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REGISTRATION NO. 33-53233
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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/X/ PRE-EFFECTIVE AMENDMENT NO. 1 / / POST-EFFECTIVE AMENDMENT NO.
SMITH BARNEY SHEARSON INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212) 720-9218
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices) (Zip code)
BURTON M. LEIBERT, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended; accordingly, no
fee is payable herewith. Registrant's Rule 24f-2 Notice for the fiscal period
ended November 30, 1993 was filed with the Securities and Exchange Commission on
January 31, 1994.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SMITH BARNEY SHEARSON INCOME TRUST
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A -- Prospectus/Proxy Statement
Part B -- Statement of Additional Information
Part C -- Other Information
Signature Page
Exhibits
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SMITH BARNEY SHEARSON INCOME TRUST
FORM N-14 CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
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PART A ITEM NO. AND CAPTION PROSPECTUS/PROXY STATEMENT CAPTION
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Item 1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus........ Cover Page; Cross Reference Sheet
Item 2. Beginning and Outside Back Cover
Page of Prospectus.............. Table of Contents
Item 3. Synopsis Information and Risk
Factors......................... Summary; Comparison of Investment Objectives and Policies
Item 4. Information About the
Transaction..................... Summary; Reasons for the Reorganization; Information About the
Reorganization; Comparative Information on Shareholder Rights;
Exhibit A (Agreement and Plan of Reorganization)
Item 5. Information About the
Registrant...................... Cover Page; Summary; Information About the Reorganization;
Comparison of Investment Objectives and Policies; Information on
Shareholder Rights; Additional Information About Smith Barney
Shearson Limited Maturity Treasury Fund and Smith Barney Shearson
Worldwide Prime Assets Fund; Prospectus of Smith Barney Shearson
Limited Maturity Treasury Fund dated January 29, 1994
Item 6. Information About the Company
Being Acquired.................. Summary; Information About the Reorganization; Comparison of
Investment Objectives and Policies; Comparative Information on
Shareholder Rights; Additional Information About Smith Barney
Shearson Limited Maturity Treasury Fund and Smith Barney Shearson
Worldwide Prime Assets Fund
Item 7. Voting Information............... Summary; Information About the Reorganization; Information on
Shareholder Rights; Voting Information
Item 8. Interest of Certain Persons and
Experts......................... Financial Statements and Experts; Legal Matters
Item 9. Additional Information Required
for Reoffering By Persons Deemed
to be Underwriters.............. Not Applicable
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PART B ITEM NO. AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
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Item 10. Cover Page....................... Cover Page
Item 11. Table of Contents................ Cover Page
Item 12. Additional Information About the
Registrant...................... Cover Page; Statement of Additional Information of Smith Barney
Shearson Income Trust dated January 29, 1994
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<TABLE>
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PART B ITEM NO. AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
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Item 13. Additional Information About the
Company Being Acquired.......... Not Applicable
Item 14. Financial Statements............. Annual Report of Smith Barney Shearson Limited Maturity Treasury
Fund; Annual Report of Smith Barney Shearson Worldwide Prime
Assets Fund; Pro-Forma Financial Statements
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PART C ITEM NO. AND CAPTION OTHER INFORMATION CAPTION
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Item 15. Indemnification.................. Incorporated by reference to Part A caption "Information on
Shareholder Rights -- Liability of Trustees"
Item 16. Exhibits......................... Exhibits
Item 17. Undertakings..................... Undertakings
</TABLE>
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A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
YOUR VOTE IS IMPORTANT
Dear Shareholder:
The Board of Trustees of Smith Barney Shearson Worldwide Prime Assets Fund
(the "Trust") has recently reviewed and endorsed a proposal for a reorganization
of the Trust which it judges to be in the best interests of the Trust's
shareholders.
UNDER THE TERMS OF THE PROPOSAL, SMITH BARNEY SHEARSON LIMITED MATURITY
TREASURY FUND ("LIMITED MATURITY TREASURY FUND"), A SEPARATE INVESTMENT
PORTFOLIO OF SMITH BARNEY SHEARSON INCOME TRUST ("INCOME TRUST"), WOULD ACQUIRE
SUBSTANTIALLY ALL OF THE ASSETS AND LIABILITIES OF THE TRUST. After the
transaction, the Trust would be dissolved and you would become a shareholder of
Limited Maturity Treasury Fund, having received shares of Limited Maturity
Treasury Fund with an aggregate value equivalent to the aggregate net asset
value of your investment in the Trust at the time of the transaction.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
The Board of Trustees of the Trust has determined that the proposed
reorganization should provide benefits to shareholders due, in part, to savings
in expenses borne by shareholders. We have therefore called a Special Meeting of
Shareholders to be held July 5, 1994 to consider this transaction. WE STRONGLY
INVITE YOUR PARTICIPATION BY ASKING YOU TO REVIEW, COMPLETE AND RETURN YOUR
PROXY NO LATER THAN JULY 5, 1994.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the board, I thank you for your
participation as a shareholder and urge you to please exercise your right to
vote by completing, dating and signing the enclosed proxy card. A
self-addressed, postage-paid envelope has been enclosed for your convenience.
Shareholders of the Trust will recognize a taxable gain or loss on the
exchange of their shares of the Trust for shares of Limited Maturity Treasury
Fund. Shareholders should consult their tax advisors regarding the effect of the
proposed transaction in light of their individual circumstances.
If you have any questions regarding the proposed transaction, please feel
free to call your financial consultant.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE
RECEIVED PROMPTLY.
Sincerely,
HEATH B. McLENDON
Chairman of the Board
June 2, 1994
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SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
Two World Trade Center
New York, New York 10048
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on July 5, 1994
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To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Smith Barney Shearson Worldwide Prime Assets Fund (the "Trust")
will be held at Two World Trade Center, 100th Floor, New York, New York on July
5, 1994, commencing at 10:30 A.M. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") dated as of June 1, 1994 providing for (i) the acquisition of
substantially all of the assets of the Trust by Smith Barney Shearson Limited
Maturity Treasury Fund ("Limited Maturity Treasury Fund"), a separate investment
series of Smith Barney Shearson Income Trust ("Income Trust"), in exchange for
shares of Limited Maturity Treasury Fund and the assumption by Limited Maturity
Treasury Fund of certain liabilities of the Trust, (ii) the distribution of such
shares of Limited Maturity Treasury Fund to shareholders of the Trust in
liquidation of the Trust and (iii) the subsequent dissolution and termination of
the Trust.
2. To transact such other business as may properly come before the Meeting
or any adjournment or adjournments thereof.
The Trustees of the Trust have fixed the close of business on May 16, 1994
as the record date for the determination of shareholders entitled to notice of
and to vote at the Meeting and any adjournment or adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE SPECIAL MEETING ARE URGED TO SIGN AND RETURN WITHOUT DELAY
THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE SO
THAT THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE.
By Order of the Board of Trustees
CHRISTINA T. SYDOR
Secretary
June 2, 1994
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE
OF FURTHER SOLICITATION.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense involved in validating your vote if you fail
to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration on the proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
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REGISTRATION VALID SIGNATURES
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CORPORATE ACCOUNTS
(1) ABC Corp....................................... ABC Corp.
(2) ABC Corp....................................... John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer....................... John Doe
(4) ABC Corp. Profit Sharing Plan.................. John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust...................................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78................................ Jane B. Doe
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA................. John B. Smith
(2) John B. Smith.................................. John B. Smith, Jr.,
Executor
</TABLE>
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PROSPECTUS/PROXY STATEMENT DATED JUNE 2, 1994
ACQUISITION OF THE ASSETS OF
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
BY AND IN EXCHANGE FOR SHARES OF
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND
A SEPARATE INVESTMENT SERIES OF
SMITH BARNEY SHEARSON INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
This Prospectus/Proxy Statement is being furnished to shareholders of Smith
Barney Shearson Worldwide Prime Assets Fund (the "Acquired Fund") in connection
with a proposed plan of reorganization to be submitted to shareholders of the
Acquired Fund for consideration at a Special Meeting of Shareholders to be held
on July 5, 1994 at 10:30 A.M. (the "Meeting"), at Two World Trade Center, 100th
Floor, New York, New York or any adjournment or adjournments thereof.
The plan provides for all or substantially all of the assets of the Acquired
Fund to be acquired by Smith Barney Shearson Limited Maturity Treasury Fund (the
"Acquiring Fund"), a separate series of Smith Barney Shearson Income Trust
("Income Trust"), in exchange for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of certain liabilities of the Acquired Fund
(hereinafter referred to as the "Reorganization"; the Acquiring Fund and the
Acquired Fund are sometimes referred to hereinafter as the "Funds" and
individually as a "Fund"). The shares of the Acquiring Fund would be distributed
to shareholders of the Acquired Fund in liquidation of the Acquired Fund and the
Acquired Fund would be dissolved and terminated. As a result of the proposed
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares of the Acquired Fund.
Holders of Class A shares of the Acquired Fund will receive shares of the
Acquiring Fund, and no sales charge or any contingent deferred sales charge
("CDSC") will be imposed on the shares of the Acquiring Fund received by the
Acquired Fund's Class A shareholders.
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The Acquiring Fund is a separate series of Income Trust, an open-end
management investment company. Greenwich Street Advisors ("Greenwich Street
Advisors"), a division of Mutual Management Corp., serves as investment adviser
to the Acquiring Fund. Mutual Management Corp. provides investment advisory and
management services to investment companies affiliated with Smith Barney
Shearson Inc. ("Smith Barney Shearson"). Mutual Management Corp. is a wholly
owned subsidiary of Smith Barney Shearson Holdings Inc., which is itself a
wholly owned subsidiary of The Travelers Inc. PanAgora Asset Management Limited
("PanAgora") serves as investment adviser to the Acquired Fund. Fifty percent of
the outstanding voting stock of PanAgora is owned by Nippon Life Insurance
Company and fifty percent is owned by Lehman Brothers Inc. Lehman Brothers Inc.
is a wholly owned subsidiary of Lehman Brothers Holdings Inc. ("LBHI"), which
until 12:00 midnight on May 31, 1994 was a wholly owned subsidiary of American
Express Company. As of such date, the common stock of LBHI was distributed to
the holders of common stock of American Express Company.
The investment objectives of the Acquiring Fund are generally similar to
those of the Acquired Fund. The Acquiring Fund's investment objective is to
achieve as high a level of current income as is consistent with preservation of
principal. The investment objective of the Acquired Fund is to maximize current
income consistent with the protection of principal and relative stability of net
asset value per share. Notwithstanding the similarity of the investment
objectives, the investment policies of the Funds differ in significant respects.
The Acquiring Fund invests exclusively in United States government securities
while the Acquired Fund invests in high quality debt securities of various
issuers including the United States government, foreign governments,
supranational organizations, corporations, certificates of deposit and bankers'
acceptances and commercial paper. The investment policies of the Acquired Fund
and the Acquiring Fund are described in detail under "Comparison of Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that a
prospective investor should know before investing. Certain relevant documents
listed below, which have been filed with the Securities and Exchange Commission
("SEC"), are incorporated in whole or in part by reference. A Statement of
Additional Information dated June 2, 1994, relating to this Prospectus/Proxy
Statement and the Reorganization, has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to the Acquired Fund at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-221-8806.
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1. The Prospectus of Smith Barney Shearson Limited Maturity Treasury Fund
dated January 29, 1994, as supplemented by a Prospectus Supplement dated April
14, 1994, is incorporated in its entirety by reference and a copy is included
herein.
2. The Prospectus of Smith Barney Shearson Worldwide Prime Assets Fund
dated April 1, 1993, as supplemented by Prospectus Supplements dated January 3,
1994, February 1, 1994 and April 1, 1994, is incorporated in its entirety by
reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of
the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
3
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TABLE OF CONTENTS
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PAGE
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Summary...................................................................... 5
Reasons for the Reorganization............................................... 9
Information About the Reorganization......................................... 10
Comparison of Investment Objectives and Policies............................. 14
Information on Shareholders' Rights.......................................... 15
Additional Information About Smith Barney Shearson Worldwide Prime Assets
Fund and Smith Barney Shearson Limited Maturity Treasury Fund............... 17
Other Business............................................................... 18
Voting Information........................................................... 18
Financial Statements and Experts............................................. 20
Legal Matters................................................................ 20
Exhibit A: Agreement and Plan of Reorganization.............................. A-1
</TABLE>
ADDITIONAL MATERIALS
Prospectus of Smith Barney Shearson
Limited Maturity Treasury Fund,
dated January 29, 1994 as
____supplemented by a Prospectus
____Supplement dated April 14, 1994
4
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SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE
AGREEMENT AND PLAN OF REORGANIZATION, A COPY OF WHICH IS ATTACHED TO THIS
PROSPECTUS/ PROXY STATEMENT AS EXHIBIT A, THE ACCOMPANYING PROSPECTUS OF THE
ACQUIRING FUND DATED JANUARY 29, 1994, AS SUPPLEMENTED BY A PROSPECTUS
SUPPLEMENT DATED APRIL 14, 1994, AND THE PROSPECTUS OF THE ACQUIRED FUND DATED
APRIL 1, 1994, AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS DATED JANUARY 3, 1994,
FEBRUARY 1, 1994 AND APRIL 1, 1994.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all of the
assets of the Acquired Fund to the Acquiring Fund in exchange for shares of the
Acquiring Fund and the assumption by the Acquiring Fund of certain liabilities
of the Acquired Fund. The Plan also calls for the distribution of shares of the
Acquiring Fund to the Acquired Fund's shareholders in liquidation of the
Acquired Fund. As a result of the Reorganization, each holder of Class A shares
of the Acquired Fund will become the owner of that number of full and fractional
shares of the Acquiring Fund having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of the Acquired Fund as of
the close of business on the date that the Acquired Fund's assets are exchanged
for shares of the Acquiring Fund. See "Information About the Reorganization --
Plan of Reorganization."
For the reasons set forth below under "Reasons for the Reorganization," the
Board of Trustees of the Acquired Fund, including the Trustees of the Acquired
Fund who are not "interested persons" (the "Independent Trustees"), as that term
is defined in the Investment Company Act of 1940 (the "1940 Act"), has concluded
that the Reorganization would be in the best interests of the shareholders of
the Acquired Fund and that the interests of the Acquired Fund's existing
shareholders will not be diluted as a result of the transaction contemplated by
the Reorganization and therefore has submitted the Plan for approval by the
Acquired Fund's shareholders. The Board of Trustees of Income Trust has also
reached similar conclusions with respect to the Acquiring Fund and has approved
the Reorganization.
Approval of the Reorganization will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the Acquired
Fund, which is the lesser of: (i) 67% of the voting securities of the Acquired
Fund present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities of the Acquired Fund.
See "Voting Information."
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TAX CONSEQUENCES. The Reorganization will be a taxable event, and gain or
loss will be recognized by both the Acquired Fund and its shareholders. The
Acquired Fund, however, will not be required to pay any tax, but, rather, will
take into account any gain or loss it recognizes in the Reorganization in
setting the amount of its declared ordinary and capital gains dividends and,
accordingly, its net asset value on the Closing Date (as defined herein).
Accordingly, such Fund-level gain or loss will generally reduce shareholder gain
(or increase shareholder loss) in the case of Fund gain, or increase shareholder
gain (or reduce shareholder loss) in the case of Fund loss. Taxable recognition
of gain or loss at the Fund level may, therefore, be offset by changes in the
amount of gain or loss recognized at the shareholder level, although the overall
effect of the tax treatment of the Reorganization on shareholders of the
Acquired Fund may be affected by the character of the gain or loss (as
short-term or long-term gain or loss) to the Fund and the shareholders of the
Acquired Fund. Shareholders of the Acquired Fund will recognize a gain or loss
on the exchange of their shares in the Acquired Fund for shares of the Acquiring
Fund, which will be short-term or long-term gain or loss depending on the
shareholder's holding period for the shares of the Acquired Fund. The Acquired
Fund's shareholders tax basis in the shares of the Acquiring Fund, after the
Reorganization, will be the net asset value of shares of the Acquiring Fund on
the Closing Date, and the Acquired Fund shareholders' holding period for shares
of the Acquiring Fund will begin on the day following the Closing Date.
INVESTMENT OBJECTIVES AND POLICIES. The investment objectives of the
Acquiring Fund are generally similar to those of the Acquired Fund. The
Acquiring Fund's investment objective is to achieve as high a level of current
income as is consistent with preservation of principal. The investment objective
of the Acquired Fund is to maximize current income consistent with the
protection of principal and relative stability of net asset value per share.
Notwithstanding the similarity of the investment objectives, the investment
policies of the Funds differ in significant respects. The Acquiring Fund invests
exclusively in United States government securities while the Acquired Fund
invests in high quality debt securities of various issuers including the United
States government, foreign governments, supranational organizations,
corporations, certificates of deposit and bankers' acceptances and commercial
paper. The differences between the investment policies of the Acquiring Fund and
the Acquired Fund are described in greater detail under "Comparison of
Investment Objectives and Policies."
FEES AND EXPENSES. Total management fees payable by the Acquired Fund are
0.65% of the Acquired Fund's average daily net assets, consisting of a monthly
fee computed at an annual rate of 0.45% which is paid to PanAgora as investment
adviser and a monthly fee computed at an annual rate of 0.20% which is paid to
Smith, Barney Advisors, Inc. ("Smith Barney Advisors") as
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administrator (from which The Boston Company Advisors, Inc. ("Boston Advisors")
is compensated for its services as sub-administrator). As a result of a
voluntary agreement between PanAgora and Boston Advisors to waive certain
management fees, the cumulative fees paid by the Acquired Fund to PanAgora and
Boston Advisors was 0.38% of the Acquired Fund's average daily net assets for
the fiscal year ended November 30, 1993. Total management fees payable by the
Acquiring Fund are 0.55% of the Acquiring Fund's average daily net assets,
consisting of a monthly fee computed at an annual rate of 0.35% which is paid to
Greenwich Street Advisors as investment adviser and a monthly fee computed at an
annual rate of 0.20% which is paid to Smith Barney Advisors as administrator
(from which Boston Advisors is compensated for its services as
sub-administrator). Greenwich Street Advisors and Boston Advisors have
voluntarily waived investment advisory and administration fees, respectively, in
the aggregate amount equal to 0.25% of the value of the Acquiring Fund's average
daily net assets for the fiscal year ended November 30, 1993.
The expense ratio of the Acquiring Fund subsequent to the Reorganization is
expected to be lower than that of the Acquired Fund. See "Reasons for the
Reorganization." Total operating expenses for the Acquiring Fund stated as a
percentage of average net assets for the fiscal year ended November 30, 1993
were 0.79% which includes the voluntary fee waiver by Greenwich Street Advisors
and Boston Advisors. If these voluntary waivers had not been in place, total
operating expenses would have been 1.04% for the fiscal year ended November 30,
1993. Total operating expenses for the Acquired Fund stated as a percentage of
average net assets for the fiscal year ended November 30, 1993 were 1.75%, which
includes the voluntary agreements of PanAgora and Boston Advisors to waive a
portion of their fees. If these voluntary agreements had not been in place,
total operating expenses for the fiscal year ended November 30, 1993 would have
been 2.03%. Assuming that the level of net assets of the combined fund remains
the same after the Reorganization as the level of net assets of the Acquiring
Fund and the Acquired Fund as considered by the Board of Trustees of each Fund
in approving the Reorganization, it is estimated that the expense ratio for
shares of the combined fund would be reduced to 0.91%.
Shares of the Acquiring Fund and the Acquired Fund are both sold subject to
distribution plans adopted pursuant to Rule 12b-1 under the 1940 Act under which
(i) the Acquired Fund charges its Class A shareholders an annual distribution
fee of 0.90% of the value of the Acquired Fund's average daily net assets and
(ii) the Acquiring Fund charges holders of its shares an annual service fee of
0.15% of the value of the Acquiring Fund's average daily net assets. See
"Distributor" in the accompanying Prospectus of the Acquiring Fund.
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EXCHANGE PRIVILEGES. Holders of the Acquired Fund's Class A shares are
entitled to exchange such shares for Class A shares of certain funds in the
Smith Barney Shearson Group of Funds ("Group of Funds") to the extent shares are
offered for sale in the shareholder's state of residence. Shareholders of the
Acquiring Fund are entitled to exchange their shares for Class A shares of
certain other funds in the Group of Funds. After the Reorganization, each
shareholder of the Acquired Fund who becomes the owner of shares of the
Acquiring Fund will be entitled to the exchange privileges offered by those
shares. Any exchange will be a taxable event for which a shareholder may have to
recognize a gain or loss under federal income tax provisions. For the purposes
of any exchange of shares acquired through the Reorganization, the Acquired Fund
shareholders will be deemed to have paid the maximum sales charge currently
applicable for shares of the Acquiring Fund. A "sales charge differential" will
be imposed on any Acquiring Fund shareholder who chooses to exchange shares of
the Acquiring Fund for shares of another fund in the Group of Funds which
imposes a higher sales charge than that imposed on the Acquiring Fund shares.
The Acquiring Fund reserves the right to amend or terminate the exchange
privilege after providing notice to shareholders. See "Exchange Privilege" in
the accompanying Prospectus of the Acquiring Fund.
DIVIDENDS. The policies of each Fund with regard to dividends and
distributions are generally the same. Each Fund's policy is to distribute its
investment income monthly and its net realized capital gains, if any, once a
year, normally at the end of the year in which earned or at the beginning of the
next year. Unless a shareholder instructs that dividends and capital gains
distributions be paid in cash and credited to the shareholder's account at Smith
Barney Shearson, dividends and capital gains distributions will be reinvested
automatically in additional shares of the Acquiring Fund at net asset value,
without a sales charge or CDSC. The Acquired Fund shareholders that have elected
to receive dividends and distributions in cash will continue to receive
distributions in such manner from the Acquiring Fund. Subsequent to the
Reorganization, the Acquired Fund shareholders may elect at any time to have
their dividends and distributions reinvested automatically in additional shares
of the Acquiring Fund by contacting their Smith Barney Shearson Financial
Consultant. See "Dividends, Distributions and Taxes" in the accompanying
Prospectus of the Acquiring Fund.
PURCHASE AND REDEMPTION PROCEDURES. Purchase of shares of the Acquiring
Fund and the Acquired Fund must be made through a brokerage account maintained
with Smith Barney Shearson or with a broker that clears securities transactions
through Smith Barney Shearson on a fully disclosed basis (an "Introducing
Broker"). The Acquiring Fund imposes a maximum sales charge in connection with
the purchase of its shares of 1.25%. The Acquired Fund imposes no sales charge
in connection with the purchase of
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its Class A Shares. The Acquiring Fund shares are subject to a maximum CDSC of
1.00% of the amount being redeemed if such redemption occurs within one year of
purchase of the shares. Redemptions may be made by submitting a redemption
request through Smith Barney Shearson or an Introducing Broker or the respective
Fund's transfer agent. Acquiring Fund shares issued to holders of the Acquired
Fund's Class A shares pursuant to the Reorganization will not be subject to the
1.00% CDSC otherwise applicable upon the redemption of the Acquiring Fund shares
within one year of purchase of such shares. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
SHAREHOLDERS' RIGHTS. Shareholders of the Acquiring Fund and the Acquired
Fund have similar voting rights. For example, neither the Acquired Fund nor
Income Trust, on behalf of the Acquiring Fund, holds an annual meeting of
shareholders and there is normally no meeting of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. In addition, under
the laws of The Commonwealth of Massachusetts and the Master Trust Agreement of
the Acquired Fund, shareholders of the Acquired Fund do not have appraisal
rights in connection with a combination or acquisition of the assets of the
Acquired Fund by another entity. Shareholders of the Acquired Fund may, however,
redeem their shares at net asset value prior to the date of the Reorganization.
See "Information on Shareholder Rights."
RISK FACTORS. The Acquired Fund and the Acquiring Fund share investment
risks which are those generally associated with investing in a managed portfolio
consisting primarily of high-quality debt securities. The Acquiring Fund invests
exclusively in (a) securities issued by the United States Treasury and (b) other
United States government securities that generally provide interest income
exempt from state and local income taxes. The Acquired Fund may invest in
foreign securities, securities denominated in foreign currencies, securities
issued by non-governmental issuers, futures contracts, options and forward
currency contracts. The foregoing investments and investment techniques all have
associated risks that warrant special consideration. For a full description of
the risk factors involved in investing in the Acquiring Fund, refer to "Risk
Factors and Special Considerations" in the accompanying Prospectus of the
Acquiring Fund.
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Acquired Fund has determined that it is
advantageous to combine the Acquired Fund with the Acquiring Fund. The Funds
have generally similar investment objectives and the same administrator,
sub-administrator, custodian and transfer agent.
9
<PAGE>
The Board of Trustees of the Acquired Fund has determined that the
Reorganization should provide certain benefits to shareholders. In making such
determination, the Board of Trustees considered, among other things, the savings
in expenses borne by shareholders expected to be realized by the Reorganization,
the comparative investment performance of the Funds and the advantages of
eliminating duplication inherent in marketing two funds with similar investment
objectives and that, despite the taxable nature of the Reorganization, the
Board's belief that most shareholders would not recognize gain as a result of
the Reorganization.
In light of the foregoing, the Board of Trustees of the Acquired Fund,
including the Independent Trustees, has decided that it is in the best interests
of the Acquired Fund and its shareholders to combine with the Acquiring Fund.
The Board of Trustees of the Acquired Fund has also determined that a
combination of the Acquired Fund and the Acquiring Fund would not result in a
dilution of the interests of the Acquired Fund's shareholders.
The Board of Trustees of Income Trust considered various factors in
approving the Reorganization and it has determined that it is advantageous to
acquire the assets of the Acquired Fund. Among other factors, the Board of
Trustees of Income Trust considered pro forma financial information provided by
Smith Barney Shearson which indicated that the Reorganization is likely to
reduce the expense ratio of Acquiring Fund shares. Accordingly, the Board of
Trustees of Income Trust, including a majority of the non-interested Trustees,
has determined that the Reorganization is in the best interests of the Acquiring
Fund's shareholders and that the interests of the Acquiring Fund's shareholders
will not be diluted as a result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
PLAN OF REORGANIZATION. The following summary of the Plan is qualified in
its entirety by reference to the Plan (Exhibit A hereto). The Plan provides that
the Acquiring Fund will acquire all or substantially all of the assets of the
Acquired Fund in exchange for shares of the Acquiring Fund and the assumption by
the Acquiring Fund of certain liabilities of the Acquired Fund on July 15, 1994
or such later date as may be agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to discharge all
of its known liabilities and obligations. The Acquiring Fund will not assume any
liabilities, or obligations other than those reflected on an unaudited statement
of assets and liabilities of the Acquired Fund prepared as of the close of
regular trading on the New York Stock Exchange, Inc. (the "NYSE"), currently
4:00 p.m. New York time, on the Closing Date. The number of full and fractional
shares of the Acquiring Fund to be issued to the Acquired Fund shareholders will
be determined on the basis of the Acquiring Fund's and the
10
<PAGE>
Acquired Fund's relative net asset values per share, computed as of the close of
regular trading on the NYSE on the Closing Date. In the case of the Acquired
Fund, the net asset value per share of each Class will be determined by dividing
the assets attributable to each Class, less the liabilities attributable to each
Class, by the total number of outstanding shares of each Class. The net asset
value per share of the Acquiring Fund will be determined by dividing the
Acquiring Fund's assets, less liabilities, by the total number of outstanding
shares of the Acquiring Fund.
Both the Acquired Fund and the Acquiring Fund will utilize Boston Advisors
as agent to determine the value of their respective portfolio securities. The
Acquired Fund and the Acquiring Fund also will use the same independent pricing
service to determine the value of each security so that Boston Advisors, as
agent, can determine the aggregate value of each Fund's portfolio. The method of
valuation employed will be consistent with the requirements set forth in the
Prospectus of each Fund, Rule 22c-1 under the 1940 Act and the interpretation of
such rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, each of the Acquired Fund and the Acquiring
Fund shall have declared a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to their
respective shareholders all taxable income for the taxable year ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid) and all of the respective Funds' net capital gains realized in
the taxable year ending on or prior to the Closing Date (after reductions for
any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the Acquired
Fund will liquidate and distribute pro rata to shareholders of record as of the
close of business on the Closing Date the full and fractional shares of the
Acquiring Fund received by the Acquired Fund. Such liquidation and distribution
will be accomplished by the establishment of accounts in the names of the
Acquired Fund's shareholders on the share records of the Acquiring Fund's
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of the Acquiring Fund due to each of the Acquired
Fund's shareholders. After such distribution and the winding up of its affairs,
the Acquired Fund and its registration under the 1940 Act will be terminated.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan. Notwithstanding approval of the Acquired Fund's shareholders,
the Plan may be terminated at any time at or prior to the Closing Date (1) by
mutual agreement of the Acquired Fund and the Acquiring Fund or (2) by either
party to the Plan upon a material breach by the other party of any
representation, warranty or agreement contained therein.
11
<PAGE>
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Acquired
Fund. The 1940 Act defines "majority" as the lesser of: (i) 67% of the voting
securities of the Acquired Fund present at the Meeting, if the holders of more
than 50% of the outstanding voting securities of the Acquired Fund are present
or represented by proxy; or (ii) more than 50% of the outstanding voting
securities of the Acquired Fund. If the Reorganization is not approved by
shareholders of the Acquired Fund, the Board of Trustees of the Acquired Fund
will consider other possible courses of action, including liquidation of the
Acquired Fund.
DESCRIPTION OF THE ACQUIRING FUND'S SHARES. Full and fractional shares of
beneficial interest of the Acquiring Fund will be issued to the Acquired Fund's
shareholders in accordance with the procedures detailed in the Plan and as
described in the Acquiring Fund's Prospectus. Generally, the Acquiring Fund does
not issue share certificates to shareholders unless a specific request is
submitted to the Acquiring Fund's transfer agent. The shares of the Acquiring
Fund to be issued to the Acquired Fund shareholders and registered on the
shareholder records of the transfer agent will have no pre-emptive or conversion
rights. See "Information on Shareholder Rights" and the Acquiring Fund's
Prospectus for additional information with respect to the shares of the
Acquiring Fund.
FEDERAL INCOME TAX CONSEQUENCES. The Reorganization will be a taxable
event, and gain or loss will be recognized in accordance with Section 1001 of
the Internal Revenue code of 1986, as amended (the "Code"), by both shareholders
of the Acquired Fund and by the Acquired Fund. The Acquired Fund, however, will
not be required to pay any tax, but, rather, will take into account any gain or
loss it recognizes in the Reorganization in setting the amount of its declared
ordinary and capital gains dividends and, accordingly, its net asset value on
the Closing Date. Accordingly, such Fund-level gain or loss will generally
reduce shareholder gain (or increase shareholder loss) in the case of Fund gain,
or increase shareholder gain (or reduce shareholder loss) in the case of Fund
loss. Taxable recognition of gain or loss at the Fund level may, therefore, be
offset by changes in the amount of gain or loss recognized at the shareholder
level, although the overall effect of the tax treatment of the Reorganization on
shareholders of the Acquired Fund may be affected by the character of the gain
or loss (determined under Code Section 1222 as short-term or long-term gain or
loss) to the Fund and the shareholders of the Acquired Fund. The gain or loss
recognized by the Acquired Fund on the transfer of capital assets will be
long-term or short-term capital
12
<PAGE>
gain or loss, depending on the holding period of the Acquired Fund for each
asset, as determined under Code Section 1223. Dividends of the Acquired Fund
attributable to short-term capital gains will be taxable to shareholders of the
Acquired Fund as ordinary income, and dividends attributable to long-term
capital gains will be taxable to shareholders of the Acquired Fund as long-term
taxable gain regardless of the length of time shareholders of the Acquired Fund
have held their shares in the Acquired Fund. Shareholders of the Acquired Fund
will recognize a gain or loss on the exchange of their shares in the Acquired
Fund for shares of the Acquiring Fund, which will be short-term or long-term
gain or loss depending on the shareholder's holding period for the shares in the
Acquired Fund. Under Code Sections 1011 and 1012, the Acquired Fund
shareholders' tax basis in the shares of the Acquiring Fund received in the
Reorganization will be the net asset value of Acquiring Fund shares on the
Closing Date, and the Acquired Fund's shareholders' holding period for Acquiring
Fund shares will begin on the day following the Closing Date.
Shareholders of the Acquired Fund should consult their tax advisors
regarding the effect of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates to the federal income
tax consequences of the Reorganization, shareholders of the Acquired Fund should
also consult their tax advisors as to state and local tax consequences, if any,
of the Reorganization.
CAPITALIZATION. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of March 31, 1994, and on a pro forma
basis as of that date, giving effect to the proposed acquisition of assets at
net asset value.
<TABLE>
<CAPTION>
SMITH BARNEY
SHEARSON WORLDWIDE SMITH BARNEY SHEARSON
PRIME ASSETS FUND LIMITED MATURITY PRO FORMA FOR
(CLASS A SHARES) TREASURY FUND REORGANIZATION
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------------- ----------------------- ----------------
<S> <C> <C> <C>
Net Assets.............. $ 67,097,534 $ 47,550,461 $ 114,647,995
Net asset value per
share.................. $ 1.70 $ 7.46 $ 7.46
Shares outstanding...... 39,371,814 6,372,289 15,366,597
</TABLE>
As of the Record Date, May 16, 1994, there were 35,415,714 outstanding Class
A shares of the Acquired Fund and 6,163,776 outstanding shares of the Acquiring
Fund. As of the Record Date, the officers and Trustees of the Acquired Fund
beneficially owned as a group less than 1% of the outstanding shares of the
Acquired Fund. As of the Record Date, M.D. Sass Investors Services, Inc. with
its address at 1133 Avenue of the Americas, New York, NY 10036-6710, was record
holder of 12.14% of Class A shares of the Acquired Fund. To the best knowledge
of the Trustees of the Acquired Fund, as of the
13
<PAGE>
Record Date, no shareholder or "group" (as that term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
beneficially owned more than 5% of the Acquired Fund. As of the Record Date, the
officers and Trustees of the Income Trust beneficially owned as a group less
than 1% of the outstanding shares of the Acquiring Fund. To the best knowledge
of the Trustees of Income Trust, as of the Record Date, no shareholder or
"group" (as that term is used in Section 13(d) of the Exchange Act) beneficially
owned more than 5% of the Acquiring Fund.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies and
restrictions of the Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the respective investment objectives, policies and
restrictions sections of the Prospectuses of the Acquiring Fund and the Acquired
Fund. For a full discussion of the investment objectives, policies and
restrictions of the Acquiring Fund, refer to the Acquiring Fund's Prospectus,
which accompanies this Prospectus/Proxy Statement, under the caption "Investment
Objective and Management Policies," and for a discussion of these issues as they
apply to the Acquired Fund, refer to the Acquired Fund's Prospectus under the
caption "Investment Objective and Management Policies."
