Smith Barney
NEW YORK MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney New York
Municipals Fund Inc. (the "Fund"), dated November 7, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from a Smith Bar-
ney Financial Consultant or by writing or calling the Fund at the address
or telephone number set forth above. This Statement of Additional Informa-
tion, although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectus and the Statement of Additional Information, except where shown
below:
<TABLE>
<S>
<C>
Management of the Fund
1
Investment Objective and Management Policies
5
Municipal Bonds (See in the Prospectus "New York Municipal Securities")
13
Special Considerations Relating to New York Municipal Securities
15
Purchase of Shares
25
Redemption of Shares
26
Distributor
27
Valuation of Shares
28
Exchange Privilege
29
Performance Data (See in the Prospectus "The Fund's Performance")
29
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")
32
Additional Information
35
Financial Statements
35
Appendix
A-1
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of the organizations that
provide services to the Fund. These organizations are as follows:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser and
Administrator
("SBMFM")
The Boston Company Advisors, Inc.
("Boston Advisors") Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc. ("TSSG"),
a subsidiary of First Data Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Fund are dis-
cussed in the Prospectus and in this Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The Directors and executive officers of the Fund, together with informa-
tion as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person" of the
Fund, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Herbert Barg, Director. Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director. Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New
Jersey 17466.
Martin Brody, Director. Vice Chairman of the Board of Restaurant Associ-
ates Corp.; a Director of Jaclyn, Inc. His address is HMK Associates,
Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director. Professor, Graduate School of Business Adminis-
tration, Harvard University; a Director of Peer Review Analysis, Inc. His
address is Graduate School of Business Administration, Harvard University,
Boston, Massachusetts 02163.
James J. Crisona, Director. Attorney; formerly a Justice of the Supreme
Court of the State of New York. His address is 118 East 60th Street, New
York, New York 10022.
Burt N. Dorsett, Director. Managing Partner of Dorsett McCabe Management,
Inc., an investment counseling firm; Director of Research Corporation
Technologies, Inc., a non-profit patent-clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
Robert A. Frankel, Director. Management Consultant; retired Vice President
of The Reader's Digest Association, Inc. His address is 102 Grand Street,
Croton-on-Hudson, New York 10520.
Dr. Paul Hardin, Director. Chancellor of the University of North Carolina
at Chapel Hill; a Director of The Summit Bancorporation. His address is
University of North Carolina, 103 S. Building, Chapel Hill, North Carolina
27599.
Elliot S. Jaffe, Director. Chairman of the Board and President of The
Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman, Director. Attorney. His address is 277 Park Avenue,
New York, New York 10172.
Joseph J. McCann, Director. Financial Consultant; formerly Vice President
of Ryan Homes, Inc. His address is 200 Oak Park Place, Pittsburgh, Penn-
sylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman
of Shearson Asset Management, a member of the Asset Management Group of
Shearson Lehman Brothers; a Director of PanAgora Asset Management, Inc.
and PanAgora Asset Management Limited. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director. President, Cornelius C. Rose Associates,
Inc., Financial Consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. His address is Fair Oaks, En-
field, New Hampshire 03748.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and
SBMFM; and Trustee of Corporate Realty Income Trust Inc. His address
is 388 Greenwich Street, New York, New
York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers; Vice President of
Shearson Lehman Investment Strategy Advisors Inc., an investment advisory
affiliate of Shearson Lehman Brothers. His address is 388 Greenwich
Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer. Investment Officer
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
David Fare, Investment Officer. Investment Officer of SBMFM; prior to July
1993, Vice President of Shearson Lehman Advisors. His address is 388
Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New
York, New York 10013.
Each Director also serves as a director, trustee and/ or general
partner of
certain other mutual funds for which Smith Barney serves as
distributor.
As of Oc-
tober 31, 1994, the Directors and officers of the Fund, as a group, owned
less than 1% of the outstanding common stock of the Fund.
No director, officer or employee of Smith Barney or any parent or
subsidiary
receive s any compensation from the Fund for serving as an
officer
or Director of the Fund. The Fund pays each Director who is not an
officer, director or employee of Smith Barney or of its affiliates a fee
of $2,000 per annum plus $500 per meeting attended and reimburses them for
travel and out-of-pocket expenses. For the fiscal year ended December 31,
1993, such fees and expenses totaled $41,687.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer of
the investment advisory agreement effective November 7, 1994, from its
affiliate,
Mutual Management Corp. (Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. ("Travelers").
The advisory agreement is dated July 30, 1993 (the "Advisory
Agreement")
and was first approved by the Board of Directors, including a majority of
those
Directors who are not "interested persons" of the Fund or SBMFM, on April
7, 1993.
The services provided by SBMFM under the Advisory Agreement are described
in
the Prospectus under "Management of the Fund." SBMFM pays the salary of
any
officer and employee who is employed by both it and the Fund.
As compensation for investment advisory services, the Fund pays
SBMFM a fee computed daily and paid monthly at
the following annual rates of the Fund's average daily net assets:
0.35%
up to $500
million; 0.32% of the next $1 billion; and 0.29% in excess of $1.5 billion.
For the
1991, 1992 and 1993 fiscal years the Fund incurred $1,553,171,
$1,754,263,
and $2,218,952, respectively, in advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement")
, which was
most recently approved by the Fund's Board of Directors, including a ma-
jority of Directors who are not "interested persons" of the Fund or
SBMFM
, on July 20, 1994. The services provided by SBMFM under the
Administration Agreement are described in the Prospectus under "Management
of the Fund." SBMFM pays the salary of any officer and employee who is
employed by both it and the Fund and bears all expenses in connection with
the performance of its services.
As compensation for administrative services rendered to
the Fund , SBMFM receives a fee paid at the following annual
rates of average
daily net assets: 0.20% up to $500 million; 0.18% of the next $1 billion;
and 0.16% in excess of $1.5 billion.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors served as administrator to the
Fund. Boston Advisors serves as sub-administrator to the Fund
pursuant to a written agreement (the "Sub-Administration Agreement")
dated April 20, 1994, which was most recently approved by the Fund's Board
of Direc-
tors, including a majority of Directors who are not "interested persons"
of the Fund or Boston Advisors on July 20, 1994. Under the
Sub-Administrative Agreement, Boston Advisors is paid a portion of the
administration fee paid by the Fund to SBMFM at a rate agreed upon from
time
to time between Boston Advisors and SBMFM . Boston Advisors is a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), a financial
services holding company, which is in turn a wholly owned subsidiary of
Mellon Bank Corporation ("Mellon").
Prior to April 20, 1994 , Boston Advisors served as the Fund's sub-
investment
adviser and/or administrator. . For the 1991, 1992 and 1993 fiscal
years,
the Fund paid Boston Advi-
sors $887,526, $1,002,117 and $1,263,785, respectively, in sub-investment
advisory and/or administration fees.
Certain services provided to the Fund by Boston Advisors pursu-
ant to the Sub- Administration Agreement are described in the
Prospectus
under
"Management of the Fund." In addition to those services, Boston
Advisors pay s the salaries of all officers and employees who are
employed
by both it and the Fund, maintains office facili ties for the Fund,
furnishes
the Fund with statistical and research data, clerical help and accounting,
data processing,
bookkeeping, internal au-
diting and legal services and certain other services required by the Fund,
prepares reports to the Fund's shareholders, and prepares tax returns and
reports to and filings with the Securities and Exchange Commission (the
"SEC") and state B lue S ky authorities. Boston
Advisors bear s all
expenses in connection with the performance of its services.
The Fund bears expenses incurred in its operation including: taxes, inter-
est, brokerage fees and commissions, if any; fees of Directors who are not
officers, directors, shareholders or employees of Smith Barney , SBMFM
or
Boston Advisors ; SEC fees
and S tate B lue sky qualification fees; charges of custodian;
transfer
and dividend disbursing agent's fees; certain insurance premiums; outside
au-
diting and legal expenses; costs of maintaining corporate existence;
costs
of investor services (including
allocated telephone and personnel expenses); costs of preparing and print-
ing of prospectuses for regulatory purposes and for distribution to exist-
ing shareholders; cost of shareholders' reports and shareholder meetings;
meetings of the officers or Board of Directors of the Fund.
SBMFM and Boston Advisors have each agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees pursuant to the Advisory
Agreement, Administration and Sub-Administration Agreements, but excluding
interest, taxes, brokerage fees paid pursuant to the Fund's services and
distribution
plan, and, with the prior written consent of the nec-
essary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, SBMFM
and Boston Advisors will, to the extent required by state law, reduce
their management fees by the amount of such excess expenses, such amount
to be allocated between them in the proportion that their respective fees
bear to the aggregate of such fees paid by the Fund. Any fee reductions
will be reconciled on a monthly basis. The most restrictive state expense
limitation applicable to the Fund would require SBMFM and Boston
Advisors to reduce their fees in any
year that such expenses exceed 2.50% of the first $30 million of average
net assets, 2.00% of the next $70 million of average net assets and 1.50%
of the remaining average net assets. No fee reduction was required for the
1991, 1992 and 1993 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Direc-
tors who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick, LLP, independent accountants, 345 Park Avenue,
New York, New
York 10154, serve as auditors of the Fund and will render an opinion
on the
Fund's financial statements annually. Prior to October 19, 1994,
Coopers &
Lybrand, LLP, independent auditors, served as auditors of the Fund and
rendered
an opinion on the financial statements for the fiscal year ended December
31, 1993.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve that objective. The following discussion supplements
the description of the Fund's investment policies in the Prospectus. For
purposes of this Statement of Additional Information, obligations of non-
New York municipal issuers, the interest on which is excluded from gross
income for Federal income tax purposes, together with obligations of the
State of New York and its political subdivisions, agencies and public au-
thorities ("New York Municipal Securities"), are collectively referred to
as "Municipal Bonds."
As noted in the Prospectus, the Fund is classified as a non-diversified
investment company under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that may be in-
vested in the obligations of a single issuer. The identification of the
issuer of Municipal Bonds generally depends upon the terms and conditions
of the security. When the assets and revenues of an agency, authority, in-
strumentality or other political subdivision are separate from those of
the government creating the issuing entity and the security is backed only
by the assets and revenues of such entity, such entity would be deemed to
be the sole issuer. Similarly, in the case of a private activity bond, if
that bond is backed only by the assets and revenues of the nongovernmental
user, then such nongovernmental user is deemed to be the sole issuer. If
in either case, however, the creating government or some other entity
guarantees a security, such a guarantee would be considered a separate se-
curity and would be treated as an issue of such government or other en-
tity.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") represent the opinions of those
agencies as to the quality of the Municipal Bonds and short-term invest-
ments which they rate. It should be emphasized, however, that such ratings
are relative and subjective, are not absolute standards of quality and do
not evaluate the market risk of securities. These ratings will be used by
the Fund as initial criteria for the selection of portfolio securities,
but the Fund also will rely upon the independent advice of SBMFM to evalu-
ate potential investments. Among the factors that will be considered are
the long-term ability of the issuer to pay principal and interest and gen-
eral economic trends. To the extent the Fund invests in low-rated and com-
parable unrated securities, the Fund's achievement of its investment ob-
jective may be more dependent on SBMFM's credit analysis of such securi-
ties than would be the case for a portfolio consisting entirely of higher-
rated securities. The Appendix contains information concerning the ratings
of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds may
cease to be rated or its rating may be reduced below the rating given at
the time the securities were acquired by the Fund. Neither event will re-
quire the sale of such Municipal Bonds by the Fund, but SBMFM will con-
sider such event in its determination of whether the Fund should continue
to hold the Municipal Bonds. In addition, to the extent the ratings change
as a result of changes in the rating systems or due to a corporate re-
structuring of Moody's or S&P, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objective and policies.
