. If you fail to specify, Class A
shares will be redeemed first.
When you sell your Class B shares, they will be redeemed so as to minimize your
CDSC. Shares on which the CDSC is not payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions
will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds normally on the
business day after you sell your shares but generally within seven days. Your
redemption proceeds may be delayed for up to ten days if your purchase was made
by check. Your redemption proceeds may also be delayed, or your right to
receive redemption proceeds suspended, if the New York Stock Exchange is closed
(other than on weekends or holidays) or trading is restricted, or if an
emergency exists. The Fund has the right to pay your redemption proceeds by
giving you securities instead of cash. In that case, you may incur costs (such
as brokerage commissions) converting the securities into cash. You should be
aware that you may have to pay taxes on your redemption proceeds.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Fund permits you to
repurchase Class A shares in the Fund, up to the dollar amount of shares
redeemed, without paying any sales charges. To take advantage of this
reinstatement privilege, you must notify the Fund in writing at the time you
wish to repurchase the shares.
EXCHANGES
You may exchange Fund shares for shares of the same class of certain other
CitiFunds. You may also be able to exchange your Class A shares for shares of
certain CitiFunds that offer only a single class of shares unless your Class A
shares are subject to a CDSC. You may not exchange Class B shares for shares of
CitiFunds that offer only a single class of shares. You may also acquire Fund
shares through an exchange from another fund managed by Citibank.
You may place exchange orders through the transfer agent or, if you are a
customer of a Service Agent, through your Service Agent. You may place exchange
orders by telephone if your account application permits. The transfer agent or
your Service Agent can provide you with more information, including a
prospectus for any fund that may be acquired through an exchange.
The exchange will be based on the relative NAVs of both funds when they are
next determined after your order is accepted by the Fund's transfer agent,
<PAGE>
subject to any applicable sales charge. You cannot exchange shares until the
Fund has received payment in federal funds for your shares.
When you exchange your Class A shares, you will generally be required to pay
the difference, if any, between the sales charge payable on the shares to be
acquired in the exchange and the sales charge paid in connection with your
original purchase of Class A shares. However, if your Class A shares were
purchased prior to January 4, 1999, you will not have to pay a sales charge
when you exchange those shares for Class A shares of certain other CitiFunds,
subject to confirmation through a check of appropriate records and
documentation.
When you exchange your Class B shares, you will not pay any initial sales
charge, and no CDSC is imposed when your Class B shares are exchanged for Class
B shares of certain other CitiFunds that are made available by your Service
Agent. However, you may be required to pay a CDSC when you sell those shares.
The length of time that you owned Fund shares will be included in the holding
period of your new Class B shares.
The exchange privilege may be changed or terminated at any time. You should be
aware that you may have to pay taxes on your exchange.
DIVIDENDS
The Fund declares dividends daily of substantially all of its net income (if
any) from dividends and interest. The Fund pays these dividends monthly to its
shareholders of record.
The Fund's net realized short-term and long-term capital gains, if any, will be
distributed to Fund shareholders at least annually. The Fund may also make
additional distributions to 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.
Unless you choose to receive your dividends in cash, you will receive them as
full and fractional additional Fund shares.
TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation, and the status of your
account under state and local laws.
TAXABILITY OF DISTRIBUTIONS; FEDERAL INCOME TAXES. You will not normally have
to pay federal income taxes on distributions the Fund designates as
attributable to interest on municipal obligations, that is, as "tax-exempt"
dividends. Certain "tax-exempt" dividends may be subject to the federal
alternative minimum tax, however. In addition, if you are receiving social
security or railroad retirement benefits any "tax-exempt" dividends may affect
the amount of those benefits which are subject to federal income tax; if you
borrow to purchase or continue to hold Fund shares, you may not be able to
deduct the interest you pay on that debt.
The Fund may also invest from time to time in taxable securities, or realize
gains from transactions in securities. You will normally have to pay federal
income taxes on the distributions not attributable to interest on municipal
<PAGE>
obligations which you receive from the Fund, whether you take the distributions
in cash or reinvest them in additional shares. Distributions designated by the
Fund as capital gain dividends are taxable as long-term capital gains. Other
distributions, not designated as "tax-exempt" dividends, are generally taxable
as ordinary income. Some distributions paid in January may be taxable to you as
if they had been paid the previous December. The IRS Form 1099 that is mailed
to you every January details your distributions for the prior year and how they
are treated for federal tax purposes.
STATE AND LOCAL TAXES. Generally, you will have to pay state or local taxes on
Fund dividends and other distributions, although distributions derived from
interest on U.S. government obligations may be exempt from certain state and
local taxes. Fund dividends that are not taxable to you for federal income tax
purposes may still be subject to tax under the income or other tax laws of
state or local taxing authorities.
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of the U.S., the
Fund will withhold U.S. federal income tax payments at the rate of 30% (or any
lower applicable treaty rate) on taxable dividends and other payments subject
to withholding taxes. Distributions received from the Fund by non-U.S. persons
also may be subject to tax under the laws of their own jurisdictions.
BACKUP WITHHOLDING. The account application asks each new investor to certify
that the investor's Social Security or taxpayer identification number is
correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. The Fund may be required to withhold (and
pay over to the IRS for your credit) 31% of certain distributions and proceeds
it pays you if you fail to provide this information or otherwise violate IRS
regulations.
TAXATION OF TRANSACTIONS. If you sell your shares of the Fund, or exchange them
for shares of another fund, it is considered a taxable event. Depending on your
purchase price and the sales price of the shares you sell or exchange, you may
have a gain or loss on the transaction. If you purchased Class A shares and
held your shares in the Fund only a short time, your gain or loss could also be
affected by whether you reinvest the proceeds you receive in shares of the Fund
or another regulated investment company, without having to pay a sales charge
that would otherwise be due because you paid a sales charge on the shares of
the Fund you sold. If you redeem your Fund shares 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, if you redeem your Fund shares within six months of
their purchase, any short-term capital loss realized on redemption is
disallowed to the extent of any dividends of tax-exempt income received during
that period. You are responsible for any tax liabilities generated by your
transaction.
<PAGE>
MANAGEMENT OF THE FUND
MANAGER
National Tax Free Income Portfolio draws on the strength and experience of
Citibank. Citibank is the investment manager of the Fund, and subject to
policies set by the Fund's Trustees, Citibank makes investment decisions.
Citibank, with headquarters at 153 East 53rd Street, New York, New York, has
been managing money since 1822. With its affiliates, it currently manages more
than $290 billion in assets worldwide. Citibank is a wholly-owned subsidiary of
Citicorp, which is, in turn, a wholly-owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of Citicorp and Travelers
Group, Inc., which was completed on October 8, 1998. "CitiFunds" is a service
mark of Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the Fund.
However, in making investment decisions for the Fund, Citibank does not obtain
or use material inside information acquired by any division, department or
affiliate of Citibank in the course of those relationships. Citibank and its
affiliates may have loans outstanding that are repaid with proceeds of
securities purchased by the Fund.
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 FEES
For the management services Citibank provided the Fund, for the Fund's fiscal
year ended December 31, 1998 Citibank received a total of 0% of the Fund's
average daily net assets, after waivers.
<PAGE>
MORE ABOUT THE FUND
The Fund's goals, principal investments and risks are summarized in FUND AT A
GLANCE on page ____. More information on investments, investment strategies and
risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's principal investment strategies are the strategies that, in the
opinion of Citibank, are most likely to achieve the Fund's investment goals. Of
course, there can be no assurance that the Fund will achieve its goals. Please
note that the Fund may also use strategies and invest in securities that are
not described below but that are described in the Statement of Additional
Information. Of course, Citibank may decide, as a matter of investment
strategy, not to use the investments and investment techniques described below
and in the Statement of Additional Information at any particular time. The
Fund's goals and strategies may be changed without shareholder approval.
Under normal market conditions, the Fund invests at least 80% of its assets in
municipal obligations that pay interest that is exempt from federal income
taxes including the federal alternative minimum tax. The Fund invests in
municipal obligations issued by a variety of states and localities.
_______________________________________________________________________________
WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations issued by or on
behalf of states and municipal governments, Puerto Rico and other U.S.
territories, and their authorities, agencies, instrumentalities and political
subdivisions, and by other qualifying issuers. The interest on these
obligations is exempt from federal income tax.
Longer term municipal obligations (municipal bonds) generally are issued to
raise funds to finance public projects or to retire previous debt. Short term
obligations (municipal notes or commercial paper) may be issued to finance
short term cash needs in anticipation of receipt of tax and other revenues.
The Fund invests in both "general obligation" securities, which are backed by
the full faith, credit and taxing power of the issuer, and in "revenue"
securities, which are payable only from revenues from a specific project or
another revenue source.
______________________________________________________________________________
The Fund invests without limit in different types of municipal obligations,
including general obligation securities, revenue securities, private activity
bonds, industrial revenue bonds and municipal lease obligations. Although the
Fund is non-diversified, it seeks to limit its exposure to the housing,
electrical utilities and hospital sectors by restricting its investment in any
one of these sectors to 25% of the Fund's assets.
______________________________________________________________________________
WHAT ARE MUNICIPAL LEASE OBLIGATIONS?
Municipal lease obligations are undivided interests issued by a state or
municipality in a lease or installment purchase which generally relates to
equipment or facilities.
______________________________________________________________________________
<PAGE>
The Fund may invest in participation interests in municipal obligations that
are issued by banks and other financial institutions.
______________________________________________________________________________
WHAT ARE PARTICIPATION INTERESTS?
In a participation interest, the bank sells undivided interests in a municipal
obligation it owns. These interests may be supported by a bank letter of credit
or guarantee. The interest rate generally is adjusted periodically, and the
holder can sell back to the issuer after a specified period. If interest rates
rise or fall, the rates on participation interests and other variable rate
instruments generally will be readjusted. As a result, these instruments do not
offer the same opportunity for capital appreciation or loss as fixed rate
investments.
______________________________________________________________________________
The Fund may purchase municipal obligations under arrangements (called stand-by
commitments) where they can sell the securities at an agreed-upon price and
date under certain circumstances. The Fund can also purchase securities under
arrangements (called when-issued or forward-delivery basis) where the
securities will not be delivered immediately. The Fund will set aside the
assets to pay for these securities at the time of the agreement.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable municipal obligations are not
available, the Fund may also invest in short-term debt securities that pay
interest that is subject to federal 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.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
In addition, some of the bonds held in the Fund may be covered by municipal
bond insurance, in which case an insurer may make principal and interest
payments on the securities if the issuer fails to do so. Although the Fund also
seeks to minimize risk by investing in municipal securities from a number of
different states and localities, the Fund may, from time to time, invest over
25% of its assets in municipal securities from one state or region.
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years).
<PAGE>
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
securities. Futures contracts may not be available on terms that make economic
sense (they may be too costly). The Fund's ability to use futures contracts may
be limited by tax considerations.
See "Risks" for more information about the risks associated with investing in
the Fund.
DEFENSIVE STRATEGIES. The Fund may, from time to time, take temporary defensive
positions that are inconsistent with the Fund's principal investment strategies
in attempting to respond to adverse market, political or other conditions. When
doing so, the Fund may invest without limit in high quality money market and
other short-term instruments, and may not be pursuing its investment goals.
MANAGEMENT STYLE. National Tax Free Income Portfolio is managed using a
combination of qualitative and quantitative analysis. The Citibank fixed income
team develops an interest rate forecast and analysis of general economic
conditions throughout the United States. Then Citibank compares specific
regions and sectors to identify broad segments of the municipal market poised
to benefit in this environment. Citibank also closely studies the yields and
other characteristics of specific issues to identify attractive opportunities.
Citibank uses a geographically diversified approach, seeking a portfolio of
bonds representing a wide range of sectors, maturities and regions. The
portfolio manager uses this approach when deciding when to purchase or sell
securities and which securities to purchase or sell. For more information
about the portfolio manager, see "Manager" on page __.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the portfolio
manager attempts to minimize portfolio turnover, from time to time the Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to investors.
Active trading may also increase the amount of commissions or mark-ups the Fund
pays to brokers or dealers when it buys and sells securities. The "Financial
Highlights" section of this prospectus shows the Fund's historical portfolio
turnover rate.
BROKERAGE. Citibank may use brokers or dealers for Fund transactions who also
provide brokerage and research services to the Fund or other accounts over
which Citibank exercises investment discretion. The Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a broker or dealer who
provides these brokerage and research services a commission for executing a
portfolio transaction which is higher than the commission another broker or
dealer would have charged. However, the Fund will "pay up" only if Citibank
determines in good faith that the higher commission is reasonable in relation
to the brokerage and research services provided, viewed in terms of either the
particular transaction or all of the accounts over which Citibank exercises
investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Certain of these risks are described below. More
information about risks appears in the Fund's Statement of Additional
Information. The Fund is designed for investors seeking current income that is
exempt from federal income taxes. Remember that you may receive little or no
return on your investment in the Fund. You may lose money if you invest in this
Fund.
<PAGE>
Please remember that an investment in the Fund is not a deposit of Citibank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means
that the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Fund also may invest 25% or
more of its assets in securities of issuers who are located in the same state,
that derive income from similar type projects or that are otherwise related. As
a result, many securities held by the Fund may be adversely affected by a
particular single economic, business, regulatory or political event. You should
consider the greater risk inherent in these policies when compared with a more
diversified mutual fund.
MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities. The Fund
may invest in certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than ordinary
municipal bonds.
REVENUE OBLIGATION RISK. The Fund may invest in municipal obligations called
revenue obligations that are payable only from the revenues generated from a
specific project or from another specific revenue source. 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 the Fund's
revenue obligations.
MUNICIPAL LEASE OBLIGATIONS. When the Fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases payments under municipal leases do not have to be
made unless money is specifically approved for that purpose by an appropriate
legislative body.
INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. Longer term obligations
are usually more sensitive to interest rate changes. A change in interest rates
could cause the Fund's share price to go down.
CREDIT RISK. Some issuers may not make payments on debt securities held by the
Fund, causing a loss. Or, an issuer's financial condition may deteriorate,
lowering the credit quality of a security and leading to greater volatility in
the price of the security and in shares of the Fund. If the credit quality of a
security deteriorates below investment grade, the Fund may continue to hold
this security, commonly known as a junk bond. The prices of lower rated
securities, especially junk bonds, often are more volatile than those of higher
rated securities. Lower quality debt securities, especially junk bonds, may be
less liquid and may be more difficult for the Fund to value and sell.
PREPAYMENT RISK. The issuers of debt securities held by the Fund may be able to
prepay principal due on securities, particularly during periods of declining
interest rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund, and the Fund may lose any
premium paid. On the other hand, rising interest rates may cause prepayments to
<PAGE>
occur at slower than expected rates. This effectively lengthens the maturities
of the affected securities, making them more sensitive to interest rate changes
and the Fund's share price more volatile.
FUTURES CONTRACTS. Futures contracts are commonly referred to as derivatives.
The Fund's use of futures contracts particularly for non-hedging purposes, may
be risky. This practice could result in losses that are not offset by gains on
other portfolio assets. Losses would cause the Fund's share price to go down.
There is also the risk that the counterparty may fail to honor contract terms.
The Fund's ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest rate
movements. If Citibank's predictions are wrong, the Fund could suffer greater
losses than if it had not used futures contracts.
PARTICIPATION INTERESTS. The Fund's investments in participation interests are
subject to the risk that the Fund will not be considered the owner of the
underlying municipal obligation. In that case, interest paid on the
participation interest may not be exempt from federal, state, and local taxes.
ZERO COUPON OBLIGATIONS. Certain debt securities purchased by the Fund may be
zero coupon obligations. Zero coupon obligations pay no current interest. As a
result, their prices tend to be more volatile than those of securities that
offer regular payments of interest. This makes the Fund's share price more
volatile. In order to pay cash distributions representing income on zero coupon
obligations, the Fund may have to sell other securities on unfavorable terms.
These sales may generate taxable gains for Fund investors.
YEAR 2000. The Fund could be adversely affected if the computer systems used by
the Fund or its service providers are not programmed to accurately process
information on or after January 1, 2000. The Fund, and its service providers,
are making efforts to resolve any potential Year 2000 problems. While it is
likely these efforts will be successful, the failure to implement any necessary
modifications could have an adverse impact on the Fund. The Fund also could be
adversely affected if the issuers of securities held by the Fund do not solve
their Year 2000 problems, or if it costs them large amounts of money to solve
these problems.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
performance for the fiscal periods indicated. Certain information reflects
financial results for a single Class A Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund, assuming reinvestment of all dividends and
distributions. The information has been audited by Deloitte & Touche LLP whose
report, along with the Fund's financial statements, is included in the Annual
Report which is incorporated by reference into the Statement of Additional
Information and which is available upon request.
<PAGE>
Appendix
CLASS A SHARES - ELIGIBLE PURCHASERS:
Class A shares may be purchased without a sales charge by the following
eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises
discretionary investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees
for acting as custodian
[] directors or trustees (and their immediate families), and
retired directors or trustees (and their immediate families),
of any investment company for which Citibank or any subsidiary
or affiliate of Citibank serves as the investment adviser or
as a service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired
employees of Citibank and its affiliates or CFBDS and its
affiliates (including immediate families of any of the
foregoing)
[] investors participating in a fee-based or promotional
arrangement sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances
in selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan
offered to Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by the Fund's
<PAGE>
Board of Trustees or by the Board of Trustees of any other
CitiFund or mutual fund managed or advised by Citibank (all of
such funds being referred to herein as CitiFunds) the terms of
which entitle those shareholders to purchase shares of the
Fund or any other CitiFund at net asset value without a sales
charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4,
1999
[] employee benefit plans qualified under Section 401 of the
Internal Revenue Code, including salary reduction plans
qualified under Section 401(k) of the Code, subject to minimum
requirements as may be established by CFBDS with respect to
the amount of purchase; currently, the amount invested by the
qualified plan in the Fund or in any combination of CitiFunds
must total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares;
however, a contingent deferred sales charge will be imposed on
the investments in the event of certain share redemptions
within 12 months following the share purchase, at the rate of
1% of the lesser of the value of the shares redeemed (not
including reinvested dividends and capital gains
distributions) or the total cost of the shares; the contingent
deferred sales charge on Class A shares will be waived under
the same circumstances as the contingent deferred sales charge
on Class B shares will be waived; in determining whether a
contingent deferred sales charge on Class A shares is payable,
and if so, the amount of the charge:
+ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
+ all investments made during a calendar month will age one
month on the last day of the month and each subsequent
month
+ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the
redemption proceeds when the exchanged shares are
subsequently redeemed (assuming the contingent deferred
sales charge is then payable)
+ the holding period of Class A shares so acquired through
an exchange will be aggregated with the period during
which the original Class A shares were held
[] subject to appropriate documentation, investors where the
amount invested represents redemption proceeds from a mutual
fund (other than a CitiFund), if:
+ the redeemed shares were subject to an initial sales
charge or a deferred sales charge (whether or not
actually imposed), and
<PAGE>
+ the redemption has occurred no more than 60 days prior to
the purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from
another investment firm within six months prior to the date of
purchase by the investor, if:
+ the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative,
and either paid an initial sales charge or was at some
time subject to, but did not actually pay, a deferred
sales charge or redemption fee with respect to the
redemption proceeds
+ the redemption is made within 60 days prior to the
investment in the Fund, and
+ the net asset value of the shares of the Fund sold to
that investor without a sales charge does not exceed the
proceeds of the redemption
<PAGE>
The Statement of Additional Information (SAI) provides more details about the
Fund and its policies. The SAI is incorporated by reference into this
prospectus and is legally part of it.
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance.
The Annual and Semi-Annual Reports for the Fund list its portfolio holdings and
describe performance.
To obtain free copies of the SAI and the Annual and Semi-Annual Reports or to
make other inquiries, please call toll-free 1-800-625-4554.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can receive
copies of this information by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
SEC file number: 811-5034
<PAGE>
Prospectus
CITIFUNDSSM NEW YORK TAX FREE INCOME PORTFOLIO
Citibank, N.A., investment manager
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has
not approved or disapproved these securities or
passed upon the accuracy of this prospectus,
and any representation to the contrary is a
criminal offense.
_________ __, 1999
<PAGE>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
TABLE OF CONTENTS
Fund at a Glance
Your CitiFunds Account
Choosing a Share Class
How to Buy Shares
How the Price of Your Shares is Calculated
How to Sell Shares
Reinstating Recently Sold Shares
Exchanges
Dividends
Tax Matters
Management of the Fund
Manager
Management Fees
More About the Fund
Principal Investment Strategies
Risks
Financial Highlights
Appendix
<PAGE>
FUND AT A GLANCE
THIS SUMMARY BRIEFLY DESCRIBES NEW YORK TAX FREE INCOME PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN IT. FOR MORE INFORMATION, SEE "MORE ABOUT THE
FUND" ON PAGE _____.
FUND GOAL
The Fund's goal 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. Of course, there is no assurance
that the Fund will achieve its goal.
MAIN INVESTMENT STRATEGIES
The Fund invests primarily in investment grade municipal obligations that pay
interest that is exempt from federal as well as New York State and New York
City personal income tax. Municipal obligations are debt securities issued by
states, cities and towns and other political or public entities or agencies or
qualifying issuers. Under normal market conditions, the Fund invests at least
80% of its assets in these New York municipal obligations. Issuers of these
securities are usually located in New York, but the securities can also be
issued by Puerto Rico and other U.S. territories. Interest on these obligations
is also exempt from the federal alternative minimum tax.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable New York municipal obligations are not
available, the Fund may purchase other municipal obligations. The interest on
these securities may be subject to New York State or 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.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
Certain securities held by the Fund may be covered by municipal bond insurance.
<PAGE>
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years).
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
securities. The Fund's ability to use futures contracts successfully depends on
a number of factors, including futures contracts being available at prices that
are not too costly, tax considerations, and Citibank accurately predicting
movements in interest rates.
MAIN RISKS
Like all mutual funds, you may lose money if you invest in this Fund. The
principal risks of investing in New York Tax Free Income Portfolio are
described below. Please remember that the value of the Fund's shares will
change daily as the value of its underlying securities change. See page ___ for
more information about risks.
o NON-DIVERSIFIED FUND. The Fund is a non-diversified fund, which
means that it may invest a relatively high percentage of its assets
in the securities of a limited number of issuers, including issuers
that derive income from similar type projects or that are otherwise
related. As a result, many securities held by the Fund may be
adversely affected by a particular economic, business, regulatory or
political event.
o NEW YORK MUNICIPAL OBLIGATIONS. Because the Fund invests a high
percentage of its assets in municipal obligations of issuers located
in New York, the Fund is more exposed to events that adversely
affect issuers in New York. As a result, this Fund has more risk
than a broadly diversified fund.
New York State and other issuers of New York municipal obligations
have experienced financial difficulties over the past several years.
Although the New York economy has improved more recently, there is
no assurance that this will continue. Recent global economic events
have begun to hurt the earnings of companies in New York. If New
York were to experience economic difficulties again, the value of
your investment in the Fund could decline. In addition, the Fund
also could have difficulty in finding high quality New York
municipal obligations available for investment. This could cause the
amount of the Fund's income that is subject to New York state and
city personal incomes taxes to increase.
o MUNICIPAL MARKET RISK. There are special factors which may affect
the value of municipal securities and, as a result, the Fund's share
price. These factors include political or legislative changes,
uncertainties related to the tax status of the securities or the
rights of investors in the securities. The Fund may invest in
certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than
ordinary municipal bonds.
o REVENUE OBLIGATION RISK. The Fund may invest in municipal
obligations called revenue obligations that are payable only from
the revenues generated from a specific project or from another
<PAGE>
specific revenue source. 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
the Fund's revenue obligations.
o INTEREST RATE RISK. In general, the prices of municipal securities
and other debt securities rise when interest rates fall, and fall
when interest rates rise. Longer term obligations are usually more
sensitive to interest rate changes. A change in interest rates could
cause the Fund's share price to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Fund, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a security
and leading to greater volatility in the price of the security and
in shares of the Fund. If the credit quality of a security
deteriorates below investment grade, the Fund may continue to hold
this security, commonly known as a junk bond. The prices of lower
rated securities, especially junk bonds, often are more volatile
than those of higher rated securities.
o PREPAYMENT RISK. The issuers of debt securities held by the Fund may
be able to prepay principal due on securities, particularly during
periods of declining interest rates. The Fund may not be able to
reinvest that principal at attractive rates, reducing income to the
Fund, and the Fund may lose any premium paid. On the other hand,
rising interest rates may cause prepayments to occur at slower than
expected rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest rate
changes and the Fund's share price more volatile.
o FUTURES CONTRACTS. Futures contracts are commonly referred to as
derivatives. The Fund's use of futures contracts particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets.
Losses would cause the Fund's share price to go down. The Fund's
ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest
rate movements. If Citibank's predictions are wrong, the Fund could
suffer greater losses than if it had not used futures contracts.
Please note that an investment in the Fund is not a deposit of Citibank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in New York Tax Free Income
Portfolio is not a complete investment program.
You should consider investing in New York Tax Free Income Portfolio if:
o You seek tax-exempt income from your investments.
<PAGE>
o Your investment horizon is at least intermediate term--typically
three years or longer.
o Your income is subject to New York State or City taxes.
Don't invest in New York Tax Free Income Portfolio if:
o You don't need your income to be tax exempt, or you're investing
through a tax-deferred vehicle -- such as an IRA account.
o Growth of principal is more important to you than current income.
o You are not prepared to accept daily share price or income
fluctuations.
o Your investment horizon is shorter term--usually less than three
years.
FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks of investing
in the Fund, and how its returns have varied over time.
o The bar chart shows changes in the Fund's performance from year to year
over the last ten calendar years. The chart and related information do not
take into account any sales charges that you may be required to pay. Any
sales charges will reduce your return.
o The table compares the Fund's average annual returns for the periods
indicated to those of a broad measure of market performance. Please
remember that unlike the Fund, the market indexes do not include the costs
of buying and selling securities and other Fund expenses.
o In both the chart and table, the returns shown for the Fund are for periods
before the creation of share classes on January 4, 1999. All existing Fund
shares were designated Class A shares on that date. Prior to that date,
there were no sales charges on the purchase or sale of Fund shares. The
returns for Class A in the table, but not the bar chart, have been adjusted
to reflect the maximum front-end sales charge currently applicable to the
Class A shares.
o The Class B shares were newly offered on January 4, 1999. Class B
performance would have been lower than that shown for Class A shares,
because of higher fund expenses and the effects of the contingent deferred
sales charge.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future.
<PAGE>
TOTAL RETURN
(per calendar year - Class A)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
_____________________________________________________________________
[bar chart - for calendar years 1989
through 1998]
1989. . . . . . . . . . . . . . . .
1990. . . . . . . . . . . . . . . .
1991. . . . . . . . . . . . . . . .
1992. . . . . . . . . . . . . . . .
1993. . . . . . . . . . . . . . . .
1994. . . . . . . . . . . . . . . .-7.47%
1995. . . . . . . . . . . . . . . .17.89%
1996. . . . . . . . . . . . . . . .3.01%
1997. . . . . . . . . . . . . . . .9.62%
1998. . . . . . . . . . . . . . . .
_________________________________________________
HIGHEST AND LOWEST RETURNS
For Calendar Quarters Covered by the Bar Chart
_________________________________________________
Quarter Ending
_________________________________________________
Highest _____% _____
_________________________________________________
Lowest _____% _____
_________________________________________________
_______________________________________________________________________________
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1998
_______________________________________________________________________________
1 Year 5 years 10 years Life of
Fund
Since
September
8, 1986
_______________________________________________________________________________
Class A _____ % _____ % _____% _____ %
_______________________________________________________________________________
Class B _____ % N/A N/A N/A
_______________________________________________________________________________
Lehman Municipal Bond Index _____ % _____ % _____% _____ %
_______________________________________________________________________________
Current yield (for 30 day period ending December 31, 1998): ____
Tax equivalent yield (for 30 day period ending December 31, 1998): ____
For up-to-date yield information, please call 800-625-4554 toll free, or
contact your account representative.
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
<TABLE>
<CAPTION>
<S> <C> <C>
CLASS A CLASS B
Class descriptions begin on page ___
SHAREHOLDER FEES (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 4.50% None
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are
deducted from Fund assets):
Management Fees 0.75% 0.75%
Distribution and/or Service (12b-1) Fees 0.25% 0.75%
Other Expenses 0.09% 0.09%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.09% 1.59%
______________________________________________________________________________________________________________
*Because some of the Fund's expenses were waived or reimbursed, actual total operating expenses for the prior
year were (or, in the case of Class B shares, would have been): 0.80% 1.30%
These fee waivers and reimbursements may be reduced or terminated at any time.
1 Except for investment of $500,000 or more.
2 Class B shares have a contingent deferred sales charge (CDSC) which is deducted from your sale
proceeds if you sell your Class B shares within five years of your original purchase of the shares. In the
first year after purchase, the CDSC is 4.50% of the price at which you purchased your shares, or the
price at which you sold your shares, whichever is less, declining to 1.00% in the fifth year after
purchase.
</TABLE>
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods, if you own
Class A shares.
If you own Class B shares, two numbers are given, one showing your expenses if
you sold all your shares at the end of each time period and one if you held
onto your shares. The example also shows the effects of the conversion of Class
B shares to Class A shares after 8 years.
