<PAGE>
As filed with the Securities and Exchange Commission on April 30, 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. 25
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 26
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 May 3, 1999
pursuant to paragraph (b) of Rule 485.
<PAGE>
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PROSPECTUS
----------
MAY 3, 1999
CitiFunds(SM)
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.
<PAGE>
Table of Contents
FUND AT A GLANCE ....................................................... 3
YOUR CITIFUNDS(SM) ACCOUNT ............................................. 12
CHOOSING A SHARE CLASS .............................................. 12
HOW TO BUY SHARES ................................................... 18
HOW THE PRICE OF YOUR SHARES IS CALCULATED 19
HOW TO SELL SHARES .................................................. 19
REINSTATING RECENTLY SOLD SHARES .................................... 21
EXCHANGES ........................................................... 21
DIVIDENDS ........................................................... 22
TAX MATTERS ......................................................... 23
MANAGEMENT OF THE FUND ................................................. 26
MANAGER ............................................................. 26
MANAGEMENT FEES ..................................................... 27
MORE ABOUT THE FUND .................................................... 28
PRINCIPAL INVESTMENT STRATEGIES ..................................... 28
RISKS ............................................................... 34
FINANCIAL HIGHLIGHTS ................................................... A-1
APPENDIX 1 ............................................................. B-1
APPENDIX 2 ............................................................. C-1
TAXABLE EQUIVALENT YIELD TABLE ...................................... C-1
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----------------
FUND AT A GLANCE
----------------
Fund at a Glance
This summary briefly describes CitiFunds California Tax Free
Income Portfolio and the principal risks of investing in it.
For more information, see MORE ABOUT THE FUND on page 28.
CitiFunds(SM)
California Tax Free
Income Portfolio
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 which are municipal obligations 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.
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. The Fund may also 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. 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 including the federal
alternative minimum tax.
Citibank seeks to minimize the Fund's exposure to the risk of
default by investing in debt securities that are:
o Investment grade (investment grade securities are those rated Baa
or better by Moody's or 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.
Under normal market conditions, the Fund intends that the
dollar-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 average dollar-weighted 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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in
this Fund. The principal risks of investing in CitiFunds
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 34 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 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 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 a common form of
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,
causing the Fund's share price to go down. In addition, 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 and the availability of liquid markets. 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 CitiFunds
California Tax Free Income Portfolio is not a complete
investment program.
You should consider investing in CitiFunds 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 CitiFunds 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 and possible losses.
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.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
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SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT:
..............................................................................
SHARE CLASS (Class descriptions begin on page 12) CLASS A CLASS B
..............................................................................
Maximum Sales Charge (Load) Imposed on Purchases 4.50% None
..............................................................................
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2)
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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%
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* Because some of the Fund's expenses are expected to be waived
or reimbursed, actual total operating expenses for the current fiscal
year are estimated to 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.
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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 (redeemed) 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:
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CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
..............................................................................
1 Year 3 Years 5 Years 10 Years
..............................................................................
Class A $605 $932 $1,282 $2,265
..............................................................................
Class B
..............................................................................
Assuming redemption at end of $663 $958 $1,229 $2,198
period
..............................................................................
Assuming no redemption $213 $658 $1,129 $2,198
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<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.
CLASS A AT A GLANCE:
o Front-end load -- there is an initial sales charge of 4.50% or less
o Lower sales charge rates for larger investments
o Annual service fee of up to 0.25%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE:
o No initial sales charge
o The deferred sales charge declines from 4.50% to 1% over five
years, and is eliminated if you hold your shares for six years or
more
o Annual distribution/service fee of up to 0.75%
o Automatic conversion to Class A shares after 8 years
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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.
- --------------------------------------------------------------------------------
----------------------
YOUR CITIFUNDS ACCOUNT
----------------------
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.
- --------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING 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%
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*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
that represent capital appreciation or 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.
- --------------------------------------------------------------------------------
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 and capital gain distributions or on 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.
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 Appendix 1 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 CitiFunds 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 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. If you wish to transfer your account,
you may only transfer it to another financial institution that
acts as a Service Agent, or you may set up an account directly
with the Fund's transfer agent.
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. Under the Plan,
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 a CDSC on the shares withdrawn under the
Plan. For more information, please contact the Fund's transfer
agent or, if you are a customer of a Service Agent, 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.
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 semi-
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.
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.
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.
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 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
CitiFunds 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 has been managing money since 1822. With its
affiliates, it currently manages more than $327 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is 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 joined Citibank in 1997
as 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.
From 1994 to 1997, Mr. Mooney served as a Vice President and
tax-exempt portfolio manager at SunAmerica and, prior to that,
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.
<PAGE>
----------------------
MANAGEMENT OF THE FUND
----------------------
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 subadvisory
agreements to be changed, and the employment of subadvisers to
be continued after events that would otherwise cause an
automatic termination of a subadvisory 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
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
Citibank waived its entire fee for management services for the
Fund's fiscal year ended December 31, 1998.
More About the Fund
The Fund's goals, principal investments and risks are
summarized in FUND AT A GLANCE on page 3. 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.
<PAGE>
-------------------
MORE ABOUT THE FUND
-------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
WHAT ARE MUNICIPAL LEASE OBLIGATIONS?
Municipal lease obligations are undivided interests issued by
a state or municipality in a lease or installment purchase of
equipment or facilities.
- --------------------------------------------------------------------------------
The Fund may invest in participation interests in municipal
obligations that are issued by banks and other financial
institutions and in variable rate demand notes. 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
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. The Fund also 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. 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 including the federal
alternative minimum tax.
Citibank seeks to minimize the Fund's exposure to the risk of
default by investing in debt securities that are:
o Investment grade (investment grade securities are those rated Baa
or better by Moody's or 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
dollar-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 dollar-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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
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
taxable money market and other short-term instruments, and may
not be pursuing its investment goals.
MANAGEMENT STYLE. CitiFunds California Tax Free Income
Portfolio is managed by employing a combination of qualitative
and quantitative analysis. The portfolio managers decide which
securities to purchase by first 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, the portfolio managers
develop expectations for the performance of short-,
intermediate- and long-term bonds although they generally make
only modest adjustments to reflect their 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 managers use
this same approach when deciding which securities to sell.
Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better
opportunities exist or that the security no longer fits within
the managers' overall strategies for achieving the Fund's
goals. For more information about the portfolio managers, see
"Manager" on page 26.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the
portfolio managers attempt 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 and California State personal income
taxes. Investors should be willing to accept fluctuations 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 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 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 a common form of
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, causing the Fund's share price to go down.
In addition, 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 and the availability of liquid markets. 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>
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<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
performance for the fiscal period indicated. Certain information reflects
financial results for a single Class A Fund share. The total return in the
table represents 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 in the Statement of
Additional Information and which is available upon request.
November 2, 1998 (Commencement of Operations) to December 31, 1998
..............................................................................
Net Asset Value, beginning of period $10.00
..............................................................................
Income From Operations:
Net investment income 0.069
Net realized and unrealized gain (loss) on investments 0.080
..............................................................................
Total from operations 0.149
..............................................................................
Less Dividends From:
Net investment income (0.069)
..............................................................................
Net Asset Value, end of period $10.08
..............................................................................
Total return (A) 1.49%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $96,706
Ratio of expenses to average net assets 0%*
Ratio of net investment income to average net assets 4.16%*
Portfolio turnover 1%
Note: If agents of the Fund had not voluntarily agreed to waive all of their
fees for the period and the Sub-administrator had not voluntarily assumed
expenses, the net investment income per share and the ratios would have been
as follows:
Net investment income per share $0.042
RATIOS:
Expenses to average net assets 1.60%*
Net investment income to average net assets 2.56%*
* Annualized.
** Not annualized.
(A)Total Return does not include the maximum sales charge of 4.50% effective
January 4, 1999.
<PAGE>
Appendix 1
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
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:
o 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
o all investments made during a calendar month will age one month
on the last day of the month and each subsequent month
o 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)
o 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:
o the redeemed shares were subject to an initial sales charge or a
deferred sales charge (whether or not actually imposed), and
o 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:
o 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
o the redemption is made within 60 days prior to the investment in
the Fund, and
o 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>
Appendix 2
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 1999 UNDER FEDERAL PERSONAL AND CALIFORNIA STATE INCOME TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following tables show the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws,
and under the California State personal income tax laws described in the
tables. If tax laws, rates or brackets are changed, the information in the
table would be out of date. CitiFunds California Tax Free Income Portfolio
expects that a substantial portion of its dividends will be exempt from
federal personal income taxes. CitiFunds California Tax Free Income Portfolio
also expects that a substantial portion of its dividends will be exempt from
California personal income taxes. However, in reviewing the tables below, you
should remember that the Fund may also pay dividends which are subject to
federal, state and local personal income taxes.
FEDERAL TAX RATES
<TABLE>
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
*Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
<PAGE>
----------
APPENDIX 2
----------
CALIFORNIA TAX RATES
<TABLE>
<CAPTION>
Taxable Income* Income California Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1998*** Joint 1998*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 17.86% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0 - $ 43,050 17.42% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.27% 7.87%
$ 25,751 - $ 62,450 34.46% 3.05% 3.81% 4.58% 5.34% 6.10% 6.87% 7.63% 8.39% 9.15% 9.92%
$ 43,051 - $104,050 34.08% 3.03% 3.79% 4.55% 5.31% 6.07% 6.83% 7.58% 8.34% 9.10% 9.86%
$ 62,451 - $130,250 $104,051 - $158,550 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$130,251 - $283,150 $158,551 - $283,150 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$283,151 & Over $283,151 & Over 45.22% 3.65% 4.56% 5.48% 6.39% 7.30% 8.21% 9.13% 10.04% 10.95% 11.87%
</TABLE>
*Net amount subject to Federal and California personal income tax after
deductions and exemptions.