The Fund generally may invest up to 25% of its total assets in securities
rated below investment grade, (i.e., lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 by S&P, or in unrated securities of comparable
quality). Such securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are out-
weighed by large uncertainties or major risk exposures to adverse condi-
tions and (b) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligation.
While the market values of low-rated and comparable unrated securities
tend to react less to fluctuations in interest rate levels than the market
values of higher-rated securities, the market values of certain low-rated
and comparable unrated municipal securities also tend to be more sensitive
than higher-rated securities to short-term corporate and industry develop-
ments and changes in economic conditions (including recession) in specific
regions or localities or among specific types of issuers. In addition,
low-rated securities and comparable unrated securities generally present a
higher degree of credit risk. During an economic downturn or a prolonged
period of rising interest rates, the ability of issuers of lower-rated and
comparable unrated securities to service their payment obligations, meet
projected goals or obtain additional financing may be impaired. The risk
of loss due to default by such issuers is significantly greater because
low-rated and comparable unrated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on
its portfolio holdings.
While the market for municipal securities is considered to be generally
adequate, the existence of limited markets for particular low-rated and
comparable unrated securities may diminish the Fund's ability to (a) ob-
tain accurate market quotations for purposes of valuing such securities
and calculating its net asset value and (b) sell the securities at fair
value either to meet redemption requests or to respond to changes in the
economy or in the financial markets. The market for certain low-rated and
comparable unrated securities has not fully weathered a major economic re-
cession. Any such recession, however, would likely disrupt severely the
market for such securities and adversely affect the value of the securi-
ties and the ability of the issuers of these securities to repay principal
and pay interest thereon.
Fixed-income securities, including low-rated securities and comparable un-
rated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders,
such as the Fund. If an issuer exercises these rights during periods of
declining interest rates, the Fund may have to replace the security with a
lower yielding security, thus resulting in a decreased return to the Fund.
TEMPORARY INVESTMENTS
When the Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of: (a) the
following tax-exempt securities: notes of municipal issuers having, at the
time of purchase, a rating within the three highest grades of Moody's or
S&P or, if not rated, having an issue of outstanding Municipal Bonds rated
within the three highest grades by Moody's or S&P; and (b) the following
taxable securities: obligations of the United States government, its agen-
cies or instrumentalities ("U.S. government securities"), repurchase
agreements, other debt securities rated within the three highest grades by
Moody's and S&P, commercial paper rated in the highest grade by either of
such rating services, and certificates of deposit of domestic banks with
assets of $1 billion or more. The Fund may invest in Temporary Investments
for defensive reasons in anticipation of a market decline. At no time will
more than 20% of the Fund's total assets be invested in Temporary Invest-
ments unless the Fund has adopted a defensive investment policy. The Fund
intends, however, to purchase tax-exempt Temporary Investments pending the
investment of the proceeds of the sale of portfolio securities or shares
of the Fund's common stock, or in order to have highly liquid securities
available to meet anticipated redemptions. Since the commencement of its
operations, the Fund has not found it necessary to purchase taxable Tempo-
rary Investments.
INVESTMENTS IN MUNICIPAL BOND INDEX FUTURES CONTRACTS AND OPTIONS ON
INTEREST RATE FUTURES CONTRACTS
The Fund may invest in municipal bond index futures contracts and options
on interest rate futures contracts that are traded on a domestic exchange
or board of trade. Such investments may be made by the Fund solely for the
purpose of hedging against changes in the value of its portfolio securi-
ties due to anticipated changes in interest rates and market conditions,
and not for purposes of speculation. Further, such investments will be
made only in unusual circumstances, such as when SBMFM anticipates an ex-
treme change in interest rates or market conditions.
Municipal Bond Index Futures Contracts. Municipal Bond index futures con-
tracts based on an index of 40 tax-exempt, long-term municipal bonds with
an original issue size of at least $50 million and a rating of A- or
higher by S&P or A or higher by Moody's began trading in mid-1985. No
physical delivery of the underlying municipal bonds in the index is made.
The purpose of the acquisition or sale of a municipal bond index futures
contract by the Fund, as the holder of long-term municipal securities, is
to protect the Fund from fluctuations in interest rates on tax-exempt se-
curities without actually buying or selling long-term municipal securi-
ties.
Unlike the purchase or sale of a Municipal Bond, no consideration is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker an amount
of cash or cash equivalents equal to approximately 10% of the contract
amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a
higher amount). This amount is known as initial margin and is in the na-
ture of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
that all contractual obligations have been satisfied. Subsequent payments,
known as variation margin, to and from the broker, will be made on a daily
basis as the price of the index fluctuates making the long and short posi-
tions in the futures contract more or less valuable, a process known as
marking-to-market. At any time prior to the expiration of the contract,
the Fund may elect to close the position by taking an opposite position,
which will operate to terminate the Fund's existing position in the fu-
tures contract.
There are several risks in connection with the use of municipal bond index
futures contracts as a hedging device. Successful use of municipal bond
index futures contracts by the Fund is subject to Smith Barney's ability
to predict correctly movements in the direction of interest rates. Such
predictions involve skills and techniques which may be different from
those involved in the management of a long-term municipal bond portfolio.
In addition, there can be no assurance that there will be a correlation
between movements in the price of the municipal bond index and movements
in the price of the Municipal Bonds which are the subject of the hedge.
The degree of imperfection of correlation depends upon various circum-
stances, such as variations in speculative market demand for futures con-
tracts and municipal securities, technical influences on futures trading,
and differences between the municipal securities being hedged and the mu-
nicipal securities underlying the municipal bond index futures contracts,
in such respects as interest rate levels, maturities and creditworthiness
of issuers. A decision of whether, when and how to hedge involves the ex-
ercise of skill and judgment and even a well-conceived hedge may be unsuc-
cessful to some degree because of market behavior or unexpected trends in
interest rates.
Although the Fund intends to enter into futures contracts only if an ac-
tive market exists for such contracts, there can be no assurance that an
active market will exist for the contracts at any particular time. Most
domestic futures exchanges and boards of trade limit the amount of fluctu-
ation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount the price of a futures con-
tract may vary either up or down from the previous day's settlement price
at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond
that limit. The daily limit governs only price movement during a particu-
lar trading day and therefore does not limit potential losses because the
limit may prevent the liquidation of unfavorable positions. It is possible
that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures trad-
ers to substantial losses. In such event, it will not be possible to close
a futures position and, in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may partially or completely offset losses on the fu-
tures contract. As described above, however, there is no guarantee the
price of Municipal Bonds will, in fact, correlate with the price movements
in the municipal bond index futures contract and thus provide an offset to
losses on a futures contract.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of Municipal Bonds held in its portfo-
lio and rates decrease instead, the Fund will lose part or all of the ben-
efit of the increased value of the Municipal Bonds it has hedged because
it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of se-
curities may, but will not necessarily, be at increased prices which re-
flect the decline in interest rates. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
When the Fund purchases municipal bond index futures contracts, an amount
of cash and U.S. government securities equal to the market value of the
futures contracts will be deposited in a segregated account with the
Fund's custodian (and/or such other persons as appropriate) to collateral-
ize the position and thereby insure that the use of such futures is not
leveraged. In addition, the ability of the Fund to trade in municipal bond
index futures contracts and options on interest rate futures contracts may
be materially limited by the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to a regulated investment com-
pany. See "Taxes" below.
Options on Interest Rate Futures Contracts. The Fund may purchase put and
call options on interest rate futures contracts which are traded on a do-
mestic exchange or board of trade as a hedge against changes in interest
rates, and may enter into closing transactions with respect to such op-
tions to terminate existing positions. The Fund will sell put and call op-
tions on interest rate futures contracts only as part of closing sale
transactions to terminate its options positions. There is no guarantee
such closing transactions can be effected.
Options on interest rate futures contracts, as contrasted with the direct
investment in such contracts, give the purchaser the right, in return for
the premium paid, to assume a position in interest rate futures contracts
at a specified exercise price at any time prior to the expiration date of
the options. Upon exercise of an option, the delivery of the futures posi-
tion by the writer of the option to the holder of the option will be ac-
companied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures con-
tract. The potential loss related to the purchase of an option on interest
rate futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point
of sale, there are no daily cash payments to reflect changes in the value
of the underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value of the
Fund.
There are several risks relating to options on interest rate futures con-
tracts. The ability to establish and close out positions on such options
will be subject to the existence of a liquid market. In addition, the
Fund's purchase of put or call options will be based upon predictions as
to anticipated interest rate trends by SBMFM, which could prove to be in-
accurate. Even if SBMFM's expectations are correct, there may be an imper-
fect correlation between the change in the value of the options and of the
Fund's portfolio securities.
Repurchase Agreements. The Fund may engage in repurchase agreements with
banks which are the issuers of instruments acceptable for purchase by the
Fund and with certain dealers on the Federal Reserve Bank of New York's
list of reporting dealers. A repurchase agreement is a contract under
which the buyer of a security simultaneously commits to resell the secu-
rity to the seller at an agreed-upon price on an agreed-upon date. Under
the terms of a typical repurchase agreement, the Fund would acquire an un-
derlying debt obligation for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Fund's holding period. Under each
repurchase agreement, the selling institution will be required to maintain
the value of the securities subject to the repurchase agreement at not
less than their repurchase price. SBMFM or Boston Advisors, acting under
the supervision of the Fund's Board of Directors, reviews on an ongoing
basis the value of the collateral and the creditworthiness of those banks
and dealers with which the Fund enters into repurchase agreements to eval-
uate potential risks.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the protec-
tion of shareholders. Restrictions 1 through 7 below cannot be changed
without approval by the holders of a majority of the outstanding shares of
the Fund, defined as the lesser of (a) 67% of the Fund's shares present at
a meeting if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the
Fund's outstanding shares. The remaining restrictions may be changed by
the Fund's Board of Directors at any time.
The Fund may not:
1. Issue senior securities as defined in the 1940 Act and any rules
and orders thereunder, except insofar as the Fund may be deemed to
have issued senior securities by reason of: (a) borrowing money or
purchasing securities on a when-issued or delayed-delivery basis; (b)
purchasing or selling futures contracts and options on futures con-
tracts and other similar instruments; and (c) issuing separate classes
of shares.
2. Invest more than 25% of its total assets in securities, the issu-
ers of which are in the same industry. For purposes of this limita-
tion, U.S. government securities and securities of state or municipal
governments and their political subdivisions are not considered to be
issued by members of any industry.
3. Borrow money, except that the Fund may borrow from banks for tem-
porary or emergency (not leveraging) purposes, including the meeting
of redemption requests which might otherwise require the untimely dis-
position of securities, in an amount not exceeding 10% of the value of
the Fund's total assets (including the amount borrowed) valued at mar-
ket less liabilities (not including the amount borrowed) at the time
the borrowing is made. Whenever borrowings exceed 5% of the value of
the Fund's total assets, the Fund will not make additional invest-
ments.