The example also assumes that:
o each investment has a 5% return each year--the assumption of a 5% return
is required by the SEC for the purpose of this example and is not a
prediction of the Fund's future performance; and
o the Fund's operating expenses shown in the Fund Fees and Expenses Table
remain the same before taking into consideration any fee waivers or
reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
_______________________________________________________________________________
1 YEAR 3 YEARS 5 YEARS 10 YEARS
_______________________________________________________________________________
Class A $556 $781 $1,024 $1,719
Class B
Assuming redemption at end of period $612 $802 $966 $1,646
Assuming no redemption $162 $502 $866 $1,646
_______________________________________________________________________________
<PAGE>
YOUR CITIFUNDS ACCOUNT
CHOOSING A SHARE CLASS
THE FUND OFFERS TWO SHARE CLASSES, CLASS A AND CLASS B. EACH CLASS
HAS ITS OWN SALES CHARGE AND EXPENSE STRUCTURE. PLEASE READ THE
INFORMATION BELOW CAREFULLY TO HELP YOU DECIDE WHICH SHARE CLASS
IS BEST FOR YOU.
<TABLE>
<CAPTION>
<S> <C>
CLASS A AT A GLANCE: CLASS B AT A GLANCE:
o Front-end load--there is an initial sales o No initial sales charge
charge of 4.50% or less
o Lower sales charge rates for larger o The deferred sales charge declines from
investments 4.50% to 1% over five years, and is
eliminated if you hold your shares for six
years or more
o Annual service fee of up to 0.25% o Annual distribution/service fee of up
to 0.75%
o Lower annual expenses than Class B shares o Automatic conversion to Class A shares
after 8 years
</TABLE>
_______________________________________________________________________________
WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/SERVICE FEES that are
paid under a 12B-1 PLAN. These are fees, also called 12B-1 FEES, that are
deducted from Fund assets and are used to compensate those financial
professionals who sell fund shares and provide ongoing services to shareholders
and to pay other marketing and advertising expenses. Because you pay these fees
during the whole period that you own the shares, over time, you may pay more
than if you had paid other types of sales charges. For this reason, you should
consider the effects of 12b-1 fees as well as sales loads when choosing a share
class.
_______________________________________________________________________________
SALES CHARGES--CLASS A SHARES
o Class A shares are sold at net asset value plus a front-end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The chart below shows the
rate of sales charge that you pay, depending on the amount that you
purchase.
o The chart below also shows the amount of broker/dealer compensation
that is paid out of the sales charge. This compensation includes
commissions and other fees that financial professionals who sell
shares of the Fund receive. The distributor keeps up to
approximately 10% of the sales charge imposed on Class A shares.
Financial professionals that sell Class A shares will also receive
the service fee payable on Class A shares at an annual rate equal to
0.25% of the average daily net assets represented by the Class A
shares sold by them.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
_______________________________________________________________________________
SALES CHARGE SALES CHARGE BROKER/DEALER
AS A % OF AS A % OF COMMISSION AS
AMOUNT OF OFFERING YOUR A % OF OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
_______________________________________________________________________________
Less than $25,000 4.50% 4.71% 4.05%
_______________________________________________________________________________
$25,000 to less than $50,000 4.00% 4.17% 3.60%
_______________________________________________________________________________
$50,000 to less than $100,000 3.50% 3.63% 3.15%
_______________________________________________________________________________
$100,000 to less than $250,000 2.50% 2.56% 2.25%
_______________________________________________________________________________
$250,000 to less than $500,000 1.50% 1.52% 1.35%
_______________________________________________________________________________
$500,000 or more none* none* up to 1.00%
_______________________________________________________________________________
*A contingent deferred sales charge may apply in certain instances. See
below.
</TABLE>
o After the initial sales charge is deducted from your investment, the
balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain circumstances, as
described in "Sales Charge Waivers or Reductions" below. If you qualify to
purchase Class A shares without a sales load, you should purchase Class A
shares rather than Class B shares because Class A shares pay lower fees.
o If you invest at least $500,000 in the Fund, you do not pay any initial
sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% of the purchase price, or the sale price, whichever is
less, if you sell within the first year. Under certain circumstances,
waivers may apply. Other policies regarding the application of the CDSC are
the same as for Class B shares. Please read the discussion below on Class B
shares for more information.
PLEASE NOTE: If you owned Fund shares prior to January 4, 1999, you may
exchange those shares into Class A shares of other CitiFunds and other
mutual funds managed by Citibank without paying any sales charge, subject
to verification. Shares subject to the waiver include shares purchased
prior to January 4, 1999, and any shares you received through capital
appreciation or through the reinvestment of dividends or capital gains
distributions on those shares.
<PAGE>
SALES CHARGES--CLASS B SHARES
o Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a contingent deferred sales charge (CDSC) when you sell
shares within five years of purchase. The rate of CDSC goes down the longer
you hold your shares. The table below shows the rates that you pay, as a
percentage of your original purchase price (or the sales price, whichever is
less), depending upon when you sell your shares.
_________________________________________________________________
SALE DURING CDSC ON SHARES BEING SOLD
_________________________________________________________________
1st year since purchase 4.50%
_________________________________________________________________
2nd year since purchase 4.00%
_________________________________________________________________
3rd year since purchase 3.00%
_________________________________________________________________
4th year since purchase 2.00%
_________________________________________________________________
5th year since purchase 1.00%
_________________________________________________________________
6th year (or later) since purchase None
_________________________________________________________________
o Financial professionals selling Class B shares receive a commission of 4.00%
of the purchase price of the Class B shares that they sell, except for sales
exempt from the CDSC. Financial professionals also receive a service fee at
an annual rate equal to 0.25% of the average daily net assets represented by
the Class B shares that they have sold.
o When you sell your shares, the CDSC will be based on either your original
purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of dividends,
capital gain distributions and shares representing capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Fund will always use
the Class B shares with the lowest CDSC to fill your sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares for Class
B shares of certain CitiFunds - any payment will be deferred until your
Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from another fund
managed or advised by Citibank, the date of your initial investment will be
used as the basis of the CDSC calculations. If the rate of CDSC on the
shares exchanged was higher than the rate of CDSC on your Fund shares, you
will be charged the higher rate when you sell your Fund shares.
From time to time, the Fund's distributor or Citibank may provide additional
promotional bonuses, incentives or payments to dealers that sell shares of the
Fund. These may include payments for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and their guests to locations within and outside the United States for meetings
or seminars of a business nature. In some instances, these bonuses, incentives
<PAGE>
or payments may be offered only to dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
The Fund's distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. The
distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments are determined by the
distributor and may vary. Citibank may make similar payments under similar
arrangements.
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you qualify for
certain waivers or elect to participate in certain programs. These include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers, including certain
tax-exempt organizations, certain employee benefit plans, certain entities
or persons with a qualifying affiliation or relationship with Citibank, and,
under certain circumstances, investors using the proceeds of a redemption
from another mutual fund for their purchase of Class A shares. Further
information about eligible purchasers may be found in the Appendix to this
prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other retirement
accounts.
o Redemptions made under the Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or reduction and how the
programs work by requesting a copy of the Fund's Statement of Additional
Information, or by consulting with your account representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares approximately eight
years after purchase. If you acquired your shares through an exchange, the date
of your initial investment will be used to determine your conversion date. You
will receive the same dollar amount of Class A shares as the Class B shares
converted. The price of Class A shares may be higher than Class B shares at the
<PAGE>
time of conversion, because of the lower expenses of Class A shares. Therefore,
you may receive fewer Class A shares than the number of Class B shares
converted.
HOW TO BUY SHARES
Shares of New York Tax Free Income Portfolio are offered continuously and
purchases may be made Monday through Friday, except on certain holidays. Shares
may be purchased from the Fund's distributor or a broker-dealer or financial
institution (called a Service Agent) that has entered into a service agreement
with the distributor concerning the Fund. Please specify whether you are
purchasing Class A or Class B shares. If you fail to specify, Class A shares
will be purchased for your account. The Fund and the distributor have the right
to reject any purchase order or cease offering Fund shares at any time.
Shares are purchased at net asset value (NAV) the next time it is calculated
after your order is received and accepted by the Fund's transfer agent. NAV is
the value of a single share of the Fund. If you are purchasing Class A shares,
the applicable sales charge will be added to the cost of your shares.
Your Service Agent will not transmit your purchase order for Fund shares until
it receives the purchase price in federal or other immediately available funds.
If you pay by check, the Service Agent transmits the order when the check
clears, usually within two business days.
If you are a customer of a Service Agent, your Service Agent will establish and
maintain your account and be the shareholder of record.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
The Fund calculates its NAV every day the New York Stock Exchange is open for
trading. This calculation is made at the close of regular trading on the New
York Stock Exchange, normally 4:00 p.m. Eastern time. NAV is calculated
separately for each class of shares. NAV may be higher for Class A shares
because Class A shares bear lower expenses. On days when the financial markets
in which the Fund invests close early, NAV will be calculated as of the close
of those markets.
The Fund's securities are valued primarily on the basis of market quotations.
When market quotations are not readily available, the Fund may price securities
at fair value. Fair value is determined in accordance with procedures approved
by the Fund's Board of Trustees. When the Fund uses the fair value pricing
method, a security may be priced higher or lower than if the Fund had used a
market quotation to price the same security.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The price will be the
NAV the next time it is calculated after your redemption request in proper form
has been received by the Fund's transfer agent. If your shares are subject to a
CDSC, the applicable charge will be deducted from your sale proceeds.
<PAGE>
You may make redemption requests in writing through the Fund's transfer agent
or, if you are a customer of a Service Agent, through your Service Agent. If
your account application permits, you may also make redemption requests by
calling the Fund's transfer agent or, if you are a customer of a Service Agent,
your Service Agent. Each Service Agent is responsible for promptly submitting
redemption requests to the Fund's transfer agent. You are responsible for
making sure your redemption request is in proper form.
The Fund has a Systematic Withdrawal Plan which allows you to automatically
withdraw a specific dollar amount from your account on a regular basis. You
must have at least $10,000 in your account to participate in this program. If
your shares are subject to a CDSC, you may only withdraw up to 10% of the value
of your account in any year, but you will not be subject to CDSC on the shares
withdrawn under the Plan. For more information, please contact your Service
Agent.
If you own both Class A and Class B shares, and want to sell shares, you should
specify which class of shares you wish to sell. If you fail to specify, Class A
shares will be redeemed first.
When you sell your Class B shares, they will be redeemed so as to minimize your
CDSC. Shares on which the CDSC is not payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions
will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds normally on the
business day after you sell your shares but generally within seven days. Your
redemption proceeds may be delayed for up to ten days if your purchase was made
by check. Your redemption proceeds may also be delayed, or your right to
receive redemption proceeds suspended, if the New York Stock Exchange is closed
(other than on weekends or holidays) or trading is restricted, or if an
emergency exists. The Fund has the right to pay your redemption proceeds by
giving you securities instead of cash. In that case, you may incur costs (such
as brokerage commissions) converting the securities into cash. You should be
aware that you may have to pay taxes on your redemption proceeds.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Fund permits you to
repurchase Class A shares in the Fund, up to the dollar amount of shares
redeemed, without paying any sales charges. To take advantage of this
reinstatement privilege, you must notify the Fund in writing at the time you
wish to repurchase the shares.
<PAGE>
EXCHANGES
You may exchange Fund shares for shares of the same class of certain other
CitiFunds. You may also be able to exchange your Class A shares for shares of
certain CitiFunds that offer only a single class of shares unless your Class A
shares are subject to a CDSC. You may not exchange Class B shares for shares of
CitiFunds that offer only a single class of shares. You may also acquire Fund
shares through an exchange from another fund managed by Citibank.
You may place exchange orders through the transfer agent or, if you are a
customer of a Service Agent, through your Service Agent. You may place exchange
orders by telephone if your account application permits. The transfer agent or
your Service Agent can provide you with more information, including a
prospectus for any fund that may be acquired through an exchange.
The exchange will be based on the relative NAVs of both funds when they are
next determined after your order is accepted by the Fund's transfer agent,
subject to any applicable sales charge. You cannot exchange shares until the
Fund has received payment in federal funds for your shares.
When you exchange your Class A shares, you will generally be required to pay
the difference, if any, between the sales charge payable on the shares to be
acquired in the exchange and the sales charge paid in connection with your
original purchase of Class A shares. However, if your Class A shares were
purchased prior to January 4, 1999, you will not have to pay a sales charge
when you exchange those shares for Class A shares of certain other CitiFunds,
subject to confirmation through a check of appropriate records and
documentation.
When you exchange your Class B shares, you will not pay any initial sales
charge, and no CDSC is imposed when your Class B shares are exchanged for Class
B shares of certain other CitiFunds that are made available by your Service
Agent. However, you may be required to pay a CDSC when you sell those shares.
The length of time that you owned Fund shares will be included in the holding
period of your new Class B shares.
The exchange privilege may be changed or terminated at any time. You should be
aware that you may have to pay taxes on your exchange.
DIVIDENDS
The Fund declares dividends daily of substantially all of its net income (if
any) from dividends and interest. The Fund pays these dividends monthly, to its
shareholders of record.
The Fund's net realized short-term and long-term capital gains, if any, will be
distributed to Fund shareholders at least annually. The Fund may also make
additional distributions to 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.
Unless you choose to receive your dividends in cash, you will receive them as
full and fractional additional Fund shares.
<PAGE>
TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation, and the status of your
account under state and local laws.
TAXABILITY OF DISTRIBUTIONS; FEDERAL INCOME TAXES. You will not normally have
to pay federal income taxes on distributions the Fund designates as
attributable to interest on municipal obligations, that is, as "tax-exempt"
dividends. Certain "tax-exempt" dividends may be subject to the federal
alternative minimum tax, however. In addition, if you borrow to purchase or
continue to hold Fund shares, you may not be able to deduct the interest you
pay on that debt.
The Fund may also invest from time to time in taxable securities, or realize
gains from transactions in securities. You will normally have to pay federal
income taxes on the distributions not attributable to interest on municipal
obligations which you receive from the Fund, whether you take the distributions
in cash or reinvest them in additional shares. Distributions designated by the
Fund as capital gain dividends are taxable as long-term capital gains. Other
distributions, not designated as "tax-exempt" dividends, are generally taxable
as ordinary income. Some distributions paid in January may be taxable to you as
if they had been paid the previous December. The IRS Form 1099 that is mailed
to you every January details your distributions for the prior year and how they
are treated for federal tax purposes.
STATE AND LOCAL TAXES. Generally, you will have to pay state or local taxes on
Fund dividends and other distributions, although distributions derived from
interest on U.S. government obligations may be exempt from certain state and
local taxes. Except as noted below, Fund dividends that are not taxable to you
for federal income tax purposes may still be subject to tax under the income or
other tax laws of state or local taxing authorities.
To the extent that dividends received from the Fund are derived from interest
on New York municipal obligations, the dividends will also be excluded from the
gross income of individual shareholders who are New York residents for New York
State and New York City personal income tax purposes. Dividends from the Fund
are not excluded in determining New York State or New York City franchise taxes
on corporations and financial institutions (with certain limited exceptions
provided in the New York City Tax on Bank Corporations).
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of the U.S., the
Fund will withhold U.S. federal income tax payments at the rate of 30% (or any
lower applicable treaty rate) on taxable dividends and other payments subject
to withholding taxes. Distributions received from the Fund by non-U.S. persons
also may be subject to tax under the laws of their own jurisdictions.
BACKUP WITHHOLDING. The account application asks each new investor to certify
that the investor's Social Security or taxpayer identification number is
correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. The Fund may be required to withhold (and
pay over to the IRS for your credit) 31% of certain distributions and proceeds
it pays you if you fail to provide this information or otherwise violate IRS
regulations.
<PAGE>
TAXATION OF TRANSACTIONS. If you sell your shares of the Fund, or exchange them
for shares of another fund, it is considered a taxable event. Depending on your
purchase price and the sales price of the shares you sell or exchange, you may
have a gain or loss on the transaction. If you purchased Class A shares and
held your shares in the Fund only a short time, your gain or loss could also be
affected by whether you reinvest the proceeds you receive in shares of the Fund
or another regulated investment company, without having to pay a sales charge
that would otherwise be due because you paid a sales charge on the shares of
the Fund you sold. If you redeem your Fund shares 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, if you redeem your Fund shares within six months of
their purchase, any short-term capital loss realized on redemption is
disallowed to the extent of any dividends of tax-exempt income received during
that period. You are responsible for any tax liabilities generated by your
transaction.
MANAGEMENT OF THE FUND
MANAGER
New York Tax Free Income Portfolio draws on the strength and experience of
Citibank. Citibank is the investment manager of the Fund, and subject to
policies set by the Fund's Trustees, Citibank makes investment decisions.
Citibank, with headquarters at 153 East 53rd Street, New York, New York, has
been managing money since 1822. With its affiliates, it currently manages more
than $290 billion in assets worldwide. Citibank is a wholly-owned subsidiary of
Citicorp, which is, in turn, a wholly-owned subsidiary of Citigroup Inc.
Citigroup Inc. was formed as a result of the merger of Citicorp and Travelers
Group, Inc., which was completed on October 8, 1998. "CitiFunds" is a service
mark of Citicorp.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the Fund.
However, in making investment decisions for the Fund, Citibank does not obtain
or use material inside information acquired by any division, department or
affiliate of Citibank in the course of those relationships. Citibank and its
affiliates may have loans outstanding that are repaid with proceeds of
securities purchased by the Fund.
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 FEES
For the management services Citibank provided the Fund, for the Fund's fiscal
year ended December 31, 1998 Citibank received a total of 0.46% of the Fund's
average daily net assets, after waivers.
<PAGE>
MORE ABOUT THE FUND
The Fund's goals, principal investments and risks are summarized in FUND AT A
GLANCE on page ____. More information on investments, investment strategies and
risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's principal investment strategies are the strategies that, in the
opinion of Citibank, are most likely to achieve the Fund's investment goals. Of
course, there can be no assurance that the Fund will achieve its goals. Please
note that the Fund may also use strategies and invest in securities that are
not described below but that are described in the Statement of Additional
Information. Of course, Citibank may decide, as a matter of investment
strategy, not to use the investments and investment techniques described below
and in the Statement of Additional Information at any particular time. The
Fund's goals and strategies may be changed without shareholder approval.
The Fund invests primarily in 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.
_______________________________________________________________________________
WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations issued by or on
behalf of states and municipal governments, Puerto Rico and other U.S.
territories, and their authorities, agencies, instrumentalities and political
subdivisions, and by other qualifying issuers. The interest on these
obligations is exempt from federal income tax.
Longer term municipal obligations (municipal bonds) generally are issued to
raise funds to finance public projects or to retire previous debt. Short term
obligations (municipal notes or commercial paper) may be issued to finance
short term cash needs in anticipation of receipt of tax and other revenues.
The Fund invests in both "general obligation" securities, which are backed by
the full faith, credit and taxing power of the issuer, and in "revenue"
securities, which are payable only from revenues from a specific project or
another revenue source.
_______________________________________________________________________________
The Fund invests without limit in different types of municipal obligations,
including general obligation securities, revenue securities, private activity
bonds, industrial revenue bonds and municipal lease obligations. Although the
Fund is non-diversified, it seeks to limit its exposure to the housing,
electrical utilities and hospital sectors by restricting its investment in any
one of these sectors to 25% of the Fund's assets.
_______________________________________________________________________________
WHAT ARE MUNICIPAL LEASE OBLIGATIONS?
Municipal lease obligations are undivided interests issued by a state or
municipality in a lease or installment purchase which generally relates to
equipment or facilities.
_______________________________________________________________________________
The Fund may invest in participation interests in municipal obligations that
are issued by banks and other financial institutions.
<PAGE>
_______________________________________________________________________________
WHAT ARE PARTICIPATION INTERESTS?
In a participation interest, the bank sells undivided interests in a municipal
obligation it owns. These interests may be supported by a bank letter of credit
or guarantee. The interest rate generally is adjusted periodically, and the
holder can sell back to the issuer after a specified period. If interest rates
rise or fall, the rates on participation interests and other variable rate
instruments generally will be readjusted. As a result, these instruments do not
offer the same opportunity for capital appreciation or loss as fixed rate
investments.
_______________________________________________________________________________
The Fund may purchase municipal obligations under arrangements (called stand-by
commitments) where they can sell the securities at an agreed-upon price and
date under certain circumstances. The Fund can also purchase securities under
arrangements (called when-issued or forward-delivery basis) where the
securities will not be delivered immediately. The Fund will set aside the
assets to pay for these securities at the time of the agreement.
The Fund may invest to a limited extent in municipal obligations that are
exempt from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable New York municipal obligations are not
available, the Fund may purchase other municipal obligations. The interest on
these securities may be subject to New York State or 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.
Citibank seeks to minimize the Fund's exposure to the risk of default by
investing the Fund's assets only in cash and debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's, or which
Citibank believes to be of comparable quality), or
o Issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities, or
o Obligations (including certificates of deposit, bankers' acceptances
and repurchase agreements) of banks with at least $1 billion of
assets.
In addition, some of the bonds held in the Fund may be covered by municipal
bond insurance, in which case an insurer may make principal and interest
payments on the securities if the issuer fails to do so.
Under normal market conditions, the Fund intends that the weighted average
maturity of securities held by the Fund will be in a long-term range (between
10 and 30 years).
The Fund may use futures contracts in order to protect (or "hedge") against
changes in interest rates or to manage the maturity or duration of fixed income
<PAGE>
securities. Futures contracts may not be available on terms that make economic
sense (they may be too costly). The Fund's ability to use futures contracts may
be limited by tax considerations.
See "Risks" for more information about the risks associated with investing in
the Fund.
DEFENSIVE STRATEGIES. The Fund may, from time to time, take temporary defensive
positions that are inconsistent with the Fund's principal investment strategies
in attempting to respond to adverse market, political or other conditions. When
doing so, the Fund may invest without limit in high quality money market and
other short-term instruments, and may not be pursuing its investment goals.
MANAGEMENT STYLE. New York Tax Free Income Portfolio is managed with a
combination of qualitative and quantitative analysis. Citibank starts by
developing an interest rate forecast and analysis of general economic
conditions for the United States as a whole, with a particular focus on the New
York area. Given this information, Citibank determines whether it believes
short-, intermediate- or long-term bonds will perform best, though it generally
makes only modest adjustments to reflect its interest rate expectations.
Citibank seeks to add value by investing in a range of municipal bonds,
representing different market sectors, structures and maturities. The portfolio
manager uses this approach when deciding when to purchase or sell securities
and which securities to purchase or sell. For more information about the
portfolio manager, see "Manager" on page ___.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the portfolio
manager attempts to minimize portfolio turnover, from time to time the Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to investors.
Active trading may also increase the amount of commissions or mark-ups the Fund
pays to broker or dealers when it buys and sells securities. The "Financial
Highlights" section of this prospectus shows the Fund's historical portfolio
turnover rate.
BROKERAGE. Citibank may use brokers or dealers for Fund transactions who also
provide brokerage and research services to the Fund or other accounts over
which Citibank exercises investment discretion. The Fund may "pay up" for
brokerage services, meaning that it is authorized to pay a broker or dealer who
provides these brokerage and research services a commission for executing a
portfolio transaction which is higher than the commission another broker or
dealer would have charged. However, the Fund will "pay up" only if Citibank
determines in good faith that the higher commission is reasonable in relation
to the brokerage and research services provided, viewed in terms of either the
particular transaction or all of the accounts over which Citibank exercises
investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Certain of these risks are described below. More
information about risks appears in the Fund's Statement of Additional
Information. 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 Fund shares
and to bear the increased risk of an investment portfolio that is concentrated
in obligations of New York and its political subdivisions. Remember that you
may receive little or no return on your investment in the Fund. You may lose
money if you invest in this Fund.
<PAGE>
Please remember that an investment in the Fund is not a deposit of Citibank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means
that the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, including issuers that derive
income from similar type projects or that are otherwise related. As a result,
many securities held by the Fund may be adversely affected by a particular
single economic, business, regulatory or political event. You should consider
the greater risk inherent in these policies when compared with a more
diversified mutual fund.
NEW YORK MUNICIPAL OBLIGATIONS. The Fund invests a high percentage of its
assets in municipal obligations of issuers located in New York. As a result,
the Fund is more exposed to events that adversely affect issuers in New York,
and the Fund has more risk than a broadly diversified fund.
You should be aware of special economic factors affecting New York before
investing. These factors are summarized in "Fund at a Glance." The Fund has
obtained this information from issuers of New York municipal obligations, and
is not responsible for its accuracy or timeliness.
MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities. The Fund
may invest in certain municipal securities, such as municipal lease obligations
and industrial revenue bonds, that may have greater risks than ordinary
municipal bonds.
REVENUE OBLIGATION RISK. The Fund may invest in municipal obligations called
revenue obligations that are payable only from the revenues generated from a
specific project or from another specific revenue source. 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 the Fund's
revenue obligations.
MUNICIPAL LEASE OBLIGATIONS. When the Fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases payments under municipal leases do not have to be
made unless money is specifically approved for that purpose by an appropriate
legislative body.
INTEREST RATE RISK. In general, the prices of municipal securities and other
debt securities rise when interest rates fall, and fall when interest rates
rise. Longer term obligations are usually more sensitive to interest rate
changes. A change in interest rates could cause the Fund's share price to go
down.
CREDIT RISK. Some issuers may not make payments on debt securities held by the
Fund. Or, an issuer may suffer adverse changes in its financial condition that
could lower the credit quality of a security, leading to greater volatility in
the price of the security and in shares of the Fund. If the credit quality of a
security deteriorates below investment grade, the Fund may continue to hold
<PAGE>
this security, commonly known as a junk bond. The prices of lower rated
securities, especially junk bonds, often are more volatile than those of higher
rated securities. Lower quality debt securities, especially junk bonds, may be
less liquid and may be more difficult for the Fund to value and sell.
PREPAYMENT RISK. The issuers of debt securities held by the Fund may be able to
prepay principal due on securities, particularly during periods of declining
interest rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund, and the Fund may lose any
premium paid. On the other hand, rising interest rates may cause prepayments to
occur at slower than expected rates. This effectively lengthens the maturities
of the affected securities, making them more sensitive to interest rate changes
and the Fund's share price more volatile.
FUTURES CONTRACTS. Futures contracts are commonly referred to as derivatives.
The Fund's use of futures contracts particularly for non-hedging purposes, may
be risky. This practice could result in losses that are not offset by gains on
other portfolio assets. Losses would cause the Fund's share price to go down.
There is also the risk that the counterparty may fail to honor contract terms.
The Fund's ability to use futures contracts successfully depends on a number of
factors, including Citibank's ability to accurately predict interest rate
movements. If Citibank's predictions are wrong, the Fund could suffer greater
losses than if it had not used futures contracts.
PARTICIPATION INTERESTS. The Fund's investments in participation interests are
subject to the risk that the Fund will not be considered the owner of the
underlying municipal obligation. In that case, interest paid on the
participation interest may not be exempt from federal, state, and local taxes.
ZERO COUPON OBLIGATIONS. Certain debt securities purchased by the Fund may be
zero coupon obligations. Zero coupon obligations pay no current interest. As a
result, their prices tend to be more volatile than those of securities that
offer regular payments of interest. This makes the Fund's share price more
volatile. In order to pay cash distributions representing income on zero coupon
obligations, the Fund may have to sell other securities on unfavorable terms.
These sales may generate taxable gains for Fund investors.
YEAR 2000. The Fund could be adversely affected if the computer systems used by
the Fund or its service providers are not programmed to accurately process
information on or after January 1, 2000. The Fund, and its service providers,
are making efforts to resolve any potential Year 2000 problems. While it is
likely these efforts will be successful, the failure to implement any necessary
modifications could have an adverse impact on the Fund. The Fund also could be
adversely affected if the issuers of securities held by the Fund do not solve
their Year 2000 problems, or if it costs them large amounts of money to solve
these problems.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
performance for the fiscal periods indicated. Certain information reflects
financial results for a single Class A Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund, assuming reinvestment of all dividends and
distributions. The information has been audited by Deloitte & Touche LLP whose
report, along with the Fund's financial statements, is included in the Annual
Report which is incorporated by reference into the Statement of Additional
Information and which is available upon request.
<PAGE>
Appendix
CLASS A SHARES - ELIGIBLE PURCHASERS:
Class A shares may be purchased without a sales charge by the following
eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises discretionary
investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees for
acting as custodian
[] directors or trustees (and their immediate families), and retired
directors or trustees (and their immediate families), of any
investment company for which Citibank or any subsidiary or
affiliate of Citibank serves as the investment adviser or as a
service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired employees
of Citibank and its affiliates or CFBDS and its affiliates
(including immediate families of any of the foregoing)
[] investors participating in a fee-based or promotional arrangement
sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances in
selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan offered
to Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by the Fund's Board
<PAGE>
of Trustees or by the Board of Trustees of any other CitiFund or
mutual fund managed or advised by Citibank (all of such funds
being referred to herein as CitiFunds) the terms of which entitle
those shareholders to purchase shares of the Fund or any other
CitiFund at net asset value without a sales charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4, 1999
[] employee benefit plans qualified under Section 401 of the Internal
Revenue Code, including salary reduction plans qualified under
Section 401(k) of the Code, subject to minimum requirements as may
be established by CFBDS with respect to the amount of purchase;
currently, the amount invested by the qualified plan in the Fund
or in any combination of CitiFunds must total a minimum of $1
million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares; however,
a contingent deferred sales charge will be imposed on the
investments in the event of certain share redemptions within 12
months following the share purchase, at the rate of 1% of the
lesser of the value of the shares redeemed (not including
reinvested dividends and capital gains distributions) or the total
cost of the shares; the contingent deferred sales charge on Class
A shares will be waived under the same circumstances as the
contingent deferred sales charge on Class B shares will be waived;
in determining whether a contingent deferred sales charge on Class
A shares is payable, and if so, the amount of the charge:
+ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
+ all investments made during a calendar month will age one
month on the last day of the month and each subsequent month
+ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the redemption
proceeds when the exchanged shares are subsequently redeemed
(assuming the contingent deferred sales charge is then
payable)
+ the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which the
original Class A shares were held
[] subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund (other
than a CitiFund), if:
<PAGE>
+ the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed),
and
+ the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from another
investment firm within six months prior to the date of purchase by
the investor, if:
+ the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative, and
either paid an initial sales charge or was at some time
subject to, but did not actually pay, a deferred sales charge
or redemption fee with respect to the redemption proceeds
+ the redemption is made within 60 days prior to the investment
in the Fund, and
+ the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds
of the redemption
<PAGE>
The Statement of Additional Information (SAI) provides more details about the
Fund and its policies. The SAI is incorporated by reference into this
prospectus and is legally part of it.