INVESTMENT OBJECTIVE. The investment objective of the Acquiring Fund is to
achieve as high a level of current income as is consistent with preservation of
principal. The investment objective of the Acquired Fund is to maximize current
income consistent with protection of principal and relative stability of net
asset value per share. Both the Acquiring Fund's and the Acquired Fund's
investment objectives are considered fundamental policies which cannot be
changed without shareholder approval.
PRIMARY INVESTMENTS. The Acquiring Fund invests exclusively in (a)
securities issued by the United States Treasury and (b) other United States
government securities that generally provide interest income exempt from state
and local income taxes. For a discussion of the risks involved in investing in
the foregoing types of securities, refer to "Investment Objectives and
Management Policies -- Investment Policies" in the accompanying Prospectus of
the Acquiring Fund.
The Acquired Fund invests in a managed portfolio of high-quality debt
securities that may be denominated in U.S. dollars or selected foreign
currencies with remaining maturities of not more than three years. The Acquired
Fund will at all times maintain at least 30% of its net assets in U.S. dollar-
denominated securities and under normal circumstances, at least 20% of its
14
<PAGE>
net assets in securities denominated in the currencies of the countries
participating in the European Monetary System or denominated in European
Currency Units. Under normal circumstances, the Acquired Fund will invest at
least 65% of its assets in securities of issuers domiciled in at least three
different countries, one of which will be the United States.
The Acquired Fund is a non-diversified investment company which concentrates
its investments in the banking industry. The Acquiring Fund is a diversified
fund and does not have an industry concentration policy. Correspondingly,
shareholders of the Acquired Fund will, after the Reorganization, have a reduced
exposure to the risks associated with such restrictive investment policies as
non-diversification and industry concentration.
INVESTMENT TECHNIQUES. Both the Acquired Fund and the Acquiring Fund
purchase securities on a when-issued basis. The Acquiring Fund may purchase or
sell securities for delayed delivery.
The Acquired Fund may enter into futures contracts and options on futures
contracts and may engage in currency exchange transactions, enter into forward
currency contracts and purchase exchange traded put and call options on foreign
currencies. The Acquired Fund may also engage in repurchase agreement
transactions with respect to instruments in which the Acquired Fund invests and
may purchase and sell put, call and other types of option securities that are
traded on domestic or foreign exchanges or over-the-counter. From time to time,
the Acquired Fund may lend its portfolio securities to brokers, dealers and
other financial organizations. These loans will not exceed 20% of the Acquired
Fund's total assets taken at value. The Acquiring Fund may not invest in any of
the foregoing investments or utilize any of the foregoing investment techniques.
A detailed discussion of the investment practices of the Acquiring Fund and
their associated risks can be found under the caption "Investment Objective and
Management Policies" in the Acquiring Fund's Prospectus, which accompanies this
Prospectus/Proxy Statement.
INFORMATION ON SHAREHOLDERS' RIGHTS
GENERAL. Income Trust and the Acquired Fund are open-end management
investment companies registered under the 1940 Act which continuously offer to
sell shares at their current net asset value. The Acquiring Fund is a separate
series of Income Trust, which is organized as a business trust under the laws of
The Commonwealth of Massachusetts and is governed by a Master Trust Agreement,
By-laws and Board of Trustees. The Acquired Fund is also organized as a business
trust under the laws of The Commonwealth of Massachusetts and is also governed
by a Master Trust Agreement, By-laws and Board of Trustees. Both Funds are also
governed by applicable state and federal law.
15
<PAGE>
TRUSTEES. Under the Master Trust Agreement of each of Income Trust and the
Acquired Fund, persons serving as Trustees will continue as Trustees for the
duration of each of the Fund's existence until they resign, die or are removed
by a written instrument, signed by at least two-thirds of the Trustees or by
vote of the shareholders holding not less than two-thirds of the shares then
outstanding, cast in person or by proxy at any meeting called for that purpose
or by a written declaration signed by the shareholders holding not less than
two-thirds of the shares then outstanding and filed with the Fund's custodian.
Vacancies on the Boards of either Income Trust or the Acquired Fund may be
filled by a majority of the Trustees remaining in office. A meeting of
shareholders will be required for the purpose of electing additional Trustees
whenever fewer than a majority of the Trustees then in office were elected by
shareholders.
SHAREHOLDER LIABILITY. Under Massachusetts law, shareholders of Income
Trust and the Acquired Fund may, under certain circumstances, be held personally
liable for the obligations of either Income Trust or the Acquired Fund,
respectively. The Acquired Fund's and Income Trust's Master Trust Agreements,
however, both disclaim shareholder liability for acts or obligations of the
Acquiring Fund or the Acquired Fund, as the case may be, and require that notice
of such disclaimer be given in each agreement, obligation or instrument entered
into or executed by Income Trust or the Acquired Fund, as the case may be. The
Master Trust Agreement for each of the Acquired Fund and Income Trust provides
for indemnification out of the Acquired Fund's or a series of Income Trust's
property, as the case may be, for all losses and expenses of any shareholder
held personally liable for the obligations of either the Acquired Fund or the
series of Income Trust, as the case may be. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which a disclaimer is inoperative
and the Acquired Fund or the series of Income Trust itself, as the case may be,
would be unable to meet its obligations. A substantial number of mutual funds in
the United States are organized as Massachusetts business trusts.
VOTING RIGHTS. Neither Income Trust nor the Acquired Fund holds annual
meetings of shareholders. However, special meetings of shareholders of each of
the Funds must be called upon the written request of holders of not less than
10% of the then outstanding voting securities of the respective Fund. On each
matter submitted to a vote of the shareholders of either the Acquired Fund or
Income Trust, each shareholder is entitled to one vote for each whole share
owned and a proportionate fractional vote for any fractional share outstanding
in the shareholder's name on the Fund's books. Shares of each series of Income
Trust vote as a separate class except as to the election of
16
<PAGE>
Trustees and as otherwise required by the 1940 Act. As to any matter which does
not affect the interest of a particular series, only the holders of shares of
the one or more affected series are entitled to vote.
LIQUIDATION OR DISSOLUTION. In the event of the liquidation or dissolution
of the Acquiring Fund or the Acquired Fund, the shareholders of either Fund are
entitled to receive, when, and as declared by the Trustees, the excess of the
assets belonging to the Fund over the liabilities belonging to the Fund. In
either case, the assets so distributed to shareholders of the Fund will be
distributed among the shareholders in proportion to the number of shares of the
Fund held by them and recorded on the books of the Fund.
LIABILITY OF TRUSTEES. Under the Master Trust Agreement of each of Income
Trust and the Acquired Fund, a Trustee will be personally liable only for his or
her own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee. The Master Trust
Agreements of each Fund further provide that Trustees and officers will be
indemnified for the expenses of litigation against them unless it is determined
that the person did not act in good faith in the reasonable belief that the
person's actions were in or not opposed to the best interests of the Fund or the
person's conduct is determined to constitute willful misfeasance, bad faith,
gross negligence or reckless disregard of the person's duties.
RIGHTS OF INSPECTION. Shareholders of the Acquiring Fund and the Acquired
Fund have the same inspection rights as are permitted shareholders of a
Massachusetts corporation under Massachusetts corporate law. Currently, each
shareholder of a Massachusetts corporation is permitted to inspect the records,
accounts and books of a corporation for any legitimate business purpose.
The foregoing is only a summary of certain characteristics of the operations
of the Acquired Fund and the Acquiring Fund, the Master Trust Agreements of the
Acquired Fund and Income Trust, their respective By-laws and Massachusetts law.
The foregoing is not a complete description of the documents cited. Shareholders
should refer to the provisions of the corporate documents and state laws
governing each of the Funds for a more thorough description.
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
AND
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND. Information about the
Acquired Fund is included in its current Prospectus dated April 1, 1994, as
supplemented by Prospectus Supplements dated January 3, 1994,
17
<PAGE>
February 1, 1994 and April 1, 1994, and in the statement of additional
information that has been filed with the SEC, both of which are incorporated
herein by reference. A copy of the Prospectus and the statement of additional
information is available upon request and without charge by writing the Acquired
Fund at the address listed on the cover page of this Prospectus/Proxy Statement
or by calling toll-free 1-800-221-8806.
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND. Information
concerning the operation and management of the Acquiring Fund is incorporated
herein by reference from its Prospectus dated January 29, 1994, as supplemented
by a Prospectus Supplement dated April 14, 1994, and statement of additional
information for Income Trust dated January 29, 1994. A copy of such statement of
additional information is available upon request and without charge by writing
the Acquiring Fund at the address listed on the cover of this Prospectus/Proxy
Statement or by calling toll-free 1-800-221-8806.
Both the Acquiring Fund and the Acquired Fund are subject to the
informational requirements of the Exchange Act and in accordance therewith file
reports and other information including proxy material, reports and charter
documents with the SEC. These materials can be inspected and copies obtained at
the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the New York Regional Office of the SEC at, 75
Park Place, New York, New York 10007. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, SEC, Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of the Acquired Fund do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of the Acquired Fund to be used
at the Special Meeting of Shareholders to be held at 10:30 a.m. on July 5, 1994,
at Two World Trade Center, New York, New York 10048-0002 and at any adjournment
thereof. This Prospectus/Proxy Statement, along with a Notice of the Meeting and
a proxy card, is first being mailed to shareholders of the Acquired Fund on or
about June 2, 1994. Only shareholders of record as of the close of business on
the Record Date will be entitled to notice of, and to vote at the Meeting or any
adjournment thereof. The holders of a majority of
18
<PAGE>
the shares of the Acquired Fund outstanding at the close of business on the
Record Date present in person or represented by proxy will constitute a quorum
for the Meeting. For purposes of determining the presence of a quorum for
transacting business at the Meeting, abstention and broker "non-votes" (that is,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other persons entitled to vote the
shares with respect to which the brokers or nominees do not have discretionary
power) will be treated as shares that are present but which have not been voted.
For this reason, abstentions and broker non-votes will have the effect of a "no"
vote for purposes of obtaining the requisite approval of the Plan. If the
enclosed form of proxy is properly executed and returned in time to be voted at
the Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies will
be voted FOR the proposed Reorganization and FOR any other matters deemed
appropriate. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of the Acquired Fund, Christina T. Sydor, 1345
Avenue of the Americas, New York, New York 10105. Unless revoked, all valid
proxies will be voted in accordance with the specifications thereon or, in the
absence of such specifications, for approval of the Plan and the Reorganization
contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Acquired
Fund, which is the lesser of: (i) 67% of the voting securities of the Acquired
Fund present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities of the Acquired Fund.
Shareholders of the Acquired Fund are entitled to one vote for each share.
Fractional shares are entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy solicitations
also may be made by telephone, telegraph or personal interviews conducted by
officers and employees of the Acquired Fund, Smith Barney Shearson, PanAgora,
Smith Barney Advisors, Boston Advisors and/or The Shareholder Services Group,
Inc., a subsidiary of First Data Corporation. The aggregate cost of solicitation
of the shareholders of the Acquired Fund is expected to be approximately
$10,000. Expenses incurred in connection with the Reorganization, including the
costs of the proxy solicitation and the preparation of enclosures to the
Prospectus/Proxy Statement (including reimbursement of expenses of forwarding
solicitation material to beneficial owners of shares of the Acquired Fund), and
expenses incurred in connection with the preparation of this Prospectus/Proxy
Statement, will be borne by the Acquiring Fund and the Acquired Fund in
proportion to their assets.
19
<PAGE>
In the event that sufficient votes to approve the Reorganization are not
received by July 5, 1994, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon a decision to adjourn the
Meeting.
The votes of the shareholders of the Acquiring Fund are not being solicited
by this Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities, including the schedule of portfolio
investments and schedule of forward foreign exchange contracts, of the Acquired
Fund as of November 30, 1993, the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
then ended and the financial highlights for each of the two years then ended and
for the period from January 14, 1991 (commencement of operations) to November
30, 1991 and the statement of assets and liabilities, including the schedule of
portfolio investments, of the Acquiring Fund, as of November 30, 1992, the
related statement of operations for the year then ended, the statement of
changes in net assets and the financial highlights for the year then ended and
the period from December 31, 1991 (commencement of operations) to November 30,
1992 have been incorporated by reference into this Prospectus/Proxy Statement in
reliance on the reports of Coopers & Lybrand, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the Acquiring
Fund will be passed upon by Willkie Farr & Gallagher, One Citicorp Center, 153
East 53rd Street, New York, New York 10022.
THE BOARD OF TRUSTEES OF THE ACQUIRED FUND, INCLUDING THE "INDEPENDENT"
TRUSTEES, RECOMMEND APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
20
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 1st day of June, 1994, by and between SMITH BARNEY SHEARSON WORLDWIDE PRIME
ASSETS FUND (the "Acquired Fund"), a business trust organized under the laws of
The Commonwealth of Massachusetts, with its principal place of business at Two
World Trade Center, New York, New York 10048, and SMITH BARNEY SHEARSON INCOME
TRUST ("Income Trust"), a business trust organized under the laws of The
Commonwealth of Massachusetts, with its principal place of business at Two World
Trade Center, New York, New York 10048, on behalf of SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND (the "Acquiring Fund"), a series of Income Trust.
The reorganization (the "Reorganization") will consist of the transfer of
all or substantially all of the assets of the Acquired Fund in exchange solely
for shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund
Shares") and the assumption by the Acquiring Fund of certain liabilities of the
Acquired Fund and the distribution, after the Closing Date herein referred to,
of Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation
of the Acquired Fund and the dissolution and termination of the Acquired Fund,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, Income Trust and the Acquired Fund are registered investment
companies of the management type and both Income Trust and the Acquired Fund are
authorized to issue shares of beneficial interest;
WHEREAS, the Board of Trustees of the Acquired Fund has determined that the
exchange of all or substantially all of the assets and certain of the
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption of
such liabilities by the Acquiring Fund is in the best interests of the Acquired
Fund shareholders and that the interests of the existing shareholders of the
Acquired Fund would not be diluted as a result of this transaction;
WHEREAS, the Board of Trustees of Income Trust has determined that the
exchange of all or substantially all of the assets and certain of the
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption of
such liabilities by the Acquiring Fund is in the best interests of the Acquiring
Fund shareholders and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
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1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE
FOR ACQUIRING FUND SHARES AND ASSUMPTION OF THE ACQUIRED FUND'S STATED
LIABILITIES AND LIQUIDATION, DISSOLUTION AND TERMINATION OF THE ACQUIRED
FUND
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund agrees
to transfer the Acquired Fund's assets as set forth in paragraph 1.2 to the
Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of Acquiring Fund Shares, including
fractional Acquiring Fund Shares, determined by dividing the value of the
Acquired Fund's net assets attributable to its Class A shares, computed in the
manner and as of the time and date set forth in paragraph 2.1, by the net asset
value of one Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; and (ii) to assume certain liabilities of the
Acquired Fund, as set forth in paragraph 1.3. Such transactions shall take place
at the closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by the Acquiring
Fund shall consist of all property, including without limitation, all cash,
securities and dividends or interest receivables which are owned by the Acquired
Fund and any deferred or prepaid expenses shown as an asset on the books of the
Acquired Fund on the closing date provided in paragraph 3.1 (the "Closing
Date").
(b) The Acquired Fund has provided the Acquiring Fund with a list of
all of the Acquired Fund's assets as of the date of execution of this Agreement.
The Acquired Fund reserves the right to sell any of the securities constituting
a part of such assets but will not, without the prior approval of the Acquiring
Fund, acquire any additional securities other than securities of the type in
which the Acquiring Fund is permitted to invest. The Acquiring Fund will, within
a reasonable time prior to the Closing Date, furnish the Acquired Fund with a
statement of the Acquiring Fund's investment objectives, policies and
restrictions and a list of the securities, if any, on the Acquired Fund's list
referred to in the first sentence of this paragraph which do not conform to the
Acquiring Fund's investment objectives, policies and restrictions. In the event
that the Acquired Fund holds any investments which the Acquiring Fund may not
hold, the Acquired Fund will dispose of such securities prior to the Closing
Date. In addition, if it is determined that the portfolios of the Acquired Fund
and the Acquiring Fund, when aggregated, would contain investments exceeding
certain percentage limitations imposed upon the Acquiring Fund with respect to
such investments, the Acquired Fund if requested by the Acquiring Fund will
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
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1.3. The Acquired Fund will endeavor to discharge all the Acquired Fund's
known liabilities and obligations prior to the Closing Date. The Acquiring Fund
shall assume all liabilities, expenses, costs, charges and reserves reflected on
an unaudited Statement of Assets and Liabilities of the Acquired Fund prepared
by The Boston Company Advisors, Inc. ("Boston Advisors"), as sub-administrator
of the Acquiring Fund and the Acquired Fund, as of the Valuation Date (as
defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Acquired Fund reflected in and
quantified on the face of that unaudited Statement of Assets and Liabilities and
shall not assume any other liabilities, whether absolute or contingent, not
reflected thereon.
1.4. As soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro rata to
the Acquired Fund's shareholders of record determined as of the close of
business on the Closing Date (the "Acquired Fund Shareholders"), the Acquiring
Fund Shares it receives pursuant to paragraph 1.1. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Acquired Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the name of
the Acquired Fund's shareholders and representing the respective pro rata number
of the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of the
Acquired Fund, although share certificates representing interests in the
Acquired Fund will represent a number of Acquiring Fund Shares after the Closing
Date as determined in accordance with paragraph 1.1. The Acquiring Fund shall
not issue certificates representing the Acquiring Fund Shares in connection with
such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued in the
manner described in the Acquiring Fund's current prospectus and statement of
additional information.
1.6. Any transfer taxes payable upon issuance of the Acquiring Fund Shares
in a name other than the registered holder of the Acquired Fund shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall remain
the responsibility of the Acquired Fund up to and including the Closing Date and
such later dates on which the Acquired Fund is dissolved and deregistered.
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1.8. The Acquired Fund shall be dissolved and terminated under the relevant
laws of its state of organization and in accordance with its governing
documents, promptly following the Closing Date and the making of all
distributions pursuant to paragraph 1.4.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in Income Trust's Master Trust
Agreement and the Acquiring Fund's then current prospectus or statement of
additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net asset
value per share computed as of the close of regular trading on the NYSE on the
Valuation Date, using the valuation procedures set forth in Income Trust's
Master Trust Agreement and the Acquiring Fund's then current prospectus or
statement of additional information.
2.3. All computations of value shall be made by Boston Advisors in
accordance with its regular practice as pricing agent for the Acquiring Fund.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be July 15, 1994, or such later date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be held as of 5:00 p.m. at the
offices of Boston Advisors, One Boston Place, Boston, Massachusetts 02108, or at
such other time and/or place as the parties may agree.
3.2. Boston Safe Deposit and Trust Company, as custodian for the Acquiring
Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that: (a) the Acquired Fund's portfolio securities,
cash and any other assets shall have been delivered in proper form to the
Acquiring Fund within two business days prior to or on the Closing Date and (b)
all necessary transfer taxes including all applicable federal and state stock
transfer stamps, if any, shall have been paid, or provision for payment shall
have been made, in conjunction with the delivery of portfolio securities.
3.3. In the event that on the Valuation Date (a) the NYSE or another
primary trading market for portfolio securities of the Acquiring Fund or the
Acquired Fund shall be closed to trading or trading thereon shall be restricted
or (b) trading or the reporting of trading on the NYSE or elsewhere shall be
disrupted so that accurate appraisal of the value of the net assets of the
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Acquiring Fund or the Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed and reporting shall have been restored.
3.4. The Acquired Fund shall deliver at the Closing a list of the names and
addresses of the Acquired Fund's shareholders and the number, class and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing, certified on behalf of the Acquired Fund by
its President. The Acquiring Fund shall issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Secretary of the Acquired Fund, or provide evidence satisfactory to the Acquired
Fund that such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Fund represents and warrants to Income Trust and the
Acquiring Fund as follows:
(a) The Acquired Fund is a business trust, duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts;
(b) The Acquired Fund is a registered investment company classified as a
management company of the open-end type, and its registration with the
Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940
Act") is in full force and effect;
(c) The Acquired Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of
its Master Trust Agreement or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquired Fund
is a party or by which it is bound;
(d) The Acquired Fund has no material contracts or other commitments
(other than this Agreement) which will be terminated with liability to it
prior to the Closing Date;
(e) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquired Fund or any of its properties or
assets (other than that previously disclosed to the other party to the
Agreement) which, if adversely determined, would materially
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<PAGE>
and adversely affect its financial condition or the conduct of its business.
The Acquired Fund knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund for
the fiscal period from January 14, 1991 (commencement of operations) through
November 30, 1991 and for the fiscal years ended November 30, 1992 through
November 30, 1993 have been audited by Coopers & Lybrand, certified public
accountants, and are in accordance with generally accepted accounting
principles consistently applied, and such statements (copies of which have
been furnished to the Acquiring Fund) fairly reflect the financial condition
of the Acquired Fund as of such dates, and there are no known contingent
liabilities of the Acquired Fund as of such dates not disclosed therein;
(g) Since November 30, 1993, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one
year from the date that such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund. For the purposes of this
subparagraph (g), a decline in net asset value per share of the Acquired
Fund shall not constitute a material adverse change;
(h) At the Closing Date, all material federal and other tax returns and
reports of the Acquired Fund required by law then to have been filed by such
dates shall have been filed, and all federal and other taxes shown as due on
such returns shall have been paid so far as due, or provision shall have
been made for the payment thereof and, to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment has
been asserted with respect to such returns;
(i) For the most recent fiscal year and for the current year of its
operation, the Acquired Fund has met the requirements of Subchapter M of the
Code for qualification and treatment as a regulated investment company;
(j) All issued and outstanding shares of the Acquired Fund are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the time of Closing, be held by the persons and in
the amounts set forth in the records of the transfer agent as provided in
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paragraph 3.4. The Acquired Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquired
Fund's shares, nor is there outstanding any security convertible into any of
the Acquired Fund's shares;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to its assets to be transferred to the Acquiring Fund pursuant to
paragraph 1.2 and full right, power and authority to sell, assign, transfer
and deliver such assets hereunder and, upon delivery and payment for such
assets, the Acquiring Fund will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action on the part of the Acquired Fund's
Board of Trustees, and subject to the approval of the Acquired Fund's
shareholders, this Agreement will constitute a valid and binding obligation
of the Acquired Fund, enforceable in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general equity
principles;
(m) The information to be furnished by the Acquired Fund for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations thereunder applicable
thereto; and
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in paragraph 5.7
(other than information therein that relates to the Acquiring Fund) will, on
the effective date of the Registration Statement and on the Closing Date,
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not materially misleading.
4.2. Income Trust and the Acquiring Fund represent and warrant to the
Acquired Fund as follows:
(a) The Acquiring Fund is a series of Income Trust which is a business
trust, duly organized, validly existing and in good standing under the laws
of The Commonwealth of Massachusetts;
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(b) Income Trust is a registered investment company classified as a
management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect;
(c) The current prospectus of the Acquiring Fund and statement of
additional information of Income Trust conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not materially misleading;
(d) At the Closing Date, Income Trust will have good and marketable
title to the Acquiring Fund's assets;
(e) Income Trust is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of its Master Trust
Agreement or By-laws or of any agreement, indenture, instrument, contract,
lease or other undertaking with respect to the Acquiring Fund to which
Income Trust is a party or by which it is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Income Trust with respect to the Acquiring
Fund or any of the Acquiring Fund's properties or assets, except as
previously disclosed in writing to the Acquired Fund. Income Trust and the
Acquiring Fund know of no facts which might form the basis for the
institution of such proceedings and neither Income Trust nor the Acquiring
Fund is a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects the Acquiring Fund's business or Income Trust's ability on behalf of
the Acquiring Fund to consummate the transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund for
the fiscal period from December 31, 1991 (commencement of operations)
through November 30, 1992 and for the fiscal year ended November 30, 1993
have been audited by Coopers & Lybrand, certified public accountants, and
are in accordance with generally accepted accounting principles consistently
applied, and such statements (copies of which have been furnished to the
Acquired Fund) fairly reflect the financial condition of the Acquiring Fund
as of such dates, and there are no known contingent liabilities of the
Acquiring Fund as of such dates not disclosed therein;
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(h) Since November 30, 1993, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one
year from the date that such indebtedness was incurred. For the purposes of
this subparagraph (h), a decline in net asset value per share of the
Acquiring Fund shall not constitute a material adverse change;
(i) At the Closing Date, all material federal and other tax returns and
reports of the Acquiring Fund required by law then to have been filed by
such dates shall have been filed, and all federal and other taxes shown as
due on said returns shall have been paid so far as due, or provision shall
have been made for the payment thereof and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
(j) For the most recent fiscal year and for the current year of its
operation, the Acquiring Fund has met the requirements of Subchapter M of
the Code for qualification and treatment as a regulated investment company
and the Acquiring Fund intends to do so in the future;
(k) At the date hereof, all issued and outstanding Acquiring Fund Shares
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable, with no personal liability
attaching to the ownership thereof. The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Acquiring Fund, nor is there outstanding any
security convertible into any shares of the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action, on the part of Income Trust's Board
of Trustees and, assuming due authorization, execution and delivery by the
Acquired Fund, this Agreement constitutes a valid and binding obligation of
Income Trust on behalf of the Acquiring Fund, enforceable in accordance with
its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund's Shareholders, pursuant to the
terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable with no personal
liability attaching to the ownership thereof;
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(n) The information to be furnished by the Acquiring Fund for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(o) The Proxy Statement to be included in the Registration Statement
(only insofar as it relates to information provided by the Acquiring Fund
and Income Trust specifically for inclusion therein) will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; and
(p) Income Trust, on behalf of the Acquiring Fund, agrees to use all
reasonable efforts to obtain the approvals and authorizations required by
the 1933 Act, the 1940 Act and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue the Acquiring Fund's
operations after the Closing Date.
5. COVENANTS OF THE ACQUIRED FUND, INCOME TRUST AND
THE ACQUIRING FUND
5.1. The Acquired Fund and Income Trust on behalf of the Acquiring Fund
each will operate its business in the ordinary course between the date hereof
and the Closing Date, if being understood that such ordinary course of business
will include the declaration and payment of customary dividends and
distributions and any other dividends and distributions deemed advisable.
5.2. The Acquired Fund will call a meeting of its shareholders to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated herein.
5.3. The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.4. The Acquired Fund will assist Income Trust and the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement, the Acquired Fund and
Income Trust on behalf of the Acquiring Fund each will take, or cause to be
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taken, all action, and do or cause to be done, all things reasonably necessary,
proper or advisable to consummate and make effective the transactions
contemplated by this Agreement.
5.6. The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement, referred to in paragraph 4.1(n), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act in connection with the
meeting of the Acquired Fund's shareholders to consider approval of this
Agreement and the transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED
FUND
The obligations of the Acquired Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by Income Trust
and the Acquiring Fund of all of the obligations to be performed by them
hereunder on or before the Closing Date and, in addition thereto, the following
further conditions:
6.1. All representations and warranties of Income Trust and the Acquiring
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date;
6.2. Income Trust on behalf of the Acquiring Fund shall have delivered to
the Acquired Fund a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of Income Trust and the Acquiring
Fund made in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement and as to such other matters as the Acquired Fund shall reasonably
request; and
6.3. The Acquired Fund shall have received on the Closing Date a favorable
opinion from Willkie Farr & Gallagher, counsel to the Acquiring Fund, dated as
of the Closing Date, in a form reasonably satisfactory to Christina T. Sydor,
Esq., Secretary of the Acquired Fund, covering the following points:
That (a) the Acquiring Fund is a series of Income Trust which is a business
trust duly organized, validly existing and in good standing under the laws of
The Commonwealth of Massachusetts and has the power, under its
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Master Trust Agreement, to own all of its properties and assets and to carry on
its business as presently conducted; (b) this Agreement has been duly
authorized, executed and delivered by Income Trust on behalf of the Acquiring
Fund and, assuming that the Prospectus, Registration Statement and Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder and, assuming due authorization, execution and
delivery of the Agreement by the Acquired Fund, is a valid and binding
obligation of Income Trust on behalf of the Acquiring Fund enforceable against
Income Trust in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles; (c) the
Acquiring Fund Shares to be issued to the Acquired Fund's shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
validly issued and outstanding and are fully paid and non-assessable with no
personal liability attaching to ownership thereof, and no shareholder of the
Acquiring Fund has any preemptive rights to subscription or purchase in respect
thereof; (d) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, result in a
material violation of Income Trust's Master Trust Agreement or By-laws or any
provision of any agreement (known to such counsel) to which Income Trust is a
party with respect to the Acquiring Fund or by which it is bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which
Income Trust is a party with respect to the Acquiring Fund or by which it is
bound; (e) to the knowledge of such counsel, no consent, approval, authorization
or order of any court or governmental authority of the United States, the State
of New York or The Commonwealth of Massachusetts is required for the
consummation by Income Trust of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act,
and such as may be required under state securities law; (f) only insofar as they
relate to Income Trust and the Acquiring Fund, the descriptions in the Proxy
Statement of statutes, legal and governmental proceedings and contracts and
other documents, if any, are accurate and fairly present the information
required to be shown; (g) such counsel does not know of any legal or
governmental proceedings, only insofar as they relate to the Acquiring Fund,
existing on or before the effective date of the Registration Statement or the
Closing Date required to be described in the Registration Statement or to be
filed as exhibits to the Registration Statement which are not described as
required; (h) Income Trust is registered as an investment company under the 1940
Act and its registration with the Commission as an investment company under the
1940 Act is in full force and effect; and (i) to the best knowledge of such
counsel, no litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or threatened as
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to Income Trust with respect to the Acquiring Fund or any of the properties or
assets of the Acquiring Fund and Income Trust is not a party to or subject to
the provisions of any order, decree or judgment of any court or governmental
body, which materially and adversely affects the business of the Acquiring Fund,
other than as previously disclosed in the Registration Statement. In addition,
such counsel also shall state that they have participated in conferences with
officers and other representatives of Income Trust at which the contents of the
Proxy Statement and related matters were discussed and, although they are not
passing upon and do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Proxy Statement (except to the
extent indicated in paragraph (f) of their above opinion), on the basis of the
foregoing (relying as to materiality to a large extent upon the opinions of
officers and other representatives of Income Trust), no facts have come to their
attention that lead them to believe that the Proxy Statement as of its date, as
of the date of the Acquired Fund shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding Income Trust or the
Acquiring Fund or necessary to make the statements therein regarding Income
Trust or the Acquiring Fund, in the light of the circumstances under which they
were made, not misleading. Such opinion may state that such counsel does not
express any opinion or belief as to the financial statements or other financial
data or as to the information relating to Income Trust or the Acquired Fund
contained in the Proxy Statement or Registration Statement, and that such
opinion is solely for the benefit of the Acquired Fund, its trustees and its
officers. Such counsel may rely, as to matters governed by the laws of The
Commonwealth of Massachusetts, on an opinion of Massachusetts counsel. Such
opinion also shall include such other matters incident to the transaction
contemplated hereby as the Acquired Fund may reasonably request.