4. Make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Fund may invest consistent with its
investment objective and policies; (b) repurchase agreements; and (c)
loans of its portfolio securities.
5. Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities.
6. Purchase or sell real estate, real estate mortgages, real estate
investment trust securities, commodities or commodity contracts, but
this shall not prevent the Fund from: (a) investing in securities of
issuers engaged in the real estate business and securities which are
secured by real estate or interests therein; (b) holding or selling
real estate received in connection with securities it holds; or (c)
trading in futures contracts and options on futures contracts.
7. Purchase any securities on margin (except for such short-term cred-
its as are necessary for the clearance of purchases and sales of port-
folio securities) or sell any securities short (except against the
box). For purposes of this restriction, the deposit or payment by the
Fund of initial or maintenance margin in connection with futures con-
tracts and related options and options on securities is not considered
to be the purchase of a security on margin.
8. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in the secu-
rities of issuers having a record, including predecessors, of less
than three years of continuous operation, except U.S. government secu-
rities. (For purposes of this restriction, issuers include predeces-
sors, sponsors, controlling persons, general partners, guarantors and
originators of underlying assets ).
11. Invest in companies for the purpose of exercising control.
12. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of
assets and except to the extent permitted by Section 12 of the 1940
Act (currently, up to 5% of the total assets of the Fund and no more
than 3% of the total outstanding voting stock of any one investment
company).
13. Engage in the purchase or sale of put, call, straddle or spread
options or in writing such options, except that the Fund may purchase
and sell options on interest rate futures contracts.
Certain restrictions listed above permit the Fund without shareholder ap-
proval to engage in investment practices that the Fund does not currently
pursue. The Fund has no present intention of altering its current invest-
ment practices as otherwise described in the Prospectus and this Statement
of Additional Information and any future change in those practices would
require Board approval and appropriate disclosure to investors.
For the purposes of Investment Restriction 3, private activity bonds,
where the payment of principal and interest is the ultimate responsibility
of companies within the same industry, are grouped together as an "indus-
try." If any percentage described above is complied with at the time of
investment, a later increase or decrease in percentage resulting from a
change in the value of the assets will not constitute a violation of such
restriction. In order to permit the sale of the Fund's shares in certain
states, the Fund may make commitments more restrictive than the restric-
tions listed above. Should the Fund determine that any such commitment is
no longer in the best interests of the Fund and its shareholders it will
revoke the commitment by terminating sales of its shares in the state in-
volved.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales usually
are placed with those dealers from which it appears the best price or exe-
cution will be obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers nor-
mally are executed at a price between the bid and asked prices. The Fund
has paid no brokerage commissions since its commencement of operations.
Allocation of transactions, including their frequency, to various dealers
is determined by SBMFM in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary considerations are availabil-
ity of the desired security and the prompt execution of orders in an ef-
fective manner at the most favorable prices. Subject to these consider-
ations, dealers that provide supplemental investment research and statis-
tical or other services to SBMFM may receive orders for transactions by
the Fund. Information so received enables SBMFM to supplement its own re-
search and analysis with the views and information of other securities
firms. Such information may be useful to SBMFM in serving both the Fund
and other clients, and, conversely, supplemental information obtained by
the placement of business of other clients may be useful to SBMFM in car-
rying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence of any un-
derwriting or selling group relating thereto of which SBMFM is a member,
except to the extent permitted by the SEC. Under certain circumstances,
the Fund may be at a disadvantage because of this limitation in comparison
with other investment companies which have a similar investment objective
but which are not subject to such limitation.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type the Fund
may make also may be made by such other accounts. When the Fund and one or
more other accounts managed by SBMFM are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by SBMFM to be equitable
to each. In some cases, this procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained or disposed
of by the Fund.
PORTFOLIO TURNOVER
While the Fund's portfolio turnover rate (the lesser of purchases or sales
of portfolio securities during the year, excluding purchases or sales of
short-term securities, divided by the monthly average value of portfolio
securities) is generally not expected to exceed 100%, it has in the past
exceeded 100%. The rate of turnover will not be a limiting factor, how-
ever, when the Fund deems it desirable to sell or purchase securities.
This policy should not result in higher brokerage commissions to the Fund,
as purchases and sales of portfolio securities are usually effected as
principal transactions. Securities may be sold in anticipation of a rise
in interest rates (market decline) or purchased in anticipation of a de-
cline in interest rates (market rise) and later sold. In addition, a secu-
rity may be sold and another security of comparable quality may be pur-
chased at approximately the same time to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship be-
tween the two securities. These yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand
for or supply of various types of tax-exempt securities. For the 1992 and
1993 fiscal years, the Fund's portfolio turnover rates were 30%, and 20%
respectively. This higher level of turnover was due to significant changes
in the Portfolio in response to the unusual volatility experienced in mu-
nicipal bond markets during this period.
MUNICIPAL BONDS
GENERAL INFORMATION
Municipal Bonds generally are understood to include debt obligations is-
sued to obtain funds for various public purposes, including construction
of a wide range of public facilities, refunding of outstanding obliga-
tions, payment of general operating expenses and extensions of loans to
public institutions and facilities. Private activity bonds that are issued
by or on behalf of public authorities to finance various privately oper-
ated facilities are included within the term Municipal Bonds if the inter-
est paid thereon qualifies as excluded from gross income (but not neces-
sarily from alternative minimum taxable income) for Federal income tax
purposes in the opinion of bond counsel to the issuer.
In order to be classified as a diversified investment company under the
1940 Act, the Fund may not, with respect to 75% of its assets, invest more
than 5% of its total assets in the securities of any one issuer (except
U.S. government securities) or own more than 10% of the outstanding voting
securities of any one issuer. For the purposes of diversification under
the 1940 Act, the identification of the issuer of Municipal Bonds depends
upon the terms and conditions of the security. When the assets and reve-
nues of an agency, authority, instrumentality or other political subdivi-
sion are separate from those of the government creating the issuing entity
and the security is backed only by the assets and revenues of such entity,
such entity is deemed to be the sole issuer. Similarly, in the case of a
private activity bond, if that bond is backed only by the assets and reve-
nues of the nongovernmental user, then such nongovernmental user is deemed
to be the sole issuer. If, however, in either case, the creating govern-
ment or some other entity guarantees a security, such a guarantee would be
considered a separate security and is to be treated as an issue of such
government or other entity.
The yield on Municipal Bonds is dependent on a variety of factors, includ-
ing general economic and monetary conditions, general money market fac-
tors, general conditions of the Municipal Bond market, the financial con-
dition of the issuer, the size of a particular offering, maturity of the
obligation offered and the rating of the issue.
Municipal Bonds also may be subject to the provisions of bankruptcy, in-
solvency and other laws affecting the rights and remedies of creditors,
such as the Federal Bankruptcy Code, and laws, if any, which may be en-
acted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon en-
forcement of such obligations or upon the ability of municipalities to
levy taxes. The possibility also exists that, as a result of litigation or
other conditions, the power or ability of any one or more issuers to pay,
when due, the principal of and interest on, its or their Municipal Bonds
may be materially and adversely affected.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield).
The payment obligation and the interest rate that will be received on the
Municipal Bonds purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment. Although the Fund will purchase
Municipal Bonds on a when-issued basis only with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strat-
egy.
Municipal Bonds are subject to changes in value based upon the public's
perception of the creditworthiness of the issuers and changes, real or an-
ticipated, in the level of interest rates. In general, Municipal Bonds
tend to appreciate when interest rates decline and depreciate when inter-
est rates rise. Purchasing Municipal Bonds on a when-issued basis, there-
fore, can involve the risk that the yields available in the market when
the delivery takes place actually may be higher than those obtained in the
transaction itself. To account for this risk, a segregated account of the
Fund consisting of cash or liquid debt securities equal to the amount of
the when-issued commitments will be established at the Fund's custodian
bank. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value.
If the market or fair value of such securities declines, additional cash
or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of such commitments by the
Fund. Placing securities rather than cash in the segregated account may
have a leveraging effect on the Fund's net assets. That is, to the extent
the Fund remains substantially fully invested in securities at the same
time it has committed to purchase securities on a when-issued basis, there
will be greater fluctuations in its net assets than if it had set aside
cash to satisfy its purchase commitments. Upon the settlement date of the
when-issued securities, the Fund will meet its obligations from then-
available cash flow, sale of securities held in the segregated account,
sale of other securities or, although it normally would not expect to do
so, from the sale of the when-issued securities themselves (which may have
a value greater or less than the Fund's payment obligations). Sales of se-
curities to meet such obligations may involve the realization of capital
gains, which are not exempt from Federal income taxes.
When the Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price con-
sidered to be advantageous.
MUNICIPAL LEASES
Municipal leases are municipal securities that may take the form of a
lease or an installment purchase contract issued by state and local gov-
ernment authorities to obtain funds to acquire a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment
and other capital assets. These obligations have evolved to make it possi-
ble for state and local government authorities to acquire property and
equipment without meeting constitutional and statutory requirements for
the issuance of debt. Thus, municipal leases have special risks not nor-
mally associated with Municipal Bonds. These obligations frequently con-
tain "non-appropriation" clauses that provide that the governmental issuer
of the municipal lease has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
legislative body on a yearly or other periodic basis. In addition to the
non-appropriation risk, municipal leases represent a type of financing
that has not yet developed the depth of marketability associated with Mu-
nicipal Bonds; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of fore-
closure might prove difficult. In order to limit the risks, the Fund will
purchase either (a) municipal leases that are rated in the four highest
categories by Moody's or S&P or (b) unrated municipal leases that are pur-
chased principally from domestic banks or other responsible third parties
that have entered into an agreement with the Fund providing the seller
will either remarket or repurchase the municipal leases within a short pe-
riod after demand by the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
Some of the significant financial considerations relating to the Fund's
investment in New York Municipal Securities are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New
York Municipal Securities that were available prior to the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in those official statements have not been indepen-
dently verified.
State Economy. New York State (the "State") is the second most populous
state in the nation and has a relatively high level of personal wealth.
The State's economy is diverse with a comparatively large share of the na-
tion's finance, insurance, transportation, communications and services em-
ployment, and a comparatively small share of the nation's farming and min-
ing activity. The State has a declining proportion of its workforce en-
gaged in manufacturing, and an increasing proportion engaged in service
industries. New York City (the "City"), which is the most populous city in
the State and nation and is the center of the nation's largest metropoli-
tan area, accounts for approximately 41% of both the State's population
and personal income.
The State has historically been one of the wealthiest states in the na-
tion. For decades, however, the State has grown more slowly than the na-
tion as a whole, gradually eroding its relative economic affluence. The
recession has been more severe in the State, owing to a significant re-
trenchment in the financial services industry, cutbacks in defense spend-
ing, and an overbuilt real estate market. There can be no assurance that
the State economy will not experience worse-than-predicted results in the
1993-94 and 1994-95 fiscal years, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
The unemployment rate in the State dipped below the national rate in the
second half of 1981 and remained lower until 1991. The total employment
growth rate in the State has been below the national average since 1984,
and in 1992 the unemployment rate rose to 8.5%. State per capita personal
income remains above the national average. State per capita income for
1992 was $23,534, which is 18.5% above the 1992 national average of
$20,114. Between 1970 and 1980, the percentage by which the State's per
capita income exceeded that of the national average fell from 19.8% to
8.1%, and the State dropped from fifth to eleventh in the nation in terms
of per capita income. However, since 1980, the State's rate of per capita
income growth was greater than that of the nation generally and the
State's rank improved to fourth in 1990 and remained fourth in 1991 and
1992. Some analysts believe that the decline in jobs in both the City and
State is the result of State and local taxation, which is among the high-
est in the nation, and which may cause corporations to locate outside the
State. The current high level of taxes limits the ability of the State and
the City to impose higher taxes in the event of future difficulties.