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance.
The Annual and Semi-Annual Reports for the Fund list its portfolio holdings and
describe performance.
To obtain free copies of the SAI and the Annual and Semi-Annual Reports or to
make other inquiries, please call toll-free 1-800-625-4554.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can receive
copies of this information by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
SEC file number: 811-5034
<PAGE>
Statement of
Additional Information
_________ __, 1999
CITIFUNDSSM CALIFORNIA TAX FREE INCOME PORTFOLIO
CITIFUNDSSM NATIONAL TAX FREE INCOME PORTFOLIO
CITIFUNDSSM NEW YORK TAX FREE INCOME PORTFOLIO
CitiFundsSM California Tax Free Income Portfolio, CitiFundsSM National Tax Free
Income Portfolio, and CitiFundsSM New York Tax Free Income Portfolio (the
"Funds") are series of CitiFunds Tax Free Income Trust (the "Trust"). The
address and telephone number of the Trust are 21 Milk Street, 5th Floor,
Boston, Massachusetts 02109, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, CITIBANK,
N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
1. The Trust.............................................................................. --
2. Investment Objective and Policies; Special Information Concerning Investment Structure. --
3. Description of Permitted Investments and Investment Practices.......................... --
4. Investment Restrictions................................................................ --
5. Performance Information................................................................ --
6. Determination of Net Asset Value; Valuation of Securities.............................. --
7. Additional Information on the Purchase and Sale of Fund Shares and Shareholder Programs --
8. Management............................................................................. --
9. Portfolio Transactions................................................................. --
10. Description of Shares, Voting Rights and Liabilities................................... --
11. Certain Additional Tax Matters......................................................... --
12. Certain Bank Regulatory Matters........................................................ --
13. Financial Statements................................................................... --
Appendix A -- Additional Information Concerning California Municipal Obligations........... --
Appendix B - Additional Information Concerning New York Municipal Obligations.............. --
Appendix C -- Description of Securities Ratings............................................ --
</TABLE>
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Funds'
Prospectuses dated _________ __, 1999, by which shares of the Funds are
offered. This Statement of Additional Information should be read in conjunction
with the Prospectuses. This Statement of Additional Information incorporates by
reference the financial statements described on page ___ hereof. These
financial statements can be found in the applicable Fund's Annual Report to
Shareholders. An investor may obtain copies of the Funds' Prospectuses and
Annual Reports without charge by calling toll-free 1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Tax Free Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on May 27, 1986. The Trust was called
Landmark New York Tax Free Income Fund until its name was changed to Landmark
Tax Free Income Funds effective October 21, 1993. Effective March 2, 1998, the
Trust's name was changed to CitiFunds Tax Free Income Trust. This Statement of
Additional Information describes CitiFunds California Tax Free Income Portfolio
(the "California Fund"), CitiFunds National Tax Free Income Portfolio, (the
"National Fund"), and CitiFunds New York Tax Free Income Portfolio, (the "New
York Fund"), each of which is a separate series of the Trust. Prior to March 2,
1998, the National Fund was called Landmark National Tax Free Income Fund, and
the New York Fund was called Landmark New York Tax Free Income Fund. References
in this Statement of Additional Information to a "Prospectus" are to the
applicable Fund's Prospectus dated ________ __, 1999.
Each Fund is a non-diversified mutual fund, which means that it is not
limited by the Investment Company Act of 1940 (the "1940 Act") in the
proportion of its assets that may be invested in the obligations of a single
issuer. Each Fund intends, however, to comply with diversification requirements
imposed on mutual funds by the Internal Revenue Code.
Citibank, N.A. ("Citibank" or the "Manager") is the manager of each of the
Funds. Citibank manages the investments of the Funds from day to day in
accordance with each Fund's investment objective and policies. The selection of
investments for the Funds and the way they are managed depend on the conditions
and trends in the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by CFBDS, Inc.,
the Funds' distributor ("CFBDS" or the "Distributor").
2. INVESTMENT OBJECTIVE AND POLICIES
CALIFORNIA FUND
The investment objective of the California Fund is to generate high levels
of current income exempt from federal and California State personal income
taxes and preserve the value of its shareholders' investment.
The California 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. As a fundamental policy, at least 80% of the California Fund's net
assets will be invested in Municipal Obligations under normal circumstances. At
least 65% of the California Fund's total assets will be invested in Municipal
Obligations the interest on which is exempt from both federal and California
personal income taxes ("California Municipal Obligations") under normal
circumstances. California Municipal Obligations include Municipal Obligations
of the State of California and its political subdivisions, Puerto Rico, other
U.S. territories and their political subdivisions and other qualifying issuers.
NATIONAL FUND
The investment objective of the National Fund is to generate high levels
of current income exempt from federal income taxes and preserve the value of
its shareholders' investment.
The National Fund seeks its objective by investing in Municipal
Obligations that pay interest that is exempt from federal income taxes
including the federal alternative minimum tax. As a fundamental policy, at
least 80% of the National Fund's assets will be invested in tax-exempt
Municipal Obligations under normal circumstances.
<PAGE>
NEW YORK FUND
The investment objective of the New York Fund is to generate high levels
of current income exempt from federal, New York State and New York City
personal income taxes and preserve the value of its shareholders' investment.
The New York Fund seeks its objective by investing in 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 ("New York Municipal Obligations"). As a fundamental policy, at least 80%
of the New York Fund's assets will be invested in New York Municipal
Obligations under normal circumstances. New York Municipal Obligations include
Municipal Obligations of New York State and its political subdivisions, Puerto
Rico, other U.S. territories and their political subdivisions and other
qualifying issuers.
GENERAL
The investment objective of each Fund may be changed without approval by
that Fund's shareholders, but shareholders will be given written notice at
least 30 days before any change is implemented. Of course, there can be no
assurance that a Fund will achieve its investment objective.
Each Fund's Prospectus contains a discussion of the principal investment
strategies of that Fund and the principal risks of investing in the Fund. The
following supplements the information contained in the Prospectuses concerning
the investment, policies and techniques of each Fund. Unless specifically
designated, the policies described herein and those described below under
"Description of Permitted Investments and Investment Practices" are not
fundamental and may be changed without shareholder approval.
The Funds currently invest directly in securities. However, in the future,
the Funds 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 Funds' investment structure.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The Funds may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described in the Prospectus and
herein. The selection of investments and the utilization of investment
techniques depend on, among other things, the Manager's investment strategies
for each Fund, conditions and trends in the economy and financial markets and
investments being available on terms that, in the Manager's opinion, make
economic sense.
MUNICIPAL OBLIGATIONS
Municipal Obligations include municipal bonds, notes and commercial paper
issued by or on behalf of states, territories and possessions of the United
States (including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from federal
income taxes (without regard to whether the interest thereon is also exempt
from the personal income taxes of any state). Municipal Obligation bonds
generally have a maturity at the time of issue of one year or more and are
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Obligation bonds may be issued
include refunding outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to loan to other public institutions
<PAGE>
and facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, industrial facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities, hazardous waste
treatment or disposal facilities, and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included within the term Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax. Other types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Obligation bonds are
"general obligation" and "revenue" bonds. There are, of course, variations in
the security of Municipal Obligations, both within a particular classification
and between classifications, depending on numerous factors. General obligation
bonds are secured by the issuer's pledge of its good faith, credit and taxing
power for the payment of principal and interest. The payment of the principal
of and interest on such bonds may be dependent upon an appropriation by the
issuer's legislative body. The characteristics and enforcement of general
obligation bonds vary according to the law applicable to the particular issuer.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are Municipal Obligations are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. Each
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 a 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 Funds.
Municipal Obligation notes are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally, to
finance construction. Most Municipal Obligation notes are general obligations
of the issuing entity payable from taxes or designated revenues expected to be
received within the related fiscal period. Municipal Obligation notes generally
have maturities of one year or less. Municipal Obligation notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
operational needs of municipalities. Generally, they are issued in anticipation
of the receipt of various tax revenues, such as property, income, sales, use
and business taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of dedicated revenues, such as state aid or federal
revenues available under federal revenue sharing programs.
3. Tax and Revenue Anticipation Notes. Tax and Revenue Anticipation Notes are
issued by a state or municipality to fund its day-to-day operations and certain
local assistance payments to its municipalities and school districts. Such
Notes are issued in anticipation of the receipt of various taxes and revenues,
such as personal income taxes, business taxes and user taxes and fees.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. Long-term
bonds or renewal Bond Anticipation Notes provide the money for the repayment of
the Notes. Bond Anticipation Notes 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.
Issues of commercial paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by agencies of state
and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, Municipal Obligation commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
<PAGE>
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions
of the Municipal Obligation market, size of a particular offering, the maturity
of the obligation and rating (if any) of the issue. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("Standard
& Poor's) and FITCH IBCA, Inc. ("Fitch") represent their opinions as to the
quality of various Municipal Obligations. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, Municipal
Obligations with the same maturity, coupon and rating may have different yields
while Municipal Obligations of the same maturity and coupon with different
ratings may have the same yield.
In determining the tax status of interest on Municipal Obligations, the
Manager relies without independent review on opinions rendered at the time of
issuance of bond counsel who may be counsel to the issuer.
SPECIAL FACTORS AFFECTING CALIFORNIA
The Trust intends to invest a high proportion of the California Fund's
assets in Municipal Obligations of the State of California and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. Payment of interest and preservation of principal is dependent
upon the continuing ability of California issuers and/or obligors of state,
municipal and public authority debt obligations to meet their obligations
thereunder.
The fiscal stability of the State of California is related, at least in
part, to the fiscal stability of its localities and authorities. Various State
agencies, authorities and localities have issued large amounts of bonds and
notes either guaranteed or supported by the State through lease-purchase
arrangements, other contractual arrangements or moral obligation provisions.
While debt service is normally paid out of revenues generated by projects of
such State agencies, authorities and localities, the State has had to provide
special assistance in recent years, in some cases of a recurring nature, to
enable such agencies, authorities and localities to meet their financial
obligations and, in some cases, to prevent or cure defaults. To the extent
State agencies and local governments require State assistance to meet their
financial obligations, the ability of the State to meet its own obligations as
they become due or to obtain additional financing could be adversely affected.
Investors in the California Fund should consider carefully the special
risks inherent in investing in California Municipal Obligations. The State of
California and other issuers of California Municipal Obligations have
experienced severe financial difficulties. From 1990-1993, the State suffered
through a severe recession, the worst since the 1930's, heavily influenced by
large cutbacks in the defense/aerospace industries and military base closures
and a major drop in real estate construction. In December 1994, Orange County,
California and its pooled investment funds filed for protection under the
federal Bankruptcy Code. Orange County's financial difficulties could continue
to adversely affect other issuers and issuers of California Municipal
Obligations. Since the start of 1994, California's economy has been recovering
and growing steadily stronger, to the point where the State's economic growth
is outpacing the rest of the nation. However, the effects of the Asian economic
turmoil are just beginning to be felt in the U.S., and the earnings of some of
the State's leading high technology and other firms have been adversely
affected. Latin American markets also are experiencing economic turmoil, and
U.S. issuers, including those in California, may be adversely affected. After
having been downgraded in 1994 as the result of the financial difficulties of
the State of California, the credit ratings of certain of the State's
obligations have been upgraded by certain rating agencies. There can be no
assurance that the State's economic growth will continue or that credit ratings
on obligations of the State of California and other California Municipal
Obligations will not be downgraded again.
Many of the California Fund's Municipal Obligations are likely to be
obligations of California governmental issuers which rely in whole or in part,
directly or indirectly, on real property taxes as a source of revenue.
"Proposition Thirteen" and similar California constitutional and statutory
<PAGE>
amendments and initiatives in recent years have restricted the ability of
California taxing entities to increase real property tax revenues. Other
initiative measures approved by California voters in recent years, through
limiting various other taxes, have resulted in a substantial reduction in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments. Investors in the California Fund should
consider the greater risks inherent in the California Fund's concentration in
these securities when compared with the safety that comes with a less
geographically concentrated investment portfolio.
For further information concerning California Municipal Obligations, see
Appendix A to this Statement of Additional Information. The summary set forth
above and in Appendix A is included for purposes of providing a general
description of California credit and financial conditions. This summary is
based on information from statements, including preliminary statements, of
issuers of California Municipal Obligations and does not purport to be
complete. The Trust is not responsible for the accuracy or timeliness of this
information.
SPECIAL FACTORS AFFECTING NEW YORK
The Trust intends to invest a high proportion of the New York Fund's
assets in Municipal Obligations of the State of New York and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. Payment of interest and preservation of principal is dependent
upon the continuing ability of New York issuers and/or obligors of state,
municipal and public authority debt obligations to meet their obligations
thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to
obtain additional financing could be adversely affected.
Investors in the New York 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 New York 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 the New York Fund should consider the greater
risks inherent in the New York Fund's concentration in these securities when
compared with the safety that comes with a less geographically concentrated
investment portfolio.
For further information concerning New York Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for purposes of providing a general
description of New York State and New York City credit and financial
conditions. This summary is based on information from statements of issuers of
New York Municipal Obligations and does not purport to be complete. The Trust
is not responsible for the accuracy or timeliness of this information.
<PAGE>
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 of non-appropriation or foreclosure might, in some cases, prove
difficult.
PARTICIPATION INTERESTS
The Trust may purchase from banks on behalf of each Fund participation
interests in all or part of specific holdings of Municipal Obligations. The
Trust has the right to sell the participation interest back to the bank and
draw on the letter of credit or guarantee for all or any part of the full
principal amount of the participation interest in the security, plus accrued
interest. In some cases, these rights may not be exercisable in the event of a
default on the underlying Municipal Obligations; in these cases, the underlying
Municipal Obligations must meet the Funds' credit standards at the time of
purchase of the participation interests. Each participation interest is backed
by an irrevocable letter of credit or guarantee of the selling bank.
Participation interests will only be purchased if in the opinion of counsel
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders of the Funds. The Trust will not invest more than 5%
of either the National Fund or the New York Fund's total assets (taken at the
greater of cost or market value) in participation interests. Participation
interests include municipal lease obligations which are deemed to be illiquid
unless otherwise determined by the Board of Trustees.
OTHER DEBT SECURITIES
Subject to the limitations set forth in each Fund's Prospectus, the Funds
may also invest in short-term debt securities that pay interest that is subject
to federal income taxes and, (i) in the case of the New York Fund, New York
State and New York City personal income taxes, and (ii) in the case of the
California Fund, California State personal income taxes. These debt securities
may be issued by companies, the U.S. Government, or agencies of the U.S.
Government. These investments may include commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
SECURITIES RATED BAA OR BBB
Each Fund may purchase securities rated Baa by Moody's Investors Service,
Inc. or BBB by Standard & Poor's Ratings Group and securities of comparable
quality, which may have poor protection of payment of principal and interest.
These securities are often considered to be speculative and involve greater
risk of default or price changes than securities assigned a higher quality
rating due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than higher-rated securities and may
decline significantly in periods of general economic difficulty which may
follow periods of rising interest rates. Appendix C contains a description of
these ratings.
FLOATING AND VARIABLE RATE OBLIGATIONS
Each Fund may invest in floating and variable rate obligations. Floating
or variable rate obligations bear interest at rates that are not fixed, but
vary with changes in specified market rates or indices, such as the prime rate,
and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and
<PAGE>
the holder that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. 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 investments.
Each Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to
purchase. The Funds will monitor on an ongoing basis the ability of an issuer
of a demand instrument to pay principal and interest on demand. Some of the
demand instruments purchased by a Fund are not traded in a secondary market and
derive their liquidity solely from the ability of the holder to demand
repayment from the issuer or third party providing credit support. If a demand
instrument is not traded in a secondary market, a Fund will nonetheless treat
the instrument as "readily marketable" for the purposes of its investment
restriction limiting investments in illiquid securities unless the demand
feature has a notice period of more than seven days in which case the
instrument will be characterized as "not readily marketable" and therefore
illiquid. A Fund's right to obtain payment at par on a demand instrument could
be affected by events occurring between the date the Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or third party providing credit support to make payment when
due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a Fund's custodian subject to a sub-custodian
agreement approved by the Fund between that bank and the Fund's custodian.
The Funds' investments in floating or variable rate securities normally
involve industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate, such as
rates on Treasury Bonds or Bills or the prime rate at a major commercial bank,
and that a bondholder can demand payment of the obligations on short notice at
par plus accrued interest. While there is usually no established secondary
market for issues of this type of security, the dealer that sells an issue of
such securities frequently also offers to repurchase such securities at any
time, at a repurchase price which varies and may be more or less than the
amount the bondholder paid for them.
The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before a Fund is entitled to receive payment of the obligation
upon demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by a Fund through the demand feature, the
obligations mature on a specified date which may range up to 30 years from the
date of issuance.
FUTURES CONTRACTS
Each 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. 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.
A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the
United States have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. Futures contracts may also be traded on markets outside the
U.S.
<PAGE>
While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases
or sells a futures contract. At the same time such a purchase or sale is made,
the Fund must provide cash or securities as a deposit ("initial deposit") known
as "margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant
to such a contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than the
specific security that provides the standard for the contract. In some (but not
many) cases, securities called for by a futures contract may not have been
issued when the contract was entered into.
A Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity
or duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as if the Fund sold bonds that it owned, or as if the Fund sold
longer-term bonds and purchased shorter-term bonds. If interest rates did
increase, the value of the Fund's debt securities would decline, but the value
of the futures contracts would increase, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Similar results
could be accomplished by selling bonds, or by selling bonds with longer
maturities and investing in bonds with shorter maturities. However, by using
futures contracts, the Fund avoids having to sell its securities.
Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if a Fund
sells a futures contract to protect against losses in the debt securities held
by the Fund), at the same time the futures contracts limit any potential gain
which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a Fund's
investments through transactions in futures contracts depends on the degree to
which movements in the value of the debt securities underlying such contracts
correlate with movements in the value of the Fund's securities. If the security
underlying a futures contract is different than the security being hedged, they
may not move to the same extent or in the same direction. In that event, the
Fund's hedging strategy might not be successful and the Fund could sustain
losses on these hedging transactions which would not be offset by gains on the
Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund's other
investments. It is also possible that there may be a negative correlation
between the security underlying a futures contract and the securities being
hedged, which could result in losses both on the hedging transaction and the
securities. In these and other instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, where
a Fund enters into futures transactions other than for hedging purposes, the
effectiveness of its strategy may be affected by lack of correlation between
changes in the value of the futures contracts and changes in value of the
securities which the Fund would otherwise buy or sell.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
<PAGE>
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, there is the potential that the liquidity of
the futures market may be lacking. Prior to expiration, a futures contract may
be terminated only by entering into a closing purchase or sale transaction,
which requires a secondary market on the contract market on which the futures
contracts was originally entered into. While a Fund will establish a futures
position only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular futures
contract at any specific time. In that event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the futures contract or to meet ongoing
variation margin requirements. The inability to close out futures positions
also could have an adverse impact on the ability effectively to use futures
transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract during
a single trading day and prohibit trading beyond such limits once they have
been reached. The trading of futures contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in futures contracts also entail the risk that if the
Manager's investment judgment about the general direction of interest rates or
other economic factors is incorrect, the Fund's overall performance may be
poorer than if any such contract had not been entered into. For example, if a
Fund hedged against the possibility of an increase in interest rates which
would adversely affect the price of the Fund's bonds and interest rates
decrease instead, part or all of the benefit of the increased value of the
Fund's bonds which were hedged will be lost because the Fund will have
offsetting losses in its futures positions. Similarly, if a Fund purchases
futures contracts expecting a decrease in interest rates and interest rates
instead increased, the Fund will have losses in its futures positions which
will increase the amount of the losses on the securities in its portfolio which
will also decline in value because of the increase in interest rates. In
addition, in such situations, if the Fund has insufficient cash, the Fund may
have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Manager
does not believe that these trading and position limits would have an adverse
impact on a Fund's strategies involving futures.
CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit each Fund from purchasing
or selling futures contracts (other than for bona fide hedging transactions)
if, immediately thereafter, the sum of the amount of initial margin required to
establish the Fund's non-hedging futures positions would exceed 5% of the
Fund's net assets.
The Funds will comply with this CFTC requirement, and each Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or liquid securities will be maintained by each Fund in a segregated
account so that the amount so segregated, plus the applicable margin held on
deposit, will be approximately equal to the amount necessary to satisfy the
Fund's obligations under the futures contract. The second is that a Fund will
not enter into a futures contract if immediately thereafter the amount of
initial margin deposits on all the futures contracts held by the Fund would
exceed approximately 5% of the net assets of the Fund. The third is that the
aggregate market value of the futures contracts held by a Fund not generally
exceed 50% of the market value of the Fund's total assets other than its
futures contracts. For purposes of this third policy, "market value" of a
futures contract is deemed to be the amount obtained by multiplying the number
<PAGE>
of units covered by the futures contract times the per unit price of the
securities covered by that contract. Finally, a Fund will not invest in futures
contracts to the extent that such investment would be inconsistent with the
Fund's investment policies which provide that, under normal circumstances, the
National Fund and the California Fund will invest at least 80% of their assets
in Municipal Obligations exempt from federal income taxes including the federal
alternative minimum tax and the New York Fund will invest at least 80% of its
assets in triple tax-exempt Municipal Obligations (that is, obligations that
pay interest that is exempt from federal, New York State and New York City
personal income taxes including the federal alternative minimum tax).
The use of futures contracts potentially exposes a 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 a Fund's potential for
both gain and loss. As noted above, the Funds intend 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 Funds.
The use of futures contracts may increase the amount of taxable income of
a Fund and may affect the amount, timing and character of a Fund's income for
tax purposes, as more fully discussed herein in the section entitled "Certain
Additional Tax Matters."
STAND-BY COMMITMENTS
When a 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 a 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. Each 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.
WHEN-ISSUED SECURITIES
Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis, meaning that delivery of the securities occurs beyond
normal settlement times. In general, a Fund does not pay for the securities
until received and does not start earning interest until the contractual
settlement date. It is expected that, under normal circumstances, the Funds
would take delivery of such securities. When a Fund commits to purchase a
security on a "when-issued" or on a "forward delivery" basis, it sets up
procedures consistent with Securities and Exchange Commission ("SEC") policies.
Since those policies currently require that an amount of a Fund's assets equal
to the amount of the purchase be held aside or segregated to be used to pay for
the commitment, each Fund expects always to have cash or liquid securities
sufficient to cover any commitments or to limit any potential risk. However,
even though the Funds do not intend to make such purchases for speculative
purposes and intend to adhere to the provisions of SEC policies, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, a Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Manager determines it is advisable as a
matter of investment strategy to sell the "when-issued" or "forward delivery"
securities, a Fund would be required to meet its obligations from the then
available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the "when-issued" or "forward
delivery" securities themselves (which may have a value greater or less than
the Fund's payment obligation). 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.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers
and other institutional borrowers. Such loans will usually be made only to
member banks of the U.S. Federal Reserve System and to member firms of the New
<PAGE>
York Stock Exchange (and subsidiaries thereof). Loans of securities would be
secured continuously by collateral in cash, cash equivalents or U.S. Treasury
obligations maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The cash collateral would be invested in
high quality short-term instruments. Either party has the right to terminate a
loan at any time on customary industry settlement notice (which will not
usually exceed three business days). During the existence of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and with respect to cash collateral would
also receive compensation based on investment of the collateral (subject to a
rebate payable to the borrower). When the borrower provides a Fund with
collateral consisting of U.S. Treasury obligations, the borrower is also
obligated to pay the Fund a fee for use of the borrowed securities. A Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail financially. However,
the loans would be made only to entities deemed by the Manager to be of good
standing, and when, in the judgment of the Manager, the consideration which can
be earned currently from loans of this type justifies the attendant risk. In
addition, a Fund could suffer a loss if the borrower terminates the loan and
the Fund is forced to liquidate the investments in order to return the cash
collateral to the buyer. If the Manager determines to make loans, it is not
intended that the value of the securities loaned by a Fund would exceed 30% of
the market value of its total assets.
RULE 144A SECURITIES
Each of the Funds may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. However, the National Fund will not invest
more than 15%, and the California and New York Funds will not invest more than
10%, of their respective net assets (taken at market value) in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restrictions on resale and restricted
securities, unless, in the case of restricted securities, the Board of Trustees
of the Trust determines, based on the trading markets for a specific restricted
security, that it is liquid. The Trustees have adopted guidelines and, subject
to oversight by the Trustees, have delegated to the Manager the daily function
of determining and monitoring liquidity of restricted securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
The National Fund may invest up to 15%, and the California and New York
Funds may invest up to 10%, of their respective net assets in securities for
which there is no readily available market. These illiquid securities may
include privately placed restricted securities for which no institutional
market exists. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for a Fund to sell them promptly at an
acceptable price.
SHORT SALES "AGAINST THE BOX"
In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Fund, in
accordance with applicable investment restrictions, may engage in short sales
only if at the time of the short sale it owns or has the right to obtain, at no
additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short sale, the collateral for the short
position is maintained for the Fund by the custodian or qualified sub-
custodian. While the short sale is open, an amount of securities equal in kind
<PAGE>
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities are maintained in a segregated
account for the Fund. These securities constitute the Fund's long position.
A Fund may make a short sale against the box as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund (or a security convertible or exchangeable for such
security). In such case, any future losses in the Fund's long position should
be reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced depends upon the amount of the security sold
short relative to the amount the Fund owns. There are certain additional
transaction costs associated with short sales against the box, but each Fund
endeavors to offset these costs with the income from the investment of the cash
proceeds of short sales.
Not more than 40% of a Fund's total assets would be involved in short
sales "against the box."
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of the
Funds may be invested in shares of other investment companies.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which the Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed-upon date within a number of days (usually
not more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed-upon market rate of interest which is unrelated
to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or government agency issues. Under the 1940 Act,
repurchase agreements may be considered to be loans by the buyer. A Fund's risk
is limited to the ability of the seller to pay the agreed-upon amount on the
delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although a Fund may incur certain
costs in liquidating this collateral and in certain cases may not be permitted
to liquidate this collateral. All repurchase agreements entered into by a Fund
are fully collateralized, with such collateral being marked to market daily. In
the event of the bankruptcy of the other party to a repurchase agreement, a
Fund could experience delays in recovering the resale price. To the extent
that, in the meantime, the value of the securities purchased has decreased, a
Fund could experience a loss. Repurchase agreements may involve Municipal
Obligations and other securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by a Fund and the agreement by
the Fund to repurchase the securities at an agreed-upon price, date and
interest payment. When a Fund enters into reverse repurchase transactions,
securities of a dollar amount equal in value to the securities subject to the
agreement will be segregated. The segregation of assets could impair a 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. In the event of the bankruptcy of the
other party to a reverse repurchase agreement, a Fund could experience delays
in recovering the securities sold. To the extent that, in the meantime, the
value of the securities sold has increased, a Fund could experience a loss.
<PAGE>
DEFENSIVE STRATEGIES
During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, the Funds 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 in a lower quality or longer term.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of each Fund, has adopted the following policies
which cannot be changed without the approval of the holders of a majority of
the applicable Fund's outstanding voting securities (which, as used in this
Statement of Additional Information, means the lesser of (i) more than 50% of
the outstanding voting securities of the Fund, or (ii) 67% or more of the
outstanding voting securities of the Fund present at a meeting at which holders
of more than 50% of the Fund's outstanding voting securities are represented in
person or by proxy). The term "voting securities" as used in this paragraph has
the same meaning as in the 1940 Act.
None of the Funds may:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes it may borrow in an amount not to
exceed 1/3 of the current value of its net assets, including the amount
borrowed or purchase any securities at any time at which borrowings exceed
5% of the total assets of the Fund, taken at market value. It is intended
that the Fund would borrow money only from banks and only to accommodate
requests for the repurchase of shares of the Fund while effecting an
orderly liquidation of portfolio securities.
(2) Underwrite securities issued by other persons except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar as the Fund may technically be deemed an
underwriter under the Securities Act in selling a security.
(3) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or fixed time deposits or the purchase of short-term
obligations, or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions. The purchase of short-term commercial paper or a portion of
an issue of debt securities which is part of an issue to the public shall
not be considered the making of a loan.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the foregoing
shall not be deemed to preclude the Fund from purchasing or selling
futures contracts or options thereon, and the Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities by the Fund).
(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions in
futures contracts shall not be subject to this restriction.
(6) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder.
<PAGE>
For purposes of the investment restrictions described above, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
The California Fund treats industries such as telecommunications, electric
utilities and gas utilities as separate industries for purposes of restriction
(5) above.