In this paragraph 6.3, references to the Proxy Statement include and relate
only to the text of such Proxy Statement and not to any exhibits or attachments
thereto or to any documents incorporated by reference therein.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOME TRUST
AND THE ACQUIRING FUND
The obligations of Income Trust and the Acquiring Fund to complete the
transactions provided for herein shall be subject, at its election, to the
performance by the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the Acquired Fund contained in
this Agreement shall be true and correct in all material respects as of the
A-13
<PAGE>
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, certified by the
Treasurer or Assistant Treasurer of the Acquired Fund;
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquired Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request; and
7.4. The Acquiring Fund shall have received on the Closing Date a favorable
opinion of Willkie Farr & Gallagher, counsel to the Acquired Fund, in a form
satisfactory to Christina T. Sydor, Esq., Secretary of the Acquiring Fund,
covering the following points:
That (a) the Acquired Fund is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has the power, under its Master Trust Agreement, to own all of
its properties and assets and to carry on its business as presently conducted;
(b) this Agreement has been duly authorized, executed and delivered by the
Acquired Fund and, assuming that the Prospectus, the Registration Statement and
the Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder and, assuming due authorization, execution
and delivery of the Agreement by Income Trust on behalf of the Acquiring Fund,
is a valid and binding obligation of the Acquired Fund enforceable against the
Acquired Fund in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles; (c) the
execution and delivery of this Agreement did not, and the consummation of the
transactions contemplated hereby will not, result in a material violation of the
Acquired Fund's Master Trust Agreement or By-laws or any provision of any
agreement (known to such counsel) to which the Acquired Fund is a party or by
which it is bound or, to the knowledge of such counsel, result in the
acceleration of any obligation or the imposition of any penalty, under any
agreement, judgment or decree to which the Acquired Fund is a party or by which
it is bound; (d) to the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States, the State of New York or
A-14
<PAGE>
The Commonwealth of Massachusetts is required for the consummation by the
Acquired Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and such as may be
required under state securities laws and except for an order of the Commission
under Section 8(f) of the 1940 Act declaring that the Acquired Fund has ceased
to be an investment company; (e) only insofar as they relate to the Acquired
Fund, the descriptions in the Proxy Statement of statutes, legal and
governmental proceedings and contracts and other documents, if any, are accurate
and fairly present the information required to be shown; (f) such counsel does
not know of any legal or governmental proceedings, only insofar as they relate
to the Acquired Fund existing on or before the effective date of the
Registration Statement or the Closing Date, required to be described in the
Proxy Statement or to be filed as exhibits to the Registration Statement which
are not described and filed as required; (g) the Acquired Fund is registered as
an investment company under the 1940 Act and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect; and (h) to the best knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquired Fund or
any of its properties or assets and the Acquired Fund is neither a party to nor
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business other
than as previously disclosed in the Proxy Statement. Such counsel also shall
state that they have participated in conferences with officers and other
representatives of the Acquired Fund at which the contents of the Proxy
Statement and related matters were discussed and, although they are not passing
upon and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Proxy Statement (except to the
extent indicated in paragraph (e) of their above opinion), on the basis of the
foregoing (relying as to materiality to a large extent upon the opinions of
officers and other representatives of the Acquired Fund), no facts have come to
their attention that lead them to believe that the Proxy Statement as of its
date, as of the date of the Acquired Fund shareholders' meeting, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquired Fund
or necessary in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquired Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or other financial data, or as to the information
relating to the Acquiring Fund, contained in the Proxy Statement or Registration
Statement, and that such opinion is solely for the benefit of Income Trust, its
trustees and its officers. Such counsel may rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of Massachusetts
counsel. Such opinion also
A-15
<PAGE>
shall include such other matters incident to the transaction contemplated hereby
as Income Trust on the behalf of the Acquiring Fund may reasonably request.
In this paragraph 7.4, references to the Proxy Statement include and relate
to only the text of such Proxy Statement and not to any exhibits or attachments
thereto or to any documents incorporated by reference therein.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
ACQUIRED FUND, INCOME TRUST AND THE ACQUIRING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to Income Trust on behalf of the Acquiring Fund or the
Acquired Fund, the other party to this Agreement shall, at its option, not be
required to consummate the transactions contemplated by this Agreement:
8.1. The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of its Master Trust Agreement
and By-laws and certified copies of the votes evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything herein to
the contrary, neither the Acquired Fund nor Income Trust on behalf of the
Acquiring Fund may waive the conditions set forth in this paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including "no-
action" positions of and exemptive orders from such federal and state
authorities) deemed necessary by the Acquiring Fund or the Acquired Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Acquired Fund, provided
that either party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act;
A-16
<PAGE>
8.5. The Acquired Fund and Income Trust on behalf of the Acquiring Fund,
shall have declared and paid a dividend or dividends on the outstanding shares
of the Acquired Fund and the Acquiring Fund, respectively, which, together with
all previous such dividends, shall have the effect of distributing to the
shareholders of the Acquired Fund and the Acquiring Fund all of the investment
company taxable income of the Acquired Fund and the Acquiring Fund for all
taxable years ending on or prior to the Closing Date (computed without regard to
any deduction for dividends paid) and all of each fund's net capital gain
realized in all taxable years ending on or prior to the Closing Date (after
reduction for any capital loss carry forward);
9. BROKERAGE FEES AND EXPENSES
9.1. The Acquired Fund and Income Trust on behalf of the Acquiring Fund
each represents and warrants to the other that there are no brokers or finders
entitled to receive any payments in connection with the transactions provided
for herein.
9.2. (a) Except as may be otherwise provided herein, the Acquiring Fund and
the Acquired Fund shall each be liable, in proportion to their assets, for the
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement, including the expenses of: (i) its counsel and
independent accountants associated with the Reorganization; (ii) printing and
mailing the Prospectus/Proxy Statement and soliciting proxies in connection with
the meeting of shareholders of the Acquired Fund referred to in paragraph 5.2
hereof; (iii) any special pricing fees associated with the valuation of the
Acquired Fund's or the Acquiring Fund's portfolio on the Closing Date; (iv)
expenses associated with preparing this Agreement and preparing and filing the
Registration Statement under the 1933 Act covering the Acquiring Fund Shares to
be issued in the Reorganization; and (v) registration or qualification fees and
expenses of preparing and filing such forms, if any, necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be issued in
connection with the Reorganization. The Acquired Fund shall be liable for (i)
all fees and expenses related to the liquidation and termination of the Acquired
Fund; and (ii) fees and expenses of the Acquired Fund's custodian and transfer
agent incurred in connection with the Reorganization. The Acquiring Fund shall
be liable for any fees and expenses of the Acquiring Fund's custodian and
transfer agent incurred in connection with the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired Fund,
prior to the Closing, shall pay for or include in the unaudited Statement of
Assets and Liabilities prepared pursuant to paragraph 1.3 all of its known and
reasonably estimated expenses associated with the transactions contemplated by
this Agreement.
A-17
<PAGE>
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The Acquired Fund and Income Fund on behalf of the Acquiring Fund
agree that neither party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the Closing
Date by: (1) the mutual agreement of the Acquired Fund and Income Trust; (2) the
Acquired Fund in the event Income Trust or the Acquiring Fund shall, or Income
Trust in the event the Acquired Fund shall, materially breach any
representation, warranty or agreement contained herein to be performed at or
prior to the Closing Date; or (3) a condition herein expressed to be precedent
to the obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. In the event of any such termination, there shall be no liability for
damages on the part of either the Acquired Fund or Income Trust, or their
respective trustees or officers, to the other party, but each shall bear the
expenses incurred by it incidental to the preparation and carrying out of this
Agreement as provided in paragraph 9.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Income
Trust and the Acquired Fund; provided, however, that following the meeting of
the Acquired Fund shareholders called by the Acquired Fund pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Acquiring Fund Shares to be issued
to the Acquired Fund's shareholders under this Agreement to the detriment of
such shareholders without their further approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the Acquired Fund, Two World
Trade Center, 100th Floor, New York, New York 10048, Attention: Heath
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<PAGE>
B. McLendon; or to Income Trust on behalf of the Acquiring Fund, Two World Trade
Center, 100th Floor, New York, New York 10048, Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
14.1. The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
14.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, corporation or other entity, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
14.5. (a) It is expressly agreed that the obligations of the Acquired Fund
hereunder shall not be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of the Acquired Fund personally, but bind only the
trust property of the Acquired Fund, as provided in its Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the
trustees of the Acquired Fund and this Agreement has been executed by authorized
officers of the Acquired Fund, acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them personally, but shall bind only the trust property of the Acquired Fund
as provided in its Master Agreement.
(b) It is expressly agreed that the obligations of Income Trust
hereunder shall not be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of Income Trust personally, but bind only the
trust property of Income Trust and the Acquiring Fund, as provided in the Master
Trust Agreement of Income Trust. The execution and delivery of this Agreement
have been authorized by the trustees of Income Trust and this Agreement has been
executed by authorized officers of Income Trust on behalf of the Acquiring Fund,
acting as such, and neither such authorization by such trustees nor such
execution and delivery by such officers shall be
A-19
<PAGE>
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the
Acquiring Fund as provided in the Master Trust Agreement of Income Trust.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its Chairman of the Board, President or Vice President and its
seal to be affixed thereto and attested by its Secretary or Assistant Secretary.
<TABLE>
<S> <C>
Attest: SMITH BARNEY SHEARSON WORLDWIDE
PRIME ASSETS FUND
/s/CHRISTINA T. SYDOR By: /s/HEATH B. MCLENDON
________________________________________ ____________________________________
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
Attest: SMITH BARNEY SHEARSON INCOME TRUST,
on behalf of SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
/s/CHRISTINA T. SYDOR By: /s/HEATH B. MCLENDON
________________________________________ ____________________________________
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
</TABLE>
A-20
<PAGE>
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND
SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND
SMITH BARNEY SHEARSON INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
SMITH BARNEY SHEARSON INTERMEDIATE MATURITY
NEW YORK MUNICIPALS FUND
SUPPLEMENT TO PROSPECTUSES DATED JANUARY 29, 1994
The following information modifies the disclosure in the Prospectus of each of
the funds listed above (each a "Fund") under "Exchange Privilege:"
Shares of the Fund may be exchanged with the following funds only upon
completion of certain automated systems:
Smith Barney Shearson Daily Dividend Fund Inc.
Smith Barney Shearson Government and Agencies Fund Inc.
Smith Barney Shearson Municipal Money Market Fund Inc.
Smith Barney Shearson California Municipal Money Market Fund
Smith Barney Shearson New York Municipal Money Market Fund
Smith Barney Shearson Adjustable Rate Government Income Fund
Shareholders will be notified when such automated systems are complete. Until
such time shareholders will not be able to exchange their shares for shares of
the above-referenced funds.
- -------------------
April 14, 1994
<PAGE>
JANUARY 29, 1994
SMITH BARNEY SHEARSON
LIMITED
MATURITY
TREASURY
FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
PROSPECTUS January 29, 1994
Two World Trade Center
New York, New York 10048
(212) 720-9218
Smith Barney Shearson Limited Maturity Treasury Fund (the "Fund") seeks as
high a level of current income as is consistent with preservation of principal
by investing exclusively in securities issued by the United States Treasury and
other United States government securities. Dividends paid by the Fund that
represent interest derived from securities held by the Fund may be exempt from
MANY, BUT NOT ALL, state and local income taxes. The weighted average maturity
of the Fund's portfolio securities will normally not be less than two nor more
than five years. The Fund is one of a number of funds, each having distinct
investment objectives and policies making up Smith Barney Shearson Income Trust
(the "Trust"). The Trust is an open-end investment management company commonly
referred to as a mutual fund.
This Prospectus briefly sets forth certain information about the Fund,
including applicable sales charges and operating and distribution expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses that may be obtained by calling or writing the Trust at
the telephone number or address set forth above or by contacting your Smith
Barney Shearson Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated January 29, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address listed
above or by contacting your Smith Barney Shearson Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY SHEARSON INC.
Distributor
GREENWICH STREET ADVISORS
Investment Adviser
THE BOSTON COMPANY ADVISORS, INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary 3
-------------------------------------------------------------
Financial Highlights 8
-------------------------------------------------------------
The Fund's Performance 9
-------------------------------------------------------------
Management of the Trust and the Fund 10
-------------------------------------------------------------
Investment Objective and Management Policies 12
-------------------------------------------------------------
Purchase of Shares 16
-------------------------------------------------------------
Redemption of Shares 21
-------------------------------------------------------------
Valuation of Shares 24
-------------------------------------------------------------
Exchange Privilege 25
-------------------------------------------------------------
Distributor 30
-------------------------------------------------------------
Dividends, Distributions and Taxes 31
-------------------------------------------------------------
Additional Information 33
-------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING PROSPECTUS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF
ADDITIONAL INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE HEADINGS IN THE
PROSPECTUS. SEE "TABLE OF CONTENTS."
BENEFITS TO INVESTORS THE FUND OFFERS INVESTORS SEVERAL IMPORTANT BENEFITS:
- - A professionally managed diversified portfolio of primarily obligations
issued or guaranteed by the United States Treasury and other United States
government securities.
- - Investment liquidity through convenient purchase and redemption procedures.
- - A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
- - Different methods for purchasing shares that allow investment flexibility and
a wider range of investment alternatives.
- - Automatic dividend reinvestment feature, plus exchange privilege within the
same class of shares of most other funds in the Smith Barney Shearson Group
of Funds.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney Shearson Inc. ("Smith Barney Shearson"), or a broker that clears
securities transactions through Smith Barney Shearson on a fully disclosed basis
(an "Introducing Broker"). The public offering price will be at the net asset
value per share next determined after a purchase order is received, subject to a
maximum sales charge of 1.25%. Smith Barney Shearson receives a shareholder
servicing fee pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"), at the annual rate of .15% of the value of the
Fund's average daily net assets. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors are subject to a minimum initial investment
requirement of $2,500 and a minimum subsequent investment requirement of $1,000,
except that, for certain employee benefit plans, the minimum purchase is $250.
See "Purchase of Shares."
3
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which shareholders may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount not less than
$100. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed at the Fund's next determined net
asset value per share on each day on which the New York Stock Exchange, Inc.
(the "NYSE") is open for business. Redemptions of shares made within one year of
their purchase will be subject to a contingent deferred sales charge ("CDSC")
equal to 1.00% of the amount being redeemed. See "Redemption of Shares" and
"Valuation of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Greenwich Street Advisors, a division of
Mutual Management Corp. ("Greenwich Street Advisors"), serves as the Fund's
investment adviser. Mutual Management Corp. provides investment advisory and
management services to investment companies affiliated with Smith Barney
Shearson. Mutual Management Corp. is controlled by Smith Barney Shearson
Holdings Inc. ("Holdings"), which is a wholly owned subsidiary of The Travelers
Inc. ("Travelers") (formerly Primerica Corporation), a diversified financial
services holding company principally engaged in the business of providing
investment, consumer finance and insurance services.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), a financial services holding company which in turn is a
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See "Management
of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of the Fund may be exchanged for Class A shares of
certain other funds in the Smith Barney Shearson Group of Funds. Certain
exchanges may be subject to a sales charge differential. See "Exchange
Privilege."
VALUATION OF SHARES Net asset value per share is quoted daily in the financial
section of most newspapers and is also available from your Smith Barney Shearson
Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and generally paid on the 10th day of the calendar month.
4
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Distributions of net realized long-and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they were
earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares will be
reinvested automatically, unless otherwise specified by an investor, in
additional shares of the Fund at current net asset value. Shares acquired by
dividend and distribution reinvestments will not be subject to any sales charge
or CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS No assurance can be given that the Fund
will achieve its investment objective. Although the Fund will limit its
investments to United States government securities, shares of the Fund, unlike
certain bank deposit accounts, are not insured or guaranteed by the United
States government. Changes in interest rates generally will result in increases
or decreases in the market value of the obligations held by the Fund. The Fund's
yield may not be as high as those of other funds that invest in lower quality
and/or longer term securities. The Fund is not a money market fund; the Fund's
net asset value per share will fluctuate and will be subject to greater
fluctuation to the extent that the Fund invests in zero coupon United States
Treasury securities. The Fund may be subject to certain risks in entering into
securities transactions on a when-issued or delayed-delivery basis. INVESTORS
SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE WHETHER DIVIDENDS PAID BY THE
FUND THAT REPRESENT INTEREST DERIVED FROM UNITED STATES GOVERNMENT SECURITIES
ARE EXEMPT FROM ANY OTHERWISE APPLICABLE STATE OR LOCAL INCOME TAXES. See
"Investment Objective and Management Policies -- Risk Factors and Special
Considerations" and "Dividends, Distributions and Taxes."
5
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND EXPENSES
THAT AN INVESTOR WILL INCUR, EITHER DIRECTLY OR INDIRECTLY, AS A SHAREHOLDER OF
THE FUND, BASED UPON THE FUND'S CURRENT ANNUAL OPERATING EXPENSES:
- --------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of
offering price) 1.25%
Maximum CDSC (as a percentage of redemption proceeds) 1.00%
-----------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (after waivers of 0.25%) 0.30%
12b-1 fees 0.15%
Other expenses 0.34%
-----------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(after waivers) 0.79%
-----------------------------------------------------------------------------------
</TABLE>
The sales charge set forth in the above table is the maximum charge imposed on
purchases and redemptions of Fund shares and investors may pay less than those
charges above, as described under "Purchases of Shares." Management fees paid by
the Fund include investment advisory fees payable monthly to Greenwich Street
Advisors at the annual rate of 0.35% of the value of the Fund's average daily
net assets, and administration fees payable to Boston Advisors at the annual
rate of 0.20% of the value of the Fund's average daily net assets. The nature of
the services for which the Fund pays management fees is described under
"Management of the Trust and the Fund." "Other expenses" includes fees for
shareholder services not provided by Smith Barney Shearson, custodial fees,
legal and accounting fees, printing costs and registration fees, the costs of
regulatory compliance, the costs associated with maintaining the Trust's legal
existence and the costs involved in communicating with shareholders of the Fund.
Greenwich Street Advisors and Boston Advisors have voluntarily waived
investment advisory and administration fees, respectively, in the aggregate
amount equal to 0.25% of the value of the Fund's average daily net assets. This
has the effect of lowering the Fund's overall expense ratio and increasing the
returns available to investors. If Greenwich Street Advisors
6
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
and Boston Advisors had not elected to waive fees, the Fund's total operating
expenses for the period from December 1, 1992 through November 30, 1993, would
have been as a percentage of the value of the Fund's average daily net assets
1.04%.
EXAMPLE *
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon (a) payment
by an investor of the maximum sales charge and the applicable CDSC, (b) payment
by the Fund of operating expenses at the levels set forth in the table above and
(c) the following assumptions:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------
A shareholder would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time
period................................. $31 $48 $66 $120
A shareholder would pay the following
expenses on the same investment,
assuming no redemption................. $21 $38 $56 $110
-------------------------------------------------------------------------------
<FN>
*This example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
Moreover, while this example assumes a 5% annual return, the Fund's actual
performance will vary and may result in an actual return greater or less than
5%.
</TABLE>
7
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE HAS BEEN AUDITED BY COOPERS & LYBRAND, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL REPORT DATED
NOVEMBER 30, 1993. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL
REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF ADDITIONAL
INFORMATION.
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
11/30/93 11/30/92*
<S> <C> <C>
Net Asset Value, beginning of period $ 7.88 $ 7.90
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.38 0.37
Net realized and unrealized gain/loss on
investments 0.35 (0.02)
- ------------------------------------------------------------------------------
Total from investment operations 0.73 0.35
Less distributions:
Dividends from net investment income (0.38) (0.37)
Distributions from net realized capital gains (0.09) --
- ------------------------------------------------------------------------------
Total distributions (0.47) (0.37)
- ------------------------------------------------------------------------------
Net Asset Value, end of period $ 8.14 $ 7.88
- ------------------------------------------------------------------------------
Total return++ 9.49% 4.54%
- ------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $52,026 $44,967
Ratio of operating expenses to average net
assets+++ 0.79% 0.65%**
Ratio of net investment income to average net
assets 4.58% 4.96%**
Portfolio turnover rate 104% 188%
- ------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on December 31, 1991.
**Annualized.
+Net investment income per share before waiver of fees by investment adviser
and administrator for the year ended November 30, 1993 and waiver of fees by
investment adviser, administrator, and custodian for the period ended
November 30, 1992 was $0.36 and $0.33, respectively.
++Total return represents aggregate total returns for the periods indicated
and does not reflect any applicable sales charges.
+++Annualized operating expense ratios before waiver of fees by investment
adviser and administrator for the year ended November 30, 1993 and waiver
of fees by investment adviser, sub-investment adviser and administrator and
custodian for the period ended November 30, 1992 were 1.04% and 1.19%,
respectively.
</TABLE>
8
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
THE FUND'S PERFORMANCE
TOTAL RETURN
From time to time, the Fund may advertise the "average annual total return"
over various periods of time. Such total return figure show the average
percentage change in value of an investment in the Fund from the beginning date
of the measuring period to the ending date of the period. The figure reflects
changes in the price of the Fund's shares and assumes that any income, dividends
and/or capital gains distributions made by the Fund during the period are
reinvested in shares of the Fund. Figures will be given for recent one-, five-
and 10-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Fund's operations, or on a year-by-year
basis). When considering average annual total return figures for periods longer
than one year, investors should note that the Fund's annual total return for any
one year in the period might have been greater or less than the average for the
entire period. The Fund may also use "aggregate" total return figures for
various periods, representing the cumulative change in value of an investment
for the specific period (again reflecting changes in the Fund's share price and
assuming reinvestment of dividends and distributions). Aggregate total returns
may be calculated either with or without the effect of the maximum sales charge
or CDSC and may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of total return (that is, the
change in value of initial investment, income dividends and capital gains
distributions).
YIELD
From time to time, the Fund may advertise the 30-day "yield." The yield of the
Fund refers to the income generated by an investment in the Fund over the 30-day
period identified in the advertisement and is computed by dividing the net
investment income per share earned by the Fund during the period by the public
offering price on the last day of the period. This income is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as a
percentage of the net asset value.
In reports or other communications to shareholders or in advertising
materials, the Fund may compare its performance with that of other mutual funds
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent services which monitor the performance of
9
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
THE FUND'S PERFORMANCE (CONTINUED)
mutual funds. The performance information may also include evaluations of the
Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as BARRON'S, BUSINESS WEEK,
CDA INVESTMENT TECHNOLOGIES, INC., FORBES, FORTUNE, INSTITUTIONAL INVESTOR,
INVESTORS DAILY, KIPLINGER'S PERSONAL FINANCE, MONEY, MORNINGSTAR MUTUAL FUND
VALUES, THE NEW YORK TIMES, THE WALL STREET JOURNAL and USA TODAY. Performance
figures are based on historical earnings and are not intended to indicate future
performance. The Statement of Additional Information further describes the
methods used to determine performance. Performance figures may be obtained from
your Smith Barney Shearson Financial Consultant.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the persons and companies that furnish services to the
Fund, including agreements with the Fund's investment adviser, administrator,
distributor, custodian and transfer agent. The day-to-day operations of the Fund
have been delegated to Greenwich Street Advisors and Boston Advisors. The
Statement of Additional Information contains background information regarding
each of the Trust's Trustees and executive officers of the Fund.
INVESTMENT ADVISER
Greenwich Street Advisors located at Two World Trade Center, New York, New
York 10048, serves as the Fund's investment adviser. Greenwich Street Advisors
(through its predecessors), has been in the investment counseling business since
1934 and is a division of Mutual Management Corp., which was incorporated in
1978. Greenwich Street Advisors renders investment advice to investment
companies that had aggregate assets under management as of December 31, 1993 in
excess of $42.8 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Greenwich Street Advisors manages the Fund's portfolio in accordance with
10
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
the Fund's stated investment objective and policies, makes investment decisions
for the Fund, places orders to purchase and sell securities and employs
professional portfolio managers and securities analysts who provide research
services to the Fund. For the fiscal year ended November 30, 1993 the Fund paid
investment advisory fees to Greenwich Street Advisors and Shearson Lehman
Advisors, the predecessor to Greenwich Street Advisors, in an amount equal to
0.19% of the value of the Fund's average daily net assets. Greenwich Street
Advisors and Shearson Lehman Advisors waived investment advisory fees in an
amount equal to 0.16% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
James E. Conroy, Managing Director of Greenwich Street Advisors, has served as
Vice President of the Fund since it commenced operations on December 31, 1991,
and manages the day-to-day operations of the Fund, including making all
investment decisions.
Mr. Conroy's management discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended November 30, 1993 is
included in the Annual Report dated November 30, 1993. A copy of the Annual
Report may be obtained upon request without charge from your Smith Barney
Shearson Financial Consultant or by writing or calling the Fund at the address
or phone number listed on pages one of this Prospectus.
ADMINISTRATOR
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management, as of December 31, 1993,
in excess of $86.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists all aspects of the Fund's administration and operation. For
the fiscal year ended November 30, 1993, Boston Advisors received 0.11% of the
value of the Fund's average daily net assets and voluntarily waived 0.09%.
11
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is as high a level of current income as
is consistent with preservation of principal. No assurance can be given that the
Fund will be able to achieve its investment objective, which may be changed only
with the approval of the holders of a majority of the Fund's outstanding shares.
INVESTMENT POLICIES
GENERAL. In seeking its investment objective, the Fund invests exclusively in
(a) securities issued by the United States Treasury and (b) other United States
government securities that generally provide interest income exempt from state
and local income taxes. Among the Treasury securities in which the Fund invests
are Treasury Bills, Treasury Notes, Treasury Bonds and other debt instruments
issued by the United States Treasury. Treasury securities are direct obligations
of the United States government that differ among themselves in interest rates,
maturities, call provisions and the times of their issuances. Treasury Bills
have initial maturities of one year or less, Treasury Notes have initial
maturities of from one to 10 years, and Treasury Bonds have initial maturities
of greater than 10 years.
The Fund will limit its investments in United States government securities,
other than Treasury securities, to those the interest from which is prohibited
under Federal law from being taxed by the states. Among the obligations to which
this prohibition may currently apply are those issued by the Federal Financing
Bank, Federal Home Loan Banks, the General Services Administration, the Student
Loan Marketing Association, the Tennessee Valley Authority, the U.S. Postal
Service and various institutions that previously were or currently are part of
the Farm Credit System (which has been undergoing a reorganization since 1987).
The Fund may purchase zero coupon securities issued by the United States when
yields on those securities are attractive, to enhance portfolio liquidity or for
a combination of both of these purposes. Zero coupon securities are debt
obligations that are issued or purchased at a significant discount from face
value that approximates the total amount of interest the security will accrue
and compound over the period until maturity or the particular interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance or purchase. Zero coupon securities, which
12
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
do not require the periodic payment of interest, benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of cash.
These investments experience greater volatility in market value than fixed
income securities that make regular payments of interest. The Fund may invest in
zero coupon securities issued by the United States Treasury as component parts
of Treasury Bonds that represent scheduled interest and principal payments on
the bonds. The Fund will accrue income on zero coupon securities it holds for
tax and accounting purposes, which income is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of portfolio securities to satisfy the Fund's distribution
obligations.
INVESTING IN LIMITED MATURITY OBLIGATIONS. The weighted average maturity of
the Fund's portfolio securities will normally not be less than two nor more than
five years. The maximum remaining maturity of the securities in which the Fund
will normally invest will be no greater than 10 years.
Greenwich Street Advisors believes that the Fund, by virtue of holding United
States government securities with maturities as described above, may offer an
attractive investment opportunity for investors seeking a higher yield than a
short-term fund investing principally in United States government securities and
less fluctuation in net asset value than a longer term fund investing
principally in United States government securities. Intermediate-term government
bonds enjoyed higher returns, compounded annually over the period 1973 through
1991, than did long-term government bonds or 90-day Treasury Bills over the same
period, the better performance of the intermediate-term bonds reflecting a
combination of their price stability and relatively high yield.
Intermediate-term bonds out-performed longer-term issues over the period because
intermediate-term bonds did not suffer the large capital losses experienced by
long-term bonds when bond yields rose. Intermediate-term bonds outperformed
short-term bills because the yield on intermediate-term obligations during the
period was typically higher than the yield on short-term obligations. Although
Greenwich Street Advisors believes that the history of government bonds from
1973 through 1991 should be indicative of the future performance of the
securities in which the Fund invests, no assurance can be given that those
securities will perform as well in the future as intermediate-term government
bonds have performed in the past.
13
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT TECHNIQUES. The Fund purchases securities on a when-issued basis,
or purchases or sells securities for delayed delivery. In when-issued or
delayed-delivery transactions, delivery of the securities occurs beyond normal
settlement periods, and no payment or delivery is made by the Fund prior to the
actual delivery or payment by the other party to the transaction. The Fund will
not accrue income with respect to a when-issued or delayed delivery security
prior to its stated delivery date. The Trust will establish with its custodian,
Boston Safe, a segregated account consisting of cash or United States government
securities in an amount equal to the amount of the Fund's when-issued and
delayed delivery purchase commitments.
INVESTMENT RESTRICTIONS
The Trust adopted certain fundamental investment restrictions with respect to
the Fund that may not be changed without approval of a majority of the Fund's
outstanding shares as defined in the 1940 Act. Included among those fundamental
restrictions are the following:
1. The Fund does not borrow money, except that the Fund may borrow from banks
for temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests and cash payments of dividends and distributions that
might otherwise require the untimely disposition of securities, in an amount
not to exceed 10% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever the Fund's borrowings
exceed 5% of the value of its total assets, the Fund does not make any
additional investments.
2. The Fund does not lend money to other persons, except through purchasing
debt obligations.
3. The Fund does not pledge, hypothecate, mortgage or otherwise encumber its
assets, except to secure permitted borrowings.
Certain other investment restrictions adopted by the Fund are described in the
Statement of Additional Information.
14
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risk factors and special considerations, such
as those described below:
DESIGN OF THE FUND. Although the Fund is designed as an alternative to fixed
income investments seeking to maintain stable principal values, such as money
market mutual funds and bank deposit accounts, the Fund differs in certain
respects from those instruments. Unlike the net asset value per share of a money
market fund, for example, the Fund's net asset value will fluctuate, the degree
of fluctuation increasing to the extent that the Fund invests in zero coupon
Treasury securities. In addition, unlike certain bank deposit accounts, an
investment in the Fund is not insured.
INTEREST RATE RISK. The Fund's portfolio securities will be affected by
general changes in interest rates, which changes will result in increases or
decreases in the market value of the Fund's investments. The market value of the
obligations in which the Fund will invest can be expected to vary inversely to
changes in prevailing interest rates. Investors should also recognize that, in
periods of declining interest rates, the Fund's yield will tend to be somewhat
higher than prevailing market rates, and in periods of rising interest rates,
the Fund's yield will tend to be somewhat lower. In addition, when interest
rates are falling, the inflow of net new money to the Fund from the continuous
sale of its shares will likely be invested in instruments producing lower yields
than the balance of its investments, thereby reducing the Fund's current yield.
In periods of rising interest rates, the opposite result can be expected to
occur. The Fund's yield may not be as high as those of other funds that invest
in lower quality and/or longer term securities.
STATE AND LOCAL TAXATION. Many, but not all, states will permit the Fund's
shareholders to treat dividends from the Fund that represent interest derived
from Treasury and certain United States government securities as income that is
exempt from state income taxes. As a result, the state and local tax benefits
intended to be offered by the Fund may be unavailable to certain investors.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
15
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Purchasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent.
The Fund cannot accurately predict its portfolio turnover rate, but
anticipates that its annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Fund are
replaced once during a period of one year. Greenwich Street Advisors will not
consider turnover rate a limiting factor in making investment decisions
consistent with the Fund's investment objective and policies.
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
Purchases of shares must be made through a brokerage account maintained with
Smith Barney Shearson or with an Introducing Broker. No maintenance fee will be
charged in connection with a brokerage account through which an investor
purchases shares of the Fund. Purchases are effected at the net asset value per
share next determined after a purchase order is received by Smith Barney
Shearson or an Introducing Broker (the "trade date"). Payment is generally due
at Smith Barney Shearson or at the Introducing Broker on the fifth business day
(the "settlement date") after the trade date. Investors who make payment prior
to the settlement date may permit the payment to be held in their brokerage
accounts or may designate a temporary investment (such as a money market fund in
the Smith Barney
16
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Shearson Group of Funds) for the payment until the settlement date. The Fund
reserves the right to reject any purchase order for shares and to suspend the
offering of shares for a time.
Purchase orders received by Smith Barney Shearson or an Introducing Broker
prior to the close of regular trading on the NYSE (currently 4:00 p.m., New York
time) on any day that the Fund's net asset value is calculated are priced
according to the net asset value determined on that day. Purchase orders
received after the close of the NYSE are priced as of the time that the net
asset value per share is next determined. See "Valuation of Shares."
The public offering price is the net asset value per share plus a sales
charge, which is imposed in accordance with the following schedule:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS %
AMOUNT OF INVESTMENT* OF OFFERING PRICE OF NET ASSET VALUE
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Less than $50,000 1.25% 1.27%
$50,000 but less than $250,000 1.00% 1.01%
$250,000 but less than $500,000 .75% .76%
$500,000 but less than $1,000,000 .50% .50%
$1,000,000 or more* 0% 0%
- -------------------------------------------------------------------------------------
<FN>
*No sales charge is imposed on purchases of $1 million or more; however, a CDSC of .75% is
imposed for the first year after purchase. The CDSC is payable to Smith Barney Shearson
which, with Boston Advisors, compensates Smith Barney Shearson Financial Consultants upon
the sale of these shares. The CDSC is waived in the same circumstances in which the CDSC
applicable to all other Fund shares is currently waived. See "Redemption of Shares --
Contingent Deferred Sales Charges -- Waivers of the Contingent Deferred Sales Charge."
</TABLE>
SYSTEMATIC INVESTMENT PLAN. The Fund offers a Systematic Investment Plan under
which a shareholder may authorize Smith Barney Shearson to place a purchase
order each month or quarter for Fund shares in an amount not less than $100. The
purchase price is paid automatically from cash held in the shareholder's Smith
Barney Shearson brokerage account or through the automatic redemption of the
shareholder's shares of a Smith Barney Shearson money market fund. For further
information regarding the Systematic Investment Plan, shareholders should
contact their Smith Barney Shearson Financial Consultants.
INVESTMENT MINIMUMS. The minimum initial investment in the Fund is $2,500 and
the minimum subsequent investment is $1,000, except that, for
17
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
(a) employee benefit plans such as individual retirement accounts ("IRAs"),
self-employed retirement plans and retirement plans qualified under Section
403(b)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), the
minimum investment is $250 and (b) purchases through the Fund's Systematic
Investment Plan, the minimum initial and subsequent investments are both $100.
No minimum investment requirements are imposed on employees of Travelers and its
affiliates, including Smith Barney Shearson. The Trust reserves the right at any
time to vary the initial and subsequent investment minimums applicable to the
purchase of shares of any Fund. Certificates evidencing shares of a Fund will be
issued only upon written request to the Trust's transfer agent, The Shareholder
Services Group, Inc. ("TSSG"), a subsidiary of First Data Corporation.
SMITH BARNEY SHEARSON 401(K) PROGRAM
Shareholders investing in the Fund may be eligible to participate in the Smith
Barney Shearson 401(k) Program (the "401(k) Program"), which is generally
designed to assist employers or plan sponsors in the creation and operation of
retirement plans qualified under Section 401(a) of the Code. The same terms and
conditions offered to 401(k) plans, to the extent applicable, are also available
through the 401(k) Program to other types of participant directed, tax-qualified
employee benefit plans (collectively, "Participating Plans").
