<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
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. 26
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 27
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 1, 2000
pursuant to paragraph (b) of Rule 485.
<PAGE>
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PROSPECTUS
----------
MAY 1, 2000
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 ACCOUNT ................................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 18
HOW THE PRICE OF YOUR SHARES IS CALCULATED .......................... 19
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
ACCOUNT INQUIRIES ................................................... 23
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
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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 29.
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, towns and other public entities and
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.
Certain securities held by the Fund may be covered by
municipal bond insurance.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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, a common form of
derivative, in order to protect (or "hedge") against changes
in interest rates or to manage the maturity or duration of
fixed income securities.
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. See
page 35 for more information about risks.
The value of the Fund's shares will change daily as the value
of its underlying securities change. This means that your
shares of the Fund may be worth more or less when you sell
them than when you bought them.
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.
You should be aware that California has experienced difficulties
in recent years and could do so again in the future. This
could cause the Fund to lose money. If the Fund has difficulty
finding high quality California municipal obligations to
purchase, the amount of the Fund's income that is subject to
California taxes could 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
and supply and demand for California municipal obligations.
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 INCOME RISK. If interest rates decline, the amount of income
paid to you by the Fund as dividends may also decline.
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 PORTFOLIO SELECTION. The success of the Fund's investment
strategy depends in large part on the investment process. The
portfolio managers may fail to pick securities that perform
well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes
affecting the credit quality of issuers, or other factors. In
that case, you may lose money, or your investment may not do
as well as an investment in another tax-free fund.
o PREPAYMENT AND EXTENSION RISK. The issuers of debt securities
held by the Fund may be able to call a bond or 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 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 the Fund 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.
Please keep in mind that an investment in any fixed income
fund is not a complete investment program.
Fund Performance
The following bar chart and table can help you evaluate the
risks and performance of the Fund.
o The bar chart shows changes in the Fund's performance from
year to year for the calendar years indicated. 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. The
Fund's returns in the table reflect the maximum sales charge
currently applicable.
o In both the chart and table, the returns shown for Class A
shares include returns for periods before the creation of
share classes on January 4, 1999. Prior to that date, there
were no sales charges on the purchases or sale of Fund shares.
The returns for Class A in the table have been adjusted to
reflect the maximum front-end sales charge currently
applicable to the Class A shares.
o Class B shares have been offered since January 4, 1999. Class
B performance is lower than that shown for Class A shares,
because of higher fund expenses and the effect of the
contingent deferred sales charge.
o The Fund's performance reflects certain fee waivers or
reimbursements. If these are reduced or eliminated, the Fund's
performance may go down.
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. For current yield
information, please call 800-625-4554 toll free, or contact
your account representative.
<PAGE>
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS - CLASS A
(WITHOUT SALES CHARGE)
1999 (2.54)%
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FUND'S HIGHEST AND LOWEST RETURNS (WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
................................................................................
Quarter Ending
................................................................................
Highest 0.99% March 31, 1999
................................................................................
Lowest (2.97)% June 30, 1999
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AVERAGE ANNUAL TOTAL RETURNS (WITH MAXIMUM SALES CHARGE)
AS OF DECEMBER 31, 1999
................................................................................
Life of Fund
Since
1 Year November 2, 1998
................................................................................
Class A (6.93)% (5.01)%
................................................................................
Class B (7.57)% N/A
................................................................................
Lehman California 4 Years Plus Index (3.65)% *
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* Information regarding performance for this period is not available.
Current yield for Class A (for 30 day period ending December 31, 1999): 4.49%.
Tax equivalent yield for Class A (for 30 day period ending December 31,1999):
8.20%.
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.
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CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
................................................................................
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)
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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 0.66% 0.66%
................................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.41% 1.91%
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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.
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<PAGE>
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual
funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends;
o you then sell all your shares at the end of those periods --
for Class B shares a number is also given showing your
expenses 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;
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 as shown in the table without
waivers remain the same.
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 $587 $876 $1,186 $2,065
................................................................................
Class B
................................................................................
Assuming redemption at end of
period $644 $900 $1,132 $2,101
................................................................................
Assuming no redemption $194 $600 $1,032 $2,101
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<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 1.00% 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 intermediaries such as broker/dealers
that 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.
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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 intermediaries that sell shares of the Fund receive.
The distributor keeps up to approximately 10% of the sales
charge imposed on Class A shares. Financial intermediaries
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.
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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 page 15.
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 1.00% 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.
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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
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o Financial intermediaries 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 intermediaries 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 applicable CDSC, 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.
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
sales or 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. The
Fund does not impose any minimum initial or subsequent
investment requirements but your Service Agent may.
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.
If you hold your shares through 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 transfer it to another financial institution, 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
may be calculated as of the earlier 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 hold your shares through a Service
Agent, through your Service Agent. If your account application
permits, you may also make redemption requests by telephone.
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 hold your shares through 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 third business day after you sell your shares
but in any event within seven days. However, 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.
Your account balance with the Fund may be subject to a $500
minimum. If so, the Fund reserves the right to close your
account if it falls below $500 because of redemptions. You
will have 60 days to make an additional investment. If you do
not increase your balance, the Fund may close your account and
send the proceeds to you. Your shares will be sold at NAV on
the day your account was closed.
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 hold your shares through 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 each fund
the next time they are 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 for exchange. 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.
ACCOUNT INQUIRIES
Please contact your Service Agent. If you hold your shares
through the transfer agent, please call 1-800-625-4554.
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 federal taxes is very general. 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. Each year the Fund will mail you a report
of 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 such 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
----------------------
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 $351 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citigroup Inc.
"CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates, including their directors,
officers or employees, may have banking and investment banking
relationships with the issuers of securities that are held in
the Fund. They may also own the securities of these issuers.
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, CFA, is a Vice President of Citibank and 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. He
has 12 years of investment management experience.
MANAGEMENT FEES
For the Fund's fiscal year ended December 31, 1999, Citibank
received management fees totaling 0.05% 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 described
below. The Fund may use other strategies and invest in other
securities that are described in the Statement of Additional
Information. However, the Fund may not use all of the
strategies and techniques or invest in all of the types of
securities described in this Prospectus or in the Statement of
Additional Information. The Fund's goals may be changed
without shareholder approval. Of course, there can be no
assurance that the Fund will achieve its goals.
Under normal market conditions, the Fund invests at least 65%
of its assets in municipal obligations that pay interest that
is exempt from federal and California State personal income
taxes including the federal alternative minimum tax.
- --------------------------------------------------------------------------------
WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations
issued by or on behalf of states and municipal governments,
Puerto Rico and other U.S. territories, and their authorities,
agencies, instrumentalities and political subdivisions, and by
other qualifying issuers. The interest on these obligations is
exempt from federal income tax.
Longer term municipal obligations (municipal bonds) generally
are issued to raise funds for construction or to retire
previous debt. Short term obligations (municipal notes or
commercial paper) may be issued to finance short term cash
needs in anticipation of receipt of tax and other revenues.
The Fund invests in both "general obligation" securities,
which are backed by the full faith, credit and taxing power of
the issuer, and in "revenue" securities, which are payable
only from revenues from a specific project or another revenue
source.
- --------------------------------------------------------------------------------
The Fund invests without limit in different types of municipal
obligations, including general obligation securities, revenue
securities, private activity bonds, industrial revenue bonds
and municipal lease obligations. Although the Fund is non-
diversified, it seeks to limit its exposure to the housing,
electrical utilities and hospital sectors by restricting its
investment in any one of these sectors to 25% of the Fund's
assets.
- --------------------------------------------------------------------------------
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 at the time of purchase (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.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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.
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.
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. Please note that there are
many other factors that could adversely affect your investment
and that could prevent the Fund from achieving its goals,
which are not described here. 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. The
value of the Fund's shares will change daily as the value of
its underlying securities changes. This means that your shares
of the Fund may be worth more or less when you sell them than
when you bought them. 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 that California has experienced
difficulties in recent years and could do so again in the
future. This could cause the Fund to lose money. If the Fund
has difficulty finding high quality California municipal
obligations to purchase, the amount of the Fund's income that
is subject to California taxes could increase.
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
and supply and demand for California municipal obligations.
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.
INCOME RISK. If interest rates decline, the amount of income
paid to you by the Fund as dividends may also decline.
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.
PORTFOLIO SELECTION. The success of the Fund's investment
strategy depends in large part on the investment process. The
portfolio managers may fail to pick securities that perform
well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes
affecting the credit quality of issuers or other factors. In
that case, you may lose money, or your investment may not do
as well as an investment in another tax-free fund.
PREPAYMENT AND EXTENSION RISK. The issuers of debt securities
held by the Fund may be able to call a bond or 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. The Fund would
also lose the benefit of falling interest rates on the price
of the repaid bond. 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. Securities
subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise.
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.
<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 and Class B 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.
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
CLASS A
----------------------------------------------
November 2, 1998
(Commencement of
Year end Operations) to
December 31, 1999 December 31, 1998
................................................................................
Net Asset Value, beginning of period $10.08 $10.00
................................................................................
Income From Operations:
Net investment income 0.400 0.069
Net realized and unrealized gain (loss) on
investments (0.650) 0.080
................................................................................
Total from operations (0.250) 0.149
................................................................................
Less Dividends From:
Net investment income (0.400) (0.069)
................................................................................
Net Asset Value, end of period $ 9.43 $10.08
................................................................................
Total return (A) (2.54)% 1.49%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $34,396 $96,706
Ratio of expenses to average net assets 70% 0%*
Ratio of net investment income to average
net assets 4.06% 4.16%*
Portfolio turnover 116% 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 $0.195 $0.042
RATIOS:
Expenses to average net assets 1.41% 1.60%*
Net investment income to average net assets 3.35% 2.56%*
* Annualized.
** Not annualized.
(A) Total Return does not include the maximum sales charge of 4.50% effective
January 4, 1999.
<PAGE>
CITIFUNDS CALIFORNIA
TAX FREE INCOME
PORTFOLIO
CLASS B
--------------------
January 4, 1999
(Commencement
of Operations) to
December 31,
1999
..............................................................................
Net Asset Value, beginning of period $11.43
..............................................................................
Income From Operations:
Net investment income 0.332
Net realized and unrealized gain (loss) on investments (2.000)
..............................................................................
Total from operations (1.668)
..............................................................................
Less Dividends From:
Net investment income (0.332)
..............................................................................
Net Asset Value, end of period $ 9.43
..............................................................................
Total return(A) (3.22)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $ 1,206
Ratio of expenses to average net assets 1.25%*
Ratio of net investment income to average net assets 3.41%*
Portfolio turnover 116%
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 $0.263
RATIOS:
Expenses to average net assets 2.40%*
Net investment income to average net assets 2.26%*
* Annualized.
** Not annualized.
(A) Total Return does not include the maximum sales charge of 4.50% effective
January 4, 1999.
<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 and retired employees of Citibank and its
affiliates, CFBDS, Inc. and its affiliates, any Service Agent
and its affiliates and certain other Fund service providers
(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
(qualified plans investing through certain programs sponsored
by Citibank or its affiliates are not subject to this
minimum)
[] 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 2000 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 2000 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.
<TABLE>
FEDERAL TAX RATES
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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.
CALIFORNIA TAX RATES
<CAPTION>
Taxable Income* Income California 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%
- --------------------- -------------------- ---------- ------ ------ ------ ----- ----- ----- ----- ------ ------ ------
$0 - $ 26,250 17.85% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0 - $ 43,850 17.40% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87%
$ 26,251 - $ 63,550 34.45% 3.05% 3.81% 4.58% 5.34% 6.10% 6.86% 7.63% 8.39% 9.15% 9.92%
$ 43,851 - $105,950 34.06% 3.03% 3.79% 4.55% 5.31% 6.07% 6.82% 7.58% 8.34% 9.10% 9.86%
$ 63,551 - $132,600 $105,951 - $161,450 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$132,601 - $288,350 $161,451 - $288,350 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$288,351 & Over $288,351 & 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 1999 information since at this time 2000 information is
not available.
</TABLE>
<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, reports, and other information about the Fund are
also available on the Edgar Database 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 1-202-942-8090. Copies may also be obtained upon payment of
a duplicating fee by electronic request to [email protected].
or by writing to the SEC's Public Reference Section,
Washington, DC 20549-6009.
SEC File Numbers: 811-5034 CFP/CAP/500
<PAGE>
----------
PROSPECTUS
----------
MAY 1, 2000
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 ACCOUNT ................................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 18
HOW THE PRICE OF YOUR SHARES IS CALCULATED 19
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
ACCOUNT INQUIRIES ................................................... 23
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, towns and other public entities and 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.
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.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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, a common form of
derivative, in order to protect (or "hedge") against changes
in interest rates or to manage the maturity or duration of
fixed income securities.
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. See
page 35 for more information about risks.
The value of the Fund's shares will change daily as the value
of its underlying securities change. This means that your
shares of the Fund may be worth more or less when you sell
them than when you bought them.
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
and supply and demand for municipal obligations. 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 INCOME RISK. If interest rates decline, the amount of income
paid to you by the Fund as dividends may also decline.
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 PORTFOLIO SELECTION. The success of the Fund's investment
strategy depends in large part on the investment process. The
portfolio managers may fail to pick securities that perform
well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes
affecting the credit quality of issuers, or other factors. In
that case, you may lose money, or your investment may not do
as well as an investment in another tax- free fund.
o PREPAYMENT AND EXTENSION RISK. The issuers of debt securities
held by the Fund may be able to call a bond or 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 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 the Fund 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.
Please keep in mind that an investment in any fixed income
fund is not a complete investment program.
<PAGE>
Fund Performance
The following bar chart and table can help you evaluate the
risks and performance of the Fund.
o The bar chart shows changes in the Fund's performance from
year to year for the calendar years indicated. 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. The
Fund's returns in the table reflect the maximum sales charge
currently applicable.
o In both the chart and table, the returns shown for Class A
shares include returns for periods before the creation of
share classes on January 4, 1999. 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 have been adjusted to
reflect the maximum front-end sales charge currently
applicable to the Class A shares.
o Class B shares have been offered since January 4, 1999. Class
B performance is lower than that shown for Class A shares,
because of higher fund expenses and the effect of the
contingent deferred sales charge.
o The Fund's performance reflects certain fee waivers or
reimbursements. If these are reduced or eliminated, the Fund's
performance may go down.
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. For current yield
information, please call 1-800-625-4554 toll-free, or contact
your account representative.
<PAGE>
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS - CLASS A
(WITHOUT SALES CHARGE)
1996 3.31%
1997 11.45%
1998 10.05%
1999 (3.86)%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND'S HIGHEST AND LOWEST RETURNS
(WITHOUT SALES CHARGE)
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
................................................................................
