AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1999
FILE NO. 811-6118
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 11
TAX FREE RESERVES PORTFOLIO
(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)
WITH A COPY TO
ROGER P. JOSEPH, ESQ.
BINGHAM DANA LLP
150 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
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EXPLANATORY NOTE
Tax Free Reserves Portfolio has filed this Registration Statement pursuant
to Section 8(b) of the Investment Company Act of 1940. However, beneficial
interests in the Portfolio are not being registered under the Securities Act of
1933, since such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Only investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act may make investments in the Portfolio. This Registration
Statement is not an offer to sell, or the solicitation of an offer to buy, any
beneficial interests in the Portfolio.
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PART A
Responses to Items 1,2,3,5 and 9 have been omitted pursuant to General
Instruction B.2(b) of Form N-1A.
Item 4. Investment Objectives, Principal Investment Strategies, and Related
Risks.
PORTFOLIO GOALS
The goals of Tax Free Reserves Portfolio are to provide investors in the
Portfolio with high levels of current income exempt from federal income taxes,
preservation of capital and liquidity. The Portfolio's goals may be changed
without the approval of its investors, but not without written notice thereof
to the Portfolio's investors at least 30 days prior to implementing the change.
Of course, there is no assurance that the Portfolio will achieve its goals.
MAIN INVESTMENT STRATEGIES
o Under normal market conditions, the Portfolio invests at least 80% of its
assets in high quality municipal obligations and in participation
interests in these obligations issued by banks, insurance companies and
other financial institutions. Municipal obligations are debt securities
issued by states, cities and towns and other public entities or qualifying
issuers. The interest paid on these debt securities is free from federal
income tax, but is generally lower than the interest paid on taxable
securities.
o The Portfolio invests more than 25% of its assets in participation
interests in municipal obligations that are secured by bank letters of
credit or guarantees.
o The Portfolio may invest up to 20% of its assets in high quality
securities that pay interest that is subject to federal income tax or
federal alternative minimum tax.
The Portfolio's principal investment strategies are the strategies that, in the
opinion of Citibank, N.A., the Portfolio's investment adviser, are most likely
to be important in trying to achieve the Portfolio's investment goals. Of
course, there can be no assurance that the Portfolio will achieve its goals.
Please note that the Portfolio may also use strategies and invest in securities
that are not described below but that are described in Part B to this
Registration Statement. The Portfolio may not use all of the strategies and
techniques or invest in all of the types of securities described in this Part A
or in Part B to this Registration Statement.
The Portfolio complies with industry regulations that apply to money market
funds. These regulations require that the Portfolio's investments mature or be
deemed to mature within 397 days from the date purchased and that the average
maturity of the Portfolio's investments (on a dollar-weighted basis) be 90 days
or less. In addition, all of the Portfolio's investments must be in U.S.
dollar-denominated high quality securities which have been determined by
Citibank to present minimal credit risks. To be high quality, a security (or
its issuer) must be rated in one of the two highest short-term rating
categories by nationally recognized rating agencies, such as Moody's or
Standard & Poor's, or, in Citibank's opinion, be of comparable quality.
Investors should note that within these two rating categories there may be
sub-categories or gradations indicating relative quality. If the credit quality
of a security deteriorates after the Portfolio buys it, Citibank will decide
whether the security should be held or sold.
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WHAT ARE MONEY MARKET INSTRUMENTS?
A money market instrument is a short-term IOU issued by banks or other
corporations, or the U.S. or a foreign government and state or local
governments. Money market instruments have maturity dates of 13 months or less.
Money market instruments may include certificates of deposit, bankers'
acceptances, variable rate demand notes (where the interest rate is reset
periodically and the holder may demand payment from the issuer at any time),
fixed-term obligations, commercial paper (short term unsecured debt of
corporations), asset-backed securities (which are backed by pools of accounts
receivable such as car installment loans or credit card receivables) and
repurchase agreements. In a repurchase agreement, the seller sells a security
and agrees to buy it back at a later date (usually within seven days) and at a
higher price, which reflects an agreed upon interest rate.
The Portfolio invests primarily in high quality municipal obligations,
including municipal money market instruments, and in participation interests in
municipal obligations.
Under normal market conditions, the Portfolio invests at least 80% of its
assets in municipal obligations and participation interests in municipal
obligations. These policies cannot be changed without a vote of investors.
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, but is generally lower than the
interest paid on taxable securities.
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.
Municipal obligations bought by the Portfolio must be rated in the highest two
rating categories of nationally recognized rating agencies or determined by
Citibank to be of comparable quality.
The Portfolio 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 Portfolio also invests in private activity bonds,
which fund privately operated industrial facilities. Payment on these bonds
generally is made from payments by the operators of the facilities and is not
backed by the taxing authority of the issuing municipality. The Portfolio
invests in municipal lease obligations, which are undivided interests issued by
a state or municipality in a lease or installment purchase which generally
relates to equipment or facilities. 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.
The Portfolio may purchase municipal obligations under arrangements (called
stand-by commitments) where it can sell the securities at an agreed-upon price
and date under certain circumstances. The Portfolio can also purchase
securities under arrangements (called when-issued or forward-delivery basis)
where the securities will not be delivered immediately. The Portfolio will set
aside the assets to pay for these securities at the time of the agreement.
The Portfolio will invest more than 25% of its assets in participation
interests in municipal obligations issued by banks and other financial
institutions and secured by bank letters of credit or guarantees. In a
participation interest, the bank sells undivided interests in a municipal
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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 notice period. If interest
rates rise or fall, the rates on participation interests and other variable
rate instruments generally will be readjusted.
The Portfolio may also invest in taxable money market instruments, particularly
if the after-tax return on those securities is greater than the return on
municipal money market instruments. The Portfolio's taxable investments will be
comparable in quality to its municipal investments. Under normal circumstances,
not more than 20% of the Portfolio's assets are invested in taxable
instruments. Except for its policy to invest in municipal obligations, the
Portfolio's investment goals and policies may be changed without a vote of
investors.
Defensive Strategies. The Portfolio may, from time to time, take temporary
defensive positions that are inconsistent with its principal investment
strategies in attempting to respond to adverse market, political or other
conditions. When doing so, the Portfolio may invest without limit in high
quality taxable money market instruments, and may not be pursuing its
investment objectives.
Management Style. Managers of mutual funds use different styles when selecting
securities to purchase. Citibank's portfolio managers use a "top-down" approach
when selecting securities for the Portfolio. When using a "top-down" approach,
the portfolio manager looks first at broad economic factors and market
conditions, such as prevailing and anticipated interest rates. On the basis of
those factors and conditions, the manager selects optimal interest rates and
maturities and chooses certain sectors or industries within the overall market.
The manager then looks at individual companies within those sectors or
industries to select securities for the investment portfolio.
Since the Portfolio maintains a weighted average maturity of no more than 90
days, many of its investments are held until maturity. The manager may sell a
security before maturity when it is necessary to do so to meet redemption
requests. The manager may also sell a security if the manager believes the
issuer is no longer as creditworthy, or in order to adjust the average weighted
maturity of the Portfolio's investment portfolio (for example, to reflect
changes in the manager's expectations concerning interest rates), or when the
manager believes there is superior value in other market sectors or industries.
MAIN RISKS
Investing in a mutual fund involves risk. It is possible to lose money by
investing in the Portfolio. Please remember that an investment in the Portfolio
is not a deposit of Citibank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
The principal risks of investing in the Portfolio are described below. Please
note that there are many other factors that could adversely affect your
investment and that could prevent the Portfolio from achieving its goals, which
are not described here. More information about risks appears in Part B to this
Registration Statement. Before investing, you should carefully consider the
risks that you will assume.
YIELD FLUCTUATION. The Portfolio invests in short term money market
instruments. As a result, the amount of income paid to you by the Portfolio
will go up or down depending on day-to-day variations in short term interest
rates. Investing in high quality, short term instruments may result in a lower
yield (the income or your investment) than investing in lower quality or
longer-term instruments.
CREDIT RISK. The Portfolio invests in high quality debt securities, meaning
securities that are rated, when the Portfolio buys them, in one of the two
highest short term rating categories by nationally recognized rating agencies
or, in Citibank's opinion, are of comparable quality. However, it is possible
that some issuers will be unable to make the required payments on debt
securities held by the Portfolio. Debt securities also fluctuate in value based
on the perceived creditworthiness of issuers. A default on an investment held
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by the Portfolio could cause the value of your investment in the Portfolio, or
its yield, to decline.
INTEREST RATE AND MARKET RISK. A major change in interest rates or a
significant decline in the market value of a Portfolio investment, or other
market event could cause the value of your investment in the Portfolio, or its
yield, to decline.