The sales charge for shares acquired by Participating Plans are as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS %
AMOUNT OF INVESTMENT OF OFFERING PRICE OF NET ASSET VALUE
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Less than $50,000 1.25% 1.27%
$50,000 but less than $250,000 1.00% 1.01%
$250,000 but less than $500,000 .75% .76%
$500,000 but less than $750,000 .50% .50%
$750,000 or more .00% .00%
- -------------------------------------------------------------------------------------
</TABLE>
Shares of the Fund acquired by Participating Plans will not be subject to a
CDSC.
Participating Plans eligible to purchase Class B and Class D shares of other
funds in the Smith Barney Shearson Group of Funds may not acquire shares of the
Fund. Under the 401(k) Program, Class B shares are offered to
18
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans that: (a) purchase less than $250,000 of Class B shares of
one or more funds in the Smith Barney Shearson Group of Funds that are sold
subject to a CDSC; and (b) that have less than 100 employees eligible to
participate in the Participating Plan. Class D shares are offered to
Participating Plans that: (a) purchase less than $750,000 but more than $250,000
of Class D shares of one or more funds in the Smith Barney Shearson Group of
Funds that offer one or more classes of shares subject to a sales charge and/or
CDSC; or (b) have more than 100 but less than 250 employees eligible to
participate in the Participating Plan.
Participating Plans wishing to acquire shares of the Fund through the 401(k)
Program must purchase such shares directly from the Trust's transfer agent. For
further information regarding the 401(k) Program, investors should contact their
Smith Barney Shearson Financial Consultants.
REDUCED SALES CHARGES
Reduced sales charges are available to investors who are eligible to combine
their purchases of Fund shares to receive volume discounts. Investors eligible
to receive volume discounts include individuals and their immediate families,
tax-qualified employee benefit plans and trustees or other professional
fiduciaries (including banks and investment advisers registered with the SEC
under the Investment Advisers Act of 1940, as amended) purchasing shares for one
or more trust estates or fiduciary accounts even though more than one
beneficiary is involved. Reduced sales charges are also available under a
combined right of accumulation, under which an investor who is purchasing shares
of the Fund and any other fund in the Smith Barney Shearson Group of Funds
listed below under "Exchange Privilege" and sold with a sales charge may combine
the value of the shares of those series and funds with the value of the Fund
shares being purchased to qualify for a reduced sales charge in accordance with
the schedule shown above. If, for example, an investor holds shares of the Fund
that has an aggregate value of $40,000, and makes an additional investment in
the Fund of $20,000, the sales charge applicable to the additional investment
would be 1.00%, rather than the 1.25% normally charged on a $20,000 purchase.
Investors interested in further information regarding volume discounts and the
combined right of accumulation should contact their Smith Barney Shearson
Financial Consultants.
19
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Shares of the Fund may be offered without any applicable sales charges to (a)
employees of Travelers and its subsidiaries, including Smith Barney Shearson,
employee benefit plans for those employees and their immediate families when
orders on their behalf are placed by the employees; (b) accounts managed by
investment advisory subsidiaries of Travelers; (c) directors, trustees or
general partners of any investment company for which Smith Barney Shearson
serves as distributor; (d) any other investment company in connection with the
combination of such company with the Fund by merger, acquisition of assets or
otherwise; (e) any person investing the proceeds of a redemption of shares of
any series of the Trust within 180 days of the redemption; and (f) any person
investing the proceeds of a redemption of shares of any fund in the Smith Barney
Shearson Group of Funds listed below under "Exchange Privilege" within 30 days
of the redemption.
REINSTATEMENT PRIVILEGE
An investor who redeems shares of the Fund and who reinvests all or part of
the redemption proceeds within 180 days of the redemption in shares of any
series of the Trust will not be assessed any sales charge upon the subsequent
purchase of shares made with the redemption proceeds. An investor who redeems
shares of the Fund and who reinvests all or part of the redemption proceeds
within 30 days of the redemption in shares of any fund in the Smith Barney
Shearson Group of Funds listed below under "Exchange Privilege" also will not be
assessed any sales charge upon the subsequent purchase of shares made with the
redemption proceeds.
An investor who has redeemed shares of the Fund and who reinvests all or part
of the redemption proceeds in shares of any of the Trust's series within 180
days of the redemption will receive a proportionate credit (in the form of
additional shares of the series into which the reinvestment is being made) for
any CDSC imposed on the prior redemption. An investor who has redeemed shares of
the Fund and who reinvests all or any part of the redemption proceeds within 30
days of the redemption in shares of any fund in the Smith Barney Shearson Group
of Funds listed below under "Exchange Privilege" will receive a proportionate
credit (in the form of additional shares of the fund into which the reinvestment
is being made). The CDSC applicable to redemption of shares of the Fund is
described below under "Redemption of Shares -- Contingent Deferred Sales
Charge."
20
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES
REDEMPTIONS IN GENERAL
Shares of the Fund may be redeemed on any day on which the Fund's net asset
value is calculated as described below under "Valuation of Shares." Redemption
requests received in proper form prior to the close of regular trading on the
NYSE are priced at the net asset value per share determined on that day, subject
to any applicable CDSC. Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value as next determined,
subject to any applicable CDSC. The Fund normally transmits redemption proceeds
for credit to the shareholder's account at Smith Barney Shearson or at an
Introducing Broker at no charge (other than any applicable CDSC) within seven
days after receipt of a redemption request. Generally, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney Shearson will benefit from the use of temporarily uninvested funds. A
shareholder who pays for Fund shares by personal check will be credited with the
proceeds of a redemption of those shares only after the purchase check has been
collected, which may take up to 10 days or more. Shareholders who anticipate the
need for more immediate access to their investment should purchase shares with
Federal funds, by bank wire or by a certified or cashier's check.
INVOLUNTARY REDEMPTIONS
A Fund account that is reduced to a value of $1,000 or less may be subject to
redemption by the Fund, but only after the shareholder has been given at least
30 days in which to increase the account balance to more than $1,000.
Shares of the Fund may be redeemed in either of the following two ways:
REDEMPTIONS THROUGH SMITH BARNEY SHEARSON
Redemption requests may be made through Smith Barney Shearson or an
Introducing Broker. A shareholder desiring to redeem Fund shares represented by
certificates must present the certificates to Smith Barney Shearson or the
Introducing Broker endorsed for transfer (or accompanied by a stock power),
signed exactly as the shares are registered. Smith Barney Shearson or the
Introducing Broker will transmit all properly received redemption
21
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
requests to TSSG. Redemption requests involving shares represented by
certificates will not be deemed received until TSSG has received the
certificates in proper form.
REDEMPTIONS BY MAIL
Shares held by Smith Barney Shearson as custodian must be redeemed by
submitting a written request to your Smith Barney Shearson Financial Consultant.
All other shares may be redeemed by submitting a written request for redemption
to:
Smith Barney Shearson Limited Maturity Treasury Fund
The Shareholder Services Group, Inc.,
Exchange Place, P.O. Box 9134,
Boston, Massachusetts 02205-9134
A written request for redemption to TSSG or your Smith Barney Shearson
Financial Consultant must (a) state the number of shares to be redeemed, (b)
identify the shareholder's account number and (c) be signed by each registered
owner of the shares exactly as the shares are registered. If the shares to be
redeemed are represented by certificates, the certificates also must be
submitted to TSSG endorsed for transfer or accompanied by a stock power endorsed
exactly as the shares are registered. Any signature appearing on a redemption
request, share certificate or stock power must be guaranteed by a domestic bank,
a savings and loan institution, domestic credit union, member bank of the
Federal Reserve System or a member firm of a national securities exchange. TSSG
may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until TSSG receives all required
documents in proper form.
CONTINGENT DEFERRED SALES CHARGE
The CDSC is payable to Smith Barney Shearson and is imposed on that portion of
a redemption by the shareholder that causes the current value of shares of the
Fund held by the shareholder to fall below the total dollar amount of payments
for the purchase of shares of the Fund (less any applicable sales charge upon
purchase) ("Purchase Payments") made by the shareholder during the preceding
year. No CDSC would be imposed to the extent that the net asset value of the
shares of the Fund redeemed by a
22
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
shareholder does not exceed (a) the current net asset value of shares of the
Fund purchased more than one year prior to the redemption ("Old Shares Value"),
plus (b) the current net asset value of shares of the Fund purchased through
reinvestment of dividends or capital gains distributions ("Reinvestment Shares
Value"), plus (c) increases in the net asset value of the shares of the Fund
above Purchase Payments made during the preceding year ("Appreciation Value").
The amount by which a redemption exceeds the total of Appreciation Value,
Reinvestment Shares Value and Old Shares Value would be subject to the CDSC,
which would be imposed at the rate of 1.00%.
All Purchase Payments for shares of the Fund made by a shareholder during a
particular Smith Barney Shearson statement month will be aggregated and deemed
to have been made on the last day of the current Smith Barney Shearson statement
month for purposes of determining the amount of time that has elapsed since the
Purchase Payments were made. The Smith Barney Shearson statement month, which is
the period of time covered by the monthly statements Smith Barney Shearson
provides to its clients, ends on the last Friday of a month, so long as Smith
Barney Shearson is open for business on that day. For purposes of the CDSC, when
shares of the Fund are exchanged for shares of another series of the Trust or
any of the funds listed below under "Exchange Privilege," the purchase date for
the shares of the series exchanged into, will be assumed by the Trust to be the
date on which the Fund shares were initially purchased.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 2% per month of the
value of the shareholder's shares at the time the withdrawal plan commences (see
above); (c) redemptions of shares following the death or disability of a
shareholder; (d) redemption of shares in connection with certain post-retirement
distributions and withdrawals from retirement plans or IRAs; (e) involuntary
redemptions; (f) redemption proceeds from other funds in the Smith Barney
Shearson Group of Funds that are reinvested within 30 days of the redemption;
(g) redemptions of shares in connection with a combination of any investment
company with the Fund by merger, acquisition of assets or otherwise; and (h)
certain redemptions of shares of
23
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
the Fund in connection with lump-sum or other distributions made by a
Participating Plan in the 401(k) Program. See "Purchase of Shares -- Smith
Barney Shearson 401(k) Program."
DISTRIBUTIONS IN KIND
If the Trust's Board of Trustees determines that it would be detrimental to
the best interests of the Fund's shareholders to make a redemption payment
wholly in cash, the Fund may pay, in accordance with rules adopted by the SEC,
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 readily marketable portfolio
securities in lieu of cash. Shareholders receiving distributions in kind of
portfolio securities may incur brokerage commissions when subsequently disposing
of those securities.
AUTOMATIC CASH WITHDRAWALS
The Fund offers shareholders an automatic cash withdrawal plan, under which a
shareholder who owns shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly. A shareholder investing
in the Fund through a retirement plan account is eligible for the automatic cash
withdrawal plan if the shareholder is eligible to receive qualified
distributions under the retirement plan and owns, through the retirement plan,
shares with a value of at least $5,000. As noted above under "Waivers of the
Contingent Deferred Sales Charge," no CDSC will be imposed on automatic cash
withdrawals in amounts no greater than 2% per month of the value of a
shareholder's shares at the time that the shareholder's participation in the
withdrawal plan commences. For further information regarding the Fund's
automatic cash withdrawal plan, shareholders should contact their Smith Barney
Shearson Financial Consultants.
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is calculated on each day, Monday through
Friday, except on days on which the NYSE is closed. The NYSE is currently
scheduled to be closed on New Year's Day, Presidents' Day, Good
24
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
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.
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, and is computed by dividing the value of the Fund's net
assets by the total number of its shares outstanding. In general, the Fund's
investments will be valued at market value or, in the absence of market value,
at fair value as determined by or under the direction of the Trust's Board of
Trustees. Short-term investments that mature in 60 days or less are valued on
the basis of amortized cost (which involves valuing an investment at its cost
and, thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Trust's Board of Trustees has determined that
amortized cost is fair value.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders in the Fund may exchange their shares for Class A shares of
certain other mutual funds in the Smith Barney Shearson Group of Funds then
offering shares for sale in the shareholder's state of residence. Exchanges of
shares may be made at any time without payment of any exchange fee. Shares of
the Fund acquired through the exchange of Class A shares of other funds will
have the same class designations as the shares from which the exchange was made.
Based on these class designations, shares of the Fund may be subsequently
exchanged for Class A shares of the following funds in the Smith Barney Shearson
Group of Funds.
<TABLE>
<CAPTION>
FUND NAME AND INVESTMENT OBJECTIVE:
<S> <C>
- -------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS
Smith Barney Shearson Limited Maturity Municipals Fund, an intermediate-term municipal bond fund
investing in investment-grade obligations.
Smith Barney Shearson Managed Municipals Fund Inc., an intermediate- and long-term municipal bond
fund.
</TABLE>
25
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
FUND NAME AND INVESTMENT OBJECTIVE:
- -------------------------------------------------------------------------------------------------
<S> <C>
Smith Barney Shearson Tax-Exempt Income Fund, an intermediate- and long-term municipal bond fund
investing in medium- and lower-rated securities.
Smith Barney Shearson Arizona Municipals Fund Inc., an intermediate- and long-term municipal bond
fund designed for Arizona investors.
Smith Barney Shearson Intermediate Maturity California Municipals Fund, an intermediate-term
municipal bond fund designed for California investors.
Smith Barney Shearson California Municipals Fund Inc., an intermediate- and long-term municipal
bond fund designed for California investors.
Smith Barney Shearson Florida Municipals Fund, an intermediate- and long-term municipal bond fund
designed for Florida investors.
Smith Barney Shearson Massachusetts Municipals Fund, an intermediate- and long-term municipal bond
fund designed for Massachusetts investors.
Smith Barney Shearson New Jersey Municipals Fund Inc., an intermediate- and long-term municipal
bond fund designed for New Jersey investors.
Smith Barney Shearson Intermediate Maturity New York Municipals Fund, an intermediate-term
municipal bond fund designed for New York investors.
Smith Barney Shearson New York Municipals Fund Inc., an intermediate- and long-term municipal bond
fund designed for New York investors.
INCOME FUNDS
Smith Barney Shearson Adjustable Rate Government Income Fund, seeks high current income while
limiting the degree of fluctuation in net asset value resulting from movement in interest rates.
</TABLE>
26
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
FUND NAME AND INVESTMENT OBJECTIVE:
- -------------------------------------------------------------------------------------------------
<S> <C>
Smith Barney Shearson Worldwide Prime Assets Fund, invests in a portfolio of high quality debt
securities that may be denominated in U.S. dollars or selected foreign currencies and that have
remaining maturities of not more than one year.
Smith Barney Shearson Short-Term World Income Fund, invests in high quality, short-term debt
securities denominated in U.S. dollars as well as a range of foreign currencies.
Smith Barney Shearson Diversified Strategic Income Fund, seeks high current income primarily by
allocating and reallocating its assets among various types of fixed-income securities.
Smith Barney Shearson Managed Governments Fund Inc., invests in obligations issued or guaranteed
by the U.S. government and its agencies and instrumentalities with emphasis on mortgage-backed
government securities.
Smith Barney Shearson Government Securities Fund, seeks a high current return by investing in U.S.
government securities.
Smith Barney Shearson Investment Grade Bond Fund, seeks maximum current income consistent with
prudent investment management and preservation of capital by investing in corporate bonds.
Smith Barney Shearson High Income Fund, seeks high current income by investing in high-yielding
corporate bonds, debentures and notes.
Smith Barney Shearson Global Bond Fund, seeks current income and capital appreciation by investing
in bonds, debentures and notes of foreign and domestic issuers.
GROWTH AND INCOME FUNDS
Smith Barney Shearson Convertible Fund, seeks current income and capital appreciation by investing
in convertible securities.
Smith Barney Shearson Utilities Fund, seeks total return by investing in equity and debt
securities of utilities companies.
Smith Barney Shearson Strategic Investors Fund, seeks high total return consisting of current
income and capital appreciation by investing in a combination of equity, fixed-income and money
market securities.
</TABLE>
27
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
FUND NAME AND INVESTMENT OBJECTIVE:
- -------------------------------------------------------------------------------------------------
<S> <C>
Smith Barney Shearson Premium Total Return Fund, seeks total return by investing in
dividend-paying common stocks.
Smith Barney Shearson Growth and Income Fund, seeks income and long-term capital growth by
investing in income-producing equity securities.
GROWTH FUNDS
Smith Barney Shearson Appreciation Fund Inc., seeks long-term appreciation of capital.
Smith Barney Shearson Fundamental Value Fund Inc., seeks long-term capital growth with current
income as a secondary objective.
Smith Barney Shearson Sector Analysis Fund, seeks capital appreciation by following a sector
strategy.
Smith Barney Shearson Telecommunications Growth Fund, seeks capital appreciation, with income as a
secondary consideration.
Smith Barney Shearson Aggressive Growth Fund Inc., seeks above-average capital growth.
Smith Barney Shearson Special Equities Fund, seeks long-term capital appreciation by investing in
equity securities primarily of emerging growth companies.
Smith Barney Shearson Global Opportunities Fund, seeks long-term capital growth by investing
principally in the common stocks of foreign and domestic issuers.
Smith Barney Shearson European Fund, seeks long-term capital appreciation by investing primarily
in securities of issuers based in European countries.
Smith Barney Shearson Precious Metals and Minerals Fund Inc., seeks long-term capital appreciation
by investing primarily in precious metal- and mineral-related companies and gold bullion.
MONEY MARKET FUNDS
Smith Barney Shearson Daily Dividend Fund Inc., invests in a diversified portfolio of high quality
money market instruments.
</TABLE>
28
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
FUND NAME AND INVESTMENT OBJECTIVE:
- -------------------------------------------------------------------------------------------------
<S> <C>
Smith Barney Shearson Government and Agencies Fund Inc., invests in short-term U.S. government and
agency securities.
Smith Barney Shearson Municipal Money Market Fund Inc., invests in short-term, high quality
municipal obligations.
Smith Barney Shearson California Municipal Money Market Fund, invests in short-term, high quality
California municipal obligations.
Smith Barney Shearson New York Municipal Money Market Fund, invests in short-term, high quality
New York municipal obligations.
</TABLE>
TAX EFFECT. The exchange of shares of one fund for shares of another fund is
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder, and an exchanging shareholder, therefore, may
realize a taxable gain or loss in connection with an exchange.
EXCHANGES. Shareholders of the Fund or shareholders holding Class A shares of
any of the funds in the Smith Barney Shearson Group of Funds sold without a
sales charge or with a maximum sales charge of less than 5% will be subject to
the appropriate "sales charge differential" upon the exchange of their shares
for Class A shares of any of the funds sold with a higher sales charge. The
sales charge differential is limited to a percentage rate no greater than the
excess of the sales charge rate applicable to purchases of shares of the mutual
fund being acquired in the exchange over the sales charge rate(s) actually paid
on the mutual fund shares relinquished in the exchange and on any predecessor of
those shares. For purposes of the exchange privilege, shares obtained through
automatic reinvestment of dividends are treated as having paid the same sales
charges applicable to the shares on which the dividends were paid. However,
except in the case of the 401(k) Program, if no sales charge was imposed upon
the initial purchase of the shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon exchange. In
addition, Smith Barney Shearson receives an annual service fee ranging from .15%
to .25% of the value of average daily net assets attributable to the Class A
shares of each fund, except the money market funds listed above.
29
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders
exercising the exchange privilege with any of the other funds in the Smith
Barney Shearson Group of Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney Shearson reserves the right
to reject any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its shareholders.
Greenwich Street Advisors may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Fund's other shareholders.
In this event, Greenwich Street Advisors will notify Smith Barney Shearson, and
Smith Barney Shearson may, at its discretion, decide to limit additional
purchases and/or exchanges by the shareholder. Upon such a determination, Smith
Barney Shearson will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or exchange into any
of the funds in the Smith Barney Shearson Group of Funds ordinarily available,
which position the shareholder would expect to maintain for a significant period
of time. All relevant factors will be considered in determining what constitutes
an abusive pattern of exchanges. For further information regarding this exchange
privilege, or to obtain current prospectuses for the funds of the Smith Barney
Shearson Group of Funds, shareholders should contact their Smith Barney Shearson
Financial Consultants.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney Shearson is located at 388 Greenwich Street, New York, New York
10013, and serves as distributor of the Fund's shares. Smith Barney Shearson is
paid an annual fee by the Trust in connection with the servicing of shareholder
accounts with the Fund. The annual fee, authorized pursuant to a Shareholder
Servicing Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-1 under the
1940 Act, is calculated at the annual rate of .15% of the value of the average
daily net assets of the Fund and is used by Smith Barney Shearson to provide
compensation for ongoing servicing
30
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
and/or maintenance of shareholder accounts with the Fund. Compensation will be
paid by Smith Barney Shearson to persons, including Smith Barney Shearson
Financial Consultants, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's investment adviser, administrator, or transfer agent.
Payments under the Plan are not tied exclusively to the shareholder servicing
expenses actually incurred by Smith Barney Shearson, and the payments may exceed
expenses actually incurred by Smith Barney Shearson. The Trust's Board of
Trustees evaluates the appropriateness of the Plan and its payment terms with
respect to the Fund on a continuing basis and in doing so will consider all
relevant factors, including expenses borne by Smith Barney Shearson and the
amount received under the Plan.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to declare daily and distribute monthly, generally on the
10th day of each calendar month, substantially all of its net investment income
(that is, its income other than net realized capital gains) and declare and
distribute the Fund's net realized capital gains, if any, annually, normally at
the end of the calendar year in which earned or at the beginning of the
subsequent year. Dividends and distributions payable on an investor's shares
will begin to accrue on settlement date and, unless a shareholder instructs that
dividends and capital gains distributions should be paid in cash and credited to
the shareholder's account at Smith Barney Shearson, such dividends and
distributions will be reinvested automatically in additional shares of the Fund
at net asset value, subject to no sales charge or CDSC. The Fund is subject to a
4% nondeductible excise tax measured with respect to certain undistributed
amounts of net investment income and capital gains. If necessary to avoid the
imposition of this tax, and if in the best interests of the shareholders, the
Fund will declare and pay dividends of its net investment income and
distributions of the Fund's net capital gains more frequently than stated above.
31
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's net
investment income and distributions of the Fund's net realized short-term
capital gains are taxable to shareholders (other than IRAs, self-employed
retirement plans and other tax-exempt investors) as ordinary income, regardless
of how long shareholders have held their Fund shares and whether the dividends
or distributions are received in cash or reinvested in additional Fund shares.
Distributions of the Fund's net realized long-term capital gains will be taxable
to shareholders as long-term capital gains, regardless of how long shareholders
have held their Fund shares and whether the distributions are received in cash
or are reinvested in additional Fund shares. In addition, as a general rule, a
shareholder's gain or loss on a sale or redemption of Fund shares will be a
long-term capital gain or loss if the shareholder has held the shares for more
than one year and will be a short-term capital gain or loss if the shareholder
has held the shares for one year or less. The Fund's dividends and distributions
will not qualify for the dividends-received deduction for corporations. Subject
to the Fund's meeting certain asset and diversification requirements,
shareholders of the Fund will be permitted by many, but not all, states to treat
dividends from the Fund that represent interest derived from United States
Treasury and certain U.S. government securities as income that is exempt from
applicable state income taxes.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. These statements will, among other things,
inform shareholders of the portion of their dividends that are attributable to
Treasury securities and each type of U.S. government securities.
Shareholders should consult their tax advisors with specific reference to
their own tax situations. In particular, shareholders should consult their tax
advisors about the status of the Fund's dividends and distributions for state
and local tax purposes in order to assess the consequences of investing in the
Fund under state and local laws generally and to determine whether dividends
paid by the Fund that represent interest derived from U.S. government securities
are exempt from any otherwise applicable state or local taxes.
32
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on October 17, 1991 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." Under the Trust's master trust agreement, as amended from time
to time, the Trust's Board of Trustees is authorized to create separate series
of an unlimited number of shares of beneficial interest, par value $.001 per
share. As of the date of this Prospectus, the Trustees have established four
such series, representing interests in the Fund, Smith Barney Shearson Limited
Maturity Municipals Fund, Smith Barney Shearson Intermediate Maturity California
Municipals Fund and Smith Barney Shearson Intermediate Maturity New York
Municipals Fund.
When matters are submitted for shareholder vote, each shareholder of each
series will have one vote for each full share held and a proportionate,
fractional vote for any fractional share held. In general, shares of each series
vote by individual series on all matters except (a) a matter affecting the
interests of one or more of the series, in which case only shares of the
affected series would be entitled to vote or (b) when the 1940 Act requires that
shares of the series be voted in the aggregate. Normally, no meetings of
shareholders will be held for the purpose of electing Trustees of the Trust
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders who
satisfy certain criteria will be assisted by the Trust in communicating with
other shareholders in seeking the holding of the meeting.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston Place,
Boston, Massachusetts 02108, and serves as custodian of the Fund's investments.
33
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent.
The Fund sends shareholders a semi-annual report and an audited annual report,
each of which includes a list of the investment securities held by the Fund. In
an effort to reduce the Fund's printing and mailing costs, the Fund plans to
consolidate the mailing of the Fund's semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record will receive a single copy of each report.
In addition, the Fund also plans to consolidate the mailing of the Fund's
Prospectus so that a shareholder having multiple accounts (e.g., individual, IRA
and/or Self-Employed Retirement Plan accounts) will receive a single Prospectus
annually. Any shareholder who does not want this consolidation to apply to his
or her account should contact his or her Financial Consultant or the Fund's
transfer agent. Shareholders may seek information regarding the Fund, including
the current performance of the Fund, from their Smith Barney Shearson Financial
Consultants.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND/OR THE FUND'S
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE FUND'S SHARES,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER
MAY NOT LAWFULLY BE MADE.
34
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
TRUSTEES
Burt N. Dorsett
Peter H. Gallary
Elliot S. Jaffe
Harry W. Knight
Heath B. McLendon
Cornelius C. Rose
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Richard P. Roelofs
PRESIDENT
James C. Conroy
VICE PRESIDENT AND
INVESTMENT OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISORS
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallaher
153 East 53rd Street
New York, New York 1002
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
35
<PAGE>
SMITH BARNEY SHEARSON
LIMITED
MATURITY
TREASURY
FUND
Two World Trade Center
New York, New York 10048
Fund 162
FD0245 A4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 2, 1994
ACQUISITION OF THE ASSETS OF
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
BY AND IN EXCHANGE FOR SHARES OF
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND
A SERIES OF SMITH BARNEY SHEARSON INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
This Statement of Additional Information, relating specifically to the
proposed transfer of all or substantially all of the assets of Smith Barney
Shearson Worldwide Prime Assets Fund (the "Acquired Fund") to Smith Barney
Shearson Limited Maturity Treasury Fund (the "Acquiring Fund"), a series of
Smith Barney Shearson Income Trust ("Income Trust"), in exchange for shares of
the Acquiring Fund and the assumption by the Acquiring Fund of certain
liabilities of the Acquired Fund, consists of this cover page and the following
described documents, each of which accompanies this Statement of Additional
Information (except as noted below) and is incorporated herein by reference.
1. Statement of Additional Information of Income Trust dated
January 29, 1994.
2. Annual Report of the Acquiring Fund for the fiscal year ended
November 30, 1993.
3. Annual Report of the Acquired Fund for the fiscal period ended
November 30, 1993.
4. Pro Forma Financial Statements.
This Statement of Additional Information is not a prospectus. A Prospectus/
Proxy Statement, dated June 2, 1994, relating to the above referenced matter may
be obtained without charge by calling or writing either the Acquiring Fund or
the Acquired Fund at the telephone numbers or addresses set forth above or by
contacting any Shearson Lehman Brothers Financial Consultant or by calling
toll-free 1-800-221-8806.
The date of this Statement of Additional Information
is June 2, 1994.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OF INCOME TRUST
DATED JANUARY 29, 1994
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 29, 1994
SMITH BARNEY SHEARSON
INCOME TRUST
[LOGO]
TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (212) 720-9218
This Statement of Additional Information supplements the
information contained in the current Prospectuses of Smith Barney
Shearson Limited Maturity Treasury Fund (the "Treasury Fund"),
Smith Barney Shearson Limited Maturity Municipals Fund (the
"Municipal Fund"), Smith Barney Shearson Intermediate Maturity
California Municipals Fund (the "California Fund") and Smith
Barney Shearson Intermediate Maturity New York Municipals Fund
(the "New York Fund") dated January 29, 1994, as amended or
supplemented from time to time and should be read in conjunction
with the Prospectuses. The Prospectuses may be obtained by
contacting your Smith Barney Shearson Financial Consultant, or by
writing or calling Smith Barney Shearson Income Trust (the
"Trust"), of which each of the Treasury Fund, Municipal Fund,
California Fund and New York Fund (individually referred to as a
"Fund" and collectively referred to as the "Funds") is a series,
at the address or telephone number set forth above. This Statement
of Additional Information, although not in itself a prospectus, is
incorporated by reference into each Prospectus in its entirety.
The executive officers of the Funds are employees of certain
of the organizations that provide services to the Fund. These
organizations are as follows:
<TABLE>
<CAPTION>
NAME SERVICE
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C>
Smith Barney Shearson Inc.
("Smith Barney Shearson").............................. Distributor
Greenwich Street Advisors................................ Investment Adviser
The Boston Company Advisors, Inc.
("Boston Advisors").................................... Administrator
The 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 that they perform for
the Funds are discussed in the Prospectuses and in this Statement
of Additional Information.
<PAGE>
CONTENTS
For ease of reference, the section headings used in this Statement
of Additional Information are identical to those used in each
Prospectus except as noted in parentheses below.
<TABLE>
<S> <C>
Management of the Trust and the Funds............................................ 2
Investment Objectives and Management Policies.................................... 4
Purchase of Shares............................................................... 27
Redemption of Shares............................................................. 28
Distributor...................................................................... 28
Valuation of Shares.............................................................. 29
Exchange Privilege............................................................... 30
Performance Data................................................................. 30
(See in the Prospectuses "The Fund's Performance")
Taxes............................................................................ 32
(See in the Prospectuses "Dividends, Distributions and Taxes")
Custodian and Transfer Agent..................................................... 34
(See in the Prospectuses "Additional Information")
Organization of the Trust........................................................ 34
Financial Statements............................................................. 34
Appendix......................................................................... A-1
</TABLE>
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The names of the Trustees of the Trust and executive officers of the Funds,
together with information as to their principal business occupations, are set
forth below. The executive officers of the Funds are employees of organizations
that provide services to the Funds. Each Trustee who is an "interested person"
of the Trust, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Burt N. Dorsett, Trustee. Managing Partner of Dorsett McCabe Management,
Inc., an investment counselling firm; Director and Treasurer of Research
Corporation, a non-profit patent-clearing and licensing firm. His address is 201
East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee. Chairman of the Board and President of The Dress
Barn, Inc. His address is 88 Hamilton Avenue, Stamford, Connecticut 06904.
Harry W. Knight, Trustee. Chairman of the Board of Hillsboro Associates,
Inc., a private investment and management firm; formerly Senior Partner with
Booz, Allen & Hamilton Inc.; among the corporations of which he has served in
the past as Director are Burlington Industries, Inc., The Foxboro Company, The
Waldorf-Astoria Hotel and Menlo Ventures. His address is The Dorchester, 110
East 57th Street, New York, New York 10022.
*Heath B. McLendon, Chairman of the Board. Executive Vice President of Smith
Barney Shearson; Chairman of the Board of Smith Barney Strategy Advisers Inc.;
prior to July 1993, Senior Executive Vice President of Shearson Lehman Brothers
Inc.; Vice Chairman of the Board of Shearson Asset Management; a Director of
PanAgora Asset Management, Inc. and PanAgora Asset Management Limited. His
address is Two World Trade Center, New York, New York 10048.
Cornelius C. Rose, Jr., Trustee. President, Cornelius C. Rose Associates,
Inc., financial consultants, and Chairman and Director of Performance Learning
Systems, an educational consultant. His address is Fair Oaks, Enfield, New
Hampshire 03748.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney Shearson; Director and President Mutual Management Corp., Smith
Barney Advisers, Inc.; and Trustee of Corporate Income Realty Trust. His address
is 388 Greenwich Street, New York, New York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney Shearson; President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers Inc.; Vice President of
Shearson Lehman Investment Strategy Advisors, Inc. His address is Two World
Trade Center, New York, New York 10048.
James E. Conroy, Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. His address is Two World Trade Center, New York, New York
10048.
Joseph P. Deane, Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. His address is Two World Trade Center, New York, New York
10048.
Lawrence T. McDermott, Vice President and Investment Officer. Managing
Director of Greenwich Street Advisors; prior to July 1993, Managing Director of
Shearson Lehman Advisors. His address is Two World Trade Center, New York, New
York 10048.
Karen L. Mahoney-Malcomson, Vice President and Investment Officer. Vice
President of Greenwich Street Advisors; prior to July 1993, Senior Vice
President of Shearson Lehman Advisors. Her address is Two World Trade Center,
New York, New York 10048.
Vincent Nave, Treasurer. Senior Vice President of Boston Advisors and Boston
Safe. His address is One Boston Place, Boston, Massachusetts 02108.
Francis J. McNamara, III, Secretary. Senior Vice President and General
Counsel of Boston Advisors; prior
2
<PAGE>
to June 1989, Vice President and Associate Counsel of Boston Advisors. His
address is One Boston Place, Boston, Massachusetts 02108.
Each of the Trust's Trustees serves as a trustee, general partner and/or
director of other mutual funds for which Shearson Lehman Brothers serves as
distributor. As of January 1, 1994, the Trustees and Officers owned less than 1%
of each Fund's outstanding shares.