Quarter Ending
................................................................................
Highest 4.30% June 30, 1997
................................................................................
Lowest (2.59)% June 30, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (WITH MAXIMUM SALES CHARGE)
AS OF DECEMBER 31, 1999
................................................................................
Life of Fund
Since
August 17,
1 Year 1995
................................................................................
Class A (8.19)% 5.23%
................................................................................
Class B (8.79)% N/A
................................................................................
Lehman Municipal 4 Years Plus Bond Index (2.92)% *
- --------------------------------------------------------------------------------
*Information regarding performance for this period is not available.
Current yield for Class A (for 30 day period ending December 31, 1999): 4.67%
Tax equivalent yield for Class A (for 30 day period ending December 31,
1999): 7.73%
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.
- --------------------------------------------------------------------------------
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
..............................................................................
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 0.20% 0.20%
..............................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.20% 1.70%
- ------------------------------------------------------------------------------
* Because some of the Fund's expenses were waived or
reimbursed, actual total operating expenses for the
prior year were:
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.
- --------------------------------------------------------------------------------
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual
funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends;
o you then sell all your shares at the end of those periods -- for
Class B shares a number is also given showing your expenses 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;
o your 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 as shown in the table without waivers
remain the same.
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 $567 $814 $1,080 $1,839
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $623 $836 $1,023 $1,875
..............................................................................
Assuming no redemption $173 $536 $ 923 $1,875
- --------------------------------------------------------------------------------
<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 1.00% 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
intermediaries such as broker/dealers that 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.
- --------------------------------------------------------------------------------
<PAGE>
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
intermediaries that sell shares of the Fund receive. The
distributor keeps up to approximately 10% of the sales charge
imposed on Class A shares. Financial intermediaries 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 page 15.
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 1.00% 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 intermediaries 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
intermediaries 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 applicable CDSC, 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.
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
sales or 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. The
Fund does not impose any minimum initial or subsequent
investment requirements but your Service Agent may.
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.
If you hold your shares through 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 transfer it to another financial institution, 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
may be calculated as of the earlier 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 hold your shares through a Service
Agent, through your Service Agent. If your account application
permits, you may also make redemption requests by telephone.
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 hold your shares through 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 third business day after you sell your shares
but in any event within seven days. However, 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.
Your account balance with the Fund may be subject to a $500
minimum. If so, the Fund reserves the right to close your
account if it falls below $500 because of redemptions. You
will have 60 days to make an additional investment. If you do
not increase your balance, the Fund may close your account and
send the proceeds to you. Your shares will be sold at NAV on
the day your account was closed.
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 hold your shares through 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 each fund
the next time they are 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 for exchange. 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.
ACCOUNT INQUIRIES
Please contact your Service Agent. If you hold your shares
through the transfer agent, please call 1-800-625-4554.
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 federal taxes is very general. 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. Each year the Fund will mail you a report
of 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 $351 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citigroup Inc.
"CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates, including their directors,
officers or employees may have banking and investment banking
relationships with the issuers of securities that are held in
the Fund. They may also own the securities of these issuers.
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, CFA, is a Vice President of Citibank and 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. He has 12 years of
investment management experience.
MANAGEMENT FEES
For the Fund's fiscal year ended December 31, 1999, Citibank
received management fees totaling 0.36% 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 described
below. The Fund may use other strategies and invest in other
securities that are described in the Statement of Additional
Information. However, the Fund may not use all of the
strategies and techniques or invest in all of the types of
securities described in this Prospectus or in the Statement of
Additional Information. The Fund's goals may be changed
without shareholder approval. Of course, there can be no
assurance that the Fund will achieve its goals.
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 at the time of purchase (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.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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.
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.
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. Please note that there are
many other factors that could adversely affect your investment
and that could prevent the Fund from achieving its goals,
which are not described here. 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. The value of the Fund's
shares will change daily as the value of its underlying
securities changes. This means that your shares of the Fund
may be worth more or less when you sell them than when you
bought them. 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
and supply and demand for municipal obligations. 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.
INCOME RISK. If interest rates decline, the amount of income
paid to you by the Fund as dividends may also decline.
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.
PORTFOLIO SELECTION. The success of the Fund's investment
strategy depends in large part on the investment process. The
portfolio managers may fail to pick securities that perform
well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes
affecting the credit quality of issuers or other factors. In
that case, you may lose money, or your investment may not do
as well as an investment in another tax-free fund.
PREPAYMENT AND EXTENSION RISK. The issuers of debt securities
held by the Fund may be able to call a bond or 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. The Fund would
also lose the benefit of falling interest rates on the price
of the repaid bond. 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. Securities
subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise.
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.
<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 and Class B 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>
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
-----------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------------------------------ -----------------
August 17, 1995 January 4, 1999
Year Ended December 31, (Commencement (Commencement
------------------------------------------ of Operations) to of Operations) to
1999 1998 1997 1996 December 31, 1995 December 31, 1999
...................................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $11.43 $10.92 $10.34 $10.55 $10.00 $11.43
...................................................................................................................................
Income From Operations:
Net investment income 0.469 0.524 0.564 0.562 0.187 0.385
Net realized and unrealized gain
(loss) on investments (0.900) 0.549 0.586 (0.232) 0.551 (0.889)
...................................................................................................................................
Total from operations (0.431) 1.073 1.150 0.330 0.738 (0.504)
...................................................................................................................................
Less Dividends From:
Net investment income (0.450) (0.540) (0.570) (0.540) (0.188) (0.377)
Net realized gain on investments (0.009) (0.023) -- -- -- (0.009)
...................................................................................................................................
Total from distributions (0.459) (0.563) (0.570) (0.540) (0.188) (0.386)
...................................................................................................................................
Net Asset Value, end of period $10.54 $11.43 $10.92 $10.34 $10.55 $10.54
...................................................................................................................................
Total return (A) (3.86)% 10.05% 11.45% 3.31% 7.43%** (4.49)%**
</TABLE>
<PAGE>
<TABLE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
<CAPTION>
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
----------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------------------------------- -----------------
August 17, 1995 January 4, 1999
Year Ended December 31, (Commencement (Commencement
---------------------------------------------------- of Operations) to of Operations) to
1999 1998 1997 1996 December 31, 1995 December 31, 1999
...................................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $106,449 $259,447 $1,917 $2,060 $1,306 $6,953
Ratio of expenses to
average net assets (B) 0.80% 0% 0.14% 0% 0% 1.30%*
Ratio of expenses to
average net assets
after fees paid
indirectly (B) 0.81% 0% 0% 0% 0% 1.30%*
Ratio of net investment
income to average net
assets 4.14% 4.49% 5.45% 5.42% 5.20%* 3.64%*
Portfolio turnover 112% 57% 55% 52% 0% 112%
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 $0.424 $0.364 $(0.229) $(0.291) $0.098 $0.343
RATIOS:
Expenses to average net
assets 1.20% 1.37% 7.66% 8.23% 2.50%* 1.70%*
Net investment income
(loss) to average net
assets 4.55% 3.12% (2.21)% (2.81)% 2.70%* 3.24%*
* 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 and retired employees of Citibank and its affiliates,
CFBDS, Inc. and its affiliates, any Service Agent and its
affiliates and certain other Fund service providers (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 (qualified plans investing through certain programs
sponsored by Citibank or its affiliates are not subject to this
minimum)
[] 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 2000 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 2000 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 Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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>
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, reports, and other information about the Fund are
also available on the Edgar Database 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 1-202-942-8090. Copies may also be obtained upon payment of
a duplicating fee by electronic request to [email protected],
or by writing to the SEC's Public Reference Section,
Washington, DC 20549-6009.
- -------------------------
SEC File Number: 811-5034 CFP-NAT 5/00
<PAGE>
----------
PROSPECTUS
----------
MAY 1, 2000
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 ACCOUNT ................................................. 13
CHOOSING A SHARE CLASS .............................................. 13
HOW TO BUY SHARES ................................................... 18
HOW THE PRICE OF YOUR SHARES IS CALCULATED 19
HOW TO SELL SHARES .................................................. 20
REINSTATING RECENTLY SOLD SHARES .................................... 22
EXCHANGES ........................................................... 22
ACCOUNT INQUIRIES ................................................... 23
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 ............................................................... 34
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, towns and other
public entities and 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.
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 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.
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.
Certain securities held by the Fund may be covered by
municipal bond insurance.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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, a common form of
derivative, in order to protect (or "hedge") against changes
in interest rates or to manage the maturity or duration of
fixed income securities.
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. See page
34 for more information about risks.
The value of the Fund's shares will change daily as the value
of its underlying securities change. This means that your
shares of the Fund may be worth more or less when you sell
them than when you bought them.
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.
You should be aware that New York has experienced difficulties in
recent years and could do so again in the future. This could cause
the Fund to lose money. If the Fund has difficulty finding high
quality New York municipal obligations to purchase, the amount of
the Fund's income that is subject to New York taxes could 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 and supply and demand
for New York municipal obligations. 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 INCOME RISK. If interest rates decline, the amount of income paid
to you by the Fund as dividends may also decline.
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 PORTFOLIO SELECTION. The success of the Fund's investment strategy
depends in large part on the investment process. The portfolio
managers may fail to pick securities that perform well because they
are unable to predict accurately the direction of interest rates or
to assess fundamental changes affecting the credit quality of
issuers, or other factors. In that case, you may lose money, or
your investment may not do as well as an investment in another tax-
free fund.
o PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held
by the Fund may be able to call a bond or 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 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 the Fund 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.
Please keep in mind that an investment in any fixed
income fund is not a complete investment program.
Fund Performance
The following bar chart and table can help you evaluate the
risks and performance of the Fund.
o The bar chart shows changes in the Fund's performance from year to
year for the calendar years indicated. 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. The Fund's returns in the
table reflect the maximum sales charge currently applicable.
o In both the chart and table, the returns shown for Class A shares
include returns for periods before the creation of share classes on
January 4, 1999. 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 have been adjusted to reflect the maximum front-end sales
charge currently applicable to the Class A shares.
o Class B shares have been offered since January 4, 1999. Class B
performance is lower than that shown for Class A shares, because of
higher fund expenses and the effect of the contingent deferred
sales charge.
o The Fund's performance reflects certain fee waivers or
reimbursements. If these are reduced or eliminated, the Fund's
performance may go down.
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. For current yield
information, please call 800-625-4554 toll free, or contact
your account representative.
<PAGE>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS -- CLASS A
(WITHOUT SALES CHARGE)
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%
1999 (3.73)%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND'S 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 (WITH MAXIMUM SALES CHARGE)
AS OF DECEMBER 31, 1999
..............................................................................
Life of Fund
Since
1 Year 5 Years 10 Years September 8, 1986
..............................................................................
Class A (8.07)% 5.52% 5.70% 5.81%
..............................................................................
Class B (8.75)% N/A N/A *
..............................................................................
Lehman Municipal Bond Index (2.06)% 6.91% 6.89% *
- --------------------------------------------------------------------------------
*Information regarding performance for this period is not available.
Current yield for Class A (for 30 day period ending December 31, 1999): 4.74%
Tax equivalent yield for Class A (for 30 day period ending December 31,
1999): 8.43%
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.
- --------------------------------------------------------------------------------
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
..............................................................................
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 0.13% 0.13%
..............................................................................
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.13% 1.63%
- ------------------------------------------------------------------------------
* Because some of the Fund's expenses were waived or
reimbursed, actual total operating expenses
for the prior year were: 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;
o you then sell all your shares at the end of those periods -- for
Class B shares a number is also given showing your expenses 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;
o your 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 as shown in the table without waivers
remain the same.
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 $560 $793 $1,044 $1,763
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $616 $814 $ 987 $1,798
..............................................................................
Assuming no redemption $166 $514 $ 887 $1,798
- --------------------------------------------------------------------------------
<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 1.00% 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 intermediaries such as broker/dealers that 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 intermediaries that sell
shares of the Fund receive. The distributor keeps up to
approximately 10% of the sales charge imposed on Class A shares.
Financial intermediaries 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 page 15.
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 1.00% 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 intermediaries 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
intermediaries 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 applicable CDSC, 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.
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
sales or 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. The
Fund does not impose any minimum initial or subsequent
investment requirements but your Service Agent may.
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.
If you hold your shares through 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 transfer it to another financial institution, 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
may be calculated as of the earlier 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 hold your shares through a Service
Agent, through your Service Agent. If your account application
permits, you may also make redemption requests by telephone.
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 hold your shares through 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 third business day after you sell your shares
but in any event within seven days. However, 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.
Your account balance with the Fund may be subject to a $500
minimum. If so, the Fund reserves the right to close your
account if it falls below $500 because of redemptions. You
will have 60 days to make an additional investment. If you do
not increase your balance, the Fund may close your account and
send the proceeds to you. Your shares will be sold at NAV on
the day your account was closed.
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 hold your shares through 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 each fund
the next time they are 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 for exchange. 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.
ACCOUNT INQUIRIES
Please contact your Service Agent. If you hold your shares
through the transfer agent, please call 1-800-625-4554.
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 federal taxes is very general. 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. Each year the Fund will mail you a report
of 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 $351 billion in
assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citigroup Inc.
"CitiFunds" is a service mark of Citicorp.
Citibank and its affiliates, including their directors,
officers or employees, may have banking and investment banking
relationships with the issuers of securities that are held in
the Fund. They may also own the securities of these issuers.
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, CFA, is a Vice President of Citibank and 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. He has 12 years of
investment management experience.
MANAGEMENT FEES
For the Fund's fiscal year ended December 31, 1999, Citibank
received management fees totaling 0.41% 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 described
below. The Fund may use other strategies and invest in other
securities that are described in the Statement of Additional
Information. However, the Fund may not use all of the
strategies and techniques or invest in all of the types of
securities described in this Prospectus or in the Statement of
Additional Information. The Fund's goals may be changed
without shareholder approval. Of course, there can be no
assurance that the Fund will achieve its goals.
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 at the time of purchase (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.
The Fund is permitted to invest in bonds with any maturity.
However, the Fund's dollar-weighted average maturity is
normally expected to 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.
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.
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. Please note that there are
many other factors that could adversely affect your investment
and that could prevent the Fund from achieving its goals,
which are not described here. 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. The
value of the Fund's shares will change daily as the value of
its underlying securities changes. This means that your shares
of the Fund may be worth more or less when you sell them than
when you bought them. 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 that New York has experienced difficulties
in recent years and could do so again in the future. This
could cause the Fund to lose money. If the Fund has difficulty
finding high quality New York municipal obligations to
purchase, the amount of the Fund's income that is subject to
New York taxes could increase.