NON-DIVERSIFIED STATUS. The Portfolio is a non-diversified mutual fund. This
means that it may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Portfolio also may invest 25%
or more of its assets in securities of issuers that are located in the same
state, that derive income from similar type projects or that are otherwise
related. As a result, many securities held by the Portfolio may be adversely
affected by a particular single economic, business, regulatory or political
event. You should consider the risk inherent in this policy when you compare
the Portfolio with a more diversified mutual fund.
CONCENTRATION IN THE BANKING INDUSTRY. The Portfolio concentrates in
participation interests in municipal obligations that are issued by banks and
secured by bank letters of credit or guarantees. This means that an investment
in the Portfolio is particularly susceptible to adverse events affecting the
banking industry. Banks are highly regulated. Decisions by regulators may limit
the loans banks make and the interest rates and fees they charge, and may
reduce bank profitability. Banks also depend on being able to obtain funds at
reasonable costs to finance their lending operations. This makes them sensitive
to changes in money market and general economic conditions. When a bank's
borrowers get in financial trouble, their failure to repay the bank will also
affect the bank's financial situation.
YEAR 2000 RISK. The Portfolio could be adversely affected if the computer
systems used by the Portfolio or its service providers have not been programmed
to process information accurately on or after January 1, 2000. The Portfolio,
and its service providers, have made efforts to resolve any potential Year 2000
problems. While it is likely these efforts will be successful, the failure to
implement any necessary modifications could have an adverse impact on the
Portfolio. The Portfolio also could be adversely affected if the issuers of
securities held by the Portfolio or the markets on which those securities are
traded do not solve their Year 2000 problems, or if it costs them large amounts
of money to do so.
Item 6. Management, Organization and Capital Structure.
INVESTMENT ADVISER
The Portfolio draws on the strength and experience of Citibank. Citibank is the
investment adviser of the Portfolio, and subject to policies set by the
Portfolio'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 its headquarters at 153 East 53rd Street, New York, New York, is
a wholly-owned subsidiary of Citicorp, which is, in turn, a wholly-owned
subsidiary of Citigroup Inc.
Citibank and its affiliates may have banking and investment banking
relationships with the issuers of securities that are held in the Portfolio.
However, in making investment decisions for the Portfolio 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 Portfolio.
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ADVISORY FEES
For the services it provided under the investment advisory agreement for the
Portfolio, for the Portfolio's fiscal year ended August 31, 1999, the
investment advisory fees paid to Citibank, after waivers, were 0.11% of the
Portfolio's average daily net assets for that fiscal year.
CAPITAL STOCK
Investments in the Portfolio have no preference, pre-emptive or conversion
rights and are fully paid and non-assessable, except as set forth below. The
Portfolio is not required and has no current intention to hold annual meetings
of investors, but the Portfolio holds special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Investors have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of investors) the right to communicate with other investors in
connection with requesting a meeting of investors for the purpose of removing
one or more Trustees. Investors also have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified number of
investors. Upon liquidation or dissolution of the Portfolio, investors would be
entitled to share pro rata in the net assets of the Portfolio available for
distribution to investors.
The Portfolio is organized as a trust under the laws of the State of New York.
Under the Declaration of Trust, the Trustees are authorized to issue beneficial
interests in the Portfolio. Each investor is entitled to a vote in proportion
to the value of its investment in the Portfolio. Investments in the Portfolio
may not be transferred, but an investor may withdraw all or any portion of its
investment at any time at net asset value. Investors in the Portfolio (e.g.,
investment companies, insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of the Portfolio.
However, it is not expected that the liabilities of the Portfolio would ever
exceed its assets.
Item 7. Investor Information.
HOW NET INCOME IS CALCULATED
The Portfolio calculates its net income at 12:00 noon, Eastern time, every day
the New York Stock Exchange is open for trading. All the Portfolio's net income
so determined is allocated pro rata among the investors in the Portfolio at the
time of such determination. On days when the financial markets in which the
Portfolio invests close early, net income may be calculated as of the earlier
close of those markets. The Portfolio's securities are valued at amortized
cost, which is approximately equal to market value.
It is intended that the Portfolio's assets, income and distributions will be
managed in such a way that an investor in the Portfolio will be able to satisfy
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, assuming that the investor invested all of its investable assets in
the Portfolio.
THE PURCHASE AND REDEMPTION OF BENEFICIAL INTERESTS IN THE PORTFOLIO
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933. Only investment companies,
insurance company separate accounts, common or commingled trust funds or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act may invest in the Portfolio. This
Registration Statement is not an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
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received by the Portfolio. The net asset value of the Portfolio is determined
once during each Business Day as of 12:00 noon, Eastern time. Securities are
valued at amortized cost, which the Trustees of the Portfolio have determined
in good faith constitutes fair value for the purposes of complying with the
Investment Company Act of 1940. This valuation method will continue to be used
until such time as the Trustees of the Portfolio determine that it does not
constitute fair value for such purposes.
There is no minimum initial or subsequent investment in the Portfolio. However,
since the Portfolio intends to be as fully invested at all times as is
reasonably practicable in order to enhance the yield on its assets, investments
must be made in federal funds (i.e., monies credited to the account of the
Portfolio's custodian bank by a Federal Reserve Bank).
The Portfolio reserves the right to cease accepting investments at any time or
to reject any investment order.
An investor in the Portfolio may withdraw all or any portion of its investment
at any time at the net asset value next determined after a withdrawal request
in proper form is furnished by the investor to the Portfolio. The proceeds of a
withdrawal will be paid by the Portfolio in federal funds normally on the
business day (a day the New York Stock Exchange is open for trading) the
withdrawal is effected, but in any event within seven days. Investments in the
Portfolio may not be transferred.
Subject to compliance with applicable regulations, the Portfolio may pay the
redemption price of beneficial interests in the Portfolio, 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 beneficial
interests being redeemed. If a holder of beneficial interests received a
distribution in kind, such holder could incur brokerage or other charges in
converting the securities into cash.
The right of any investor to receive payment with respect to any withdrawal may
be suspended or the payment of the withdrawal proceeds postponed during any
period in which the New York Stock Exchange is closed (other than weekends or
holidays) or trading on the Exchange is restricted, or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists.
TAX MATTERS
The Portfolio expects to be treated as a partnership for federal income tax
purposes. As a result, the Portfolio does not expect to pay any federal income
or excise taxes, and, generally, investors in the Portfolio should not have to
pay federal taxes when they invest in or receive distributions or make
withdrawals from the Portfolio. However, each investor, in determining its own
federal income and excise tax liabilities, if any, will have to include the
investor's share from time to time of the Portfolio's ordinary income,
expenses, capital gains or losses, credits, tax-exempt income, and other items,
whether or not distributed.
The Portfolio also expects that investors which seek to qualify as regulated
investment companies under the Internal Revenue Code will be able to look to
their proportionate share of the assets and gross income of the Portfolio for
purposes of determining their compliance with the requirements applicable to
such companies.
The foregoing tax discussion is only for an investor's general information, and
does not take account of the special rules applicable to certain investors
(such as tax-exempt investors) or a number of special circumstances. Each
investor should consult its own tax advisers regarding the tax consequences in
its circumstances of an investment in the Portfolio, as well as any state,
local or foreign tax consequences to them of investing in the Portfolio.
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Item 8. Distribution Arrangements.
The exclusive placement agent for the Portfolio is CFBDS, Inc. CFBDS receives
no compensation for serving as the Portfolio's exclusive placement agent.
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PART B
Item 10. Cover Page and Table of Contents.
This Part B sets forth information with respect to Tax Free Reserves
Portfolio (the "Portfolio"), an investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The date of this
Part B and Part A to the Registration Statement for the Portfolio is December
31, 1999.
TABLE OF CONTENTS Page
Portfolio History........................................................B-2
Description of the Portfolio and Its Investments and Risks...............B-2
Management of the Portfolio..............................................B-10
Control Persons and Principal Holders
of Securities..........................................................B-12
Investment Advisory and Other Services...................................B-12
Brokerage Allocation and Other Practices.................................B-14
Capital Stock and Other Securities.......................................B-14
Purchase, Redemption and Pricing of
Securities.............................................................B-15
Taxation of the Portfolio................................................B-16
Underwriters.............................................................B-18
Calculations of Performance Data.........................................B-18
Financial Statements.....................................................B-18
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Item 11. Portfolio History.
The Portfolio was organized as a trust under the laws of the State of
New York on March 1, 1990.
Item 12. Description of the Portfolio and Its Investments and Risks.
The investment objectives of the Portfolio are to provide its investors
with high levels of current income which is exempt from federal income taxes,
preservation of capital and liquidity. There can, of course, be no assurance
that the Portfolio will achieve its investment objectives. The investment
objectives of the Portfolio may be changed without approval of the investors in
the Portfolio. The Portfolio would, however, give written notice to its
investors at least 30 days prior to implementing any change in its investment
objectives.