No director, officer or employee of Smith Barney Shearson, Greenwich Street
Advisors or Boston Advisors or any of their affiliates will receive any
compensation from the Trust for serving as an officer or Trustee of the Trust.
The Trust pays each Trustee who is not a director, officer or employee of Smith
Barney Shearson, Greenwich Street Advisors, Boston Advisors, or any of their
affiliates, a fee of $4,000 per annum plus $500 per meeting attended, and
reimburses them for travel and out-of-pocket expenses. For the fiscal year
ended, November 30, 1993, such fees and expenses totalled $26,395.
INVESTMENT ADVISER AND ADMINISTRATOR
Certain of the services provided to, and the fees paid by, the Trust under its
agreements with Greenwich Street Advisors and Boston Advisors with respect to
the Funds are described in the Prospectuses. Boston Advisors, in addition to
providing the services described in the Prospectuses: furnishes the Trust with
statistical and research data, clerical help and accounting data processing,
bookkeeping, internal auditing and legal services and certain other services
required by the Trust; prepares reports to the Funds' shareholders; and prepares
tax returns, reports to and filings with, the SEC and state regulatory
authorities.
Greenwich Street Advisors is a division of Mutual Management Corp. and
controlled by Smith Barney Shearson Holdings Inc., which is a wholly owned
subsidiary of The Travelers Inc. ("Travelers"), a diversified financial services
holding company principally engaged in the business of providing investment,
consumer finance and insurance services. Boston Advisors is a wholly owned
subsidiary of The Boston Company, Inc. ("TBC"), which is in turn a wholly owned
subsidiary of Mellon Bank Corporation ("Mellon").
Greenwich Street Advisors and Boston Advisors each pays the salaries of all
officers and employees who serve the Trust, and Boston Advisors maintains office
facilities for the Trust. Greenwich Street Advisors and Boston Advisors bear all
expenses in connection with the performance of their respective services under
their agreements with the Trust relating to the Funds.
For the fiscal period from December 31, 1991 through November 30, 1992, the
Funds paid Shearson Lehman Advisors the Fund's predecessor investment adviser
investment advisory fees and Shearson Lehman Advisors waived fees and reimbursed
expenses as follows:
<TABLE>
<CAPTION>
FEES WAIVED
AND EXPENSES
FUND FEES PAID REIMBURSED
----------------------------------- --------- ------------
<S> <C> <C>
Treasury Fund...................... $ 6,603 $ 76,000
Municipal Fund..................... $ 0 $ 67,265
California Fund.................... $ 0 $ 58,703
New York Fund...................... $ 0 $ 46,577
</TABLE>
For the fiscal year ended November 30, 1993, the Funds paid Shearson Lehman
Advisors and Greenwich Street Advisors investment advisory fees and Shearson
Lehman Advisors and Greenwich Street Advisors waived fees and reimbursed
expenses as follows:
<TABLE>
<CAPTION>
FEES WAIVED
AND EXPENSES
FUND FEES PAID REIMBURSED
----------------------------------- --------- ------------
<S> <C> <C>
Treasury Fund...................... $91,652 $ 79,608
Municipal Fund..................... $93,010 $135,127
California Fund.................... $ 0 $ 83,727
New York Fund...................... $28,605 $130,230
</TABLE>
3
<PAGE>
For the fiscal period from December 31, 1991 through November 30, 1992, the
Funds paid Boston Advisors sub-investment advisory and administration fees and
Boston Advisors waived fees as follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES WAIVED
----------------------------------- --------- ------------
<S> <C> <C>
Treasury Fund...................... $ 3,537 $ 43,665
Municipal Fund..................... $ 0 $ 38,437
California Fund.................... $ 0 $ 10,927
New York Fund...................... $ 0 $ 23,884
</TABLE>
For the fiscal year ended November 30, 1993 the Funds paid Boston Advisors
administration fees and Boston Advisors waived fees as follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES WAIVED
----------------------------------- --------- ------------
<S> <C> <C>
Treasury Fund...................... $51,860 $ 46,003
Municipal Fund..................... $52,571 $ 77,793
California Fund.................... $ 0 $ 39,799
New York Fund...................... $16,167 $ 74,596
</TABLE>
Greenwich Street Advisors and Boston Advisors each have agreed that, if in
any fiscal year of a Fund, the aggregate expenses of the Fund (including fees
payable pursuant to the Trust's agreements with Greenwich Street Advisors and
Boston Advisors relating to the Funds, but excluding interest, taxes, brokerage
fees, fees paid with respect to the Fund pursuant to the Trust's shareholder
servicing plan, and, if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, Greenwich Street Advisors and Boston Advisors will
each reduce their management fees for the Fund that excess expense to the extent
required by state law in the same proportion as their respective fees bear to
the combined fees for investment advice and administration. The most restrictive
state expense limitation currently applicable to each Fund is 2.5% of the first
$30 million of the Fund's average net assets, 2% of the next $70 million of the
Fund's average net assets and 1.5% of the Fund's remaining average net assets.
For the fiscal period ended November 30, 1992 and the 1993 fiscal year the Funds
were not required to waive fees.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as counsel to the Trust. The Trustees who are
not "interested persons" of the Trust have selected Sullivan & Cromwell as their
counsel.
Coopers & Lybrand, independent accountants, One Post Office Square, Boston,
Massachusetts 02109, serves as auditors of the Trust and render an opinion on
the Funds' financial statements annually.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objective of each Fund and the principal
policies to be employed to achieve that objective. Supplemental information is
set out below concerning the types of securities and other instruments in which
the Funds may invest, the investment policies and strategies that the Funds may
utilize and certain risks attendant to those investments, policies and
strategies.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States government or one of its
agencies, authorities or instrumentalities ("U.S. government securities") in
which each of the Municipal Fund, the California Fund and the New York Fund
(individually referred to as a "Muni Fund" and collectively referred to as the
"Muni Funds") may invest include debt obligations of varying maturities issued
by the United States Treasury or issued or guaranteed by an agency or
instrumentality of the United States government, including the Federal Housing
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal National Mortgage Association,
Maritime Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association, Resolution Trust Corporation and
various institutions that previously were or currently are part of the Farm
4
<PAGE>
Credit System (which has been undergoing a reorganization since 1987). Direct
obligations of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
United States government is not obligated by law to provide support to an
instrumentality that it sponsors, none of the Muni Funds will invest in
obligations issued by an instrumentality of the United States government unless
Greenwich Street Advisors determines that the instrumentality's credit risk does
not make its securities unsuitable for investment by the Fund.
As noted in the Treasury Prospectus, the Treasury Fund will limit its
investments in U.S. government securities to those issued by the United States
Treasury and those the interest from which is prohibited under Federal law from
being taxed by the states. A list of obligations coming within the latter
category is set out in the Treasury Prospectus.
MUNICIPAL OBLIGATIONS
Each of the Muni Funds invests principally in debt obligations issued by, or on
behalf of, states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities or multistate agencies or authorities, the interest from which
debt obligations is, in the opinion of bond counsel to the issuer, excluded from
gross income for Federal income tax purposes ("Municipal Obligations").
Municipal Obligations generally are understood to include debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities, refunding of outstanding obligations,
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 privately operated facilities are
considered to be Municipal Obligations if the interest paid on them qualifies as
excluded from gross income (but not necessarily from alternative minimum taxable
income) for Federal income tax purposes in the opinion of bond counsel to the
issuer.
Municipal Obligations may be issued to finance life care facilities, which
are an alternative form of long-term housing for the elderly that offer
residents the independence of a condominium life-style and, if needed, the
comprehensive care of nursing home services. Bonds to finance these facilities
have been issued by various state industrial development authorities. Because
the bonds are secured only by the revenues of each facility and not by state or
local government tax payments, they are subject to a wide variety of risks,
including a drop in occupancy levels, the difficulty of maintaining adequate
financial reserves to secure estimated actuarial liabilities, the possibility of
regulatory cost restrictions applied to health care delivery and competition
from alternative health care or conventional housing facilities.
MUNICIPAL LEASES
Municipal leases are Municipal Obligations that may take the form of a lease or
an installment purchase issued by state and local government 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 possible 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 normally associated with Municipal Obligations. These
obligations frequently contain "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
Municipal Obligations; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of foreclosure
might prove difficult. In order to limit the risks, the Fund will purchase
either (a) municipal leases that are rated in the four highest
5
<PAGE>
categories by Moody's Investor Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P") or (b) unrated municipal leases that are purchased
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 period after demand
by the Fund.
From time to time, proposals to restrict or eliminate the Federal income tax
exemption for interest on Municipal Obligations have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Internal Revenue Code of 1986, as amended, (the "Code") currently provides that
small issue private activity bonds will not be tax-exempt if the bonds were
issued after December 31, 1986, and the proceeds were used to finance projects
other than manufacturing facilities. Interest on certain small issue private
activity bonds used to finance manufacturing facilities will not be tax-exempt
if the bonds are issued after December 31, 1991. If the latter deadline is not
extended, or, if a proposal to restrict or eliminate the Federal tax exemption
for interest on Municipal Obligations were enacted, the availability of
Municipal Obligations for investment by the Muni Funds would be adversely
affected. In such event, the Trust's Board of Trustees would reevaluate the
investment objective and policies of each Muni Fund and submit possible changes
in its structure for the consideration of its shareholders.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
EXEMPT OBLIGATIONS
As indicated in the Muni Prospectus, the California Fund seeks its objective by
investing principally in a portfolio of Municipal Obligations, the interest from
which is exempt from California State personal income taxes ("California Exempt
Obligations"). Some of the financial considerations relating to the California
Fund's investing in California Exempt Obligations are summarized below. This
summary is not intended to be a complete description and is principally derived
from official statements relating to issues of California Exempt Obligations
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 has not been independently verified.
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on January 8,
1993, proposed general fund expenditures of $37.3 billion, with projected
revenues of $39.9 billion. It also proposed special fund expenditures of $12.4
billion and special fund revenues of $12.1 billion. To balance the budget in the
face of declining revenues, the Governor proposed a series of revenue shifts
from local government, reliance on increased Federal aid, and reductions in
state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, indicated that the revenue projections of the January budget proposal were
tracking well, with the full year 1992-1993 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected, sales
tax was close to target, and bank and corporation taxes were lagging behind
projections. The May Revision projected the State would have an accumulated
deficit of about $2.75 billion by June 30, 1993. The Governor proposed to
eliminate this deficit over an 18-month period. He also agreed to retain the
0.5% sales tax scheduled to expire June 30 for a six-month period, dedicated to
local public safety purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May Revision did not
calculate a "gap" to be closed, but rather set forth revenue and expenditure
forecasts and proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act is predicated on general fund revenues and transfers
estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive
6
<PAGE>
year of actual decline). The principal reasons for declining revenue are the
continued weak economy and the expiration (or repeal) of three fiscal steps
taken in 1991 -- a half cent temporary sales tax, a deferral of operating loss
carryforwards, and repeal by initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumes special fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of $38.5 billion
(a 6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The 1993-94
Budget Act also includes special fund expenditures of $12.1 billion, a 4.2%
increase. The 1993-94 Budget Act reflects the following major adjustments:
1. Changes in local government financing to shift
about $2.6 billion in property taxes from cities, counties, special districts
and redevelopment agencies to school and community college districts, thereby
reducing general fund support by an equal amount. About $2.5 billion would be
permanent, reflecting termination of the State's "bailout" of local governments
following the property tax cuts of Proposition 13 in 1978 (See "Constitutional,
Legislative and Other Factors" below).
The property tax revenue losses for cities and counties are offset in part
by additional sales tax revenues and mandate relief. The temporary 0.5% sales
tax has been extended through December 31, 1993, for allocation to counties for
public safety programs. A Constitutional amendment will be placed on the ballot
in a special statewide election in November 1993 to extend the sales tax
permanently for public safety purposes.
Legislation also has been enacted to eliminate state mandates in order to
provide local governments flexibility in making their programs responsive to
local needs. Legislation provides mandate relief for local justice systems which
affect county audit requirements, court reporter fees, and court consolidation;
health and welfare relief involving advisory boards, family planning, state
audits and realignment maintenance efforts; and relief in areas such as county
welfare department self-evaluations, noise guidelines and recycling
requirements.
A lawsuit has been filed by Los Angeles County challenging the shift of
property taxes. Other counties or local agencies may join this action or file
separate suits.
2. The 1993-94 Budget Act keeps K-12
Proposition 98 funding on a cash basis at the same per-pupil level as 1992-93 by
providing schools a $609 million loan payable from future years' Proposition 98
funds.
3. President Clinton's Fiscal Year 1994 budget
proposals include about $692 million of aid to the State from the Federal
government to offset health and welfare costs associated with foreign immigrants
living in the State, which would reduce a like amount of general fund
expenditures. About $411 million of this amount is one-time funding. The receipt
of this money is dependent upon the inclusion of such funding for the State in
the President's budget that is ultimately approved.
4. Reductions of $600 million in health and
welfare programs, which were agreed upon by the California Legislature and the
Governor.
5. Reductions of $400 million in support for
higher education. These reductions will be partly offset by fee increases at all
three units of higher education.
6. A 2-year suspension of the renters' tax credit
($390 million expenditure reduction in 1993-94). A constitutional amendment will
be placed on the June 1994 ballot to restore the renter's tax credit after
1994-95.
7. Various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent. The Governor would suspend the 4 percent automatic budget reduction
"trigger," as was done in 1992-93, so cuts can be focused.
8. Miscellaneous one-time items, including deferral
of payment to the Public Employees Retirement Fund ($339 million) and a change
in accounting for debt service from accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contains no general fund tax/revenue increases other
than a two year suspension
7
<PAGE>
of the renters' tax credit. The Governor continues to predict that population
growth in the 1990's will keep upward pressure on major State programs, such as
K-14 education, health and welfare and corrections, outstripping projected
revenue growth in an economy only very slowly emerging from a deep recession.
The October 1993 Bulletin of the Department of Finance reports that General
Fund revenues for September were $128 million above projections, although the
report indicated $45 million of this represented a scheduled insurance tax
refund which was not processed in September. Through the first three months of
the fiscal year, revenues were $214 million, or 2.3 percent, above projections,
with all four major taxes (personal income, sales, bank and corporation and
insurance) tracking projections well. Revenues for the first quarter represent
about 20 percent of annual receipts. The Department of Finance also reports that
the State will only receive approximately $450 million in aid from the Federal
Government to offset the health and welfare costs associated with foreign
immigrants living in the State, substantially less than the $692 million
contemplated by the 1993-94 Budget Act.
Despite the encouraging financial results early in the fiscal year, the
Department's report of sluggish economic activity raises the possibility that
results later in the fiscal year may not meet original projections. A new
projection will be issued with the Governor's Budget in January 1994.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain California constitutional
amendments, legislative measures, executive orders, administrative regulations
and voter initiatives could result in the adverse effects described below. The
following information constitutes only a brief summary, does not purport to be a
complete description, and is based on information drawn from official statements
and prospectuses relating to securities offerings of the State of California and
various local agencies in California available as of the date of this
Prospectus.
Certain of the California Municipal Obligations in which the Fund may invest
may be obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities the State assumes certain obligations theretofore
paid out of local funds. Whether and to what extent a portion of the State's
general fund will be distributed in the future to counties, cities and their
various entities, is unclear.
On November 1, 1993 the United States Supreme Court agreed to review the
California court decisions in BARCLAYS BANK INTERNATIONAL, LTD. V. FRANCHISE TAX
BOARD and COLGATE-PALMOLIVE COMPANY, INC. V. FRANCHISE TAX BOARD which upheld
California's worldwide combined reporting ("WWCR") method of taxing corporations
engaged in a unitary business operation against challenges under the foreign
commerce and due process clauses. In 1983, in CONTAINER CORPORATION V. FRANCHISE
TAX BOARD, the Supreme Court held that the WWCR method did not violate the
foreign commerce clause in the case of a domestic-based unitary business group
with foreign-domiciled subsidiaries, but specifically left open the question of
whether a different result would obtain for a foreign-based multinational
unitary business. BARCLAYS concerns a foreign-based multinational and COLGATE-
PALMOLIVE concerns a domestic-based multinational in light of Federal foreign
policy developments since 1983. In a brief filed at the Supreme Court's request,
the Clinton Administration had argued that the Court should not hear the
BARCLAYS case, even though there are "serious questions" about the California
Supreme Court's analysis and holdings, because the recent changes in the law
noted below means the issue in BARCLAYS "lacks substantial recurring
importance." The Clinton Administration had previously decided not to become
involved in the BARCLAYS petition. The United States government under the Bush
Administration, along with various foreign governments, had appeared as amicus
on behalf of Barclays before the California Courts. It is
8
<PAGE>
unclear what position, if any, the Clinton Administration will take in the case
on the merits. The fiscal impact on the State of California has been reported as
follows: the State would have to refund $1.730 billion to taxpayers ($530
million due to BARCLAYS; $1.2 billion due to Colgate), and cancel another $2.35
billion of pending assessments ($350 million due to BARCLAYS; $1.9 billion due
to Colgate), if the Supreme Court ultimately strikes down the WWCR method and
rules its decision has retrospective effect.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions met.
On October 6, 1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the requirements that a
taxpayer electing to determine its income on a water's-edge basis pay a fee and
file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27 million
in 1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagree with that estimate and assert that more revenue will be
generated for California, rather than less, because of an anticipated increase
in economic activity and additional revenue generated by the incentives in the
Legislation. The United Kingdom has been encouraged by the legislative
developments in California and threatened retaliatory taxation by the United
Kingdom is on hold.
Certain of the California Municipal Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (a) any indebtedness approved by the voters prior to
July 1, 1978, or (b) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of the Article XIIIA
defines "full cash value" to mean "the County Assessor's valuation of real
property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The full cash value may be adjusted annually to reflect inflation at a rate not
to exceed 2% per year, or reduction in the consumer price index or comparable
local data, or reduced in the event of declining property value caused by
damage, destruction or other factors. The California State Board of Equalization
has adopted regulations, binding on county assessors, interpreting the meaning
of "change in ownership" and "new construction" for purposes of determining full
cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article XIIIA of $4.00
per $100 assessed valuation (based on the former practice of using 25%, instead
of 100%, of full cash value as the assessed value for tax purposes). The
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legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. Under Article XIIIB, State and local governmental
entities have an annual "appropriations limit" and are not allowed to spend
certain monies called "appropriations subject to limitation" in an amount higher
than the "appropriations limit." Article XIIIB does not affect the appropriation
of moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (a) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (b) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988-89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (a) an amount equalling the percentage of state general revenue bonds
for school and community college districts in fiscal year 1986-87, or (b) an
amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate Constitutional
Amendment 1, a proposed modification of the California Constitution to alter the
spending limit and the education funding provisions of Proposition 98. Senate
Constitutional Amendment 1, on the June 5, 1990 ballot as Proposition 111, was
approved by the voters and look effect on July 1, 1990.
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Among a number of important provisions, Proposition 111 recalculates spending
limits for the State and for local governments, allows greater annual increases
in the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9% of State general fund tax revenues),
removes the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limits the amount of State tax revenue over the limit which would
be transferred to school districts and community college districts, and exempts
increased gasoline taxes and truck weight fees from the State appropriations
limit. Additionally, Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further interpretation by
both the Legislature and the courts to determine its applicability to specific
situations involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative (a) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (b)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (c) restricts the use of
revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (d) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (e) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (f) requires that any tax imposed by
a local government on or after August 1, 1985 be ratified by a majority vote of
the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (g) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (h) permits these provisions to be
amended exclusively by the voters of the State of California.
In September 1988, the California Court of Appeal in CITY OF WESTMINSTER V.
COUNTY OF ORANGE 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 in unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87. Proposition
87 amended Article XVI, Section 16, of the California Constitution by
authorizing the California Legislature to prohibit redevelopment agencies from
receiving any of the property tax revenue raised by increased property tax rates
levied to repay bonded indebtedness of local governments which is approved by
voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
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Certain California Municipal Obligations in which the Fund may invest may be
obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect such
revenues and, consequently, payment on those California Municipal Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by 10% through June 1987. However,
a Federal district court issued a preliminary injunction preventing application
of any cuts until a trial on the merits can be held. If the injunction is deemed
to have been granted improperly, the State of California would be entitled to
recapture the payment differential for the intended reduction period. It is not
possible to predict at this time whether any decreases will ultimately be
implemented.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
Such California Municipal Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Obligations, the
State Treasurer will issue debentures payable out of a reserve fund established
under the insurance program or will pay principal and interest, on an
unaccelerated basis from unappropriated State funds. At the request of the
Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983 to evaluate the adequacy of the reserve fund
established
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under the insurance program and, based on certain formulations and assumptions
found the reserve fund substantially underfunded. In September of 1986, Arthur
D. Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March 1990, Arthur D. Little, Inc. prepared a further review of the
study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
Certain California Municipal Obligations in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. California has five principal statutory provisions which limit the
remedies of a creditor secured by a mortgage or deed of trust. Two limit the
creditor's right to obtain a deficiency judgment, one limitation being based on
the method of foreclosure and the other on the type of debt secured. Under the
former, a deficiency judgment is barred when the foreclosure is accomplished by
means of a nonjudicial trustee's sale. Under the latter, a deficiency judgment
is barred when the foreclosed mortgage or deed of trust secures certain purchase
money obligations. Another California statute, commonly known as the "one form
of action" rule, requires creditors secured by real property to exhaust their
real property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale of
such property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a mortgage could be in excess of seven months
after the initial default. Such time delays in collections could disrupt the
flow of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain California Municipal Obligations in the Fund may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a
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single family residence purchased with the loan secured by the mortgage,
regardless of whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and cannot in any event exceed
six months' advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan. This limitation could affect the
flow of revenues available to an issuer for debt service on the outstanding debt
obligations which financed such home mortgages.
ADDITIONAL CONSIDERATIONS. With respect to Municipal Obligations issued by the
State of California and its political sub-divisions, the Fund cannot predict
what legislation, if any, may be proposed in the California State Legislature as
regards the California State personal income tax status of interest on such
obligations, or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially adversely affect the availability of California
Municipal Obligations for investment by the Fund and the value of the Fund's
portfolio. In such an event, the Trustees would reevaluate the Fund's investment
objective and policies and consider changes in its structure or possible
dissolution.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK
EXEMPT OBLIGATIONS
As indicated in the Muni Prospectus, the New York Fund seeks its objective by
investing principally in a portfolio of Municipal Obligations, the interest from
which is exempt from New York State and New York City personal income taxes
("New York Exempt Obligations"). Some of the financial considerations relating
to the New York Fund's investing in New York Exempt Obligations 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
Exempt Obligations 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 has not been independently 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 nation's finance,
insurance, transportation, communications and services employment, and a
comparatively small share of the nation's farming and mining activity. The State
has a declining proportion of its workforce engaged 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 metropolitan 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 nation.
For decades, however, the State has grown more slowly than the nation as a
whole, gradually eroding its relative economic affluence. The recession has been
more severe in the State, owing to a significant retrenchment in the financial
services industry, cutbacks in defense spending, 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 fiscal year, 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 1991
and 1992 the unemployment rate rose to 8.5%. State per capital personal income
remains above the national average. State per capital income for 1992 was
$23,534, which is 18.6% above the 1992 national average of $19,841. Between 1970
and 1980, the percentage by which the State's per
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capital 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
capital income. However, since 1980, the State's rate of per capital 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 the State is the result of
State and local taxation, which is among the highest in the nation, and which
may cause corporations to locate outside New York. 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 revenue 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's
financial plan necessitated by such deviations. The first quarterly update to
the 1993-94 State Financial Plan was submitted by the Governor on September 1,
1993. Such revision shows a General Fund operating surplus of $12 million, with
an overall surplus for all governmental funds of $195 million.
The Governor released the recommended Executive Budget for the 1993-94
fiscal year on January 19, 1993 and amended it on February 18, 1993. The
recommended 1993-94 State Financial Plan projects a balanced General Fund.
General Fund receipts and transfers from other funds are projected at $31.556
billion, including $184 million carried over from the 1992-93 fiscal year.
Disbursements and transfers from other funds are projected at $31.489 billion,
not including a $67 million repayment to the State's Tax Stabilization Reserve
Fund.
The 1993-94 State Financial Plan formulated on April 16, 1993 (the "1993-94
State Financial Plan"), following enactment of the State's 1993-94 budget,
projected General Fund receipts and transfers from other funds at $32.367
billion and disbursements and transfers to other funds at $32.300 billion.
Excess receipts of $67 million will be used for a required repayment to the
State's Tax Stabilization Reserve Fund. In comparison to the recommended 1993-94
Executive Budget, the 1993-94 State budget, as enacted, reflected increases in
both receipts and disbursements in General Funds of $811 million. On October 29,
1993, the 1993-94 State Financial Plan was revised.
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 spending
required to maintain State programs at current levels. To address any potential
budgetary imbalances, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
The Revised 1993-94 State Financial Plan is based on a number of assumptions
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. The Revised 1993-94 State
Financial Plan has been prepared on a cash basis and on the basis of generally
accepted accounting principles ("GAAP") using the four GAAP defined governmental
fund types: the General Fund, Special Revenue Funds, Capital Projects Funds and
Debt Service Funds.
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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 52% of total
projected governmental fund receipts.
RECENT FINANCIAL RESULTS. During its 1989-90, 1990-91 and 1991-92 fiscal years,
the State incurred cash-basis operating deficits, prior to the issuance 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.
General Fund receipts, excluding transfers from other funds, totalled
$28.818 billion in the State's 1991-92 fiscal year (before repayment of $1.081
billion in deficit notes issued in its 1990-91 fiscal year and before issuance
of $531 million in deficit notes to close the 1991-92 fiscal year General Fund
cash-basis operating deficit) and $29.95 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 operating deficit. General
Fund receipts in the State's 1993-94 fiscal year are estimated in the 1993-1994
State Financial Plan at $30.295 billion. Taxes account for 96% of estimated
fiscal year 1993-94 General Fund receipts, with the balance comprised of
miscellaneous receipts.
General Fund disbursements, exclusive of transfers to other funds, totalled
$28.058 billion in the State's 1991-92 fiscal year and $29.068 billion in the
State's 1992-93 fiscal year and are estimated during the State's 1993-94 fiscal
year.
The State's financial position as shown in its Combined Balance Sheet as of
March 31, 1993 included an accumulated deficit in its combined governmental
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 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 borrowing 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 incurred by the State. The total amount of
long-term State general obligation debt authorized but not issued as of
September 30, 1993 was approximately $2.343 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 proceeds from the
sale of duly authorized but unissued bonds, by issuing bond anticipation notes.
The State may also, pursuant to specific constitutional authorization, directly
guarantee certain obligations of the State's authorities and public benefit
corporations ("Authorities"). Payments of debt service on State 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 the 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 amounts to fund a capital reserve fund, to pay costs of issuance,
and to provide for certain capitalized interest costs. Over a period of years,
the issuance of those long-
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term obligations, which will be amortized over no more than 30 years, is
expected to result in eliminating the need for continuing short-term seasonal
borrowing for those purposes. The legislation also imposed a cap on the annual
seasonal borrowing 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 required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded.
In April 1993, legislation was also enacted providing for significant
changes in the long-term financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would permit
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. Before becoming effective, the proposed constitutional
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 until after the general election in November 1995.
On March 26, 1990, Standard & Poor's Corporation ("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 State agencies. On August 27, 1990, S&P
affirmed these ratings without change. On June 6, 1990, Moody's Investors
Services, Inc. ("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 of all the State's outstanding general obligations 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 and its agencies. Approximately
two-thirds of the State's tax-supported debt is affected by Moody's rating
action. 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 New York State general obligation bonds to "A-" from
"A." Various agency debt, state moral obligations, contractual 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 rating actions, Moody's and S&P variously cited
continued economic deterioration, chronic operating deficits, mounting GAAP fund
balance deficits and the legislative stalemate in seeking permanent and
structurally sound fiscal 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 1992-93
will consist of approximately $770 million in general obligation bonds and in
new commercial paper issuances. The State also expects to issue approximately
$178 million in general obligation bonds
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for the purpose of redeeming outstanding bond anticipation notes. The
Legislature has also authorized the issuance of up to $105 million in
certificates of participation during the State's 1992-93 fiscal year for
equipment purchases and real property purposes. The Governor has recommended the
issuance of $761 million in borrowings for capital purposes during the State's
1993-94 fiscal years. In addition, the State expects to issue $140 million in
bonds for the purpose of redeeming outstanding bond anticipation notes. The
Governor has also recommended the issuance of up to $70 million in certificates
of participation during the State's 1993-94 fiscal year for personal property
acquisitions. He has also recommended the continuation of the authorization to
issue up to approximately $15 million in certificates of participation for real
property acquisitions during the State's 1993-94 fiscal year. The projection of
the State regarding its borrowings for the 1992-93 and 1993-94 fiscal years may
change if actual receipts fall short of State projections or if other
circumstances require.
Payments for principal and interest due on general obligation bonds,
interest 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 the State's 1991-92 and 1992-93
fiscal years, respectively, and are estimated to be $2.181 billion for the
State's 1993-94 fiscal year. These figures do not include interest 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 the State's installment payments relating to the
issuance of certificates of participation.
The State has never defaulted on any of its general obligation indebtedness
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 default 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 the 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 certain land in central and upstate New York; (b)
certain aspects of the State's Medicaid rates regulations and policies,
including reimbursements to providers of mandatory and optional Medicaid
services; (c) contamination in the Love Canal area of Niagara Falls; (d) an
action against State and City officials alleging inadequate shelter allowances
to maintain proper housing; employment discrimination by the State and its
agencies; (e) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (f)
alleged responsibility of State 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 administrative costs of food stamp programs;
(h) an action, for injunctive or other appropriate relief, concerning 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 public 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% surcharge 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 implementing regulations that imposed a bad debt and charity care
allowance on all hospital bills and a 13% surcharge on inpatient bills paid by
employee welfare benefit plans.
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A number of cases have also been instituted against the State challenging
the constitutionality of various public authority financing programs. In SCHULZ,
ET AL. V. STATE OF NEW YORK, a proceeding was commenced on April 29, 1991 in the
Supreme Court, Albany County, challenging the constitutionality of certain state
bonding and financing programs authorized by Chapter 190 of the Laws of 1990. By
opinion dated May 11, 1993, the Court of Appeals held that petitioners have
standing as voters pursuant to Section 11 of Article VII of the State but
affirmed the order dismissing the proceeding on the ground of laches.
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 addition,
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 procedural grounds
was denied by order of the Supreme Court dated January 2, 1992. By order dated
November 5, 1992, the Appellate Division, Third Department, reversed the order
of the Supreme Court and granted defendants' motion to dismiss on grounds of
standing and mootness. By order dated September 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 an action commenced on February 6, 1992 (SCHULZ, ET AL. V. STATE OF NEW
YORK, ET AL., Supreme Court, Albany County) plaintiffs seek a judgment declaring
unconstitutional sections 1, 2, 3 and 10 of Chapter 220 of the Laws of 1990
which relate to the creation and operation of LGAC. On March 3, 1992 the Supreme
Court, Albany County, granted defendants' motion for summary judgment in all
respects and dismissed the complaint. On July 23, 1992 the Appellate Division,
Third Department, modified and affirmed the judgment of the Supreme Court,
holding that the plaintiffs lacked standing. By opinion dated May 11, 1993, the
Court of Appeals denied plaintiffs' motion for leave to appeal and dismissed the
litigation. The Court noted that plaintiffs had failed to plead standing as
voters pursuant to Section 11 of Article VII of the State Constitution, and,
thus, the motion for leave to appeal did not directly involve a substantial
constitutional question.
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 Authority 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 Authority 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 methods for
determining state and local contributions to state employee retirement 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
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to the State's Abandoned Property Law may result in the State having to make
certain payments during the 1993-94 fiscal year.
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 1993-1994
fiscal year or thereafter. Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1993-94 State Financial Plan. An adverse decision in any of these
proceedings could exceed the amount of the 1993-94 State Financial Plan reserve
for the payment of judgments and, therefore, could affect the ability of the
State to maintain a balanced 1993-94 State Financial Plan. In its audited
financial statements for the 1991-92 fiscal year, the State has reported its
estimate for awarded and anticipated unfavorable judgments to be $489 million.
Although other litigation is pending against the State, except as described
above, no current litigation involves New York 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 ability, 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 financing,
constructing and operating revenue-producing public benefit facilities.
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, 1992, 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 $62.2 billion as of
September 30, 1992, of which approximately $8.2 billion was moral obligation
debt and approximately $17.1 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, New York
State has provided financial assistance through appropriations, in some cases of
a recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance 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, respectively, and expects to provide
approximately $1,096.6 million in financial assistance to these Authorities in
its 1993-94 fiscal year. The amounts set forth above exclude, 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
difficulties, both the ability of the State and the Authorities to obtain
financing in the public credit markets and the market price of the State's
outstanding bonds and notes may be adversely affected. The New York State
Housing Finance Agency and the New York State 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
increasing 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 payments have been
paid to Authorities
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under these arrangements. However, in the event that such local assistance
payments are so diverted, the affected 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, which has
required and continues to require significant financial assistance from the
State. The City's independently audited operating 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. The City has eliminated the cumulative deficit
in its net General Fund position. In addition, the City's financial statements
for the 1993 fiscal year received 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 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. Since 1981, the City has fully satisfied its seasonal
financing needs with sales of short-term notes in the public credit markets
ranging from $850 million in fiscal year 1985 to $1.2 billion in fiscal year
1989.
On February 11, 1991, Moody's lowered their rating on the City's general
obligation bonds to "Baa1" from "A." Moody's expressed doubts about whether the
City's January 16, 1991 financial plan presents "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 problem, 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
November 6, 1991, commenting on New York City's 1992-1996 Financial Plan, S&P
stated that "at first glance, the proposals fall short of a structural change in
[C]ity finances and operations, and represent only a timetable for potential
balancing actions, dependent on future decisions by [C]ity and [S]tate officials
for implementation." S&P noted that "without early commitments to the longer
term actions in the plan, the use of debt refinancing by the Municipal
Assistance Corporation for a two-year tax freeze would be little more than
deficit financing, and negative for the City's current single 'A' minus rating."