**Effective combined federal and state tax bracket.
***State rate based on the average state rate for the federal tax bracket.
Combined Federal and California rate assumes itemization of state tax
deduction. California tax rates are based on 1998 information since at this
time 1999 information is not available.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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 Numbers: 811-5034 CFP-CAP 5/99
<PAGE>
----------
PROSPECTUS
----------
MAY 3, 1999
CitiFunds(SM)
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.
<PAGE>
Table of Contents
FUND AT A GLANCE ....................................................... 3
YOUR CITIFUNDS(SM) ACCOUNT ............................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 19
HOW THE PRICE OF YOUR SHARES IS CALCULATED 20
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
DIVIDENDS ........................................................... 23
TAX MATTERS ......................................................... 24
MANAGEMENT OF THE FUND ................................................. 27
MANAGER ............................................................. 27
MANAGEMENT FEES ..................................................... 28
MORE ABOUT THE FUND .................................................... 29
PRINCIPAL INVESTMENT STRATEGIES ..................................... 29
RISKS ............................................................... 35
FINANCIAL HIGHLIGHTS ................................................... A-1
APPENDIX 1 ............................................................. B-1
APPENDIX 2 ............................................................. C-1
TAXABLE EQUIVALENT YIELD TABLE ...................................... C-1
<PAGE>
----------------
FUND AT A GLANCE
----------------
Fund at a Glance
This summary briefly describes CitiFunds National Tax Free
Income Portfolio and the principal risks of investing in it.
For more information, see MORE ABOUT THE FUND on page 29.
CitiFunds(SM)
National Tax Free
Income Portfolio
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, including the federal alternative minimum tax.
Citibank seeks to minimize the Fund's exposure to the risk of
default by investing in debt securities that are:
o Investment grade (investment grade securities are those rated Baa
or better by Moody's or 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.
Under normal market conditions, the Fund intends that the
dollar-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 dollar-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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in
this Fund. The principal risks of investing in CitiFunds
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 35
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
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 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 a common form of
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,
causing the Fund's share price to go down. In addition, 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 and the availability of liquid markets. 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 CitiFunds
National Tax Free Income Portfolio is not a complete
investment program.
You should consider investing in CitiFunds 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 CitiFunds 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 and possible losses.
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 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 or sales charges.
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 (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
[Graphic Omitted]
CITIFUNDS NATIONAL TAX FREE
INCOME PORTFOLIO
1996 1997 1998
3.31% 11.45% 10.05%
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 4.30% June 30, 1997
..............................................................................
Lowest (2.34)% March 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
August 17,
1 Year 1995
..............................................................................
Class A (with maximum sales charge) 5.10% 8.09%
..............................................................................
Class B N/A N/A
..............................................................................
Lehman Municipal 4 Years Plus Bond Index 6.73% *
- --------------------------------------------------------------------------------
*Information regarding performance for this period is not available.
Current yield (for 30 day period ending December 31, 1998): 4.49%
Tax equivalent yield (for 30 day period ending December 31, 1998): 7.43%
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.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
..............................................................................
SHARE CLASS (Class descriptions begin on page 13) CLASS A CLASS B
..............................................................................
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 current fiscal year are estimated to 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.
- --------------------------------------------------------------------------------
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 (redeemed) 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:
- --------------------------------------------------------------------------------
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
..............................................................................
1 Year 3 Years 5 Years 10 Years
..............................................................................
Class A $583 $864 $1,166 $2,023
..............................................................................
Class B
..............................................................................
Assuming redemption at end of $640 $888 $1,111 $2,060
period
..............................................................................
Assuming no redemption $190 $588 $1,011 $2,060
- --------------------------------------------------------------------------------
<PAGE>
----------------------
YOUR CITIFUNDS ACCOUNT
----------------------
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.
CLASS A AT A GLANCE
o Front-end load -- there is an initial sales charge of 4.50% or
less
o Lower sales charge rates for larger investments
o Annual service fee of up to 0.25%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE
o No initial sales charge
o The deferred sales charge declines from 4.50% to 1% over five
years, and is eliminated if you hold your shares for six years or
more
o Annual distribution/service fee of up to 0.75%
o Automatic conversion to Class A shares after 8 years
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING 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 that represent capital
appreciation or 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.
- --------------------------------------------------------------------------------
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 and capital gain distributions or on 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.
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 Appendix 1
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 CitiFunds 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 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. If you wish to transfer your account,
you may only transfer it to another financial institution that
acts as a Service Agent, or you may set up an account directly
with the Fund's transfer agent.
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. Under the Plan,
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 a CDSC on the shares withdrawn under the
Plan. For more information, please contact the Fund's transfer
agent or, if you are a customer of a Service Agent, 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.
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 semi-
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.
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. 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.
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 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
-----------------------
Management of the Fund
MANAGER
CitiFunds 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 has been managing money since 1822. With its
affiliates, it currently manages more than $327 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is 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 joined Citibank in 1997 as 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. From 1994 to
1997, Mr. Mooney served as a Vice President and tax-exempt
portfolio manager at SunAmerica and, prior to that, 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
Citibank waived its entire fee for management services for the
Fund's fiscal year ended December 31, 1998.
<PAGE>
-------------------
MORE ABOUT THE FUND
-------------------
More About the Fund
The Fund's goals, principal investments and risks are
summarized in FUND AT A GLANCE on page 3. 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 of
equipment or facilities.
- --------------------------------------------------------------------------------
The Fund may invest in participation interests in municipal
obligations that are issued by banks and other financial
institutions and in variable rate demand notes. 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 including the federal alternative
minimum tax.
Citibank seeks to minimize the Fund's exposure to the risk of
default by investing in debt securities that are:
o Investment grade (investment grade securities are those rated Baa
or better by Moody's or 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
dollar-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 dollar-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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
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
taxable money market and other short-term instruments, and may
not be pursuing its investment goals.
MANAGEMENT STYLE. CitiFunds National Tax Free Income Portfolio
is managed using a combination of qualitative and quantitative
analysis. The portfolio managers decide which securities to
purchase by first developing an interest rate forecast and
analysis of general economic conditions throughout the United
States. Then the portfolio managers compare specific regions
and sectors to identify broad segments of the municipal market
poised to benefit in this environment. The portfolio managers
also closely study 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 managers use this same
approach when deciding which securities to sell. Securities
are sold when the Fund needs cash to meet redemptions, or when
the managers believe that better opportunities exist or that
the security no longer fits within the managers' overall
strategies for achieving the Fund's goals. For more
information about the portfolio managers, see "Manager" on
page 27.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the
portfolio managers attempt 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.
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 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 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 a common form of
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, causing the Fund's share price to go down.
In addition, 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 and the availability of liquid markets. 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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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.) This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, is included in the
Annual Report which is incorporated by reference in the Statement of
Additional Information and which is available upon request.
<TABLE>
<CAPTION>
August 17, 1995
Year Ended December 31, (Commencement
--------------------------------------------------------- of Operations) to
1998 1997 1996 December 31, 1995
............................................................................................................................
<S> <C> <C> <C> <C>
Net Asset Value, beginning of
period $10.92 $10.34 $10.55 $10.00
............................................................................................................................
Income From Operations:
Net investment income 0.524 0.564 0.562 0.187
Net realized and unrealized gain
(loss) on investments 0.549 0.586 (0.232) 0.551
............................................................................................................................
Total from operations 1.073 1.150 0.330 0.738
............................................................................................................................
Less Dividends From:
Net investment income (0.540) (0.570) (0.540) (0.188)
Net realized gain on investments (0.023) -- -- --
............................................................................................................................
Decrease from distributions (0.563) (0.570) (0.540) (0.188)
............................................................................................................................
Net Asset Value, end of period $11.43 $10.92 $10.34 $10.55
............................................................................................................................
Total return (A) 10.05% 11.45% 3.31% 7.43%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $259,447 $1,917 $2,060 $1,306
Ratio of expenses to average net
assets (B) 0% 0.14% 0% 0%
Ratio of expenses to average net
assets after fees paid
indirectly (B) 0% 0% 0% 0%
Ratio of net investment income
to average net assets 4.49% 5.45% 5.42% 5.20%*
Portfolio turnover 57% 55% 52% 0%
Note: If agents of the Fund had not voluntarily agreed to waive all of their fees for the period, the expenses were not
reduced for fees paid indirectly, the Sub-administrator had not voluntarily assumed expenses and had expenses been limited to
that required by certain state securities law in 1995, the net investment income per share and the ratios would have been as
follows:
Net investment income (loss) per
share $0.364 $(0.229) $(0.291) $0.098
RATIOS:
Expenses to average net assets 1.37% 7.66% 8.23% 2.50%*
Net investment income (loss) to
average net assets 3.12% (2.21)% (2.81)% 2.70%*
* Annualized.
** Not annualized
(A)Total return does not include the maximum sales charge of 4.50% effective January 4, 1999.
(B)The expense ratios for the year ended December 31, 1995 and the periods thereafter have been adjusted to reflect a change
in reporting requirements. The new reporting guidelines require the Fund to increase its expense ratio by the effect of any
expense offset ar rangements with its service providers.
</TABLE>
<PAGE>
Appendix 1
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
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:
o 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
o all investments made during a calendar month will age one month
on the last day of the month and each subsequent month
o 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)
o 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:
o the redeemed shares were subject to an initial sales charge or
a deferred sales charge (whether or not actually imposed), and
o 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:
o 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
o the redemption is made within 60 days prior to the investment
in the Fund, and
o 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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
----------
APPENDIX 2
----------
Appendix 2
TAXABLE EQUIVALENT YIELD TABLE
RATES FOR 1999 UNDER FEDERAL PERSONAL INCOME TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following table shows the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws.