The Portfolio seeks its investment objectives by investing primarily in
short-term, high quality fixed rate and variable rate obligations issued by or
on behalf of states and municipal governments, and their authorities, agencies,
instrumentalities and political subdivisions and other qualifying issuers, the
interest on which is exempt from federal income taxes, including participation
interests in such obligations issued by banks, insurance companies or other
financial institutions. (These securities, whether or not the interest thereon
is subject to the federal alternative minimum tax, are referred to herein as
"Municipal Obligations.") In determining the tax status of interest on
Municipal Obligations, Citibank, N.A., the Portfolio's investment adviser
("Citibank" or the "Adviser"), relies on opinions of bond counsel who may be
counsel to the issuer. Although the Portfolio will attempt to invest 100% of
its assets in Municipal Obligations, the Portfolio reserves the right to invest
up to 20% of its total assets in securities the interest income on which is
subject to federal, state and local income tax or the federal alternative
minimum tax. The Portfolio invests more than 25% of its assets in participation
certificates issued by banks in industrial development bonds and other
Municipal Obligations. In view of this "concentration" in bank participation
certificates, an investment in the Portfolio should be made with an
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. (See "Variable Rate Instruments and
Participation Interests" below.) The Portfolio may hold uninvested cash
reserves pending investment. The Portfolio's investments may include
"when-issued" or "forward delivery" Municipal Obligations, stand-by commitments
and taxable repurchase agreements.
The Portfolio may invest 25% or more of its assets in securities that
are related in such a way that an economic, business or political development
or change affecting one of the securities would also affect the other
securities including, for example, securities the interest upon which is paid
from revenues of similar type projects, or securities the issuers of which are
located in the same state.
All investments by the Portfolio mature or are deemed to mature within
397 days from the date of acquisition and the average maturity of the
Portfolio's securities (on a dollar-weighted basis) is 90 days or less. The
maturities of variable rate instruments held by the Portfolio are deemed to be
the longer of the notice period, or the period remaining until the next
interest rate adjustment, although the stated maturities may be in excess of
397 days. (See "Variable Rate Instruments and Participation Interests" below.)
All investments by the Portfolio are "eligible securities," that is, rated in
one of the two highest rating categories for short-term obligations by at least
two NRSRO's assigning a rating to the security or issuer or, if only one NRSRO
assigns a rating, that NRSRO, or, in the case of an investment which is not
rated, of comparable quality as determined by the Adviser on the basis of its
credit evaluation of the obligor or of the bank issuing a participation
interest, letter of credit or guarantee, or insurance issued in support of the
Municipal Obligations or participation interests. (See "Variable Rate
Instruments and Participation Interests" below.) Such instruments may produce a
lower yield than would be available from less highly rated instruments.
The Portfolio's fundamental policy to invest at least 80% of its assets, under
normal circumstances, in certain Municipal Obligations is described below in
"Municipal Obligations."
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MUNICIPAL OBLIGATIONS
As a fundamental policy, the Portfolio invests at least 80% of its
assets, under normal circumstances, in:
(1) Municipal bonds with remaining maturities of one year or less that
are rated within the Aaa or Aa categories at the date of purchase by Moody's
Investors Service, Inc. ("Moody's") or within the AAA or AA categories by
Standard & Poor's Ratings Group ("Standard & Poor's") or Fitch IBCA, Inc.
("Fitch") or, if not rated by these rating agencies, are of comparable quality
as determined by the Adviser on the basis of the credit evaluation of the
obligor on the bonds or of the bank issuing a participation interest or
guarantee or of any insurance issued in support of the bonds or the
participation interests.
(2) Municipal notes with remaining maturities of one year or less that
at the date of purchase are rated MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's,
SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1 or F-2 by Fitch or, if not
rated by these rating agencies, are of comparable quality as determined by the
Adviser. The principal kinds of municipal notes are tax and revenue
anticipation notes, tax anticipation notes, bond anticipation notes and revenue
anticipation notes. Notes sold in anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the
issuing municipality or agency.
(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by
Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1 or F-2 by Fitch or, if
not rated by these rating agencies, is of comparable quality as determined by
the Adviser. Issues of municipal commercial paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are often
issued to meet 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
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions which may be called upon in the event of default by the
issuer of the commercial paper.
Subsequent to its purchase by the Portfolio, a rated Municipal
Obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event requires sale of such
Municipal Obligation by the Portfolio (other than variable rate instruments
which must be sold if they are not "high quality"), but the Adviser considers
such event in determining whether the Portfolio should continue to hold the
Municipal Obligation. To the extent that the ratings given to the Municipal
Obligations or other securities held by the Portfolio are altered due to
changes in any of the Moody's, Standard & Poor's or Fitch ratings systems, the
Adviser adopts such changed ratings as standards for its future investments in
accordance with the investment policies contained above and in the Part A to
this Registration Statement. Certain Municipal Obligations issued by
instrumentalities of the U.S. government are not backed by the full faith and
credit of the U.S. Treasury but only by the creditworthiness of the
instrumentality. The Portfolio's Board of Trustees has determined that any
Municipal Obligation that depends directly, or indirectly through a government
insurance program or other guarantee, on the full faith and credit of the U.S.
government is considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are "eligible securities"
(e.g., within the two highest ratings assigned by Moody's, Standard & Poor's or
Fitch or, if not rated, are of comparable quality as determined by the
Adviser), or where the obligations are not freely transferable, the Portfolio
will require that the obligation to pay the principal and accrued interest be
backed by an unconditional irrevocable bank letter of credit, a guarantee,
insurance policy or other comparable undertaking of an approved financial
institution.
MUNICIPAL BONDS. Municipal bonds are debt obligations of states,
cities, municipalities and municipal agencies and authorities which generally
have a maturity at the time of issuance of one year or more and which are
issued to raise funds for various public purposes, such as construction of a
wide range of public facilities, refunding outstanding obligations or obtaining
funds for institutions and facilities. The two principal classifications of
<PAGE>
municipal bonds are "general obligation" and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. The principal of
and interest on revenue bonds are payable from the income of specific projects
or authorities and generally are not supported by the issuer's general power to
levy taxes. In some cases, revenues derived from specific taxes are pledged to
support payments on a revenue bond.
In addition, certain kinds of private activity bonds ("IDBs") are
issued by or on behalf of public authorities to provide funding for various
privately operated industrial facilities, such as warehouse, office, plant and
store facilities and environmental and pollution control facilities. IDBs are,
in most cases, revenue bonds. The payment of the principal and interest on IDBs
usually depends solely on the ability of the user of the facilities financed by
the bonds or other guarantor to meet its financial obligations and, in certain
instances, the pledge of real and personal property as security for payment.
Many IDBs may not be readily marketable; however, it is expected that the IDBs
or the participation certificates in IDBs purchased by the Portfolio will have
liquidity because they generally will be supported by demand features to "high
quality" banks, insurance companies or other financial institutions.
Municipal bonds may be issued as "zero coupon" obligations. Zero-coupon
bonds are issued at a significant discount from their principal amount in lieu
of paying interest periodically. Because zero-coupon bonds do not pay current
interest in cash, their value is subject to greater fluctuation in response to
changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve greater credit
risks than bonds paying interest currently in cash. The Portfolio is required
to accrue interest income on such investments and to distribute such amounts at
least annually to shareholders even though zero-coupon bonds do not pay current
interest in cash. Thus, it may be necessary at times for the Portfolio to
liquidate investments in order to satisfy its dividend requirements.
MUNICIPAL NOTES. There are four major varieties of state and municipal
notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes
("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes
("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally, to
finance construction. Many TRANs, TANs and RANs are general obligations of the
issuing entity payable from taxes or designated revenues, respectively,
expected to be received within the related fiscal period. BANSs are issued with
the expectation that their principal and interest will be paid out of proceeds
from renewal notes or bonds to be issued prior to the maturity of the BANs.
BANs are issued most frequently by both general obligation and revenue bond
issuers usually to finance such items as land acquisition, facility acquisition
and/or construction and capital improvement projects.
MUNICIPAL LEASE OBLIGATIONS. 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. Municipal lease obligations are deemed
to be illiquid unless otherwise determined by the Board of Trustees.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
The Portfolio may purchase variable rate instruments and participation
interests. Variable rate instruments that the Portfolio may purchase are
tax-exempt Municipal Obligations (including municipal notes and municipal
commercial paper) that provide for a periodic adjustment in the interest rate
paid on the instrument and permit the holder to receive payment upon a
specified number of days' notice of the unpaid principal balance plus accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or an insurance policy issued with respect to such instrument or by
tendering or "putting" such instrument to a third party.