On April 29, 1991, S&P downgraded the City's outstanding $1.3 billion of general
obligation revenue and anticipation 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 revenue anticipation notes. The lower ratings of S&P "reflect the
City's aggravated 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 continued 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 anticipation notes. Moody's stated that
"although an increasingly strained financial outlook for both the City and the
State complicates the State budget adoption process, this rating on revenue
anticipation notes relies explicitly on the expectation that the State is fully
cognizant of the consequences of further untimely delays in state budget
adoption and will act responsibly. Failure of the State to find a timely
resolution to the budget process will have severe implications for the normal
financial performance 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 obligations
that while such action did not directly affect the bond ratings of local
governments in the State, the impact of its fiscal stringency on local
government bond ratings will be assessed on a
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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 additional 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 the State and Federal assistance to cover
insufficiencies in its revenues. There can be no assurance that in the future
federal and State assistance will enable the City to make up its budget
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 derived 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 assistance, 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 covering 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 period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On November 23, 1993, the City submitted to the Control Board a modification
to its 1994-1997 Financial Plan (the "November Modification") incorporating
various re-estimates of revenues and expenditures. For fiscal year 1994, the
November Modification includes additional resources stemming primarily from the
City comptroller's fiscal year 1993 annual audit, savings from a reduction in
prior years' accrued expenditures, and higher State and federal aid resulting
from claims by the City for reimbursement of various social services costs.
These resources were used to offset new risks to the November Modification
including higher costs in the uniformed agencies, at the Board of Education
("BOE") and for certain 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 projects a
balanced budget for fiscal year 1994, based upon revenues of $31.585 billion.
For fiscal years 1995,
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1996 and 1997, the November Modification projects budget gaps of $1.730 billion,
$2.513 billion and $2.699 billion, respectively. 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 recurring value of the fiscal year 1994 revenue and expenditure 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 estimates to the gap-closing program. To offset these larger gaps, the
November Modification relies on additional City, State and other actions.
OSDC and the staff of the Control Board are examining the November
Modification and are expected to report on the results of their review.
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 materialize 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 essential City services. The City might
also seek additional assistance from the 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 financing
program projects long-term financing requirements of approximately $16.3 billion
for the City's fiscal years 1994 through 1997 for the construction and
rehabilitation of the City's infrastructure and other fixed assets. The major
capital requirements include expenditures for the City's water supply system,
sewage and waste disposal systems, roads, bridges, mass transit, schools and
housing. In addition to financing for new purposes, the City and the New York
City Municipal Water Finance Authority have issued refunding bonds totalling
$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
fiscal year and thereafter. The potential impact on the State of such actions by
localities is not included in the projections of the State receipts and
disbursements in the State's 1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (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 1991, the total indebtedness of all localities in
the State was approximately $32.2 billion, of which $16.8 billion was debt of
the City (excluding $6.7 billion in MAC debt); a small portion (approximately
$39.0 million) of the $32.2 billion of indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to enabling the 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. Fifteen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1991.
In 1992, an unusually large number of local government units requested
authorization for deficit financings. According to the State's comptroller, ten
local government units have been authorized to issue deficit financing in the
aggregate amount of $131.1 million. The current
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session of the Legislature may receive as many or more requests for
deficit-financing authorizations 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 to
increase local revenues to sustain those expenditures. If the State, City or any
of the Authorities were to suffer 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 potential problems of declining urban population, increasing
expenditures and other economic trends could adversely affect certain localities
and require increasing State assistance in the future.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's, S&P and Fitch Investors Service, Inc.
("Fitch") represent the opinions of those agencies as to the quality of debt
obligations that they rate. These ratings, however, are relative and subjective,
are not absolute standards of quality and do not evaluate the market risk of
securities. Ratings will be used with respect to the Muni Funds as initial
criteria for the selection of portfolio securities; the Muni Funds will also
rely upon the independent advice of Greenwich Street Advisor to evaluate
potential investments. Among the factors that will be considered by Greenwich
Street Advisors are the long-term ability of the issuer to pay principal and
interest and general economic trends. The Appendix to this Statement of
Additional Information contains further information concerning the ratings of
Moody's, S&P and Fitch, together with a brief discussion of the significance of
those ratings.
An issue of debt obligations may, subsequent to its purchase by a Muni Fund,
cease to be rated or its ratings may be reduced below the minimum required for
purchase by the Muni Fund. Neither event will require the sale of the debt
obligation by a Muni Fund, but Greenwich Street Advisors will consider the event
in its determination of whether the Muni Fund should continue to hold the
obligation. In addition, to the extent that ratings change as a result of
changes in rating organizations or their rating systems or as a result of a
corporate restructuring of Moody's, S&P or Fitch, Greenwich Street will attempt
to use comparable ratings as standards for each Muni Fund's investments.
MISCELLANEOUS INVESTMENT POLICIES
Each Fund may invest up to an aggregate amount equal to 10% of its net assets in
illiquid securities, which term includes securities subject to contractual or
other restrictions on resale and other instruments that lack readily available
markets. None of the Funds will lend its portfolio securities.
REPURCHASE AGREEMENTS
Each Muni Fund may engage in repurchase agreement transactions with banks which
are the issuers of instruments acceptable for purchase by the Fund and 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 security to the seller at an agreed-upon
price on an agreed-upon date. Under the terms of a typical repurchase agreement,
a Fund would acquire an underlying debt obligation for a relatively short period
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. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period.
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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. Although the amount of a Fund's assets that
may be invested in purchase agreements terminable in less than seven days is not
limited, repurchase agreements maturing in more than seven days, together with
other securities lacking readily available markets held by the Fund, will not
exceed 10% of the Fund's net assets.
The value of the securities underlying a repurchase agreement of a Fund will
be monitored on an ongoing basis by Greenwich Street Advisors or Boston Advisors
to ensure that the value is at least equal at all times to the total amount of
the repurchase obligation, including interest. Greenwich Street Advisors or
Boston Advisors will also monitor, on an ongoing basis to evaluate potential
risks, the creditworthiness of the banks and dealers with which a Fund enters
into repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When a Fund engages in when-issued or delayed delivery securities transactions,
it will rely on the other party to consummate the trade. Failure of the seller
to do so may result in a Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below have been adopted by the
Trust as fundamental policies of the Funds. Under the 1940 Act, a fundamental
policy may not be changed with respect to a Fund without the vote of a majority
of the outstanding voting securities of the Fund. Majority is defined in the
1940 Act as the lesser of (a) 67% or more of the shares present at a Trust
meeting, if the holders of more than 50% of the outstanding shares of the Trust
are present or represented by proxy, or (b) more than 50% of outstanding shares.
Investment restrictions 15 through 19 may be changed by a vote of a majority of
the Trust's Board of Trustees at any time.
Under the investment restrictions adopted by the Trust with respect to the
Funds:
1. No Muni Fund will purchase securities other than Municipal Obligations
and Taxable Investments as those terms are defined in the Muni Prospectus or
this Statement of Additional Information.
2. Neither the Treasury Fund nor the Municipal Fund will purchase
securities (other than U.S. government securities) of any issuer if, as a
result of the purchase, more than 5% of the value of the Fund's total assets
would be invested in the securities of the issuer, except that up to 25% of
the value of the Fund's total assets may be invested without regard to this
5% limitation.
3. Neither the Treasury Fund nor the Municipal Fund will purchase more than
10% of the voting securities of any one issuer, except that this limitation
is not applicable to a Fund's investments in U.S. government securities, and
up to 25% of a Fund's assets may be invested without regard to this 10%
limitation.
4. No Fund will invest more than 25% of the value of its total assets in
securities of issuers in any one industry, except that this limitation is
not applicable to a Fund's investments in U.S. government securities.
5. No Fund will borrow money, except that a Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition of
securities, in an amount not to exceed 10% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever a Fund's borrowings exceed 5% of the value of its total assets, the
Fund will not make any additional investments.
25
<PAGE>
6. No Fund will pledge, hypothecate, mortgage or otherwise encumber its
assets, except to secure permitted borrowings.
7. No Fund will lend money to other persons, except, with respect to the
Treasury Fund, through purchasing debt obligations, and, except, with
respect to each of the Muni Funds, through purchasing Municipal Obligations
or Taxable Investments and entering into repurchase agreements, each in a
manner consistent with the Muni Fund's investment objective and policies.
8. No Fund will purchase securities on margin, except that a Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities.
9. No Fund will make short sales of securities or maintain a short
position.
10. No Fund will purchase or sell real estate or real estate limited
partnership interests.
11. No Fund will purchase or sell commodities or commodity contracts.
12. No Fund will act as an underwriter of securities, except that a Fund may
acquire securities under circumstances in which, if the securities were
sold, the Fund could be deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended.
13. No Fund will invest in oil, gas or other mineral leases or exploration
or development programs.
14. No Fund may write or sell puts, calls, straddles, spreads or
combinations of those transactions, except as permitted under the Fund's
investment objective and policies.
15. No Fund will purchase any security if, as a result (unless the security
is acquired pursuant to a plan of reorganization or an offer of exchange),
the Fund would own any securities of an open-end investment company or more
than 3% of the total outstanding voting stock of any closed-end investment
company, or more than 5% of the value of the Fund's total assets would be
invested in securities of any one or more closed-end investment companies.
16. No Fund will purchase a security if, as a result, the Fund would then
have more than 5% of its total assets invested in securities of issuers
(including predecessors) that have been in continuous operation for fewer
than three years, except that this limitation will be deemed to apply to the
entity supplying the revenues from which the issue is to be paid, in the
case of private activity bonds purchased on behalf of any of the Muni Funds.
17. No Fund may make investments for the purpose of exercising control of
management.
18. No Fund will purchase or retain securities of any issuer if, to the
knowledge of the Trust, any of the Trust's officers or Trustees or any
officer or director of Greenwich Street Advisors or Boston Advisors
individually owns more than 1/2 of 1% of the outstanding securities of the
issuer and together they own beneficially more than 5% of the securities.
19. No Fund will lend its portfolio securities.
The Trust may make commitments more restrictive than the restrictions listed
above to enable the sale of shares of any Fund in certain states. Should the
Trust determine that a commitment is no longer in the best interests of a Fund
and its shareholders, the Trust will revoke the commitment by terminating the
sale of shares of the Fund in the state involved. The percentage limitations
contained in the restrictions listed above apply at the time of purchases of
securities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for each Fund are made by the Greenwich
Street Advisors, subject to the overall review of the Trust's Board of Trustees.
Although investment decisions for each Fund are made independently from those of
the other accounts managed by Greenwich Street Advisors, investments of the type
that a Fund may make also may be made by those other accounts. When a Fund and
one or more other accounts managed by Greenwich Street Advisors are prepared to
invest in, or desire to dispose of, the same security, available investments or
opportunities for sales will be
26
<PAGE>
allocated in a manner believed by Greenwich Street Advisors to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by a
Fund. The Trust has paid no brokerage commissions since its commencement of
operations.
Allocation of transactions on behalf of the Funds, including their
frequency, to various dealers is determined by Greenwich Street Advisors in its
best judgment and in a manner deemed fair and reasonable to the Funds'
shareholders. The primary considerations of Greenwich Street Advisors in
allocating transactions are availability of the desired security and the prompt
execution of orders in an effective manner at the most favorable prices. Subject
to these considerations, dealers that provide supplemental investment research
and statistical or other services to Greenwich Street Advisors may receive
orders for portfolio transactions by a Fund. Information so received is in
addition to, and not in lieu of, services required to be performed by Greenwich
Street Advisors, and the fees of Greenwich Street Advisors are not reduced as a
consequence of their receipt of the supplemental information. The information
may be useful to Greenwich Street Advisors in serving both a Fund and other
clients, and conversely, supplemental information obtained by the placement of
business of other clients may be useful to Greenwich Street Advisors in carrying
out their obligations to a Fund.
No Fund will purchase U.S. government securities or Municipal Obligations
during the existence of any underwriting or selling group relating to the
securities, of which Greenwich Street Advisors is a member, except to the extent
permitted by the SEC. Under certain circumstances, a Fund may be at a
disadvantage because of this limitation in comparison with other funds that have
similar investment objectives but that are not subject to a similar limitation.
PORTFOLIO TURNOVER
A 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)
generally is not expected to exceed 100%, but the portfolio turnover rate will
not be a limiting factor whenever a Fund deems it desirable to sell or purchase
securities. Securities may be sold in anticipation of a rise in interest rates
(market decline) or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be sold and another
security of comparable quality may be purchased at approximately the same time
in order to take advantage of what the Fund believes to be a temporary disparity
in the normal yield relationship between 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 supply of (in the case of the Muni Funds) various
types of tax-exempt securities.
The portfolio turnover rates are as follows:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
FUND 11/30/93 11/30/92
- ----------------------------------------- ---------- ----------
<S> <C> <C>
Treasury Fund............................ 104% 188%
Municipal Fund........................... 4% 22%
California Fund.......................... 16% 46%
New York Fund............................ 22% 68%
</TABLE>
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges described in the Prospectuses applies to
purchases of shares of each Fund made by any "purchaser," which term is defined
to include the following: (a) an individual; (b) an individual, his or her
immediate family purchasing shares for his or her own account; (c) a trustee or
other professional fiduciary purchasing shares for one or more trust estates or
fiduciary accounts even though more than one beneficiary is involved; (d) a
pension, profit-sharing or other employee benefit plan qualified under Section
401 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 enumerated in Section 501(c)(3) or (13) of the Code; or
27
<PAGE>
(f) any other organized group of persons, provided that the organization has
been in existence for at least six months and was organized for a purpose other
than the purchase of investment company securities at a discount. Purchasers who
wish to combine purchase orders to take advantage of volume discounts should
contact their Smith Barney Shearson Financial Consultants.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospectuses,
apply to any purchase of shares of a Fund by any "purchaser" (as defined above).
The reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate records. The Trust reserves the right to
terminate or amend the combined right of accumulation at any time after notice
to shareholders.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Funds is included in the
Prospectuses. The right of redemption of shares of each Fund may be suspended,
or the date of payment postponed (a) for any periods during which the New York
Stock Exchange, Inc. (the "NYSE") is closed (other than for customary weekend
and holiday closings), (b) when trading in the markets the Fund normally
utilizes is restricted, or an emergency, as defined by the rules and regulations
of the SEC, exists making disposal of the Fund's investments or determination of
its net asset value not reasonably practicable or (c) for any other periods as
the SEC by order may permit for the protection of the Fund's shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to a
shareholder of any Fund who owns shares of the Fund with a value of at least
$10,000 ($5,000 for retirement plan accounts) and who wishes to receive specific
amounts of cash periodically. Withdrawals of at least $50 monthly 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 2% per month of
the value of a shareholder's shares at the time the Withdrawal Plan commences.
To the extent that withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in a Fund, the shareholder will experience a
reduction in the value of his or her investment and continued withdrawal
payments may reduce the shareholder's investment and ultimately exhaust it.
Withdrawal payments should not be considered as income from investment in a
Fund. In addition, because making an additional investment in a Fund at the same
time a shareholder is participating in the Withdrawal Plan generally would not
be advantageous to the shareholder, purchases by a participating shareholder of
additional shares in the Fund in amounts less than $5,000 will not ordinarily be
permitted.
A shareholder of a Fund who wishes to participate in the Withdrawal Plan and
who holds his or her shares of the Fund in certificate form must deposit the
certificates with TSSG, as agent for Withdrawal Plan participants. All dividends
and distributions on shares in the Withdrawal Plan are reinvested automatically
at net asset value in additional shares of the Fund involved. All applications
for participation in the Withdrawal Plan must be received by TSSG as plan agent
no later than the eighth day of each month to ensure eligibility for
participation beginning with that month's withdrawal. The Withdrawal Plan will
not be carried over on exchanges between Funds; a new Withdrawal Plan
application is required to establish the Plan with respect to the new Fund. For
additional information regarding the Withdrawal Plan, investors should contact
their Smith Barney Shearson Financial Consultants.
DISTRIBUTOR
Smith Barney Shearson serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
Smith Barney Shearson forwards investors' funds for the purchase of shares
five business days after placement
28
<PAGE>
of purchase orders (i.e., the "settlement date"). When payment is made by the
investor before the settlement date, unless otherwise directed by the investor,
the funds will be held as a free credit balance in the investor's brokerage
account, and Smith Barney Shearson 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 a money market fund (other than the Smith Barney
Shearson Money Market Fund) in the Smith Barney Shearson Group of Funds. If the
investor instructs Smith Barney Shearson to invest the funds in a money market
fund, the amount of the investment will be included as part of the average daily
net assets of both the relevant Fund and the money market fund, and affiliates
of Smith Barney Shearson which serve the funds in an investment advisory
capacity will benefit from the fact that they are receiving fees from both such
investment companies for managing these assets computed on the basis of their
average daily net assets. The Trust's Board of Trustees has been advised of the
benefits to Smith Barney Shearson resulting from five-day settlement procedures
and will take such benefits into consideration when reviewing the Advisory and
Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Trust are distributed on a best efforts basis by Smith Barney
Shearson as exclusive sales agent of the Trust pursuant to the Distribution
Agreement. To compensate Smith Barney Shearson for the services it provides and
for the expense it bears under the Distribution Agreement, the Trust has adopted
a services and distribution plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, each Fund pays Smith Barney Shearson a service fee,
accrued daily and paid monthly, calculated at the annual rate of .15% of the
value of the Fund's average daily net assets attributable to the Fund's shares.
During the period from December 31, 1991 through November 30, 1992, Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"), the Trust's distributor prior
to Smith Barney Shearson, received $90,238 in the aggregate from the Trust under
the Plan. For the same period, Smith Barney Shearson also received $10,561
representing CDSC on redemptions of shares of the Trust. For the fiscal year
ended November 30, 1993, Shearson Lehman Brothers and Smith Barney Shearson
received $269,091 in the aggregate from the Plan and $126,806 representing CDSC.
Under its terms, the Plan continues from year to year provided such
continuance is approved annually by vote of the Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan (the
"Independent Trustees"). The Plan may not be amended to increase the amount to
be spent for the services provided by Smith Barney Shearson without shareholder
approval, and all amendments of the Plan also must be approved by the Trustees
in the manner described above. The Plan may be terminated at any time, without
penalty, by vote of a majority of the Independent Trustees or, with respect to
any Fund, by vote of a majority of the outstanding voting securities of a Fund
(as defined in the 1940 Act). Pursuant to the Plan, Smith Barney Shearson will
provide the Board of Trustees with periodic reports of amounts expended under
the Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
As noted in the Prospectuses, a Fund's net asset value will not be calculated on
certain holidays. In carrying out valuation policies adopted by the Trust's
Board of Trustees, Boston Advisors, as administrator, may consult with an
independent pricing service (the "Pricing Service") retained by the Trust. Debt
securities of domestic issuers (other than U.S. government securities and short-
term investments), including Municipal Obligations, are valued by Boston
Advisors after consultation with the Pricing Service. When, in the judgment of
the Pricing Service, quoted bid prices for investments are readily available and
are representative of the bid side of the
29
<PAGE>
market, these investments are valued at the mean between the quoted bid prices
and asked prices. Investments for which no readily obtainable market quotations
are available, in the judgment of the Pricing Service, are carried at fair value
as determined by the Pricing Service. The procedures of the Pricing Service are
reviewed periodically by the officers of the Trust under the general supervision
and responsibility of the Board of Trustees.
EXCHANGE PRIVILEGE
Shareholders of the Fund may exchange their shares for Class A shares of certain
other funds in the Smith Barney Shearson Group of Funds, as indicated in the
Prospectus, to the extent such shares are offered for sale in the shareholders
state of residence.
Except as noted below, shareholders of any fund in the Smith Barney Shearson
Group of Funds may exchange all or part of their shares for shares of the other
funds in the Smith Barney Shearson Group of Funds, 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 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.
Dealers other than Smith Barney Shearson must notify the Fund's transfer
agent of the investor's prior ownership of shares of Smith Barney Shearson High
Income Fund and their account number in order to accomplish an exchange of
shares of High Income Fund under paragraph B above.
The exchange privilege enables shareholders in any fund in the Smith Barney
Shearson Group of Funds to acquire shares in a fund with different investment
objectives when they believe a shift between funds is an appropriate investment
decision. This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be legally sold. Prior to any exchange,
the investor should obtain and review a copy of the current prospectus of each
fund into which an exchange is to be made. Prospectuses may be obtained from
your Smith Barney Shearson Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds are immediately invested, at the price described above, in
shares of the fund being acquired. Smith Barney Shearson reserves the right to
reject any exchange request. Upon written notice, the exchange privilege may be
modified or terminated at any time.
PERFORMANCE DATA
From time to time, the Trust may quote a Fund's yield or total return in
advertisements or in reports and other communications to shareholders.
YIELD AND EQUIVALENT TAXABLE YIELD
A Fund's 30-day yield figure described in the Prospectuses is calculated
according to a formula prescribed by the SEC, expressed as follows:
<TABLE>
<S> <C> <C>
YIELD = 2 [(a-b + 1)6 - 1]
cd
</TABLE>
<TABLE>
<S> <C> <C>
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
period that were entitled to
receive dividends.
d = the maximum offering price per
share on the last day of the
period.
</TABLE>
30
<PAGE>
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a 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.
A Muni Fund's "equivalent taxable 30-day yield" is computed by dividing that
portion of the Fund's 30-day yield that is tax-exempt by one minus a stated
income tax rate and adding the product to any portion of the Fund's yield that
is not tax-exempt. The yields for the 30-day period ended November 30, 1993 were
as follows: Treasury Fund -- 3.97%, Municipal Fund -- 3.47%, California Fund --
4.11%, and New York Fund -- 4.18%.
The equivalent taxable yields for the 30-day period ended November 30, 1993
assuming payment of Federal income taxes at the rate of 31%; California income
taxes at the rate of 9.3% for the California Fund; and New York State and City
income taxes at a rate of 11.785% for the New York Fund would have been as
follows: Municipal Fund -- 5.03%; California Fund -- 6.57%, and New York Fund --
6.87%.
Investors should recognize that in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates will tend to be somewhat lower. In addition,
when interest rates are falling, the inflow of net new money to a Fund from the
continuous sale of its shares will likely be invested in instruments producing
lower yields than the balance of its portfolio of securities, thereby reducing
the current yield of the Fund. In periods of rising interest rates, the opposite
can be expected to occur.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures are computed according to a
formula prescribed by the SEC, expressed as follows:
P(1 + T)n = ERV
<TABLE>
<S> <C> <C>
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
a 1-, 5- or 10-year period
(or fractional portion
thereof), assuming
reinvestment of all dividends
and distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund.
The average annual total return figures for the Funds were as follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1993
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- ------------ ------------
<S> <C> <C>
Treasury Fund............... 9.22% 6.88%
Municipal Fund.............. 6.59% 4.27%
California Fund............. 9.79% 7.44%
New York Fund............... 9.25% 6.90%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1993
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------ ------------
<S> <C> <C>
Treasury Fund............... 6.89% 6.19%
Municipal Fund.............. 6.69% 6.00%
California Fund............. 7.67% 6.97%
New York Fund............... 8.92% 8.21%
</TABLE>
31
<PAGE>
AGGREGATE TOTAL RETURN
A Fund's "aggregate total return" figures represent the cumulative change in the
value of an investment in the Fund for the specified period and are computed by
the following formula:
ERV - P
------------
P
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial
payment of $10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000
investment made at the
beginning of the 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 distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
The aggregate total return figures for the Funds were as follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1993
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- ------------ ------------
<S> <C> <C>
Treasury Fund............... 9.22% 6.88%
Municipal Fund.............. 6.59% 4.27%
California Fund............. 9.79% 7.44%
New York Fund............... 9.25% 6.90%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1993
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------ ------------
<S> <C> <C>
Treasury Fund............... 13.62% 12.20%
Municipal Fund.............. 13.22% 11.82%
California Fund............. 15.22% 13.78%
New York Fund............... 17.79% 16.32%
</TABLE>
A Fund's net investment income changes in response to fluctuations in
interest rates and the expenses of the Fund. Consequently, the given performance
quotations should not be considered as representative of the Fund's performance
for any specified period in the future.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
TAXES
As described above and in the Muni Prospectus, each Muni Fund is designed to
provide investors with current income that is excluded from gross income for
Federal income tax purposes, and the California Fund and the New York Fund are
designed to provide investors with current income exempt from otherwise
applicable state and/or local taxes. None of the Muni Funds is intended to be a
balanced investment program and none is designed for investors seeking capital
gains or maximum tax-exempt income irrespective of fluctuations in principal.
Investment in a Muni Fund would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and individual retirement accounts
because those investors would not gain any additional tax benefit from the
receipt of tax-exempt income.
The Trust intends that each Fund continue to qualify in each year as a
"regulated investment company" under the Code. If a Fund (a) is a regulated
investment company and (b) distributes to its shareholders at least 90% of its
taxable net investment income (including, for this purpose, its net realized
short-term capital gains) and 90% of its tax-exempt interest income (reduced by
certain expenses), it will not be liable for Federal income taxes to the extent
its taxable net investment income and its net realized long-term and short-term
capital gains, if any, are distributed to its shareholders.
32
<PAGE>
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a Muni Fund will not be deductible for Federal income tax purposes. In
addition, the indebtedness is not deductible by a shareholder of the California
Fund for California State income tax purposes, nor by a New York Fund
shareholder for New York State and New York City personal income tax purposes.
If a shareholder receives exempt-interest dividends with respect to any share of
a Muni Fund and if the share is held by the shareholder for six months or less,
then any loss on the sale or exchange of the share may, to the extent of the
exempt-interest dividends, be disallowed. In addition, the Code may require a
shareholder that receives exempt-interest dividends to treat as taxable income a
portion of certain otherwise non-taxable social security and railroad retirement
benefit payments. Furthermore, the portion of any exempt-interest dividend paid
by a Muni Fund that represents income derived from private activity bonds held
by the Fund may not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by the bonds, or a "related
person" of the substantial user. Moreover, as noted in the Muni Prospectus (a)
some or all of a Muni Fund's exempt-interest 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 a Muni Fund's dividends and distributions may affect a corporate
shareholder's Federal "environmental" tax liability. In addition, the receipt of
a Muni Fund's dividends and distributions may affect a foreign corporate
shareholder's Federal "branch profits" tax liability and the Federal and
California "excess net passive income" tax liability of a Subchapter S
corporation. Shareholders should consult their own tax advisors to determine
whether they are (a) "substantial users" with respect to a facility or "related"
to those 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 or California "excess net passive income" tax. As a
general rule, a Fund's gain or loss on a sale or exchange of an investment will
be a long-term capital gain or loss if the Fund has held the investment for more
than one year and will be a short-term capital gain or loss if it has held the
investment for one year or less. Furthermore, as a general rule, a shareholder's
gain or loss on a sale or redemption of shares of a Fund will be a long-term
capital gain or loss if the shareholder has held his or her Fund shares for more
than one year and will be a short-term capital gain or loss if he or she has
held his or her Fund shares for one year or less.
Shareholders of each Fund will receive, as more fully described in the
Prospectuses, an annual statement as to the income tax status of his or her
dividends and distributions for the prior calendar year. Each shareholder will
also receive, if appropriate, various written notices after the close of a
Fund's prior taxable year as to the Federal income tax status of certain
dividends or distributions which were received from the Fund during the Fund's
prior taxable year.
The dollar amount of dividends paid by a Muni Fund that is excluded from
Federal income taxation and the dollar amount of dividends paid by a Muni Fund
that is subject to federal income taxation, if any, will vary for each
shareholder depending upon the size and duration of each shareholder's
investment in a Muni Fund.
Investors considering buying shares of a Fund on or just prior to the record
date for a capital gain distribution should be aware that the amount of the
forthcoming distribution payment will be a taxable distribution payment.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income or fails to certify that he or
she has provided a correct taxpayer identification number and that he or she is
not subject to "backup withholding," then the shareholder may be subject to a
31% "backup withholding" tax with respect to (a) taxable dividends and
distributions and (b) the proceeds of any redemptions of shares of a Fund. 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 taxpayer's regular Federal income tax liability.
33
<PAGE>
The discussion above is only a summary of certain tax considerations
generally affecting a Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including their
state and local tax liabilities.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston Place,
Boston, Massachusetts 02108, and serves as custodian for the Trust. The assets
of the Funds are held under bank custodianship in accordance with the 1940 Act.
Under its custody agreement with the Trust, Boston Safe is authorized to
establish separate accounts and securities depositories as sub-custodians of
assets owned by the Funds. For its custody services, Boston Safe receives
monthly fees charged to a Fund based upon the month-end, aggregate net asset
value of the Fund plus certain charges for securities transactions. Boston Safe
is also reimbursed by each Fund for out-of-pocket expenses, including the costs
of any sub-custodians.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent. Under the transfer agency agreement, TSSG
maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust and distributes dividends and
distributions payable by each Fund. For these services TSSG receives from each
Fund a monthly fee computed on the basis of the number of shareholder accounts
maintained during the year for each Fund and is reimbursed for certain out-of-
pocket expenses.
ORGANIZATION OF THE TRUST
The Trust was organized as an unincorporated business trust under the laws of
The Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
October 17, 1991, as amended from time to time (the "Trust Agreement"). On
November 20, 1991 the trust changed its name from Shearson Lehman Brothers
Intermediate-Term Trust to Shearson Lehman Brothers Income Trust. On July 30,
1993 the Trust changed its name from Shearson Lehman Brothers Income Trust to
Smith Barney Shearson Income Trust. In the interest of economy and convenience,
certificates representing shares in the Funds are not physically issued. Boston
Safe maintains a record of each shareholder's ownership of Fund shares. Shares
of the Funds do not have cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of Trustees of the Trust can
elect all Trustees. Shares of the Funds are transferable, but have no
preemptive, conversion or subscription rights.
Massachusetts law provides that shareholders of the Funds could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust, however, and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee of the Trust. The Trust Agreement provides for
indemnification from the property of a Fund for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's Fund incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations, a possibility that the Trust's management believes is remote.
Upon payment of any liability incurred by the Fund, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the Fund.
The Trustees intend to conduct the operations of the Trust and the Funds in a
manner so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Funds.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended November 30, 1993,
accompanies this Statement of Additional Information and are incorporated herein
by reference in their entirety.
34
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds rated 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 elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present that make
the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium grade obligations, that is
they are neither highly protected nor poorly secured. Interest payment 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. These bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification below Aaa. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short term loans are
designated Moody's Investment Grade (MIG) and for variable demand obligations
are designated Variable Moody's Investment Grade (VMIG). This distinction
recognizes the differences between short term credit risk and long term risk.
Loans bearing the designation MIG 1/VMIG 1 are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
Loans bearing the designation MIG 2/VMIG 2 are of high quality, with margins of
protection ample, although not as large as the preceding group. Loans bearing
the designation MIG 3/VMIG 3 are of favorable quality, with all security
elements accounted for but lacking the undeniable strength of the preceding
grades. Market access for refinancing, in particular, is likely to be less well
established.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short term promissory obligations. This
will normally be evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
A-1
<PAGE>
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:
AAA -- These are the obligations of the highest quality. They have the strongest
capacity for timely payment of debt service.
General Obligation Bonds rated AAA -- 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. Quality of management appears superior.
Revenue Bonds rated AAA -- Debt service coverage has been, and is expected
to remain, 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 covenant, earnings test for issuance of additional bonds and
debt service reserve requirements) are rigorous. There is evidence of
superior management.
AA -- The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.
A -- Principal and interest payments on bonds in this category are regarded
as safe, although the bonds are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories. This rating describes the third strongest capacity for payment of
debt service.
General Obligation Bonds rated A -- There is some weakness, either in the
local economic base, in debt burden, in the balance between revenues and
expenditures 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 rated A -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB -- The bonds in this group are regarded as having an adequate capacity
to pay interest and repay principal. Whereas bonds in this group normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Bonds
rated BBB have the fourth strongest capacity for payment of debt service.
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
categories, except in the AAA category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) 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.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Capacity for
timely payment on commercial paper rated A-2 is strong, but the relative degree
of safety is not as high as for issues designated A-1.
DESCRIPTION OF FITCH MUNICIPAL BOND RATINGS:
AAA -- Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor
A-2
<PAGE>
has an exceptionally strong ability to pay interest and repay principal, which
is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short term debt of these issues is generally
rated F-1+ by Fitch.
A -- Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus and minus signs are used by Fitch with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
DESCRIPTION OF FITCH SHORT TERM RATINGS:
Fitch's short term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium term notes, and municipal and investment
notes.
The short term rating places greater emphasis than a long term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short term ratings are as follows:
F-1+ -- Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2 -- Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near term adverse
changes could cause these securities to be rated below investment grade.
LOC -- The symbol LOC indicates that a Fitch rating is based on a letter of
credit issued by a commercial bank.
A-3
<PAGE>
ANNUAL REPORT FOR
SMITH BARNEY SHEARSON
LIMITED MATURITY
TREASURY FUND DATED
NOVEMBER 30, 1993
<PAGE>
ANNUAL REPORT NOVEMBER 30, 1993
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
A ROUND, EAGLE SYMBOL LAYING
ON THE AMERICAN FLAG.
SMITH BARNEY SHEARSON
LIMITED
MATURITY
TREASURY
FUND
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
DEAR SHAREHOLDER:
INTEREST RATES AND ECONOMIC ENVIRONMENT
The election in November of 1992 of a new President, especially a Democratic
President for the first time in 12 years, created confusion and speculation in
the financial markets. Much of the speculation was centered on the question of
whether this party's stereotypical label of "government knows best" would
continue, or would a "new Presidency" emerge? From our vantage point, there is
enough evidence to suggest that both labels are appropriate. We're going to use
the graph below to show the effect of the economic and political environment on
the interest rate of a 30-year Treasury bond.