If tax laws, rates or brackets are changed, the information in the table would
be out of date. CitiFunds National Tax Free Income Portfolio expects that a
substantial portion of its dividends will be exempt from federal personal
income taxes. However, in reviewing the table below, you should remember that
CitiFunds National Tax Free Income Portfolio may also pay dividends which are
subject to federal, state and local personal income taxes.
FEDERAL TAX RATES
<TABLE>
<CAPTION>
Taxable Incme* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
<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 CFP-NAT 5/99
<PAGE>
----------
PROSPECTUS
----------
MAY 3, 1999
CitiFunds(SM)
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.
<PAGE>
Table of Contents
FUND AT A GLANCE ....................................................... 3
YOUR CITIFUNDS(SM) ACCOUNT ............................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 19
HOW THE PRICE OF YOUR SHARES IS CALCULATED 20
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
DIVIDENDS ........................................................... 23
TAX MATTERS ......................................................... 24
MANAGEMENT OF THE FUND ................................................. 27
MANAGER ............................................................. 27
MANAGEMENT FEES ..................................................... 28
MORE ABOUT THE FUND .................................................... 29
PRINCIPAL INVESTMENT STRATEGIES ..................................... 29
RISKS ............................................................... 35
FINANCIAL HIGHLIGHTS ................................................... A-1
APPENDIX 1 ............................................................. B-1
APPENDIX 2 ............................................................. C-1
TAXABLE EQUIVALENT YIELD TABLES ..................................... C-1
<PAGE>
----------------
FUND AT A GLANCE
----------------
Fund at a Glance
This summary briefly describes CitiFunds New York Tax Free
Income Portfolio and the principal risks of investing in it.
For more information, see MORE ABOUT THE FUND on page 29.
CitiFunds(SM)
New York Tax Free Income Portfolio
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 New York
municipal obligations which are 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, including the federal
alternative minimum 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 in debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's or 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.
Under normal market conditions, the Fund intends that the
dollar-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 dollar-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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in
this Fund. The principal risks of investing in CitiFunds 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 35
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 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
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 a common form of
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,
causing the Fund's share price to go down. In addition, 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 and the availability of liquid markets. 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 CitiFunds New
York Tax Free Income Portfolio is not a complete investment
program.
You should consider investing in CitiFunds New York 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 New York State or City taxes.
Don't invest in CitiFunds 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 and possible losses.
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 index does not include the
costs of buying and selling securities and other Fund expenses or
sales charges.
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 (WITHOUT SALES CHARGE)
(per calendar year -- Class A)
1989 9.73%
1990 5.93%
1991 12.34%
1992 7.86%
1993 12.03%
1994 -7.47%
1995 17.89%
1996 3.01%
1997 9.62%
1998 6.89%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 6.98% March 31, 1995
..............................................................................
Lowest (5.98%) March 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
................................................................................
Life of Fund
Since
1 Year 5 Years 10 Years September 8, 1986
................................................................................
Class A (with maximum sales
charge) 2.08% 4.69% 7.09% 6.63%
................................................................................
Class B N/A N/A N/A N/A
................................................................................
Lehman Municipal Bond Index 6.48% 6.22% 8.22% * %
- --------------------------------------------------------------------------------
* Information regarding performance for this period is not available.
Current yield (for 30 day period ending December 31, 1998): 4.01%
Tax equivalent yield (for 30 day period ending December 31, 1998): 7.13%
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.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
...............................................................................
SHARE CLASS (Class descriptions begin on page 13) CLASS A CLASS B
...............................................................................
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.
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 (redeemed) 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:
- --------------------------------------------------------------------------------
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
................................................................................
1 Year 3 Years 5 Years 10 Years
................................................................................
Class A $556 $781 $1,024 $1,720
................................................................................
Class B
................................................................................
Assuming redemption at end of period $612 $802 $ 966 $1,755
................................................................................
Assuming no redemption $162 $502 $ 866 $1,755
- --------------------------------------------------------------------------------
<PAGE>
----------------------
YOUR CITIFUNDS ACCOUNT
----------------------
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.
CLASS A AT A GLANCE
o Front-end load -- there is an initial sales charge of 4.50% or less
o Lower sales charge rates for larger investments
o Annual service fee of up to 0.25%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE
o No initial sales charge
o The deferred sales charge declines from 4.50% to 1% over five years,
and is eliminated if you hold your shares for six years or more
o Annual distribution/service fee of up to 0.75%
o Automatic conversion to Class A shares after 8 years
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING 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 that represent capital
appreciation or 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.
- --------------------------------------------------------------------------------
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 and capital gain distributions or on 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.
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 Appendix 1 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 CitiFunds 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. If you wish to transfer your account,
you may only transfer it to another financial institution that
acts as a Service Agent, or you may set up an account directly
with the Fund's transfer agent.
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. Under the Plan,
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 a CDSC on the shares withdrawn under the
Plan. For more information, please contact the Fund's transfer
agent or, if you are a customer of a Service Agent, 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.
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 semi-
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.
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).
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 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
----------------------
Management of the Fund
MANAGER
CitiFunds 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 has been managing money since 1822. With its
affiliates, it currently manages more than $327 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is 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 joined Citibank in 1997 as 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. From 1994 to
1997, Mr. Mooney served as a Vice President and tax-exempt
portfolio manager at SunAmerica and, prior to that, 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
-------------------
More About the Fund
The Fund's goals, principal investments and risks are
summarized in FUND AT A GLANCE on page 3. 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 of
equipment or facilities.
- --------------------------------------------------------------------------------
The Fund may invest in participation interests in municipal
obligations that are issued by banks and other financial
institutions and in variable rate demand notes. 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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, including the federal
alternative minimum 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 in debt securities that are:
o Investment grade (investment grade securities are those rated Baa or
better by Moody's or 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
dollar-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 dollar-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. 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, the
availability of liquid markets, and Citibank accurately
predicting movements in interest rates.
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
taxable money market and other short-term instruments, and may
not be pursuing its investment goals.
MANAGEMENT STYLE. CitiFunds New York Tax Free Income Portfolio
is managed with a combination of qualitative and quantitative
analysis. The portfolio managers decide which securities to
purchase by first 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, the portfolio managers develop
expectations for the performance of short-, intermediate- and
long-term bonds although they generally make only modest
adjustments to reflect their 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 managers use this
same approach when deciding which securities to sell.
Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better
opportunities exist or that the security no longer fits within
the managers' overall strategies for achieving the Fund's
goals. For more information about the portfolio managers, see
"Manager" on page 27.
PORTFOLIO TURNOVER. The Fund is actively managed. Although the
portfolio managers attempt 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, New York State and New York City personal
income taxes. Investors should be willing to accept
fluctuations 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.
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 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 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 a common form of
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, causing the Fund's share price to go down.
In addition, 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 and the availability of liquid markets. 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
--------------------
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 in the Statement of
Additional Information and which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
..............................................................................................................................
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $11.42 $10.98 $11.25 $10.09 $11.54
..............................................................................................................................
Income From Operations:
Net investment income 0.487 0.594 0.585 0.607 0.566
Net realized and unrealized gain
(loss) on investments 0.282 0.431 (0.267) 1.153 (1.415)
..............................................................................................................................
Total from operations 0.769 1.025 0.318 1.760 (0.849)
..............................................................................................................................
Less Dividends From:
Net investment income (0.499) (0.585) (0.588) (0.600) (0.601)
..............................................................................................................................
Net Asset Value, end of period $11.69 $11.42 $10.98 $11.25 $10.09
..............................................................................................................................
Total return (A) 6.89% 9.62% 3.01% 17.89% (7.47)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $459,591 $75,978 $82,182 $90,264 $86,399
Ratio of expenses to average net
assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of net investment income to
average net assets 4.24% 5.31% 5.34% 5.62% 5.52%
Portfolio turnover 17% 16% 47% 98% 150%
Note: If agents of the Fund had not voluntarily agreed to waive all or a portion of their fees for the periods indicated and
the expenses were not reduced for fees paid indirectly for the years ended after December 31, 1994, the net investment income
per share and the ratios would have been as follows:
Net investment income per share $0.454 $0.540 $0.534 $0.555 $0.508
RATIOS:
Expenses to average net assets 1.09% 1.28% 1.27% 1.27% 1.27%
Net investment income to average net
assets 3.95% 4.83% 4.87% 5.15% 5.05%
(A) Total Return does not include the maximum sales charges of 4.50% effective January 4, 1999.
</TABLE>
<PAGE>
----------
Appendix 1
----------
Appendix 1
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
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:
o 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
o all investments made during a calendar month will age one month
on the last day of the month and each subsequent month
o 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)
o 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:
o the redeemed shares were subject to an initial sales charge or a
deferred sales charge (whether or not actually imposed), and
o 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:
o 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
o the redemption is made within 60 days prior to the investment in
the Fund, and
o 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>
----------
APPENDIX 2
----------
Appendix 2
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 1999 UNDER FEDERAL PERSONAL, NEW YORK STATE AND NEW YORK CITY INCOME
TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following tables show the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws,
and under the New York State and New York City personal income tax laws
described in the tables. If tax laws, rates or brackets are changed, the
information in the table would be out of date. CitiFunds New York Tax Free
Income Portfolio expects that a substantial portion of its dividends will be
exempt from federal personal income taxes. Similarly, CitiFunds New York Tax
Free Income Portfolio expects a substantial portion of the dividends it pays
will be exempt from New York State and New York City personal income taxes.
However, in reviewing the tables below, you should remember that the Fund may
also pay dividends which are subject to federal, state and local personal
income taxes.
<TABLE>
FEDERAL TAX RATES
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
* Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
<PAGE>
<TABLE>
NEW YORK STATE TAX RATES
<CAPTION>
Taxable Income* Income New York Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999** Joint 1999*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 19.51% 2.48% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.83% 7.45% 8.08%
$0 - $ 43,050 19.25% 2.48% 3.10% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 62,451 - $130,250 $104,051 - $158,550 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$130,251 - $283,150 $158,551 - $283,150 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$283,151 & Over $283,151 & Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket. Combined Federal and New York rate assumes itemization
of state tax deduction.
