Tax Free Reserves Portfolio
N O T E S T O F I N A N C I A L S T A T E M E N T S
1. Organization and Significant Accounting Policies
Tax Free Reserves Portfolio (the “Portfolio”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a no-load, non-diversified, open-end management investment company, which was organized as a trust under the laws of the State of New York. The Declaration of Trust permits the Trustees to issue shares of beneficial interest in the Portfolio. Citi Fund Management Inc. (the “Manager”) acts as the Investment Manager.
The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted acounting principles (”GAAP”):
A. Valuation of Investments. Money market instruments are valued at amortized cost, which the Trustees have determined in good faith constitutes fair value. The Portfolio’s use of amortized cost is subject to the Portfolio’s compliance with certain conditions as specified under the 1940 Act.
B. Investment Income and Expenses. Investment income consists of interest accrued and discount earned (including both original issue and market discount), adjusted for amortization of premium, on the investments of the Portfolio. Expenses of the Portfolio are accrued daily.
C. IncomeTaxes. The Portfolio is classified as a partnership for Federal income tax purposes. As such, each investor in the Portfolio is treated as an owner of its proportionate share of the net assets, income, expenses and realized gains and losses of the Portfolio. Therefore, no Federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so that an investor in the Portfolio can satisfy the requirements of subchapter M of the Internal Revenue Code.
D. Fees Paid Indirectly. The Portfolio’s custodian calculates its fees based on the Portfolio’s average daily net assets. The fee is reduced according to a fee arrangement, which provides for custody fees to be reduced based on a formula developed to measure the value of cash deposited with the custodian by the Portfolio. This amount is shown as a reduction of expenses on the Statement of Operations.
E. Use of Estimate. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
F. Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction.
2. Management Fees
The Manager is responsible for overall management of the Portfolio’s business affairs, and has a Management agreement with the Portfolio. The Manager or an affiliate also provides certain administrative services to the Portfolio. These administrative services include providing general office facilities and supervising the overall administration of the Portfolio.
The management fees paid to the Manager are accrued daily and payable monthly. The management fee is computed at the annual rate of 0.20% of the Funds’ average daily net assets. The management fee amounted to $3,302,870, of which $1,342,971 was
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Tax Free Reserves Portfolio
N O T E S T O F I N A N C I A L S T A T E M E N T S (Continued)
voluntarily waived for the year ended August 31, 2004. Such waiver is voluntary and may be terminated at any time at the discretion of the manager.
The Portfolio pays no compensation directly to any Trustee or any officer who is affil-iated with the Manager, all of whom receive remuneration for their services to the Portfolio from the Manager or its affiliates. Certain of the officers and a Trustee of the Portfolio are officers and a director of the Manager or its affiliates.
3. Investment Transactions
Purchases, and maturities and sales of money market instruments, exclusive of securities purchased subject to repurchase agreements, aggregated $13,905,773,658 and $13,935,164,687, respectively, for the year ended August 31, 2004.
4. Federal Income Tax Basis of Investment Securities
The cost of investment securities owned at August 31, 2004, for federal income tax purposes, amounted to $1,455,572,286.
5.Trustee Retirement Plan
The Trustees of the Portfolio have adopted a Retirement Plan for all Trustees who are not “interested persons” of the Portfolio, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75 (certain Trustees who had already attained age 75 when the Plan was adopted were required to retire effective December 31, 2003). Trustees may retire under the Plan before attaining the mandatory retirement age. Trustees who have served as Trustee of the Trust or any of the investment companies associated with Citigroup for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement ben-efit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the calendar year ending on or immediately prior to the applicable Trustee’s retirement. Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Two former Trustees are currently receiving payments under the plan. In addition, two other former Trustees received a lump sum payment under the plan during this period. The Portfolio’s allocable share of the expenses of the Plan for the year ended August 31, 2004 was $58,368.
6. Additional Information
In connection with an investigation previously disclosed by Citigroup, the Staff of the Securities and Exchange Commission (“SEC”) has notified Citigroup Asset Management (“CAM”), the Citigroup business unit that includes the Portfolio’s investment manager and other investment advisory companies; Citicorp Trust Bank (“CTB”), an affiliate of CAM; Thomas W. Jones, the former CEO of CAM; and two other individuals, one of whom is an employee and the other of whom is a former employee of CAM, that the SEC Staff is considering recommending a civil injunctive action and/or an administrative proceeding against each of them relating to the creation and operation of an internal transfer agent unit to serve various CAM-managed funds.