<PAGE>
The variable rate instruments in which Portfolio's assets may be
invested are payable upon a specified period of notice which may range from one
day up to one year. The terms of the instruments provide that interest rates
are adjustable at intervals ranging from daily to up to one year and the
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. An
unrated variable rate instrument may be determined to meet the Portfolio's high
quality criteria if it is backed by a letter of credit or guarantee or a right
to tender or put the instrument to a third party or is insured by an insurer
that meets the high quality criteria for the Portfolio discussed above or on
the basis of a credit evaluation of the underlying obligor. If the credit of
the obligor is of "high quality," no credit support from a bank or other
financial institution will be necessary. Each unrated variable rate instrument
will be evaluated on a quarterly basis to determine that it continues to meet
the Portfolio's high quality criteria.
Variable rate instruments in which the Portfolio may invest include
participation interests in variable rate, tax-exempt Municipal Obligations
owned by a bank, insurance company or other financial institution or affiliated
organizations. Although the rate of the underlying Municipal Obligations may be
fixed, the terms of the participation interest may result in the Portfolio
receiving a variable rate on its investment. A participation interest gives the
Portfolio an undivided interest in the Municipal Obligation in the proportion
that the Portfolio's participation bears to the total principal amount of the
Municipal Obligation and provides the liquidity feature. Each participation may
be backed by an irrevocable letter of credit or guarantee of, or a right to put
to, a bank (which may be the bank issuing the participation interest, a bank
issuing a confirming letter of credit to that of the issuing bank, or a bank
serving as agent of the issuing bank with respect to the possible repurchase of
the participation interest) or insurance policy of an insurance company that
has been determined by the Adviser to meet the prescribed quality standards of
the Portfolio. The Portfolio has the right to sell the participation interest
back to the institution or draw on the letter of credit or insurance after a
specified period of notice, for all or any part of the full principal amount of
the Portfolio's participation in the security, plus accrued interest. The
Portfolio intends to exercise the liquidity feature only (1) upon a default
under the terms of the bond documents, (2) as needed to provide liquidity to
the Portfolio in order to facilitate withdrawals from the Portfolio, or (3) to
maintain a high quality investment portfolio. In some cases, this liquidity
feature 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 Portfolio's high credit standards at the time of purchase of the
participation interest. Issuers of participation interests will retain a
service and letter of credit fee and a fee for providing the liquidity feature,
in an amount equal to the excess of the interest paid on the instruments over
the negotiated yield at which the participations were purchased on behalf of
the Portfolio. With respect to insurance, the Portfolio will attempt to have
the issuer of the participation interest bear the cost of the insurance,
although the Portfolio may also purchase insurance in which case the cost of
insurance will be an expense of the Portfolio. The Adviser has been instructed
by the Portfolio's Board of Trustees to monitor continually the pricing,
quality and liquidity of the variable rate instruments held by the Portfolio,
including the participation interests, on the basis of published financial
information and reports of the rating agencies and other bank analytical
services to which the Portfolio may subscribe. Although participation interests
may be sold, the Portfolio intends to hold them until maturity, except under
the circumstances stated above. Participation interests may include municipal
lease obligations. Purchase of a participation interest may involve the risk
that the Portfolio will not be deemed to be the owner of the underlying
Municipal Obligation for purposes of the ability to claim tax exemption of
interest paid on that Municipal Obligation.
Periods of high inflation and periods of economic slowdown, together
with the fiscal measures adopted to attempt to deal with them, have brought
wide fluctuations in interest rates. When interest rates rise, the value of
fixed income securities generally falls; and vice versa. While this is true for
variable rate instruments generally, the variable rate nature of the underlying
instruments should minimize these changes in value. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation and the risk
of potential capital depreciation is less than would be the case with a
portfolio of fixed interest rate securities. Because the adjustment of interest
<PAGE>
rates on the variable rate instruments is made in relation to movements of
various interest rate adjustment indices, the variable rate instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate instruments may be higher or lower than current market rates
for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, when prevailing
interest rates decline the Portfolio's yield will decline and its shareholders
will forgo the opportunity for capital appreciation. On the other hand, during
periods when prevailing interest rates increase, the Portfolio's yield will
increase and its shareholders will have reduced risk of capital depreciation.
For purposes of determining whether a variable rate instrument held by
the Portfolio matures within 397 days from the date of its acquisition, the
maturity of the instrument will be deemed to be the longer of (1) the period
required before the Portfolio is entitled to receive payment of the principal
amount of the instrument after notice or (2) the period remaining until the
instrument's next interest rate adjustment, except that an instrument issued or
guaranteed by the U.S. government or any agency thereof shall be deemed to have
a maturity equal to the period remaining until the next adjustment of the
interest rate. The maturity of a variable rate instrument will be determined in
the same manner for purposes of computing the Portfolio's dollar-weighted
average portfolio maturity.
In view of the "concentration" of the Portfolio in bank participation
interests in Municipal Obligations secured by bank letters of credit or
guarantees, an investment in the Portfolio should be made with an understanding
of the characteristics of the banking industry and the risks which such an
investment may entail. Banks are subject to extensive governmental regulation
which may limit both the amounts and types of loans and other financial
commitments which may be made and interest rates and fees which may be charged.
The profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operation of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit.
"WHEN-ISSUED" SECURITIES
The Portfolio may purchase securities on a "when-issued" or "forward
delivery" basis. New issues of certain Municipal Obligations frequently are
offered on a "when-issued" or "forward delivery" basis. The payment obligation
and the interest rate that will be received on the Municipal Obligations are
each fixed at the time the buyer enters into the commitment although
settlement, i.e., delivery of and payment for the Municipal Obligations, takes
place beyond customary settlement time (but normally within 45 days after the
date of the Portfolio's commitment to purchase). Although the Portfolio will
only make commitments to purchase "when-issued" or "forward delivery" Municipal
Obligations with the intention of actually acquiring them, the Portfolio may
sell these securities before the settlement date if deemed advisable by the
Adviser.
Municipal Obligations purchased on a "when-issued" or "forward
delivery" basis and the securities held in the Portfolio's investment portfolio
are subject to changes in value based upon the market's perception of the
credit-worthiness of the issuer and changes, real or anticipated, in the level
of interest rates. The value of these Municipal Obligations and securities
generally change in the same way, that is, both experience appreciation when
interest rates decline and depreciation when interest rates rise. Purchasing
Municipal Obligations on a "when-issued" or "forward delivery" basis can
involve a risk that the yields available in the market on the settlement date
may actually be higher or lower than those obtained in the transaction itself.
A segregated account of the Portfolio consisting of cash or liquid debt
securities equal to the amount of the "when-issued" or "forward delivery"
commitments will be established at the Portfolio's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of
<PAGE>
such securities declines, additional cash or highly liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of the Portfolio's commitments. On the settlement date of the
"when-issued" or "forward delivery" securities, the Portfolio's obligations
will be met from then-available cash flow, sale of securities held in the
separate account, sale of other securities or, although not normally expected,
from sale of the "when-issued" or "forward delivery" securities themselves
(which may have a value greater or lesser than the Portfolio's payment
obligations). Sale of securities to meet such obligations may result in the
realization of capital gains or losses, which are not exempt from federal
income tax. An increase in the percentage of the Portfolio's assets committed
to the purchase of securities on a "when-issued" basis may increase the
volatility of its net asset value.
STAND-BY COMMITMENTS
When the Portfolio purchases Municipal Obligations it may also acquire
stand-by commitments from banks with respect to such Municipal Obligations. The
Portfolio also may acquire stand-by commitments from broker-dealers. Under the
stand-by commitment, a bank or broker-dealer agrees to purchase at the
Portfolio's option a specified Municipal Obligation at a specified price. A
stand-by commitment is the equivalent of a "put" option acquired by the
Portfolio with respect to a particular Municipal Obligation held in the
Portfolio's investment portfolio.
The amount payable to the Portfolio upon the exercise of a stand-by
commitment normally would be (1) the acquisition cost of the Municipal
Obligation (excluding any accrued interest paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio owned the security, plus (2) all
interest accrued on the security since the last interest payment date during
the period the security was owned by the Portfolio. Absent unusual
circumstances relating to a change in market value, the Portfolio would value
the underlying Municipal Obligation at amortized cost. Accordingly, the amount
payable by a bank or dealer during the time a stand-by commitment is
exercisable would be substantially the same as the market value of the
underlying Municipal Obligation. The Portfolio values stand-by commitments at
zero for purposes of computing the value of its net assets.
The stand-by commitments that the Portfolio may enter into are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised and the fact
that the commitment is not marketable by the Portfolio and the maturity of the
underlying security will generally be different from that of the commitment.