As an operating policy, the National Fund will not invest more than 15% of
its net assets (taken at market value), and the California and New York Funds
will not invest more than 10% of their respective net assets (taken at market
value) in securities for which there is no readily available market. Each
Fund's policy is not fundamental and may be changed without shareholder
approval.
If a percentage restriction on investment or utilization of assets set
forth above or referred to in the Prospectus is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the securities held for the Fund is not
considered a violation of policy. For the California Fund, this policy does not
apply to securities for which there is no readily available market. With
respect to such securities the California Fund will take action to reduce its
holdings.
5. 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 a Fund's shares when redeemed may be more or
less than their original cost.
Each 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 a 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 a Fund. The use of a tax equivalent total rate of return
allows investors to compare the total rates of return of a Fund, the dividends
from which 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.
A total rate of return quotation for each Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and
capital gains distributions, by (ii) the public offering price per share on the
first day of such period, and (b) subtracting 1 from the result. Any annualized
total rate of return quotation is calculated by (x) adding 1 to the period
total rate of return quotation calculated above, (y) raising such sum to a
power which is equal to 365 divided by the number of days in such period, and
(z) subtracting 1 from the result.
Each Fund may provide annualized "yield," "effective yield" and "tax
equivalent yield" quotations. The "yield" of a 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
<PAGE>
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 a Fund.
The use of a tax equivalent yield allows investors to compare the yield of a
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.
Any current yield quotation of a Fund consists of an annualized historical
yield, carried at least to the nearest hundredth of one percent, based on a 30
calendar day or one month period and is calculated by (a) raising to the sixth
power the sum of 1 plus the quotient obtained by dividing the Fund's net
investment income earned during the period by the product of the average daily
number of shares outstanding during the period that were entitled to receive
dividends and the public offering price per share on the last day of the
period, (b) subtracting 1 from the result, and (c) multiplying the result by 2.
Any tax equivalent yield quotation of a Fund is calculated as follows: If
the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield would be the current yield quotation divided by 1 minus a
stated income tax rate or rates. If a portion of the current yield quotation is
not tax-exempt, the tax equivalent yield would be the sum of (a) that portion
of the yield which is tax-exempt divided by 1 minus a stated income tax rate or
rates, and (b) the portion of the yield which is not tax-exempt.
Set forth below is total rate of return information for the Class A shares
of the Funds for the periods indicated, assuming that dividends and capital
gains distributions, if any, were reinvested. All outstanding shares of each
Fund were designated Class A shares on January 4, 1999. The return information
relates to periods prior to January 4, 1999, when there were no sales charges
on the purchase or sale of a Fund's shares. The Class A performance for past
periods has therefore been adjusted to reflect the maximum sales charge
currently in effect. The Class B shares were newly offered on January 4, 1999.
Performance results include any applicable fee waivers or expense subsidies in
place during the time period, which may cause the results to be more favorable
than they would otherwise have been.
<TABLE>
<CAPTION>
<S> <C> <C>
REDEEMABLE VALUE OF A
ANNUALIZED HYPOTHETICAL $1,000
TOTAL RATE OF INVESTMENT AT THE END
RETURN OF THE PERIOD
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
Period from _______ __, 1998 (commencement of operations)
to December 31, 1998 ____% $_____
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
Ten years ended December 31, 1998 ____% $_____
Five years ended December 31, 1998 ____% $_____
One year ended December 31, 1998 ____% $_____
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
August 17, 1995 (commencement of operations)
to December 31, 1998 ____% $_____
One year ended December 31, 1998 ____% $_____
</TABLE>
The yields for the 30-day period ended December 31, 1998 were _____% for
the California Fund, _____% for the National Fund, and _____% for the New York
Fund.
<PAGE>
The tax equivalent yields for the 30-day period ended December 31, 1998
were _____% for the California Fund, _____% for the National Fund, and _____%
for the New York Fund.
Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time a
Fund may compare its performance against inflation with the performance of
other instruments against inflation, such as FDIC-insured bank money market
accounts. In addition, advertising for the Funds may indicate that investors
should consider diversifying their investment portfolios in order to seek
protection of the value of their assets against inflation. From time to time,
advertising materials for the Funds may refer to or discuss current or past
economic or financial conditions, developments and events.
From time to time, each Fund may use hypothetical tax equivalent yields or
charts in its advertising. These hypothetical yields or charts will be used for
illustrative purposes only and are not indicative of a Fund's past or future
performance.
For advertising and sales purposes, the Funds will generally use the
performance of Class A shares. All outstanding Fund shares were designated
Class A shares on January 4, 1999. Performance prior to that date will be
adjusted to include the sales charges currently in effect. Class A shares are
sold at net asset value plus a current maximum sales charge of 4.50%.
Performance will typically include this maximum sales charge for the purposes
of calculating performance figures. If the performance of Class B shares is
used for advertising and sales purposes, performance after class inception on
January 4, 1999 will be actual performance, while performance prior to that
date will be Class A performance, adjusted to reflect the differences in sales
charges (but not the differences in fees and expenses) between the classes. For
these purposes, it will be assumed that the maximum contingent deferred sales
charge applicable to the Class B shares is deducted at the times, in the
amount, and under the terms stated in the applicable Prospectus. Class B share
performance generally would have been lower than Class A performance, had the
Class B shares been offered for the entire period, because the expenses
attributable to Class B shares are higher than the expenses attributable to the
Class A shares. Fund performance may also be presented in advertising and sales
literature without the inclusion of sales charges.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The net asset value per share of each Fund is determined for each class on
each day during which the New York Stock Exchange is open for trading
("Business Day"). As of the date of this Statement of Additional Information,
the Exchange is open for trading every weekday except for the following
holidays (or the days on which they are observed): New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. This determination is made
once each day as of the close of regular trading on the Exchange (normally 4:00
p.m. Eastern time) by adding the market value of all securities and other
assets attributable to the class, then subtracting the liabilities attributable
to that class, and then dividing the result by the number of outstanding shares
of the class. The net asset value per share is effective for orders received
and accepted by the Transfer Agent prior to its calculation.
Bonds and other fixed income securities (other than short-term
obligations) held for each Fund are valued on the basis of valuations furnished
by a pricing service, use of which has been approved by the Board of Trustees.
In making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
<PAGE>
Short-term obligations (maturing in 60 days or less) are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures contracts are normally valued at the settlement price on the exchange
on which they are traded. Securities for which there are no such valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premiums.
7. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE OF FUND SHARES AND
SHAREHOLDER PROGRAMS
As described in the Funds' Prospectuses, the Funds provide you with
alternative ways of purchasing shares based upon your individual investment
needs.
Each class of shares of a Fund represents an interest in the same
portfolio of investments. Each class is identical in all respects except that
each class bears its own class expenses, including distribution and service
fees, and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per
share, dividends per share and net asset value per share will vary for each
class of shares. There are no conversion, preemptive or other subscription
rights, except that Class B shares automatically convert to Class A shares in
eight years as more fully described below.
Shareholders of each class will share expenses proportionately for
services that are received equally by all shareholders. A particular class of
shares will bear only those expenses that are directly attributable to that
class, where the type or amount of services received by a class varies from one
class to another. The expenses that may be borne by specific classes of shares
may include (i) transfer agency fees attributable to a specific class of
shares, (ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxy
statements to current shareholders of a specific class of shares, (iii) SEC and
state securities registration fees incurred by a specific class, (iv) the
expense of administrative personnel and services required to support the
shareholders of a specific class of shares, (v) litigation or other legal
expenses relating to a specific class of shares, (vi) accounting expenses
relating to a specific class of shares and (vii) any additional incremental
expenses subsequently identified and determined to be properly allocated to one
or more classes of shares.
CLASS A SHARES
You may purchase Class A shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the applicable Prospectus. You may qualify
for a reduced sales charge depending upon the amount of your purchase, or the
sales charge may be waived in its entirety, as described below under "Sales
Charge Waivers." If you qualify to purchase Class A shares without a sales
load, you should purchase Class A shares rather than Class B shares because
Class A shares pay lower fees. Class A Shares are also subject to an annual
service fee of .25%. See "Distributor." Set forth below is an example of the
method of computing the offering price of the Class A shares of the Funds. The
example assumes a purchase on December 31, 1998 of Class A shares from a Fund
aggregating less than $25,000 subject to the schedule of sales charges set
forth below.
____________________________________________________________________
Net Asset Value per share $
____________________________________________________________________
Per Share Sales Charge - 4.50% of $
public offering price (4.71% of net
asset value per share)
____________________________________________________________________
Per Share Offering Price to the Public $
____________________________________________________________________
<PAGE>
A Fund receives the entire net asset value of all Class A shares that are sold.
The Distributor retains the full applicable sales charge from which it pays the
uniform reallowances shown in the table below.
The front-end sales charge for Class A shares expressed as a percentage of
offering price and net asset value, and the dealer reallowance expressed as a
percentage of the offering price is set forth in the table below. Each Fund has
established certain shareholder programs that may permit you to take advantage
of the lower rates available for larger purchases, as described under
"Shareholder Programs" below.
_______________________________________________________________________________
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF REALLOWANCE AS A
AMOUNT OF OFFERING PRICE INVESTMENT % OF OFFERING
INVESTMENT PRICE
_______________________________________________________________________________
Less than $25,000 4.50% 4.71% 4.05%
_______________________________________________________________________________
$25,000 to less than $50,000 4.00% 4.17% 3.60%
_______________________________________________________________________________
$50,000 to less than $100,000 3.50% 3.63% 3.15%
_______________________________________________________________________________
$100,000 to less than $250,000 2.50% 2.56% 2.25%
_______________________________________________________________________________
$250,000 to less than $500,000 1.50% 1.52% 1.35%
_______________________________________________________________________________
$500,000 or more none* none* up to 1.00%
_______________________________________________________________________________
*A contingent deferred sales charge may apply in certain
instances. See "Sales Charge Waivers--Class A" below.
CLASS B SHARES
Class B shares are sold without a front-end, or initial, sales charge, but
you are charged a contingent deferred sales charge (CDSC) when you sell shares
within five years of purchase. The rate of CDSC goes down the longer you hold
your shares. The table below shows the rates that you pay, as a percentage of
the purchase price (or the sale price, whichever is less), depending upon when
you sell your shares.
_____________________________________________________________________
SALE DURING CDSC ON SHARES BEING SOLD
_____________________________________________________________________
1st year since purchase 4.50%
_____________________________________________________________________
2nd year since purchase 4%
_____________________________________________________________________
3rd year since purchase 3%
_____________________________________________________________________
4th year since purchase 2%
_____________________________________________________________________
5th year since purchase 1%
_____________________________________________________________________
6th year (or later) since purchase None
_____________________________________________________________________
Class B shares pay distribution/service fees of up to 0.75% of the average
daily net assets represented by the Class B shares. The Distributor pays
commissions to brokers, dealers and other institutions of 4.00% of the offering
price of Class B shares sold by these entities. These commissions are not paid
on exchanges from other CitiFunds or on sales of Class B shares to investors
exempt from the CDSC. The Distributor is compensated for these payments through
the receipt of the ongoing distribution fees from a Fund, and through the CDSC,
if any. The Distributor will also advance the first year service fee to dealers
at an annual rate equal to 0.25% of the average daily net assets represented by
Class B shares sold by them. As a result, the total amount paid to a dealer
upon the purchase of Class B shares may be a maximum of 4.25% of the purchase
price of the Class B shares.
When you sell your shares, the CDSC will be based on either your purchase
price, or the sale price, whichever is less. You do not pay a CDSC on shares
acquired through reinvestment of dividends and capital gain distributions and
shares representing capital appreciation. Each Fund will assume that a
redemption of Class B shares is made:
<PAGE>
[] first, of Class B shares representing capital appreciation
[] next, of shares representing the reinvestment of dividends and
capital gains distributions
[] finally, of other shares held by the investor for the longest
period of time.
Under certain circumstances, as set forth below in "Sales Charge Waivers," the
CDSC will be waived.
The holding period of Class B shares of a Fund acquired through an
exchange with another CitiFund will be calculated from the date that the Class
B shares were initially acquired in the other CitiFund, and Class B shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gains distribution reinvestments in the
other fund. When determining the amount of the CDSC, each Fund will use the
CDSC schedule of any fund from which you have exchanged shares that would
result in you paying the highest CDSC.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares, and the CDSC imposed upon sales of Class A or Class B shares,
are waived. Waivers are generally instituted in order to promote good will with
persons or entities with which Citibank or the Distributor or their affiliates
have business relationships, or because the sales effort, if any, involved in
making such sales is negligible, or, in the case of certain CDSC waivers,
because the circumstances surrounding the sale of Fund shares were not
foreseeable or voluntary. These sales charge waivers may be modified or
discontinued at any time.
CLASS A--FRONT-END SALES CHARGE
o Reinvestment. The sales charge does not apply to Class A shares
acquired through the reinvestment of dividends and capital gains
distributions.
o Eligible Purchasers. Class A shares may be purchased without a sales
charge by:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises
discretionary investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees
for acting as custodian
[] directors or trustees (and their immediate families), and
retired directors or trustees (and their immediate families), of
any investment company for which Citibank or any subsidiary or
affiliate of Citibank serves as the investment adviser or as a
service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired
employees of Citibank and its affiliates or CFBDS, Inc. and its
affiliates (including immediate families of the foregoing)
[] investors participating in a fee-based or promotional
arrangement sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances
in selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan offered
to Citigroup employees
<PAGE>
[] shareholder accounts established through a reorganization or
similar form of business combination approved by a Fund's Board
of Trustees or by the Board of Trustees of any other CitiFund or
mutual fund managed or advised by Citibank (all of such funds
being referred to herein as CitiFunds) the terms of which
entitle those shareholders to purchase shares of a Fund or any
other CitiFund at net asset value without a sales charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4,
1999
[] employee benefit plans qualified under Section 401 of the
Internal Revenue Code, including salary reduction plans
qualified under Section 401(k) of the Code, subject to minimum
requirements as may be established by CFBDS with respect to the
amount of purchase; currently, the amount invested by the
qualified plan in a Fund or in any combination of CitiFunds must
total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares;
however, a contingent deferred sales charge will be imposed on
the investments in the event of certain share redemptions within
12 months following the share purchase, at the rate of 1% of the
lesser of the value of the shares redeemed (not including
reinvested dividends and capital gains distributions) or the
total cost of the shares; the contingent deferred sales charge
on Class A shares will be waived under the same circumstances as
the contingent deferred sales charge on Class B shares will be
waived; in determining whether a contingent deferred sales
charge on Class A shares is payable, and if so, the amount of
the charge:
+ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
+ all investments made during a calendar month will age one
month on the last day of the month and each subsequent
month
+ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the redemption
proceeds when the exchanged shares are subsequently
redeemed (assuming the contingent deferred sales charge is
then payable)
+ the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which
the original Class A shares were held
[] subject to appropriate documentation, investors where the amount
invested represents redemption proceeds from a mutual fund
(other than a CitiFund), if:
+ the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually
imposed), and
+ the redemption has occurred no more than 60 days prior to
the purchase of Class A shares of a Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from
another investment firm within six months prior to the date of
purchase by the investor, if:
+ the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative,
and either paid an initial sales charge or was at some time
subject to, but did not actually pay, a deferred sales
charge or redemption fee with respect to the redemption
proceeds
+ the redemption is made within 60 days prior to the
investment in a Fund, and
<PAGE>
+ the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the
proceeds of the redemption
CONTINGENT DEFERRED SALES CHARGE:
o Reinvestment. There is no CDSC on shares representing capital
appreciation or on shares acquired through reinvestment of
dividends or capital gains distributions.
o Waivers. The CDSC will be waived in connection with:
[] a total or partial redemption made within one year of the death
of the shareholder; this waiver is available where the deceased
shareholder is either the sole shareholder or owns the shares
with his or her spouse as a joint tenant with right of
survivorship, and applies only to redemption of shares held at
the time of death
[] a lump sum or other distribution in the case of an Individual
Retirement Account (IRA), a self-employed individual retirement
plan (Keogh Plan) or a custodian account under Section 403(b) of
the Internal Revenue Code, in each case following attainment of
age 59 1/2
[] a total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement
plan
[] a redemption resulting from a tax-free return of an excess
contribution to an IRA
[] redemptions made under a Fund's Systematic Withdrawal Plan
AUTOMATIC CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A
shares in the same Fund approximately eight years after the date of issuance.
At the same time, a portion of all Class B shares representing dividends and
other distributions paid in additional Class B shares will be converted in
accordance with procedures from time to time approved by the Funds' Trustees.
The conversion will be effected at the relative net asset values per share of
the two classes on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs. If a shareholder
effects one or more exchanges among Class B shares of the CitiFunds during the
eight-year period, the holding periods for the shares so exchanged will be
counted toward the eight-year period. Because the per share net asset value of
the Class A shares may be higher than that of the Class B shares at the time of
conversion, a shareholder may receive fewer Class A shares than the number of
Class B shares converted, although the dollar value will be the same.
SHAREHOLDER PROGRAMS
The Funds makes the following programs available to shareholders to enable
them to reduce or eliminate the front-end sales charges on Class A shares or to
exchange Fund shares for shares of other CitiFunds without, in many cases, the
payment of a sales charge. These programs may be changed or discontinued at any
time. For more information, please contact your Service Agent.
REDUCED SALES CHARGE PLAN
A qualified group may purchase shares as a single purchaser under the
reduced sales charge plan. The purchases by the group are lumped together
and the sales charge is based on the lump sum. A qualified group must:
[] have been in existence for more than six months
[] have a purpose other than acquiring Fund shares at a discount
[] satisfy uniform criteria that enable CFBDS to realize economies of
scale in its costs of distributing shares
[] have more than ten members
<PAGE>
[] be available to arrange for group meetings between representatives of
the Funds and the members
[] agree to include sales and other materials related to the Funds in
its publications and mailings to members at reduced or no cost to the
distributor
[] seek to arrange for payroll deduction or other bulk transmission of
investments to the Funds
LETTER OF INTENT
If an investor anticipates purchasing $25,000 or more of Class A
shares of a Fund alone or in combination with Class B shares of the Fund
or any of the classes of other CitiFunds or of any other mutual fund
managed or advised by Citibank (all of such funds being referred to herein
as CitiFunds) within a 13-month period, the investor may obtain the shares
at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing a letter of intent on the terms
described below. Subject to acceptance by CFBDS, Inc., the Funds'
distributor, and the conditions mentioned below, each purchase will be
made at a public offering price applicable to a single transaction of the
dollar amount specified in the letter of intent.
[] The shareholder or, if the shareholder is a customer of a Service
Agent, his or her Service Agent must inform CFBDS that the letter of
intent is in effect each time shares are purchased.
[] The shareholder makes no commitment to purchase additional shares,
but if his or her purchases within 13 months plus the value of shares
credited toward completion of the letter of intent do not total the
sum specified, an increased sales charge will apply as described
below.
[] A purchase not originally made pursuant to a letter of intent may be
included under a subsequent letter of intent executed within 90 days
of the purchase if CFBDS is informed in writing of this intent within
the 90-day period.
[] The value of shares of a Fund presently held, at cost or maximum
offering price (whichever is higher), on the date of the first
purchase under the letter of intent, may be included as a credit
toward the completion of the letter, but the reduced sales charge
applicable to the amount covered by the letter is applied only to new
purchases.
[] Instructions for issuance of shares in the name of a person other
than the person signing the letter of intent must be accompanied by a
written statement from the Transfer Agent or a Service Agent stating
that the shares were paid for by the person signing the letter.
[] Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of
intent.
[] The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the letter of intent
are deducted from the total purchases made under the letter of
intent.
If the investment specified in the letter of intent is not completed
(either prior to or by the end of the 13-month period), the Transfer Agent
will redeem, within 20 days of the expiration of the letter of intent, an
appropriate number of the shares in order to realize the difference between
the reduced sales charge that would apply if the investment under the
letter of intent had been completed and the sales charge that would
normally apply to the number of shares actually purchased. By completing
and signing the letter of intent, the shareholder irrevocably grants a
power of attorney to the Transfer Agent to redeem any or all shares
purchased under the letter of intent, with full power of substitution.
<PAGE>
RIGHT OF ACCUMULATION
A shareholder qualifies for cumulative quantity discounts on the
purchase of Class A shares when his or her new investment, together with
the current offering price value of all holdings of that shareholder in the
CitiFunds, reaches a discount level. For example, if a Fund shareholder
owns shares valued at $50,000 and purchases an additional $50,000 of Class
A shares of the Fund, the sales charge for the $50,000 purchase would be at
the rate of 2.50% (the rate applicable to single transactions from $100,000
to less than $250,000). A shareholder must provide the Transfer Agent with
information to verify that the quantity sales charge discount is applicable
at the time the investment is made.
SYSTEMATIC WITHDRAWAL PLAN
Each Fund's Systematic Withdrawal Plan permits you to have a specified
dollar amount (minimum of $100 per withdrawal) automatically withdrawn from
your account on a regular basis if you have at least $10,000 in your Fund
account at the time of enrollment. You are limited to one withdrawal a
month under the Plan.
If you redeem Class A or Class B shares under the Plan that are
subject to a CDSC, you are not subject to any CDSC applicable to the shares
redeemed, but the maximum amount that you can redeem under the Plan in any
year is limited to 10% of the average daily balance in your account.
You may receive your withdrawals by check, or have the monies
transferred directly into your bank account. Or you may direct that
payments be made directly to a third party.
To participate in the Plan, you must complete the appropriate forms
provided by your Service Agent.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed (with a
credit for any contingent deferred sales charge paid) by purchasing Class A
shares of the same Fund within 90 days after the redemption. To take
advantage of this reinstatement privilege, shareholders must notify their
Service Agents in writing at the time the privilege is exercised.
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged for shares of the same class of
certain other CitiFunds that are made available by your Service Agent, or
may be acquired through an exchange of shares of the same class of those
funds. Class A shares also may be exchanged for shares of certain CitiFunds
money market funds that offer only a single class of shares, unless the
Class A shares are subject to a contingent deferred sales charge. Class B
shares may not be exchanged for shares of CitiFunds money market funds
other than Cash Reserves.
No initial sales charge is imposed on shares being acquired through an
exchange unless Class A shares are being acquired and the sales charge for
Class A of the fund being exchanged into is greater than the current sales
charge of the Fund (in which case an initial sales charge will be imposed
at a rate equal to the difference). Investors whose shares are outstanding
on January 4, 1999 will be able to exchange those Class A shares, and any
shares acquired through capital appreciation and the reinvestment of
dividends and capital gains distributions on those shares, into Class A
shares of the other funds without paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged for
Class B shares of certain other CitiFunds that are made available by your
<PAGE>
Service Agent. However, you may be required to pay a CDSC when you sell
those shares. When determining the amount of the CDSC, each Fund will use
the CDSC schedule of any fund from which you have exchanged shares that
would result in you paying the highest CDSC.
You must notify your Service Agent at the time of exchange if you
believe that you qualify for share prices which do not include the sales
charge or which reflect a reduced sales charge, because the Fund shares you
are exchanging were: (a) purchased with a sales charge, (b) acquired
through a previous exchange from shares purchased with a sales charge, (c)
outstanding as of January 4, 1999, or (d) acquired through capital
appreciation or the reinvestment of dividends and capital gains
distributions on those shares. Any such qualification may be subject to
confirmation, through a check of appropriate records and documentation, of
your existing share balances and any sales charges paid on prior share
purchases.
This exchange privilege may be modified or terminated at any time, and
is available only in those jurisdictions where such exchanges legally may
be made. Before making any exchange, shareholders should contact their
Service Agents to obtain more information and prospectuses of the funds to
be acquired through the exchange. 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.
ADDITIONAL PURCHASE AND SALE INFORMATION
Each Service Agent has agreed to transmit to its customers who are
shareholders of a Fund appropriate prior written disclosure of any fees that it
may charge them directly. Each Service Agent is responsible for transmitting
promptly orders of its customers. Your Service Agent is the shareholder of
record for the shares of the Fund that you own.
Investors may be able to establish new accounts in the Funds under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and certain
other qualified pension and profit-sharing plans. Investors should consult with
their Service Agent and their tax and retirement advisers.
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 Funds, 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,
Social Security number, and account number. If these or other reasonable
procedures are not followed, the Funds, 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.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption or repurchase price of shares of the Funds,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a holder of shares received a distribution in kind,
such holder could incur brokerage or other charges in converting the securities
to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the SEC, exists making disposal of a
<PAGE>
Fund's investments or determination of its net asset value not reasonably
practicable; (b) the New York Stock Exchange is closed (other than customary
weekend and holiday closings); or (c) the SEC has by order permitted such
suspension.
8. MANAGEMENT
The Trustees and officers of the Trust, their ages and their principal
occupations during at least the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust. Unless otherwise indicated below, the address of each Trustee and
officer is 21 Milk Street, 5th Floor, Boston, Massachusetts 02109.
TRUSTEES
ELLIOTT J. BERV; 56 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June 1991 to
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984). His address is 24 Atlantic Drive, Scarborough,
Maine.
PHILIP W. COOLIDGE*; 47 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN; 55 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading Advisory
Firm) (since March 1997); Director, Vantage Consulting Group, Inc. (since
October 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia
Beach, Virginia.
RILEY C. GILLEY; 72 -- Vice President and General Counsel, Corporate Property
Investors (November 1988 to December 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December 1987). His address is 4041 Gulf Shore Boulevard
North, Naples, Florida.
DIANA R. HARRINGTON; 59 -- Professor, Babson College (since September 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate
School of Business, University of Virginia (September 1978 to September 1993);
Trustee, The Highland Family of Funds (March 1997 to March 1998). Her address
is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 47 -- President, Global Research Associates, Inc. (Investment
Research) (since August 1990); Manager, Rockefeller & Co. (March 1988 to July
1990); Trustee, Mainstay Institutional Funds (since December 1990). Her address
is P.O. Box 9572, New Haven, Connecticut.
HEATH B. MCLENDON*; 65 - Chairman, President, and Chief Executive Officer of
Mutual Management Corp. (since _____); Managing Director of Salomon Smith
Barney (since ____). His address is 388 Greenwich Street, New York, New York.
C. OSCAR MORONG, JR.; 64 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Senior Vice
President and Investment Manager, CREF Investments, Teachers Insurance &
Annuity Association (retired, January 1993); Director, Indonesia Fund;
Director, MAS Funds. His address is 1385 Outlook Drive West, Mountainside, New
Jersey.
WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors)(since 1989);
Trustee of certain registered investment companies in the MFS Family of Funds.
His address is 35 Farm Road, Sherborn, Massachusetts.
<PAGE>
E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University,
Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 78 -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE*; 47 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE A. DRAPEAU*; 28 -- Assistant Secretary and Assistant Treasurer of
Trust; Vice President, Signature Financial Group, Inc. (since January 1996);
Paralegal and Compliance Officer, various financial companies (July 1992 to
January 1996).
TAMIE EBANKS-CUNNINGHAM*; 26 -- Assistant Secretary of the Trust; Office
Manager, Signature Financial Group (Cayman) Ltd. (since April 1995);
Administrator, Cayman Islands Primary School (prior to April 1995). Her address
is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I.
JOHN R. ELDER*; 50 -- Treasurer of the Trust; Vice President, Signature
Financial Group, Inc. (since April 1995); Assistant Treasurer, CFBDS (since
April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life
Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON*; 33 -- Secretary of the Trust; Senior Vice President,
Signature Financial Group, Inc. (since May 1992); Secretary, CFBDS (since
October 1992).
JAMES E. HOOLAHAN*; 52 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Senior Vice President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI*; 35 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust (since August 1994); Vice President, Signature Financial
Group (Cayman) Ltd. (since August 1994); Fund Compliance Administrator, Concord
Financial Group (November 1990 to August 1994).
MOLLY S. MUGLER*; 47 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary,
CFBDS.
CLAIR TOMALIN*; 30 -- Assistant Secretary of the Trust; Office Manager,
Signature Financial Group (Europe) Limited. Her address is 117 Charterhouse
Street, London ECIM 6AA.
SHARON M. WHITSON*; 50 -- Assistant Secretary and Assistant Treasurer of the
Trust; Assistant Vice President, Signature Financial Group, Inc.
JULIE J. WYETZNER*; 39 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust; Vice President, Signature Financial Group, Inc.
The Trustees and officers of the Trust also hold comparable positions with
certain other funds for which CFBDS, Signature Financial Group, Inc., or their
affiliates serve as distributor, administrator or sub-administrator.
The following table shows estimated Trustee compensation for the period
indicated:
<PAGE>
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
<S> <C> <C> <C> <C>
____________________________________________________________________________________________
AGGREGATE
COMPENSATION AGGREGATE AGGREGATE TOTAL
FROM THE COMPENSATION COMPENSATION FROM COMPENSATION
TRUSTEE CALIFORNIA FROM THE NATIONAL THE NEW YORK FROM THE TRUST
FUND (1) FUND (1) FUND (1) AND COMPLEX (2)
____________________________________________________________________________________________
Elliott J. Berv
____________________________________________________________________________________________
Philip W. Coolidge
____________________________________________________________________________________________
Mark T. Finn
____________________________________________________________________________________________
Riley C. Gilley
____________________________________________________________________________________________
Diana R. Harrington
____________________________________________________________________________________________
Susan B. Kerley
____________________________________________________________________________________________
Heath B. McLendon (3)
____________________________________________________________________________________________
C. Oscar Morong, Jr.
____________________________________________________________________________________________
Walter E. Robb, III
____________________________________________________________________________________________
E. Kirby Warren
____________________________________________________________________________________________
William Woods, Jr.