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
and supply and demand for New York municipal obligations. 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.
INCOME RISK. If interest rates decline, the amount of income
paid to you by the Fund as dividends may also decline.
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.
PORTFOLIO SELECTION. The success of the Fund's investment
strategy depends in large part on the investment process. The
portfolio managers may fail to pick securities that perform
well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes
affecting the credit quality of issuers or other factors. In
that case, you may lose money, or your investment may not do
as well as an investment in another tax-free fund.
PREPAYMENT AND EXTENSION RISK. The issuers of debt securities
held by the Fund may be able to call a bond or 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. The Fund would
also lose the benefit of falling interest rates on the price
of the repaid bond. 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. Securities
subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise.
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.
<PAGE>
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<PAGE>
<TABLE>
--------------------
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 and Class B 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.
<CAPTION>
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
----------------------------------------------------------------------------------
CLASS A CLASS B
----------------------------------------------------------- -------------------
For the Period
January 4, 1999
Year Ended December 31, (Commencement
----------------------------------------------------------- of Operations) to
1999 1998 1997 1996 1995 December 31, 1999
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $11.69 $11.42 $10.98 $11.25 $10.09 $11.69
...........................................................................................................................
Income From Operations:
Net investment income 0.514 0.487 0.594 0.585 0.607 0.412
Net realized and unrealized gain
(loss) on investments (0.940) 0.282 0.431 (0.267) 1.153 (0.923)
...........................................................................................................................
Total from operations (0.426) 0.769 1.025 0.318 1.760 (0.511)
...........................................................................................................................
Less Dividends From:
Net investment income (0.474) (0.499) (0.585) (0.588) (0.600) (0.399)
...........................................................................................................................
Net Asset Value, end of period $10.79 $11.69 $11.42 $10.98 $11.25 $10.78
...........................................................................................................................
Total return (A) (3.73)% 6.89% 9.62% 3.01% 17.89% (4.45)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $224,144 $459,591 $75,978 $82,182 $90,264 $10,713
Ratio of expenses to average net
assets 0.80% 0.80% 0.80% 0.80% 0.80% 1.30%*
Ratio of net investment income to
average net assets 4.40% 4.24% 5.31% 5.34% 5.62% 3.90%*
Portfolio turnover 30% 17% 16% 47% 98% 30%
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 $0.465 $0.454 $0.540 $0.534 $0.555 $0.375
RATIOS:
Expenses to average net assets 1.13% 1.09% 1.28% 1.27% 1.27% 1.63%*
Net investment income to average
net assets 4.07% 3.95% 4.83% 4.87% 5.15% 3.57%*
* Annualized.
(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 and retired employees of Citibank and its affiliates,
CFBDS, Inc. and its affiliates, any Service Agent and its
affiliates and certain other Fund service providers (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 (qualified plans investing through certain programs
sponsored by Citibank or its affiliates are not subject to this
minimum)
[] 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 2000 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 2000 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.
FEDERAL TAX RATES
<TABLE>
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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>
----------
APPENDIX 2
----------
NEW YORK STATE TAX RATES
<CAPTION>
Taxable Income* Income New York Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000** Joint 2000*** 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 - $ 26,250 19.54% 2.49% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.84% 7.46% 8.08%
$0 - $ 43,850 19.28% 2.48% 3.10% 3.72% 4.33% 4.96% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 63,551 - $132,600 $105,951 - $161,450 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$132,601 - $288,350 $161,451 - $288,350 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$288,351 & Over $288,351 & Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.56%
* 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.
</TABLE>
<TABLE>
NEW YORK STATE AND CITY TAX RATES
<CAPTION>
Taxable Income* Income New York City Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000**** Joint 2000**** 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 - $ 26,250 22.40% 2.58% 3.22% 3.87% 4.51% 5.15% 5.80% 6.44% 7.09% 7.73% 8.38%
$0 - $ 43,850 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$ 26,251 - $ 63,550 35.63% 3.11% 3.88% 4.66% 5.44% 6.21% 6.99% 7.77% 8.54% 9.32% 10.10%
$43,851 - $105,950 35.62% 3.11% 3.88% 4.66% 5.44% 6.21% 6.99% 7.77% 8.54% 9.32% 10.10%
$ 63,551 - $132,600 $105,951 - $161,450 38.37% 3.25% 4.06% 4.67% 5.68% 6.49% 7.30% 8.11% 8.92% 9.74% 10.55%
$132,601 - $288,350 $161,451 - $288,350 42.83% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$288,351 & Over $288,351 & 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>
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, reports, and other information about the Fund are also
available on the Edgar Database 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 1-202-942-8090. Copies may also
be obtained upon payment of a duplicating fee by electronic request to
[email protected], or by writing to the SEC's Public Reference
Section, Washington, DC 20549-6009.
- -------------------------
SEC File Number: 811-5034 CFP-NYT 5/00
<PAGE>
Statement of
Additional Information
May 1, 2000
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 ........... 17
7. Additional Information on the Purchase and Sale of Fund Shares and
Shareholder Programs .............................................. 17
8. Management .......................................................... 24
9. Portfolio Transactions .............................................. 30
10. Description of Shares, Voting Rights and Liabilities ................ 31
11. Tax Matters ......................................................... 32
12. Financial Statements ................................................ 33
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 1, 2000, 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 33
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 1, 2000.
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 all of the investments and utilize
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. A significant portion of the State's economic growth
has been in industries, such as high technology and entertainment, that may be
particularly sensitive to economic trends. In addition, such industries can be
adversely affected by economic turmoil in foreign markets. 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 1999, 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
(frequently overnight and usually not more than seven days) 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 by the Fund. 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.
Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of a
period, deducting (as applicable) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by each Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Average annual and cumulative total returns may also be presented in
advertising and sales literature without the inclusion of sales charges. Total
return calculations that do not include the effect of the sales charge would
be reduced if such charge were included.
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.
In computing total rates of return and yield quotations, all Fund expenses
are included. However, fees that may be charged directly to a shareholder by
that shareholder's broker dealer, Service Agent or other financial
intermediaries are not included. Of course, any such fees will reduce the
shareholder's net return on investment.
Set forth below is average annual total rate of return information for the
Class A and Class B 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. Prior to January 4, 1999, there were no sales charges on the purchase or
sale of the Funds' shares. The Class A share performance for past periods has
therefore been adjusted to reflect the maximum sales charge currently in
effect. The Funds offered Class B shares beginning January 4, 1999. For
periods prior to that date, Class B share performance includes the performance
of the applicable Fund's Class A shares, adjusted to take into account the
deduction of the Class B contingent deferred sales charge, which declines over
six years from 4.5% to 0%, rather than the initial sales charge applicable to
Class A shares. This blended performance has not been adjusted to take into
account differences in class-specific operating expenses. Because operating
expenses of Class B shares are higher than those of Class A shares, this
blended Class B share performance is higher than the performance of Class B
shares would have been had Class B shares been offered for the entire period.
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 otherwise would have been.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
--------- ----------
<S> <C> <C>
CITIFUNDS CALIFORNIA TAX FREE INCOME PORTFOLIO
CLASS A
November 2, 1998 (Commencement of Operations) to
December 31, 1999 ................................................. (5.01)% $ 942.06
One Year Ended December 31, 1999 .................................... (6.93)% $ 930.71
CLASS B
January 4, 1999 (Commencement of Operations) to
December 31, 1999 ................................................. (7.57)% $ 924.29
One Year Ended December 31, 1999 .................................... (7.58)% $ 924.24
CITIFUNDS NATIONAL TAX FREE INCOME PORTFOLIO
CLASS A
August 17, 1995 (Commencement of Operations) to
December 31, 1999 ................................................. 5.23% $1,249.82
One Year Ended December 31, 1999 .................................... (8.19)% $ 918.11
CLASS B
January 4, 1999 (Commencement of Operations) to
December 31, 1999 ................................................. (8.79)% $ 912.14
One Year Ended December 31, 1999 .................................... (8.79)% $ 912.09
CITIFUNDS NEW YORK TAX FREE INCOME PORTFOLIO
CLASS A
Ten Years Ended December 31, 1999 ................................... 5.70% $1,740.52
Five Years Ended December 31, 1999 .................................. 5.52% $1,308.14
One year Ended December 31, 1999 .................................... (8.07)% $ 919.33
CLASS B
Ten Years Ended December 31, 1999 ................................... 5.15% $1,651.77
Five Years Ended December 31, 1999 .................................. 4.94% $1,272.74
One year Ended December 31, 1999 .................................... (8.76)% $ 912.41
January 4, 1999 (Commencement of Operations) to December 31, 1999 ... (8.75)% $ 912.46
</TABLE>
The yields of Class A shares for the 30-day period ended December 31, 1999
were 4.48% for the California Fund, 4.66% for the National Fund, and 4.73% for
the New York Fund. The yields of the Class B shares for the 30-day period
ended December 31, 1999 were 4.01% for the California Fund, 4.14% for the
National Fund, and 4.22% for the New York Fund.
The tax equivalent yields of Class A shares for the 30-day period ended
December 31, 1999 were 8.20% for the California Fund, 7.73% for the National
Fund, and 8.43% for the New York Fund. The tax equivalent yields of the Class
B shares for the 30-day period ended December 31, 1999 were 7.32% for the
California Fund, 6.85% for the National Fund, and 7.52% 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. 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 may not reflect 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 (the "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, 1999 of Class A shares
from a Fund aggregating less than $25,000 subject to the schedule of sales
charges set forth below.
<TABLE>
<CAPTION>
CALIFORNIA FUND NATIONAL FUND NEW YORK FUND
--------------- ------------- -------------
<S> <C> <C> <C>
Net Asset Value per share ................................. $9.43 $10.54 $10.79
Per Share Sales Charge -- 4.50% of public offering price
(4.71% of net asset value per share) .................... $0.44 $ 0.50 $ 0.51
Per Share Offering Price to the Public .................... $9.87 $11.04 $11.30
</TABLE>
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.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER REALLOWANCE
AMOUNT OF AS A % OF AS A % OF AS A % OF
INVESTMENT OFFERING PRICE INVESTMENT OFFERING PRICE
- ---------- -------------- ---------- --------------
<S> <C> <C> <C>
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.
</TABLE>
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.
ADDITIONAL DEALER CONCESSIONS
From time to time, the Distributor or Citibank, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers that sell or arrange for the sale of shares of the
Funds. Such concessions provided by the Distributor or Citibank may include
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited registered representatives
and other employees, payment for travel expenses, including lodging, incurred
by registered representatives and other employees for such seminars or
training programs, seminars for the public, advertising and sales campaigns
regarding the Funds, and/or other dealer-sponsored events. From time to time,
the Distributor or Citibank may make expense reimbursements for special
training of a dealer's registered representatives and other employees in group
meetings or to help pay the expenses of sales contests. Other concessions may
be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
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 or retired 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)
[ ] 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 (qualified
plans investing through certain programs sponsored by Citibank or its
affiliates are not subject to this minimum)
[ ] 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 the Transfer Agent or, if you hold your shares
through a Service Agent, 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 front-
end 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 holds Fund shares through 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.
[ ] Class B shares included in the shares covered by the letter of intent
will continue to be subject to the applicable CDSC.
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 the Transfer Agent or, if you hold your shares through a Service
Agent, 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, you must notify the Transfer Agent or, if you hold
your shares through a Service Agent, your Service Agent 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 were outstanding on
January 4, 1999 may 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 the Transfer Agent or, if you hold your shares through a
Service Agent, 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. If you hold your shares through
a Service Agent, your Service Agent is the shareholder of record for the
shares of the Fund that you own.
Investors may be able to invest 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 hold
shares through 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; 57 -- Chief Executive Officer, Rocket City Enterprises
(Consulting, Publishing, Internet Services) (since January 2000); President and
Chief Executive Officer, Catalyst, Inc. (Management Consultants) (since 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*; 48 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
MARK T. FINN; 56 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Part Owner, FX 500 Ltd. (Commodity Trading
Advisory Firm) (April 1990 to February 1996); General Partner and Shareholder,
Greenwich Ventures LLC (Investment Partnership) (since January 1996);
President, Secretary, and Owner, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Director, Chairman and Owner, Vantage
Consulting Group, Inc. (since October 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.
RILEY C. GILLEY; 73 -- 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; 60 -- Professor, Babson College (since September 1993);
Trustee, The Highland Family of Funds (March 1997 to March 1998). Her address
is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 48 -- Consultant, Global Research Associates, Inc.
(Investment Research) (since September 1990); Director, Mainstay Institutional
Funds (since December 1990). Her address is P.O. Box 9572, New Haven,
Connecticut.
HEATH B. MCLENDON*; 66 -- Chairman, President, and Chief Executive Officer of
SSB Citi Fund Management LLC (formerly known as SSBC Fund Management, Inc.)
(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.; 65 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Director,
Indonesia Fund (1990 to 1999); Director, MAS Funds (since 1993). His address
is 1385 Outlook Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 73 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors)(since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985). His address is 35 Farm Road, Sherborn,
Massachusetts.
E. KIRBY WARREN; 65 -- Professor of Management, Graduate School of Business,
Columbia University (1987 to December 1999). His address is Laurel Road, P.O.
Box 146, Tuxedo Park, New York.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE*; 48 -- President of the Trust; Chief Executive Officer and
President, Signature Financial Group, Inc. and CFBDS.
CHRISTINE D. DORSEY*; 29 -- 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).
LINWOOD C. DOWNS*; 38 -- Treasurer of the Trust; Chief Financial Officer and
Senior Vice President, Signature Financial Group; Treasurer, CFBDS.
TAMIE EBANKS-CUNNINGHAM*; 27 -- 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.
SUSAN JAKUBOSKI*; 36 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trust (since August 1994); Vice President, Signature
Financial Group (Cayman) Ltd.
MOLLY S. MUGLER*; 48 -- Assistant Secretary and Assistant Treasurer of the
Trust; Vice President, Signature Financial Group, Inc.; Assistant Secretary,
CFBDS.