NEW YORK STATE AND CITY TAX RATES
<CAPTION>
Taxable Income* Income New York City Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999**** Joint 1999**** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 22.41% 2.58% 3.22% 3.87% 4.51% 5.16% 5.80% 6.44% 7.09% 7.73% 8.38%
$0 - $ 43,050 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$ 25,751 - $ 62,450 35.66% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.33% 10.10%
$43,051 - $104,050 35.65% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.32% 10.10%
$ 62,451 - $130,250 $104,051 - $158,550 38.37% 3.25% 4.06% 4.67% 5.68% 6.49% 7.30% 8.11% 6.92% 9.74% 10.55%
$130,251 - $283,150 $158,551 - $283,150 42.89% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$283,151 & Over $283,151 & Over 46.05% 3.71% 4.63% 5.56% 6.49% 7.41% 8.34% 9.27% 10.19% 11.12% 12.05%
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined federal, state and city tax bracket.
**** State rate based on the average state rate for the federal tax bracket. City rate based on the average city rate for the
federal tax bracket. Combined Federal, New York State and New York City rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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 CFP-NYT 5/99
<PAGE>
Statement of
Additional Information
May 3, 1999
CITIFUNDS(SM) CALIFORNIA TAX FREE INCOME PORTFOLIO
CITIFUNDS(SM) NATIONAL TAX FREE INCOME PORTFOLIO
CITIFUNDS(SM) NEW YORK TAX FREE INCOME PORTFOLIO
CitiFunds(SM) California Tax Free Income Portfolio, CitiFunds(SM) National
Tax Free Income Portfolio, and CitiFunds(SM) New York Tax Free Income Portfolio
(the "Funds") are series of CitiFunds Tax Free Income Trust (the "Trust"). The
address and telephone number of the Trust are 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 GOVERNMENT AGENCY, AND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
- ----------------- ----
1. The Trust ........................................................... 2
2. Investment Objective and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ....... 3
4. Investment Restrictions ............................................. 12
5. Performance Information ............................................. 13
6. Determination of Net Asset Value; Valuation of Securities ........... 16
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs ................................................ 16
8. Management .......................................................... 23
9. Portfolio Transactions .............................................. 28
10. Description of Shares, Voting Rights and Liabilities ................ 29
11. Certain Additional Tax Matters ...................................... 30
12. Certain Bank Regulatory Matters ..................................... 32
13. Financial Statements ................................................ 32
Appendix A -- Additional Information Concerning California Municipal
Obligations .......................................................... A-1
Appendix B -- Additional Information Concerning New York Municipal
Obligations ......................................................... B-1
Appendix C -- Description of Securities Ratings ......................... C-1
Appendix D -- Taxable Equivalent Yield Tables ........................... D-1
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 May 3, 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 32
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 May 3, 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.
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 in this section 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 below and in the
Prospectus. 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, for example, the District of Columbia, Puerto Rico, Guam
and certain Indian tribes) 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 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.
Municipal Obligation commercial paper typically represents short-term,
unsecured, negotiable promissory notes. These obligations are issued by
agencies of state and local governments to finance seasonal working capital
needs of municipalities or to provide interim construction financing and are
paid from general revenues of municipalities or are refinanced with long-term
debt. In most cases, Municipal Obligation commercial paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions
of the Municipal Obligation market, size of a particular offering, the
maturity of the obligation and rating (if any) of the issue. The ratings of
Moody's Investors Service, Inc. ("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.
RISK 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 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
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.
RISK 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 1998, a continuation of international financial and economic turmoil
may result in a slowdown in the New York economy. 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.
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. Participations in municipal lease obligations are
deemed to be illiquid unless otherwise determined by the Board of Trustees.
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 to
the issuer 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.
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 State and city 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 or BBB by Standard
& Poor's 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 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 operating
policy 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 a common form of 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.
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, if correctly used, 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), they do not eliminate the risk of loss and
at the same time the futures contracts may 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
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
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, but the Fund may sell them
before the settlement date. 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.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that
case, there could be an unrealized loss at the time of delivery. 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
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. 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. The
Manager will make loans only when, in the judgment of the Manager, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. 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 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
("Rule 144A securities"). 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 Rule 144A
securities, unless, in the case of Rule 144A securities, the Board of Trustees
of the Trust determines, based on the trading markets for a specific Rule 144A
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 Rule 144A 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
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 subject to the
Funds' investment restriction on borrowing. 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 changed, a Fund could experience a loss.
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 taxable 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.
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. For purposes of restriction (1) above, arrangements
with respect to securities lending are not treated as borrowing.
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. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable
at the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
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, annualized, cumulative, and average
annual "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. Average
annual total return figures represent the average annual percentage change
over the specified period. Cumulative total return figures are not annualized
and represent the aggregate percentage or dollar value change over a stated
period of time. 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.
Average annual total return is a measure of a Fund's performance over
time. It is determined by taking a Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of that investment at the end of the
period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
distributions have been reinvested in Fund shares at net asset value on the
reinvestment dates during the period.
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 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 average annual 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.
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
--------- ----------
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
Period from November 2, 1998 (commencement of
operations) to December 31, 1998 ............ 2.58% $ 971
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
August 17, 1995 (commencement of operations) to
December 31, 1998 ............................. 8.09% $1,301
One year ended December 31, 1998 ................ 5.10% $1,053
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
Ten years ended December 31, 1998 ............... 7.09% $1,984
Five years ended December 31, 1998 .............. 4.69% $1,257
One year ended December 31, 1998 ................ 2.08% $1,023
The yields for the 30-day period ended December 31, 1998 were 4.40% for
the California Fund, 4.49% for the National Fund, and 4.01% for the New York
Fund.
The tax equivalent yields for the 30-day period ended December 31, 1998
were 8.03% for the California Fund, 7.43% for the National Fund, and 7.13% for
the New York Fund. Tax equivalent yields are set forth in Appendix D.
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.
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.
CALIFORNIA NATIONAL NEW YORK
FUND FUND FUND
---- ---- ----
Net Asset Value per share ............. $10.08 $11.43 $11.69
Per Share Sales Charge -- 4.50% of
public offering price (4.71% of
net asset value per share) .......... $ 0.47 $ 0.54 $ 0.55
Per Share Offering Price to the Public $10.55 $11.97 $12.24
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 REALLOWANCE
AMOUNT OF AS A % OF AS A % OF AS A % OF
INVESTMENT OFFERING PRICE INVESTMENT OFFERING 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 4.00%
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
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 or
on shares representing capital appreciation. Each Fund will assume that a
redemption of Class B shares is made:
[ ] 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 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
[ ] 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
+ 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 make the following programs available to shareholders to enable
them to reduce or eliminate the front-end sales charges on Class A shares, to
exchange Fund shares for shares of other CitiFunds without, in many cases, the
payment of a sales charge, or to provide for the automatic withdrawal of cash.
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
[ ] 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.
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 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 that offer only a single class of shares.
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
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 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 March 1996); Managing Director of Salomon Smith
Barney (since August 1993); and Chairman, President and Chief Executive
Officer of fifty-eight investment companies sponsored by Salomon Smith Barney.
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.
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 Trustee compensation for the period indicated:
AGGREGATE AGGREGATE AGGREGATE
COMPENSATION COMPENSATION COMPENSATION TOTAL
FROM THE FROM THE FROM THE COMPENSATION
CALIFORNIA NATIONAL NEW YORK FROM THE TRUST
TRUSTEE FUND(1) FUND(1) FUND(1) AND COMPLEX(2)
------- ------- ------- ------- --------------
Elliott J. Berv $590 $692 $1,974 $53,750
Philip W. Coolidge -0- -0- -0- -0-
Mark T. Finn 590 689 1,933 52,000
Riley C. Gilley 570 669 1,860 41,500
Diana R. Harrington 532 732 2,308 59,000
Susan B. Kerley 627 727 2,240 55,000
Heath B. McLendon(3) -0- -0- -0- -0-
C. Oscar Morong, Jr. 670 770 2,610 71,000
Walter E. Robb, III 591 691 1,948 50,000
E. Kirby Warren 619 719 2,170 49,000
William Woods, Jr. 613 713 2,152 54,000
(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, 50, 26, 34, 22, 41, 30, 41, 27,
29, and 29 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 April 9, 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 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 of 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 November 2, 1998 (commencement of operations) to
December 31, 1998, Citibank waived all management fees for the California
Fund.
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, all fees payable to Citibank by the National Fund under its
Management Agreement were waived.
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 $1,026,221, after waivers.
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
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,
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 November 2, 1998 (commencement of
operations) to December 31, 1998, CFBDS waived all fees payable from the
California Fund under the Distribution Agreement. For the fiscal years ended
December 31, 1996, 1997 and 1998, CFBDS waived all fees payable from the
National Fund under the Distribution Agreement. For the fiscal year ended
December 31, 1996, CFBDS waived all fees payable from the New York Fund under
the Distribution Agreement. For the fiscal years ended December 31, 1997 and
1998, the fees paid to CFBDS under the Distribution Agreement with the New
York Fund, after waivers, were $1,860 and $555,422, 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.
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.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's other clients.
Investment decisions for each Fund and for Citibank's other clients are made
with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for a Fund.
When purchases or sales of the same security for a Fund and for other
portfolios managed by Citibank occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large volume purchases or sales.
For the fiscal years ended December 31, 1996, 1997 and 1998, none of the
Funds paid any 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.
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
TAXATION OF THE FUNDS
FEDERAL TAXES. 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.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. 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 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.
BACKUP WITHHOLDING. 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.