TAXABLE SECURITIES
Although the Portfolio attempts to invest 100% of its net assets in
tax-exempt Municipal Obligations, the Portfolio may invest up to 20% of the
value of its net assets in securities of the kind described below, the interest
income on which is subject to federal income tax. Circumstances in which the
Portfolio may invest in taxable securities include the following: (a) pending
investment in the type of securities described above; (b) to maintain liquidity
for the purpose of meeting anticipated withdrawals; and (c) when, in the
opinion of the Portfolio's investment adviser, it is advisable to do so because
of adverse market conditions affecting the market for Municipal Obligations.
The kinds of taxable securities in which the Portfolio's assets may be invested
are limited to the following short-term, fixed-income securities (maturing in
397 days or less from the time of purchase): (1) obligations of the U.S.
government or its agencies, instrumentalities or authorities; (2) commercial
paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard &
Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks
with assets of $1 billion or more; and (4) repurchase agreements with respect
to any Municipal Obligations or other securities which the Portfolio is
permitted to own. The Portfolio's assets may also be invested in Municipal
Obligations which are subject to an alternative minimum tax.
REPURCHASE AGREEMENTS
The Portfolio may invest its assets in repurchase agreements only with
member banks of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York) in U.S. government securities. Under
the terms of a typical repurchase agreement, the Portfolio would acquire an
underlying debt instrument for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and the
Portfolio to resell the instrument at a fixed price and time, thereby
<PAGE>
determining the yield during the Portfolio's holding period. This results in a
fixed rate of return insulated from market fluctuations during such period. A
repurchase agreement is subject to the risk that the seller may fail to
repurchase the security. All repurchase agreements entered into by the
Portfolio shall be fully collateralized at all times during the period of the
agreement in that the value of the underlying security shall be at least equal
to the amount of the loan, including the accrued interest thereon, and the
Portfolio or its custodian or sub-custodian shall have control of the
collateral, which the Adviser believes will give the Portfolio a valid,
perfected security interest in the collateral. This might become an issue in
the event of the bankruptcy of the other party to the transaction. In the event
of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Portfolio
but only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, the Portfolio may suffer time delays and incur
costs in connection with the disposition of the collateral. The Adviser
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by the Portfolio. Repurchase agreements will give rise to
income which will not qualify as tax-exempt income when distributed by the
Portfolio. The Portfolio will not invest in a repurchase agreement maturing in
more than seven days if any such investment together with illiquid securities
held by the Portfolio exceed 10% of the Portfolio's total net assets.
Repurchase agreements are also subject to the same risks described herein with
respect to stand-by commitments.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, the Portfolio 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, the
Portfolio would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and/or with respect to cash
collateral would receive compensation based on investment of the collateral
(subject to a rebate payable to the borrower). The borrower alternatively may
pay the Portfolio a fee for use of the borrowed securities. The Portfolio 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 Adviser to be of good
standing, and when, in the judgment of the Adviser, the consideration which can
be earned currently from loans of this type justifies the attendant risk. In
addition, the Portfolio could suffer loss if the borrower terminates the loan
and the Portfolio is forced to liquidate investments in order to return the
cash collateral to the buyer. If the Adviser determines to make loans, it is
not intended that the value of the securities loaned by the Portfolio would
exceed 33 1/3% of the value of its net assets.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
The Portfolio may invest up to 10% of its net assets in securities for
which there is no readily available market. These illiquid securities may
include privately placed restricted securities for which no institutional
market exists. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Portfolio to sell them promptly at an
acceptable price.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following policies which may not be
changed without approval by holders of a "majority of the outstanding voting
<PAGE>
securities" of the Portfolio, which as used in this Registration Statement
means the vote of the lesser of (i) 67% or more of the outstanding voting
securities of the Portfolio present at a meeting if the holders of more than
50% of the outstanding voting securities of the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Portfolio. The term "voting securities" as used in this
paragraph has the same meaning as in the 1940 Act.
The Portfolio may not:
(1) borrow money, except that as a temporary measure for extraordinary
or emergency purposes the Portfolio may borrow from banks in an amount not to
exceed 1/3 of the value of the net assets of the Portfolio, including the
amount borrowed (moreover, the Portfolio may not purchase any securities at any
time at which borrowings exceed 5% of its total assets (taken at market
value))(it is intended that the Portfolio would borrow money only from banks
and only to accommodate requests for withdrawal of all or a portion of a
beneficial interest in the Portfolio while effecting an orderly liquidation of
securities);
(2) purchase any security or evidence of interest therein on margin,
except that the Portfolio may obtain such short term credit as may be necessary
for the clearance of purchases and sales of securities;
(3) underwrite securities issued by other persons, except insofar as
the Portfolio may technically be deemed an underwriter under the Securities Act
of 1933, as amended (the "1933 Act"), in selling a security;
(4) make loans to other persons except (a) through the lending of
securities held by the Portfolio, but not in excess of 33 1/3% of the
Portfolio's net assets, (b) through the use of fixed time deposits or
repurchase agreements 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; for purposes of this paragraph
(4) the purchase of short term commercial paper or a portion of an issue of
debt securities which are part of an issue to the public shall not be
considered the making of a loan;
(5) 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 Portfolio reserves the
freedom of action to hold and to sell real estate acquired as the result of
ownership of securities by the Portfolio);
(6) concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of its investment objective, up to
25% of the assets of the Portfolio (taken at market value at the time of each
investment) may be invested in any one industry, except that the Portfolio will
invest at least 25% of its assets and may invest up to 100% of its assets in
bank obligations; or
(7) 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, except as appropriate to evidence a debt
incurred without violating the investment restriction in paragraph (1) above.
Designation of Issuer of Securities
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 principal of and interest on the
security. When the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the assets and
revenues of the entity, the entity would be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial development bond, if that
bond is backed only by the assets and revenues of the non-governmental user,
<PAGE>
then such non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity, such as
an insurance company or other corporate obligor, guarantees a security or a
bank issues a letter of credit, such a guarantee or letter of credit may, in
accordance with applicable Securities and Exchange Commission rules, be
considered a separate security and could be treated as an issue of such
government, other entity or bank.
Percentage and Rating Restrictions
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above 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 portfolio securities or a later change in the
rating of a portfolio security will not be considered a violation of such
policy.
Item 13. Management of the Portfolio.
The Trustees and officers of the Portfolio and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Asterisks indicate that those Trustees and
officers are "interested persons" (as defined in the 1940 Act) of the
Portfolio. Unless otherwise indicated below, the address of each Trustee and
officer is 21 Milk Street, Boston, Massachusetts 02109.
TRUSTEES
ELLIOTT J. BERV; 56 - 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 Portfolio; Chief Executive Officer
and President, Signature Financial Group, Inc. and CFBDS, Inc.
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.
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.
OFFICERS
PHILIP W. COOLIDGE*; 48 -- President of the Portfolio; Chief Executive Officer
and President, Signature Financial Group, Inc. and CFBDS, Inc.
CHRISTINE D. DORSEY*; 29 -- Assistant Secretary and Assistant Treasurer of the
Portfolio; 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 -- Assistant Treasurer of the Portfolio; Chief Financial
Officer and Senior Vice President, Signature Financial Group, Inc; Treasurer,
CFBDS, Inc.
TAMIE EBANKS-CUNNINGHAM*; 27 -- Assistant Secretary of the Portfolio; 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.
<PAGE>
LINDA T. GIBSON*; 34 -- Secretary of the Portfolio; Senior Vice President,
Signature Financial Group, Inc.; Secretary, CFBDS, Inc.
SUSAN JAKUBOSKI*; 35 -- Vice President, Assistant Treasurer and Assistant
Secretary of the Portfolio; Vice President, Signature Financial Group (Cayman)
Ltd. (since July 1994).
MOLLY S. MUGLER*; 48 -- Assistant Secretary and Assistant Treasurer of the
Portfolio; Vice President, Signature Financial Group, Inc.; Assistant
Secretary, CFBDS, Inc.
JULIE J. WYETZNER*; 40 -- Vice President, Assistant Secretary and Assistant
Treasurer of the Portfolio; Vice President, Signature Financial Group, Inc.
The Trustees and officers of the Portfolio also hold comparable
positions with certain other funds for which CFBDS, Inc. ("CFBDS" or the
"Administrator"), the Portfolio's administrator and a wholly-owned subsidiary
of Signature Financial Group, Inc., or an affiliate serves as the distributor
or administrator. Mr. Coolidge is also a Trustee of CitiFunds Tax Free Reserves
and CitiFunds Institutional Trust, open-end investment companies, series of
each of which are investors in the Portfolio, and each officer of the Portfolio
holds the same position with those investment companies.