JULIE J. WYETZNER*; 40 -- 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 Trustees of the Trust received the following remuneration from the
sources indicated below during its fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE AGGREGATE
COMPENSATION COMPENSATION COMPENSATION
FROM THE FROM THE FROM THE TOTAL COMPENSATION
CALIFORNIA NATIONAL NEW YORK FROM THE TRUST
TRUSTEE FUND(1) FUND(1) FUND(1) AND COMPLEX(1)
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Elliott J. Berv $1,447 $1,045 $2,581 $69,500
Philip W. Coolidge -0- -0- -0- -0-
Mark T. Finn 1,790 1,863 4,061 63,250
Riley C. Gilley 1,377 895 2,326 65,250
Diana R. Harrington 1,537 1,381 3,324 71,250
Susan B. Kerley 1,537 1,361 3,265 69,750
Heath B. McLendon -0- -0- -0- -0-
C. Oscar Morong, Jr. 1,622 1,704 4,043 92,000
Walter E. Robb, III 1,411 953 2,408 67,500
E. Kirby Warren 1,453 1,124 2,797 62,750
William Woods, Jr.(2) 1,694 1,751 3,987 66,000
(1) Messrs. Berv, Coolidge, Finn, Gilley, McLendon, Morong, Robb, and Warren and Mses. Harrington and Kerley are Trustees
of 25, 48, 24, 35, 23, 39, 28, 39, 30, and 30 funds and portfolios, respectively, in the family of open-end registered
investment companies advised or managed by Citibank.
(2) Effective December 31, 1999, Mr. Woods became a Trustee Emeritus of the Trust. Per the terms of the Trust's
Trustee Emeritus Plan, Mr. Woods serves the Board of Trustees in an advisory capacity. As a Trustee Emeritus,
Mr. Woods is paid 50% of the annual retainer fee and meeting fees otherwise applicable to Trustees, together
with reasonable out-of-pocket expenses for each meeting attended.
</TABLE>
As of April 12, 2000 all Trustees and officers as a group owned less than
1% of the outstanding shares of any Fund. The following shareholders owned of
record 5% or more of the outstanding voting securities of the indicated Funds
on April 12, 2000: California Fund - Class A shares: Fiserv Securities Inc.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103-7042 - 98.28%;
Class B shares: Fiserv Securities Inc., Attn: Mutual Funds Dept., One Commerce
Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103-7042 - 63.95%;
Edwin F. Feo and Mary Ann M. Feo J+Ten, 6008 E. Bay Shore Walk, Long Beach, CA
90803-5628 - 9.59%; National Fund - Class A shares: Fiserv Securities Inc.,
Trade House Account, Attn: Mutual Funds Dept., One Commerce Square, 2005
Market Street, Suite 1200, Philadelphia, PA 19103-7042 - 94.88%; New York Fund
- - Class A shares: Fiserv Securities Inc., Attn: Mutual Funds, One Commerce
Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103-7042 - 94.27%.
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 year ended December 31, 1999, the fees paid to Citibank
by the California Fund under its Management Agreement, after waivers, were
$56,949.
For the fiscal year ended December 31, 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 year ended December 31, 1999,
the fees paid to Citibank by the National Fund under its Management Agreement,
after waivers, were $684,897.
For the fiscal year ended December 31, 1997, the fees paid to Citibank by
the New York Fund under a prior investment advisory agreement, after waivers,
were $181,270. For the fiscal years ended December 31, 1998 and 1999, the fees
paid to Citibank by the New York Fund under its Management Agreement were
$1,026,221 and $1,456,147, respectively, 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 year ended December 31, 1997, the fees payable from each of
the National Fund and the New York Fund to CFBDS under prior administrative
services agreements were $7,777 (all of which 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" (as
defined in the 1940 Act) 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 who are not interested Trustees of the
Trust. 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 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. For the fiscal year ended December 31, 1999, the fees paid to
CFBDS under the Distribution Agreement with the California Fund, with respect
to Class A and Class B shares, after waivers, were $153,959 and $11,138,
respectively, with the National Fund, with respect to Class A and Class B
shares, after waivers, were $455,060 and $48,439, respectively, and with the
New York Fund, with respect to Class A and Class B shares, after waivers, were
$862,089 and $66,782, 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. The 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.
CODE OF ETHICS
The Trust, the Manager and the Distributor each have adopted a code of
ethics pursuant to Rule 17j-1 under the 1940 Act. Each code of ethics permits
personnel subject to such code to invest in securities, including securities
that may be purchased or held by a Fund. However, the codes of ethics contain
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of the
Funds. Of course, there can be no assurance that the codes of ethics will be
effective in identifying and addressing all conflicts of interest relating to
personal securities transactions.
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
200 Berkeley Street, Boston, Massachusetts 02116.
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, 1997, 1998 and 1999, 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. 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 a shareholder is 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 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. FINANCIAL STATEMENTS
The audited financial statements of the California Fund (Portfolio of
Investments at December 31, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31, 1999,
Statement of Changes in Net Assets for the year ended December 31, 1999 and for
the period November 2, 1998 (commencement of operations) to December 31, 1998,
Financial Highlights for the year ended December 31, 1999 and for the period
November 2, 1998 (commencement of operations) to December 31, 1999, 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, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31,
1999, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1999, Financial Highlights for each of the years in the four-year period
ended December 31, 1999 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, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31,
1999, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1999, Financial Highlights for each of the years in the five-year period
ended December 31, 1999, 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 10, 2000, the Department of
Finance projected that the California economy will show robust growth through
2001. 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 in the early 1990s, 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 1999-00 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 50 percent from the level in place from
1991-92, and is estimated at about $6,313 per ADA in 2000-01. A significant
amount of the "extra" Proposition 98 monies in the last few years have been
allocated to special programs, including an initiative to increase the number of
computers in schools throughout the State. Furthermore, since General Fund
revenue growth is expected to continue in 2000-01, the Governor has also
proposed new initiatives to improve student achievement, provide better teacher
recruitment and training, and provide schools with advanced technology and the
opportunity to form academic partnerships to help them meet increased
expectations.
SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.
PERSONAL INCOME TAX
The California personal income tax, which in 1998-99 contributed about 53
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 1.0
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.
Taxes on capital gains realizations, which have in part been linked to
stock market performance, have become a larger component of personal income
taxes in the last few years. For the 1999 tax year, capital gains are
projected to be 17 percent of the total personal income tax liability compared
to an average of 8.5 percent for the period 1985-94.
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 1998-99. 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. Pursuant
to federal law, sales over the internet are not taxed at this time.
BANK AND CORPORATION TAX
Bank and corporation tax revenues, which comprised about 10 percent of
General Fund revenue in
1998-99, 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 2.1
percent of General Fund revenues and transfers in 1998-99.
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 2.3 percent of General Fund revenues and transfers in the
1998-99 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 55 percent of all
Special Fund revenues and transfers in 1998-99. Principal sources of this
income are motor vehicle fuel taxes, registration and weight fees and vehicle
license fees. During the 1998-99 Fiscal Year, $8.6 billion was derived from
the ownership or operation of motor vehicles. This was only 1.0 percent above
the 1997-98 level, due to tax reductions enacted for vehicle license fees.
About $4.7 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 established a vehicle license fee offset
program. Pursuant to this chapter, vehicle license fees were reduced by 25
percent beginning January 1, 1999. In addition, Chapter 74, Statutes of 1999,
provided a one-time expansion of the offset program by an additional 10
percent for the 2000 calendar year only, and Chapter 76, Statutes of 1999,
allowed a one-year reduction in vehicle license fees for certain commercial
motor vehicles. For 1999-00 and 2000-01, the offset program is expected to
reduce revenues by $1.350 billion and $1.712 billion, respectively. This loss
of local revenue is replaced by the State's General Fund.
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 replaces 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 will be
reduced to assure that local governments are not disadvantaged.
In addition to the initial 25 percent reduction, Chapter 322 also sets out
a series of "trigger" levels, so that the percentage fee 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 the target levels. In order for
the next 10 percent fee reduction, which will result in a cumulative 35
percent cut from 1998 base levels, to go into effect permanently beginning
calendar year 2001, General Fund revenues in FY 2000-01 would need to reach
about $65.5 billion. Based on the current revenue forecast, the 35 percent
offset will go into effect in the 2001 calendar year.
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 to early childhood development programs,
tobacco education and research, indigent health services, and environmental
and recreation 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. Additionally, payments of approximately
$1 billion per year will continue in perpetuity. Under the State's settlement,
half of these moneys will be paid to the State, and half to local governments
(all counties and the cities of San Diego, Los Angeles, San Francisco and San
Jose). The State's revised 1999-2000 Budget includes receipt of $517 million
of settlement money to the General Fund. The Governor's Budget for
2000-01 projects receipt of $388 million of settlement money to the General
Fund.
PRIOR FISCAL YEARS' FINANCIAL RESULTS
Following a severe recession beginning in 1990, the State's financial
condition improved markedly during the fiscal years starting in 1995-96, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on actions taken in
earlier years. The State's cash position also improved, and no external
deficit borrowing occurred over the end of the last four fiscal years.
The economy grew strongly during the fiscal years beginning in 1995-96,
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 and $1.7 billion in 1998-99) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives.
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement
on a total of $1.4 billion of tax cuts. The central element was a bill
which provided for a phased-in reduction of the Vehicle License Fee
("VLF"). Since the VLF is transferred to cities and counties under
existing law, the bill provided for the General Fund to replace the lost
revenues. Starting on January 1, 1999, the VLF has been reduced by 25
percent, 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 included 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).
2. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, over $300
million higher than the minimum Proposition 98 guarantee. Of the 1998-99
funds, major new programs included money for instructional and library
materials, deferred maintenance, support for increasing the school year to
180 days and reduction of class sizes in Grade 9. The Budget also included
$250 million as repayment of prior years' loans to schools, as part of the
settmement of the CTA v. Gould lawsuit.
3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million
(15.6 percent) for the University of California and $267 million (14.1
percent) for the California State University system. In addition,
Community Colleges funding increased by $300 million (6.6 percent).
4. The Budget included increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years.
5. Funding for the judiciary and criminal justice programs increased
by about 11 percent over 1997-98, primarily to reflect increased State
support for local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State
realized savings of $433 million from a reduction in the State's
contribution to the State Teacher's Retirement System in 1998-99.
Final tabulation of revenues and expenditures contained in the 2000-01
Governor's Budget, released on January 10, 2000, reveals that stronger than
expected economic conditions in the State produced total 1998-99 General Fund
revenues of about $58.6 billion, almost $1.6 billion above the 1998 Budget Act
estimates. Actual General Fund expenditures were $57.8 billion, the amount
estimated at the 1998 Budget Act. Some of this additional revenue will be
directed to K-14 schools pursuant to Proposition 98. The Governor's Budget
reports a balance in the SFEU at June 30, 1999, of approximately $3.1 billion
on a budgetary basis.
CURRENT STATE BUDGET
The discussion below of the 1999-00 Fiscal Year budget and the Proposed
2000-01 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 2000-01 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.
1999-2000 FISCAL YEAR BUDGET
On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that General Fund revenues for FY 1998-99 and FY 1999-00
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of General Fund expenditures in FY 1999-00, with a $415 million SFEU
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget
Act occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated
in bargaining with employee unions), and for litigation reserves. The 1999
Budget Act anticipated normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds,
major new programs included money for reading improvement, new textbooks,
school safety, improving teacher quality, funding teacher bonuses,
providing greater accountability for school performance, increasing
preschool and after school care programs and funding deferred maintenance
of school facilities. The Budget also includes $310 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 1998-99 level. General Fund support was increased by $184 million
(7.3 percent) for the University of California and $126 million (5.9
percent) for the California State University system. In addition,
Community Colleges funding increased by $324.3 million (6.6 percent). As a
result, undergraduate fees at UC and CSU will be reduced for the second
consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the General Fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrasctucture Bank, initial planning costs for a new prison in the
Central Valley, additional equipment for train and ferry service, and
payment of deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about
$250 million in each of FY 1999-00 and 2000-01 to make up lost funding to
local governments. Conversion of this one-time reduction to a permanent
cut will remain subject to the revenue tests in the legislation adopted
last year. Several other targeted tax cuts, primarily for businesses, were
also approved, at a cost of $54 million in 1999-00.
6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the
early 1990's. Additionally, an ongoing $50 million was appropriated as a
subvention to cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is taken to a
county detention facility.
The revised 1999-2000 budget included in the 2000-01 Governor's Budget
also reflects the latest estimated costs or savings as provided in various
pieces of legislation passed and signed after the 1999 Budget Act. The revised
budget includes $730 million for various departments for enrollment, caseload
and population changes and $562 million for Smog Impact Fee refunds. Revised
1999-2000 revenues are $65.2 billion or $2.2 billion higher than projections
at the 1999 Budget Act. Revised 1999-2000 expenditures are $65.9 billion or
$2.1 billion higher than projections at the 1999 Budget Act.
The State's Legislative Analyst (LAO) issued a report in February 2000.
The LAO report indicates General Fund revenues for the 18-month period
(January 2000 through June 2001) could be as much as $4.2 billion higher than
the 2000-01 Governor's Budget estimates. The LAO estimate was issued after
analyzing actual revenues for December 1999 and January 2000, which were not
available at the time the Governor's Budget estimates were prepared. The LAO
report assumed the continuation of strong economic growth in the State during
this period.
PROPOSED 2000-01 FISCAL YEAR BUDGET
On January 10, 2000, Governor Davis released his proposed budget for
Fiscal Year 2000-01. The 2000-01 Governor's Budget generally reflects that
General Fund revenues for Fiscal Year 1999-2000 will be higher than projections
made at the time of the 1999 Budget Act.
The Governor's Budget projects General Fund revenues and transfers in
2000-01 of $68.2 billion. This includes anticipated payments from the tobacco
litigation settlement of $387.9 million and the receipt of one-time revenue
from the sale of assets. More accurate revenue estimates will be available in
May and June before the adoption of the Budget. The Governor has proposed $167
million in tax reduction initiatives.
The Governor's Budget proposes General Fund expenditures of $68.8 billion.
Included in the Budget are set-asides of $500 million for legal contingencies
and $100 million for various one-time legislative initiatives. Based on the
proposed revenues and expenditures, the Governor's Budget projects the June
30, 2001 balance in the SFEU to be $1.238 billion.
YEAR 2000
The State's Department of Information Technology has received no reports
that the State experienced any interruption in the delivery of mission
critical services as a result of the date change to the Year 2000 or during
the leap year period of February 28-29 and March 1, 2000.
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 December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to school
districts beginning in 1993-94, is a reimbursable state mandated cost. The
test claim was heard on October 29, 1998, and the Commission on State Mandates
found in favor of the State. In October 1999, the Supreme Court of Sonoma
County overturned the Commission's decision. The State appealed, and briefing
will be completed by the end of June 2000. Should the final decision on this
matter be in favor of the counties, the impact to the State General Fund could
be as high as $10.0 billion. In addition, there would be an annual Proposition
98 General Fund cost of at least $3.75 billion. This cost would grow in
accordance with the annual assessed value growth rate.