DISPOSITION OF SHARES. 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. Gain may be increased (or loss
reduced) upon a redemption of Class A Fund shares held for 90 days or less
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of a sales charge which would otherwise apply because of any
sales charge paid on the original purchase of the Class A Fund shares.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
CERTAIN DEBT INVESTMENTS. 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.
FUTURE CONTRACTS, ETC. 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 shareholders. 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 futures contracts on behalf of the Funds to the
extent necessary to meet the requirements of Subchapter M of the Code.
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, Statement of Changes in Net
Assets, Financial Highlights for the period November 2, 1998 (commencement of
operations) to 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, 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 8, 1999, the Department of
Finance projected that the California economy will show moderate growth
through 2000, at a slower pace than in 1998. The economic expansion has been
marked by strong growth in high technology business services (including
computer software), construction, and computer and electronic components
manufacturing. The Asian economic crisis, which began in 1997, has had some
dampening effects on the State's economy, particularly in high technology
manufacturing. The widening trade deficit, continuing weakness in Asia,
initial signs of economic weakness in Latin America, and uncertainty in stock
prices worldwide all support moderating growth in 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 Aa3, A+ and
AA-, respectively, to the State's general obligation bonds. Each such rating
reflects only the views of the respective rating agency, and an explanation of
the significance of such rating may be obtained from such rating agency. There
is no assurance that such ratings will continue for any given period of time
or that they will not be revised or withdrawn entirely by such rating agency
if, in the judgment of such rating agency, circumstances so warrant. A
downward revision or withdrawal of any such rating may have an adverse effect
on the market price of the State's general obligation bonds.
CONSTITUTIONAL LIMITS ON SPENDING AND TAXES
STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject
to limitation" in excess of the Appropriations Limit. "Appropriations subject
to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most State subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels,
and appropriations of certain special taxes imposed by initiative (e.g.,
cigarette and tobacco taxes). The Appropriations Limit may also be exceeded in
cases of emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government or any transfer of the financial source for the provisions
of services from tax proceeds to non-tax proceeds. The measurement of change
in population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
The Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year period
above the combined Appropriations Limits for those two years is divided
equally between transfers to K-14 districts and refunds to taxpayers.
PROPOSITION 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed
State funding of public education below the university level and the operation
of the State Appropriations Limit, primarily by guaranteeing K-14 schools a
minimum share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are
guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII
B by reference to State per capita personal income) and enrollment ("Test 2"),
or (c) a third test, which would replace Test 2 in any year when the
percentage growth in per capita General Fund revenues from the prior year plus
one half of one percent is less than the percentage growth in State per capita
personal income ("Test 3"). Under Test 3, schools would receive the amount
appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues, plus an additional small adjustment factor. If
Test 3 is used in any year, the difference between Test 3 and Test 2 would
become a "credit" to schools which would be the basis of payments in future
years when per capita General Fund revenue growth exceeds per capita personal
income growth. Legislation adopted prior to the end of the 1988-89 Fiscal
Year, implementing Proposition 98, determined the K-14 schools' funding
guarantee under Test 1 to be 40.3 percent of the General Fund tax revenues,
based on 1986-87 appropriations. However, that percentage has been adjusted to
approximately 35 percent to account for a subsequent redirection of local
property taxes, since such redirection directly affects the share of General
Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit
to K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98 sources stayed almost constant at approximately $4,200 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from "below" the current base.
Repayments are spread over the eight-year period of 1994-95 through 2001-02 to
mitigate any adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1998-99 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets. Because of the State's increasing revenues, per-pupil funding at
the K-12 level has increased by about 42 percent from the level in place from
1991-92 through 1993-94, and is estimated at about $5,944 per ADA in 1999-00. 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. Although General Fund revenue growth is expected to
slow in 1999-00, there are also new initiatives proposed to improve pupil
reading skills, to enhance teacher quality, and to increase school
accountability.
SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.
In August, 1998, a major tax relief package was enacted, which included a
25 percent vehicle license fee offset, an increase in the personal income tax
dependent credit, and a reinstatement of the renters' credit. Also included in
the 1998-99 tax relief package were a variety of federal conformity
provisions, targeted tax cuts and a reduction in horse racing licenses.
PERSONAL INCOME TAX
The California personal income tax, which in 1997-98 contributed about 51
percent of General Fund revenues and transfers, 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 and transfers 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 an
8.84 percent rate on profits. The former is imposed on corporations for
the privilege of doing business in California, while the latter is imposed
on corporations that derive income from California sources but are not
sufficiently present to be classified as doing business in the State.
2. Banks and other financial corporations are subject to the
franchise tax plus an additional tax at the rate of 2.0 percent on their
net income. This additional tax is in lieu of personal property taxes and
business license taxes.
3. The alternative minimum tax ("AMT") is similar to that in federal
law. In general, the AMT is based on a higher level of net income computed
by adding back certain tax preferences. This tax is imposed at a rate of
6.65 percent.
4. A minimum franchise tax of $800 is imposed on corporations subject
to the franchise tax but not on those subject to the corporate income tax.
New corporations with gross receipts under $1 million pay a reduced
minimum tax of $300 for their first year of incorporation and $500 for
their second year.
5. Sub-Chapter S corporations are taxed at 1.5 percent of profits.
INSURANCE TAX
The majority of insurance written in California is subject to a 2.35
percent gross premium tax. For insurers, this premium tax takes the place of
all other State and local taxes except those on real property and motor
vehicles. Exceptions to the 2.35 percent rate are certain pension and profit-
sharing plans which are taxed at the lesser rate of 0.50 percent, surplus
lines and nonadmitted insurance at 3 percent and ocean marine insurers at 5
percent of underwriting profits. Insurance taxes comprised approximately 2.2
percent of General Fund revenues and transfers in 1997-98.
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 and transfers 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 58 percent of all
Special Fund revenues and transfers in 1997-98. Principal sources of this
income are motor vehicle fuel taxes, registration and weight fees and vehicle
license fees. During the 1997-98 Fiscal Year, $8.4 billion was derived from
the ownership or operation of motor vehicles. About $4.8 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 percentage offset would be
reduced 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, 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.
Beginning January 1, 1999, after voters approved a constitutional
amendment (Proposition 10 of 1998), the excise tax imposed on distributors
selling cigarettes in California was increased from 37 to 87 cents per
package. At the same time, this amendment imposed a new excise tax on cigars,
chewing tobacco, pipe tobacco, and snuff that was implemented at a rate
"equivalent" to a 50 cent per pack tax on cigarettes. Proceeds of this new
state excise tax are to be allocated primarily for early childhood development
programs. Under current law, any increase in the tax on cigarettes
automatically triggers an increase in the tax on other tobacco products. Thus,
this amendment increased the excise tax on other tobacco products in total by
the equivalent of a $1 per pack increase in the tax on cigarettes.
TOBACCO LITIGATION
In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers, which was later ratified by a State court judge
having jurisdiction over a pending lawsuit brought by the State against these
companies. Under the settlement, the companies will pay California governments
a total of approximately $25 billion over a period of 25 years, starting with
some payments in the spring of 1999. Under the State's settlement, half of
these moneys will be paid to the State, and half to local governments (cities
and counties).
The specific amount to be received by the State and local governments is,
however, subject to adjustment for a number of reasons. First, the federal
government has indicated that it may seek recovery of part of the State's
settlement as reimbursement for federal Medicaid funding in prior years. The
State expects to resist such a claim, which may ultimately be resolved by
Congress. Second, various details in the settlement allow reduction of the
companies' payments because of events such as certain federal government
actions, reductions in cigarette sales, or bankruptcy of any settling
companies.
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, often needed to pay previously maturing
notes or warrants, were issued in the period from June 1992 to July 1994.
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 THROUGH 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 no 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 1995-96, $1.6 billion in 1996-97 and $2.4 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 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 new 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 and the Proposed
1999-00 Fiscal Year budget are based on estimates and projections of revenues
and expenditures for the current and upcoming fiscal years and must not be
construed as statements of fact. These estimates and projections are based
upon various assumptions as updated in the 1999-00 Governor's Budget 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 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 then 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 projected a balance in the State Fund for
Economic Uncertainties (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 assumed the State will carry out its
normal intra-year cash flow borrowing in the amount of $1.7 billion of revenue
anticipation notes, which were issued on October 1, 1998.
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 has been
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).
Other significant elements of the revised 1998-99 Budget Acts are as
follows:
1. Proposition 98 funding for K-12 schools is increased by $2.2
billion in General Fund moneys over the latest revised 1997-98 levels,
about $1 billion higher than the minimum Proposition 98 guarantee. 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. Overall, per-
pupil spending for K-12 schools under Proposition 98 is increased to
$5,752, which is $478 over the 1997-98 level. 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
actual 1997-98 level. General Fund support was increased by $339 million
(15.6%) for the University of California and $271 million (14.5%) for the
California State University system. In addition, Community Colleges
increased by $183 million (9.0%).
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 15% over 1997-98, primarily to reflect increased State support
for local trial courts and rising prison population.
5. Various other highlights of the revised Budget included new
funding for resources projects, dedication of $240 million of General Fund
moneys for capital outlay projects, funding of a 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 $173 million in federal reimbursements
for federal fiscal year 1998.
The revised 1998-99 budget as reported in the 1999-00 Governor's Budget,
also reflects the latest estimated costs or savings as provided in various
pieces of legislation passed and signed after the 1998 Budget Act. Major
budget items include costs for the All-American Canal, State's share of
purchase of Headwaters Forest, and additional funds for state prisons and
juvenile facilities. The revised budget reflects a $433 million reduction in
the State's obligation to contribute to the State Teachers' Retirement System
in 1998-99.