____________________________________________________________________________________________
</TABLE>
(1) For the fiscal year ended December 31, 1998.
(2) As of the date of this Statement of Additional Information, Messrs. Berv,
Coolidge, Finn, Gilley, McLendon, Morong, Robb, Warren and Woods, and Mses.
Harrington and Kerley are Trustees of 27, 49, 26, 33, 20, 40, 30, 40, 26,
28, and 28 funds and portfolios, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.
(3) Mr. McLendon was appointed as Trustee in February, 1999.
As of __________, 1999 all Trustees and officers as a group owned less
than 1% of the outstanding shares of any Fund. As of the same date, more than
95% of the outstanding shares of each Fund were held of record by Citibank or
its affiliates, as Service Agents of the Fund for the accounts of their
respective clients.
The Trust's Declaration of Trust provides that the Trust will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust unless, as to liability to the Trust or its investors,
it is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless with respect to any other matter it is finally adjudicated that they
did not act in good faith in the reasonable belief that their actions were in
the best interests of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees of the Trust, or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
MANAGER
Citibank manages the assets of each Fund and provides certain
administrative services to the Trust pursuant to separate management agreements
(the "Management Agreements"). Subject to such policies as the Board of
Trustees of the Trust may determine, Citibank manages the securities of each
Fund and makes investment decisions for each Fund. Citibank furnishes at its
own expense all services, facilities and personnel necessary in connection with
managing each Fund's investments and effecting securities transactions for each
Fund. The Management Agreements with the Trust provide that Citibank may
<PAGE>
delegate the daily management of the securities of each Fund to one or more
subadvisers. Unless otherwise terminated, each Management Agreement with the
Trust will continue in effect indefinitely as long as such continuance is
specifically approved at least annually by the Board of Trustees of the Trust
or by a vote of a majority of the outstanding voting securities of the
applicable Fund, and, in either case, by a majority of the Trustees of the
Trust who are not parties to the Management Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Management
Agreement.
Citibank provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's independent contractors
and agents; the preparation and filing of all documents required for compliance
by the Trust with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trust. Trustees, officers, and
investors in the Trust are or may be or may become interested in Citibank, as
directors, officers, employees, or otherwise and directors, officers and
employees of Citibank are or may become similarly interested in the Trust.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the Trust when
authorized either by a vote of a majority of the outstanding voting securities
of the applicable Fund or by a vote of a majority of the Board of Trustees of
the Trust, or by Citibank on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its
assignment. The Management Agreements with the Trust provide that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution of security transactions for the applicable Fund, except for
willful misfeasance, bad faith or gross negligence or reckless disregard of its
or their obligations and duties under the Management Agreements with the Trust.
For its services under the Management Agreements, Citibank receives fees,
which are accrued daily and paid monthly, of 0.75% of the New York and National
Fund's average daily net assets and 0.50% of the California Fund's average
daily net assets, in each case on an annualized basis. Citibank may voluntarily
agree to waive a portion of its management fees.
For the period from ________ __, 1998 (commencement of operations) to
December 31, 1998, the fee paid to Citibank by the California Fund under its
Management Agreement was $_________.
For the fiscal years ended December 31, 1996 and 1997, Citibank waived all
investment advisory fees for the National Fund. For the fiscal year ended
December 31, 1998, the fee paid to Citibank by the National Fund under its
Management Agreement was $_________.
For the fiscal years ended December 31, 1996 and 1997, the fees paid to
Citibank by the New York Fund under a prior investment advisory agreement,
after waivers, were $88,585 and $181,270, respectively. For the fiscal year
ended December 31, 1998, the fee paid to Citibank by the New York Fund under
its Management Agreement was $_________.
The Funds currently do not employ investment subadvisers, but in the
future a Fund may do so. Citibank would be responsible for recommending the
hiring, termination or replacement of any subadviser and for supervising and
monitoring the subadviser's performance. Certain CitiFunds have applied for
exemptive relief from the Securities and Exchange Commission which would permit
them and other CitiFunds, including the Funds, to employ subadvisers without
shareholder approval. The requested exemptive relief also would permit the
terms of sub-advisory agreements to be changed, and the employment of
subadvisers to be continued after events that would otherwise cause an
automatic termination of a sub-advisory agreement, in each case without
shareholder approval if those changes or continuation are approved by the
fund's Board of Trustees. There is no assurance that the SEC will grant the
requested relief; however, if the requested relief is granted, the Funds also
would be permitted to employ subadvisers without shareholder approval, subject
to compliance with certain conditions. If the Funds add or change a subadviser,
shareholders would be notified.
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust as from time to time are
<PAGE>
agreed upon by Citibank and CFBDS. For performing such sub-administrative
services, CFBDS receives compensation as from time to time is agreed upon by
Citibank, not in excess of the amount paid to Citibank for its services under
the Management Agreements with the Trust. All such compensation is paid by
Citibank.
For the fiscal years ended December 31, 1996 and 1997, the fees payable
from the National Fund to CFBDS under a prior administrative services agreement
were $7,598 and $7,777, respectively (all of which were voluntarily waived).
For the fiscal years ended December 31, 1996 and 1997, the fees payable
from the New York Fund to CFBDS under a prior administrative services agreement
were $214,125 (of which $18,284 was voluntarily waived) and $194,607 (of which
124,928 was voluntarily waived), respectively.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, MA 02109, serves as the Distributor of each
Fund's shares pursuant to a Distribution Agreement with the Trust with respect
to each class of shares of the Funds (each, a "Distribution Agreement"). 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. Under the
Distribution Agreements, CFBDS is obligated to use its best efforts to sell
shares of each class of the Funds.
Either party may terminate a Distribution Agreement on not less than
thirty days' nor more than sixty days' prior written notice to the other party.
Unless otherwise terminated each Distribution Agreement will continue from year
to year upon annual approval by the Trust's Board of Trustees and by the vote
of a majority of the Board of Trustees of the Trust who are not parties to the
Distribution Agreement or interested persons of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. Each Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
Each class of each Fund has a Service Plan (each, a "Service Plan")
adopted in accordance with Rule 12b-1 under the 1940 Act. Under the Plans, a
Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average
daily net assets of the Fund attributable to that class in the case of the Plan
relating to Class A shares, and not to exceed 0.75% of the average daily net
assets of the Fund attributable to that class in the case of the Plan relating
to Class B shares. Such fees may be used to make payments to the Distributor
for distribution services, to securities dealers and other industry
professionals (called Service Agents) that have entered into service agreements
with the Distributor and others in respect of the sale of shares of the Funds,
and to other parties in respect of the sale of shares of the Funds, and to make
payments for advertising, marketing or other promotional activity, and payments
for preparation, printing, and distribution of prospectuses, statements of
additional information and reports for recipients other than regulators and
existing shareholders. The Funds also may make payments to the Distributor,
Service Agents and others for providing personal service or the maintenance of
shareholder accounts. The amounts paid by the Distributor to each recipient may
vary based upon certain factors, including, among other things, the levels of
sales of Fund shares and/or shareholder services provided. Recipients may
receive different compensation for sales for Class A and Class B shares.
The Service Plan with respect to Class A shares also provides that the
Distributor, broker-dealers, banks and other financial intermediaries may
receive the sales charge paid by Class A investors as partial compensation for
their services in connection with the sale of shares. The Service Plan with
respect to Class B shares provides that the Distributor, dealers, and others
may receive all or a portion of the deferred sales charges paid by Class B
investors.
The Service Plans permit the Funds to pay fees to the Distributor, Service
Agents and others as compensation for their services, not as reimbursement for
specific expenses incurred. Thus, even if their expenses exceed the fees
provided for by the applicable Plan, a Fund will not be obligated to pay more
than those fees and, if their expenses are less than the fees paid to them,
<PAGE>
they will realize a profit. Each Fund will pay the fees to the Distributor and
others until the applicable Plan or Distribution Agreement is terminated or not
renewed. In that event, the Distributor's or other recipient's expenses in
excess of fees received or accrued through the termination date will be the
Distributor's or other recipient's sole responsibility and not obligations of a
Fund. In their annual consideration of the continuation of the Service Plans
for each Fund, the Trustees will review the Service Plans and the expenses for
each Fund separately.
Each Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's Trustees
and a majority of the Trustees who are not "interested persons" of the Trust
and who have no direct or indirect financial interest in the operation of the
Service Plan or in any agreement related to the Plan (for purposes of this
paragraph "Qualified Trustees"). Each Service Plan requires that the Trust and
the Distributor provide to the Board of Trustees, and the Board of Trustees
review, at least quarterly, a written report of the amounts expended (and the
purposes therefor) under the Service Plan. Each Service Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of such Qualified Trustees then in office. A Service Plan may be
terminated with respect to any class of a Fund at any time by a vote of a
majority of the Trust's Qualified Trustees or by a vote of a majority of the
outstanding voting securities of that class. A Service Plan may not be amended
to increase materially the amount of permitted expenses of the class thereunder
without the approval of a majority of the outstanding securities of that class
and may not be materially amended in any case without a vote of a majority of
both the Trustees and Qualified Trustees. The Distributor will preserve copies
of any plan, agreement or report made pursuant to the Service Plans for a
period of not less than six years, and for the first two years the Distributor
will preserve such copies in an easily accessible place.
As contemplated by the Service Plans, CFBDS acts as the agent of the Trust
in connection with the offering of shares of the Fund pursuant to the
Distribution Agreements. For the period from ________ __, 1998 (commencement of
operations) to December 31, 1998, the fee paid to CFBDS under a prior
distribution agreement with the California Fund was $_________. For the fiscal
years ended December 31, 1996 and 1997, CFBDS waived all fees payable from the
National Fund under a prior distribution agreement. For the fiscal year ended
December 31, 1998, the fee paid to CFBDS under a prior distribution agreement
with the National Fund was $_________. For the fiscal year ended December 31,
1996, CFBDS waived all fees payable from the New York Fund under a prior
distribution agreement. For the fiscal years ended December 31, 1997 and 1998,
the fees paid to CFBDS under a prior distribution agreement with the New York
Fund, after waivers, were $1,860 and $_________, respectively.
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents or for other
distribution expenses out of the distribution fees received by the Distributor
and out of the Distributor's past profits or any other source available to it.
EXPENSES
In addition to amounts payable under the Management Agreements and Service
Plans, each 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 Funds' Distributor, government fees,
taxes, accounting and legal fees, expenses of communication with shareholders,
interest expense, and insurance premiums.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as Transfer Agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
each Fund. Among other things, State Street calculates the daily net asset
value for the Funds. Securities may be held by a sub-custodian bank approved by
the Trustees.
<PAGE>
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110.
AUDITORS
Deloitte & Touche LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Deloitte & Touche LLP is
125 Summer Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, acts as
counsel for the Trust.
9. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in a Fund's investments are made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of turnover is not
a limiting factor when changes are appropriate. Specific decisions to purchase
or sell securities for each Fund are made by a portfolio manager who is an
employee of Citibank and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of Citibank in a
similar capacity.
The primary consideration in placing portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Citibank attempts to achieve this result by selecting broker-dealers
to execute transactions on behalf of each Fund and other clients of Citibank on
the basis of their professional capability, the value and quality of their
brokerage services, and the level of their brokerage commissions. In the case
of securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or markdown),
Citibank normally seeks to deal directly with the primary market makers, unless
in its opinion, best execution is available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities generally
includes a fixed underwriting commission or concession. From time to time,
soliciting dealer fees are available to Citibank on the tender of a Fund's
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by Citibank. At present no other
recapture arrangements are in effect.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which Citibank or its affiliates exercise investment discretion.
Citibank is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if Citibank determines in
good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities which Citibank and its affiliates have with
respect to accounts over which they exercise investment discretion. The
Trustees of the Trust periodically review the commissions paid by a Fund to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits to the Fund.
The management fee that each Fund pays to Citibank will not be reduced as
a consequence of Citibank's receipt of brokerage and research services. While
such services are not expected to reduce the expenses of Citibank, Citibank
would, through the use of the services, avoid the additional expenses which
would be incurred if it should attempt to develop comparable information
through its own staff or obtain such services independently.
<PAGE>
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's other clients.
Investment decisions for each Fund and for Citibank's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could adversely affect the price of or the size of the
position obtainable in a security for a Fund. When purchases or sales of the
same security for a Fund and for other portfolios managed by Citibank occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large volume purchases or sales.
For the period from ________ __, 1998 (commencement of operations) to
December 31, 1998, the California Fund paid $_________ in brokerage
commissions. For the fiscal years ended December 31, 1996 and 1997, neither the
National Fund nor the New York Fund paid any brokerage commissions. For the
fiscal year ended December 31, 1998, the National Fund paid $__________ in
brokerage commissions, and the New York Fund paid $_________ in brokerage
commissions.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value) of each series and to divide or combine the shares of any series
into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series and to divide
such series into classes. The Trust has reserved the right to create and issue
additional series and classes of shares. Each share of each class represents an
equal proportionate interest in that Fund with each other share of that class.
Shares of each series of the Trust participate equally in the earnings,
dividends and distribution of net assets of the particular series upon
liquidation or dissolution (except for any differences between classes of
shares of a series). Shares of each series are entitled to vote separately to
approve advisory agreements or changes in investment policy, and shares of a
class are entitled to vote separately to approve any distribution or service
arrangements relating to that class, but shares of all series may vote together
in the election or selection of Trustees and accountants for the Trust. In
matters affecting only a particular series or class only shares of that
particular series or class are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required to hold, and
has no present intention of holding, annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have, under certain circumstances (e.g., upon the application and
submission of certain specified documents to the Trustees by a specified number
of shareholders), the right to communicate with other shareholders in
connection with requesting a meeting of shareholders for the purpose of
removing one or more Trustees. Shareholders also have under certain
circumstances the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of shareholders. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of each
series affected by the amendment. (See "Investment Restrictions.")
At any meeting of shareholders of a 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.
<PAGE>
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares would be sufficient. The Trust or any
series of the Trust, as the case may be, may be terminated (i) by a vote of a
majority of the outstanding voting securities of the Trust or the affected
series or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Funds' Transfer Agent maintains a share register for shareholders of
record. Share certificates are not issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust of the Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust of the Trust also provides
that the Trust may maintain appropriate insurance (e.g., fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust of the Trust protects a Trustee
against any liability to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office.
11. CERTAIN ADDITIONAL TAX MATTERS
Each Fund has elected to be treated, and intends to qualify each year, as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by meeting all applicable requirements
of Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of both the Fund's
income and its tax-exempt income), and the composition of the Fund's portfolio
assets. Provided all such requirements are met and all of a Fund's net
investment income and realized capital gains are distributed to shareholders in
accordance with the timing requirements imposed by the Code, no federal income
or excise taxes generally will be required to be paid by the Fund. If a Fund
should fail to qualify as a "regulated investment company" for any year, the
Fund would incur a regular corporate federal income tax upon its taxable
income, and Fund distributions would generally be taxable as ordinary dividend
income to shareholders.
The portion of each Fund's distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Fund's assets consists of tax-exempt securities
at the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be treated as
an item of tax preference for shareholders under the federal alternative
minimum tax, and all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax. In addition, if you are receiving Social
Security or railroad retirement benefits any "tax-exempt" dividends may affect
the amount of those benefits which are subject to federal income tax. Unless a
<PAGE>
Fund provides shareholders with actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly to all
distributions by the Fund of net investment income made during each fiscal year
of the Fund and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from a Fund on their federal income
tax returns.
Shareholders of a Fund will generally have to pay federal income taxes on
the balance of the Fund's distributions of net investment income and on any
distributions from net short-term capital gains, whether the distributions are
made in cash or in additional shares. Distributions of net capital gains (i.e.,
the excess of net long-term capital gains over net short-term capital losses),
whether made in cash or in additional shares, are taxable to shareholders as
long-term capital gains without regard to the length of time the shareholders
have held their shares. Because each Fund expects to earn primarily interest
income, it is expected that no Fund dividends will qualify for the dividends
received deduction for corporations.
Any Fund dividend that is declared in October, November or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. Any
Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution other than
an exempt-interest dividend may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
In general, any gain or loss realized upon a taxable disposition of shares
of a Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a redemption of shares in a Fund held for six months or
less will be disallowed to the extent of any exempt-interest dividends received
with respect to those shares. If not disallowed, any such loss will be treated
as a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a disposition of
shares may also be disallowed under rules relating to wash sales.
Each Fund's current dividend and accounting policies will affect the
amount, timing, and character of distributions to shareholders. Any investment
in certain securities purchased at a market discount will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax, the Trust may
be required to liquidate securities of a Fund that it might otherwise have
continued to hold and thereby potentially cause the Fund to realize additional
taxable gain or loss.
The Funds' transactions in short sales "against the box" and futures
contracts, if any, will be subject to special tax rules that may affect the
amount, timing, and character of Fund income and distributions to holders of
beneficial interests. For example, certain positions held by the Trust on
behalf of a Fund on the last business day of each taxable year will be marked
to market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Trust on behalf
of a Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute straddles, and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of securities held by the Trust on behalf of the Fund and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles which may alter the effects of these rules. The Trust will
limit its investment activities in short sales and futures contracts on behalf
of the Funds to the extent necessary to meet the requirements of Subchapter M
of the Code.
Each Fund will withhold tax payments at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
subject to withholding taxes that are made to persons who are not citizens or
residents of the United States. Any amounts overwithheld may be recovered by
such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period appropriate to such claims. Distributions
received from a Fund by non-U.S. persons also may be subject to tax under the
laws of their own jurisdictions.
<PAGE>
The account application asks each new shareholder to certify that the
shareholder's Social Security or taxpayer identification number is correct and
that the shareholder is not subject to 31% backup withholding for failing to
report income to the IRS. If a shareholder (including non-U.S. persons) fails
to provide this information, or is otherwise subject to backup withholding, a
Fund may be required to withhold tax at the rate of 31% on certain
distributions and redemption proceeds paid to that shareholder. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
12. CERTAIN 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 Funds. Citibank believes that its services under the Management
Agreements 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 Service Agent, the Funds would seek
alternative means for obtaining these services. The Funds do not expect that
shareholders would suffer any adverse financial consequences as a result of any
such occurrence.
13. FINANCIAL STATEMENTS
The audited financial statements of the California Fund (Portfolio of
Investments at December 31, 1998, Statement of Assets and Liabilities at
December 31, 1998, Statement of Operations for the period ended December 31,
1998, Statement of Changes in Net Assets for the period ended December 31,
1998, Financial Highlights for the period ended December 31, 1998, Notes to
Financial Statements and Independent Auditors' Report), each of which is
included in the Annual Report to Shareholders of the California Fund, are
incorporated by reference into this Statement of Additional Information and
have been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent accountants, on behalf of the California Fund.
The audited financial statements of the National Fund (Portfolio of
Investments at December 31, 1998, Statement of Assets and Liabilities at
December 31, 1998, Statement of Operations for the year ended December 31,
1998, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1997, Financial Highlights for each of the years in the three-year period
ended December 31, 1998 and for the period August 17, 1995 (commencement of
operations) to December 31, 1995, Notes to Financial Statements and Independent
Auditors' Report), each of which is included in the Annual Report to
Shareholders of the National Fund, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, on behalf
of the National Fund.
The audited financial statements of the New York Fund (Portfolio of
Investments at December 31, 1998, Statement of Assets and Liabilities at
December 31, 1998, Statement of Operations for the year ended December 31,
1998, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1997, Financial Highlights for each of the years in the five-year period
ended December 31, 1998, the four months ended December 31, 1993, and the year
ended August 31, 1993, Notes to Financial Statements and Independent Auditors'
Report), each of which is included in the Annual Report to Shareholders of the
New York Fund, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent accountants, on behalf of the New York Fund.
A copy of the Annual Report to Shareholders of the applicable Fund
accompanies this Statement of Additional Information.
<PAGE>
APPENDIX A
ADDITIONAL INFORMATION CONCERNING
CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting investments
in California Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by the State of California (the "State") and certain
of its municipalities and public authorities. This information does not purport
to be a complete description and is based on information from statements
relating to offerings of California issuers. CitiFunds California Tax Free
Income Portfolio is not responsible for the accuracy or timeliness of this
information.
RECENT DEVELOPMENTS
In the Governor's Budget released on January 9, 1998, and the May Revision to
the 1998-99 Governor's Budget, released May 13, 1998, the Department of Finance
projected that the California economy will continue to show robust growth
through 1998, although at a slightly slower pace than in 1997. The economic
expansion has been marked by strong growth in high technology business services
(including computer software), construction, computers and electronic
components. The Asian economic crisis which began in late 1997 was expected to
have some dampening effects on the State's economy, which was included in the
May Revision forecasts. However, during the summer of 1998, the soaring trade
deficit, continuing weakness in Asia, initial signs of economic weakness in
Canada and Latin America, which have been California's largest trading
partners, and the fall in stock prices worldwide all suggest that the May
Revision forecasts may be too optimistic, particularly for 1999. Other impacts
of the international situation may help California, such as the reduction in
long-term interest rates.
Moody's, Standard and Poor's and Fitch IBCA assigned their municipal bond
ratings of A1, A+ and AA-, respectively, to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating
agency, and an explanation of the significance of such rating may be obtained
from such rating agency. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised or withdrawn
entirely by such rating agency if, in the judgment of such rating agency,
circumstances so warrant. A downward revision or withdrawal of any such rating
may have an adverse effect on the market price of the State's general
obligation bonds.
CONSTITUTIONAL LIMITS ON SPENDING AND TAXES
STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article XIII
B of the State Constitution (the "Appropriations Limit"). The Appropriations
Limit does not restrict appropriations to pay debt service on voter-authorized
bonds.
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds
of taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most State subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
<PAGE>
capital outlay projects, appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels,
and appropriations of certain special taxes imposed by initiative (e.g.,
cigarette and tobacco taxes). The Appropriations Limit may also be exceeded in
cases of emergency.
The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. The measurement of change in population is a blended average of
statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. The Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year period above the combined Appropriations
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.
PROPOSITION 98
On November 8, 1988, voters of the State approved Proposition 98, a combined
initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are
guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used in
any year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percentage has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses, with
the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit
to K-14 schools.
During the recent recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra" payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v. Gould,
which challenged the validity of these off-budget loans. The settlement of this
case, finalized in July, 1996, provides, among other things, that both the
State and K-14 schools share in the repayment of prior years' emergency loans
to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
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repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets. Because of the State's increasing revenues,
per-pupil funding at the K-12 level has increased by about 36 percent from the
level in place from 1991-92 through 1993-94, and is estimated at about $5,695
per ADA in 1998-99. A significant amount of the "extra" Proposition 98 monies
in the last few years have been allocated to special programs, most
particularly an initiative to allow each classroom from grades K-3 to have no
more than 20 pupils by the end of the 1997-98 school year. There are also new
initiatives increasing instructional time, for purchasing new instructional and
library materials, and expanding teacher preparation and support.
SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.
PERSONAL INCOME TAX
The California personal income tax, which in 1997-98 contributed about 50
percent of General Fund revenues, is closely modeled after the federal income
tax law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1 to 9.3 percent.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
("AMT") which is much like the federal AMT.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
SALES TAX
The sales tax is imposed upon retailers for the privilege of selling tangible
personal property in California. Sales tax accounted for about 32 percent of
General Fund revenue in 1997-98. Most retail sales and leases are subject to
the tax. However, exemptions have been provided for certain essentials such as
food for home consumption, prescription drugs, gas delivered through mains and
electricity. Other exemptions provide relief for a variety of sales ranging
from custom computer software to aircraft.
BANK AND CORPORATION TAX
Bank and corporation tax revenues, which comprised about 11 percent of General
Fund revenue in 1997-98, are derived from the following taxes:
1. The franchise tax and the corporate income tax are levied at a 8.84
percent rate on profits. The former is imposed on corporations for the
privilege of doing business in California, while the latter is imposed
on corporations that derive income from California sources but are not
sufficiently present to be classified as doing business in the State.
2. Banks and other financial corporations are subject to the franchise
tax plus an additional tax at the rate of 2.0 percent on their net
income. This additional tax is in lieu of personal property taxes and
business license taxes.
3. The alternative minimum tax ("AMT") is similar to that in federal
law. In general, the AMT is based on a higher level of net income
computed by adding back certain tax preferences. This tax is imposed at
a rate of 6.65 percent.
4. Sub-Chapter S corporations are taxed at 1.5 percent of profits.
<PAGE>
INSURANCE TAX
The majority of insurance written in California is subject to a 2.35 percent
gross premium tax. For insurers, this premium tax takes the place of all other
State and local taxes except those on real property and motor vehicles.
Exceptions to the 2.35 percent rate are certain pension and profit-sharing
plans which are taxed at the lesser rate of 0.50 percent, surplus lines and
nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent of
underwriting profits. Insurance taxes comprised approximately 2.3 percent of
General Fund revenues in 1997-98.
In December, 1996, the California Earthquake Authority ("CEA") was authorized
to start selling homeowners' earthquake insurance. Earthquake policies written
through the CEA are exempt from the gross premiums tax.
OTHER TAXES
Other General Fund major taxes and license revenues include: Estate,
Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes,
Horse Racing Revenues and trailer coach license fees. These other sources
totaled approximately 2.4 percent of General Fund revenues in the 1997-98
Fiscal Year.
SPECIAL FUND REVENUES
The California Constitution, codes and statutes specify the uses of certain
revenue. Such receipts are accounted for in various Special Funds. In general,
Special Fund revenues comprise three categories of income:
1. Receipts from tax levies which are allocated to specified functions,
such as motor vehicle taxes and fees and certain taxes on tobacco products.
2. Charges for special services to specific functions, including such items
as business and professional license fees.
3. Rental royalties and other receipts designated for particular purposes
(e.g., oil and gas royalties).
Motor vehicle related taxes and fees accounted for about 59 percent of all
Special Fund revenue in 1996-97. Principal sources of this income are motor
vehicle fuel taxes, registration and weight fees and vehicle license fees.
During the 1997-98 Fiscal Year, $8.3 billion was derived from the ownership
or operation of motor vehicles. About $4.5 billion of this revenue was
returned to local governments. The remainder was available for various
State programs related to transportation and services to vehicle owners.
These amounts include the additional fees and taxes derived from the
passage of Proposition 111 in June 1990.
Chapter 322, Statutes of 1998, reduced vehicle license fees by 25 percent
beginning January 1, 1999. In addition, this percentage reduction could be
increased in annual stages up to a maximum of 67.5 percent in 2003
depending on whether future General Fund revenues reach specified target
levels. Vehicle license fees, over and above the costs of collection and
refunds authorized by law, are constitutionally defined local revenues. A
continuous appropriation from the General Fund will replace the vehicle
license fee revenue that local governments would otherwise lose due to the
fee reductions. If in any year the Legislature fails to appropriate enough
funds to fully offset the then-applicable vehicle license fee reduction,
the fee may be increased to assure that local governments are not
disadvantaged. Therefore, the amount of revenue going to local governments
will remain the same as under prior law.
On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes,
<PAGE>
and a new, equivalent excise tax on other tobacco products. The initiative
requires that funds from this tax be allocated to anti-tobacco education
and research and indigent health services, and environmental and recreation
programs. Legislation enacted in 1993 added an additional 2 cents per pack
excise tax for the purpose of funding breast cancer research.
PRIOR FISCAL YEARS' FINANCIAL RESULTS
FISCAL YEARS PRIOR TO 1995-96
Pressures on the State's budget in the late 1980's and early 1990's were caused
by a combination of external economic conditions (including a recession which
began in 1990) and growth of the largest General Fund Programs -- K-14
education, health, welfare and corrections -- at rates faster than the revenue
base. During this period, expenditures exceeded revenues in four out of six
years up to 1992-93, and the State accumulated and sustained a budget deficit
approaching $2.8 billion at its peak at June 30, 1993. Between the 1991-92 and
1994-95 Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and funding from the State to local governments; transfer of about $3.6 billion
in annual local property tax revenues from other local governments to local
school districts, thereby reducing State funding for schools under Proposition
98; and revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration.
Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely on
external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier. The
last and largest of these borrowings was $4.0 billion of revenue anticipation
warrants which were issued in July, 1994 and matured on April 25, 1996.
1995-96 AND 1997-98 FISCAL YEARS
The State's financial condition improved markedly during the 1995-96, 1996-97
and 1997-98 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and external deficit borrowing has occurred over the end of these
three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
<PAGE>
1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget
reserve, the Special Fund for Economic Uncertainties (the "SFEU") totaled
$639.8 million as of June 30, 1997 and $1.782 billion at June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase
in funding for K-14 education under Proposition 98, reflecting strong
revenues which exceeded initial budgeted amounts. Part of the nearly
$1.75 billion in increased spending was allocated to prior fiscal
years. Funds were provided to fully pay for the cost-of-living-increase
component of Proposition 98, and to extend the class size reduction and
reading initiatives.
2. The Budget Act reflected payment of $1.228 billion to satisfy a
court judgment in a lawsuit regarding payments to the State pension
fund, and brought funding of the State's pension contribution back to
the quarterly basis which existed prior to the deferral actions which
were invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121
million and $107 million, respectively), and there was no increase in
student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload
changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of
the CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already
included in the federal fiscal year 1997 and 1998 budgets, was included
in the Budget Act, to offset incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
CURRENT STATE BUDGET
The discussion below of the 1998-99 Fiscal Year budget is based on
estimates and projections of revenues and expenditures for the current
fiscal year and must not be construed as statements of fact. These
estimates and projections are based upon various assumptions which may
be affected by numerous factors, including future economic conditions
in the State and the nation, and there can be no assurance that the
estimates will be achieved.