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 constitutionality of a Revenue & Taxation Code
section which limits deductions for insurance dividends to those dividends
paid from earnings previously subject to California taxation. On August 13,
1998, the trial court issued a judgment against the Franchise Tax Board. The
Franchise Tax Board has appealed the judgment. Briefing has been completed.
The State has taken the position that, if the challenged section of the
Revenue & Taxation Code is struck down, all deductions relating to dividends
would be eliminated and the result would be additional income to the State.
Plaintiffs, however, contend that if they prevail, the deduction should be
extended to all dividends which would result in a one-time liability for open
years of approximately $60 million, including interest, and an annual revenue
loss of approxiately $10 million.
The State is also a defendant in First Credit Bank etc. v. Franchise Tax
Board which challenges a Revenue & Taxation Code section similar to the one
challenged in the Ceridian case, but applicable to a different group of
corporate taxpayers. The State's motion for summary judgment is currently
pending and a trial date has been set in April 2000. A decision in the
Ceridian case could impact the outcome of this case. The State has taken the
position that, if the challenged section of the Revenue & Taxation Code is
struck down, all deductions relating to dividends would be eliminated and the
result would be additional income to the State. Plaintiffs, however, contend
that if they prevail, the deduction should be extended to all dividends which
would result in a one-time liability for open years of approximately $385
million, including interest, and an annual revenue loss of approximately $60
million.
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
Commission issued a decision in December 1998 determining that a small number
of components of the State's special education program are state mandated
local costs. The administrative proceeding is in the "parameters and
guidelines" stage where the Commission is considering whether and to what
extent the costs associated with the state mandated components of the special
education program are offset by funds that the State already allocates to that
program. The State's position is that all costs are offset by existing
funding. The State has the option to seek judicial review of the mandate
finding. Potential liability of the State, if all potentially eligible school
districts pursue timely claims, has been estimated by the Department of
Finance to be in excess of $1.5 billion, if the State is not credited for its
existing funding of the program.
In January of 1997, California experienced major flooding with preliminary
estimates of property damage of approximately $1.6 to $2.0 billion. In McMahon
v. State, a substantial number of plaintiffs have joined 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.
After various pre-trial proceedings, the State filed its answer to the
plaintiffs' complaint in January of 2000. No trial date has been set. The
State is vigorously defending the action.
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 State has appealed the rulings. Present
estimates of the cleanup range from $400 to $600 million. Potential State
liability falls within this same range. However, all or a portion of any
judgment against the State could be satisfied by recoveries from the State's
insurance carriers. The State has filed a suit against certain of these
carriers. The trial is expected to begin in early 2001.
The State is a defendant in Paterno v. State of California, a coordinated
action involving 3,000 plaintiffs seeking recovery of damages caused by the
Yuba River flood of February 1986. The trial court found liability in inverse
condemnation and awarded damages of $500,000 to a sample of the 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. In
August 1999, the Court of Appeal issued a decision reversing the trial court's
judgment against the State and remanding the case for retrial on the inverse
condemnation cause of action. The California Supreme Court denied plaintiffs'
petition for review. No trial date has been set.
Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated
the damages to be several hundred million dollars. The State is vigorously
defending these cases, as well as related federal cases addressing the
calculation of Medi-Cal reimbursement rates in the future.
The State is involved in two refund actions, Cigarettes Cheaper!, et al.
v. Board of Equalization, et al. and California Assn. Of Retail Tobacconists
(CART), et al. v. Board of Equalization, et al., that challenge the
constitutionality of Proposition 10, approved by the voters in 1998.
Plaintiffs allege that Proposition 10, which increases the excise tax on
tobacco products, violates 11 sections of the California Constitution and
related provisions of law. Plaintiffs Cigarettes Cheaper! seek declaratory
and injunctive relief and a refund of over $4 million. The CART case filed by
retail tobacconists in San Diego seeks a refund of $5 million. The State is
vigorously contesting these cases. If the statute is declared
unconstitutional, exposure may include the entire $750 million collected
annually with interest.
The State is involved in two cases challenging the constitutionality of
the interest offset provisions of the Revenue and Taxation Code: Hunt-Wesson,
Inc., v. Franchise Tax Board and F.W. Woolworth Co. and Kinney Shoe
Corporation v. Franchise Tax Board. In both cases, the Franchise Tax Board
prevailed in the California Court of Appeal and the California Supreme Court
denied taxpayers' petitions for review. In both cases, the United States
Supreme Court granted certiorari. On February 22, 2000, the United States
Supreme Court reversed and remanded the Hunt-Wesson case to the California
Court of Appeal for further proceedings. Although the Court did not take
similar action in the Woolworth Co. case, it is anticipated that it will do
so. The Franchise Tax Board recently estimated that the adverse decisions in
these cases will result in a reduction in state revenues of approximately $15
million annually, with past year collection and interest exposure of
approximately $95 million.
Guy F. Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system tax credit
provided for under the Revenue & Taxation Code. The case went to trial in May
1998 and the trial court entered judgment in favor of the Franchise Tax Board.
The taxpayer has filed an appeal to the California Court of Appeal and
briefing is completed. The Franchise Tax Board estimates that the cost would
be $150 million annually if the plaintiff prevails. Allowing refunds for all
open years would entail a refund of at least $500 million.
Jordan, et al. v. Department of Motor Vehicles, et al., challenges the
validity of the Vehicle Smog Impact Fee, a $300 fee which is collected by the
Department of Motor Vehicles from vehicle registrants when a vehicle without a
California new-vehicle certification is first registered in California. The
plaintiffs contend that the fee violates the interstate commerce and equal
protection clauses of the United States Constitution as well as Article XIX of
the State Constitution. In October, 1999 the Court of Appeal upheld a trial
court judgment for the plaintiffs and the State has declined to appeal
further. Although refunds through the court actions could be limited by a
three-year statute of limitations, with a potential liability of about $350
million, the Governor has proposed refunding fees collected back to the
initiation of these fees in 1990. The 2000-01 Governor's Budget proposes
expenditures of $562 million as a supplemental appropriation in 1999-2000 to
pay these claims.
PTI, Inc., et al. v. Philip Morris, et al. was filed by five distributors
in the cigarette import/re-entry business, seeking to overturn the tobacco
Master Settlement Agreement (MSA) entered between 46 states and the tobacco
industry in November, 1998. The primary focus of the complaint is the
provision of the MSA encouraging participating states to adopt a statute
requiring nonparticipating manufacturers to either become participating
manufacturers and share the financial obligations under the MSA or pay money
into an escrow account. Plaintiffs seek compensatory and punitive damages
against the state and state officials and an order placing tobacco settlement
funds into a trust to be administered by the court for the treatment of
medical expenses of persons injured by tobacco products. Plaintiffs have filed
an amended complaint and the State has filed a motion to dismiss the amended
complaint. A hearing on the State's motion to dismiss is set for May 8, 2000.
The potential fiscal impact of an adverse ruling is largely unknown, but could
exceed the full amount of the settlement (estimated to be $1 billion annually,
of which 50 percent will go directly to the State's General Fund and the other
50 percent directly to the State's 58 counties and 4 largest cities).
In FORCES Action Project et al. v. State of California et al., various
smokers rights groups challenge the tobacco settlement as it pertains to
California, Utah and the City and County of San Francisco. Plaintiffs assert a
variety of constitutional challenges, including that the settlement represents
an unlawful tax on smokers. Motions to dismiss by all defendants, including
the tobacco companies, were eventually converted to summary judgment motions
by the court and heard on September 17, 1999. On January 5, 2000, the court
dismissed the complaint for lack of subject matter jurisdiction because the
plaintiffs lacked standing to sue. The court also concluded that the
plaintiffs' claims against the State and its officials are barred by the 11th
Amendment. Plaintiffs have appealed. Briefing is expected to be complete by
July, 2000.
Louis Bolduc et al. v. State of California et al. is a class action filed
on July 13, 1999 by six Medi-Cal beneficiaries who have received medical
treatment for smoking-related diseases. Plaintiffs allege the State owes them
an unspecified portion of the tobacco settlement monies under a federal
regulation that requires a state to turn over to an injured Medicaid
beneficiary any monies the state recovers from a third party tortfeasor in
excess of the costs of the care provided. The State moved to dismiss the
complaint on September 8, 1999. On February 29, 2000, the court denied the
State's motion to dismiss, but struck the Plaintiffs' class action
allegations. The State intends to appeal that portion of the court's order
denying its motion to dismiss.
Arnett v. California Public Employees Retirement System, et al. was filed
by seven former employees of the State of California and local agencies,
seeking back wages, damages and injunctive relief. Plaintiffs are former
public safety members who began employment after the age of 40 and are
recipients of Industrial Disability Retirement ("IDR") benefits. Plaintiffs
contend that the formula which determines the amount of IDR benefits violates
the federal Age Discrimination in Employment Act of 1967 ("ADEA"). Plaintiffs
contend that, but for their ages at hire, they would receive increased monthly
IDR benefits similar to their younger counterparts who began employment before
the age of 40. CalPERS has estimated the liability to the State as
approximately $315.5 million were the plaintiffs to prevail. The District
Court dismissed the complaint for failure to state a claim. On August 17,
1999, the Ninth Circuit Court of Appeals reversed the District Court's
dismissal of the complaint. The State sought further review in the United
States Supreme Court. On January 11, 2000, the United States Supreme Court in
Kimel v. Florida Board of Regents, held that Congress did not abrogate the
sovereign immunity of the states when it enacted the ADEA. Thereafter, on
January 18, 2000, the Supreme Court granted the petition for writ of
certiorari in Arnett, vacated the judgment of the Ninth Circuit, and remanded
the case to the Ninth Circuit for further proceedings consistent with Kimel.
It now appears that the District Court will dismiss the State Defendants from
the lawsuit.
<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 2000-2001 Executive Budget forecast, continued growth in
the State is projected in 2000 and 2001 for employment, wages, and personal
income, although the growth in employment is expected to moderate from the
1999 pace. Personal income is estimated to have grown by 4.7 percent in 1999,
fueled in part by a continued large increase in financial sector bonus
payments at the year's end, and is projected to grow by 5.5 percent in 2000
and 4.8 percent in 2001. Total bonus payments are expected to increase 11
percent in 2000 and 10.5 percent in 2001. 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 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
2000-2001 Executive Budget forecast, primarily due to the stronger-than-
expected economy.
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.
1998-99 FISCAL YEAR
The State ended its 1998-99 fiscal year on March 31, 1999 in balance on a
cash basis, with a General Fund cash surplus as reported by the DOB of $1.82
billion. The cash surplus was derived primarily from higher-than-projected tax
collections as a result of continued economic growth, particularly in the
financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 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 $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312
million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000, of which $521 million was made available as a result of
the Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.74 billion,
an increase of 6.34 percent from 1997-98 levels. General Fund disbursements
and transfers to other funds totaled $36.49 billion for the 1998-99 fiscal
year, an increase of 6.23 percent from 1997-98 levels.
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 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 $1.4 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.
RATING AGENCIES' ACTIONS
Moody's assigned its municipal bond rating of Aaa, and Standard & Poor's
assigned its rating of AAA to the State's general obligation variable interest
rate bonds as of March 15, 2000. 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.
The MTA has proposed a $17.5 billion capital program for 2000 through
2004. There can be no assurance that the proposed capital plan will be
approved by the Capital Program Review Board without significant
modifications, that the plan as adopted will be adequate to finance the MTA's
capital needs over the plan period, or that funding sources identified in the
approved plan will not be reduced or eliminated.
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 the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the
capital program, two entities were created to issue debt to increase the
City's capital financing capacity: (i) the State Legislature created the
Transitional Finance Authority ("TFA") in 1997, and (ii) the City created the
Tobacco Settlement Asset Securitization Corporation in 1999. Despite these
actions, the City, in order to continue its capital program, will need
additional financing capacity in fiscal year 2002, which could be provided
through increasing the borrowing authority of the TFA or amending the State
constitutional debt limit.
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. In addition, the size of recent tax reductions has increased
to over $2 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110.
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.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550
million, and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study
the distribution and amounts of general purpose local government aid failed to
agree on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State, other than New York City, was
approximately $21.0 billion. A small portion (approximately $80 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units (other than New York City) authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Twenty-two localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1997.
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
To date, the State has experienced no significant Year 2000 computer
disruptions. Monitoring will continue over the next few months to identify and
correct any problems that may arise. However, there can be no assurance that
outside parties who provide goods and services to the State will not
experience computer problems related to Year 2000 programming in the future,
or that such disruptions, if they occur, will not have an adverse impact on
State operations or finances.
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 1999-2000
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 1999-2000 Financial Plan. The State believes that the 1999-2000
Financial Plan includes sufficient reserves to offset the costs associated
with the payment of judgments that may be required during the 1999-2000 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
1999-2000 Financial Plan resources available for the payment of judgments and,
could therefore, affect the ability of the State to maintain a balanced
1999-2000 Financial Plan. In its General Purpose Financial Statements, the
State reports its estimated liability for awarded and anticipated unfavorable
judgments.
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." By decision and judgment dated July 9, 1999, the Supreme
Court, Albany County, granted judgment dismissing the petition. On September 2,
1999, petitioners appealed to the Appellate Division, Third Department, from the
July 9, 1999 decision and order.
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.
On September 9, 1999, the Appellate Division, Third Department, heard the
appeal.
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 a related case, Rodriguez v. DeBuono, on April 19,
1999, the United States District Court for the Southern District of New York
enjoined the State's use of task based assessment, which is similar to the
HARRI, unless the State assesses safety monitoring as a separate task based
assessment, on the grounds that its use without such additional assessment
violated federal Medicaid law and the Americans with Disabilities Act. The
State appealed from the April 19, 1999 order and on July 12, 1999 argued the
appeal before the Second Circuit. By order dated October 6, 1999, the Second
Circuit reversed the April 19, 1999 order and vacated the injunction. On
October 20, 1999, petitioners filed a request for rehearing en banc.
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 the remaining cases in
accordance with the result in Matter of New York State Radiological Society v.
Wing. By decision dated July 8, 1999, the Court of Appeals denied leave to
appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law (S) 2807-d, which imposes a tax on the gross receipts
hospitals and residential health care facilities receive from all patient care
services. Plaintiffs allege that the tax assessments were not uniformly
applied, in violation of federal regulations. In a decision dated June 30,
1997, the Court held that the 1.2 percent and 3.8 percent assessments on gross
receipts imposed pursuant to Public Health Law (S)(S) 2807-d(2)(b)(ii) and
2807-d(2)(b)(iii), respectively, are unconstitutional. An order entered August
27, 1997, enforced the terms of the decision. The State appealed that order.