The Trustees of the Portfolio (with the exception of Mr. Coolidge, who
received no remuneration from the Portfolio) received the following
remuneration from the Portfolio during its fiscal year ended August 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED ANNUAL FROM REGISTRANT AND
NAME OF PERSON, COMPENSATION FROM PART OF PORTFOLIO BENEFITS UPON PORTFOLIO COMPLEX
POSITION REGISTRANT EXPENSES RETIREMENT PAID TO TRUSTEES(1)
Elliott J. Berv, Trustee $4,873 None None $69,500
Riley C. Gilley, Trustee $2,895 None None $65,250
Walter E. Robb, III, Trustee $4,550 None None $67,500
</TABLE>
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(1) Messrs. Coolidge, Berv, Gilley and Robb are trustees of 49, 27, 33 and
30, funds, respectively, in the family of open-end registered
investment companies advised or managed by Citibank.
The Portfolio's Declaration of Trust provides that it 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 Portfolio, unless, as to liability to the Portfolio 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 Portfolio. 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 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.
<PAGE>
Item 14. Control Persons and Principal Holders of Securities.
As of December 22, 1999, CitiFunds Tax Free Reserves and CitiFunds
Institutional Tax Free Reserves, a series of CitiFunds Institutional Trust (the
"Funds") owned 83.0% and 17.0%, respectively, of the beneficial interests in
the Portfolio.
The Funds are registered investment companies which have informed the
Portfolio that whenever requested to vote on matters pertaining to the
Portfolio (other than a vote to continue the Portfolio following the withdrawal
of an investor) each will hold a meeting of shareholders and will cast its vote
as instructed by its shareholders, or otherwise act in accordance with
applicable law. Notwithstanding the foregoing, at any meeting of shareholders
of a Fund, a shareholder servicing 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 instructions it received for all other
shares of which that shareholder servicing agent is the holder of record.
Item 15. Investment Advisory and Other Services.
Citibank manages the assets of the Portfolio pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Subject to such policies as the
Portfolio's Board of Trustees may determine, the Adviser makes investment
decisions for the Portfolio. The Adviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
Portfolio's investments and effecting securities transactions for the
Portfolio. The Advisory Agreement continues in effect if such continuance is
specifically approved at least annually by the Portfolio's Board of Trustees or
by a vote of a majority of the voting securities of the Portfolio and, in
either case, by a majority of the Portfolio's Trustees who are not parties to
the Advisory Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to
others. The Advisory Agreement is terminable by the Portfolio without penalty
on not more than 60 days' nor less than 30 days' written notice when authorized
either by a vote of a majority of the voting securities of the Portfolio or by
a vote of a majority of its Board of Trustees, or by the Adviser on not more
than 60 days' nor less than 30 days' written notice, and will automatically
terminate in the event of its assignment. The Advisory Agreement provides that
neither the Adviser 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 Portfolio, except
for willful misfeasance, bad faith or gross negligence or reckless disregard of
its or their obligations and duties under the Advisory Agreement.
For its services under the Advisory Agreement, the Adviser receives
investment advisory fees, which are accrued daily and paid monthly, of 0.20% of
the Portfolio's average daily net assets on an annualized basis for the
Portfolio's then-current fiscal year. The Adviser has voluntarily agreed to
waive a portion of its investment advisory fee from the Portfolio.
For the fiscal years ended August 31, 1997, 1998 and 1999 the fees paid
to Citibank under the Advisory Agreement with the Portfolio, after waivers,
were $506,142, $659,288 and $824,462, respectively.
<PAGE>
The Portfolio has adopted an Administrative Services Plan (the
"Administrative Plan") which provides that the Portfolio may obtain the
services of an administrator, a transfer agent and a custodian, and may enter
into agreements providing for the payment of fees for such services. Under the
Administrative Plan, the administrative services fee payable to the
Administrator from the Portfolio may not exceed 0.05% of the Portfolio's
average daily net assets on an annualized basis for its thencurrent fiscal
year. The Administrative Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Portfolio's Trustees and a majority of the Portfolio's Trustees who are not
"interested persons" of the Portfolio and who have no direct or indirect
financial interest in the operation of the Administrative Plan or in any
agreement related to such Plan ("Qualified Trustees"). The Administrative Plan
requires that the Portfolio 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 Administrative Plan. The Administrative
Plan may be terminated at any time by a vote of a majority of the Portfolio's
Qualified Trustees or by a vote of a majority of the outstanding voting
securities of the Portfolio. The Administrative Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of a majority of the outstanding voting securities of the Portfolio
and may not be materially amended in any case without a vote of the majority of
both the Trustees and the Qualified Trustees.
Pursuant to an Administrative Services Agreement (the "Administrative
Services Agreement"), CFBDS provides the Portfolio with general office
facilities and supervises the overall administration of the Portfolio,
including, among other responsibilities, the negotiation of contracts and fees
with, and the monitoring of performance and billings of, the independent
contractors and agents of the Portfolio; the preparation and filing of all
documents required for compliance by the Portfolio with applicable laws and
regulations; and arranging for the maintenance of books and records of the
Portfolio. CFBDS provides persons satisfactory to the Board of Trustees of the
Portfolio to serve as Trustees and officers of the Portfolio. Such Trustees and
officers may be directors, officers or employees of CFBDS or its affiliates.
The Administrative Services Agreement continues in effect if such
continuance is specifically approved at least annually by the Portfolio's Board
of Trustees or by a vote of a majority of the outstanding voting securities of
the Portfolio and, in either case, by a majority of the Trustees of the
Portfolio who are not parties to the Administrative Services Agreement or
interested persons of any such party. The Administrative Services Agreement
terminates automatically if it is assigned and may be terminated without
penalty by a vote of a majority of the outstanding voting securities in the
Portfolio or by either party on not more than 60 days' nor less than 30 days'
written notice. The Administrative Services Agreement also provides that
neither CFBDS, as the Administrator, nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Portfolio, except for willful misfeasance,
bad faith or gross negligence in the performance of its or their duties or by
reason of reckless disregard of its or their obligations and duties under the
Administrative Services Agreement.
For these services under the Administrative Services Agreement, CFBDS
receives a fee accrued daily and paid monthly of 0.05% of the assets of the
Portfolio. For the fiscal year ended August 31, 1997, the fees paid to CFBDS
under the Administrative Services Agreement with the Portfolio, after waivers,
were $79,252. For the fiscal years ended August 31, 1998 and 1999, the fees
payable to CFBDS under the Administrative Services Agreement were voluntarily
waived.
The Administrative Services Agreement provides that CFBDS may render
administrative services to others.
<PAGE>
CFBDS is a whollyowned subsidiary of Signature Financial Group, Inc.
Pursuant to a subadministrative services agreement, Citibank performs
such subadministrative duties for the Portfolio as are from time to time agreed
upon by Citibank and CFBDS. Citibank's subadministrative duties may include
providing equipment and clerical personnel necessary for maintaining the
organization of the Portfolio, participation in the preparation of documents
required for compliance by the Portfolio with applicable laws and regulations,
preparation of certain documents in connection with meetings of Trustees and
investors in the Portfolio, and other functions which would otherwise be
performed by the Administrator as set forth above. For performing such
subadministrative services, Citibank receives such compensation as is from time
to time agreed upon by CFBDS and Citibank, not to exceed the amount paid to the
Administrator for its services under the Administrative Services Agreement. All
such compensation is paid by CFBDS.
The Portfolio has entered into a Transfer Agency Agreement and a
Custodian Agreement with State Street Bank and Trust Company ("State Street")
pursuant to which State Street acts as transfer agent and custodian for the
Portfolio. The principal business address of State Street is 225 Franklin
Street, Boston, Massachusetts 02110.
Deloitte & Touche LLP are the independent certified public accountants
for the Portfolio, providing audit services and assistance and consultation
with respect to the preparation of filings with the Securities and Exchange
Commission. The principal business address of Deloitte & Touche LLP is 125
Summer Street, Boston, Massachusetts 02110.
Item 16. Brokerage Allocation and Other Practices.
The Portfolio's purchases and sales of securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
are no brokerage commissions paid for such purchases. The Portfolio does not
anticipate paying brokerage commissions. Any transaction for which the
Portfolio pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
asked price.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner
deemed to be in the best interest of investors in the Portfolio rather than by
any formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for the Portfolio are made independently from
those for any other account or investment company that is or may in the future
become managed by the Adviser or its affiliates. If, however, the Portfolio and
other investment companies or accounts managed by the Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy may adversely affect the price paid or
received by the Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for the
Portfolio and for other investment companies or accounts managed by the Adviser
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantages available to large denomination purchases or
sales.
No transactions are executed with the Adviser or an affiliate of the
Adviser, in any case acting either as principal or as broker.
<PAGE>
Item 17. Capital Stock and Other Securities.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate
pro rata in distributions of taxable income, loss, gain and credit of the
Portfolio. Upon liquidation or dissolution of the Portfolio, investors are
entitled to share pro rata in the Portfolio's net assets available for
distribution to its investors. Investments in the Portfolio have no preference,
pre-emptive, conversion or similar rights and are fully paid and
non-assessable, except as set forth below. Investments in the Portfolio may not
be transferred. Certificates representing an investor's beneficial interest in
the Portfolio are issued only upon the written request of an investor.