State Budget. The State Constitution requires the Governor to submit to
the Legislature a balanced Executive Budget which contains a complete plan
of expenditures for the ensuing fiscal year and all moneys and revenues
estimated to be available therefor, accompanied by bills containing all
proposed appropriations or reappropriations and any new or modified reve-
new measures to be enacted in connection with the Executive Budget. The
entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor submits to the Legislature, on at least a quarterly
basis, reports of actual receipts, revenues, disbursements, expenditures,
tax refunds and reimbursements, and repayment of advances in form suitable
for comparison with the State financial plan, together with explanations
of deviations from the State financial plan. At such time, the Governor is
required to submit any amendments to the State financial plan necessitated
by such deviations.
The Governor released the recommended Executive Budget for the 1994-95
fiscal year on January 18, 1994. The Recommended 1994-95 State Financial
Plan projected a balanced General Fund, with receipts and transfers from
other funds projected at $33.422 billion, including $299 million carried
over from the surplus anticipated for the State's 1993-94 fiscal year.
Disbursements and transfers to other funds are projected at $33.399 bil-
lion and, in addition, the financial plan includes a $23 million repayment
to the State's Tax Stabilization Reserve Fund. The Division of the Budget
projects that at the close of the State's 1994-95 fiscal year, the balance
in the Tax Stabilization Reserve Fund will be $157 million. The balance
available in the Contingency Reserve Fund on April 1, 1994 is projected by
the Division of the Budget at $311 million.
There can be no assurance that the Legislature will enact the Executive
Budget as proposed, nor can there be any assurance that the Legislature
will enact a budget for the State's 1994-95 fiscal year prior to the be-
ginning of such fiscal year. In recent years, the Legislature has failed
to enact a budget prior to the beginning of the State's fiscal year. A
protracted delay in legislative enactment of the State's 1994-95 fiscal
year budget may reduce the effectiveness of several of the actions pro-
posed. The 1994-95 State Financial Plan, when formulated after enactment
of the budget, would have to take into account any reduced savings arising
from any late budget enactment.
The 1993-94 State Financial Plan issued on April 16, 1993 projected Gen-
eral Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. Excess re-
ceipts of $67 million were to be used for a required repayment to the
State's Tax Stabilization Reserve Fund.
The 1993-94 State Financial Plan was last revised on January 18, 1994 (the
"Revised 1993-94 State Financial Plan"). This update now projects a sur-
plus of $299 million, almost one percent of the General Fund. Positive de-
velopments affecting both receipts and disbursements contributed to this
improved outlook for the current year.
The Revised 1993-94 State Financial Plan is based on a number of assump-
tions and projections. Because it is not possible to predict accurately
the occurrence of all factors that may affect the Revised 1993-94 State
Financial Plan, actual results may differ and have differed materially in
recent years, from projections made at the outset of a fiscal year. There
can be no assurance that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between
tax revenues projected from a lower recurring receipts base and the spend-
ing required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant ac-
tions to align recurring receipts and disbursements in future fiscal
years.
Recent Financial Results. During its 1989-90, 1990-91 and 1991-92 fiscal
years, the State incurred cash-basis operating deficits, prior to the is-
suance of short-term tax and revenue anticipation notes, owing to lower-
than-projected receipts, which it believes to have been principally the
result of a significant slowdown in the New York and regional economy, and
with respect to the 1989-90 fiscal year, changes in taxpayer behavior
caused by the Federal Tax Reform Act of 1986.
The General Fund is the principal operating fund of the State. It receives
all State income that is not required by law to be deposited in another
fund which for the State's 1993-94 fiscal year, comprises approximately
53% of total projected governmental fund receipts.
General Fund receipts, excluding transfers from other funds, totaled
$28.818 billion in the State's 1991-92 fiscal year (before repayment of
$1.081 billion of deficit notes issued in its 1990-91 fiscal year and be-
fore issuance of $531 million in deficit notes to close the 1991-92 fiscal
year General Fund cash basis operating deficit) and $29.950 billion in the
State's 1992-93 fiscal year (before repayment of $531 million in deficit
notes issued to close the State's 1991-92 fiscal year General Fund cash
basis deficit.) General Fund receipts in the State's 1993-94 fiscal year
are estimated in the Revised 1993-94 State Financial Plan at $30.200 bil-
lion. Taxes account for 96% of estimated 1993-94 and 1994-95 General Fund
receipts, with the balance comprised of miscellaneous receipts.
General Fund disbursements, exclusive of transfers to other funds, to-
talled $28.058 billion in the State's 1991-92 fiscal year and $29.068 bil-
lion in the State's 1992-93 fiscal year and are estimated and recommended
to total $30.421 billion and $31.453 billion in the State's 1993-94 and
1994-95 fiscal years, respectively.
The State's financial position as shown in its Combined Balance Sheet as
of March 31, 1993 included an accumulated deficit in its combined govern-
mental funds of $681 million represented by liabilities of $12.864 billion
and assets of $12.183 billion available to liquidate such liabilities.
Debt Limits and Outstanding Debt. There are a number of methods by which
the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-
term borrowing (i.e., borrowing for more than one year) unless the borrow-
ing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the
amount of long-term debt that may be so authorized and subsequently in-
curred by the State. The total amount of long-term State general obliga-
tion debt authorized but not issued as of December 31, 1993 was approxi-
mately $2.273 billion.
The State may undertake short-term borrowings without voter approval (a)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (b) in anticipation of the receipt of pro-
ceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitu-
tional authorization, directly guarantee certain obligations of the
State's authorities and public benefit corporations ("Authorities"). Pay-
ments of debt service on New York State's general obligation and State-
guaranteed bonds and notes are legally enforceable obligations of the
State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State:
moral obligation and lease-purchase or contractual-obligation financing.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating the New York Local Government Assistance Corporation ("LGAC"), a
public benefit corporation empowered to issue long-term obligations to
fund certain payments to local governments traditionally funded through
New York State's annual seasonal borrowing. The legislation empowered LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of those long-term obligations, which will
be amortized over no more than 30 years, is expected to result in elimi-
nating the need for continuing short-term seasonal borrowing for those
purposes. The legislation also imposed a cap on the annual seasonal bor-
rowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases
where the Governor and the legislative leaders have certified both the
need for additional borrowing and a schedule for reducing it to the cap.
If borrowing above the cap is thus permitted in any fiscal year, it is re-
quired by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. As of December 31, 1993, LGAC had issued its
bonds to provide net proceeds of $3.581 billion and has been authorized to
issue its bonds to provide net proceeds of up to an additional $275 mil-
lion during the State's 1993-94 fiscal year. The Governor has recommended
up to $315 million in additional bond issuances in the 1994-95 fiscal
year. In April 1993, legislation was also enacted providing for signifi-
cant changes in the long-term financing practices of the State and the Au-
thorities.
The Legislature passed a proposed constitutional amendment that would per-
mit the State, without a voter referendum but within a formula-based cap,
to issue revenue bonds, which would be debt of the State secured solely by
a pledge of certain State tax receipts (including those allocated to State
funds dedicated for transportation purposes), and not by the full faith
and credit of the State. In addition, the proposed amendment would require
that State debt be incurred only for capital projects included in a multi-
year capital financing plan and would prohibit lease-purchase and
contractual-obligation financing mechanisms for State facilities. Public
hearings have been held on the proposed constitutional amendment. The Gov-
ernor has announced that he intends to submit changes to the proposed con-
stitutional amendment. Before becoming effective, the proposed constitu-
tional amendment must first be passed again by the next separately elected
Legislature and then approved by the voters at a general election, so that
it could not become effective at the earliest until January 1, after the
general election in November 1995.
On March 26, 1990, S&P downgraded the State's (a) general obligation bonds
from "AA-" to "A" and (b) commercial paper from "A-1+" to "A-1." Also
downgraded was certain of the State's variously rated moral obligation,
lease-purchase, guaranteed and contractual-obligation debt, including debt
issued by certain New York State agencies. On August 27, 1990, S&P af-
firmed these ratings without change. On June 6, 1990, Moody's changed its
ratings on all the State's outstanding general obligation bonds from "A1"
to "A." On March 26, 1990, S&P changed its ratings on all the State's out-
standing general obligation bonds from "AA-" to "A." On January 6, 1992,
Moody's lowered from "A" to "Baa1" the ratings on certain appropriation-
backed debt of the State of New York and its agencies. Approximately two-
thirds of the State's tax-supported debt is affected by Moody's rating ac-
tion. Moody's stated that the more secure general obligation, state-
guaranteed and LGAC bonds continue to be rated "A" but are placed under
review for possible downgrade over the coming months. On January 13, 1992,
S&P lowered its rating on $4.8 billion of the State's general obligation
bonds to "A-" from "A." Various agency debt, state moral obligations, con-
tractual obligations, lease-purchase obligations and state guarantees are
also affected by S&P's action. Additionally, under S&P's minimum-rating
approach, New York local school district debt will now carry a minimum
rating of "A-" rather than "A" and school districts currently rated "A"
are placed on CreditWatch with negative implications. In taking these rat-
ing actions, Moody's and S&P variously cited continued economic deteriora-
tion, chronic operating deficits, mounting GAAP fund balance deficits and
the legislative stalemate in seeking permanent and structurally sound fis-
cal operations. On January 15, 1992, S&P took further action by lowering
the rating on the claims-paying ability of the State of New York Mortgage
Agency Mortgage Insurance Fund to "BBB+" from "A-" following the January
13, 1992 downgrade of New York State's general obligation bond rating to
"A-."
The State anticipates that its borrowings for capital purposes in its
1993-94 fiscal year will consist of approximately $456 million in general
obligation bonds. In addition, it is anticipated that the State will issue
$140 million in general obligation bonds for the purpose of redeeming out-
standing bond anticipation notes. The Legislature has also authorized the
issuance of up to $85 million in certificates of participation for equip-
ment purchases and real property purposes during the State's 1993-94 fis-
cal year. The Governor has recommended the issuance of $413 million in
bonds and new commercial paper issuances for capital purposes during the
State's 1994-95 fiscal year. In addition, the State expects to issue $154
million in bonds for the purpose of redeeming outstanding bond anticipa-
tion notes. The Governor has also recommended authorization for the issu-
ance of up to $67.8 million in certificates of participation during the
State's 1994-95 fiscal year for personal property acquisitions. The pro-
jection of the State regarding its borrowings for the 1993-94 and 1994-95
fiscal years may change if circumstances require.
Payments for principal and interest due on general obligation bonds, in-
terest due on bond anticipation notes and on tax and revenue anticipation
notes, and contractual-obligation and lease-purchase commitments were
$1.783 billion and $2.045 billion in the aggregate, for New York State's
1991-92 and 1992-93 fiscal years, respectively, and are estimated and rec-
ommended to be $2.167 billion and $2.459 billion for the State's 1993-94
and 1994-95 fiscal years, respectively. These figures do not include in-
terest payable on either State General Obligation Refunding Bonds issued
on July 30, 1992, to the extent that such interest is to be paid from an
escrow fund established with the proceeds of such bonds or New York
State's installment payments relating to the issuance of certificates of
participation.