PROPOSED 1999-00 BUDGET
On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-2000 (the "Governor's Budget"). The Governor's Budget generally
reported that General Fund revenues for fiscal years 1998-99 and 1999-00 would
be lower than earlier projections (primarily due to the overseas economic
downturn), while some caseloads would be higher than earlier projections. The
Governor's Budget was designed to meet ongoing caseloads and basic inflation
adjustments, and included certain new programs.
The Governor's Budget projects General Fund revenues and transfers in
1999-00 of $60.3 billion. This includes anticipated initial payments from the
tobacco litigation settlement of about $560 million, and receipt of one-time
revenue from sale of assets. The Governor also assumes receipt of about $400
million of federal aid for certain health and welfare programs and
reimbursement for costs for incarceration of undocumented felons, above
amounts presently received by California from the federal government. The
Governor's Budget notes that more accurate revenue estimates will be available
in May and June before adoption of the budget. Among other things, the amount
of realized capital gains for 1998 is still unknown, given the large
fluctuations in the stock market last year. The Governor has not proposed any
tax cuts or increases.
The Governor's Budget proposes General Fund expenditures of $60.5 billion.
The Governor's Budget gives highest priority to education, with Proposition 98
funding increasing by almost 5 percent. The Governor proposed certain new
education initiatives focused on improving reading skills, teacher quality and
school accountability. The Governor proposed modest increase in funding for
higher education, and an 8 percent increase in SSP payments (a State-funded
welfare program), while assuming decreases in Medi-Cal and CalWORKS grant
costs due to lowering caseloads. The Governor also proposes to reduce
expenditures by deferring certain previously budgeted expenditures totaling
about $170 million.
Based on the proposed revenues and expenditures, the Governor's Budget
projects the June 30, 2000 balance in the SFEU would drop to about $415
million.
The Governor's Budget includes a proposal to implement changes in law to
make "mid-course corrections" in the State's budget if ongoing revenues fall
short of projections during a fiscal year or expenditures increase
significantly. The proposals include two components: restoring authority for
the Director of Finance to reduce expenditures in certain circumstances, and
an automatic "trigger" mechanism which would produce spending cuts if certain
conditions were met. These proposals will require legislative action.
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 December 1996, the DOIT began requiring departments to report on Y2K
activities and currently requires departmental monthly reporting of Y2K
status. The DOIT has emphasized to departments that efforts should be focused
on applications that support mission-critical business practices.
The risks posed by Y2K information technology related issues are not
confined to computer systems, but also include problems presented by embedded
microchips (products or systems that contain microchips to perform functions
such as traffic control, instruments used in hospitals or medical
laboratories, and California Aqueduct monitoring). To address these problems,
the Governor issued Executive Order W-163-97, broadening the responsibilities
of the DOIT to resolve these issues as well as legal questions associated with
Y2K issues. The executive order also required that mission critical systems be
remediated by December 31, 1998, that purchases of new systems, hardware,
software and equipment be Year 2000 compliant and further limited new computer
projects to those required by law until a department's Y2K problems are
resolved. The DOIT has also more recently required departments to address
interfacing of State IT systems with external IT systems, and to report on
contingency planning status for problems which might occur if IT systems are
not fully remediated by the end of 1999.
In its quarterly report for the period ending December 31, 1998 (the
"January Quarterly Report"), the DOIT unveiled the new administration's
strategy for addressing Y2K issues. The key components of this strategy
include centralization and coordination of the State's Y2K efforts, delivery
of essential services and emergency preparedness, elimination of obstacles and
barriers in an effort to streamline the current funding request process, and
broad-based collaboration across public and private sectors through a
comprehensive communication plan. Departments, programs and systems will be
categorized by tier according to the amount of assistance required to become
Y2K compliant. The first tier, which consists of departments that are of no
specific cause of concern, will be required to report their status and may be
subject to independent review. The second tier consists of departments that
require targeted assistance. The California 2000 Project Office will deploy an
Action team to provide necessary assistance. The third tier consists of
seriously troubled departments where the California Year 2000 Project Office
will assume Y2K management responsibility.
In addition to setting forth a new action plan, the January Quarterly
Report updated the survey of State departments and reported that of a total of
about 564 mission critical IT systems, 372 had completed remediation. Of the
remaining 192 systems, 54 systems are scheduled to be retired and 138 are in
the process of being remediated. The January Quarterly Report also updated the
status of embedded systems, noting that State entities have not yet reported
on all facilities nor have they completed the survey of all of their
facilities. Of the 606 facilities that were reported, remediation has been
completed in 52 facilities.
In the January Quarterly Report, the DOIT estimates total Y2K costs
identified by the departments under its supervision at about $342 million, of
which more than $200 million was projected to be expended in fiscal years
1998-1999 and 1999-2000. These costs are part of much larger overall IT costs
incurred annually by the State, including costs incurred by certain
independent State entities, such as the judiciary, the Legislature the
University of California and California State University System. Furthermore,
cost estimates for embedded systems only apply to the subset of embedded
systems posing the highest risk to essential programs. For fiscal year
1998-99, the Legislature created a $20 million fund for unanticipated Y2K
costs, which can be increased if necessary.
On February 18, 1999, the Bureau of State Audits (the "BSA") presented its
report concerning state agencies' progress in resolving Y2K problems. The
report highlighted the following issues: remediation efforts at 14 agencies
that it identified as critical; the status of Y2K compliance for other State
programs; deficiencies in Y2K compliance for other State programs;
deficiencies in Y2K planning at one of the primary data centers for the State;
and coordination among public and private entities to ensure uninterrupted
service of essential utilities.
The BSA indicated that each of the 14 agencies identified as administering
programs critical to the State has appointed a Y2K project manager, developed
an overall Y2K plan and is actively working to complete planned tasks.
However, the report further noted that although state agencies are making
progress toward correcting critical computer systems, remediation efforts at
11 of these agencies are not complete. The report defined completion as
including three key steps: completion of all planned testing, removal of
threats from embedded technology, and resolution of potential problems caused
by data exchange partners. None of these 11 agencies have fully tested the
systems reviewed, which industry experts consider to be the most crucial and
time-consuming phase. Furthermore, seven agencies have not yet replaced or
corrected embedded microchips in equipment their systems rely upon.
As part of the audit, the BSA also surveyed all 140 agencies, which
administer 462 separate budgetary programs, listed in the Governor's Budget.
Although the BSA does not consider all of these programs to be as critical as
those administered by the 14 agencies it reviewed, the BSA has similar
concerns about testing, embedded technology and coordination with data
exchange partners. The report also contained certain recommendations for one
of the State's two primary data centers to enhance their Y2K efforts. Finally,
the BSA noted that no single entity is charged with overseeing the Y2K
preparedness of all utilities in California and recommended that the Governor
or Legislature should designate one representative or agency to assess and
disclose the Y2K readiness of critical public utilities.
The State Treasurer's Office reports that as of December 31, 1998, its
systems for bond payments were fully Y2K compliant. The State Controller's
Office reported that it had completed the necessary Y2K remediation projects
for the State fiscal and accounting system by December 31, 1998, consistent
with the Governor's Executive Order. The final steps of testing will be
completed during 1999. Both offices are actively working with the outside
entities with whom they interface to ensure they are also compliant.
In sum, although substantial progress has been made 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.
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:
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the
trial court issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-99, with
certain limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making
any payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August
5, 1998, the Court of Appeal denied the plaintiffs' request to reconsider the
stay. Also on July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of Appeal.
Briefs are being submitted; no date has yet been set for oral argument.
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. On August 13, 1998, the court
issued a judgment against the Franchise Tax Board on both issues. The
Franchise Tax Board has appealed the judgment. If both sections of the
California Tax law are invalidated, and all dividends become deductible, in
the future General Fund allocations could be reduced annually in the $200-250
million range for all taxpayers.
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. 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 Commission issued a decision in December 1998 determining that a
portion, but not all, of the claims constituted state mandated local costs.
The Commission is now developing parameters and guidelines for claims for
reimbursement. The Department of Finance has not yet determined whether to
seek judicial review of the Commission's decision.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr. et al., the State is seeking recovery for
the past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts, resulting in significant
findings of liability against the State as owner, operator, and generator of
wastes taken to the site. The primary government has appealed the rulings.
Present estimates of the cleanup range from $400 million to $600 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. In 1992, the State and plaintiffs filed appeals; however, no hearing
date has been set.
The State is a defendant in 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 $258 million from the State Highway Account, within
the special revenue funds, and $131 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. The
petitioners are also challenging a $130 million transfer from the State
Highway Account to the Motor Vehicle Account. 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
Superior Court ruled in December 1998 that $30.7 million of the $258.2 million
transferred from the State Highway Account to the General Fund violated the
California Constitution. The court also invalidated $130.9 million transferred
from the Motor Vehicle Account to the General Fund. The court ordered further
briefing on the $130 million transfer from the State Highway Account to the
Motor Vehicle Account. A hearing on this transfer is scheduled for April 1999.
No decision has been made as to whether an appeal will be taken from the
court's ruling.
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
Fund, an agency fund, for approximately $166 million. The Superior Court
issued an order in December 1998, granting the State's demurrer to the entire
action and dismissing the case. Plaintiffs have asked the court to reconsider
its ruling.
In Capitola Land v. Anderson and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in Capitola, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services ("DHHS") to enable the State to comply
with the Capitola ruling and receive federal funding. The DHHS denied the
state plan amendment, and the State has filed suit against DHHS. The
Legislature also enacted a statute which required federal funding in order to
comply with the Capitola judgment. The State then refused to implement the
Capitola judgment based on the new statute. Certain plaintiffs moved for an
order of contempt against the State, which was granted by the trial court, but
was stayed and annulled by the Court of Appeal. The plaintiffs are petitioning
the California Supreme Court for review. If, as a result of this litigation,
compliance with the Capitola judgment is required and the judgment is applied
retroactively, liability to the State could exceed $200 million.