In 1999, CTB entered the transfer agent business. CTB hired an unaffiliated subcontractor to perform some of the transfer agent services. The subcontractor, in
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Tax Free Reserves Portfolio
N O T E S T O F I N A N C I A L S T A T E M E N T S (Continued)
exchange, had signed a separate agreement with CAM in 1998 that guaranteed investment management revenue to CAM and investment banking revenue to a CAM affiliate. The sub-contractor’s business was later taken over by PFPC Inc., and at that time the revenue guarantee was eliminated and a one-time payment was made by the subcontractor to a CAM affiliate.
CAM did not disclose the revenue guarantee when the boards of various CAM-managed funds hired CTB as transfer agent. Nor did CAM disclose to the boards of the various CAM-managed funds the one-time payment received by the CAM affil-iate when it was made.
In addition, the SEC Staff has indicated that it is considering recommending action based on the adequacy of the disclosures made to the fund boards that approved the transfer agency arrangement, CAM’s initiation and operation of, and compensation for, the transfer agent business and CAM’s retention of, and agreements with, the subcontractor.
Citigroup is cooperating fully in the investigation and will seek to resolve the matter in discussions with the SEC Staff. Although there can be no assurance, Citigroup does not believe that this matter will have a material adverse effect on the Portfolio. As previously disclosed, CAM has already agreed to pay the applicable funds, primarily through fee waivers, a total of approximately $17 million (plus interest) that is the amount of the revenue received by Citigroup relating to the revenue guarantee.
The Portfolio did not implement the contractual arrangement described above and therefore will not receive any portion of such payment.
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Tax Free Reserves Portfolio
R E P O RT O F I N D E P E N D E N T R E G I S T E R E D P U B L I C
A C C O U N T I N G F I R M
To the Trustees and Investors of
Tax Free Reserves Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Tax Free Reserves Portfolio (a New York Trust) as of August 31, 2004, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two year period then ended, and the financial highlights for each of the years in the four year period then ended. These financial statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended August 31, 2000 was audited by other auditors whose report thereon, dated October 4, 2000, expressed an unqualified opinion on the financial highlights.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2004 by correspondence with the custodian. As to securities purchased or sold but not yet received or delivered, we performed other appropriate procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Tax Free Reserves Portfolio as of August 31, 2004, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two year period then ended, and the financial highlights for each of the years in the four year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
October 22, 2004
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Tax Free Reserves Portfolio
A D D I T I O N A L I N F O R M AT I O N (Unaudited)
Information about the Trustees and Officers of the Portfolio can be found on pages 20 through 25 of this report.
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ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the registrant has determined that Jane F.
Dasher, the Chairman of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Ms. Dasher as the Audit Committee's financial expert. Ms.
Dasher is an "independent" Trustee pursuant to paragraph (a)(2) of Item
3 to Form N-CSR.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees for the Tax Free Reserves Portfolio of $19,000 and $19,000
for the years ended 8/31/04 and 8/31/03.
(b) Audit-Related Fees for the Tax Free Reserves Portfolio of $0 and $0 for
the years ended 8/31/04 and 8/31/03.
(c) Tax Fees for Tax Free Reserves Portfolio of $2,500 and $2,500 for the
years ended 8/31/04 and 8/31/03. These amounts represent aggregate fees
paid for tax compliance, tax advice and tax planning services, which
include (the filing and amendment of federal, state and local income
tax returns, timely RIC qualification review and tax distribution and
analysis planning) rendered by the Accountant to Tax Free Reserves
Portfolio
(d) All Other Fees for Tax Free Reserves Portfolio of $0 and $0 for the
years ended 8/31/04 and 8/31/03.
(e) (1) Audit Committee's pre-approval policies and procedures described in
paragraph (c) (7) of Rule 2-01 of Regulation S-X.