By decision and order dated August 31, 1998, the Appellate Division, Second
Department, affirmed that order. On September 30, 1998, the State moved for
re-argument or, in the alternative, for a certified question for the Court of
Appeals to review. By order dated January 7, 1999 the motion was denied. A
final order was entered in Supreme Court on January 26, 1999. On February 23,
1999, the State appealed that order to the Court of Appeals. In a decision
entered December 16, 1999, the Court of Appeal reversed the decision below and
upheld the constitutionality of the assessments.
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. By decision and order dated May 6, 1999, the Appellate Division, First
Department, affirmed the July 25, 1997 judgment. By order dated July 8, 1999,
the Appellate Division denied the State's motion for leave to appeal to the
Court of Appeals from the May 6, 1999 decision and order. By order dated
October 14, 1999, the Court of Appeals dismissed the State's leave to appeal.
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.
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. By decision
dated June 22, 1999, as discussed below, the Second Circuit affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP
I for the 1996-97 school year and remanded the case to the District Court for
further proceedings consistent with its decision.
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. That opinion was
reduced to an order on July 27, 1998. The order directed the State to pay
$37.5 million by August 1, 1998 for estimated EIP costs for the 1997-98 school
year. The State made this payment, as directed. On August 24, 1998, the State
appealed that order to the Second Circuit. The City of Yonkers Board of
Education cross-appealed to the Second Circuit from that order. By stipulation
of the parties approved by the Second Circuit on November 19, 1998, the
appeals from the July 27, 1998 order were withdrawn without prejudice to
reinstatement upon determination of the State's appeal of the October 14, 1997
judgment discussed above.
On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million
by May 1, 1999, as the State's remaining share of EIP costs for the 1997-98
school year. The second order directed the State to pay to Yonkers $69.1
million as its share of the estimated EIP costs for the 1998-99 school year.
The State made both payments on April 30, 1999.
In a decision dated June 22, 1999, the Second Circuit found no basis for
the District Court's findings that vestiges of a dual system continued to
exist in Yonkers and reversed the order directing the implementation of EIP-
II. The Second Circuit also affirmed the District Court's order requiring the
State to pay one-half of the cost of EIP I for the 1996-97 school year and
remanded the case to the District Court for further proceedings consistent
with its decision. On July 2, 1999 the NAACP filed a petition for rehearing of
the June 22, 1999 decision before the Second Circuit, en banc. The State has
joined in the City of Yonker's motion to stay further implementation of EIP II
pending the decision on the petition for rehearing. By order dated August 5,
1999, the Second Circuit granted the motion staying further implementation of
EIP II pending appeal.
On July 27, 1999, the City of Yonkers moved in the District Court to
modify the July 27, 1998 order to require the State to make payments for EIP
expenses each month from July 1999 through April 2000 of $9.22 million per
month instead of paying $92.2 million by May 1, 2000. By memorandum and order
dated July 29, 1999, the District Court denied this motion.
In a decision dated November 16, 1999, the Second Circuit vacated its June
22, 1999 decision. In this decision, the Second Circuit again affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP
I for the 1996-97 school year. The Second Circuit also found no basis for the
District Court's findings that vestiges of a dual system continued to exist in
Yonkers, and therefore vacated the District Court's EIP II order. The Second
Circuit, however, remanded to the District Court for the limited purpose of
making further findings on the existing record as to whether any other
vestiges of the dual system remain in the Yonkers public schools.
In Campaign for Fiscal Equity, Inc., et al. v. State, et al. (Supreme
Court, New York County), plaintiffs challenge the funding for New York City
public schools. Plaintiffs seek a declaratory judgment that the State's public
school financing system violates article 11, section 1 of the State
Constitution and Title VI of the federal Civil Rights Act of 1964 and
injunctive relief that would require the State to satisfy State Constitutional
standards. This action was commenced in 1993. The trial of this action
commenced October 12, 1999.
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 were argued March 29, 1999 and are still
awaiting determination. The District Court has not yet rendered a decision. By
order dated February 24, 1999, the District Court appointed a federal
settlement master. A conference scheduled by the District Court for May 26,
1999 to address the administration of this case has been adjourned
indefinitely.
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. In the Cayuga Indian Nation of New York case,
by order dated March 29, 1999, the United States District Court for the
Northern District of New York appointed a federal settlement master. In
October 1999, the District Court granted the Federal Government's motion to
have the State held jointly and severally liable for any damages owed to the
plaintiffs. The damages phase of the trial of this case is underway. In the
Canadian St. Regis Band of Mohawk Indians case, the United States District
Court for the Northern District of New York has directed the parties to
rebrief outstanding motions to dismiss brought by the defendants. The State
filed its brief on July 1, 1999. The motions were argued in September 1999. No
decision has been rendered on these motions. In Seneca Nation of Indians, by
order dated November 22, 1999, the District Court confirmed the July 12, 1999
magistrate's report, which recommended granting the State's motion to dismiss
that portion of the action relating to the right of way where the New York
State Thruway crosses the Cattaraugus Reservation in Erie and Chatauqua
Counties and denying the State's motion to dismiss the Federal Government's
damage claims. The District court has set a trial date of October 17, 2000 for
that portion of the case related to plaintiff's claim of ownership of the
islands in the Niagara River.
PROPRIETARY SCHOOLS
In an action unsealed in February, 1996, the relator claims, inter alia,
that the State violated the Federal False Claims Act, 31 USC (S) 3729, et seq.
(United States ex rel. Long v. SCS Business and Technical Institute, Inc., et
al., United States District Court, District of Columbia). On March 29, 1999,
the District of Columbia Circuit Court reversed a decision by the District
Court and granted the State's motion to dismiss the action. The United States
has petitioned for certiorari to the United States Supreme Court, which is
holding the petition pending its decision in a similar case, U.S. ex rel.
Stevens v. State of Vermont.
FOOD STAMP PROGRAM
In an action commenced April 5, 1999 by New York and several other states
against the Federal Government (State of Arizona, et al. v. Shalala, et al.,
United States District Court, District of Columbia), plaintiffs challenge a
federal directive which requires state to change their method of allocating
costs associated with the Food Stamp program. On July 29, 1999, plaintiffs
moved for summary judgment. On September 23, 1999, defendant cross-moved for
summary judgment. No date for argument of these motions has been set.
<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 due 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 dependent the issue is 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. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
<PAGE>
TAXABLE EQUIVALENT YIELD TABLES
RATES FOR 2000 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 2000 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.
<TABLE>
FEDERAL TAX RATES
<CAPTION>
Taxable Income* Income Federal Tax-Exempt Yield
- ------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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>
CALIFORNIA TAX RATES
<TABLE>
<CAPTION>
Taxable Income* Income California 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 - $ 26,250 17.85% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0 - $ 43,850 17.40% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87%
$ 26,251 - $ 63,550 34.45% 3.05% 3.81% 4.58% 5.34% 6.10% 6.86% 7.63% 8.39% 9.15% 9.92%
$ 43,851 - $105,950 34.06% 3.03% 3.79% 4.55% 5.31% 6.07% 6.82% 7.58% 8.34% 9.10% 9.86%
$ 63,551 - $132,600 $105,951 - $161,450 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$132,601 - $288,350 $161,451 - $288,350 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$288,351 & Over $288,351 & 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 1999 information since at this time 2000 information is
not available.
</TABLE>
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
RATES FOR 2000 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 2000 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 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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 2000 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 2000 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 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 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 2000** Joint 2000*** 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 - $ 26,250 19.54% 2.48% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.83% 7.45% 8.08%
$0 - $ 43,850 19.28% 2.48% 3.10% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 63,551 - $132,600 $105,951 - $161,450 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$132,601 - $288,350 $161,451 - $288,350 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$288,351 & Over $288,351 & 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 2000**** Joint 2000**** 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 - $ 26,250 22.40% 2.58% 3.22% 3.87% 4.51% 5.16% 5.80% 6.44% 7.09% 7.73% 8.38%
$0 - $ 43,850 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$ 26,251 - $ 63,550 35.63% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.33% 10.10%
$ 43,851 - $105,950 35.62% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.32% 10.10%
$ 63,551 - $132,600 $105,951 - $161,450 38.37% 3.25% 4.06% 4.67% 5.68% 6.49% 7.30% 8.11% 6.92% 9.74% 10.55%
$132,601 - $288,350 $161,451 - $288,350 42.83% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$288,351 & Over $288,351 & 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
**** o Multiple Class Plan of the Registrant
* and ***** p Powers of Attorney for the Registrant
q(1) Code of Ethics of the Registrant
q(2) Code of Ethics of CFBDS
- ---------------------
* 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 and Foreign Bond Portfolio), The Premium
Portfolios (U.S. Fixed Income Portfolio, High Yield 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
Conservative, CitiSelect(R) VIP Folio 300 Balanced, CitiSelect(R) VIP Folio 400
Growth, CitiSelect(R) VIP Folio 500 Growth Plus 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.
Victor J. Menezes is the Chairman 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.
The following persons have the affiliations indicated:
Paul J. Collins Director, Kimberly-Clark Corporation
Director, Nokia Corporation
Robert I. Lipp Chairman, Chief Executive Officer and
President, Travelers Property Casualty Corp.
William R. Rhodes Director, Private Export Funding Corporation
Director, Conoco, Inc.
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) New York Tax Free Income
Portfolio, CitiFunds(SM) National Tax Free Income Portfolio, CitiFunds(SM)
California Tax Free Income Portfolio, CitiFunds(SM) Small Cap Value Portfolio,
CitiFunds(SM) Growth & Income Portfolio, CitiFunds(SM) Large Cap Growth
Portfolio, CitiFunds(SM) Small Cap Growth Portfolio, CitiFunds(SM) Balanced
Portfolio, CitiSelect(R) Folio 100 Income, CitiSelect(R) Folio 200 Conservative,
CitiSelect(R) Folio 300 Balanced, CitiSelect Folio 400 Growth, CitiSelect(R)
Folio 500 Growth Plus, CitiSelect(R) VIP Folio 200 Conservative, CitiSelect(R)
VIP Folio 300 Balanced, CitiSelect(R) VIP Folio 400 Growth, CitiSelect(R) VIP
Folio 500 Growth Plus and CitiFunds(SM) Small Cap Growth VIP Portfolio. CFBDS is
also the placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio. CFBDS also serves as the distributor for the following funds: The
Travelers Fund U for Variable Annuities, The Travelers Fund VA for Variable
Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD
II for Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Variable Annuities, The Travelers Fund UL II for Variable Annuities, The
Travelers Variable Life Insurance 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,
Small Cap Fund, Government Fund, Growth Fund, Growth and Income Fund,
International Equity Fund, Mid Cap Fund, Municipal Bond Fund, Select Small Cap
Portfolio, Select Government Portfolio, Select Growth Portfolio, Select Growth
and Income Portfolio, Select Mid Cap Portfolio, 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, S&P Index
Investments, Small Capitalization Growth Investments, Small Capitalization Value
Equity Investments, Multi-Sector Fixed Income Investments, Multi-Strategy Market
Neutral 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 Inc., 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 Premier Selections Fund, Smith Barney
Small Cap Value Fund, Smith Barney Small Cap Growth 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 EAFE Index Fund, Smith Barney US 5000 Index 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, National Portfolio, Massachusetts Money
Market 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 Financial Services Fund, Smith
Barney Health Sciences Fund, Smith Barney Technology Fund, 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 Equity Portfolio, Pacific Portfolio,
AIM Capital Appreciation Portfolio, Smith Aggressive Growth Portfolio, Smith Mid
Cap Portfolio, Alliance Growth Portfolio, INVESCO 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, Travelers Managed Income Portfolio, Van Kampen Enterprise
Portfolio, Centurion U.S. Equity Fund, Centurion International Equity Fund,
Centurion U.S. Contra Fund, Centurion International Contra 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 International Equity
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Large Cap Growth
Fund, Salomon Brothers Balanced Fund, Salomon Brothers Asia Growth Fund, Salomon
Brothers Capital Fund Inc, Salomon Brothers Investors Value 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, Salomon Brothers Variable Asia Growth
Fund, and Salomon Brothers Variable Small Cap 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 28th day of April, 2000.
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 28, 2000.
Signature Title
--------- -----
Philip W. Coolidge President, Principal Executive
- ---------------------------- Officer and Trustee
Philip W. Coolidge
Linwood C. Downs Principal Financial Officer and
- ---------------------------- Principal Accounting Officer
Linwood C. Downs
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>
*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
q(1) Code of Ethics of the Registrant
q(2) Code of Ethics of CFBDS
<PAGE>
Exhibit j
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post Effective Amendment
No. 26 to Registration Statement No. 33-5819 of CitiFunds Tax Free Income Trust
of our reports each dated February 8, 2000 appearing in the annual reports to
shareholders for the year ended December 31, 1999 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 26, 2000
<PAGE>
Exhibit q(1)
AMENDED AND RESTATED
CODE OF ETHICS
FEBRUARY 4, 2000
This Amended and Restated Code of Ethics has been duly adopted by the
Board of Trustees, including a majority of the Disinterested Trustees (as
defined below in this Code of Ethics), of each investment company listed in
Appendix I hereto (each, an "Investment Company" and collectively, the
"Investment Companies"), pursuant to Rule 17j-1 under the Investment Company Act
of 1940, as amended (the "1940 Act").
I. RULES APPLICABLE TO ACCESS PERSONS
A. Definitions
1. "Access Person" means
(i) any trustee, officer or Advisory Person (as defined below) of
any Investment Company or investment adviser thereof, or
(ii) any director or officer of a principal underwriter of an
Investment Company who, in the ordinary course of his or her
business, makes, participates in or obtains information
regarding the purchase or sale of securities for the
Investment Company for which the principal underwriter so acts
or whose functions or duties as part of the ordinary course of
his or her business relate to the making of any recommendation
to such Investment Company regarding the purchase or sale of
securities, or
(iii) notwithstanding the provisions of clause (i) above, where the
investment adviser is primarily engaged in a business or
businesses other than advising registered investment companies
or other advisory clients (as determined in accordance with
Rule 17j-1 under the 1940 Act), any director, officer or
Advisory Person of the investment adviser who, with respect to
any Investment Company, makes any recommendation, participates
in the determination of which recommendation shall be made, or
whose principal function or duties relate to the determination
of which recommendation shall be made to any Investment
Company, or who, in connection with his or her duties, obtains
any information concerning securities recommendations being
made by such investment adviser to any Investment Company.
2. An "Advisory Person" is any employee of an Investment Company or of
the Investment Company's investment adviser (or of any company in a control
relationship to the Investment Company or its investment adviser) who, in
connection with his or her regular functions or duties, makes, participates in
or obtains information regarding the purchase or sale of securities by an
Investment Company or whose functions relate to any recommendations with respect
to such purchases or sales, and any natural person in a control relationship
with the Investment Company or adviser who obtains information regarding the
purchase or sale of securities by the Investment Company.