LIMITED MATURITY TREASURY
To allow you to compare the performance of your investment in the Fund to
that of the general market, we have included a chart showing the values of
$10,000 invested in the Fund since its inception and in the Lehman Brothers
Intermediate Treasury Index. The Lehman Brothers Intermediate Treasury Index is
an unmanaged, broad-based index which includes about 131 actively-traded
Treasury issues totaling approximately $1.4 billion in market capitalization.
The average maturity of the securities in the Index is approximately 3.9 years;
in comparison, the average maturity of the securities in the Fund is 4.8 years.
Because it is unmanaged, the Lehman Brothers Intermediate Treasury Index is not
subject to the same management and trading expenses of a mutual fund.
In expectation of a promised budget compromise and continued economic growth
that was slow by historical standards, interest rates resumed their downward
movement in mid-January (A). Once long-term interest rates dropped below 7%, the
market basically treaded water (B) while waiting for the close margin of
approval for the budget package. Although economic statistics indicated a
reluctantly-improving economy, it was also apparent that renewed inflation was
unlikely. Ongoing reports of layoffs and low levels of consumer confidence
prompted the Federal Reserve Board to maintain its neutral wait-and-see policy.
CONTINUED
1
<PAGE>
YIELD ON U.S. TREASURY BOND
(12/25/92 -- 11/30/93)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-Nov 7.6
<S> <C>
1-Dec 7.57
2-Dec 7.56
3-Dec 7.56
4-Dec 7.49
7-Dec 7.45
8-Dec 7.43
9-Dec 7.44
10-Dec 7.42
11-Dec 7.44
14-Dec 7.46
15-Dec 7.45
16-Dec 7.43
17-Dec 7.42
18-Dec 7.42
21-Dec 7.39
22-Dec 7.34
23-Dec 7.35
24-Dec 7.36
25-Dec 7.36
28-Dec 7.4
29-Dec 7.36
30-Dec 7.38
31-Dec 7.4
4-Jan 7.32
5-Jan 7.32
6-Jan 7.35
7-Jan 7.44
8-Jan 7.46
11-Jan 7.45
12-Jan 7.47
13-Jan 7.43
14-Jan 7.39
15-Jan 7.35
18-Jan 7.35
19-Jan 7.3
20-Jan 7.33
21-Jan 7.3
22-Jan 7.29
25-Jan 7.2
26-Jan 7.25
27-Jan 7.24
28-Jan 7.2
29-Jan 7.2
1-Feb 7.21
2-Feb 7.24
3-Feb 7.21
4-Feb 7.18
5-Feb 7.16
8-Feb 7.2
9-Feb 7.2
10-Feb 7.25
11-Feb 7.2
12-Feb 7.12
15-Feb 7.11
16-Feb 7.15
17-Feb 7.1
18-Feb 7.02
19-Feb 7.01
22-Feb 6.93
23-Feb 6.82
24-Feb 6.88
25-Feb 6.89
26-Feb 6.9
1-Mar 6.84
2-Mar 6.84
3-Mar 6.78
4-Mar 6.72
5-Mar 6.74
8-Mar 6.72
9-Mar 6.74
10-Mar 6.75
11-Mar 6.76
12-Mar 6.86
15-Mar 6.89
16-Mar 6.87
17-Mar 6.86
18-Mar 6.78
19-Mar 6.8
22-Mar 6.8
23-Mar 6.77
24-Mar 6.81
25-Mar 6.85
26-Mar 6.94
29-Mar 6.89
30-Mar 6.91
31-Mar 6.92
1-Apr 6.97
2-Apr 7.05
5-Apr 7.02
6-Apr 6.96
7-Apr 6.95
8-Apr 6.85
9-Apr 6.85
12-Apr 6.79
13-Apr 6.78
14-Apr 6.75
15-Apr 6.72
16-Apr 6.75
19-Apr 6.72
20-Apr 6.75
21-Apr 6.74
22-Apr 6.75
23-Apr 6.79
26-Apr 6.83
27-Apr 6.9
28-Apr 6.92
29-Apr 6.88
30-Apr 6.93
3-May 6.86
4-May 6.79
5-May 6.78
6-May 6.8
7-May 6.84
10-May 6.81
11-May 6.81
12-May 6.86
13-May 6.95
14-May 6.94
17-May 6.96
18-May 7.02
19-May 6.97
20-May 6.99
21-May 7
24-May 7
25-May 7
26-May 6.92
27-May 6.93
28-May 6.98
31-May 6.98
1-Jun 6.88
2-Jun 6.87
3-Jun 6.86
4-Jun 6.91
7-Jun 6.88
8-Jun 6.92
9-Jun 6.88
10-Jun 6.87
11-Jun 6.8
14-Jun 6.81
15-Jun 6.82
16-Jun 6.81
17-Jun 6.8
18-Jun 6.8
21-Jun 6.77
22-Jun 6.77
23-Jun 6.76
24-Jun 6.73
25-Jun 6.7
28-Jun 6.67
29-Jun 6.67
30-Jun 6.67
1-Jul 6.68
2-Jul 6.66
5-Jul 6.66
6-Jul 6.68
7-Jul 6.68
8-Jul 6.66
9-Jul 6.64
12-Jul 6.62
13-Jul 6.61
14-Jul 6.56
15-Jul 6.56
16-Jul 6.54
19-Jul 6.54
20-Jul 6.55
21-Jul 6.62
22-Jul 6.66
23-Jul 6.7
26-Jul 6.68
27-Jul 6.67
28-Jul 6.65
29-Jul 6.57
30-Jul 6.56
2-Aug 6.55
3-Aug 6.52
4-Aug 6.55
5-Aug 6.52
6-Aug 6.52
9-Aug 6.47
10-Aug 6.45
11-Aug 6.43
12-Aug 6.44
13-Aug 6.35
16-Aug 6.3
17-Aug 6.31
18-Aug 6.26
19-Aug 6.19
20-Aug 6.22
23-Aug 6.22
24-Aug 6.2
25-Aug 6.17
26-Aug 6.09
27-Aug 6.13
30-Aug 6.12
31-Aug 6.09
1-Sep 6.09
2-Sep 6.04
3-Sep 5.94
6-Sep 5.94
7-Sep 5.9
8-Sep 5.86
9-Sep 5.96
10-Sep 5.88
13-Sep 5.87
14-Sep 5.97
15-Sep 5.98
16-Sep 6.03
17-Sep 6.04
20-Sep 6.09
21-Sep 6.12
22-Sep 6.09
23-Sep 6.06
24-Sep 6.05
27-Sep 5.95
28-Sep 5.94
29-Sep 6
30-Sep 6.02
1-Oct 5.99
4-Oct 6
5-Oct 6.01
6-Oct 6.01
7-Oct 6.01
8-Oct 5.92
12-Oct 5.92
13-Oct 5.92
14-Oct 5.85
15-Oct 5.78
18-Oct 5.85
19-Oct 5.84
20-Oct 5.82
21-Oct 5.92
22-Oct 5.97
25-Oct 6
26-Oct 5.98
27-Oct 6
28-Oct 5.95
29-Oct 5.97
1-Nov 6.03
2-Nov 6.06
3-Nov 6.11
4-Nov 6.18
5-Nov 6.21
8-Nov 6.2
9-Nov 6.14
10-Nov 6.21
12-Nov 6.14
15-Nov 6.16
16-Nov 6.17
17-Nov 6.18
18-Nov 6.24
19-Nov 6.34
22-Nov 6.38
23-Nov 6.31
24-Nov 6.3
25-Nov 6.31
26-Nov 6.26
29-Nov 6.23
30-Nov 6.3
</TABLE>
[GRAPHIC]
Chart showing the fluctuation
of interest rates of the 30 year
Treasury Bond over the past 12 months.
Phase C of the interest rate cycle reflects the market's reaction to higher
tax rates and concern over the cost of health care reform. As consumers
attempted to pare down their debt levels and bolster savings, a vicious downward
spiral in interest rates began in mid-May. The combination of mortgage
refinancings and thirst for yield caused long-term rates to fall to levels not
seen since the early 1970's.
As economic growth gained momentum and attention turned toward NAFTA and its
implications, fear of a tightening in the Federal Reserve's monetary policy
infiltrated the minds of many investors. Many investors subsequently took their
profits, and a slowdown in new money entering the financial markets caused rates
to rise by 50 basis points (one-half of a percentage point) to the current
market rate of approximately 6.30%(D).
The key issue confronting the financial markets today is whether the economy
truly is finally on the road to a healthy recovery or whether this is yet
another example of short-lived growth. By early in the second quarter of 1994,
when the effect of the retroactive tax increase becomes more fully felt and the
costs of health care reform are clearer, we should have a good idea of the
sustainability of the recovery. If the combined costs prove to be surprisingly
high and consumer confidence becomes negative, we would anticipate lower
interest rates than we saw in 1993. Stay tuned!
CONTINUED
2
<PAGE>
PORTFOLIO STRATEGY
The management philosophy of the Fund and its investment restrictions limit
the volatility of the net asset value per share -- and rightfully so.
CONTINUED
3
<PAGE>
During the past fiscal year and as we have mentioned in prior reports, we have
invested primarily in five-year Treasury securities and allowed these
investments to roll down the maturity curve. The essence of this strategy is
that as time passes the security becomes less volatile but still pays the higher
yield of its purchase date. We will change this strategy only if we anticipate a
significant rise in interest rates which would make it necessary for us to
quickly shorten the maturity of our investments in order to reduce their
volatility.
PERFORMANCE
The Limited Maturity Treasury Fund produced a compounded total return of
9.49% for the fiscal year which ended on November 30, 1993. Based on an analysis
of its peer group of similarly-managed funds as measured by Lipper Analytical
Services, Inc., a nationally recognized mutual fund ranking organization, the
Fund was among the best-performing funds for this twelve-month period. In
comparison, the 10- and 30-year Treasuries returned 12.08% and 19.16%,
respectively. However, achieving these returns also required investors to assume
greater risk in the financial markets. We believe that our management style will
generate returns similar to if not better than longer-maturity securities but
with substantially less volatility.
DIVIDEND YIELD AND POLICY
The Fund does not pay a level monthly dividend rate but instead distributes
to shareholders the accrued monthly income earned by the portfolio. We will
continue to strive to offer an attractive dividend distribution as we also face
declining interest rates and rising volatility.
As the vagaries of the new world order influence fiscal policy and inter-
national treaties, we will attempt to give you a timely interpretation of the
impact on the financial markets. Once again, we appreciate your continued
support of the Fund and look forward to hearing from you.
Sincerely,
Heath B. McLendon James E. Conroy
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
January 5, 1994
4
<PAGE>
HISTORICAL PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD NET ASSET VALUE CAPITAL GAINS DIVIDENDS TOTAL
ENDED BEGINNING ENDING DISTRIBUTED PAID RETURN**
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------
12/31/91* -
11/30/92 $7.90 $7.88 -- $0.37 4.54%
------------------------------------------------------------------
11/30/93 7.88 8.14 $0.09 0.38 9.49
------------------------------------------------------------------
TOTAL $0.09 $0.75
------------------------------------------------------------------
CUMULATIVE TOTAL RETURN (12/31/91 THROUGH 11/30/93) 14.46%
------------------------------------------------------------------
<FN>
*The Fund commenced operations on December 31, 1991.
**Figures assume reinvestment of all dividends and capital gain distributions at
net asset value and do not reflect deduction of the applicable sales charge.
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN*** (UNAUDITED)
<TABLE>
<CAPTION>
WITHOUT FRONT END AND WITH FRONT END AND
CONTINGENT DEFERRED SALES CONTINGENT DEFERRED SALES
CHARGES CHARGES
WITH WAIVER WITHOUT WAIVER WITH WAIVER WITHOUT WAIVER
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Year Ended 11/30/93 9.49% 9.22% 7.14% 6.88%
- -------------------------------------------------------------------------------------
Inception (12/31/91) through 11/30/93 7.30% 6.89% 6.60% 6.19%
- -------------------------------------------------------------------------------------
<FN>
***Shares of the Fund are subject to a maximum 1.25% front-end sales charge and
a maximum 1% contingent deferred sales charge (CDSC). All total return
figures shown reflect the reinvestment of dividends and capital gains. The
Fund waived fees from December 31, 1991 to the present; a shareholder's
actual return for the period during which fees were waived would be the
higher of the two numbers shown.
</TABLE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Limited Maturity
Treasury Fund shares on December 31, 1991 through November 30, 1993 as compared
with the growth of a $10,000 investment in Lehman Brothers Intermediate Treasury
Index and Lipper Peer Group Average Index. The plot points used to draw the line
graph were as follows: + Hypothetical illustration of $10,000 invested at
inception on December 31, 1991 through November 30,
1993 compared to the Lehman Brothers Intermediate
Treasury Index and the Lipper Peer Group Average Index.
Investment assumes deduction of the front-end sales
charge and CDSC.
The Lehman Brothers Intermediate Treasury Index is an
unmanaged, broad-based index with approximately $1.4
billion in market capitalization which tracks the
market value of approximately 131 actively-traded U.S.
Treasury securities with maturities of 3 to 10 years.
5
<PAGE>
The Lipper Analytical Services, Inc. Peer Group Average
Index is composed of an average of the Fund's peer
group of mutual funds (11 as of November 30, 1993)
investing in limited maturity Treasury securities.
This period was one in which treasury prices fluctuated
and the results should not be considered as a
representation of the dividend income or capital gain
or loss which may be realized from an investment in the
Fund today. No adjustment has been made for shareholder
tax liability on dividends or capital gains.
Note: All figures cited here and on the following pages
represent past performance and do not guarantee future
results.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
6
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS November 30, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
-----------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 98.6%
U.S. TREASURY NOTES --
$ 500,000 6.000% due 12/31/97 $ 519,545
1,300,000 4.750% due 08/31/98 1,280,916
46,250,000 4.750% due 09/30/98 45,560,875
4,000,000 4.750% due 10/31/98 3,934,481
-----------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $51,939,473*) 98.6% 51,295,817
OTHER ASSETS AND LIABILITIES (NET) 1.4 730,164
-----------------------------------------------------------------------------
NET ASSETS 100.0% $52,025,981
-----------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES November 30, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $51,939,473) (Note 1)
See accompanying schedule $51,295,817
Cash 296,132
Interest receivable 418,125
Receivable for Fund shares sold 396,815
Unamortized organization costs (Note 6) 37,130
- -------------------------------------------------------------------------------
TOTAL ASSETS 52,444,019
- -------------------------------------------------------------------------------
LIABILITIES:
Dividends payable $113,195
Investment advisory fee payable (Note 2) 91,652
Payable for Fund shares redeemed 84,256
Administration fee payable (Note 2) 51,860
Accrued shareholder reports expense 34,594
Accrued legal and audit 21,750
Distribution fee payable (Note 3) 6,629
Custodian fees payable (Note 2) 4,200
Transfer agent fees payable (Note 2) 3,400
Accrued expenses and other payables 6,502
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 418,038
- -------------------------------------------------------------------------------
NET ASSETS $52,025,981
- -------------------------------------------------------------------------------
NET ASSETS consist of:
Undistributed net investment income $ 707
Accumulated net realized gain on investments sold 2,172,569
Unrealized depreciation of investments (643,656)
Par value 6,389
Paid-in capital in excess of par value 50,489,972
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $52,025,981
NET ASSET VALUE per share
($52,025,981 DIVIDED BY 6,388,691 shares of beneficial
interest outstanding)+ $8.14
- -------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($8.14 DIVIDED BY 0.9875)
(based on sales charge of 1.25% of the offering price at
November 30, 1993) $8.24
- -------------------------------------------------------------------------------
<FN>
+Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $2,627,530
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $171,260
Sub-investment advisory and administration fee
(Note 2) 97,863
Distribution fee (Note 3) 73,397
Shareholder reports expense 44,179
Transfer agent fees (Note 2) 39,550
Legal and audit fees 27,815
Custodian fees (Note 2) 15,843
Amortization of organization costs (Note 6) 12,042
Trustees' fees and expenses (Note 2) 6,594
Other 21,622
Fees waived by investment adviser and
administrator (Note 2) (125,611)
- --------------------------------------------------------------------------------
TOTAL EXPENSES 384,554
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,242,976
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 4):
Net realized gain on investments sold during the
period 2,172,569
Net unrealized depreciation of investments
during the period (217,200)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,955,369
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,198,345
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
11/30/93 11/30/92*
<S> <C> <C>
Net investment income $ 2,242,976 $ 1,170,876
Net realized gain on investments during the period 2,172,569 518,134
Net unrealized depreciation of investments during the
period (217,200) (426,456)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,198,345 1,262,554
Distributions to shareholders from:
Net investment income (2,242,269) (1,170,876)
Net realized capital gain on investments (518,134) --
Net increase in net assets from Fund share transactions
(Note 5) 5,620,932 44,850,429
- -------------------------------------------------------------------------------------
Net increase in net assets 7,058,874 44,942,107
NET ASSETS:
Beginning of period 44,967,107 25,000
- -------------------------------------------------------------------------------------
End of period $52,025,981 $44,967,107
- -------------------------------------------------------------------------------------
*The Fund commenced operations on December 31, 1991.
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
11/30/93 11/30/92*
<S> <C> <C>
Net asset value, beginning of period $ 7.88 $ 7.90
- ---------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.38 0.37
Net realized and unrealized gain/loss on
investments 0.35 (0.02)
- ---------------------------------------------------------------------
Total from investment operations 0.73 0.35
Less distributions:
Dividends from net investment income (0.38) (0.37)
Distributions from net realized capital
gains (0.09) --
- ---------------------------------------------------------------------
Total distributions (0.47) (0.37)
- ---------------------------------------------------------------------
Net asset value, end of period $ 8.14 $ 7.88
- ---------------------------------------------------------------------
Total return++ 9.49% 4.54%
- ---------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $52,026 $44,967
Ratio of operating expenses to average net
assets+++ 0.79% 0.65%**
Ratio of net investment income to average
net assets 4.58% 4.96%**
Portfolio turnover rate 104% 188%
- ---------------------------------------------------------------------
<FN>
*The Fund commenced operations on December 31, 1991.
**Annualized
+Net investment income per share before waiver of fees by investment adviser
and administrator for the year ended November 30, 1993 and waiver of fees by
investment adviser, sub-investment adviser, administrator, and custodian for
the period ended November 30, 1992 was $0.36 and $0.33, respectively.
++Total return represents aggregate total returns for the periods indicated and
does not reflect any applicable sales charges.
+++Annualized operating expense ratios before waiver of fees by investment
adviser and administrator for the year ended November 30, 1993 and waiver of
fees by investment adviser, sub-investment adviser and administrator and
custodian for the period ended November 30, 1992 were 1.04% and 1.19%,
respectively.
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Trust (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on October 17, 1991. The Trust is registered with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. The Trust
consists of the following four funds: Smith Barney Shearson Limited Maturity
Treasury Fund (the "Fund"), Smith Barney Shearson Limited Maturity Municipals
Fund, Smith Barney Shearson Intermediate Maturity California Municipals Fund and
Smith Barney Shearson Intermediate Maturity New York Municipals Fund. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
PORTFOLIO VALUATION: Securities are valued at market value or, in the
absence of market value, at fair value as determined by or under the direction
of the Board of Trustees. Short-term investments that mature within 60 days or
less are valued at amortized cost.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled a month or more after the trade date.
Interest income is recorded on the accrual basis. Realized gains and losses from
securities sold are recorded on the identified cost basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of the Fund to
declare dividends from net investment income daily and to pay such dividends
monthly. Distributions from net realized capital gains, if any, are declared and
paid annually, after the end of the calendar year in which earned. In addition,
in order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 in each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid this tax. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
11
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES: The Trust intends that the Fund separately qualify as
a regulated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its earnings to its shareholders. Therefore,
no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
Up to the close of business on July 30, 1993, the Fund had an investment
advisory agreement with Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers") on behalf of Shearson Lehman Advisors, a member of the Asset
Management Group of Shearson Lehman Brothers. Under the Advisory Agreement, the
Fund paid a monthly fee at the annual rate of 0.35% of the value of its average
daily net assets.
As of the close of business on July 30, 1993, The Travelers Inc. (which at
the time was known as Primerica Corporation) ("Travelers") and Smith Barney,
Harris Upham & Co. Incorporated completed the acquisition of substantially all
of the domestic retail brokerage and asset management businesses of Shearson
Lehman Brothers and Smith Barney, Harris Upham & Co. Incorporated was renamed
Smith Barney Shearson Inc. ("Smith Barney Shearson").
As of the close of business on July 30, 1993, Greenwich Street Advisors, a
division of Mutual Management Corp., which is controlled by Smith Barney
Shearson Holdings Inc. ("Holdings"), succeeded Shearson Lehman Advisors as the
Fund's investment adviser. Holdings is a wholly owned subsidiary of Travelers.
The new investment advisory agreement with Greenwich Street Advisors (the
"Advisory Agreement") contains terms and conditions substantially similar to the
investment advisory agreement with the predecessor investment adviser and
provides for the payment of fees at the same rate as was paid to such
predecessor investment adviser.
The Fund has also entered into an administration agreement (the
"Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Administration
Agreement, the Fund pays a monthly fee at the annual rate of 0.20% of the value
of its average daily net assets. Prior to May 21, 1993, Boston Advisors served
as sub-investment adviser and administrator to the Fund.
12
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
From time to time, Smith Barney Shearson and Boston Advisors may voluntarily
waive a portion or all of their respective fees otherwise payable to them. For
the year ended November 30, 1993, Smith Barney Shearson and Boston Advisors
voluntarily waived fees of $79,608 and $46,003, respectively.
For the year ended November 30, 1993, Smith Barney Shearson received
$216,976 from investors representing commissions (sales charges) on sales of
Fund shares.
A contingent deferred sales charge is generally payable by a shareholder in
connection with the redemption of shares within one year after the date of
purchase. For the year ended November 30, 1993, Smith Barney Shearson received
from shareholders $53,181 in contingent deferred sales charges.
No officer, director or employee of Smith Barney Shearson, Boston Advisors
or of any parent or subsidiary of those corporations receives any compensation
from the Trust for serving as a Trustee or officer of the Trust. The Trust pays
each Trustee who is not an officer, director or employee of Smith Barney
Shearson, Boston Advisors or any of their affiliates $4,000 per annum plus $500
per meeting attended and reimburses each such Trustee for travel and out-of-
pocket expenses.
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly
owned subsidiary of Mellon, serves as the Trust's custodian. The Shareholder
Services Group, Inc., a subsidiary of First Data Corporation, serves as the
Trust's transfer agent.
3. DISTRIBUTION PLAN
The Trust has adopted a plan of distribution (the "Plan") under Rule 12b-1
of the 1940 Act. Under the Plan, the Fund pays an annual fee computed daily and
payable monthly of 0.15% of its average daily net assets to Smith Barney
Shearson for activities primarily intended to result in the sale of its shares.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Trust's Board of
Trustees, including a majority of those Trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Plan.
13
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds of U.S. government securities, excluding
short-term investments, for the year ended November 30, 1993, were $56,350,568
and $49,079,703, respectively.
At November 30, 1993, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost of $20,590, and
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value of $664,246.
5. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
with a $.001 par value. Changes in shares of beneficial interest in the Fund
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1993 NOVEMBER 30, 1992*
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 2,881,661 $ 23,543,768 3,285,463 $ 26,028,593
Issued in exchange for net assets of
Shearson Lehman Brothers Income
Portfolio's Intermediate Term Government
Portfolio (Note 7) -- -- 3,764,994 29,637,330
Issued as reinvestment of dividends 303,092 2,449,289 115,167 920,573
Redeemed (2,500,147) (20,372,125) (1,464,704) (11,736,067)
- -------------------------------------------------------------------------------------
Net increase 684,606 $ 5,620,932 5,700,920 $ 44,850,429
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on December 31, 1991.
</TABLE>
6. ORGANIZATION COSTS
The Fund bears all cost in connection with its organization including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line basis over a period of five years from
commencement of operations of the Fund. In the event that any of the initial
shares of the Fund are redeemed
14
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
during such amortization period, the Fund will be reimbursed for any unamortized
organization costs in the same proportion as the number of shares redeemed bears
to the number of initial shares held at the time of redemption.
7. REORGANIZATION
On July 10, 1992, the Fund ("Acquiring Fund") acquired the assets and
liabilities of the Intermediate Term Government Portfolio ("Acquired Fund"), a
portfolio of Shearson Lehman Brothers Income Portfolios (now known as Smith
Barney Shearson Income Portfolios), in exchange for shares of the Acquiring
Fund, pursuant to a plan of reorganization approved by the Acquiring Fund's
shareholders on June 25, 1992. Total shares issued by the Acquiring Fund, total
net assets of the Acquired Fund and the Acquiring Fund and any unrealized
appreciation included in the Acquired Fund's total net assets is as follows:
<TABLE>
<CAPTION>
SHARES TOTAL NET TOTAL NET ACQUIRED
ISSUED BY ASSETS OF ASSETS OF FUND
ACQUIRING ACQUIRED ACQUIRING UNREALIZED
ACQUIRING FUND ACQUIRED FUND FUND FUND FUND APPRECIATION
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Limited Maturity Intermediate Term
Treasury Fund Government Portfolio 3,764,994 $29,943,860 $13,597,825 $306,530
- -------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY SHEARSON INCOME TRUST:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of Limited Maturity Treasury
Fund, of Smith Barney Shearson Income Trust, as of November 30, 1993, and the
related statement of operations for the year then ended, and the statement of
changes in net assets and the financial highlights for the year then ended and
the period from December 31, 1991 (commencement of operations) to November 30,
1992. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Limited Maturity Treasury Fund, of Smith Barney Shearson Income Trust, as of
November 30, 1993, the results of its operations for the year then ended, and
the changes in its net assets and the financial highlights for the year then
ended and the period from December 31, 1991 (commencement of operations) to
November 30, 1992, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
January 10, 1994
16
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- --------------------------------------------------------------------
TAX INFORMATION
YEAR ENDED NOVEMBER 30, 1993 (UNAUDITED)
Of the dividends paid by the Fund from investment income for the period ended
November 30, 1993, 100% has been derived from investments in U.S. government and
agency obligations. All or a portion of the distributions from this income may
be exempt from taxation at the state level. Consult your tax advisor for state
specific information.
17
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS): This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE): One kind of back-end load, a CDSC is
imposed if shares are redeemed during the first few years of ownership. The CDSC
may be expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be charged
if shares are redeemed after a certain period of time.
DISTRIBUTION RATE: This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND: This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE: This is the sales charge applied to an investment at the
time of initial purchase.
NET ASSET VALUE (NAV): Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by the
number of shares you own.
SEC YIELD: This standardized calculation of a mutual fund's yield is based on a
formula developed by the Securities and Exchange Commission (SEC) to allow funds
to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity of
its holdings, and it reflects the payments of all portfolio expenses for the
most recent 30-day period. Mutual funds are required to use this figure when
stating yield.
TOTAL RETURN: Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL basis
or CUMULATIVE basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the average
annual total return according to the standardized calculation developed by the
SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes the effects of all
fees and sales charges and assumes the reinvestment of all dividends and capital
gains.
18
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
TRUSTEES
Burt N. Dorsett
Peter H. Gallary
Elliot S. Jaffe
Harry W. Knight
Heath B. McLendon
Cornelius C. Rose
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
James C. Conroy
VICE PRESIDENT AND
INVESTMENT OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
DISTRIBUTOR
Smith Barney Shearson
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISORS
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
SUB-INVESTMENT ADVISER
AND ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
19
<PAGE>
THE SMITH BARNEY
SHEARSON
APPROACH TO
MUTUAL FUND
INVESTING
1. Personal Service The Smith Barney Shearson
Financial Consultant (FC) is highly trained and
deeply committed to client service. Your FC works
with you to establish a relationship based on
one-to-one communication and the highest
standards of quality.
2. Analyzing Your Needs Defining your needs
and establishing specific goals is the first step
toward any successful investment program. The
Smith Barney Shearson Strategic Asset Allocator
-- a sophisticated financial planning tool -- can
help you and your FC evaluate your resources and
objectives. This groundwork then becomes the
basis for a strategy designed specifically for
you. Your FC can use the Strategic Asset
Allocator on a periodic basis to ensure that your
investment strategy is keeping pace with your
changing needs and goals.
3. A Unique Mutual Fund Investment
Program Your Smith Barney Shearson FC offers a
number of mutual fund assessment tools that are
unmatched in the financial services industry.
Smith Barney Shearson FCs have access to a
proprietary mutual fund research database that
provides information at their fingertips on more
than 2,100 funds. In addition, working with
another proprietary system known as the Mutual
Fund Evaluation Service, your FC can help guide
you through the complex mutual fund maze.
4. Looking Ahead Selecting a mutual fund
should not be a one-event process that ends with
the purchase of shares. You can count on the
expertise of your FC as he or she continues to
monitor and evaluate your funds, to suggest new
strategies and to listen. That, in our opinion,
is how to use mutual funds to help achieve your
financial goals.
20
<PAGE>
INVESTOR BENEFITS Monthly Distributions It's your fund's
policy to distribute dividend income monthly.
Automatic Reinvestment You may reinvest your
dividends and/or capital gains automatically in
additional shares of your fund at the current net
asset value.
Unlimited Exchanges If your invest-
ment goals change, you may exchange into another
Smith Barney Shearson mutual fund with the same
sales charge structure without incurring a sales
charge.*
Systematic Investment Plan This program allows
you to invest equal dollar amounts automatically
on a regular basis, monthly or quarterly.
Automatic Cash Withdrawal Plan With this plan,
you may withdraw money on a regular basis while
maintaining your investment.
Mutual Fund Evaluation Service Through your
Financial Consultant, you may obtain a free
personalized analysis of how your fund has
performed for you, taking into account the effect
of every transaction. The analysis is based upon
month-end data from CDA Investment Technologies,
Inc., a widely recognized mutual fund information
service. An evaluation also gives you other
important facts and figures about your investment.
FOR MORE INFORMATION ABOUT THESE BENEFITS, OR IF
YOU HAVE ANY OTHER QUESTIONS, PLEASE CALL YOUR
FINANCIAL CONSULTANT OR WRITE:
MUTUAL FUND POLICY GROUP
SMITH BARNEY SHEARSON
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
*AFTER WRITTEN NOTIFICATION, EXCHANGE
PRIVILEGE MAY BE MODIFIED OR TERMINATED
AT ANY TIME.
<PAGE>
This report is submitted for the
general information of the shareholders of
Smith Barney Shearson Limited Maturity
Treasury Fund. It is not authorized for
distribution to prospective investors unless
accompanied or preceded by an effective
Prospectus for the Fund, which contains
information concerning the Fund's investment
policies and applicable sales charges, fees
and expenses as well as other pertinent
information.
SMITH BARNEY SHEARSON
LIMITED MATURITY
TREASURY FUND
Two World Trade Center
New York, New York 10048
Fund 162
FD0308 A4
<PAGE>
SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND
APPENDIX TO GRAPHIC AND IMAGE MATERIALS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ------------------------------------------------------ ---------
<S> <C>
Cover graphics........................................ cover
Line graph -- Yield on U.S. Treasury Bond............. 2
Line graph -- Growth of $10,000 invested in Limited
Maturity Treasury Fund vs. unmanaged indices......... 5
</TABLE>
<PAGE>
ANNUAL REPORT FOR
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS
FUND DATED
NOVEMBER 30, 1993
<PAGE>
ANNUAL REPORT NOVEMBER 30, 1993
SMITH BARNEY SHEARSON
WORLDWIDE
PRIME ASSETS
FUND
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
DEAR SHAREHOLDER:
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income while protecting principal. To
achieve this objective a currency cross-hedging strategy is employed with
investments in high-quality debt securities of less than one year maturity,
denominated in U.S. dollars and foreign currencies.
PERFORMANCE
Class A shares returned -0.78% and Class B shares returned -1.60%* for the
fiscal year ended on November 30, 1993. These returns comprise an income gain
offset by a capital loss. While dividends in excess of money market rates have
continued to be distributed, the net asset value (NAV) on the Fund has fallen
from $1.81 to $1.73 in the past twelve months. This has largely been due to the
unfavorable market conditions that have prevailed within Europe over this
period.
MARKET REVIEW
The European currency tensions that resulted in devaluations at the end of
1992, resurfaced over the summer. In an attempt to release these pressures, the
fluctuation bands in the Exchange Rate Mechanism (ERM) were widened to +/-15% in
August for all members except Germany and the Netherlands. These bands indicate
the range in which bilateral exchange rates of ERM member countries can move.
Many European countries consequently depreciated against the deutschemark bloc.
Currency weakness was exacerbated by members not seizing the opportunity to aid
economic recovery in their countries by reducing interest rates below those in
Germany.
The Bundesbank has cut the discount rate six times in the last year. While
immediate currency tensions within the ERM were eased as a result of such cuts,
the pace of cuts has been too slow to make a significant
CONTINUED
- --------------------------------------------------------------------------------
*The Fund commenced selling Class B shares on November 6, 1992 and these shares
were first purchased by the public on April 15, 1993.
1
<PAGE>
contribution to European economic recovery. High unemployment and the associated
social problems have consequently placed downward pressure on European
currencies, particularly outside of the deutschemark bloc.
The problems in Europe over the last year have been detrimental to the Fund.
The cross-hedging strategy that the Fund follows uses lower yielding currencies,
typically the deutschemark bloc within Europe, to hedge higher yielding
currencies, which have underperformed.
The state of emergency in Russia provoked by opposition to President
Yeltsin's dissolution of parliament impacted currency markets for only a few
weeks in September and October 1993. The deutschemark bloc suffered against
other European currencies and the US dollar during this period to the Fund's
advantage.