Each investor is entitled to a vote in proportion to the value of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees of the Portfolio if
they choose to do so and in such event the other investors in the Portfolio
would not be able to elect any Trustee. The Portfolio is not required and has
no current intention to hold annual meetings of investors but the Portfolio
holds special meetings of investors when it is required to do so by law, or in
the judgment of the Portfolio's Trustees it is necessary or desirable to submit
matters for an investor vote. No material amendment may be made to the
Portfolio's Declaration of Trust without the affirmative vote of a majority of
the outstanding voting securities of the Portfolio.
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two-thirds of the
outstanding voting securities of the Portfolio. The Portfolio may also be
terminated (i) by the affirmative vote of two-thirds of the outstanding voting
securities of the Portfolio or (ii) by the Trustees of the Portfolio by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio are personally liable for its obligations
and liabilities, subject, however, to indemnification by the Portfolio in the
event that there is imposed upon an investor a greater portion of the
liabilities and obligations of the Portfolio than its proportionate beneficial
interest in the Portfolio. The Declaration of Trust also provides that the
Portfolio maintain appropriate insurance (e.g., fidelity bonding and errors and
omissions insurance) for the protection of the Portfolio, its investors,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of an investor incurring financial loss on account
of investor liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
It is not expected that the liabilities of the Portfolio would ever exceed its
assets.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually, but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he 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 office.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each business day. At 12:00 noon, Eastern time, on each such
business day, the value of each investor's interest in the Portfolio is
determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio effective for that day. Any additions or
withdrawals, which are to be effected on that day, are then effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio is
then re-computed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Portfolio as of 12:00
noon, Eastern time, on such day plus or minus, as the case may be, the amount
of any additions to or withdrawals from the investor's investment in the
<PAGE>
Portfolio effected on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 12:00 noon, Eastern time, on
such day plus or minus, as the case may be, the amount of the net additions to
or withdrawals from the aggregate investments in the Portfolio by all investors
in the Portfolio. The percentage so determined is then applied to determine the
value of the investor's interest in the Portfolio as of 12:00 noon, Eastern
time, on the following business day of the Portfolio.
Item 18. Purchase, Redemption and Pricing of Securities.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any "security" within the meaning of the 1933
Act.
The Portfolio normally determines its net asset value as of 12:00 noon,
Eastern time, on each day on which the New York Stock Exchange is open for
trading. As of the date of this Registration Statement, the New York Stock
Exchange will be 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. Purchases and withdrawals
will be effected at the time of determination of net asset value next following
the receipt of any purchase or withdrawal order. On days when the financial
markets in which the Portfolio invests close early, the Portfolio's net asset
value is determined as of the close of these markets if such time is earlier
than the time at which the net asset value is normally calculated.
The securities held by the Portfolio are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium. If fluctuating interest rates or other factors cause the market value
of the securities held by the Portfolio to deviate more than 1/2 of 1% from
their value determined on the basis of amortized cost, the Portfolio's Board of
Trustees will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the stated value of an
instrument is higher or lower than the price the Portfolio would receive if the
instrument were sold.
Pursuant to the rules of the Securities and Exchange Commission, the
Portfolio's Board of Trustees has established procedures to stabilize the value
of the Portfolio's net assets within 1/2 of 1% of the value determined on the
basis of amortized cost. These procedures include a review of the extent of any
such deviation of net asset value, based on available market quotations. Should
that deviation exceed 1/2 of 1%, the Portfolio's Board of Trustees would
consider whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to the investors in the Portfolio. Such action
may include withdrawal in kind, selling its securities prior to maturity and
utilizing a net asset value as determined by using available market quotations.
The Portfolio maintains a dollar-weighted average maturity of 90 days or less,
does not purchase any instrument with a remaining maturity greater than 397
days or subject to a repurchase agreement having a duration of greater than 397
days, limits its investments, including repurchase agreements, to those U.S.
dollar-denominated instruments that have been determined by or on behalf of the
Portfolio's Board of Trustees to present minimal credit risks and complies with
certain reporting and recordkeeping procedures. The Portfolio has also
established procedures to ensure that securities purchased by it meet its high
quality criteria.
Subject to compliance with applicable regulations, the Portfolio has
reserved the right to pay the redemption price of beneficial interests in the
Portfolio, 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 beneficial interests being redeemed. If a holder of beneficial
interests received a distribution in kind, such holder could incur brokerage or
other charges in converting the securities to cash.
<PAGE>
The Portfolio may suspend the right of redemption or postpone the date
of payment for beneficial interests in the Portfolio more than seven days
during any period when (a) trading in the markets the Portfolio normally
utilizes is restricted, or an emergency, as defined by the rules and
regulations of the Securities and Exchange Commission exists making disposal of
the Portfolio'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 Securities and Exchange
Commission has by order permitted such suspension.
Item 19. Taxation of the Portfolio.
The Portfolio is organized as a trust under New York law. The Portfolio
has determined, on the basis in part of an opinion of special tax counsel, that
it is properly treated as a partnership for federal and New York income tax
purposes. Accordingly, the Portfolio is not subject to any income tax, but each
investor in the Portfolio must take into account its share of the Portfolio's
ordinary income, expenses, capital gains or losses, credits and other items in
determining its income tax liability. The determination of such share will be
made in accordance with the governing instruments of the Portfolio and the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations
promulgated thereunder.
The Portfolio's taxable year-end is August 31. Although the Portfolio
is not subject to federal income tax, it files appropriate federal income tax
returns.
The Portfolio believes that, in the case of an investor in the
Portfolio that seeks to qualify as a regulated investment company ("RIC") under
the Code, the investor should be treated for federal income tax purposes as an
owner of an undivided interest in the assets and operations of the Portfolio,
and accordingly should be deemed to own a proportionate share of each of the
assets of the Portfolio and should be entitled to treat as earned by it the
portion of the Portfolio's gross income attributable to that share. Each such
investor should consult its tax advisers regarding whether, in light of its
particular tax status and any special tax rules applicable to it, this approach
applies to its investment in the Portfolio, or whether the Portfolio should be
treated, as to it, as a separate entity as to which the investor has no direct
interest in Portfolio assets or operations.
In order to enable an investor in the Portfolio that is otherwise
eligible to qualify as a RIC under the Code to so qualify, the Portfolio
intends to satisfy the requirements of Subchapter M of the Code relating to the
nature of the Portfolio's gross income and the composition (diversification) of
the Portfolio's assets as if those requirements were directly applicable to the
Portfolio, and to allocate and permit withdrawals of its net investment income
(including net investment income derived from interest on Municipal
Obligations) and any net realized capital gains in a manner that will enable an
investor that is a RIC to comply with the qualification requirements imposed by
Subchapter M of the Code.
The Portfolio will allocate at least annually among its investors each
investor's distributive share of the Portfolio's net investment income
(including net investment income derived from interest on Municipal
Obligations), net realized capital gains, and any other items of income, gain,
loss, deduction, or credit in a manner intended to comply with the Code and
applicable Treasury regulations.
To the extent the cash proceeds of any withdrawal or distribution
exceed an investor's adjusted tax basis in its partnership interest in the
Portfolio, the investor will generally recognize gain for federal income tax
purposes. If, upon a complete withdrawal (i.e., a redemption of its entire
interest in the Portfolio), the investor's adjusted tax basis in its
partnership interest in the Portfolio exceeds the proceeds of the withdrawal,
the investor will generally recognize a loss for federal income tax purposes.
An investor's adjusted tax basis in its partnership interest in the Portfolio
<PAGE>
will generally be the aggregate price paid therefor, increased by the amounts
of its distributive share of items of realized net income (including income, if
any, exempt from Federal income tax) and gain, and reduced, but not below zero,
by the amounts of its distributive share of items of realized net loss and the
amounts of any distributions received by the investor.
There are certain tax issues which will be relevant to only certain of
the Portfolio's investors, specifically, investors which are segregated asset
accounts and investors who contribute assets other than cash to the Portfolio.
It is intended that such segregated asset accounts will be able to satisfy
diversification requirements applicable to them and that such contributions of
assets will not be taxable provided certain requirements are met.
The above discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, insurance
companies, and financial institutions, or the state, local, or non-United
States tax laws that may be applicable to certain investors. Investors should
consult their own tax advisers with respect to the special tax rules that may
apply in their particular situations, as well as the state, local, or foreign
tax consequences to them of investing in the Portfolio.
Item 20. Underwriters.
The exclusive placement agent for the Portfolio is CFBDS, which
receives no additional compensation for serving in this capacity. Investment
companies, insurance company separate accounts, common and commingled trust
funds and similar organizations and entities may continuously invest in the
Portfolio.