3. "Beneficial Ownership" shall be interpreted subject to the
provisions of Rule 16a-1(a)(exclusive of Section (a)(1) of such Rule) of the
Securities Exchange Act of 1934, as amended, but without regard to any provision
in such Rule limiting its application only to equity securities.
4. "Control" shall have the meaning set forth in Section 2(a)(9) of the
1940 Act.
5. "Disinterested Trustee" of an Investment Company means a Trustee who
is not an "interested person" of that Investment Company within the meaning of
Section 2(a)(19) of the 1940 Act. An "interested person" of an Investment
Company includes any person who is a trustee, director, officer, employee or
owner of 5% or more of the outstanding stock of the investment adviser or
principal underwriter, if any, of such Investment Company. Affiliates of brokers
or dealers are also "interested persons" of such Investment Company, except as
provided in Rule 2a19-1 under the 1940 Act.
6. "Portfolio Manager" means the person or persons who have or share
direct responsibility and authority to make investment decisions affecting an
Investment Company.
7. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or sale of a
future or index on a security or option thereon.
8. "Review Officer" means, with respect to an Investment Company, the
Secretary of such Investment Company or such other person as may be designated
by the Board of Trustees of such Investment Company, except that with respect to
Advisory Persons who are employees of the investment adviser of an Investment
Company, Review Officer shall mean such person or persons as such investment
adviser shall designate from time to time.
9. "Security" shall have the meaning as set forth in Section 2(a)(36)
of the 1940 Act, except that it shall not include:
(i) direct obligations of the Government of the United States;
(ii) bankers acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments (meaning
instruments having a maturity at issuance of less than 366
days and that are rated in one of the two highest rating
categories by a Nationally Recognized Statistical Rating
Organization), including repurchase agreements; and
(iii) shares of registered open-end investment companies.
10. A security is "being considered for purchase or sale" when, among
other circumstances, the assigned analyst or Portfolio Manager is seriously
considering a change in the rating of the security.
11. Nothwithstanding any other provision hereof, the terms Access
Person, Advisory Person and Portfolio Manager shall not include any person who
is subject to provisions of a code of ethics adopted by an investment adviser or
principal underwriter of an Investment Company in compliance with Rule 17j-1
under the 1940 Act and approved by the Board of Trustees of each Investment
Company, so long as the investment adviser or principal underwriter complies
with Section V of this Code.
B. Statement of General Principles on Personal Investment Activities
Personal investment activities engaged in by an Access Person shall be
subject to the following general principles:
1. No personal investment activities shall conflict with the duty to
place the interests of the Investment Company before any personal interests;
2. All personal investment activities shall be conducted consistent
with the requirements and standards set forth in this Code and in such a manner
as to avoid any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility; and
3. No Access Person shall, directly or indirectly, otherwise take
inappropriate advantage of his or her position with the Investment Company.
C. Avoiding Conflicts of Interest
Without limiting the foregoing Section I-B, no Access Person shall
enter into or engage in a security transaction or business activity or
relationship which may result in any financial or other conflict of interest
between such person and an Investment Company and each such person shall at all
times and in all matters endeavor to place the interests of the Investment
Company before his or her personal interests.
D. Prohibited Activities
1. Blackout Periods: No Access Person shall purchase or sell, directly
or indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership:
a. and which to his or her knowledge at the time of such purchase or
sale is being considered for purchase or sale, or is to be purchased
or sold, by the Investment Company; or
b. on a day during which, to his or her knowledge, the Investment
Company has a pending "buy" or "sell" order in that same security
until that order is executed or withdrawn.
No Portfolio Manager of an Investment Company shall purchase or sell,
directly or indirectly, any security in which he or she has, or by reason of
such transaction acquires, any direct or indirect Beneficial Ownership within
seven (7) calendar days before or after that Investment Company trades in that
security.
2. Interested Transactions: No Access Person shall recommend any
securities transactions by the Investment Company without having disclosed his
or her interest, if any, in such securities or the issuer thereof, including
without limitation:
a. any direct or indirect Beneficial Ownership of any securities of
such issuer;
b. any contemplated transaction by such person in such securities;
c. any position with such issuer or its affiliates; and
d. any present or proposed business relationship between such issuer or
its affiliates and such person or any party in which such person has
a significant interest.
3. Initial Public Offerings: No Advisory Person shall acquire any
securities in an initial public offering for his or her personal account.
4. Private Placements: No Advisory Person shall acquire, directly or
indirectly, Beneficial Ownership of any securities in a private placement
without the prior approval of the Review Officer, who has been provided by such
Advisory Person with full details of the proposed transaction (including written
certification that the investment opportunity did not arise by virtue of the
Advisory Person's activities on behalf of the Investment Company) and has
concluded after consultation with other investment advisory personnel of the
Investment Company that the Investment Company has no foreseeable interest in
purchasing such securities.
5. Short-Term Trading Profits: No Advisory Person shall profit from the
purchase and sale, or sale and purchase, of the same (or equivalent) securities
of which such Advisory Person has Beneficial Ownership within sixty (60)
calendar days. Any profit so realized shall, unless the Investment Company's
Board approves otherwise, be paid over to the Investment Company or to a
charitable organization of the Advisory Person's choosing.
6. Gifts: No Advisory Person shall receive any gift or other things of
more than de minimis value from any person or entity that does business with or
on behalf of the Investment Company; provided, however, that the foregoing shall
not prohibit receipt of:
a. an occasional breakfast, luncheon, dinner or reception, ticket
to a sporting event or the theater, or comparable entertainment,
attended in the company of the giver of the entertainment in
question, that is not so frequent, costly or extensive as to raise
any question of impropriety;
b. a breakfast, luncheon, dinner, reception or cocktail party in
conjunction with a bona fide business meeting;
c. a promotional item, such as a mug, pen or other article
bearing the logo or advertising of any such person or entity,
having a value not in excess of $100; or
d. a gift approved in writing by the Review Officer.
7. Service as a Director: No Advisory Person shall serve on the board
of directors of any publicly traded company without prior authorization from the
Review Officer based upon a determination that such board service would be
consistent with the interests of the Investment Company and its shareholders.
E. Exempted Transactions
The prohibitions of Sections I-D(1) and I-D(5) above shall not apply
to:
1. purchases or sales effected in any account over which such person
has no direct or indirect influence or control;
2. purchases or sales which are nonvolitional on the part of the person
or an Investment Company;
3. purchases which are part of an automatic dividend reinvestment plan;
4. purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent such rights
were acquired from such issuer, and sales of such rights so acquired;
5. purchases and sales previously approved in writing by the Review
Officer (a) as only remotely potentially harmful to an Investment Company
because they would be very unlikely to affect a highly institutional market or
because they clearly are not economically related to the securities to be
purchased or sold or held by an Investment Company or client or (b) as not
representing any danger of the abuses proscribed by Rule 17j-1 under the 1940
Act;
6. purchases or sales of securities which are not eligible for purchase
or sale by an Investment Company.
II. COMPLIANCE PROCEDURES
A. Preclearance
An Advisory Person may directly or indirectly, acquire or dispose of
Beneficial Ownership of a security only if (1) such purchase or sale has been
approved by the Review Officer, (2) the approved transaction is completed within
two (2) business days of the day approval is received and (3) the Review Officer
has not rescinded such approval prior to execution of the transaction. The
requirements of this Section II-A shall not apply to transactions described in
Sections I-E(1), (2) and (3). The fact that preclearance of a transaction is
obtained pursuant to this Section II-A does not render the other prohibitions,
restrictions and provisions of this Code inapplicable to the transaction.
B. Reporting
1. Except as otherwise provided in paragraph 2 of this Section II-B,
each Access Person of an Investment Company must report to the Review Officer as
follows:
a. Initial Holdings Reports. Not later than 10 days after the person
becomes an Access Person, the following information:
o the title, number of shares and principal amount of each security in
which the Access Person had any direct or indirect beneficial
ownership when the person became an Access Person;
o the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any securities were held for the
direct or indirect benefit of the Access Person as of the date the
person became an Access Person; and
o the date that the report is submitted by the Access Person.
b. Quarterly Transaction Reports. Not later than 10 days after the end
of each calendar quarter, the following information:
(i) With respect to any transaction during the quarter in
a security in which the Access Person had any direct
or indirect beneficial ownership:
o the date of the transaction, the title, the interest
rate and maturity date (if applicable), the number of
shares and the principal amount of each security
involved;
o the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
o the price of the security at which the transaction was
effected;
o the name of the broker, dealer or bank with or through which
the transaction was effected; and
o the date that the report is submitted by the Access Person.
(ii) With respect to any account established by the Access Person
in which any securities were held during the quarter for the
direct or indirect benefit of the Access Person:
o the name of the broker, dealer or bank with whom the Access
Person established the account;
o the date that the account was established; and
o the date that the report is submitted by the Access Person.
In the event that no reportable transactions occurred during the
quarter, the report should so state, and should be returned signed and
dated.
c. Annual Holdings Reports. Not later than January 31 of each year, the
following information (which information must be current as of the
immediately preceding December 31):
o the title, number of shares and principal amount of each
security in which the Access Person had any dirtect or
indirect beneficial ownership;
o the name of any broker, dealer or bank with whom the Access
Person maintains an account in which any securities are held
for the direct or indirect benefit of the Access Person; and
o the date on which the report is submitted by the Access
Person.
d. Brokerage Statements. Copies of all of such person's brokerage
statements shall be furnished to the Review Officer on a quarterly
basis.
2. The following are exceptions to the reporting requirements outlined
in Section II-B(1):
a. An Access Person need not make any report required under
Section II-B (1)(a)-(c) with respect to transactions effected
for, and securities held in, any account over which the person
has no direct influence or control, including such an account
in which the person has any beneficial ownership.
b. A Disinterested Trustee who would be required to make the
reports required under Section II-B(1) solely by reason of
being a trustee of an Investment Company need not file with or
deliver to the Review Officer:
(i) an initial holdings report or an annual holdings
report; or
(ii) a quarterly transaction report unless the
Disinterested Trustee knew or, in the
ordinary course of fulfilling his or her
official duties as a Trustee of the
Investment Company, should have known, that
during the 15-day period immediately before
or after the Trustee's transaction in a
security, the Investment Company purchased
or sold the security or the security was
being considered for purchase or sale by the
Investment Company or a series thereof; or
(iii) copies of his or her brokerage statements.
c. An Access Person need not make a quarterly transaction report
under Section II-B(1) if the report would duplicate
information contained in broker trade confirmations or account
statements received by the Review Officer with respect to the
person in the time period required under Section II-B(1), if
all of the information required under Section II-B(1) is
contained in the broker trade confirmations or account
statements or in the records of the Investment Company.
3. Any report delivered pursuant to Section II-B may contain a
statement that the report shall not be construed as an admission by the person
making such report that he or she has any direct or indirect beneficial
ownership in the securities to which the report relates.
4. Each Access Person must certify annually (no later than January 31
of each year) that he or she has read and understands this Code of Ethics and
has complied with its provisions. Such certificates and reports are to be
given to the Review Officer.
C. Review
The Review Officer shall review all of the reports delivered under
Section II-B to determine whether a violation of this Code of Ethics may have
occurred. In reviewing transactions, the Review Officer shall take into account
the exemptions allowed under Section I-E above. Before making a determination
that a violation has been committed by a Trustee, the Review Officer shall give
such person an opportunity to supply additional information regarding the
transaction in question.
III. REVIEW BY THE BOARD OF TRUSTEES
The Review Officer of each Investment Company, each Investment
Company's investment adviser or advisers and each Investment Company's principal
underwriter shall furnish a written report to the Board of Trustees of each
Investment Company, at least annually, that:
A. describes any issues arising under the Code of Ethics or
procedures of such entity since the last report to the Board
of Trustees, including, but not limited to, information about
material violations of its Code of Ethics or procedures and
sanctions imposed in response to the material violations;
B. describes any recommended changes to the Code or procedures;
and
C. certifies that the Investment Company, investment adviser or
principal underwriter, as applicable, has adopted procedures
reasonably necessary to prevent its Access Persons from
violating its Code of Ethics.
The first such report pursuant to this Code shall be delivered to the
Board of Trustees not later than September, 1, 2000.
IV. SANCTIONS
A. Sanctions for Violations by Access Persons
If the Review Officer determines that an Access Person (other than a
Disinterested Trustee) has violated this Code, he or she shall so advise the
respective Board of Trustees and such persons may be subject to sanctions,
including, inter alia, a letter of censure or suspension or termination of the
employment of the violator. As provided in Section I-D(5) above, any financial
profits realized by an Advisory Person through the prohibited personal trading
activities described in such Section may be required to be disgorged. All
violations of the Code and any sanctions imposed as a result thereof shall be
reported to the respective Board of Trustees at least quarterly.
B. Sanctions for Violations by Disinterested Trustees
If the Review Officer determines that any Disinterested Trustee has
violated this Code, he or she shall so advise the President of an Investment
Company and also the Disinterested Trustees (other than the person whose
transaction is at issue) and shall provide such persons with the report, the
record of pertinent actual or contemplated portfolio transactions of an
Investment Company and any additional information supplied by such person. The
Disinterested Trustees, at their option, shall either impose such sanctions as
they deem appropriate or refer the matter to the full Board of Trustees of an
Investment Company, which shall impose such sanctions as it deems appropriate.
V. Other Codes of Ethics
Each investment adviser and principal underwriter of an Investment
Company shall:
1. submit to the Board of Trustees of each Investment Company
a copy of the Code of Ethics adopted by such person pursuant to Rule 17j-1,
which Code of Ethics shall comply with the recommendations of the Investment
Company Institute's Advisory Group on Personal Investing or be accompanied by a
statement explaining any difference and supplying the rationale therefor;
2. promptly report to the Board of Trustees of each Investment
Company in writing any material amendments to such Code of Ethics;
3. promptly furnish to the Board of Trustees of each
Investment Company, upon request, copies of any reports made pursuant to such
Code of Ethics by any person who would be an Access Person or Portfolio Manager
hereunder if such person were not subject to such other Code of Ethics; and
4. immediately furnish to the Board of Trustees of each
Investment Company all material information regarding any violation of such Code
of Ethics by any person who would be an Access Person or Portfolio Manager
hereunder if such person were not subject to such other Code of Ethics.
VI. MISCELLANEOUS
A. Access Persons
The Review Officer of each Investment Company will identify all Access
Persons who are under a duty to make reports to the Investment Company and will
inform such persons of such duty. Any failure by the Review Officer to notify
any person of his or her duties under this Code shall not relieve such person of
his or her obligations hereunder.