1998-99 FISCAL YEAR BUDGET
Background
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal
Year of $55.4 billion, and proposed expenditures in the same amount. By the
time the Governor released the May Revision to the 1998-99 Budget (the "May
Revision") on May 14, 1998, the Administration projected that revenues for
the 1997-98 and 1998-99 Fiscal Years combined would be more than $4.2
<PAGE>
billion higher than was projected in January. The Governor proposed that
most of this increased revenue be dedicated to fund a 75% cut in the
Vehicle License Fee (the "VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360
billion from the General Fund, and $160 million from Special Funds. Of this
total, the Governor indicated that about $250 million of vetoed funds were
"set aside" to fund programs for education. Vetoed items included education
funds, salary increases and many individual resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98
figures. Special Fund revenues were estimated at $14.3 billion. The revenue
projections were based on the May Revision. Economic problems overseas
since that time may affect the May Revision projections.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion
from bond funds. The Budget Act projects a balance in the SFEU at June 30,
1999 (but without including the "set aside" veto amount) of $1.255 billion,
a little more than 2% of General Fund revenues. The Budget Act assumes the
State will carry out its normal intra-year cash flow borrowing in the
amount of $1.7 billion of revenue anticipation notes, which are expected to
be issued by early October.
The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the VLF. Since the VLF is currently
transferred to cities and counties, the bill provides for the General Fund
to replace the lost revenues. Starting on January 1, 1999, the VLF will be
reduced by 25%, at a cost to the General Fund of approximately $500 million
in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted
business tax credits ($106 million). About half of the business tax credits
will only become effective if Proposition 7, an initiative measure which
involves various tax credits, is rejected by the voters on the November 3,
1998 ballot.
Other significant elements of the 1998-99 Budget Acts are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7 billion
in General Fund moneys over revised 1997-98 levels, about $300 million
higher than the minimum Proposition 98 guaranty. An additional $600
million was appropriated to "settle up" prior years' Proposition 98
entitlements, and was primarily devoted to one-time uses such as block
grants, deferred maintenance, and computer and laboratory equipment. Of
the 1998-99 funds, major new programs include money for instructional
and library materials, deferred maintenance, support for increasing the
school year to 180 days and reduction of class sizes in Grade 9. The
Governor held $250 million of educational funds which were vetoed as
set-aside for enactment of additional reforms. Overall, per-pupil
spending for K-12 schools under Proposition 98 is increased to $5,695,
more than one-third higher than the level in the last recession year of
1993-94. The Budget also includes $250 million as repayment of prior
years' loans to schools, as part of the settlement of the CTA v. Gould
lawsuit.
2. Funding for higher education increased substantially above the level
called for in the Governor's four-year compact. General Fund support
was increased by $340 million (15.6%) for the University of California
<PAGE>
and $267 million (14.1%) for the California State University system. In
addition, Community Colleges received a $300 million (6.6%) increase
under Proposition 98.
3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years. Future
increases will depend on sufficient General Fund revenue to trigger the
phased cuts in VLF described above.
4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support
for local trial courts and rising prison population.
5. Various other highlights of the Budget included new funding for
resources projects, dedication of $376 million of General Fund moneys
for capital outlay projects, funding of a 3% State employee salary
increase, funding of 2,000 new Department of Transportation positions
to accelerate transportation construction projects, and funding of the
Infrastructure and Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State
anticipates receiving approximately $195 million in federal
reimbursements for federal fiscal year 1998.
After the Budget Act was signed, and prior to the close of the
Legislative session on August 31, 1998, the Legislature passed a
variety of fiscal bills. The Governor had until September 30, 1998 to
sign or veto these bills. The bills with the most significant fiscal
impact which the Governor signed include $235 million for certain water
system improvements in Southern California, $243 million for the State
share of the purchase of environmentally sensitive forest lands, and
$175 million for state prisons. The Governor also signed bills totaling
$223 million for education programs which were part of the Governor's
$250 million veto "set aside." In addition, he signed a bill passed by
the Legislature reducing by $577 million the State's obligation to
contribute to the State Teachers' Retirement System. On a net basis,
most of these costs had already been assumed in the 1998-99 Budget Act,
and will not, in themselves, have a material effect on the projected
SFEU balance at June 30, 1999.
YEAR 2000
The State's reliance on information technology in every aspect of its
operations has made Year 2000-related ("Y2K") information technology ("IT")
issues a high priority for the State. The Department of Information Technology
("DOIT"), an independent office reporting directly to the Governor, is
responsible for ensuring the State's information technology processes are fully
functional before the year 2000. The DOIT has created a Year 2000 Task Force
and a California 2000 Office to establish statewide policy requirements; to
gather, coordinate, and share information; and to monitor statewide progress.
In late August 1998, the State Auditor ("BSA") released a report on "Year 2000
Computer Problems." The BSA surveyed 39 State departments and compared their
status to the March 31, 1998 DOIT quarterly report. The BSA Report also noted
concern that departments were not making adequate plans to test remediated
systems, were not focusing sufficiently on problems associated with data
interface with other governmental and private bodies, and were not far enough
along in developing "business continuation plans" to ensure continued
operations after January 1, 2000 in the event of IT problems. The DOIT
responded in some detail to the BSA Report, generally agreeing with its
identification of issue areas, and stating that it was following up on all
areas with the departments.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Y2K compliance, the task is very large and
will likely encounter unexpected difficulties. The State cannot predict whether
all mission critical systems will be ready and tested by late 1999 or what
impact failure of any particular IT system(s) or of outside interfaces with
State IT systems might have.
<PAGE>
The State Treasurer's Office and the State Controller's Office report that they
are both on schedule to complete their Y2K remediation projects by December 31,
1998, allowing full testing during 1999. These systems include debt service
payments on State debt and the State fiscal and accounting system.
LITIGATION
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. Following are some of the more significant
lawsuits against the State:
In the case of Board of Administration, California Public Employees' Retirement
System, et al. v. Pete Wilson, Governor, et al., plaintiffs challenged the
constitutionality of legislation which deferred payment of the State's employer
contribution to the Public Employees' Retirement System beginning in Fiscal
Year 1992-93. On January 11, 1995, the Sacramento County Superior Court entered
a judgment finding that the legislation unconstitutionally impaired the vested
contract rights of PERS members. The judgment provides for issuance of a writ
of mandate directing State defendants to disregard the provisions of the
legislation, to implement the statute governing employer contributions that
existed before the changes in the legislation found to be unconstitutional, and
to transfer to PERS the contributions that were unpaid to date. On February 19,
1997, the State Court of Appeal affirmed the decision of the Superior Court,
and the Supreme Court subsequently refused to hear the case, making the Court
of Appeals' ruling final. On July 30, 1997, the Controller transferred $1.228
billion from the General Fund to PERS in repayment of the principal amount
determined to have been improperly deferred. Subsequent State payments to PERS
will be made on a quarterly basis. On July 7, 1998, pursuant to Chapter 94,
Statutes of 1998, the State paid PERS $332.7 million for the accrued interest
on the judgement and interest on the unpaid accrued interest amount.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al. v.
Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the
trial court issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-99, with
certain limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in the
case appealed the trial court's preliminary injunction and asked the Court of
Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August
5, 1998, the Court of Appeal denied the plaintiffs' request to reconsider the
stay. Also on July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of Appeal.
In Jordan v. Department of Motor Vehicles, plaintiff challenged the validity
and constitutionality of the state's smog impact fee and requested a refund of
the fee. In October 1997, the trial court ruled in favor of plaintiff and, in
addition, ordered the State to provide refunds to all persons who paid the smog
impact fee from three years before the filing of the lawsuit in 1995 to the
present. Plaintiff asserts that the total amount required to be refunded will
exceed $350 million. The State has appealed.
The State is a defendant in several related cases, mainly California Ambulance
Association v. Shalala et al., in which the plaintiffs are seeking action to
compel the Department of Health Services to pay Part B ambulance and physician
services copayments under the Medicare and Medicaid Acts. Should the plaintiffs
prevail, the liability for retroactive payments is estimated to be $490
million, and the liability for future payments can be in excess of $130 million
annually. The General Fund and the federal government will share the liability
<PAGE>
equally. A judgment was entered for the plaintiffs. The ninth Circuit Court of
Appeals, however, reversed the trial court's decision. Plaintiffs filed a
petition for certiorari at the United States Supreme Court, which the State
opposed. The petition is currently pending at the Supreme Court.
The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a suit
which challenges the validity of two sections of the California Tax laws. The
first relates to deduction from corporate taxes for dividends received from
insurance companies to the extent the insurance companies have California
activities. The second relates to corporate deduction of dividends to the
extent the earnings of the dividend paying corporation have already been
included in the measure of their California tax. If both sections of the
California Tax law are invalidated, and all dividends become deductible, then
the General Fund can become liable for approximately $200-$250 million
annually. A judgment was entered in August 1998. The State will appeal.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget action
transfers and appropriations from particular special funds for years ended June
30, 1995, and June 30, 1996. The plaintiffs allege that the transfers and
appropriations are contrary to the substantive law establishing the funds and
providing for interest accruals to the fund, violate the single subject
requirement of the State Constitution, and is an invalid "special law".
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds. The plaintiffs and the State reached a settlement which
resolved all the issues presented in the case. Pursuant to the settlement,
judgment was entered in August 1998, requiring the State to return $19,427,000
from the General Fund to one special fund.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to State-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates ("Commission")). The Board of
Control decided in favor of local school districts' claims for reimbursement
for special education programs for handicapped students. The case was then
brought to the trial court by the State and later remanded to the Commission
for redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in late 1998. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the Stringfellow
toxic waste site. In United States, People of the State of California v. J.B.
Stringfellow, Jr. et al., the State is seeking recovery for the past costs of
cleanup of the site, a declaration that the defendants are jointly and
severally liable for future costs, and an injunction ordering completion of the
cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $300
million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to a sample of plaintiffs. The State's potential liability to the
remaining plaintiffs ranges from $800 million to $1.5 billion. An appeal has
been filed.
The State is a defendant in California State Employees Association v. Wilson,
where the petitioners are challenging several budget appropriations in the 1994
and 1995 Budget Acts. The appropriations mandate the transfer of funds from the
State Highway Account, within the special revenue funds, to the General Fund to
reimburse the General Fund for debt service costs on two rail bond measures.
The petitioners contend that the transfers violate the bond acts themselves and
are requesting the monies be returned. The loss to the State's General Fund
could be up to $227 million.
In a similar case, Professional Engineers in California Government v. Wilson,
the petitioners are challenging several appropriations in the 1993, 1994, and
1995 Budget Acts. The appropriations mandate the transfer of approximately $262
million from the State Highway Account, within the special revenue funds, and
<PAGE>
$113 million from the Motor Vehicle Account, within the special revenue funds,
to the General Fund and appropriate approximately $6 million from the State
Highway Account to fund a highway-grade crossing program administered by the
Public Utilities Commission. Petitioners contend that the transfers violate
several constitutional provisions and request that the monies be returned to
the State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State of
California, where the petitioners challenge the appropriation of approximately
$166 million of Proposition 99 funds in the Cigarette and Tobacco Products
Surtax Fund for years ended June 30, 1990, through June 30, 1995 for programs
which were allegedly not health education or tobacco-related disease research.
If the State loses, the General Fund and funds from other sources would be used
to reimburse the Cigarette and Tobacco Products Surtax for approximately $166
million.
The State is a defendant in two related cases, Beno vs. Sullivan ("Beno") and
Welch vs. Anderson ("Welch"), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek
to invalidate AFDC grant reductions and in the Welch case, plaintiffs contend
that AFDC grant reductions are not authorized by state law. The Beno case
concerns the total grant reductions while the Welch case concerns the period of
time the State did not have a waiver for those reductions. The State's
potential liability for retroactive AFDC grant reductions is estimated at $831
million if the plaintiffs are awarded the full amount in both cases.
The University of California and the special purpose authorities, which are
discretely presented component units, are contingently liable in connection
with claims and contracts, including those currently in litigation, arising in
the normal course of their activities. The outcome of such matters are not
expected to have a material effect on the financial statements.
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING
NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting investments
in New York Municipal Obligations. The sources of payment for such obligations
and the marketability thereof may be affected by financial or other
difficulties experienced by New York State (the "State") and certain of its
municipalities and public authorities. This information does not purport to be
a complete description and is based on information from official statements
relating to securities offerings of New York issuers. CitiFunds New York Tax
Free Income Portfolio is not responsible for the accuracy or timeliness of this
information.
NEW YORK STATE
The factors affecting the State's financial condition are complex and the
following description constitutes only a summary.
CURRENT ECONOMIC OUTLOOK
The State has updated the forecast of national and state economic activity used
in the July 1998 First Quarterly Update. At the national level, the current
projected growth rate for 1998, as a whole, represents only a slight change
from the earlier forecast. For 1999, however, the annual national growth rate
is now anticipated to be significantly lower than had been previously
predicted. Economic growth during both 1998 and 1999 is expected to be slower
than it was during 1997. The financial and economic turmoil which started in
Asia and has spread to other parts of the world is expected to continue to
negatively affect U.S. trade balances throughout most of 1999. In addition,
growth in domestic consumption, which has been a major driving force behind the
nation's strong economic performance in recent years, is expected to slow in
1999 as consumer confidence retreats from historic highs and the stock market
ceases to provide large amounts of discretionary income. However, the lower
short-term interest rates which are expected to be in force during 1999 should
help prevent a recession. The revised forecast projects real GDP growth of 3.4
percent in 1998, moderately below the 1997 growth rate. In 1999, real GDP
growth is expected to fall further, to 1.6 percent. The growth of nominal GDP
is projected to decline from 5.9 percent in 1997 to 4.6 percent in 1998 and 3.7
percent in 1999. The inflation rate is expected to drop to 1.7 percent in 1998
before rising to 2.7 percent in 1999. The annual rate of job growth is expected
to be 2.5 percent in 1998, almost equaling the strong growth rate experienced
in 1997. In 1999, however, employment growth is forecast to slow markedly, to
1.9 percent. Growth in personal income and wages is expected to slow in 1998
and again in 1999.
The State economic forecast for 1998 has been raised slightly from the First
Quarterly Update, but the forecast for 1999 has generally been lowered.
Continued growth is projected in 1998 and 1999 for employment, wages, and
personal income, although, for 1999, a significant slowdown in the growth rates
of personal income and wages are expected. The growth of personal income is
projected to rise from 4.7 percent in 1997 to 5.0 percent in 1998, but then
drop to 3.4 percent in 1999, in part because growth in bonus payments is
expected to moderate significantly, a distinct shift from the unusually high
increases of the last few years. Overall employment growth is expected to be
2.0 percent in 1998, the strongest in a decade, but is expected to drop to 1.0
percent in 1999, reflecting the slowing growth of the national economy,
continued spending restraint in government, less robust profitability in the
financial sector and continued restructuring in the manufacturing, health care,
and banking sectors.
Many uncertainties exist at this time in any forecast of the national and State
economies, particularly in light of the recent volatility in the international
economy and domestic financial markets. The timing and impact of changes in
economic conditions are difficult to estimate with a high degree of accuracy.
Unforeseeable events may occur. The actual rate of change in any or all, of the
concepts that are forecasted may differ substantially and adversely from the
outlook described herein.
<PAGE>
1997-98 FISCAL YEAR
The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by DOB of approximately $2.04 billion.
The cash surplus was derived primarily from higher-than-anticipated receipts
and lower spending on welfare, Medicaid, and other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund ("TSRF"), the
Contingency Reserve Fund ("CRF") and the Community Projects Fund ("CPF"). The
TSRF closing balance was $400 million, following a required deposit of $15
million (repaying a transfer made in 1991-92) and an extraordinary deposit of
$68 million made from the 1997-98 surplus. The CRF closing balance was $68
million, following a $27 million deposit from the surplus. The CPF, which
finances legislative initiatives, closed the fiscal year with a balance of $170
million, an increase of $95 million. The General Fund closing balance did not
include $2.39 billion in the tax refund reserve account, of which $521 million
was made available as a result of the Local Government Assistance Corporation
("LGAC") financing program and was required to be on deposit on March 31, 1998.
General Fund receipt and transfers from other funds for the 1997-98 fiscal year
(including net tax refund reserve account activity) totaled $34.55 billion, an
annual increase of $1.51 billion, or 4.57 percent over 1996-97. General Fund
disbursements and transfers to other funds were $34.35 billion, an annual
increase of $1.45 billion or 4.41 percent.
1996-97 FISCAL YEAR
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a cash
basis, with a General Fund cash surplus as reported by DOB of approximately
$1.2 billion. The cash surplus was derived primarily from higher-than-expected
receipts and lower-than-expected spending for social services programs.
The General Fund closing fund balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF.
The remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7 percent from the previous
fiscal year (including net tax refund reserve account activity). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
1995-96 FISCAL YEAR
The State ended its 1995-96 fiscal year on March 31, 1996 with a General Fund
cash surplus as reported by DOB, of $445 million. The cash surplus was derived
from higher-than-expected receipts, savings generated through agency cost
controls and lower-than-expected welfare spending.
The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9
million deposit to the Revenue Accumulation Fund. The closing fund balance
included $237 million on deposit in the TSRF. In addition, $41 million was on
deposit in the CRF. The remaining $9 million reflected amounts then on deposit
in the Revenue Accumulation Fund. The General Fund closing balance does not
include $678 million in the tax refund reserve account of which $521 million
was made available as a result of the LGAC financing program and was required
to be on deposit as of March 31, 1996.
<PAGE>
General Fund receipts and transfers from other funds (including net refund
reserve account activity) totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. General Fund disbursements and transfers to other funds
totaled $32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent
from 1994-95 levels.
Rating Agencies Actions: On February 8, 1993, Fitch IBCA assigned its municipal
bond rating of A+ to the State's general obligation bonds. Moody's assigned its
municipal bond rating of A2 on February 10, 1997, and as of August 28, 1997,
Standard & Poor's assigned its rating of A to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating
agency, and an explanation of the significance of such rating may be obtained
from such rating agency. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised or withdrawn
entirely by such rating agency if, in the judgment of such rating agency,
circumstances so warrant. A downward revision or withdrawal of any such rating
may have an adverse effect on the market price of the State's general
obligation bonds.
PUBLIC AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal stability
of its public authorities, meaning public benefit corporations created pursuant
to State law, other than local authorities. Public authorities are not subject
to the constitutional restrictions on the incurrence of debt which apply to the
State itself and may issue bonds and notes within the amounts, and restrictions
set forth in legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related debt. As of December
31, 1997, there were 17 public authorities that had outstanding debt of $100
million or more, and the aggregate outstanding debt, including refunding bonds,
of all State public authorities was $84 billion, only a portion of which
constitutes State-supported or State related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authorities generally pay their operating expenses
and debt service costs from revenues generated by the projects they finance or
operate, such as tolls charged for the use of highways, bridges or tunnels,
charges for public power, electrical gas utility services, rentals charged for
housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments, otherwise payable to localities, to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, the affected localities could seek additional State assistance if
local assistance payments are so diverted.
Some authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs. As described below, the
Metropolitan Transportation Authority ("MTA") receives the bulk of this money
in order to provide transit and commuter services.
Beginning in 1998, the Long Island Power Authority ("LIPA") assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of June
26, 1998, LIPA has issued over $5 billion in bonds secured solely by ratepayer
charges. LIPA's debt is not considered either State-supported or State-related
debt.
METROPOLITAN TRANSPORTATION AUTHORITY
The MTA oversees the operation of subway and bus lines in New York City by its
affiliates, the New York City Transit Authority and the Manhattan and Bronx
<PAGE>
Surface Transit Operating Authority (collectively, the "TA"). The MTA operates
certain commuter rail and bus services in the New York Metropolitan area
through MTA's subsidiaries, the Long Island Rail Road Company, the Metro- North
Commuter Railroad Company, and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare revenues
are not sufficient to finance the mass transit portion of these operations, the
MTA has depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge on the
profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax --
that provide revenues for mass transit purposes, including assistance to the
MTA. Since 1987 State law has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance
to the MTA. For the 1998-99 State fiscal year, total State assistance to the
MTA is projected to total approximately $1.3 billion, an increase of $133
million over the 1997-98 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized the
MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program
(subsequently amended in August 1997), which supercedes the overlapping portion
of the MTA's 1992-96 Capital Program. The 1995-99 Capital Program is the fourth
capital plan since the Legislature authorized procedures for the adoption,
approval and amendment of MTA capital programs and is designed to upgrade the
performance of the MTA's transportation systems by investing in new rolling
stock, maintaining replacement schedules for existing assets and bringing the
MTA system into a state of good repair. The 1995-99 Capital Program assumes the
issuance of an estimated $5.2 billion in bonds under this $6.5 billion
aggregate bonding authority. The remainder of the plan is projected to be
financed through assistance from the federal government, the State, the City of
New York, and from various other revenues generated from actions taken by the
MTA.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. Should funding
levels fall below current projections, the MTA would have to revise its 1995-99
Capital Program accordingly. If the 1995-99 Capital Program is delayed or
reduced, ridership and fare revenues may decline, which could, among other
things, impair the MTA's ability to meet its operating expenses without
additional assistance.
LOCALITIES
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal health of New
York City (the "City"), which continues to require significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public
credit markets. The City has achieved balanced operating results for each of
its fiscal years since 1981 as reported in accordance with the then-applicable
GAAP standards.
<PAGE>
FISCAL OVERSIGHT
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
("NYC MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New
York ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986 during which the
City was subject to certain statutorily-prescribed fiscal controls. Although
the Control Board terminated the Control Period in 1986 when certain statutory
conditions were met, State law requires the Control Board to reimpose a Control
Period upon the occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including (but not limited to) a City operating
budget deficit of more than $100 million or impaired access to the public
credit markets.
Currently, the City and its Covered Organizations (i.e., those which receive or
may receive moneys from the City directly, indirectly or contingently) operate
under a four-year financial plan (the "Financial Plan") which the City prepares
annually and periodically updates. The City's Financial Plan summarizes its
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's projections set forth
in the Financial Plan are based on various assumptions and contingencies, some
of which are uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow
and financing requirements.
Implementation of the Financial Plan is also dependent upon the ability of the
City and certain entities issuing debt for the benefit of the City to market
their securities successfully. The City issues securities to finance, refinance
and rehabilitate infrastructure and other capital needs, as well as for
seasonal financing needs. In 1997 the State created the New York City
Transitional Finance Authority to finance a portion of the City's capital
program because the City was approaching its State Constitutional general debt
limit. Without the additional financing capacity of the Transitional Finance
Authority, projected contracts for City capital projects would have exceeded
the City's debt limit during City fiscal year 1997-98. Despite this additional
financing mechanism, the City currently projects that if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. On June 2,
1997, an action was commenced seeking a declaratory judgment declaring the
legislation establishing the Transitional Finance Authority to be
unconstitutional. On November 25, 1997 the State Supreme Court found the
legislation establishing the TFA to be constitutional and granted the
defendants' motion for summary judgment. The plaintiffs have appealed the
decision. Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well as
prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities and may
also affect the market for their outstanding securities.
MONITORING AGENCIES
The staffs of the Control Board, OSDC and the City Comptroller issue periodic
reports on the City's Financial Plans. The reports analyze the City's forecasts
of revenues and expenditures, cash flow, and debt service requirements, as well
as evaluate compliance by the City and its Covered Organizations with the
Financial Plan. According to recent staff reports, while economic growth in New
York City has been slower than in other regions of the country, a surge in Wall
Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in City fiscal year 1996-97. Recent staff
reports also indicate that the City projects a substantial surplus for City
fiscal year 1997-98. Although several sectors of the City's economy have
expanded recently, especially tourism and business and professional services,
City tax revenues remain heavily dependent on the continued profitability of
the securities industries and the course of the national economy. Staff reports
<PAGE>
have indicated that recent City budgets have been balanced in part through the
use of non-recurring resources and that the City's Financial Plan tends to rely
in part on actions outside its direct control. These reports have also
indicated that the City has not yet brought its long-term expenditure growth in
line with recurring revenue growth and that the City is therefore likely to
continue to face substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or increased
revenues. In addition to these monitoring agencies, the Independent Budget
Office ("IBO") has been established pursuant to the City Charter to provide
analysis to elected officials and the public on relevant fiscal and budgetary
issues affecting the City. Copies of the most recent Control Board, OSDC and
City Comptroller, and IBO staff reports are available by contacting the Control
Board at 270 Broadway, 21st Floor, New York, NY, 10007, Attention: Executive
Director; OSDC at 270 Broadway, 23rd Floor, New York, NY 10007, Attention:
Deputy Comptroller; the City Comptroller at Municipal Building, Room 517, One
Centre Street, New York, NY 10007, Attention: Deputy Comptroller, Finance; and
the IBO at 110 William Street, 14th Floor, New York, NY 10038, Attention:
Director.
OTHER LOCALITIES
Certain localities outside New York City have experienced financial problems
and have requested and received additional State assistance during the last
several State fiscal years. The cities of Yonkers and Troy continue to operate
under State-ordered control agencies. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1998-99
fiscal year.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998-99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages, a 3.9 percent increase in General Purpose State Aid in 1997-98 and
continued this increase in 1998-99.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve
upstate cities will receive $24.2 million in one-time assistance from cash flow
acceleration of State aid.
The appropriation and allocation of general purpose local government aid among
localities, including New York City, is currently the subject of investigation
by a State commission. While the distribution of general purpose local
government aid was originally based on a statutory formula, in recent years
both the total amount appropriated and the amounts appropriated to localities
have been determined by the Legislature. A State commission was established to
study the distribution and amounts appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1996, the total indebtedness of all localities in the
State other than New York City was approximately $20.0 billion. A small portion
(approximately $77.2 million) of that indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Twenty-
one localities had outstanding indebtedness for deficit financing at the close
of their fiscal year ending in 1996.
Like the State, local governments must respond to changing political, economic
and financial influences over which they have little or no control. Such
changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs, which in turn, may require
local governments to fund these expenditures from their own resources. It is
<PAGE>
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other
large-scale potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
YEAR 2000 COMPLIANCE
New York State is currently addressing "Year 2000" data processing compliance
issues. The Year 2000 compliance issue ("Y2K") arises because most computer
software programs allocate two digits to the data field for "year" on the
assumption that the first two digits will be "19". Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data.
In 1996, the State created the Office for Technology ("OFT") to help address
statewide technology issues, including the Year 2000 issue. OFT has estimated
that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose.
Contingency planning is underway for those systems which may be non-compliant
prior to failure dates. The enacted budget also continues funding for those
systems which may be non- compliant prior to failure dates. The enacted budget
also continues funding for major systems scheduled for replacement, including
the State payroll, civil service, tax and finance and welfare management
systems, for which Year 2000 compliance is included as part of the project.
OFT is monitoring compliance on a quarterly basis and is providing assistance
and assigning resources to accelerate compliance for mission critical systems,
with most compliance testing expected to be completed by mid-1999. There can be
no guarantee, however, that all of the State's mission critical and
high-priority computer systems will be Year 2000 compliant and that there will
not be an adverse impact upon State operations or State finances as a result.
LITIGATION
GENERAL
The legal proceedings noted below involve State finances, and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1998-99
fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there
are unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
1998-99 Financial Plan. The State believes that the 1998-99 Financial Plan
includes sufficient reserves to offset the costs associated with the payment of
judgments that may be required during the 1998-99 fiscal year. These reserves
include (but are not limited to) amounts, appropriated for court of claims
payments and projected fund balances in the General Fund. In addition, any
amounts ultimately required to be paid by the State may be subject to
settlement or may be paid over a multi-year period. There can be no assurance,
however, that adverse decisions in legal proceedings against the State would
not exceed the amount of all potential 1998-99 Financial Plan resources
available for the payment of judgments and, could therefore, affect the ability
of the State to maintain a balanced 1998-99 Financial Plan. In its General
Purpose Financial Statements, the State reports its estimated liability for
awarded and anticipated unfavorable judgments.
<PAGE>
STATE FINANCE POLICIES
INSURANCE LAW
Proceedings have been brought by two groups of petitioners each challenging
regulations promulgated by the Superintendent of Insurance establishing excess
medical malpractice premium rates for the 1986-87 through 1996-97 fiscal years,
(New York State Health Maintenance Organization Conference, Inc., et al. v.
Muhl et al. ["HMO"], and New York State Conference of Blue Cross and Blue
Shield Plans, et al. v. Muhl, et al. ["Blue Cross "I" and "II" "] Supreme
Court, Albany County). By order filed January 22, 1997, the Court in Blue Cross
I permitted the plaintiffs in HMO to intervene, and dismissed the challenges to
the rates for the period prior to 1995-96. By decision dated July 24, 1997, the
Court in Blue Cross I held that the determination made by the Superintendent in
establishing the 1995-96 rate was arbitrary and capricious and directed that
premiums paid pursuant to that determination should be returned to the payors.
The State has appealed this decision. The petitioners did not cross appeal. In
Blue Cross II, by amended judgment dated April 2, 1998, the Supreme Court
annulled the regulation setting the 1996-97 premium rate and directed that all
1996-97 excess malpractice premiums be returned to the payors. The State will
not be obligated in either case to pay moneys to any petitioner. Adverse
determinations would result in refunds from the affected insurers.