New York State has never defaulted on any of its general obligation in-
debtedness or its obligations under lease-purchase or contractual-
obligation financing arrangements and has never been called upon to make
any direct payments pursuant to its guarantees. There has never been a de-
fault on any moral obligation debt of any Authority.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on New
York State finances. Among the more significant of these cases are those
that involve (a) the validity of agreements and treaties by which various
Indian tribes transferred title to the State of certain land in central
and upstate New York; (b) certain aspects of New York State's Medicaid
policies and its rates and regulations, including reimbursements to pro-
viders of mandatory and optional Medicaid services; (c) contamination in
the Love Canal area of Niagara Falls; (d) an action against the State and
City officials alleging inadequate shelter allowances to maintain proper
housing; (e) challenges to the practice of reimbursing certain Office of
Mental Health patient care expenses from the client's Social Security ben-
efits; (f) alleged responsibility of the State's officials to assist in
remedying racial segregation in the City of Yonkers; (g) a challenge to
the methods by which the State reimburses localities for the administra-
tive costs of food stamp programs; (h) an action in which the State is a
third party defendant, for injunctive or other appropriate relief, con-
cerning liability for the maintenance of stone groins constructed along
certain areas of Long Island's shoreline; (i) action by school districts
and their employees challenging the constitutionality of Chapter 175 of
the Laws of 1990 which deferred school district contributions to the pub-
lic retirement system and reduced by like amount state aid to the school
districts; (j) challenges to portions of Public Health Law, which imposed
a 13% surcharge on inpatient hospital bills paid by commercial insurers
and employee welfare benefit plans and portions of Chapter 55 of the Laws
of 1992 requiring hospitals to impose and remit to the State an 11% sur-
charge on hospital bills paid by commercial insurers, and which required
health maintenance organizations to remit to the State a surcharge of up
to 9%; and (k) a challenge to provisions of the Public Health Law and im-
plementing regulations that imposed a bad debt and charity care allowance
on all hospital bills and a 13% surcharge on inpatient bills paid by em-
ployee welfare benefit plans.
A number of cases have also been instituted against the State challenging
the constitutionality of various public authority financing programs.
In a proceeding commenced on August 6, 1991 (Schulz, et al. v. State of
New York, et al., Supreme Court, Albany County), petitioners challenge the
constitutionality of two bonding programs of the New York State Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991. In addi-
tion, petitioners challenge the fiscal year 1991-92 judiciary budget as
having been enacted in violation of Sections 1 and 2 of Article VII of the
State Constitution. The defendants' motion to dismiss the action on proce-
dural grounds was denied by order of the Supreme Court dated January 2,
1992. By order dated November 5, 1992, the Appellate Division, Third De-
partment, reversed the order of the Supreme Court and granted defendants'
motion to dismiss on grounds of standing and mootness. By order dated Sep-
tember 16, 1993, on motion to reconsider, the Appellate Division, Third
Department, ruled that plaintiffs have standing to challenge the bonding
program authorized by Chapter 166 of the laws of 1991. The proceeding is
presently pending in Supreme Court, Albany County.
In Schulz, et al. v. State of New York, et al., commenced May 24, 1993,
Supreme Court, Albany County, petitioners challenge, among other things,
the constitutionality of, and seek to enjoin certain highway, bridge and
mass transportation bonding programs of the New York State Thruway Author-
ity and the Metropolitan Transportation Authority authorized by Chapter 56
of the Laws of 1993. Petitioners contend that the application of State tax
receipts held in dedicated transportation funds to pay debt service on
bonds of the Thruway Authority and of the Metropolitan Transportation Au-
thority violates Sections 8 and 11 of Article VII and Section 5 of Article
X of the State Constitution and due process provisions of the State and
Federal Constitutions. By order dated July 27, 1993, the Supreme Court
granted defendants' motions for summary judgment, dismissed the complaint,
and vacated the temporary restraining order previously issued. By decision
dated October 21, 1993, the Appellate Division, Third Department, affirmed
the judgment of the Supreme Court. Plaintiffs' appeal of the decision of
the Appellate Division is pending in the Court of Appeals.
Several actions challenging the constitutionality of legislation enacted
during the 1990 legislative session which changed actuarial funding meth-
ods for determining state and local contributions to state employee re-
tirement systems have been decided against the State. The U.S. Supreme
Court's decision in a case challenging the State's possession of certain
property taken pursuant to the State's Abandoned Property Law may result
in the State having to make certain significant payments during the 1993-
94 fiscal year or thereafter.
The legal proceedings noted above involve State finances, State programs
and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial.
These proceedings could affect adversely the financial condition of the
State in the 1993-94 and 1994-95 fiscal years or thereafter. Adverse de-
velopments in these proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced Revised 1993-94
State Financial Plan. An adverse decision in any of these proceedings
could exceed the amount of the Revised 1993-94 State Financial Plan re-
serve for the payment of judgments and, therefore, could affect the abil-
ity of the State to maintain a balanced Revised 1993-94 State Financial
Plan. In its audited financial statements for the 1992-93 fiscal year, the
State reported its estimated liability for awarded and anticipated unfa-
vorable judgments to be $721 million.
Although other litigation is pending against the State, except as de-
scribed above, no current litigation involves the State's authority, as a
matter of law, to contract indebtedness, issue its obligations, or pay
such indebtedness when it matures, or affects the State's power or abil-
ity, as a matter of law, to impose or collect significant amounts of taxes
and revenues.
Authorities. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally have responsibility for fi-
nancing, constructing and operating revenue-producing public benefit fa-
cilities. Authorities are not subject to the constitutional restrictions
on the incurrence of debt which apply to the State itself, and may issue
bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. As of September 30, 1993, the latest data
available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding
bonds, of these 18 Authorities was $63.5 billion as of September 30, 1993,
of which approximately $7.7 billion was moral obligation debt and approxi-
mately $19.3 billion was financed under lease-purchase or contractual-
obligation financing arrangements.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls
and rentals for dormitory rooms and housing. In recent years, however, the
State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operat-
ing and other expenses and, in fulfillment of its commitments on moral ob-
ligation indebtedness or otherwise, for debt service. This operating as-
sistance is expected to continue to be required in future years. The State
provided $947.4 million and $955.5 million in financial assistance to the
18 Authorities during the State's 1991-92 and 1992-93 fiscal years, re-
spectively, and expects to provide approximately $1,171.3 million and
$1,387.8 million in financial assistance to these Authorities in its 1993-
94 and 1994-95 fiscal years, respectively. The amounts set forth above ex-
clude, however, amounts provided for capital construction and pursuant to
lease-purchase or contractual-obligation (including service contract debt)
financing arrangements.
Experience has shown that if an Authority suffers serious financial diffi-
culties, both the ability of the State and the Authorities to obtain fi-
nancing in the public credit markets and the market price of the State's
outstanding bonds and notes may be adversely affected. The Housing Finance
Agency and the Urban Development Corporation have in the past required
substantial amounts of assistance from the State to meet debt service
costs or to pay operating expenses. Further assistance, possibly in in-
creasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to certain Authorities. The State has no obligation
to provide additional assistance to localities whose local assistance pay-
ments have been paid to Authorities under these arrangements. However, in
the event that such local assistance payments are so diverted, the af-
fected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State is
closely related to the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from the State. The City's independently audited op-
erating results for each of its 1981 through 1993 fiscal years, which end
on June 30, show a General Fund surplus reported in accordance with GAAP.
In addition, the City's financial statements for the 1993 fiscal year re-
ceived an unqualified opinion from the City's independent auditors, the
eleventh consecutive year the City has received such an opinion.
In 1975, the City suffered a fiscal crisis that impaired the borrowing
ability of both the City and the State. In that year the City lost access
to public credit markets. The City was not able to sell short-term notes
to the public again until 1979.
On February 11, 1991, Moody's lowered its rating on the City's general ob-
ligation bonds to "Baa1" from "A." Moody's expressed doubts about whether
the City's January 16, 1991 financial plan presented a "reasonable program
to achieve budget balance in fiscal 1991 and 1992 and assure long-term
structural integrity." Moody's stated "the enormity of the current prob-
lem, the severity of required expenditure cuts, the substantial revenue
enhancements that will be required to achieve balance, the vulnerability
to exogenous factors, and the extremely short time frame within which all
this must be accomplished introduce substantial new risk to the City's
short- and long-term credit outlook." On April 29, 1991, S&P downgraded
the City's outstanding $1.3 billion of general obligation revenue and an-
ticipation notes from "SP-1" to "SP-2." S&P also announced a rating of
"SP-2" for the City's offering of $1.25 billion of general obligation rev-
enue anticipation notes. The lower ratings of S&P "reflect the City's ag-
gravated short-term cash position for fiscal 1991, the unusually high
level of total revenue anticipation note exposure resulting from the
State's delay in passing its budget and distributing fiscal aid, and con-
tinued pressure on revenues and expenditures due to prevailing economic
conditions." On April 30, 1991, Moody's assigned a rating of "MIG-2" to
the same offering of $1.25 billion of general obligation revenue anticipa-
tion notes. Moody's stated that "although an increasingly strained finan-
cial outlook for both the City and the State complicates the State budget
adoption process, this rating on revenue anticipation notes relies explic-
itly on the expectation that the State is fully cognizant of the conse-
quences of further untimely delays in state budget adoption and will act
responsibly. Failure of the State to find a timely resolution to the bud-
get process will have severe implications for the normal financial perfor-
mance of the City and other local governments in the State." On October 7,
1991, Moody's again assigned a "MIG-2" rating to the City's $1.25 billion
of revenue anticipation notes, fiscal 1992, Series A.
Moody's stated in its January 6, 1992 downgrade of certain State obliga-
tions that while such action did not directly affect the bond ratings of
local governments in the State, the impact of the State's fiscal strin-
gency on local government bond ratings will be assessed on a case-by-case
basis. On June 22, 1992, Moody's gave its "MIG-1" rating to the City's
$1.4 billion revenue anticipation notes and tax anticipation notes citing
the City's "markedly improved" short-term credit position.
On July 6, 1993, S&P reaffirmed the City's "A-" rating on $20.4 billion of
general obligation bonds stating that "[t]he City has identified addi-
tional gap-closing measures that have recurring value and will reduce next
year's budget gap . . . by approximately $400 million." Officials at
Moody's also indicated that there were no plans to alter its "Baa1" rating
on the City's general obligation bonds.
The City is heavily dependent on State and Federal assistance to cover in-
sufficiencies in its revenues. There can be no assurance that in the fu-
ture Federal and State assistance will enable the City to make up its bud-
get deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975.
MAC is authorized to issue bonds and notes payable from certain stock
transfer tax revenues, from the City's portion of the State sales tax de-
rived in the City and from State per capita aid otherwise payable by the
State to the City. Failure by the State to continue the imposition of such
taxes, the reduction of the rate of such taxes to rates less than those in
effect on July 2, 1975, failure by the State to pay such aid revenues and
the reduction of such aid revenues below a specified level are included
among the events of default in the resolutions authorizing MAC's long-term
debt. The occurrence of an event of default may result in the acceleration
of the maturity of all or a portion of MAC's debt. As of September 30,
1993, MAC had outstanding an aggregate of approximately $5.304 billion of
its bonds. MAC bonds and notes constitute general obligations of MAC and
do not constitute an enforceable obligation or debt of either the State or
the City. Under its enabling legislation, MAC's authority to issue bonds
and notes (other than refunding bonds and notes) expired on December 31,
1984. Legislation has been passed by the legislature which would, under
certain conditions, permit MAC to issue up to $1.465 billion of additional
bonds, which are not subject to a moral obligation provision.