In January of 1997, California experienced major flooding in six different
areas with property damages estimated up to $2 billion. To date three lawsuits
have been filed. A substantial number of plaintiffs have joined the suit
against the State, local agencies, and private companies and contractors
seeking compensation for the damages they suffered as a result of the 1997
flooding. The anticipated number of lawsuits has not materialized. The
exposure arising from the floods is not expected to exceed $100 million. The
State is vigorously defending the action.
The State is a defendant in an action, Emily Q., et al., v. Belshe, et
al., to compel a change in early screening procedures for children with mental
health needs. The lawsuit is limited to Los Angeles County. The State has
filed an answer in this case. An adverse outcome is possible with the
potential liability of $500 million per year.
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.
CURRENT ECONOMIC OUTLOOK
According to the 1999-2000 Executive Budget forecast, continued growth in
the State is projected in 1999 and 2000 for employment, wages, and personal
income, although the growth is expected to moderate from the 1998 pace.
However, a continuation of international financial and economic turmoil may
result in a sharper slowdown than currently projected. Personal income is
estimated to have grown by 4.9 percent in 1998, fueled in part by a continued
large increase in financial sector bonus payments at the beginning of the
year, and is projected to grow by 4.2 percent in 1999 and 4.0 percent in 2000.
Increases in the bonus payments in 1999 and 2000 are projected to be modest, a
distinct shift from the torrid rate of the last few years. Overall employment
growth is anticipated to continue at a modest rate, reflecting the slowing
growth in the national economy, continued spending restraint in government,
and restructuring in the manufacturing, health care, social services, and
banking sectors.
The State economic forecast has been recently revised in a Supplement to
the Third Quarterly Update to the Annual Information Statement of New York.
For the State, the economic outlook is expected to be brighter than
anticipated in the 1999-2000 Executive Budget forecast, primarily due to the
connection between the State economy and the stronger-than-expected national
economy. Stronger national industrial output and exports have improved the
outlook for New York's goods-producing sector. Also, New York employment
growth remained strong in the fourth quarter of 1998 and Wall Street related
activity remains stable. Growth of employment, wages and personal income is
expected to be modestly faster than in the Executive Budget forecast.
Many uncertainties exist in any forecast of the State economy. Given the
recent volatility in the international economy and domestic financial markets,
such uncertainties are particularly present at this time. The timing and
impact of changes in economic conditions are difficult to estimate with a high
degree of accuracy. Unforeseeable events may occur. The actual rate of change
in any or all, of the concepts that are forecasted may differ substantially
and adversely from the outlook described herein.
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.
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
Moody's assigned its municipal bond rating of A2, and Standard & Poor's
assigned its rating of A to the State's general obligation bonds on March 15,
1999. 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 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.
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.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, 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 appealed the decision.
On July 30, 1998, the Appellate Division, Third Department, affirmed the
Supreme Court decision. Plaintiffs filed a notice of appeal with the New York
Court of Appeals asserting an appeal as of right of the Appellate Division
order. That appeal was dismissed on September 22, 1998. Plaintiffs
subsequently filed a motion for leave to appeal to the Court of Appeals. That
motion was denied on December 22, 1998.
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 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 city of Troy continues 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
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 ("Y2K") data processing
compliance issues. Since its inception, the computer industry has used a two-
digit date conversion to represent the year. In the year 2000, the date field
will contain "00" and, as a result, many computer systems and equipment may
not be able to process dates properly or may fail since they may not be able
to distinguish between the years 1900 and 2000. The Y2K issue not only affects
computer programs, but also the hardware, software and networks they operate
on. In addition, any system or equipment that is dependent on an embedded
chip, such as telecommunication equipment and security systems, may also be
adversely affected.
In 1996, the State established the Year 2000 Date Change Initiative to
facilitate and coordinate New York State's Y2K compliance effort. The Office
for Technology ("OFT"), under the direction of the Governor's Office of State
Operations, is responsible for the monitoring of the State's compliance
progress and for providing assistance and resources to State agencies. Each
agency is responsible for bringing their individual systems into Y2K
compliance. Y2K compliance has been identified by the Governor as New York
State's number one technology priority.
In 1997, OFT completed a risk assessment of 712 State data processing
systems and prioritized those systems for purposes of Y2K compliance. The
State has estimated that investments of at least $140 million will be required
to bring the State's approximately 350 mission-critical and high-priority
systems into Y2K compliance. Mission-critical systems are those that may
impact the public health, safety and welfare of the State and its citizens,
and for which failure could have a material and adverse impact on State
operations. High-priority systems are critical for a State agency to fulfill
its mission or deliver services. The State allocated over $117 million in
centralized Y2K funding in 1998-99 to those agencies that maintain mission-
critical and high-priority systems. Agencies are also expending funds from
their capital budgets to address the Y2K compliance issue. The State is
planning to spend an additional $19 million in 1999-2000 for Y2K embedded chip
compliance, and is also making a contingent appropriation available for
unforeseen emergencies. The Y2K compliance effort may require additional
funding above amounts assumed in the State Financial Plan, but those amounts
are not assumed to be material.
OFT is monitoring compliance progress for the State's mission-critical and
high-priority systems and is reporting compliance progress to the Governor's
office on a quarterly basis. As of December 1998, the State had completed 93
percent of overall compliance effort for its mission-critical systems; 18
systems are now Y2K compliant and the remaining systems are on schedule to be
compliant by the first quarter of 1999. As of December 1998, the State has
completed 70 percent of overall compliance effort on the high-priority
systems; 168 systems are now Y2K compliant and the remaining systems are on
schedule to be compliant by the second quarter of 1999. Compliance testing is
expected to be completed by the end of calendar 1999.
The State is also addressing a number of issues related to bringing its
mission-critical systems into compliance, including: testing throughout 1999
of over 800 data exchange interfaces with federal, state, local and private
data partners; completion of an inventory of priority equipment and systems
that may depend on embedded chips and may therefore need remediation in 1999;
and contacting critical vendors and supply partners to obtain Y2K compliance
status information and assurances.
Since problems could be identified during the compliance testing phase
that could produce compliance delays, the State is also requiring its agencies
to complete contingency plans for priority systems and business processes by
the first quarter of 1999. These plans will be integrated into the State
Emergency Response Plan and coordinated by the State Emergency Management
Office. In addition, the State Public Commission has ordered that all State
regulated utilities complete Y2K activities for mission-critical systems,
including contingency plans, by July 1, 1999. The State has also been working
with local governments since December 1996 to raise awareness, promote action
and provide assistance with Y2K compliance.
While New York State is taking what it believes to be appropriate action
to address Y2K compliance, there can be no guarantee that all of the State's
systems and equipment will be Y2K compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Y2K
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Y2K compliance could have an adverse
impact on State operations or finances as well.
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) 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.
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. On July 9, 1998, the New York Court of
Appeals reversed the order of the Appellate Division, Third Department, and
remanded the matter to the Supreme Court, Albany County, for further
proceedings. The Court held that the petitioners had standing to assert an
equal protection claim, but that their claim did not implicate racial
discrimination. The Court remanded the case to Supreme Court, Albany County,
for resolution of the question of whether there was a rational basis for the
Tax Department's policy of non-enforcement of the sales and excise taxes on
reservation sales of cigarettes and motor fuel to non-Indians. In a footnote,
the Court stated that, in view of its disposition of the case, petitioners"
cross-appeal regarding the statewide suspension of the taxes is "academic."
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 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.
LINE ITEM VETO
In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the Court denied the
State's motion to dismiss. On January 27, 1999 the State appealed that order.
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. 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. The time in which to seek further review
has expired in the latter case. By decision and order dated December 15, 1998,
the Appellate Division, First Department dismissed 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 Psychiatric Association v.
Wing as time-barred.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law (S) 2807-d, which imposes a 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. By order dated January 7, 1999 the motion was denied. A
final order was entered in Supreme Court on January 26, 1999. The time for the
State to appeal from the January 26, 1999 order has not yet expired.
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 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. In 1998, the
United States filed a complaint in intervention in Oneida Indian Nation of New
York. In December 1998, both the United States and the tribal plaintiffs moved
for leave to amend their complaints to assert claims for 250,000 acres, to add
the State as a defendant, and to certify a class made up of all individuals
who currently purport to hold title within said 250,000 acre area. These
motions are returnable March 29, 1999.
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 some time 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 generic rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
FOUR HIGHEST BOND RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
PLUS (+) OR MINUS (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF FITCH IBCA, INC.'S
FOUR HIGHEST INTERNATIONAL LONG-TERM CREDIT RATINGS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and the operating performance of
the issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as
well as developments in the economic and political environment that might
affect the issuer's financial strength and credit quality.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
"+" OR "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Issues or the features associated
with MIG or VMIG ratings are identified by date of issue, date of maturity or
maturities or rating expiration date and description to distinguish each
rating from other ratings. Each rating designation is unique with no
implication as to any other similar issue of the same obligor. MIG ratings
terminate at the retirement of the obligation while VMIG rating expiration
will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
DESCRIPTION OF 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. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
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 have an original
maturity not exceeding one year, unless explicitly noted.
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (1) leading
market positions in well-established industries; (2) high rates of return on
funds employed; (3) conservative capitalization structure with moderate
reliance on debt and ample asset protection; (4) broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and (5)
well-established access to a range of financial markets and assured sources of
alternate liquidity.
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>
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 1999 UNDER FEDERAL PERSONAL AND CALIFORNIA STATE INCOME TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following tables show the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws,
and under the California State personal income tax laws described in the
tables. If tax laws, rates or brackets are changed, the information in the
table would be out of date. CitiFunds California Tax Free Income Portfolio
expects that a substantial portion of its dividends will be exempt from
federal personal income taxes. CitiFunds California Tax Free Income Portfolio
also expects that a substantial portion of its dividends will be exempt from
California personal income taxes. However, in reviewing the tables below, you
should remember that the Fund may also pay dividends which are subject to
federal, state and local personal income taxes.