TAX LAW
In New York Association of Convenience Stores et al. v. Urbach, et al.,
petitioners New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek
to compel respondents, the Commissioner of Taxation and Finance and the
Department of Taxation and Finance, to enforce sales and excise taxes pursuant
to Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations. In orders dated August 13, 1996
and August 24, 1996, the Supreme Court, Albany County, ordered, inter alia,
that there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, inter alia, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners" motion for leave to cross-appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco. The case was argued before the Court of Appeals on March 24, 1998.
CLEAN WATER/CLEAN AIR BOND ACT OF 1996
In Robert L. Schulz et al. v. The New York State Executive, et al. (Supreme
Court, Albany County, commenced October 16, 1996), plaintiffs challenge the
enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes by reference.
In an opinion dated June 9, 1998, the Court of Appeals affirmed the July 17,
1997 order of the Appellate Division, Third Department, affirming the lower
<PAGE>
court dismissal of this case. On September 9, 1998, plaintiff sought review of
this decision from the United States Supreme Court. On November 2, 1998, the
United States Supreme Court denied certiorari.
STATE PROGRAMS
LINE ITEM VETO
In an action commenced in June 1998 by the Speaker of the Assembly of the State
of New York against the Governor of the State of New York (Silver v. Pataki,
Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.
MEDICAID
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry
Nursing Home et al. v. Pataki, et al. Plaintiffs allege that the changes in
methodology have been adopted in violation of procedural and substantive
requirements of State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home health
care providers and organizations challenge promulgation by the State Department
of Social Services ("DSS") in June 1992 of a home assessment resource review
instrument ("HARRI"), which is to be used by DSS to determine eligibility for
and the nature of home care services for Medicaid recipients, and challenge the
policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York
County).
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time- barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. The time in
which to seek further review has expired in the latter case.
In a judgment dated September 5, 1996, the Supreme Court, Albany County,
dismissed Matter of New York State Radiological Society v. Wing as time-
barred. By order dated November 26, 1997, the Appellate Division, Third
Department, affirmed that judgment. By decision dated June 9, 1998, the Court
of Appeals denied leave to appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v. Wing
(Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law (S)2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law (S)(S) 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997, enforced
the terms of the decision. The State appealed that order. By decision and order
dated August 31, 1998, the Appellate Division, Second Department, affirmed that
order. On September 30, 1998, the State moved for re-argument or, in the
alternative, for a certified question for the Court of Appeals to review.
<PAGE>
In a decision dated June 30, 1997, the Court held that the 1.2 percent and 3.8
percent assessments on gross receipts imposed pursuant to Public Health Law
(S)(S) 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii), respectively, are
unconstitutional. An order entered August 27, 1997 enforced the terms of the
decision. The State has appealed that order.
SHELTER ALLOWANCE
In an action commenced in March 1987 against State and New York City officials
(Jiggetts, et al. v. Bane, et al., Supreme Court, New York County), plaintiffs
allege that the shelter allowance granted to recipients of public assistance is
not adequate for proper housing.
In a decision dated April 16, 1997, the Court held that the shelter allowance
promulgated by the Legislature and enforced through DSS regulations is not
reasonably related to the cost of rental housing in New York City and results
in homelessness to families in New York City. A judgment was entered on July
25, 1997, directing, inter alia, that the State (i) submit a proposed schedule
of shelter allowances (for the Aid to Dependent Children program and any
successor program) that bears a reasonable relation to the cost of housing in
New York City; and (ii) compel the New York City Department of Social Services
to pay plaintiffs a monthly shelter allowance in the full amount of their
contract rents, provided they continue to meet the eligibility requirements for
public assistance, until such time as a lawful shelter allowance is
implemented, and provide interim relief to other eligible recipients of Aid to
Dependent Children under the interim relief system established in this case.
The State has appealed to the Appellate Division, First Department, from each
and every provision of this judgment except that portion directing the
continued provision of interim relief.
In an opinion dated June 9, 1998, the Court of Appeals affirmed the July 17,
1997 order of the Appellate Division, Third Department, affirming the lower
court dismissal of this case.
CIVIL RIGHTS CLAIMS
In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to
develop and comply with a remedial educational improvement plan ("EIP I"). On
January 19, 1989, the District Court granted motions by Yonkers and the NAACP
to add the State Education Department, the Yonkers Board of Education, and the
State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school system
continued to exist in Yonkers. On March 27, 1995, the District Court made
factual findings regarding the role of the State and the other State defendants
(the "State") in connection with the creation and maintenance of the dual
school system, but found no legal basis for imposing liability. On September 3,
1996, the United States Court of Appeals for the Second Circuit, based on the
District Court's factual findings, held the State defendants liable under 42
USC (S)1983 and the Equal Educational Opportunity Act, 20 USC (S)(S)1701, et
seq., for the unlawful dual school system, because the State, inter alia, had
taken no action to force the school district to desegregate despite its actual
or constructive knowledge of de jure segregation. By order dated October 8,
1997, the District Court held that vestiges of the prior segregated school
system continued to exist and that, based on the State's conduct in creating
and maintaining that system, the State is liable for eliminating segregation
and its vestiges in Yonkers and must fund a remedy to accomplish that goal.
Yonkers presented a proposed educational improvement plan ("EIP II") to
eradicate these vestiges of segregation. The October 8, 1997 order of the
<PAGE>
District Court ordered that EIP II be implemented and directed that, within 10
days of the entry of the Order, the State make available to Yonkers $450,000 to
support planning activities to prepare the EIP II budget for 1997-98 and the
accompanying capital facilities plan. A final judgment to implement EIP II was
entered on October 14, 1997. On November 7, 1997, the State appealed that
judgment to the Second Circuit. The appeal is pending. Additionally, the Court
adopted a requirement that the State pay to Yonkers approximately $9.85 million
as its pro rata share of the funding of EIP I for the 1996-97 school year. The
requirement for State funding of EIP I was reduced to an order on December 2,
1997 and reduced to a judgment on February 10, 1998. The State appealed that
order to the Second Circuit on December 31, 1997 and amended the notice of
appeal after entry of the judgment. That appeal has been consolidated with the
appeal of the EIP II appeal, and is also pending.
On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06.
REAL PROPERTY CLAIMS
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795.
At the same time, however, the Court reversed the Second Circuit by holding
that a third-party claim by the counties against the State for indemnification
was not properly before the federal courts. The case was remanded to the
District Court for an assessment of damages, which action is still pending. The
counties may still seek indemnification in the State courts.
Several other actions involving Indian claims to land in upstate New York are
also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et al.,
and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York, et
al., both in the United States District Court for the Northern District of New
York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.
<PAGE>
APPENDIX C
DESCRIPTION OF SECURITIES RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P") and FITCH IBCA, Inc. ("Fitch") represent their
opinions as to the quality of various debt securities. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently, debt
securities with the same maturity, coupon and rating may have different yields
while debt securities of the same maturity and coupon with different ratings
may have the same yield. The ratings below are as described by the rating
agencies. Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
FOUR HIGHEST BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper- medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that general rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
FOUR HIGHEST BOND RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
<PAGE>
BBB: An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
PLUS (+) OR MINUS (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF FITCH IBCA, INC.'S
FOUR HIGHEST INTERNATIONAL LONG-TERM CREDIT RATINGS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and the operating performance of
the issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"+" OR "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Issues or the features associated
with MIG or VMIG ratings are identified by date of issue, date of maturity or
maturities or rating expiration date and description to distinguish each rating
from other ratings. Each rating designation is unique with no implication as to
any other similar issue of the same obligor. MIG ratings terminate at the
retirement of the obligation while VMIG rating expiration will be a function of
each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:
-- Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
-- Source of payment -- the more the issue depends on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
RATINGS OF TAX-EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, note rating symbols are used
with the commercial paper rating symbols (for example, "SP-1+ /A-1+").
DESCRIPTION OF FITCH IBCA, INC.'S
TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1: Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2: Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations are an original
maturity not exceeding one year, unless explicitly noted.
<PAGE>
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (1) leading
market positions in well-established industries; (2) high rates of return on
funds employed; (3) conservative capitalization structure with moderate
reliance on debt and ample asset protection; (4) broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and (5)
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
TWO HIGHEST COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
<PAGE>
PART C
Item 23. Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Exhibits
* a(1) Declaration of Trust of the Registrant
* a(2) Amendments to the Registrant's Declaration of Trust
** a(3) Establishment and Designation of Series of the Registrant
* b(1) Amended and Restated By-Laws of the Registrant
* b(2) Amendments to Amended and Restated By-Laws of the Registrant
** d(1) Management Agreement between the Registrant and Citibank, N.A., as manager
to CitiFunds New York Tax Free Income Portfolio
** d(2) Management Agreement between the Registrant and Citibank, N.A., as manager
to CitiFunds National Tax Free Income Portfolio
** d(3) Management Agreement between the Registrant and Citibank, N.A., as manager
to CitiFunds California Tax Free Income Portfolio (the "California Fund")
e(1) Amended and Restated Distribution Agreement between the Registrant and
CFBDS, Inc. ("CFBDS"), as distributor with respect to Class A shares
e(2) Distribution Agreement between the Registrant and CFBDS, as distributor with
respect to Class B shares
* g(1) Custodian Contract between the Registrant and State Street Bank and Trust
Company ("State Street"), as custodian
** g(2) Letter agreement adding the California Fund to the Custodian Contract with
State Street
** h(1) Sub-Administrative Services Agreement between Citibank,N.A. and CFBDS
** h(2) Letter agreement adding the California Fund to the Sub-Administrative Services
Agreement between Citibank, N.A. and CFBDS
* h(3) Transfer Agency and Service Agreement between the Registrant and State
Street, as transfer agent
** h(4) Letter agreement adding the California Fund to the Transfer Agency and Service
Agreement with State Street
*** i Opinion and consent of counsel
m(1) Amended and Restated Service Plan of the Registrant for Class A shares
m(2) Service Plan of the Registrant for Class B shares
o Multiple Class Plan of the Registrant
* p Powers of Attorney for the Registrant
</TABLE>
- ---------------------
* Incorporated herein by reference to Post-Effective Amendment No. 19 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as
filed with the Securities and Exchange Commission on February 20, 1998.
** Incorporated herein by reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as
filed with the Securities and Exchange Commission on October 30, 1998.
*** Incorporated herein by reference to Post-Effective Amendment No. 22 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as
filed with the Securities and Exchange Commission on December 8, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
<PAGE>
Item 25. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's
Declaration of Trust, filed as an Exhibit to Post-Effective Amendment No. 19 to
its Registration Statement on Form N-1A; (b) Section 6 of the Distribution
Agreements between the Registrant and CFBDS, filed as Exhibits herewith; and
(c) the undertaking of the Registrant regarding indemnification set forth in
its Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 26. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range
of banking and investment services to customers across the United States and
around the world. Citibank is a wholly-owned subsidiary of Citicorp, which is,
in turn, a wholly-owned subsidiary of Citigroup Inc. Citibank also serves as
investment adviser to the following registered investment companies (or series
thereof): Asset Allocation Portfolios (Large Cap Value Portfolio, Small Cap
Value Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate
Income Portfolio and Short-Term Portfolio), The Premium Portfolios (Growth &
Income Portfolio, Balanced Portfolio, Large Cap Growth Portfolio, International
Equity Portfolio, Government Income Portfolio and Small Cap Growth Portfolio),
Tax Free Reserves Portfolio, U.S. Treasury Reserves Portfolio, Cash Reserves
Portfolio, CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM California Tax
Free Reserves, CitiFundsSM New York Tax Free Reserves and CitiFundsSM
Connecticut Tax Free Reserves), CitiFundsSM Institutional Trust (CitiFundsSM
Institutional Cash Reserves) and Variable Annuity Portfolios (CitiSelect VIP
Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400, CitiSelect VIP
Folio 500 and CitiFundsSM Small Cap Growth VIP Portfolio). Citibank and its
affiliates manage assets in excess of $290 billion worldwide. The principal
place of business of Citibank is located at 399 Park Avenue, New York, New York
10043.
John S. Reed is the Chairman and a Director of Citibank. Victor J.
Menezes is the President and a Director of Citibank. William R. Rhodes and H.
Onno Ruding are Vice Chairmen and Directors of Citibank. The other Directors of
Citibank are Paul J. Collins, Vice Chairman of Citigroup Inc. and Robert I.
Lipp, Chairman and Chief Executive Officer of The Travelers Insurance Group
Inc. and of Travelers Property Casualty Corp.
Each of the individuals named above is also a Director of Citigroup
Inc. In addition, the following persons have the affiliations indicated:
Paul J. Collins Director, Kimberly-Clark Corporation
Robert I. Lipp Chairman, Chief Executive Officer and President, Travelers
Property Casualty Co.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
<PAGE>
H. Onno Ruding Supervisory Director, Amsterdamsch Trustees Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated
Item 27. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Equity Portfolio, CitiFundsSM Emerging Asian Markets Equity Portfolio,
CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves, CitiFundsSM
Premium U.S. Treasury Reserves, CitiFundsSM Premium Liquid Reserves,
CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM Institutional
Liquid Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California
Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New
York Tax Free Reserves, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM
Short-Term U.S. Government Income Portfolio, CitiFundsSM Balanced Portfolio,
CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth & Income Portfolio,
CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM Small Cap Growth Portfolio,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400,
CitiSelect VIP Folio 500, CitiFundsSM Small Cap Growth VIP Portfolio,
CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400, and
CitiSelect Folio 500. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio, Foreign Bond
Portfolio, Intermediate Income Portfolio, Short-Term Portfolio, Growth & Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio,
International Equity Portfolio, Balanced Portfolio, Government Income
Portfolio, Emerging Asian Markets Equity Portfolio, Tax Free Reserves
Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio. CFBDS
is also the placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio,
International Equity Portfolio, Balanced Portfolio, Government Income
Portfolio, Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio. CFBDS also serves as the distributor for the
following funds: The Travelers Fund U for Variable Annuities, The Travelers
Fund VA for Variable Annuities, The Travelers Fund BD for Variable Annuities,
The Travelers Fund BD II for Variable Annuities, The Travelers Fund BD III for
Variable Annuities, The Travelers Fund BD IV for Variable Annuities, The
Travelers Fund ABD for Variable Annuities, The Travelers Fund ABD II for
Variable Annuities, The Travelers Separate Account PF for Variable Annuities,
The Travelers Separate Account PF II for Variable Annuities, The Travelers
Separate Account QP for Variable Annuities, The Travelers Separate Account TM
for Variable Annuities, The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable Annuities, The
Travelers Separate Account Six for Variable Annuities, The Travelers Separate
Account Seven for Variable Annuities, The Travelers Separate Account Eight for
Variable Annuities, The Travelers Fund UL for Variable Annuities, The Travelers
Fund UL II for Variable Annuities, The Travelers Variable Life Insurance
<PAGE>
Separate Account One, The Travelers Variable Life Insurance Separate Account
Two, The Travelers Variable Life Insurance Separate Account Three, The
Travelers Variable Life Insurance Separate Account Four, The Travelers Separate
Account MGA, The Travelers Separate Account MGA II, The Travelers Growth and
Income Stock Account for Variable Annuities, The Travelers Quality Bond Account
for Variable Annuities, The Travelers Money Market Account for Variable
Annuities, The Travelers Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for Variable Annuities,
The Travelers Timed Aggressive Stock Account for Variable Annuities, The
Travelers Timed Bond Account for Variable Annuities, Emerging Growth Fund,
Government Fund, Growth and Income Fund, International Equity Fund, Municipal
Fund, Balanced Investments, Emerging Markets Equity Investments, Government
Money Investments, High Yield Investments, Intermediate Fixed Income
Investments, International Equity Investments, International Fixed Income
Investments, Large Capitalization Growth Investments, Large Capitalization
Value Equity Investments, Long-Term Bond Investments, Mortgage Backed
Investments, Municipal Bond Investments, Small Capitalization Growth
Investments, Small Capitalization Value Equity Investments, Appreciation
Portfolio, Diversified Strategic Income Portfolio, Emerging Growth Portfolio,
Equity Income Portfolio, Equity Index Portfolio, Growth & Income Portfolio,
Intermediate High Grade Portfolio, International Equity Portfolio, Money Market
Portfolio, Total Return Portfolio, Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund, Smith Barney Arizona Municipals Fund Inc., Smith Barney
California Municipals Fund Inc., Balanced Portfolio, Conservative Portfolio,
Growth Portfolio, High Growth Portfolio, Income Portfolio, Global Portfolio,
Select Balanced Portfolio, Select Conservative Portfolio, Select Growth
Portfolio, Select High Growth Portfolio, Select Income Portfolio, Concert
Social Awareness Fund, Smith Barney Large Cap Blend Fund, Smith Barney
Fundamental Value Fund Inc., Large Cap Value Fund, Short-Term High Grade Bond
Fund, U.S. Government Securities Fund, Smith Barney Balanced Fund, Smith Barney
Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney
Exchange Reserve Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund, Smith Barney Premium Total Return Fund, Smith Barney Total
Return Bond Fund, Cash Portfolio, Government Portfolio, Municipal Portfolio,
Concert Peachtree Growth Fund, Smith Barney Contrarian Fund, Smith Barney
Government Securities Fund, Smith Barney Hansberger Global Small Cap Value
Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Investment Grade
Bond Fund, Smith Barney Special Equities Fund, Smith Barney Intermediate
Maturity California Municipals Fund, Smith Barney Intermediate Maturity New
York Municipals Fund, Smith Barney Large Capitalization Growth Fund, Smith
Barney S&P 500 Index Fund, Smith Barney Mid Cap Blend Fund, Smith Barney
Managed Governments Fund Inc., Smith Barney Managed Municipals Fund Inc., Smith
Barney Massachusetts Municipals Fund, Cash Portfolio, Government Portfolio,
Retirement Portfolio, California Money Market Portfolio, Florida Portfolio,
Georgia Portfolio, Limited Term Portfolio, New York Money Market Portfolio, New
York Portfolio, Pennsylvania Portfolio, Smith Barney Municipal Money Market
Fund, Inc., Smith Barney Natural Resources Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Oregon Municipals Fund, Zeros Plus Emerging
Growth Series 2000, Smith Barney Security and Growth Fund, Smith Barney Small
Cap Blend Fund, Inc., Smith Barney Telecommunications Income Fund, Income and
Growth Portfolio, Reserve Account Portfolio, U.S. Government/High Quality
Securities Portfolio, Emerging Markets Portfolio, European Portfolio, Global
Government Bond Portfolio, International Balanced Portfolio, International
Equity Portfolio, Pacific Portfolio, AIM Capital Appreciation Portfolio,
Alliance Growth Portfolio, GT Global Strategic Income Portfolio, MFS Total
Return Portfolio, Putnam Diversified Income Portfolio, Smith Barney High Income
Portfolio, Smith Barney Large Cap Value Portfolio, Smith Barney International
Equity Portfolio, Smith Barney Large Capitalization Growth Portfolio, Smith
Barney Money Market Portfolio, Smith Barney Pacific Basin Portfolio, TBC
Managed Income Portfolio, Van Kampen American Capital Enterprise Portfolio,
Centurion Tax-Managed U.S. Equity Fund, Centurion Tax-Managed International
Equity Fund, Centurion U.S. Protection Fund, Centurion International Protection
Fund, Global High-Yield Bond Fund, International Equity Fund, Emerging
Opportunities Fund, Core Equity Fund, Long-Term Bond Fund, Global Dimensions
Fund L.P., Citicorp Private Equity L.P., AIM V.I. Capital Appreciation Fund,
AIM V.I. Government Series Fund, AIM V.I. Growth Fund, AIM V.I. International
Equity Fund, AIM V.I. Value Fund, Fidelity VIP Growth Portfolio, Fidelity VIP
High Income Portfolio, Fidelity VIP Equity Income Portfolio, Fidelity VIP
Overseas Portfolio, Fidelity VIP II Contrafund Portfolio, Fidelity VIP II Index
500 Portfolio, MFS World Government Series, MFS Money Market Series, MFS Bond
Series, MFS Total Return Series, MFS Research Series, MFS Emerging Growth
Series, Salomon Brothers Institutional Money Market Fund, Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon
Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government
Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic
Bond Fund, Salomon Brothers Total Return Fund, Salomon Brothers Asia Growth
Fund, Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Fund Inc,
Salomon Brothers Opportunity Fund Inc, Salomon Brothers Institutional High
Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund,
Salomon Brothers Variable Investors Fund, Salomon Brothers Variable Capital
Fund, Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable
High Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon
Brothers Variable U.S. Government Income Fund, and Salomon Brothers Variable
Asia Growth Fund.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS is incorporated by reference to Schedule A of
Form BD filed by CFBDS pursuant to the Securities and Exchange Act of 1934
(File No. 8-32417).
<PAGE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
CFBDS, Inc. 21 Milk Street, 5th Floor
(administrator and distributor) Boston, MA 02109
State Street Bank and Trust Company 1776 Heritage Drive
(custodian and transfer agent) North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment manager) New York, NY 10043
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and Commonwealth of
Massachusetts on the 16th day of February, 1999.
CITIFUNDS TAX FREE INCOME TRUST
By: Philip W. Coolidge
---------------------------
Philip W. Coolidge, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to this Registration Statement has been signed below
by the following persons in the capacities indicated below on February 16,
1999.
Signature Title
Philip W. Coolidge President, Principal Executive Officer and Trustee
- ------------------------
Philip W. Coolidge
John R. Elder Principal Financial Officer and Principal
- ------------------------ Accounting Officer
John R. Elder
Elliott J. Berv* Trustee
- ------------------------
Elliott J. Berv
Mark T. Finn* Trustee
- ------------------------
Mark T. Finn
Riley C. Gilley* Trustee
- ------------------------
Riley C. Gilley
Diana R. Harrington* Trustee
- ------------------------
Diana R. Harrington
Susan B. Kerley* Trustee
- ------------------------
Susan B. Kerley
C. Oscar Morong, Jr.* Trustee
- ------------------------
C. Oscar Morong, Jr.
Walter E. Robb, III* Trustee
- ------------------------
Walter E. Robb, III
E. Kirby Warren* Trustee
- ------------------------
E. Kirby Warren
William S. Woods, Jr.* Trustee
- ------------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
------------------------
Philip W. Coolidge
Executed by Philip W. Coolidge on behalf
of those indicated pursuant to Powers of
Attorney.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
No.: Description:
e(1) Amended and Restated Distribution Agreement between the Registrant and
CFBDS, Inc. ("CFBDS"), as distributor with respect to Class A shares
e(2) Distribution Agreement between the Registrant and CFBDS, as distributor with
respect to Class B shares
m(1) Amended and Restated Service Plan of the Registrant for Class A shares
m(2) Service Plan of the Registrant for Class B shares
o Multiple Class Plan of the Registrant
</TABLE>
Exhibit e(1)
AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of June 24, 1986 and amended and restated as of
January 4, 1999, by and between CitiFunds Tax Free Income Trust (formerly,
Landmark Tax Free Income Funds), a Massachusetts business trust (the "Trust"),
and CFBDS, Inc., a Massachusetts corporation ("Distributor"). This Agreement
relates solely to (i) Shares of Beneficial Interest of each series of the Trust
with Shares that are not divided into classes and (ii) Shares of Beneficial
Interest of each series of the Trust that are divided into classes which are
designated "Class A" ("Shares").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust wishes to retain the services of a distributor for
Shares of each of the Trust's series listed on Exhibit A hereto (the "Funds")
and has registered the Shares of the Funds under the Securities Act of 1933, as
amended (the "1933 Act");
WHEREAS, the Trust has adopted an Amended and Restated Service Plan
pursuant to Rule 12b1 under the 1940 Act (the "Service Plan") and may enter
into related agreements providing for the distribution and servicing of Shares
of the Funds;
WHEREAS, Distributor has agreed to act as distributor of the Shares of the
Funds for the period of this Agreement;
NOW, THEREFORE, it is hereby agreed between the parties hereto as follows:
1. Appointment of Distributor.
(a) The Trust hereby appoints Distributor its exclusive agent for the
distribution of Shares of the Funds in jurisdictions wherein such Shares may be
legally offered for sale; provided, however, that the Trust in its absolute
discretion may issue Shares of the Funds in connection with (i) the payment or
reinvestment of dividends or distributions; (ii) any merger or consolidation of
the Trust or of the Funds with any other investment company or trust or any
<PAGE>
personal holding company, or the acquisition of the assets of any such entity
or another series of the Trust; or (iii) any offer of exchange permitted by
Section 11 of the 1940 Act.
(b) Distributor hereby accepts such appointment as exclusive agent for
the distribution of Shares of the Funds and agrees that it will sell the Shares
as agent for the Trust at prices determined as hereinafter provided and on the
terms hereinafter set forth, all according to the then-current prospectus and
statement of additional information of each Fund (collectively, the
"Prospectus" and the "Statement of Additional Information"), applicable laws,
rules and regulations and the Declaration of Trust of the Trust. Distributor
agrees to use its best efforts to solicit orders for the sale of Shares of the
Funds, and agrees to transmit promptly to the Trust (or to the transfer agent
of the Funds, if so instructed in writing by the Trust) any orders received by
it for purchase or redemption of Shares.
(c) Distributor may sell Shares of the Funds to or through qualified
securities dealers, financial institutions or others. Distributor will require
each dealer or other such party to conform to the provisions of this Agreement,
the Prospectus, the Statement of Additional Information and applicable law; and
neither Distributor nor any such dealers or others shall withhold the placing
of purchase orders for Shares so as to make a profit thereby.
(d) Distributor shall order Shares of the Funds from the Trust only to
the extent that it shall have received unconditional purchase orders therefor.
Distributor will not make, or authorize any dealers or others to make: (i) any
short sales of Shares; or (ii) any sales of Shares to any Trustee or officer of
the Trust, any officer or director of Distributor or any corporation or
association furnishing investment advisory, managerial or supervisory services
to the Trust, or to any such corporation or association, unless such sales are
made in accordance with the Prospectus and the Statement of Additional
Information.
(e) Distributor is not authorized by the Trust to give any information or
make any representations regarding Shares of the Funds, except such information
or representations as are contained in the Prospectus, the Statement of
Additional Information or advertisements and sales literature prepared by or on
behalf of the Trust for Distributor's use.
(f) The Trust agrees to execute any and all documents, to furnish any
and all information and otherwise to take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with the
<PAGE>
qualification of Shares of each Fund for sale in such states as Distributor and
the Trust agree.
(g) No Shares of any Fund shall be offered by either Distributor or the
Trust under this Agreement, and no orders for the purchase or sale of such
Shares hereunder shall be accepted by the Trust, if and so long as the
effectiveness of the Trust's then current registration statement as to Shares
of that Fund or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current prospectus
for Shares of that Fund as required by Section 10 of the 1933 Act is not on
file with the Securities and Exchange Commission; provided, however, that
nothing contained in this paragraph (g) shall in any way restrict the Trust's
obligation to repurchase any Shares from any shareholder in accordance with the
provisions of the applicable Fund's Prospectus or charter documents.
(h) Notwithstanding any provision hereof, the Trust may terminate,
suspend or withdraw the offering of Shares of any Fund whenever, in its sole
discretion, it deems such action to be desirable.
2. Offering Price of Shares. All Fund Shares sold under this Agreement
shall be sold at the public offering price per Share in effect at the time of
the sale, as described in the Prospectus. The public offering price of the
Shares of each Fund shall be the net asset value of such Shares plus the amount
of any applicable sales charge, as provided in the Prospectus. The excess, if
any, of the public offering price of the Shares over the net asset value of the
Shares, and any contingent deferred sales charge applicable to Shares of any
Fund as set forth in the applicable Fund's Prospectus, may be paid to, or
retained by, the Distributor, securities dealers, financial institutions
(including banks) and others, as partial compensation for their services in
connection with the sale of Shares. At no time shall the Trust receive less
than the full net asset value of the Shares of each Fund, determined in the
manner set forth in the Prospectus and the Statement of Additional Information.
Distributor also may receive such compensation under the Trust's Service Plan
for Shares as may be authorized by the Trustees of the Trust from time to time.
3. Furnishing of Information.
(a) The Trust shall furnish to Distributor copies of any information,
financial statements and other documents that Distributor may reasonably
request for use in connection with the sale of Shares of the Funds under this
Agreement. The Trust shall also make available a sufficient number of copies of
the Funds' Prospectus and Statement of Additional Information for use by the
Distributor.
<PAGE>
(b) The Trust agrees to advise Distributor immediately in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to any registration statement concerning a Fund or to a
Prospectus or for additional information;
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of any such
registration statement or Prospectus or the initiation of any proceeding
for that purpose;
(iii)of the happening of any event which makes untrue any statement
of a material fact made in any such registration statement or Prospectus
or which requires the making of a change in such registration statement or
Prospectus in order to make the statements therein not misleading; and
(iv) of all actions of the Securities and Exchange Commission with
respect to any amendments to any such registration statement or Prospectus
which may from time to time be filed with the Securities and Exchange
Commission.
4. Expenses.
(a) The Trust will pay or cause to be paid the following expenses:
organization costs of the Funds; compensation of Trustees who are not
"affiliated persons" of the Distributor; governmental fees; interest charges;
loan commitment fees; taxes; membership dues in industry associations allocable
to the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
information, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions and to existing shareholders of the
Funds; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Funds, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Funds (including but not limited to the fees of independent
pricing services); expenses of meetings of shareholders; expenses relating to
the issuance, registration and qualification of shares; and such non-recurring
or extraordinary expenses as may arise, including those relating to actions,
<PAGE>
suits or proceedings to which the Trust may be a party and the legal obligation
which the Trust may have to indemnify its Trustees and officers with respect
thereto.