B. Records
The administrator or any sub-administrator of an Investment Company
shall maintain records in the manner and to the extent set forth below, which
records may be maintained on microfilm under the conditions described in Rule
31a-2(f) under the 1940 Act, and shall be available for examination by
representatives of the Securities and Exchange Commission:
1. a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved in an easily
accessible place;
2. a record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in which
the violation occurs;
3. a copy of each report made pursuant to this Code shall be preserved
for a period of not less than five years from the end of the fiscal year in
which it is made, the first two years in an easily accessible place;
4. a list of all persons who are required, or within the past five
years have been required, to make reports pursuant to this Code shall be
maintained in an easily accessible place;
5. copy of each report required under Section II shall be preserved for
a period of not less than five years from the end of the fiscal year in which it
is made, the first two years in an early accessible place; and
6. record of any decision, and the reasons supporting the decision, to
approve the acquisition by Advisory Persons of securities under Section I-D(3)
or (4) shall be preserved for a period of not less than five years from the end
of the fiscal year in which the approval is granted.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential, except that the same may
be disclosed to the Board of Trustees of the Investment Companies, to any
regulatory or self-regulatory authority or agency upon its request, or as
required by law or court or administrative order.
D. Interpretation of Provisions
The Board of Trustees of an Investment Company may from time to time
adopt such interpretations of this Code as it deems appropriate.
<PAGE>
Appendix I
CITIFUNDS TRUST I
CITIFUNDS TRUST II
CITIFUNDS TRUST III
CITIFUNDS FIXED INCOME TRUST
CITIFUNDS PREMIUM TRUST
CITIFUNDS MULTI-STATE TAX FREE TRUST
CITIFUNDS INSTITUTIONAL TRUST
CITIFUNDS TAX FREE INCOME TRUST
CITIFUNDS TAX FREE RESERVES
CITIFUNDS INTERNATIONAL TRUST
CASH RESERVES PORTFOLIO
TAX FREE RESERVES PORTFOLIO
U.S. TREASURY RESERVES PORTFOLIO
THE PREMIUM PORTFOLIOS
ASSET ALLOCATION PORTFOLIOS
VARIABLE ANNUITY PORTFOLIOS
VAP MASTER PORTFOLIOS
<PAGE>
Exhibit q(2)
CODE OF ETHICS FOR
SIGNATURE BROKER-DEALER SERVICES, INC.
Signature Broker-Dealer Services, Inc. and its affiliates (collectively
"SBDS"), have each adopted this Code of Ethics (the "Code") to specify and
prohibit certain types of personal securities transactions deemed to create a
conflict of interest and to establish reporting requirements and preventive
procedures pursuant to the provisions of Rule 17j-1(c)(1) under the Investment
Company Act of 1940 (the "1940 Act").
I. DEFINITIONS
A. An "Access Person" means any employee, Director or officer of
SBDS who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or
sale of Covered Securities for a Fund for which SBDS acts as
distributor or whose functions or duties as a part of the
ordinary course of his or her business relate to the making of
any recommendation to such Fund regarding the purchase or sale of
securities or who serves as an officer or Trustee/Director for
any such Fund All Access Persons of SBDS shall be advised they
are considered such by the Review Officer.
B. "Beneficial Ownership" shall be interpreted subject to the
provisions of Rule 16a-1(a) (exclusive of Section (a)(1) of such
Rule) of the Securities Exchange Act of 1934, a copy of which is
attached hereto.
C. "Control" shall have the same meaning as set forth in Section
2(a)(9) of the 1940 Act.
D. "Covered Security" means a security as defined in section
2(a)(36) of the Act, except that it does not include:
1. Direct obligations of the Government of the United States;
2. Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements; and
3. Shares issued by open-end Funds.
E. A "Covered Security Held or to be Acquired by a Fund" means:
1. Any Covered Security which, within the most recent 15 days:
(a) Is or has been held by the Fund; or
(b) Is being or has been considered by the Fund or its
investment adviser for purchase by the Fund; and
2. Any option to purchase or sell, and any security convertible
into or exchangeable for, a Covered Security described in (i)
of this section.
F. "Fund" means an investment company registered under the 1940 Act.
G. "Holdings Reports" are reports filed by Access Persons and
contain the following information:
1. the title, number of shares and principal amount of each
Covered Security in which the Access Person has any direct or
indirect beneficial ownership; and
2. the name of any broker, dealer or bank with whom the Access
Person maintained an account in which any securities were held
for the direct or indirect benefit of the Access Person; and
3. the date the report is submitted by the Access Person.
H. The "Review Officer" is the person designated by SBDS' Board of
Directors to monitor the overall compliance with this Code.
Included in the duties of the Review Officer is the review of all
initial and annual Holdings Reports and quarterly transaction
reports and the maintenance of the list of Access Persons. In the
absence of any such designation, the Review Officer shall be the
General Counsel of SBDS or Molly S. Mugler.
I. "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered
Security
II. STATEMENT OF GENERAL PRINCIPLES
The following general fiduciary principles shall govern the personal
investment activities of all Access Persons.
Each Access Person shall:
A. at all times, place the interests of Funds SBDS distributes
before his or her personal interests;
B. conduct all personal securities transactions in a manner
consistent with this Code, so as to avoid any actual or potential
conflicts of interest, or an abuse of position of trust and
responsibility; and
C. not take any inappropriate advantage of his or her position with
SBDS with respect to any Fund SBDS distributes.
It is unlawful for any affiliated person of or principal underwriter for a
Fund, or any affiliated person of a principal underwriter for a Fund, in
connection with the purchase or sale, directly or indirectly, by the person
of a Covered Security Held or to be Acquired by the Fund: (1) To employ any
device, scheme or artifice to defraud the Fund; (2) To make any untrue
statement of a material fact to the Fund or omit to state a material fact
necessary in order to make the statements made to the Fund, in light of the
circumstances under which they are made, not misleading; (3) To engage in
any act, practice or course of business that operates or would operate as a
fraud or deceit on the Fund; or (4) To engage in any manipulative practice
with respect to the Fund.
III. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES.
A. BLACKOUT PERIODS
No Access Person shall purchase or sell, directly or indirectly,
any Covered Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership
on a day during which he or she knows or should have known a Fund
has a pending "buy" and "sell" order in that same security until
that order is executed or withdrawn.
B. EXEMPTED TRANSACTIONS
The prohibitions of Section III shall not apply to:
1. purchases or sales effected in any account over which the
Access Person has no direct or indirect influence or control;
2. purchases or sales that are non-volitional on the part of the
Access Person, including mergers, recapitalizations or similar
transactions;
3. purchases which are part of an automatic dividend reinvestment
plan;
4. purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities,
to the extent such rights were acquired from such issuer, and
sales of such rights so acquired; and
5. purchases and sales that receive prior approval in writing by
the Review Officer as (a) only remotely potentially harmful to
a Fund because they would be very unlikely to affect a highly
institutional market, (b) clearly not economically related to
the securities to be purchased or sold or held by a Fund or
client, and (c) not representing any danger of the abuses
proscribed by Rule 17j-1, but only if in each case the
prospective purchaser has identified to the Review Officer all
factors of which he or she is aware which are potentially
relevant to a conflict of interest analysis, including the
existence of any substantial economic relationship between his
or her transaction and securities held or to be held by a
Fund.
IV. COMPLIANCE PROCEDURES
A. REPORTING
1. Quarterly Transaction Reports
(a) Coverage of Quarterly Transaction Reports: Each Access
Person shall, unless otherwise exempted, file with the
Review Officer confidential quarterly reports containing
the information required in section (b) below, with
respect to all transactions during the preceding quarter
in any Covered Securities in which such person has, or by
reason of such transaction acquires, any direct or
indirect beneficial ownership. All such Access Persons
shall file reports, even when no transactions have been
effected, representing that no transactions subject to
reporting requirements were effected.
(b) Filing of Quarterly Transaction Reports: Every report
shall be made no later than 10 days after the end of the
calendar quarter in which the transaction to which the
report relates was effected, and shall contain the
following information:
(i) the date of the transaction, the title, the interest
rate and maturity (if applicable), the number of
shares, and the principal amount of each Covered
Security involved;
(ii) the nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected;
(v) the date that the report is submitted by the Access
Person; and
(vi) with respect to any account established by the
Access Person in which securities were held during
the quarter for the direct or indirect benefit of
the Access Person, the name of the broker, dealer or
bank with whom the Access Person established the
account, the date the account was established and
the date the report is submitted by the Access
Person.
(c) Broker Confirmations/Account Statements: An Access Persons
may direct his or her brokers to supply the Review Officer
on a timely basis, duplicate copies of confirmations of
all personal transactions in Covered Securities. An Access
Person need not make a quarterly transaction report if the
report would duplicate information contained in duplicate
information contained in broker trade confirmations or
account statements received by the Review Officer in the
time period required if all the information required is
contained in the broker trade confirmations or account
statements or in the records of the Review Officer.
2. Initial Holdings Reports: All persons who become Access
Persons must file an initial Holdings Report with the Review
Officer within ten days after that person becomes an Access
Person. The information contained in the initial Holdings
Report must be current as of the date the person became and
Access Person.
3. Annual Holdings Reports: All Access Persons, unless exempted,
must file an annual Holdings Report by the later of September
1 of each year or such earlier time as requested by the Review
Officer. The information contained in the annual Holdings
Report must be current as of a date no more than 30 days
before the report is submitted.
4. Exceptions from Reporting Requirements: No Access Person shall
be required to report transactions effected for any account
over which such Access Person has no direct or indirect
influence or control (except that such an Access Person must
file a written certification stating that he or she has no
direct or indirect influence or control over the account in
question).
B. Review
The Review Officer shall be responsible for reviewing
transactions. Before making a determination that a violation has
been committed by an Access Person, the Review Officer shall give
such person an opportunity to supply additional information
regarding the transaction in question.
V. REVIEW BY THE PRESIDENT
At least annually, the Review Officer shall report to the President
regarding:
A. All existing procedures concerning Access Persons' personal
trading activities and any procedural changes made during the
past year;
B. Any recommended changes to the Code or procedures; and
C. A summary of any violations which occurred during the past year
with respect to which significant remedial action was taken.
VI. SANCTIONS FOR VIOLATIONS BY ACCESS PERSONS
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the President who may advise the
Board of Directors and the President or the Board may impose such
sanctions as he or she or it deems appropriate, including, inter alia,
disgorgement of profits, censure, suspension or termination of the
employment of the violator. All material violations of the Code and any
sanctions imposed as a result thereto shall be reported periodically to
the Board of Directors.
VII. MISCELLANEOUS
A. ACCESS PERSONS
The Review Officer will identify all Access Persons who are under
a duty to make reports to SBDS and will inform such persons of
such duty. Any failure by the Review Officer to notify any person
of his or her duties under this Code shall not relieve such
person of his or her obligations hereunder.
B. RECORDS
SBDS shall maintain records in the manner and to the extent set
forth below, which records may be maintained on microfilm under
the conditions described in Rule 31a-2(f) under the 1940 Act, and
shall be available for examination by representatives of the
Securities and Exchange Commission ("SEC"):
1. a copy of this Code and any other code which is, or at any
time within the past five years has been, in effect shall be
preserved in an easily accessible place;
2. a record of any violation of this Code and of any action taken
as a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. a copy of each report made pursuant to this Code shall be
preserved for a period of not less than five years from the
end of the fiscal year in which it is made, the first two
years in an easily accessible place; and
4. a list of all persons who are required, or within the past
five years have been required, to make reports pursuant to
this Code shall be maintained in an easily accessible place.
C. CONFIDENTIALITY
All reports of Covered Securities transactions and any other
information filed pursuant to this Code shall be treated as
confidential, except to the extent required by law.
D. INTERPRETATION OF PROVISIONS
The Board of Directors of SBDS may from time to time adopt such
interpretations of this Code as it deems appropriate.
SFG293b
<PAGE>
SFG293c
SIGNATURE BROKER-DEALER SERVICES, INC. AND ITS AFFILIATES
TRANSACTIONS REPORT
To: Molly S. Mugler, Senior Legal Counsel
From:
(Your Name)
This Transaction Report (the "Report") is submitted pursuant to the
Code of Ethics (the "Code") of Signature Broker-Dealer Services, Inc. and its
affiliates ("SBDS") and supplies (below) information with respect to
transactions in any security in which I may be deemed to have, or by reason of
such transaction acquire, any direct or indirect beneficial ownership interest
(whether or not such security is a security held or to be acquired by an
investment company administered or distributed by SBDS) for the calendar quarter
ended ______.
Unless the context otherwise requires, all terms used in the Report
shall have the same meaning as set forth in the Code. For purposes of the
Report, beneficial ownership shall be interpreted subject to the provisions of
the Code and Rule 16a-1(a) (exclusive of Section (a)(1) of such Rule) of the
Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Nature of
Transaction
(Whether Name of the
Purchase, Principal Broker, Dealer
Sale, or Amount of Price at Or Bank with
Other Type of Securities Which the Whom the Nature of
Name of Title of Date of Disposition Acquired or Transaction Transaction Ownership of
Fund Securities Transaction Or Acquisition Disposed of Was Effected Was Effected Securities*
- ---- ---------- ----------- -------------- ----------- ------------ ------------ -----------
<CAPTION>
<S> <C> <C>
Name of Covered Securities Account Established in Last Quarter Date Account was Established
- ---------------------------------- --------------------------- ----------------------------
</TABLE>
I HEREBY CERTIFY THAT I (1) HAVE READ AND UNDERSTAND THE CODE OF SBDS,
(2) RECOGNIZE THAT I AM SUBJECT TO THE CODE, (3) HAVE DISCLOSED ALL SECURITIES
HOLDINGS AS REQUIRED, AND (4) THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION
FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
NAME (Print) _____________________________ DATE ____________________
SIGNATURE _________________________________________________
* If appropriate, you may disclaim beneficial ownership of any security listed
in this report.
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE BROKER-DEALER SERVICES, INC.
ACCESS PERSONS AS OF MARCH 31, 2000
DATE BECAME
NAME ACCESS PERSON REASON DESIGNATED AS ACCESS PERSON
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MOLLY S. MUGLER PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
PHILIP W. COOLIDGE PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
CHRISTINE D. DORSEY PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
JAMES E. HOOLAHAN PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
LINWOOD C. DOWNS PRE-2000 OFFICER OF CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
SUSAN JAKUBOSKI PRE-2000 OFFICER OF 59 WALL STREET FUNDS, CITIFUNDS
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