FEDERAL TAX RATES
<TABLE>
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
* Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA TAX RATES
<CAPTION>
Taxable Income* Income California Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1998*** Joint 1998*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 17.86% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0 - $ 43,050 17.42% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.27% 7.87%
$ 25,751 - $ 62,450 34.46% 3.05% 3.81% 4.58% 5.34% 6.10% 6.87% 7.63% 8.39% 9.15% 9.92%
$ 43,051 - $104,050 34.08% 3.03% 3.79% 4.55% 5.31% 6.07% 6.83% 7.58% 8.34% 9.10% 9.86%
$ 62,451 - $130,250 $104,051 - $158,550 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$130,251 - $283,150 $158,551 - $283,150 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$283,151 & Over $283,151 & Over 45.22% 3.65% 4.56% 5.48% 6.39% 7.30% 8.21% 9.13% 10.04% 10.95% 11.87%
* Net amount subject to Federal and California personal income tax after deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket. Combined Federal and California rate assumes itemization
of state tax deduction. California tax rates are based on 1998 information since at this time 1999 information is not available.
</TABLE>
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
RATES FOR 1999 UNDER FEDERAL PERSONAL INCOME TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following table shows the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws.
If tax laws, rates or brackets are changed, the information in the table would
be out of date. CitiFunds National Tax Free Income Portfolio expects that a
substantial portion of its dividends will be exempt from federal personal
income taxes. However, in reviewing the table below, you should remember that
CitiFunds National Tax Free Income Portfolio may also pay dividends which are
subject to federal, state and local personal income taxes.
<TABLE>
FEDERAL TAX RATES
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
* Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
<PAGE>
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 1999 UNDER FEDERAL PERSONAL, NEW YORK STATE AND NEW YORK CITY INCOME
TAX LAW
If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-
exempt. The following tables show the approximate taxable yields which are
equivalent to tax-exempt yields under 1999 federal personal income tax laws,
and under the New York State and New York City personal income tax laws
described in the tables. If tax laws, rates or brackets are changed, the
information in the table would be out of date. CitiFunds New York Tax Free
Income Portfolio expects that a substantial portion of its dividends will be
exempt from federal personal income taxes. Similarly, CitiFunds New York Tax
Free Income Portfolio expects a substantial portion of the dividends it pays
will be exempt from New York State and New York City personal income taxes.
However, in reviewing the tables below, you should remember that the Fund may
also pay dividends which are subject to federal, state and local personal
income taxes.
<TABLE>
FEDERAL TAX RATES
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999 Joint 1999 Bracket 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 $0 - $ 43,050 0.15% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 0.28% 2.78% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 62,451 - $130,250 $104,051 - $158,550 0.31% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$130,251 - $283,150 $158,551 - $283,150 0.36% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$283,151 & Over $283,151 & Over 0.396% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
* Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
<PAGE>
<TABLE>
NEW YORK STATE TAX RATES
<CAPTION>
Taxable Income* Income New York Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999** Joint 1999*** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 19.51% 2.48% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.83% 7.45% 8.08%
$0 - $ 43,050 19.25% 2.48% 3.10% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 25,751 - $ 62,450 $ 43,051 - $104,050 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 62,451 - $130,250 $104,051 - $158,550 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$130,251 - $283,150 $158,551 - $283,150 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$283,151 & Over $283,151 & Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket. Combined Federal and New York rate assumes itemization
of state tax deduction.
<CAPTION>
NEW YORK STATE AND CITY TAX RATES
Taxable Income* Income New York City Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999**** Joint 1999**** Bracket** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,750 22.41% 2.58% 3.22% 3.87% 4.51% 5.16% 5.80% 6.44% 7.09% 7.73% 8.38%
$0 - $ 43,050 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$ 25,751 - $ 62,450 35.66% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.33% 10.10%
$43,051 - $104,050 35.65% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.32% 10.10%
$ 62,451 - $130,250 $104,051 - $158,550 38.37% 3.25% 4.06% 4.67% 5.68% 6.49% 7.30% 8.11% 6.92% 9.74% 10.55%
$130,251 - $283,150 $158,551 - $283,150 42.89% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$283,151 & Over $283,151 & Over 46.05% 3.71% 4.63% 5.56% 6.49% 7.41% 8.34% 9.27% 10.19% 11.12% 12.05%
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined federal, state and city tax bracket.
**** State rate based on the average state rate for the federal tax bracket. City rate based on the average city rate for the
federal tax bracket. Combined Federal, New York State and New York City rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
PART C
Item 23. Exhibits.
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
j Independent auditors' consent
**** 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
n Financial data schedules
**** o Multiple Class Plan of the Registrant
* and ***** p Powers of Attorney for the Registrant
- ---------------------
* 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.
**** Incorporated herein by reference to Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as
filed with the Securities and Exchange Commission on February 16, 1999.
***** Incorporated herein by reference to Post-Effective Amendment No. 24 to the
Registrant's Registration Statement on Form N-1A (File No. 33-5819) as
filed with the Securities and Exchange Commission on April 16, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, 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 to Post-Effective
Amendment No. 23 to its Registration Statement on Form N-1A; and (c) the
undertaking of the Registrant regarding indemnification set forth in its
Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 26. Business and Other Connections of Investment Adviser.
Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and around
the world. Citibank is a wholly-owned subsidiary of Citicorp, which is, in turn,
a wholly-owned subsidiary of Citigroup Inc. Citibank also serves as investment
adviser to the following registered investment companies (or series thereof):
Asset Allocation Portfolios (Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio and Short-Term Portfolio), The Premium Portfolios (U.S. Fixed Income
Portfolio, High Yield Portfolio, 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(R) VIP Folio 200, CitiSelect(R) VIP Folio 300,
CitiSelect(R) VIP Folio 400, CitiSelect(R) VIP Folio 500 and CitiFundsSM Small
Cap Growth VIP Portfolio). Citibank and its affiliates manage assets in excess
of $327 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
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
CitiFunds(SM) International Growth & Income Portfolio, CitiFunds(SM)
International Growth Portfolio, CitiFunds(SM) U.S. Treasury Reserves,
CitiFunds(SM) Cash Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves,
CitiFunds(SM) Premium Liquid Reserves, CitiFunds(SM) Institutional U.S. Treasury
Reserves, CitiFunds(SM) Institutional Liquid Reserves, CitiFunds(SM)
Institutional Cash Reserves, CitiFunds(SM) Tax Free Reserves, CitiFunds(SM)
Institutional Tax Free Reserves, CitiFunds(SM) California Tax Free Reserves,
CitiFunds(SM) Connecticut Tax Free Reserves, CitiFunds(SM) New York Tax Free
Reserves, CitiFunds(SM) Intermediate Income Portfolio, CitiFunds(SM) Short-Term
U.S. Government Income Portfolio, CitiFunds(SM) Balanced Portfolio,
CitiFunds(SM) Small Cap Value Portfolio, CitiFunds(SM) Growth & Income
Portfolio, CitiFunds(SM) Large Cap Growth Portfolio, CitiFunds(SM) Small Cap
Growth Portfolio, CitiSelect(R) VIP Folio 200, CitiSelect(R) VIP Folio 300,
CitiSelect(R) VIP Folio 400, CitiSelect(R) VIP Folio 500, CitiFunds(SM) Small
Cap Growth VIP Portfolio, CitiSelect(R) Folio 100, CitiSelect(R) Folio 200,
CitiSelect(R) Folio 300, CitiSelect(R) Folio 400, and CitiSelect(R) 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, U.S. Fixed Income Portfolio, High Yield
Portfolio, Growth & 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 Life Insurance, The
Travelers Fund UL II for Variable Life Insurance, The Travelers Fund UL III for
Variable Life Insurance, The Travelers Variable Life Insurance Separate Account
One, The Travelers Variable Life Insurance Separate Account Two, The Travelers
Variable Life Insurance Separate Account Three, The Travelers Variable Life
Insurance Separate Account Four, The Travelers Separate Account MGA, The
Travelers Separate Account MGA II, The Travelers Growth and Income Stock Account
for Variable Annuities, The Travelers Quality Bond Account for Variable
Annuities, The Travelers Money Market Account for Variable Annuities, The
Travelers Timed Growth and Income Stock Account for Variable Annuities, The
Travelers Timed Short-Term Bond Account for Variable Annuities, The Travelers
Timed Aggressive Stock Account for Variable Annuities, The Travelers Timed Bond
Account for Variable Annuities, 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).
(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 certifies that it meets all
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boston and
Commonwealth of Massachusetts on the 29th day of April, 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 April 29, 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
Heath B. McLendon* Trustee
- ----------------------------
Heath B. McLendon
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
<PAGE>
William S. Woods, Jr.* Trustee
- ----------------------------
William S. Woods, Jr.
*By: Philip W. Coolidge
------------------------
Philip W. Coolidge
Executed by Philip W. Coolidge
on behalf of those indicated
pursuant to Powers of Attorney.
<PAGE>
EXHIBIT INDEX
Exhibit
No.: Description:
------- ------------
j Independent auditors' consent
n Financial data schedules
<PAGE>
Exhibit j
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post Effective Amendment
No. 25 to Registration Statement No. 33-5819 of CitiFunds Tax Free Income Trust
of our reports each dated February 8, 1999 appearing in the annual reports to
shareholders for the year ended December 31, 1998 of CitiFunds California Tax
Free Income Portfolio, CitiFunds National Tax Free Income Portfolio, and
CitiFunds New York Tax Free Income Portfolio (each a separate series of
CitiFunds Tax Free Income Trust), and to the references to us under the headings
"Financial Highlights" in the Prospectus and "Financial Statements" in the
Statement of Additional Information, both of which are part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 30, 1999
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