(b) Except as otherwise provided in this Agreement and except to the
extent such expenses are borne by the Trust pursuant to the Service Plan,
Distributor will pay or cause to be paid all expenses connected with its own
qualification as a dealer under state and federal laws and all other expenses
incurred by Distributor in connection with the sale of Shares of each Fund as
contemplated by this Agreement.
(c) Distributor shall prepare and deliver reports to the Trustees of the
Trust on a regular basis, at least quarterly, showing the expenditures with
respect to each Fund pursuant to the Service Plan and the purposes therefor, as
well as any supplemental reports that the Trustees of the Trust, from time to
time, may reasonably request.
5. Repurchase of Shares. Distributor as agent and for the account of the
Trust may repurchase Shares of the Funds offered for resale to it and redeem
such Shares at their net asset value, subject to the imposition of any deferred
sales charge.
6. Indemnification by the Trust. In the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties
hereunder on the part of Distributor, the Trust agrees to indemnify
Distributor, its officers and directors, and any person which controls
Distributor within the meaning of the 1933 Act against any and all claims,
demands, liabilities and expenses that any such indemnified party may incur
under the 1933 Act, or common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the registration
statement for any Fund, any Prospectus or Statement of Additional Information,
or any advertisements or sales literature prepared by or on behalf of the Trust
for Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, unless such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor. Nothing herein contained shall require the Trust to take any
action contrary to any provision of its Declaration of Trust or any applicable
statute or regulation.
7. Indemnification by Distributor. Distributor agrees to indemnify the
Trust, its officers and Trustees and any person which controls the Trust within
the meaning of the 1933 Act against any and all claims, demands, liabilities
and expenses that any such indemnified party may incur under the 1933 Act, or
<PAGE>
common law or otherwise, arising out of or based upon (i) any alleged untrue
statement of a material fact contained in the registration statement for any
Fund, any Prospectus or Statement of Additional Information, or any
advertisements or sales literature prepared by or on behalf of the Trust for
Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor; and (ii) any act or deed of Distributor or its sales
representatives that has not been authorized by the Trust in any Prospectus or
Statement of Additional Information or by this Agreement.
8. Term and Termination.
(a) Unless terminated as herein provided, this Agreement shall continue
in effect as to each Fund until November 13, 1999 and shall continue in effect
for successive periods of one year, but only so long as each such continuance
is specifically approved by votes of a majority of both the Trustees of the
Trust and the Trustees of the Trust who are not parties to this Agreement or
interested persons (as defined in the 1940 Act) of any such party and who have
no direct or indirect financial interest in this Agreement or in the operation
of the Service Plan or in any agreement related thereto ("Independent
Trustees"), cast in person at a meeting called for the purpose of voting on
such approval.
(b) This Agreement may be terminated as to any Fund on not less than
thirty days' nor more than sixty days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act).
9. Limitation of Liability. The obligations of the Trust hereunder shall
not be binding upon any of the Trustees, officers or shareholders of the Trust
personally, but shall bind only the assets and property of the particular Fund
in question, and not any other Fund or series of the Trust. The term "CitiFunds
Tax Free Income Trust" means and refers to the Trustees from time to time
serving under the Declaration of Trust of the Trust, a copy of which is on file
with the Secretary of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement has been authorized by the Trustees, and this
Agreement has been signed on behalf of the Trust by an authorized officer of
the Trust, acting as such and not individually, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the assets and property of the
<PAGE>
Trust as provided in the Declaration of Trust.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CitiFunds Tax Free Income Trust
By: /s/ Philip Coolidge
CFBDS, Inc.
By: /s/ Philip Coolidge
<PAGE>
Exhibit A
Funds
CitiFunds National Tax Free Income Portfolio
CitiFunds New York Tax Free Income Portfolio
CitiFunds California Tax Free Income Portfolio
Exhibit e(2)
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of January 4, 1999, by and between CitiFunds Tax Free
Income Trust (formerly, Landmark Tax Free Income Funds), a Massachusetts
business trust (the "Trust"), and CFBDS, Inc., a Massachusetts corporation
("Distributor"). This Agreement relates solely to Shares of Beneficial Interest
designated "Class B."
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest ("Shares") are divided
into separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust wishes to retain the services of a distributor for
Class B Shares of each of the Trust's series listed on Exhibit A hereto (the
"Funds") and has registered the Shares of the Funds under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, the Trust has adopted a Service Plan pursuant to Rule 12b1 under
the 1940 Act (the "Service Plan") and may enter into related agreements
providing for the distribution and servicing of Shares of the Funds;
WHEREAS, Distributor has agreed to act as distributor of the Class B
Shares of the Funds for the period of this Agreement;
NOW, THEREFORE, it is hereby agreed between the parties hereto as follows:
1. Appointment of Distributor.
(a) The Trust hereby appoints Distributor its exclusive agent for the
distribution of Class B Shares of the Funds in jurisdictions wherein such
Shares may be legally offered for sale; provided, however, that the Trust in
its absolute discretion may issue Shares of the Funds in connection with (i)
the payment or reinvestment of dividends or distributions; (ii) any merger or
consolidation of the Trust or of the Funds with any other investment company or
trust or any personal holding company, or the acquisition of the assets of any
such entity or another series of the Trust; or (iii) any offer of exchange
permitted by Section 11 of the 1940 Act.
<PAGE>
(b) Distributor hereby accepts such appointment as exclusive agent for
the distribution of Class B Shares of the Funds and agrees that it will sell
the Shares as agent for the Trust at prices determined as hereinafter provided
and on the terms hereinafter set forth, all according to the then-current
prospectus and statement of additional information of each Fund (collectively,
the "Prospectus" and the "Statement of Additional Information"), applicable
laws, rules and regulations and the Declaration of Trust of the Trust.
Distributor agrees to use its best efforts to solicit orders for the sale of
Shares of the Funds, and agrees to transmit promptly to the Trust (or to the
transfer agent of the Funds, if so instructed in writing by the Trust) any
orders received by it for purchase or redemption of Shares.
(c) Distributor may sell Shares of the Funds to or through qualified
securities dealers, financial institutions or others. Distributor will require
each dealer or other such party to conform to the provisions of this Agreement,
the Prospectus, the Statement of Additional Information and applicable law; and
neither Distributor nor any such dealers or others shall withhold the placing
of purchase orders for Shares so as to make a profit thereby.
(d) Distributor shall order Shares of the Funds from the Trust only to
the extent that it shall have received unconditional purchase orders therefor.
Distributor will not make, or authorize any dealers or others to make: (i) any
short sales of Shares; or (ii) any sales of Shares to any Trustee or officer of
the Trust, any officer or director of Distributor or any corporation or
association furnishing investment advisory, managerial or supervisory services
to the Trust, or to any such corporation or association, unless such sales are
made in accordance with the Prospectus and the Statement of Additional
Information.
(e) Distributor is not authorized by the Trust to give any information or
make any representations regarding Shares of the Funds, except such information
or representations as are contained in the Prospectus, the Statement of
Additional Information or advertisements and sales literature prepared by or on
behalf of the Trust for Distributor's use.
(f) The Trust agrees to execute any and all documents, to furnish any and
all information and otherwise to take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with the
qualification of Shares of each Fund for sale in such states as Distributor and
the Trust agree.
(g) No Shares of any Fund shall be offered by either Distributor or the
Trust under this Agreement, and no orders for the purchase or sale of such
<PAGE>
Shares hereunder shall be accepted by the Trust, if and so long as the
effectiveness of the Trust's then current registration statement as to Shares
of that Fund or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current prospectus
for Shares of that Fund as required by Section 10 of the 1933 Act is not on
file with the Securities and Exchange Commission; provided, however, that
nothing contained in this paragraph (g) shall in any way restrict the Trust's
obligation to repurchase any Shares from any shareholder in accordance with the
provisions of the applicable Fund's Prospectus or charter documents.
(h) Notwithstanding any provision hereof, the Trust may terminate,
suspend or withdraw the offering of Shares of any Fund whenever, in its sole
discretion, it deems such action to be desirable.
2. Offering Price of Shares. All Fund Shares sold under this Agreement
shall be sold at the public offering price per Share in effect at the time of
the sale, as described in the Prospectus. The public offering price of the
Class B Shares of each Fund shall be the net asset value of such Shares, as
provided in the Prospectus. Any contingent deferred sales charge applicable to
Class B Shares of any Fund as set forth in the applicable Fund's Prospectus,
may be paid to, or retained by, the Distributor, securities dealers, financial
institutions (including banks) and others, as partial compensation for their
services in connection with the sale of Class B Shares. At no time shall the
Trust receive less than the full net asset value of the Shares of each Fund,
determined in the manner set forth in the Prospectus and the Statement of
Additional Information. Distributor also may receive such compensation under
the Trust's Service Plan for Class B Shares as may be authorized by the
Trustees of the Trust from time to time.
3. Furnishing of Information.
(a) The Trust shall furnish to Distributor copies of any information,
financial statements and other documents that Distributor may reasonably
request for use in connection with the sale of Shares of the Funds under this
Agreement. The Trust shall also make available a sufficient number of copies of
the Funds' Prospectus and Statement of Additional Information for use by the
Distributor.
(b) The Trust agrees to advise Distributor immediately in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to any registration statement concerning a Fund or to a
Prospectus or for additional information;
<PAGE>
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of any such
registration statement or Prospectus or the initiation of any proceeding
for that purpose;
(iii)of the happening of any event which makes untrue any statement
of a material fact made in any such registration statement or Prospectus
or which requires the making of a change in such registration statement or
Prospectus in order to make the statements therein not misleading; and
(iv) of all actions of the Securities and Exchange Commission with
respect to any amendments to any such registration statement or Prospectus
which may from time to time be filed with the Securities and Exchange
Commission.
4. Expenses.
(a) The Trust will pay or cause to be paid the following expenses:
organization costs of the Funds; compensation of Trustees who are not
"affiliated persons" of the Distributor; governmental fees; interest charges;
loan commitment fees; taxes; membership dues in industry associations allocable
to the Trust; fees and expenses of independent auditors, legal counsel and any
transfer agent, distributor, shareholder servicing agent, registrar or dividend
disbursing agent of the Trust; expenses of issuing and redeeming shares of
beneficial interest and servicing shareholder accounts; expenses of preparing,
typesetting, printing and mailing prospectuses, statements of additional
information, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions and to existing shareholders of the
Funds; expenses connected with the execution, recording and settlement of
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Funds, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Funds (including but not limited to the fees of independent
pricing services); expenses of meetings of shareholders; expenses relating to
the issuance, registration and qualification of shares; and such non-recurring
or extraordinary expenses as may arise, including those relating to actions,
suits or proceedings to which the Trust may be a party and the legal obligation
which the Trust may have to indemnify its Trustees and officers with respect
thereto.
(b) Except as otherwise provided in this Agreement and except to the
extent such expenses are borne by the Trust pursuant to the Service Plan,
Distributor will pay or cause to be paid all expenses connected with its own
<PAGE>
qualification as a dealer under state and federal laws and all other expenses
incurred by Distributor in connection with the sale of Shares of each Fund as
contemplated by this Agreement.
(c) Distributor shall prepare and deliver reports to the Trustees of the
Trust on a regular basis, at least quarterly, showing the expenditures with
respect to each Fund pursuant to the Service Plan and the purposes therefor, as
well as any supplemental reports that the Trustees of the Trust, from time to
time, may reasonably request.
5. Repurchase of Shares. Distributor as agent and for the account of the
Trust may repurchase Shares of the Funds offered for resale to it and redeem
such Shares at their net asset value, subject to the imposition of any deferred
sales charge.
6. Indemnification by the Trust. In the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties
hereunder on the part of Distributor, the Trust agrees to indemnify
Distributor, its officers and directors, and any person which controls
Distributor within the meaning of the 1933 Act against any and all claims,
demands, liabilities and expenses that any such indemnified party may incur
under the 1933 Act, or common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the registration
statement for any Fund, any Prospectus or Statement of Additional Information,
or any advertisements or sales literature prepared by or on behalf of the Trust
for Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, unless such
statement or omission was made in reliance upon and in conformity with
information furnished to the Trust in connection therewith by or on behalf of
Distributor. Nothing herein contained shall require the Trust to take any
action contrary to any provision of its Declaration of Trust or any applicable
statute or regulation.
7. Indemnification by Distributor. Distributor agrees to indemnify the
Trust, its officers and Trustees and any person which controls the Trust within
the meaning of the 1933 Act against any and all claims, demands, liabilities
and expenses that any such indemnified party may incur under the 1933 Act, or
common law or otherwise, arising out of or based upon (i) any alleged untrue
statement of a material fact contained in the registration statement for any
Fund, any Prospectus or Statement of Additional Information, or any
advertisements or sales literature prepared by or on behalf of the Trust for
Distributor's use, or any omission to state a material fact therein, the
omission of which makes any statement contained therein misleading, if such
statement or omission was made in reliance upon and in conformity with
<PAGE>
information furnished to the Trust in connection therewith by or on behalf of
Distributor; and (ii) any act or deed of Distributor or its sales
representatives that has not been authorized by the Trust in any Prospectus or
Statement of Additional Information or by this Agreement.
8. Term and Termination.
(a) Unless terminated as herein provided, this Agreement shall continue
in effect as to each Fund until November 13, 1999 and shall continue in effect
for successive periods of one year, but only so long as each such continuance
is specifically approved by votes of a majority of both the Trustees of the
Trust and the Trustees of the Trust who are not parties to this Agreement or
interested persons (as defined in the 1940 Act) of any such party and who have
no direct or indirect financial interest in this Agreement or in the operation
of the Service Plan or in any agreement related thereto ("Independent
Trustees"), cast in person at a meeting called for the purpose of voting on
such approval.
(b) This Agreement may be terminated as to any Fund on not less than
thirty days' nor more than sixty days' written notice to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act).
9. Limitation of Liability. The obligations of the Trust hereunder shall
not be binding upon any of the Trustees, officers or shareholders of the Trust
personally, but shall bind only the assets and property of the particular Fund
in question, and not any other Fund or series of the Trust. The term "CitiFunds
Tax Free Income Trust" means and refers to the Trustees from time to time
serving under the Declaration of Trust of the Trust, a copy of which is on file
with the Secretary of the Commonwealth of Massachusetts. The execution and
delivery of this Agreement has been authorized by the Trustees, and this
Agreement has been signed on behalf of the Trust by an authorized officer of
the Trust, acting as such and not individually, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the assets and property of the
Trust as provided in the Declaration of Trust.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
<PAGE>
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
CitiFunds Tax Free Income Trust
By: /s/ Philip Cooldige
CFBDS, Inc.
By: /s/ Philip Cooldige
<PAGE>
Exhibit A
Funds
CitiFunds National Tax Free Income Portfolio
CitiFunds New York Tax Free Income Portfolio
CitiFunds California Tax Free Income Portfolio
Exhibit m(1)
AMENDED AND RESTATED
SERVICE PLAN
SERVICE PLAN, dated as of August 8, 1997 and amended and restated
effective as of January 4, 1999, of CitiFunds Tax Free Income Trust, a
Massachusetts business trust (the "Trust"), with respect to shares of
beneficial interest of its series CitiFunds National Tax Free Income Portfolio,
CitiFunds New York Tax Free Income Portfolio and CitiFunds California Tax Free
Income Portfolio and any other series of the Trust adopting this plan (the
"Series"). This Plan relates solely to (i) shares of beneficial interest of the
Series that are not divided into Classes and (ii) shares of beneficial interest
of each of the Series that are divided into Classes which are designated "Class
A" ("Shares").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust intends to distribute Shares in accordance with Rule
12b-1 under the 1940 Act, and wishes to adopt this Plan as a plan of
distribution pursuant to Rule 12b-1;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have
no direct or indirect financial interest in the operation of this Plan or in
any agreement relating hereto (the "NonInterested Trustees"), having
determined, in the exercise of reasonable business judgment and in light of
their fiduciary duties under state law and under Section 36(a) and (b) of the
1940 Act, that there is a reasonable likelihood that this Plan will benefit the
Trust and the shareholders of the Series, have approved this Plan by votes cast
at a meeting called for the purpose of voting hereon and on any agreements
related hereto;
WHEREAS, an initial sales charge may be paid by investors who purchase
Shares, and CFBDS, Inc. (the "Distributor"), broker-dealers, banks and other
financial intermediaries may receive such sales charge as partial compensation
for their services in connection with the sale of Shares;
<PAGE>
WHEREAS, each Series or the Distributor may impose certain deferred sales
charges in connection with the repurchase of Shares by such Series, and the
Series may pay to the Distributor, dealers and others, or the Series may permit
such persons to retain, as the case may be, all or any portion of such deferred
sales charges;
NOW, THEREFORE, the Trust hereby adopts this Plan as a plan of
distribution in accordance with Rule 12b-1 under the 1940 Act, with the terms
of the Plan being as follows:
1. Distribution and Servicing Activities. Subject to the supervision of
the Trustees of the Trust, the Trust may:
(a) engage, directly or indirectly, in any activities primarily
intended to result in the sale of Shares of the Series, which activities
may include, but are not limited to (i) payments to the Trust's
Distributor for distribution services, (ii) payments to securities
dealers, financial institutions (which may include banks) and others in
respect of the sale of Shares of the Series, (iii) payments for
advertising, marketing or other promotional activity, and (iv) payments
for preparation, printing, and distribution of prospectuses and statements
of additional information and reports of the Trust for recipients other
than regulators and existing shareholders of the Trust; and
(b) make payments, directly or indirectly, to the Trust's
Distributor, securities dealers, financial institutions (which may include
banks) and others for providing personal service and/or the maintenance of
shareholder accounts.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Sales Charges. It is understood that, under certain circumstances, an
initial sales charge may be paid by investors who purchase Shares of each
Series, and the Series may pay to the Distributor, securities dealers,
financial institutions (including banks) and others, or the Series may permit
such persons to retain, as the case may be, such sales charge as partial
compensation for their services in connection with the sale of Shares. It is
also understood that, under certain circumstances, each Series or the
Distributor may impose certain deferred sales charges in connection with the
repurchase of Shares of such Series, and the Series may pay to the Distributor,
securities dealers, financial institutions (including banks) and others, or the
<PAGE>
Series may permit such persons to retain, as the case may be, all or any
portion of such deferred sales charges.
3. Maximum Expenditures. The expenditures to be made by the Trust
pursuant to this Plan and the basis upon which payment of such expenditures
will be made shall be determined by the Trustees of the Trust, but in no
event may such expenditures exceed an amount calculated at the rate of 0.25%
per annum of the average daily net assets of the Shares of each Series.
Payments pursuant to this Plan may be made directly by the Trust to the
Distributor or to other persons with which the Trust has entered into
agreements related to this Plan. For purposes of determining the fees payable
under this Plan, the value of each Series' average daily net assets shall be
computed in the manner specified in the applicable Series' then-current
prospectus and statement of additional information.
4. Trust's Expenses. The Trust shall pay all expenses of its operations,
including the following, and such expenses shall not constitute expenditures
under this Plan: organization costs of each Series; compensation of Trustees;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Series; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Series,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of calculating the net asset value of the Series
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
5. Term and Termination. (a) Unless terminated as herein provided, this
Plan shall continue in effect until November 13, 1999 and shall continue in
effect for successive periods of one year, but only so long as each such
continuance is specifically approved by votes of a majority of both the
<PAGE>
Trustees of the Trust and the Non-Interested Trustees, cast in person at a
meeting called for the purpose of voting on such approval.
(b) This Plan may be terminated at any time with respect to any Series by
a vote of a majority of the NonInterested Trustees or by a vote of a majority
of the outstanding voting securities, as defined in the 1940 Act, of Shares of
the applicable Series.
6. Amendments. This Plan may not be amended to increase materially the
maximum expenditures permitted by Section 3 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities, as
defined in the 1940 Act, of Shares of the applicable Series, and no material
amendment to this Plan shall be made unless approved in the manner provided for
annual renewal of this Plan in Section 5(a) hereof.
7. Selection and Nomination of Trustees. While this Plan is in effect,
the selection and nomination of the Non-Interested Trustees of the Trust shall
be committed to the discretion of such Non-Interested Trustees.
8. Quarterly Reports. The Treasurer of the Trust shall provide to the
Trustees of the Trust and the Trustees shall review quarterly a written report
of the amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 8 hereof, for a
period of not less than six years from the date of this Plan. Any such related
agreement or such reports for the first two years will be maintained in an
easily accessible place.
10. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
Exhibit m(2)
SERVICE PLAN
SERVICE PLAN, dated as of January 4, 1999, of CitiFunds Tax Free Income
Trust, a Massachusetts business trust (the "Trust"), with respect to shares of
beneficial interest of its series CitiFunds National Tax Free Income Portfolio,
CitiFunds New York Tax Free Income Portfolio and CitiFunds California Tax Free
Income Portfolio and any other series of the Trust adopting this plan (the
"Series"). This Plan relates solely to shares of beneficial interest of each
Series which are designated "Class B" ("Shares").
WHEREAS, the Trust engages in business as an openend management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series representing interests in separate funds of securities and
other assets;
WHEREAS, the Trust intends to distribute Shares in accordance with Rule
12b-1 under the 1940 Act, and wishes to adopt this Plan as a plan of
distribution pursuant to Rule 12b-1;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have
no direct or indirect financial interest in the operation of this Plan or in
any agreement relating hereto (the "NonInterested Trustees"), having
determined, in the exercise of reasonable business judgment and in light of
their fiduciary duties under state law and under Section 36(a) and (b) of the
1940 Act, that there is a reasonable likelihood that this Plan will benefit the
Trust and the shareholders of the Series, have approved this Plan by votes cast
at a meeting called for the purpose of voting hereon and on any agreements
related hereto;
WHEREAS, each Series or CFBDS, Inc. (the "Distributor") may impose certain
deferred sales charges in connection with the repurchase of Shares by such
Series, and the Series may pay to the Distributor, dealers and others, or the
Series may permit such persons to retain, as the case may be, all or any
portion of such deferred sales charges;
NOW, THEREFORE, the Trust hereby adopts this Plan as a plan of
distribution in accordance with Rule 12b-1 under the 1940 Act, with the terms
of the Plan being as follows:
<PAGE>
1. Distribution and Servicing Activities. Subject to the supervision of
the Trustees of the Trust, the Trust may:
(a) engage, directly or indirectly, in any activities primarily
intended to result in the sale of Shares of the Series, which activities
may include, but are not limited to (i) payments to the Trust's
Distributor for distribution services, (ii) payments to securities
dealers, financial institutions (which may include banks) and others in
respect of the sale of Shares of the Series, (iii) payments for
advertising, marketing or other promotional activity, and (iv) payments
for preparation, printing, and distribution of prospectuses and statements
of additional information and reports of the Trust for recipients other
than regulators and existing shareholders of the Trust; and
(b) make payments, directly or indirectly, to the Trust's
Distributor, securities dealers, financial institutions (which may include
banks) and others for providing personal service and/or the maintenance of
shareholder accounts.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Sales Charges. It is understood that, under certain circumstances,
each Series or the Distributor may impose certain deferred sales charges in
connection with the repurchase of Shares of such Series, and the Series may pay
to the Distributor, securities dealers, financial institutions (including
banks) and others, or the Series may permit such persons to retain, as the case
may be, all or any portion of such deferred sales charges.
3. Maximum Expenditures. The expenditures to be made by the Trust
pursuant to this Plan and the basis upon which payment of such expenditures
will be made shall be determined by the Trustees of the Trust, but in no event
may such expenditures exceed an amount calculated at the rate of 0.75% per
annum of the average daily net assets of the Shares of each Series. Payments
pursuant to this Plan may be made directly by the Trust to the Distributor or
to other persons with which the Trust has entered into agreements related to
this Plan. For purposes of determining the fees payable under this Plan, the
value of each Series' average daily net assets shall be computed in the manner
specified in the applicable Series' then-current prospectus and statement of
additional information.
<PAGE>
4. Trust's Expenses. The Trust shall pay all expenses of its operations,
including the following, and such expenses shall not constitute expenditures
under this Plan: organization costs of each Series; compensation of Trustees;
governmental fees; interest charges; loan commitment fees; taxes; membership
dues in industry associations allocable to the Trust; fees and expenses of
independent auditors, legal counsel and any transfer agent, distributor,
shareholder servicing agent, registrar or dividend disbursing agent of the
Trust; expenses of issuing and redeeming shares of beneficial interest and
servicing shareholder accounts; expenses of preparing, typesetting, printing
and mailing prospectuses, statements of additional information, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to existing shareholders of the Series; expenses connected with
the execution, recording and settlement of security transactions; insurance
premiums; fees and expenses of the custodian for all services to the Series,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of calculating the net asset value of the Series
(including but not limited to the fees of independent pricing services);
expenses of meetings of shareholders; expenses relating to the issuance,
registration and qualification of shares; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust may be a party and the legal obligation which
the Trust may have to indemnify its Trustees and officers with respect thereto.
5. Term and Termination. (a) This Plan shall become effective as to a
Series upon (i) approval by a vote of at least a majority of the outstanding
voting securities (as defined in the 1940 Act) of Shares of the particular
Series, and (ii) approval by a majority of the Trustees of the Trust and a
majority of the Non-Interested Trustees cast in person at a meeting called for
the purpose of voting on this Plan. Unless terminated as herein provided, this
Plan shall continue in effect until November 13, 1999 and shall continue in
effect for successive periods of one year, but only so long as each such
continuance is specifically approved by votes of a majority of both the
Trustees of the Trust and the Non-Interested Trustees, cast in person at a
meeting called for the purpose of voting on such approval.
(b) This Plan may be terminated at any time with respect to any Series by
a vote of a majority of the NonInterested Trustees or by a vote of a majority
of the outstanding voting securities, as defined in the 1940 Act, of Shares of
the applicable Series.
6. Amendments. This Plan may not be amended to increase materially the
maximum expenditures permitted by Section 3 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities, as
<PAGE>
defined in the 1940 Act, of Shares of the applicable Series, and no material
amendment to this Plan shall be made unless approved in the manner provided for
annual renewal of this Plan in Section 5(a) hereof.
7. Selection and Nomination of Trustees. While this Plan is in effect,
the selection and nomination of the Non-Interested Trustees of the Trust shall
be committed to the discretion of such Non-Interested Trustees.
8. Quarterly Reports. The Treasurer of the Trust shall provide to the
Trustees of the Trust and the Trustees shall review quarterly a written report
of the amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 8 hereof, for a
period of not less than six years from the date of this Plan. Any such related
agreement or such reports for the first two years will be maintained in an
easily accessible place.
10. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the
provisions of the 1940 Act.
Exhibit o
CITIFUNDS TAX FREE INCOME TRUST
MULTIPLE CLASS PLAN
MULTIPLE CLASS PLAN, dated as of November 13, 1998, of CitiFunds Tax Free
Income Trust, a Massachusetts business trust (the "Trust"), with respect to
each of its series whether now existing or hereafter established (collectively,
the "Funds").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the shares of beneficial interest (without par value) of the
Trust (the "Shares") are divided into separate series and may be divided into
one or more separate classes;
WHEREAS, the Trust desires to adopt this Multiple Class Plan (the "Plan")
on behalf of the Funds as a plan pursuant to Rule 18f-3 in order that the Funds
may issue multiple classes of Shares;
WHEREAS, the Board of Trustees of the Trust, in considering whether the
Trust should adopt and implement this Plan, has evaluated such information and
considered such pertinent factors as it deemed necessary to an informed
evaluation of this Plan and determination as to whether this Plan should be
adopted and implemented, and has determined that the adoption and
implementation of this Plan, including the expense allocation contemplated
herein, are in the best interests of each class of Shares individually, as well
as the best interests of the Funds;
NOW THEREFORE, the Trust hereby adopts this Plan pursuant to Rule 18f-3
under the 1940 Act, on the following terms and conditions:
1. The Funds may issue Shares in one or more classes (each, a "Class"
and collectively, the "Classes"). Shares so issued will have the rights and
preferences set forth in the Establishment and Designation of Classes and the
Trust's then current registration statement relating to the Funds.
<PAGE>
2. Shares issued in Classes will be issued subject to and in accordance
with the terms of Rule 18f-3 under the 1940 Act, including, without limitation:
(a) Each Class shall have a different arrangement for shareholder
services or the distribution of securities or both, and shall pay all of
the expenses of that arrangement;
(b) Each Class may pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred
in a different amount by that Class, or if the Class receives services of
a different kind or to a different degree than other Classes;
(c) Each Class shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement;
(d) Each Class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one Class differ from
the interests of any other Class; and
(e) Except as otherwise permitted under Rule 18f-3 under the 1940
Act, each Class shall have the same rights and obligations as each other
Class.
3. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Board of Trustees of the responsibility for
and control of the conduct of the affairs of the Trust.
4. This Plan shall become effective as to the Funds upon the later to
occur of (a) approval by a vote of the Board of Trustees and vote of a majority
of the Trustees who are not "interested persons" of the Trust (the "Qualified
Trustees"), and (b) January 4, 1999.
5. This Plan shall continue in effect indefinitely unless terminated by
a vote of the Board of Trustees of the Trust. This Plan may be terminated at
any time with respect to the Funds by a vote of the Board of Trustees of the
Trust. This Plan supercedes any and all other multiple class plans heretofore
approved by the Board of Trustees of the Trust with respect to the Funds.
<PAGE>
6. This Plan may be amended at any time by the Board of Trustees of the
Trust, provided that any material amendment of this Plan shall be effective
only upon approval by a vote of the Board of Trustees of the Trust and a
majority of the Qualified Trustees.
7. This Plan shall be construed in accordance with the laws of the
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
8. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall
not be affected thereby.