Since 1975, the City's financial condition has been subject to oversight
and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited
by independent accounting firms. To be eligible for guarantees and assis-
tance, the City is required during a "control period" to submit annually
for Control Board approval, and when a control period is not in effect for
Control Board review, a financial plan for the next four fiscal years cov-
ering the City and certain agencies showing balanced budgets determined in
accordance with GAAP. The State also established the Office of the State
Deputy Comptroller for New York City ("OSDC") to assist the Control Board
in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control pe-
riod. This means that the Control Board's powers of approval are sus-
pended, but the Board continues to have oversight responsibilities.
On November 23, 1993, the City adopted and submitted to the Control Board
a modification to its 1994-1997 Financial Plan (the "November Modifica-
tion") incorporating various re-estimates of revenues and expenditures.
For fiscal year 1994, the November Modification includes additional re-
sources stemming primarily from the City comptroller's fiscal year 1993
annual audit, savings from a reduction in prior years' accrued expendi-
tures, and higher State and federal aid resulting from claims by the City
for reimbursement of various social services costs. These resources were
used to fund new needs in the November Modification including higher costs
in the uniformed agencies, at the Board of Education ("BOE") and for cer-
tain social services, the unlikelihood of the sale of certain City assets,
and lower estimates of miscellaneous and other revenues. After taking
these adjustments into account, the November Modification projected a bal-
anced budget for fiscal year 1994, based upon revenues of $31.585 billion.
For fiscal years 1995, 1996 and 1997, the November Modification projected
budget gaps of $1.730 billion, $2,513 billion and $2.699 billion, respec-
tively. These gaps are higher by about $450 million in fiscal year 1995
and by about $700 million in each of fiscal years 1996 and 1997 than in
the 1994-97 Financial Plan, primarily on account of the non-recurring
value of the fiscal year 1994 revenue adjustments, the loss of certain
one-time resources funding BOE fiscal year 1994 spending needs, and the
reclassification of anticipated State aid from the baseline revenue esti-
mates to the gap-closing program. To offset these larger gaps, the Novem-
ber Modification relies on additional City, State and other actions.
On December 21, 1993, the staff of the Control Board issued its report on
the November Modification. The report stated that the plan was now more
realistic in terms of the gaps it portrayed and the solutions it offered.
However, the solutions were mostly limited to fiscal year 1994 while the
gap for fiscal year 1995 had been increased by $450 million. Beginning in
fiscal year 1995, budget gaps will average over $2 billion annually.
Therefore, the staff recommended that prompt action to replace many
current-year one-shots with recurring savings was critical. The staff ad-
vocated a vigorous and effective strategy to restructure revenues and ex-
penditures, accompanied by a convincingly detailed plan of implementation.
The report focused attention on the need for the City to closely examine
its capital spending priorities, including appropriate funding for ongoing
maintenance, implementation of a stretch-out of capital commitments, and
development of a written debt policy. In addition, the report noted that
administrative other-than-personal-service expenditures have not shared in
past spending reduction and must begin to do so, and that the City must
assemble a coherent labor policy that integrates productivity initiatives
with wage increases and headcount reductions. The report concluded that
actions taken in the next few months are critical to reverse the expansion
that has occurred since the fiscal year 1994 budget was adopted.
On December 1, 1993, a three-member panel appointed by then Mayor David
Dinkins to address the City's structural budget imbalance released a re-
port setting forth its findings and recommendations. In its report, the
panel noted that budget imbalance is likely to be greater than the City
now projects by $255 million in fiscal year 1995, rising to nearly $1.5
billion in fiscal year 1997. The report provided a number of options that
the City should consider in addressing the structural balance issue such
as severe cuts in City-funded personnel levels, increases in residential
property taxes and the sales tax, and the imposition of bridge tolls and
solid waste collection fees. The report also noted that additional State
action will be required in many instances to allow the City to cut its
budget without grave damage to basic services.
OSDC issued a report on the City's economy on November 23, 1993. The re-
port concluded that the four-year old recession in New York City was end-
ing, and that Wall Street industries were leading the turn-around with in-
creased levels of activity, profits, compensation and employment. The re-
port indicated that the slow process of ending the local recession has
been influenced by the slow rate of expansion in the nation and the reces-
sions in Europe and Japan, which have hurt the City's key export indus-
tries of finance, advertising, communications, law and medicine. However,
the report noted that improvements are now evident in these areas. In ad-
dition, the report noted that the local rate of inflation has dropped
below that of the nation, leasing activity for primary office space has
increased, the rate of decline in retail sales has slowed and unemploy-
ment, while still high, has declined two percentage points over the last
year. The report projected that overall employment levels in the City's
private sector industries would be higher by early 1994. However, it also
indicated that the recovery in the local economy would likely be a slow
process, in many ways mirroring the recent experience on the national
level.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal
or State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City
should negotiate wage increases for its employees greater than the amounts
provided for in the City's financial plan or if other uncertainties mate-
rialize that reduce expected revenues or increase projected expenditures,
then, to avoid operating deficits, the City may be required to implement
additional actions, including increases in taxes and reductions in essen-
tial City services. The City might also seek additional assistance from
New York State.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City has issued $1.75 billion of notes for seasonal
financing purposes during its 1994 fiscal year. The City's capital financ-
ing program projects long-term financing requirements of approximately
$18.5 billion for the City's fiscal years 1994 through 1997 and other
fixed assets. The major capital requirements include expenditures for the
City's water supply and sewage disposal systems, roads, bridges, mass
transit, schools, hospitals and housing. In addition to financing for new
purposes, the City and the New York City Municipal Water Finance Authority
have issued refunding bonds totaling $1.5 billion in fiscal year 1994.
Certain localities, in addition to the City, could have financial problems
leading to requests for additional State assistance during the State's
1993-94 and 1994-95 fiscal years and thereafter. The potential impact on
the State of such requests by localities is not included in the projec-
tions of the State receipts and disbursements in the State's 1993-94 and
1994-95 fiscal years.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") re-
sulted in the creation of the Financial Control Board for the City of Yon-
kers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the Legislature to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1992, the total indebtedness of all locali-
ties in the State was approximately $35.2 billion, of which $19.5 billion
was debt of the City (excluding $5.9 billion in MAC debt); a small portion
(approximately $71.6 million) of the $35.2 billion of indebtedness repre-
sented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the comptroller to review
and make recommendations concerning the budgets of those local government
units other than the City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for deficit financing at
the close of their fiscal year ending in 1992.
In 1992, an unusually large number of local government units requested au-
thorization for deficit financings. According to the State's comptroller,
ten local government units were authorized to issue deficit financing in
the aggregate amount of $131.1 million. The current session of the Legis-
lature may receive as many or more requests for deficit-financing authori-
zations as a result of deficits previously incurred by local governments.
Although the comptroller has indicated that the level of deficit financing
requests is unprecedented, such developments are not expected to have a
material adverse effect on the financial condition of the State.
Certain proposed Federal expenditure reductions would reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suf-
fer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. The longer-
range problems of declining urban population, increasing expenditures and
other economic trends could adversely affect localities and require in-
creasing State assistance.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospec-
tus applies to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual's spouse and his
or her children purchasing shares for their own account; (c) a trustee or
other fiduciary purchasing shares for a single trust estate or single fi-
duciary account; (d) a pension, profit-sharing or other employee benefit
plan qualified under Section 401(a) of the Code and qualified employee
benefit plans of employers who are "affiliated persons" of each other
within the meaning of the 1940 Act; (e) tax-exempt organizations enumer-
ated in Section 501(c) (3) or (13) of the Code; and (f) a trustee or other
professional fiduciary (including a bank, or an investment adviser regis-
tered with the SEC under the Investment Advisers Act of 1940, as amended)
purchasing shares of the Fund for one or more trust estates or fiduciary
accounts. Purchasers who wish to combine purchase orders to take advantage
of volume discounts on Class A shares should contact a Smith Barney Finan-
cial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other funds of the
Smith Barney Mutual Funds that are offered with a sales charge,
including the purchase being made, of any "purchaser" is $25,000 or more.
The reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate records. The Fund reserves the
right to terminate or amend the combined right of accumulation at any time
after written notice to shareholders. For further information
regarding
the right
of accumulation, shareholders should contact a Smith Barney Financial Con-
sultant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of the Fund
is equal to the
net asset value per share at the time of purchase plus, for Class A
shares, an initial sales charge based on the aggregate amount of the in-
vestment. The public offering price for a Class B, Class C share
(and Class
A share purchases, including applicable rights of accumulation, equaling
or exceeding $500,000), is equal to the net asset value per share at the
time of purchase and no sales charge is imposed at the time of purchase. A
contingent deferred sales charge ("CDSC"), however, is imposed on certain
redemptions of Class B, Class C shares, and Class A shares when purchased
in amounts exceeding $500,000. The method of computing the public offering
price is shown in the Fund's financial statements incorporated
by reference in their entirety into this Statement of Additional
Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the New York Stock Exchange, Inc. ("NYSE")
is closed (other than for customary weekend or holiday closings), (b) when
trading in the markets that the Fund normally utilizes is restricted, or
an emergency exists, as determined by the SEC, so that disposal of the
Fund's investments or determination of net asset value is not reasonably
practicable or (c) for such other periods as the SEC by order may permit
for protection of the Fund's shareholders.
DISTRIBUTION IN KIND
If the Board of Directors of the Fund determines that it
would be detrimental
to the best interests of the remaining shareholders of the Fund to make a
redemption payment wholly in cash, the Fund may pay, in accordance with
SEC rules , any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Fund's net assets by a distribution in
kind of portfolio securities in lieu of cash. S ecurities issued
as a distribution in kind may incur brokerage commissions
when
shareholders subsequently sell those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 and who wish
to receive specific amounts of cash monthly or quarterly. Withdrawals of
at least $100 may be made under the Withdrawal Plan by redeeming as many
shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to With-
drawal Plans in effect prior to November 7, 1994, any applicable CDSC will
be waived on amounts withdrawn that do not exceed 2.00% per month of the
value of a shareholders shares at the time the Withdrawal Plan commences.)
To the extent withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in the Fund, there will be a reduction in
the value of the shareholder's investment, and continued withdrawal pay-
ments will reduce the shareholder's investment and may ultimately exhaust
it. Withdrawal payments should not be considered as income from investment
in the Fund. Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the Fund at the same time he
or she is participating in the Withdrawal Plan, purchases by such share-
holder in amounts of less than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with TSSG as agent for Withdrawal Plan members. All dividends and distri-
butions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. For additional informa-
tion, shareholders should contact a Smith Barney Financial Consultant.