Item 21. Calculations of Performance Data.
Not applicable.
Item 22. Financial Statements.
The financial statements contained in the Annual Report of the
Portfolio, as filed with the Securities and Exchange Commission on October 21,
1999 (Accession Number 0000930413-99-001305), for the fiscal year ended August
31, 1999 are incorporated by reference into this Part B.
A copy of the Annual Report of the Portfolio accompanies this Part B.
<PAGE>
PART C
Item 23. Exhibits.
*a(1) Declaration of Trust of the Registrant
*a(2) Amendment to the Declaration of Trust of the Registrant
*b By-Laws of the Registrant
*d Investment Advisory Agreement between the Registrant and Citibank,
N.A., as investment adviser
*e Placement Agency Agreement between the Registrant and CFBDS, Inc.
(formerly known as The Landmark Funds Broker-Dealer Services, Inc.)
("CFBDS"), as exclusive placement agent
*g Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street"), as custodian
*h(1) Transfer Agency and Service Agreement between the Registrant and
State Street, as transfer agent
*h(2) Administrative Services Plan of the Registrant
*h(3) Administrative Services Agreement between the Registrant and CFBDS,
as administrator
*h(4) Sub-Administrative Services Agreement between CFBDS and Citibank,
N.A.
- ---------------------------------------------------
* Incorporated herein by reference to Registrant's Registration
Statement on Form N-1A (File No. 811-6118) as filed with the Securities and
Exchange Commission on December 30, 1996.
Item 24. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit to 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 errors and omissions liability
insurance policies. 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
<PAGE>
and around the world. Citibank is a wholly-owned subsidiary of Citicorp, which
is, in turn, a wholly owned subsidiary of Citigroup Inc. Citibank also serves
as investment adviser to the following registered investment companies (or
series thereof): Asset Allocation Portfolios (Large Cap Value Portfolio, Small
Cap Value Portfolio, International Portfolio, Foreign Bond Portfolio,
Intermediate Income Portfolio and Short-Term Portfolio), The Premium Portfolios
(High Yield Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth Portfolio,
International Equity Portfolio, Government Income Portfolio and Small Cap
Growth Portfolio), U.S. Treasury Reserves Portfolio, Cash Reserves Portfolio,
CitiFundsSM Multi-State Tax Free Trust (CitiFundsSM New York Tax Free Reserves,
CitiFundsSM Connecticut Tax Free Reserves and CitiFundsSM California Tax Free
Reserves), CitiFundsSM Tax Free Income Trust (CitiFundsSM National Tax Free
Income Portfolio, CitiFundsSM New York Tax Free Income Portfolio and
CitiFundsSM California Tax Free Income Portfolio), CitiFundsSM Institutional
Trust (CitiFundsSM Institutional Cash Reserves) and Variable Annuity Portfolios
(CitiSelect VIP Folio 100 Income, CitiSelect VIP Folio 200 Conservative,
CitiSelect VIP Folio 300 Balanced, CitiSelect VIP Folio 400 Growth, CitiSelect
VIP Folio 500 Growth Plus and CitiFundsSM Small Cap Growth VIP Portfolio).
Citibank and its affiliates manage assets in excess of $351 billion worldwide.
The principal place of business of Citibank is located at 399 Park Avenue, New
York, New York 10043.
John S. Reed is the Chairman of the Board and a Director of Citibank.
Victor J. Menezes is the President and a Director of Citibank. William R.
Rhodes and H. Onno Ruding are Vice Chairmen and Directors of Citibank. The
other Directors of Citibank are Paul S. Collins, Vice Chairman of Citigroup,
Inc. and Robert I. Lipp, Chairman and Chief Executive Officer of Travelers
Insurance Group and of Travelers Property Casualty Corp.
Each of the individuals named above is also a Director of Citicorp.
In addition, the following persons have the affiliations indicated:
<TABLE>
<CAPTION>
<S> <C>
Paul J. Collins Director, Kimberly-Clark Corporation
Robert I. Lipp Chairman, Chief Executive Officer and President, Travelers
Property Casualty Corp.
John S. Reed Director, Monsanto Company
Director, Philip Morris Companies
Incorporated
Stockholder, Tampa Tank & Welding, Inc.
William R. Rhodes Director, Private Export Funding
Corporation
H. Onno Ruding Supervisory Director, Amsterdamsch
Trustees Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated
</TABLE>
Item 27. Principal Underwriters.
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International
Growth Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash
Reserves, CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium
<PAGE>
Liquid Reserves, CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM
Institutional Liquid Reserves, CitiFundsSM Institutional Cash Reserves,
CitiFundsSM Tax Free Reserves, CitiFundsSM Institutional Tax Free Reserves,
CitiFundsSM California Tax Free Reserves, CitiFundsSM Connecticut Tax Free
Reserves, CitiFundsSM New York Tax Free Reserves, CitiFundsSM Intermediate
Income Portfolio, CitiFundsSM Short-Term U.S. Government Income Portfolio,
CitiFundsSM New York Tax Free Income Portfolio, CitiFundsSM National Tax Free
Income Portfolio, CitiFundsSM California Tax Free Income Portfolio, CitiFundsSM
Small Cap Value Portfolio, CitiFundsSM Growth & Income Portfolio, CitiFundsSM
Large Cap Growth Portfolio, CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM
Balanced Portfolio, CitiSelect Folio 100 Income, CitiSelect Folio 200
Conservative, CitiSelect Folio 300 Balanced, CitiSelect Folio 400 Growth,
CitiSelect Folio 500 Growth Plus, CitiSelect VIP Folio 100 Income, CitiSelect
VIP Folio 200 Conservative, CitiSelect VIP Folio 300 Balanced, CitiSelect VIP
Folio 400 Growth, CitiSelect VIP Folio 500 Growth Plus and CitiFundsSM Small
Cap Growth VIP Portfolio. CFBDS is also the placement agent for High Yield
Portfolio, Government Income Portfolio, International Equity Portfolio, Large
Cap Growth Portfolio, Small Cap Growth Portfolio, Large Cap Value Portfolio,
Small Cap Value Portfolio, International Portfolio, Foreign Bond Portfolio,
Intermediate Income Portfolio, Short-Term Portfolio, Cash Reserves Portfolio
and U.S. Treasury Reserves Portfolio. CFBDS also serves as the distributor for
the following funds: The Travelers Fund UL 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 Life Insurance, The Travelers
Fund UL II for Life Insurance, The Travelers Fund UL III for Life Insurance,
The Travelers Variable Life Insurance Separate Account One, The Travelers
Variable Life Insurance Separate Account Two, The Travelers Variable Life
Insurance Separate Account Three, The Travelers Variable Life Insurance
Separate Account Four, The Travelers Separate Account MGA, The Travelers
Separate Account MGA II, The Travelers Growth and Income Stock Account for
Variable Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The Travelers Timed
Growth and Income Stock Account for Variable Annuities, The Travelers Timed
Short-Term Bond Account for Variable Annuities, The Travelers Timed Aggressive
Stock Account for Variable Annuities, The Travelers Timed Bond Account for
Variable Annuities, 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,
<PAGE>
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 500 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, 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 Balanced 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
<PAGE>
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 Small Cap Growth 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
Growth Fund.
(b) The information required by this Item 29 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
(administrator and exclusive Boston, MA 02109
placement agent)
State Street Bank and Trust Company State Street South
(custodian and transfer agent) 1776 Heritage Drive
North Quincy, MA 02171
Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this Amendment to its Registration Statement on
Form N-1A 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 December, 1999.
TAX FREE RESERVES PORTFOLIO
By: Philip W. Coolidge
---------------------------
Philip W. Coolidge,
President
<PAGE>
EXHIBIT INDEX
Exhibit: Description:
*a(1) Declaration of Trust of the Registrant
*a(2) Amendment to the Declaration of Trust of the Registrant
*b By-Laws of the Registrant
*d Investment Advisory Agreement between the Registrant and Citibank,
N.A., as investment adviser
*e Placement Agency Agreement between the Registrant and CFBDS, Inc.
(formerly known as The Landmark Funds Broker-Dealer Services,
Inc.) ("CFBDS"), as exclusive placement agent
*g Custodian Contract between the Registrant and State Street Bank
and Trust Company ("State Street"), as custodian
*h(1) Transfer Agency and Service Agreement between the Registrant and
State Street, as transfer agent
*h(2) Administrative Services Plan of the Registrant
*h(3) Administrative Services Agreement between the Registrant and
CFBDS, as administrator
*h(4) Sub-Administrative Services Agreement between CFBDS and Citibank,
N.A.
- ---------------------------------------------------
* Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A (File No. 811-6118) as filed with the Securities and Exchange
Commission on December 30, 1996.