The Charter for the Audit Committee (the "Committee") of the Board of
each registered investment company (the "Fund") advised by Smith Barney
Fund Management LLC or Salomon Brothers Asset Management Inc or one of
their affiliates (each, an "Adviser") requires that the Committee shall
approve (a) all audit and permissible non-audit services to be provided
to the Fund and (b) all permissible non-audit services to be provided
by the Fund's independent auditors to the Adviser and any Covered
Service Providers if the engagement relates directly to the operations
and financial reporting of the Fund. The Committee may implement
policies and procedures by which such services are approved other than
by the full Committee.
The Committee shall not approve non-audit services that the Committee
believes may impair the independence of the auditors. As of the date of
the approval of this Audit Committee Charter, permissible non-audit
services include any professional services (including tax services),
that are not prohibited services as described below, provided to the
Fund by the independent auditors, other than those provided to the Fund
in connection with an audit or a review of the financial statements of
the Fund. Permissible non-audit services may not include: (i)
bookkeeping or other services related to the accounting records or
financial statements of the Fund; (ii) financial information systems
design and implementation; (iii) appraisal or valuation services,
fairness opinions or contribution-in-kind reports; (iv) actuarial
services; (v) internal audit outsourcing services; (vi) management
functions or human resources; (vii) broker or dealer, investment
adviser or investment banking services; (viii) legal services and
expert services unrelated to the audit; and (ix) any other service the
Public Company Accounting Oversight Board determines, by regulation, is
impermissible.
Pre-approval by the Committee of any permissible non-audit services is
not required so long as: (i) the aggregate amount of all such
permissible non-audit services provided to the Fund, the Adviser and
any service providers controlling, controlled by or under common
control with the Adviser that provide ongoing services to the Fund
("Covered Service Providers") constitutes not more than 5% of the total
amount of revenues paid to the independent auditors during the fiscal
year in which the permissible non-audit services are provided to (a)
the Fund, (b) the Adviser and (c) any entity controlling, controlled by
or under common control with the Adviser that provides ongoing services
to the Fund during the fiscal year in which the services are provided
that would have to be approved by the Committee; (ii) the permissible
non-audit services were not recognized by the Fund at the time of the
engagement to be non-audit services; and (iii) such services are
promptly brought to the attention of the Committee and approved by the
Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Tax Free Reserves Portfolio, the percentage of fees that
were approved by the audit committee, with respect to: Audit-Related
Fees were 100% and 100% for the years ended 8/31/04 and 8/31/03; Tax
Fees were 100% and 100% for the years ended 8/31/04 and 8/31/03; and
Other Fees were 100% and 100% for the years ended 8/31/04 and 8/31/03.
(f) N/A
(g) Non-audit fees billed by the Accountant for services rendered to Tax
Free Reserves Portfolio and CAM and any entity controlling, controlled
by, or under common control with CAM that provides ongoing services to
Tax Free Reserves Portfolio were $2.8 million and $6.4 million for the
years ended 8/31/04 and 8/31/03.
(h) Yes. The Tax Free Reserves Portfolio's Audit Committee has considered
whether the provision of non-audit services that were rendered to
Service Affiliates which were not pre-approved(not requiring
pre-approval) is compatible with maintaining the Auditor's
independence. All services provided by the Accountant to the Tax Free
Reserves Portfolio or to Service Affiliates which were required to be
pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a- 3(c) under the Investment Company
Act of 1940, as amended (the "1940 Act")) are effective as of a date
within 90 days of the filing date of this report that includes the
disclosure required by this paragraph, based on their evaluation of the
disclosure controls and procedures required by Rule 30a-3(b) under the
1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act)
that occurred during the registrant's last fiscal half-year (the
registrant's second fiscal half-year in the case of an annual report)
that have materially affected, or are likely to materially affect the
registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a)(1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a)(2) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
(b) Furnished.
Exhibit 99.906CERT Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, there unto duly authorized.
TAX FREE RESERVES PORTFOLIO
By: /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
TAX FREE RESERVES PORTFOLIO
Date: November 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
TAX FREE RESERVES PORTFOLIO
Date: November 9, 2004
By: /s/ Frances M. Guggino
(Frances M. Guggino)
Chief Financial Officer of
TAX FREE RESERVES PORTFOLIO
Date: November 9, 2004