Effective November 7, 1994, Withdrawal Plans should be set up with a Smith
Barney Financial Consultant. A shareholder who purchases shares directly
through TSSG may continue to do so and applications for participation in
the Withdrawal Plan must be received by TSSG no later than the eighth day
of the month to be eligible for participation beginning with that month's
withdrawals.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis pur-
suant to a written agreement dated July 30, 1993 (the "Distribution Agree-
ment") , which was most recently first approved by the Fund's Board of
Directors on July 30, 1994 . For the 1991, 1992 and 1993 fiscal years,
Smith Barney or its pre-
decessor Shearson Lehman Brothers received $1,589,566, $2,199,014 and
$5,438,327, respectively, in sales charges from the sale of Fund's Class A
shares, and did not reallow any portion thereof to dealers.
When payment is made by the investor, unless otherwise noted by the inves-
tor, the funds will be held as a free credit balance in the investor's
brokerage account, and Smith Barney may benefit from the temporary use of
the funds. The investor may designate another use for the funds prior to
settlement date, such as an investment in an Exchange Reserve Fund of the
Smith Barney Mutual Funds. If the investor instructs Smith Barney to in-
vest the funds in a Smith Barney money market fund ,
the amount of the investment will be included as part of the average daily
net assets of both the Fund and the money market fund, and affiliates of
Smith Barney that serve the funds in an investment advisory or
adminis-
trative capacity will benefit from the fact they are receiving
fees from
both such investment companies for managing those assets ,
computed on the basis of their average
daily net assets. The Fund's Board of Directors has been advised of the
benefits to Smith Barney resulting from these settlement procedures and
will take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
For the fiscal year ended December 31, 1993, Smith Barney incurred
distribution expenses totaling approximately $ 2,952,000, consisting of
approximately $8,000 for advertising, $9,000 for printing and mailing of
Prospectuses, $651,000 for support services, $2,214,000 to Smith Barney
Financial Consultants, and $70,000 in accruals for interest on the excess
of Smith Barney expenses incurred in distributing the Fund's shares over
the sum of the distribution fees and CDSC received by Smith Barney from
the Fund. No comparable information is available for 1992 the year that
the
variable pricing system was implemented.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the ex-
pense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.15% of
the value of the Fund's average daily net assets attributable to Class A,
Class B and Class C shares. In addition, the Fund pays Smith Barney
a distribution fee with respect to the Class B and Class C shares
primarily intended to compensate Smith Barney for its
initial expense of paying its Financial Consultants a commission upon
sales of those shares. The Class B distribution fee is calculated
at the annual rate of 0.50% of the value of the Fund's average net assets
attributable to the shares of the Class. The Class C distribution fee is
calculated at the annual rate of 0.55% of the value of the Fund's average
net assets attributable to the shares of the Class.
For the period from
November 6, 1992 through December 31, 1992, the Class A and Class B
shares
incurred $118,993 and $2,039, respectively, in service fees. For the same
period, the Class B shares incurred $6,798 in distribution fees. For the
fiscal year ended December 31, 1993, the Class A and Class B shares in-
curred $848,117 and $122,937, respectively in service fees. For the same
period the Class B shares incurred $409,790 in distribution fees.
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Board of Directors, including
a majority of the Directors who are not interested persons of the Fund and
who have no direct or indirect financial interest in the operation of the
Plan or in the Distribution Agreement (the "Independent Directors"). The
Plan may not be amended to increase the amount of the service and distri-
bution fees without shareholder approval, and all amendments of the Plan
also must be approved by the Directors and the Independent Directors in
the manner described above. The Plan may be terminated with
respect to a Class at any time , without penalty, by vote of a
majority
of the Indepen-
dent Directors or by vote of a majority of the outstanding voting securi-
ties of the Class (as defined in the 1940 Act). Pursuant to the Plan,
Smith Barney will provide the Board of Directors with periodic reports of
amounts expended under the Plan and the purpose for which such expendi-
tures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's Day, President s'
Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ. The following is a de-
scription of the procedures used by the Fund in valuing its assets.
The valuation of the Fund's assets is made by Boston Advisors after con-
sultation with an independent pricing service (the "Service") approved by
the Board of Directors. When, in the judgment of the Service, quoted bid
prices for investments are readily available and are representative of the
bid side of the market, these investments are valued at the mean between
the quoted bid prices and asked prices. Investments for which, in the
judgment of the Service, there is no readily obtainable market quotation
(which may constitute a majority of the portfolio securities) are carried
at fair value as determined by the Service. For the most part, such in-
vestments are liquid and may be readily sold. The Service may employ elec-
tronic data processing techniques and/or a matrix system to determine val-
uations. The procedures of the Service are reviewed periodically by the
officers of the Fund under the general supervision and responsibility of
the Board of Directors, which may replace any such Service at any time if
it determines it to be in the best interests of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Fund of the Smith Barney
Mutual
Funds may exchange all or part of their shares for shares of the same
Class of other funds of the Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any Fund purchased with a sales charge may be
exchanged for Class A shares of any of the other funds and the sales
charge differential, if any, will be applied. Class A shares of any
Fund may be exchanged without a sales charge for shares of the funds
that are offered without a sales charge. Class A shares of any Fund
purchased without a sales charge may be exchanged for shares sold with
a sales charge, and the appropriate sales charge differential will be
applied.
B. Class A shares of any Fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for Class A
shares of any of the other funds, and the sales charge differential,
if any, will be applied.
C. Class B shares of any Fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares of an-
other Fund will be subject to the higher applicable CDSC of the two
funds and, for purposes of calculating CDSC rates and conversion peri-
ods, will be deemed to have been held since the date the shares being
exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of the Smith
Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a Fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision.
This privilege is available to shareholders residing in any state in which
the fund shares being acquired may legally be sold. Prior to
any exchange, the shareholder should obtain and review a copy of the cur-
rent prospectus of each Fund into which an exchange is being considered.
Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are immedi-
ately invested, at a price as described above, in shares of the Fund being
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of a Class in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, Insti-
tutional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent
any advertisement or sales literature of the Fund describes the expenses
or performance of any Class, it will also disclose such information for
the other Classes.
YIELD
A Class' 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD =2 [ ( a-bcd +1)6--1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the pe-
riod that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The Fund's equivalent taxable 30-day yield for a Class is computed by di-
viding that portion of the Class' 30-day yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if
any, of the Class' yield that is not tax-exempt.
The Fund's Class B yield for the 30-day period ended December 31, 1993
was
4.05%. The tax equivalent yield for Class B shares for this period was
6.65% assuming the payment of Federal income taxes at a rate of 31% and
New York state and city taxes at a combined rate of 11.785%.
The yield on municipal securities is dependent upon a variety of factors,
including general economic and monetary conditions, conditions of the mu-
nicipal securities market, size of a particular offering, maturity of the
obligation offered and rating of the issue. Investors should recognize
that, in periods of declining interest rates, the Fund's yield for each
Class of shares will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates the Fund's yield for each
Class of shares will tend to be somewhat lower. In addition, when interest
rates are falling, the inflow of net new money to the Fund from the con-
tinuous sale of its shares will likely be invested in portfolio instru-
ments producing lower yields than the balance of the Fund's portfolio,
thereby reducing the current yield of the Fund. In periods of rising in-
terest rates, the opposite can be expected to occur.
The Fund's yield for Class A shares for the 30-day period ended December
31, 1993 was 4.44%. The equivalent taxable yield for Class A shares for
the same period was 7.29% assuming the payment of Federal income taxes at
a rate of 31% and a combined New York state and city tax rate of 11.785%.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed
as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and distri-
butions.
The Fund's average annual total return for Class A shares assuming the
maximum applicable sales charge was as follows for the periods indicated:
(1.08)% per annum for the one-year period beginning July 1, 1993 through
June 30, 1994.
7.11 for the five-year period beginning July 1, 1989 through June 30, 1994
10.01 for the ten-year period beginning on July 31, 1984 through June 30,
1994
9.23% per annum during the period from commencement, January 23, 1984
through June 30, 1994 .
The Fund's average annual total return for Class B shares assuming the
maximum applicable CDSC was as follows for the periods indicated:
(1.63) % per annum for the one-year period beginning
July 1, 1993 through June 30, 1994
4.07 % per annum during the period from commencement,
November 6, 1992
through June 30, 1994 .
AGGREGATE TOTAL RETURN
Aggregate total return figures, as described below, represent the cumula-
tive change in the value of an investment in the Class for the specified
period and are computed by the following formula:
ERV-P P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 invest-
ment made at the beginning of a 1-, 5- or 10-year period at
the end of the 1-, 5- or 10-year period (or fractional por-
tion thereof), assuming reinvestment of all dividends and
distributions.
The Fund's aggregate total returns for Class A shares were
as follows for the pe-
riods indicated:
(1.08) % for the one-year period beginning July 1, 1993
through June 30, 1994 ;
40.99 % for the five-year period beginning July 1, 1989
through June 30, 1994;
159.56% for the ten-year period beginning July 1, 1984 through
June 30, 1994;
151.38% for the period from commencement of operations
(January 23, 1984)
through June 30 , 1994.
These aggregate total return figures do not assume that the maximum 4.0%
sales charge has been deducted from the investment at the time of pur-
chase. If the sales charge had been deducted at the time of purchase, the
aggregate total return for its Class A shares for those same periods would
have been (5.04)%, 35.35% and 149.17% , respectively. The total
return fig-
ures have been restated to show the change in the maximum sales charge.
The Fund's aggregate total return for Class B shares was as follows for
the periods indicated:
(1.63) % for the one year period beginning July 1, 1993
through June 30, 1994.
6.81 % for the period from commencement of operations
November 6, 1992 through June 30, 1994 .
These figures do not assume that the maximum 4.50% CDSC assessed by the
Fund has been deducted from the investment at the time of purchase. If the
maximum CDSC had been deducted at the time of purchase, the Fund's aggre-
gate total return for the same periods would have been (5.79)% and
2.96 %,
respectively.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future per-
formance. Each Class' net investment income changes in response to fluctu-
ation in interest rates and the expenses of the Fund.
Performance will vary from time to time depending upon market conditions,
the composition of the Fund's portfolio and operating expenses and the ex-
penses exclusively attributable to the Class. Consequently, any given per-
formance quotation should not be considered representative of the Class'
performance for any specified period in the future. Because performance
will vary, it may not provide a basis for comparing an investment in the
Class with certain bank deposits or other investments that pay a fixed
yield for a stated period of time. Investors comparing a Class' perfor-
mance with that of other mutual funds should give consideration to the
quality and maturity of the respective investment company's portfolio se-
curities.
TAXES
The following is a summary of selected Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not intended
as a substitute for individual tax advice and investors are urged to con-
sult their own tax advisors as to the tax consequences of an investment in
the Fund.
As described above and in the Prospectus, the Fund is designed to provide
shareholders with current income which is excluded from gross income for
Federal income tax purposes and exempt from New York State and New York
City personal income taxes. The Fund is not intended to constitute a bal-
anced investment program and is not designed for investors seeking capital
gains or maximum tax-exempt income irrespective of fluctuations in princi-
pal. Investment in the Fund would not be suitable for tax-exempt institu-
tions, qualified retirement plans, H.R. 10 plans and individual retirement
accounts because such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a) is
a regulated investment company and (b) distributes at least 90% of its
taxable net investment income (including, for this purpose, its net real-
ized short-term capital gains) and 90% of its tax-exempt interest income
(reduced by certain expenses), the Fund will not be liable for Federal in-
come taxes to the extent its taxable net investment income and its net re-
alized long- and short-term capital gains, if any, are distributed to its
shareholders. Any such taxes paid by the Fund would reduce the amount of
income and gains available for distribution to shareholders.
Because the Fund will distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry Fund shares is
not deductible for Federal income and New York State and New York City
personal income tax purposes. If a shareholder receives exempt-interest
dividends with respect to any share and if such share is held by the
shareholder for six months or less, then any loss on the sale or exchange
of such share may, to the extent of such exempt-interest dividends, be
disallowed. In addition, the Code may require a shareholder, if he or she
receives exempt-interest dividends, to treat as Federal taxable income a
portion of certain otherwise non-taxable social security and railroad re-
tirement benefit payments. Furthermore, that portion of any exempt-
interest dividend paid by the Fund which represents income derived from
private activity bonds held by the Fund may not retain its tax-exempt sta-
tus in the hands of a shareholder who is a "substantial user" of a facil-
ity financed by such bonds, or a "related person" thereof. Moreover, as
noted in the Fund's Prospectus, (a) some or all of the Fund's dividends
may be a specific preference item, or a component of an adjustment item,
for purposes of the Federal individual and corporate alternative minimum
taxes and (b) the receipt of Fund dividends and distributions may affect a
corporate shareholder's Federal "environmental" tax liability. In addi-
tion, the receipt of Fund dividends and distributions may affect a foreign
corporate shareholder's Federal "branch profits" tax liability and the
Federal "excess net passive income" tax liability of a shareholder of a
Subchapter S corporation. Shareholders should consult their own tax advi-
sors as to whether they are (a) substantial users with respect to a facil-
ity or related to such users within the meaning of the Code or (b) subject
to a Federal alternative minimum tax, the Federal environmental tax, the
Federal branch profits tax or the Federal "excess net passive income" tax.
As described above and in the Fund's Prospectus, the Fund may invest in
municipal bond index futures and financial futures contracts and options
on interest rate futures and financial futures contracts. The Fund antici-
pates that these investment activities will not prevent the Fund from
qualifying as a regulated investment company, however, in order to con-
tinue to qualify as a regulated investment company, the Fund might have to
limit its investments in futures contracts and options on futures con-
tracts. As a general rule, these investment activities will increase or
decrease the amount of long-term and short-term capital gains or losses
realized by the Fund and, accordingly, will affect the amount of capital
gains distributed to the Fund's shareholders.
For Federal income tax purposes, gain or loss on the futures contracts and
options described above (collectively referred to as "section 1256 con-
tracts") is taxed pursuant to a special "mark-to-market" system. Under the
mark-to-market system, these instruments are treated as if sold at the
Fund's fiscal year and for their fair market value. As a result, the Fund
may be treated as realizing a greater or lesser amount of gains or losses
than actually realized. As a general rule, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40% short-
term capital gain or loss, and, accordingly, the mark-to-market system
generally will affect the amount of capital gains or losses taxable to the
Fund and the amount of distributions taxable to a shareholder. Moreover,
if the Fund invests in both section 1256 contracts and offsetting posi-
tions, which together constitute a straddle, then the Fund may be required
to defer certain realized losses. The Fund expects that its activities
with respect to section 1256 contracts and offsetting positions in those
contracts will not cause it to be treated as recognizing a materially
greater amount of capital gains than actually realized and will permit it
to use substantially all of the losses in those fiscal years in which such
losses actually occur.
While the Fund does not expect to realize a significant amount of net
long-term capital gains, any such gains realized will be distributed as
described in the Fund's prospectus. Such distributions ("capital gain div-
idends"), if any, will be taxable to shareholders as long-term capital
gains, regardless of how long they have held Fund shares, and will be des-
ignated as capital gain dividends in a written notice mailed by the Fund
to the shareholders after the close of the Fund's taxable year. If a
shareholder receives a capital gain dividend with respect to any share and
if the share has been held by the shareholder for six months or less, then
any loss (to the extent not disallowed pursuant to the six-month rule de-
scribed above relating to exempt-interest dividends) on the sale or ex-
change of such share to the extent of the capital gain dividend, shall be
treated as a long-term capital loss.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a mu-
tual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (that is, exchange privilege), the original
sales charge will not be taken into account in computing gain/loss on
original shares to the extent the subsequent sales charge is reduced. In-
stead, it will be added to the tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the newly ac-
quired or redeemed shares made within 90 days of the second acquisition.
This provision prevents a shareholder from immediately deducting the sales
charge by shifting his or her investment within a family of mutual funds.
Each shareholder will receive after the close of the calendar year an an-
nual statement as to the Federal income tax and New York State and New
York City personal income tax status of his or her dividends and distribu-
tions from the Fund for the prior calendar year. These statements also
will designate the amount of exempt-interest dividends that is a specified
preference item for purposes of the Federal individual and corporate al-
ternative minimum taxes. Each shareholder also will receive, if appropri-
ate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and dis-
tributions which were received from the Fund during the Fund's prior tax-
able year. Shareholders should consult their tax advisors as to any other
state and local taxes that may apply to these dividends and distributions.
The dollar amount of dividends excluded from Federal income taxation or
New York State and City personal income taxation and the dollar amount
subject to Federal income taxation or New York State and City personal in-
come taxation, if any, will vary for each shareholder depending upon the
size and duration of each shareholder's investment in the Fund. To the ex-
tent the Fund earns taxable net investment income, it intends to designate
as taxable dividends the same percentage of each day's dividend as its
taxable net investment income bears to its total net investment income
earned for the year.
Investors considering buying shares of the Fund just prior to a record
date for a capital gain distribution should be aware that, regardless of
whether the price of the Fund shares to be purchased reflects the amount
of the forthcoming distribution payment; any such payment will be a dis-
tribution payment.
If a shareholder fails to furnish a correct taxpayer identification num-
ber, fails to fully report dividend and interest income, or fails to cer-
tify that he or she has provided a correct taxpayer identification number
and that he or she is not subject to such withholding, the shareholder may
be subject to a 31% "backup withholding" tax with respect to (a) taxable
dividends and distributions, and (b) any proceeds of any redemptions of
Fund shares. An individual's taxpayer identification number is his or her
social security number. The backup withholding tax is not an additional
tax and may be credited against a shareholder's regular Federal income tax
liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substi-
tute for careful tax planning. Individuals are often exempt from state and
local personal income taxes on distributions of tax-exempt interest income
derived from obligations of issuers located in the state in which they re-
side when these distributions are received directly from these issuers,
but are usually subject to such taxes on income derived from obligations
of issuers located in other jurisdictions. Shareholders are urged to con-
sult their tax advisors with specific reference to their own tax situa-
tions.
The Fund was incorporated under the laws of the State of Maryland on Octo-
ber 6, 1983, and is registered with the SEC as a non-diversified open-end
management investment company. On December 15, 1988, November 19, 1992,
July 30, 1993 and October 14, 1994; the Fund's name changed to Shearson
Lehman New York Municipals Inc., SLH New York Municipals Fund Inc., Shear-
son Lehman Brothers New York Municipals Fund Inc., Smith Barney Shearson
New York Municipals Fund Inc., and Smith Barney New York Municipals Fund
Inc., respectively.
ADDITIONAL INFORMATION
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of the Fund. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end mar-
ket value of securities held in custody and also receives securities
transaction charges. The assets of the Fund are held under bank custodian-
ship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Fund's transfer agent. Under the transfer agency agreement, TSSG
maintains the shareholder account records for the Fund, handles certain
communications between shareholders and the Fund, and distributes divi-
dends and distributions payable by the Fund. For these services, TSSG re-
ceives a monthly fee computed on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Semi-Annual and Annual Reports for the semi-annual period ended
June 30, 1994 and the fiscal year ended December 31, 1993 accompany this
Statement of Additional Information and are incorporated herein by refer-
ence in their entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P RATINGS FOR MUNICIPAL BONDS
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources
available to the municipality and the factors outlined in the rating defi-
nitions below are weighed in determining the rating. Because revenue bonds
in general are payable from specifically pledged revenues, the essential
element in the security for a revenue bond is the quantity and quality of
the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality
of general obligation bond credit is usually appropriate in the rating
analysis of a revenue bond, other factors are important, including partic-
ularly the competitive position of the municipal enterprise under review
and the basic security covenants. Although a rating reflects S&P's judg-
ment as to the issuer's capacity for the timely payment of debt service,
in certain instances it may also reflect a mechanism or procedure for an
assured and prompt cure of a default, should one occur, i.e., an insurance
program, Federal or state guarantee or the automatic withholding and use
of state aid to pay the defaulted debt service.
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, substantial. Stability of the pledged revenues is also exceptionally
strong, due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate cov-
enant, earnings test for issuance of additional bonds, and debt service
reserve requirements) are rigorous. There is evidence of superior manage-
ment.
AA
High Grade -- The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of
the prime quality issues. Bonds rated "AA" have the second strongest ca-
pacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe. This rating describes the third strongest capacity
for payment of debt service. It differs from the two higher ratings be-
cause:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expen-
ditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Sta-
bility of the pledged revenues could show some variations because of in-
creased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A" and "BBB" ratings is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among
the factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged rev-
enues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC AND CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating cat-
egories, except in the AAA-Prime Grade category.
S&P RATINGS FOR MUNICIPAL NOTES
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-1
have a very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given
the designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to
pay principal and interest.
MOODY'S RATINGS FOR MUNICIPAL BONDS
Aaa
Bonds which are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving se-
curity to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in de-
fault or present elements of danger may exist with respect to principal or
interest.
Ca
Bonds that are rated Ca represent obligations which are speculative in a
high degree. These issues are often in default or have other marked short-
comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the se-
curity ranks in the higher end of its generic rating category; the modi-
fier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
MOODY'S RATINGS FOR MUNICIPAL NOTES
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction is in recognition of the differences between short-term credit
risk and long-term credit risk. Loans bearing the designation MIG 1 or
VMIG 1 are of the best quality, enjoying strong protection by established
cash flows of funds for their servicing, superior liquidity support or
from established and broad-based access to the market for refinancing or
both. Loans bearing the designation MIG 2 or VMIG 2 are of high quality,
with ample margins of protection although not as large as the preceding
group. Loans bearing the designation MIG 3 or VMIG 3 are of favorable
quality, with all security elements accounted for but lacking the undeni-
able strength of the preceding grades. Liquidity and flow may be narrow
and market access for refinancing is likely to be less well established.
DESCRIPTION OF S&P A-1+ AND A-1 COMMERCIAL PAPER RATING
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-
term operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display
credit quality characteristics which would warrant a senior bond rating of
"AA-" or higher), or the direct credit support of an issuer or guarantor
that possesses above-average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity characteristics.
Paper rated A-1 by S&P has the following characteristics: liquidity ratios
are adequate to meet cash requirements; long-term senior debt is rated "A"
or better; the issuer has access to at least two additional channels of
borrowing; basic earnings and cash flow have an upward trend with allow-
ance made for unusual circumstances; typically, the issuer's industry is
well established and the issuer has a strong position within the industry;
and the reliability and quality of management are unquestioned.
DESCRIPTION OF MOODY'S PRIME-1 COMMERCIAL PAPER RATING
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of a parent company and the relationships which exist with the issuer; and
(h) recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
Smith Barney
NEW YORK MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
Fund 13,194
Smith Barney
NEW YORK
MUNICIPALS FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