At the end of October and the first half of November the Fund suffered from
New Zealand dollar weakness caused by a hung parliament result in the General
election. At the same time the Italian lira and Spanish peseta fell on continued
political problems and poor economic fundamentals.
OUTLOOK
In order for core European currencies to weaken relative to the high yielding
currencies, the pace of German interest rate cuts needs to be accelerated.
Falling money supply and inflation, together with a recessionary economy, will
ensure that interest rates will continue to be cut. Money supply has not yet
fallen into the target growth range of 4.5% to 6.5%. October's growth was just
above the top of the range at 6.9%. The fulfilment of the money supply target,
together with a deepening recession, may well accelerate interest rate cuts in
the coming months.
The future of the ERM remains uncertain. The consequences on the Fund of a
crumbling ERM are on the whole advantageous for the Fund. The range of interest
rates prevailing in Europe due to the pursuit of divergent monetary policies
would be likely to widen. This has direct benefits for the Fund since the income
received from its investments would rise relative to the yield it is paying to
hedge their currency exposure.
STRATEGY
The strategy adopted by the Fund is intended to provide a return above money
market rates. Of course, while the Fund's price per share will fluctuate with
market conditions, money market funds seek to maintain a
CONTINUED
2
<PAGE>
stable net asset value of $1.00. To the extent that income for tax purposes has
failed to meet net interest rate distributions, the Fund's dividends have been
characterized as returns of capital on a tax basis.
To help offset the difficulties of the cross-hedging strategy, the Fund has
increased the number of its fully hedged and unhedged bond positions in European
markets. We believe that there is still scope for a reduction in bond yields in
Europe on the basis that real yields are still abnormally high. Economic
recovery remains elusive making a resurgence in inflation unlikely. Real yields
will fall therefore only on the back of a continued European bond rally.
However, the Fund is severely limited in its exposure to falling yields due to
its one year maturity restriction.
With the changes we have proposed, we hope to achieve in future months
greater NAV stability than the previous strategy and market conditions allowed.
Sincerely,
Heath B. McLendon Alan J. Brown Paul F. Duncombe
CHAIRMAN OF THE BOARD VICE PRESIDENT AND VICE PRESIDENT AND
AND INVESTMENT OFFICER INVESTMENT OFFICER INVESTMENT OFFICER
January 17, 1994
3
<PAGE>
HISTORICAL PERFORMANCE
<TABLE>
<CAPTION>
NET ASSET VALUE CAPITAL GAINS DISTRIBUTIONS TOTAL
YEAR ENDED CLASS A CLASS B DISTRIBUTED PAID RETURN
NOVEMBER 30, BEGINNING ENDING BEGINNING ENDING CLASS A CLASS B CLASS A CLASS B CLASS A* CLASS B**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
1/14/91 -
11/30/91 $2.00 $1.94 -- $0.13 3.43%
-------------------------------------------------------------------------------------
1992 1.94 1.81 -- 0.09 (2.03)
-------------------------------------------------------------------------------------
1993 1.81 1.73 $1.80 $1.73 -- -- 0.07 0.04 (0.78) (1.60)%
-------------------------------------------------------------------------------------
TOTAL -- -- $0.29 0.04
-------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS A SHARES (1/14/91 THROUGH 11/30/93) .54%
-------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS B SHARES (11/6/92 THROUGH 11/30/93) (1.60)%
-------------------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not assume deduction of the contingent deferred sales
charge ("CDSC") (maximum 5.0% as of November 6, 1992).
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
WITHOUT
ACTUAL FEE WAIVER
<S> <C> <C>
- ---------------------------------------------------------
Year Ended 11/30/93 (0.78)% (1.35)%
- ---------------------------------------------------------
Inception 01/14/91 through 11/30/93 .19 (0.01)
- ---------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund commenced operations on
January 14, 1991. The Fund waived fees and reimbursed expenses from January 1991
to the present. A shareholder's actual return for periods during which waivers
and reimbursements were in effect would be the higher of the two numbers shown.
During the year ended November 30, 1993, the Fund had exchanges and redemptions
of Class B shares. At November 30, 1993, there was one outstanding Class B share
in existence, and therefore no relevant performance data is presented for that
class.
Note: As of November 6, 1992, shares of the Fund were designated as Class A --
subject to an annual distribution fee of .90% of average daily net assets
attributable to that class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Worldwide Prime Assets
Fund's Class A shares on January 14, 1991 through November 30, 1993 as compared
with the growth of a $10,000 investment in the Salomon Currency-Hedged World
Government Bond Index. The plot points used to draw the line graph were as
follows: + Hypothetical illustration of $10,000 invested in Class A shares on
January 14, 1991, and reinvestment of dividends and capital gains at
net asset value through November 30, 1993.
Salomon Brothers Currency-Hedged World Government Bond Index (1-3
years) consists of worldwide fixed-rate government bonds with
one-to-three years to maturity. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or
expenses.
This period was one in which security prices fluctuated and the
results should not be considered as a representation of the dividend
income or capital gain or loss which may be realized from an
investment in the Fund today. No adjustment has been made for
shareholder tax liability on dividends or capital gains.
Note: All figures cited here and on the following pages represent
past performance of the Fund and do not guarantee future results of
Class A shares.
5
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS November 30, 1993 (unaudited)
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Worldwide Prime Assets Fund's
investment securitites held at November 30, 1993 by industry classification. The
pie is broken in pieces representing industries in the following percentages:
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Issuer Net Assets
<S> <C>
- -----------------------------------------------------------------------------------
Kingdom of Finland 16.5%
Kingdom of Denmark Treasury Bills 11.2
Pacific Dunlop 7.1
Cassa Risparmi Verona 5.4
Republic of Cyprus 4.9
Montreal Trust Company of Canada 4.9
Credito Italiano 4.2
Bonos Obligation Del Estado 4.0
Unibank 3.8
Compagnie Bancaire 3.7
</TABLE>
6
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS November 30, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------------------
UNITED STATES DOLLAR BONDS -- 31.7%
US$ 3,000,000 Australia & New Zealand Bank,
3.32% due 1/6/94+ $ 2,990,073
3,000,000 Compagnie Bancaire,
3.28% due 1/4/94+ 2,990,734
3,000,000 CSR America Inc.,
3.42% due 2/1/94+ 2,982,740
3,000,000 IMI Bank,
3.42% due 2/7/94+ 2,981,054
4,000,000 Montreal Trust Company of
Canada,
3.48% due 1/4/94+ 3,986,896
3,000,000 Nova Scotia Resources,
3.42% due 2/2/94+ 2,982,459
4,000,000 Republic of Cyprus,
Zero Coupon due 12/1/93+ 4,000,000
3,000,000 Westpac Banking Corporation,
3.34% due 3/1/94+ 2,974,884
---------------------------------------------------------------------------
TOTAL UNITED STATES DOLLAR
BONDS
(Cost $25,887,765) 25,888,840
---------------------------------------------------------------------------
FINNISH MARKKAA BOND -- 16.5% (COST $13,650,214)
FIM 80,000,000 Kingdom of Finland Treasury
Bill,
5.83% due 3/15/94+ 13,458,618
---------------------------------------------------------------------------
DANISH KRONE BONDS -- 12.2%
DKK 5,580,000 Forsmarks Kraftgrupp,
9.75% due 5/25/94+ 827,990
Kingdom of Denmark Treasury
Bills:
28,000,000 6.84% due 1/3/94+ 4,097,367
35,000,000 6.99% due 4/5/94+ 5,031,620
---------------------------------------------------------------------------
TOTAL DANISH KRONE BONDS
(Cost $10,175,108) 9,956,977
---------------------------------------------------------------------------
ITALIAN LIRA BONDS -- 11.4%
ITL 5,000,000,000 Banca Di Sicilia,
8.94% due 1/12/94+ 2,901,849
6,000,000,000 Credito Italiano,
9.15% due 2/14/94 3,453,520
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
ITALIAN LIRA BONDS (CONTINUED)
ITL 5,000,000,000 Ostereische Postspankasse,
12.375% due 4/12/94 $ 2,956,458
---------------------------------------------------------------------------
TOTAL ITALIAN LIRA BONDS
(Cost $10,058,298) 9,311,827
---------------------------------------------------------------------------
GERMAN MARK BOND -- 7.1% (COST $5,748,121)
DEM 10,000,000 Pacific Dunlop,
6.17% due 2/16/94+ 5,751,462
---------------------------------------------------------------------------
EUROPEAN CURRENCY UNIT BOND -- 5.4% (COST $4,619,327)
ECU 4,000,000 Cassa Risparmi Verona,
6.69% due 1/12/94+ 4,441,339
---------------------------------------------------------------------------
SPANISH PESETA BOND -- 4.0% (COST $3,447,992)
ESP 460,000,000 Bonos Obligation Del Estado,
13.65% due 3/15/94+ 3,291,773
---------------------------------------------------------------------------
TIME DEPOSITS -- 6.3%
Salomon Brothers:
ITL 1,505,218,070 9.1875% due 12/3/93 882,696
1,963,190,184 9.0625% due 12/3/93 1,151,262
ECU 2,759,159 Unibank,
7.125% due 12/3/93 3,087,498
---------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost $5,169,035) 5,121,456
---------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 4.6% (COST $3,764,000)
US$ 3,764,000 Agreement with Union Bank of
Switzerland,
3.15% dated 11/30/93 to be
repurchased at $3,764,329 on
12/1/93, collateralized by
$3,255,000 U.S. Treasury
Bond, 8.75% due 11/15/08 3,764,000
---------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $82,519,860*) 99.2% 80,986,292
OTHER ASSETS AND LIABILITIES (NET) 0.8% 652,370
---------------------------------------------------------------------------
NET ASSETS 100.0% $81,638,662
---------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Discount note; rate represents annualized yield to maturity. (unaudited)
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
NOVEMBER 30, 1993
<TABLE>
<CAPTION>
CONTRACT MARKET VALUE
VALUE DATE (NOTE 1)
<S> <C> <C>
- --------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS
TO BUY
6,500,000 Irish Punts 12/09/93 $ 9,154,504
14,700,000 New Zealand Dollars 12/21/93 8,011,008
280,000,000 Belgian Francs 01/04/94 7,673,988
17,300,000 Australian Dollars 01/10/94 11,377,702
23,000,000 Norwegian Krones 01/21/94 3,070,899
- --------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE
CONTRACTS TO BUY
(Contract amount $39,603,102) $ 39,288,101
- --------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS
TO SELL
6,500,000 Irish Punts 12/09/93 $ (9,154,504)
2,000,000 New Zealand Dollars 12/21/93 (1,089,933)
200,000,000 Belgian Francs 01/04/94 (5,481,420)
33,000,000 French Francs 01/04/94 (5,539,181)
29,000,000 French Francs 01/04/94 (4,867,765)
5,300,000 Australian Dollars 01/10/94 (3,485,654)
17,500,000 Netherland Guilders 01/21/94 (9,046,658)
88,000,000 Norwegian Krones 01/21/94 (11,749,526)
5,000,000 Netherland Guilders 01/21/94 (2,584,759)
29,000,000 Austrian Shillings 02/08/94 (2,391,070)
400,000,000 Japanese Yen 02/09/94 (3,677,669)
18,000,000 Swiss Francs 02/14/94 (11,963,225)
10,000,000 German Marks 02/16/94 (5,790,093)
42,000,000 Finnish Marks 03/15/94 (7,132,253)
- --------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE
CONTRACTS TO SELL
(Contract amount $85,050,238) $(83,953,710)
- --------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES November 30, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$82,519,860) (Note 1)
See accompanying schedule $ 80,986,292
Cash 2,838
Receivable for forward foreign exchange
contracts to sell 85,050,238
Forward foreign exchange contracts to
buy, at value
(Contract cost $39,698,058 ) (Note 1)
See accompanying schedule 39,288,101
Receivable for investment securities
sold 4,845,185
Interest receivable 588,877
Unamortized organization costs (Note 7) 79,918
Receivable for Fund shares sold 27,002
- ----------------------------------------------------------------------------
TOTAL ASSETS 210,868,451
- ----------------------------------------------------------------------------
LIABILITIES:
Forward foreign exchange contracts to
sell, at value
(Contract cost $85,412,776 ) (Note 1)
See accompanying schedule $83,953,710
Payable for forward foreign exchange
contracts to buy 39,603,102
Payable for investment securities
purchased 5,138,159
Payable for Fund shares redeemed 248,547
Distribution fee payable (Note 3) 62,287
Custodian fees payable (Note 2) 60,000
Dividends payable 25,357
Investment advisory fee payable (Note
2) 21,628
Transfer agent fees payable (Notes 2
and 4) 8,000
Administration fee payable (Note 2) 7,959
Accrued Trustees' fees and expenses
(Note 2) 3,500
Accrued expenses and other payables 97,540
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 129,229,789
- ----------------------------------------------------------------------------
NET ASSETS $ 81,638,662
- ----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) November 30, 1993
<TABLE>
<S> <C>
NET ASSETS consist of:
Net unrealized depreciation of
securities, forward foreign
exchange contracts and currency
transactions $ (549,452)
Par value 47,142
Paid-in capital in excess of par
value 82,140,972
- -----------------------------------------------------------
TOTAL NET ASSETS $ 81,638,662
- -----------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE, offering price and
redemption price per share
($81,638,660 DIVIDED BY 47,142,056
shares of beneficial interest
outstanding) $1.73
- -----------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($1.73 DIVIDED BY 1 share of
beneficial interest outstanding) $1.73
- -----------------------------------------------------------
<FN>
+ Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 5,849,473
- ------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $1,202,614
Investment advisory fee (Note 2) 601,334
Custodian fees (Note 2) 278,784
Administration fee (Note 2) 267,259
Transfer agent fees (Notes 2 and 4) 89,690
Legal and audit fees 59,653
Amortization of organization costs (Note 7) 37,679
Trustees' fees and expenses (Note 2) 22,957
Other 146,347
Fees waived by investment advisor and
administrator (Note 2) (367,482)
- ------------------------------------------------------------------------------------
TOTAL EXPENSES 2,338,835
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,510,638
- ------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions (14,642,512)
Forward foreign exchange contracts 7,999,744
Currencies transactions 1,060,328
- ------------------------------------------------------------------------------------
Net realized loss on investments during the year (5,582,440)
- ------------------------------------------------------------------------------------
Net change in unrealized
appreciation/(depreciation) of:
Securities 4,244,742
Forward foreign exchange contracts (2,099,536)
Currencies and net other assets (64,994)
- ------------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the year 2,080,212
- ------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (3,502,228)
- ------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,410
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
11/30/93 11/30/92
<S> <C> <C>
Net investment income $ 3,510,638 $ 21,608,358
Net realized loss on investments, forward foreign
exchange contracts and currency transactions during
the year (5,582,440) (35,088,588)
Net unrealized appreciation of investments, forward
foreign exchange contracts, foreign currency holdings
and net other assets during the year 2,080,212 10,169,271
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations 8,410 (3,310,959)
Distributions to shareholders from net investment
income:
Class A -- (22,339,082)
Class B -- --
Distributions in excess of realized gains
Class A 91,734
Class B 3
Distributions from capital
Class A 4,846,107
Class B 132
Net increase in net assets from:
Class A share transactions (Note 6) (138,276,589) (408,112,599)
Class B share transactions (Note 6) -- 2
- -------------------------------------------------------------------------------------
Net decrease in net assets (143,206,155) (433,762,638)
NET ASSETS:
Beginning of year 224,844,817 658,607,455
- -------------------------------------------------------------------------------------
End of year (including undistributed net investment
income $1,430,563 at November 30, 1992.) $ 81,638,662 $ 224,844,817
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
11/30/93# 11/30/92 11/30/91*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 1.81 $ 1.94 $ 2.00
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income*** 0.05 0.10 0.13
Net realized and unrealized loss on
securities (0.06) (0.14) (0.06)
- -----------------------------------------------------------------------------------
Total from investment operations (0.01) (0.04) 0.07
Less distributions:
Dividends from net investment income -- (0.09) (0.13)
Distributions in excess of realized gains (0.00)+++
Distributions from capital (0.07)
Net Asset Value, end of period $ 1.73 $ 1.81 $ 1.94
- -----------------------------------------------------------------------------------
Total return++ (0.78)% (2.03)% 3.43%
- -----------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $81,639 $224,845 $658,607
Ratio of expenses to average net assets+ 1.75% 1.80% 1.74%**
Ratio of net investment income to average
net assets 2.63% 4.89% 7.34%**
- -----------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on January 14, 1991. Those shares outstanding
prior to November 6, 1992, were designated as Class A shares.
**Annualized.
***Net investment income before waiver of fees and expenses by investment
adviser and administrator for the years ended November 30, 1993, 1992, and
1991, were $0.04, $0.10, and $0.13.
+Annualized operating expense ratios before waiver of fees by investment
adviser and administrator for the years ended November 30, 1993, 1992, and
1991, were 2.03%, 1.87% and 1.82%, respectively.
++Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charges.
+++This amount represents less than $.01.
#The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for the year since
use of the undistributed method did not accord with the results of
operations.
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
YEAR
ENDED
11/30/93*#
<S> <C>
Net Asset Value, beginning of period $1.80
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income** 0.02
Net realized and unrealized loss on securities (0.05)
- ---------------------------------------------------------------------------
Total from investment operations (0.03)
Less distributions:
Distributions in excess of realized gains (0.00)+++
Distributions from capital (0.04)
- ---------------------------------------------------------------------------
Net Asset Value, end of period $1.73
- ---------------------------------------------------------------------------
Total return++ (1.60)%
- ---------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year $1.73
Ratio of expenses to average net assets+ 1.99%
Ratio of net investment income to average net assets 2.38%
- ---------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class B shares on November 6, 1992. On November
30, 1992 there was one Class B share outstanding; however, no income or
expenses were allocated to this share for the period ended November 30, 1992.
**Net investment income before waiver of fees and expenses by investment
adviser and administrator for the fiscal year ended November 30, 1993 was
$0.01.
+Annualized operating expense ratios before waiver of fees by investment
adviser and administrator was 2.27% for the year ended November 30, 1993.
++Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
+++This amount represents less than $0.01.
#The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for the year since
use of the undistributed method did not accord with the results of
operations.
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Worldwide Prime Assets Fund ("the Fund") was organized
under the laws of the Commonwealth of Massachusetts on November 15, 1990 and
commenced operations on January 14, 1991. The Fund is an entity commonly known
as a "Massachusetts business trust" and is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended (the
"1940 Act"), as a non-diversified, open-end management investment company. As of
November 6, 1992, the Fund offered two classes of shares to the general public:
Class A shares and Class B shares. Class A shares, which are available for
direct purchases, are offered without a sales charge. Class B shares, which are
available only through exchanges, are not offered for direct purchases but may
be acquired through exchanges with Class B shares of other funds in the Smith
Barney Shearson Group of Funds. A contingent deferred sales charge ("CDSC") is
applicable to Class B shares upon redemption and Class B shares are subject to
the highest CDSC (if any) of the shares from which the exchange or any preceding
exchange was made. Class B shares will convert automatically to Class A shares
eight years after the date of the original purchase. Both classes of shares have
identical rights and privileges except with respect to the expenses allocable
exclusively to each class, voting rights on matters affecting a single class,
the exchange privilege of each class and the conversion feature of Class B
shares. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
PORTFOLIO VALUATION: The Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Fund's Board of Trustees. A security that is traded primarily
on a U.S. or foreign stock exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at the current quoted bid
price. Securities that are traded primarily on foreign securities exchanges
generally are valued at the preceding closing values of the securities on their
respective exchanges, except that, when an occurrence subsequent to the time
that a value was so established is likely to have changed that value, the fair
market value of those securities will be determined by consideration of other
factors by or under the direction of the Fund's Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost when the
Board of Trustees determines that such method of valuation reflects fair value
for the securities. Amortized cost involves valuing an instrument at its cost
initially and, thereafter,
16
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assuming a constant amortization to maturity of any discount or premium,
regardless of the effect of fluctuating interest rates on the market value of
the instrument.
FOREIGN CURRENCY: The books and records of the Fund are maintained in United
States (U.S.) dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
Unrealized gains and losses which result from changes in foreign currency
exchange rates have been included in the unrealized appreciation/(depreciation)
of investments and net other assets. Net realized foreign currency gains and
losses resulting from changes in exchange rates include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Fund and the
amount actually received. The portion of foreign currency gains and losses
related to fluctuation in exchange rates between the initial purchase trade date
and subsequent sale trade date is included in realized gains and losses on
investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts are
valued at the forward rate, and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. The difference
between the forward rate and the spot rate at the inception of the contract is
amortized or accreted to income over the life of the forward contract on the
straight line method and is included in interest income in the accompanying
statement of operations. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
as adjusted for accretion or amortization and the value at the time that it was
closed.
The use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the Fund's portfolio securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, the Fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
17
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
possession of an underlying debt obligation 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.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund delayed or was prevented from exercising its rights
to dispose of the collateral securities including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser, acting under the
supervision of the Board of Trustees, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund accretes market discount on debt securities. Investment
income and realized and unrealized gains and losses are allocated based upon
relative net assets of each class.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of the Fund to
declare dividends from net investment income, determined on a class level, on
each day that the Fund is open for business and to pay such dividends monthly.
Capital gains, determined on a Fund basis, if any, generally will be paid
annually after the close of the fiscal year in which they are earned or at the
beginning of the next year. Additional distributions of net investment income
and capital gains may be made at the discretion of the Board of Trustees in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of capital gains. Income distributions and capital gain
distributions on a Fund level are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund as a whole.
18
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code of 1986 applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
RECLASSIFICATIONS: During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, certain reclassifications have been made to the
components of capital in the Statement of Net Assets to conform with the
accounting and reporting guidelines of this statement. Distributions in excess
of book basis accumulated realized gains or undistributed net investment income
that were the result of permanent book and tax accounting differences have been
reclassified to paid-in capital. In addition, amounts distributed in excess of
undistributed net investment income as determined for financial statement
purposes but as distributions from net investment income or accumulated net
realized gains for tax purposes, previously reported as distributions from
paid-in capital have been reclassified to reflect the tax characterization.
Accordingly, amounts as of November 30, 1992 have been restated to reflect a
decrease in paid-in capital and a decrease in undistributed net investment
income and an increase in accumulated net realized gains of $46,038,064,
$1,430,563 and $47,468,627. The Statement of Changes in Net Assets and Financial
Highlights for prior periods have not been restated to reflect this change in
presentation. Net investment income, net realized gains, and net assets on a
book and tax basis were not affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with PanAgora Asset Management Limited ("PanAgora U.K."). Fifty
percent of the outstanding voting stock of PanAgora U.K. is owned by Nippon Life
Insurance Company and fifty percent is owned by Lehman Brothers Inc., which is a
wholly owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). American
Express Company ("American Express") owns 100% of Holdings' issued and
outstanding common stock, which represents approximately 92% of Lehman Holdings'
issued and outstanding voting stock. The remainder of Holdings' voting stock is
owned by Nippon Life Insurance Company. Under the Advisory Agreement, the Fund
pays PanAgora U.K. a monthly fee at the annual rate of .45% of the value of its
average daily net assets.
19
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of the close of business on July 30, 1993, The Travelers Inc. (which at
the time was known as Primerica Corporation) and Smith Barney, Harris Upham &
Co. Incorporated completed the acquisition of substantially all of the domestic
retail brokerage and asset management businesses of Shearson Lehman Brothers
Inc. and Smith Barney, Harris Upham & Co. Incorporated was renamed Smith Barney
Shearson, Inc. ("Smith Barney Shearson").
The Fund has also entered into an administration agreement (the
"Administration Agreement") dated May 21, 1993, with The Boston Company
Advisors, Inc. ("Boston Advisors"), an indirect wholly owned subsidiary of
Mellon Bank Corporation ("Mellon"). Under the Administration Agreement, the Fund
pays a monthly fee at the annual rate of .20% of the value of the Fund's average
daily net assets. Prior to May 21, 1993 Boston Advisors served as sub-investment
adviser and administrator to the Fund.
From time to time, PanAgora U.K. and Boston Advisors may waive a portion or
all of their respective fees otherwise payable to them. For the fiscal year
ended November 30, 1993, PanAgora U.K. and Boston Advisors voluntarily waived
fees of $253,897 and $113,585, respectively.
No director, officer or employee of Smith Barney Shearson, PanAgora U.K.,
Boston Advisors or any parent or subsidiary of those corporations receives any
compensation from the Fund for serving as an officer or Trustee of the Fund. The
Fund pays each Trustee who is not a director, officer or employee of Smith
Barney Shearson, PanAgora U.K., Boston Advisors or any of their affiliates,
$2,000 per annum plus $500 per meeting attended and reimburses each such Trustee
for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc.,
a subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Fund, and sells shares of the Fund through Smith
Barney Shearson or its affiliates.
20
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
Shearson, for both Class A and Class B shareholders, a distribution fee accrued
daily and payable monthly, calculated at the annual rate of .90% of the value of
the average daily net assets of each respective class of shares for activities
primarily intended to result in the sale of its shares. For the year ended
November 30, 1993, the Fund incurred $1,202,580 and $34, in distribution fees
for Class A and Class B, respectively.
Under its terms, the Plan remains in effect from year to year, provided that
such continuance is approved annually by a vote of the Fund's Trustees,
including a majority of those Trustees who are not "interested persons" of the
Fund (as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class of
shares are charged to that class' operations. In addition to the above
distribution fees, class specific operating expenses include transfer agent fees
of $89,679 and $11 for Class A and Class B shares, respectively.
5. PURCHASES AND SALES OF SECURITIES
At November 30, 1993, aggregate gross unrealized appreciation of all
securities in which there was an excess of value over tax cost was $4,611 and
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $1,538,179.
21
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
The Fund may issue an unlimited number of shares of beneficial interest
divided into two classes, Class A and Class B with a par value of $.001 per
share. Changes in shares of beneficial interest for the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
11/30/93 11/30/92
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 5,161,614 $ 9,279,972 88,892,177 $ 170,645,349
Issued as reinvestment of dividends 2,366,712 4,234,397 10,106,133 19,316,879
Redeemed (84,524,110) (151,790,958) (314,713,465) (598,074,827)
- -------------------------------------------------------------------------------------
Net decrease (76,995,784) $(138,276,589) (215,715,155) $(408,112,599)
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED PERIOD ENDED
11/30/93 11/30/92*
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 24,424 $ 43,155 1 $ 2
Issued as reinvestment of dividends 55 98 -- --
Redeemed (24,479) (43,253) -- --
- -------------------------------------------------------------------------------------
Net increase/(decrease) (0) $ 0 1 $ 2
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class B shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 have been designated as Class A shares.
As of November 30, 1992, the Fund had one Class B share outstanding. However,
there were no expenses incurred during this period for Class B shares.
</TABLE>
7. ORGANIZATION COSTS
All costs in connection with the organization of the Fund, including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations, are being amortized on the
straight-line method over a period of sixty months from January 14, 1991, the
date the Fund commenced operations. In the event that any of the initial shares
of the Fund are redeemed during such amortization period, the Fund will be
reimbursed for any unamortized costs in the same proportion as the number of
shares redeemed bears to the initial shares outstanding at the time of
redemption.
22
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the United States government. These risks
include revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the United States
government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated Line
of Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary or emergency purposes, including the meeting of redemption requests
that otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 15% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the year ended November 30, 1993, the Fund did not borrow under the
Agreement.
10. CONCENTRATION OF CREDIT
The Fund's fundamental policy, under normal circumstances, is to concentrate
at least 25% of its assets in debt instruments issued by domestic and foreign
companies engaged in the banking industry. Because the Fund concentrates its
investments in one industry, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. To the extent the Fund's investments are
concentrated in the banking industry, the Fund will have correspondingly greater
exposure to the risk factors that are characteristic of such investments. The
Fund seeks to minimize its exposure to such risks by investing only in debt
securities that are determined to be of high quality.
23
<PAGE>
SMITH BARNEY SHEARSON
WORLDWIDE PRIME ASSETS FUND
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments and schedule of forward foreign
exchange contracts, of Smith Barney Shearson Worldwide Prime Assets Fund as of
November 30, 1993, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years then
ended and the financial highlights for each of the two years then ended and for
the period from January 14, 1991 (commencement of operations) to November 30,
1991. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Shearson Worldwide Prime Assets Fund as of November 30, 1993, the results
of operations for the year then ended, the changes in net assets for each of the
two years then ended and the financial highlights for each of the two years then
ended and for the period from January 14, 1991 (commencement of operations) to
November 30, 1991, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
January 7, 1994
24
<PAGE>
This report is submitted for the
general information of the shareholders of
Smith Barney Shearson Worldwide Prime Assets
Fund. It is not authorized for distribution
to prospective investors unless accompanied
or preceded by an effective Prospectus for
the Fund, which contains information
concerning the Fund's investment policies and
applicable sales charges, fees and expenses
as well as other pertinent information.
SMITH BARNEY SHEARSON
WORLDWIDE
PRIME ASSETS
FUND
Two World Trade Center
New York, New York 10048
Fund 139, 193
FD0307 A4
<PAGE>
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND
APPENDIX TO GRAPHIC AND IMAGE MATERIALS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- -------------------------------------------------------- ---------
<S> <C>
Line graph -- growth of Class A shares.................. 5
Pie Chart showing portfolio breakdown................... 6
</TABLE>
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
<PAGE>
Smith Barney Shearson
Limited Maturity Treasury Fund/Worldwide Prime Assets Fund
Portfolio of Investments
November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL VALUE (NOTE 2)
- ------------------------------------------------------ --------------------------------------
SBS SBS SBS SBS
LIMITED WORLDWIDE PRO FORMA LIMITED WORLDWIDE PRO FORMA
MATURITY PRIME COMBINED MATURITY PRIME COMBINED
TREASURY ASSETS (NOTE 1) TREASURY ASSETS (NOTE 1)
- ----------------------- -------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES DOLLAR
BONDS -- 58.4%
US $ 0 4,000,000 4,000,000 Montreal Trust Co. Canada ECP
due 01/04/1994............... $ 0 $ 3,986,896 $ 3,986,896
0 3,000,000 3,000,000 Australia and New Zealand Bk
ECP due 01/06/1994........... 0 2,990,073 2,990,073
0 3,000,000 3,000,000 Compagnie Bancaire 0% ECP
due 01/04/1994............... 0 2,990,734 2,990,734
0 3,000,000 3,000,000 IMI Bank ECD
0.000% due 02/07/1994........ 0 2,981,054 2,981,054
0 3,000,000 3,000,000 CSR America Inc ECP
due 02/01/1994............... 0 2,982,740 2,982,740
0 3,000,000 3,000,000 Westpac Banking Corp Sydney
ECP due 03/01/1994........... 0 2,974,884 2,974,884
0 4,000,000 4,000,000 Republic of Cyprus 0% ECP
due 12/01/1993............... 0 4,000,000 4,000,000
0 3,000,000 3,000,000 Nova Scotia Resources ECP
0.000% due 02/02/1994........ 0 2,982,459 2,982,459
U S Treasury Notes:
500,000 0 500,000 6.000% due 12/31/1997......... 519,545 0 519,545
1,300,000 0 1,300,000 4.750% due 08/31/1998......... 1,280,916 0 1,280,916
46,250,000 0 46,250,000 4.750% due 09/30/1998......... 45,560,875 0 45,560,875
4,000,000 0 4,000,000 4.750% due 10/31/1998......... 3,934,481 0 3,934,487
TOTAL UNITED STATES DOLLAR
BONDS
(Cost $77,827,238)........... 51,295,817 25,888,840 77,184,557
FINNISH MARRKA
BONDS -- 10.2%
(Cost $13,650,214)
FIM 0 80,000,000 80,000,000 Finland T-Bill
due 03/15/1994............... 0 13,458,618 13,458,618
DANISH KRONER
BONDS -- 7.5%
DKK 0 5,580,000 5,580,000 Forsmarks Kraftgrupp
9.750% due 05/25/1995........ 0 827,990 827,990
28,000,000 28,000,000 Danish T-Bill
due 01/03/1994............... 0 4,097,367 4,097,367
35,000,000 35,000,000 Denmark T-Bill
due 04/05/1994............... 0 5,031,620 5,031,620
TOTAL DANISH KRONE BONDS (Cost
$10,175,108)................. 0 9,956,977 9,956,977
</TABLE>
See Notes to Pro Forma Financial Statements
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND/WORLDWIDE PRIME ASSETS FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE (NOTE 2)
- ------------------------------------------------------ --------------------------------------
SBS SBS SBS SBS
LIMITED WORLDWIDE PRO FORMA LIMITED WORLDWIDE PRO FORMA
MATURITY PRIME COMBINED MATURITY PRIME COMBINED
TREASURY ASSETS (NOTE 1) TREASURY ASSETS (NOTE 1)
- ----------------------- -------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ITALIAN LIRA BONDS -- 7.0%
ITL 0 5,000,000,000 5,000,000,000 Banca Di Sicilia ECD
0.000% due 01/12/1994........ $ 0 $ 2,901,849 $ 2,901,849
0 5,000,000,000 5,000,000,000 Ostereische Postspankasse
(PSK) 12.375% due 04/1994.... 0 2,956,458 2,956,458
0 6,000,000,000 6,000,000,000 Credito Italiano ECD
0.000% due 02/14/1994........ 0 3,453,520 3,453,520
TOTAL ITALIAN LIRA BONDS
(Cost $10,058,298)........... 0 9,311,827 9,311,827
GERMAN MARK BOND -- 4.3%
(Cost 5,748,121)
Pacific Dunlop ECP
DEM 0 10,000,000 10,000,000 due 02/16/1994................ 0 5,751,462 5,751,462
EUROPEAN CURRENCY UNIT
BOND -- 3.4%
(Cost $4,619,327)
ECU 0 4,000,000 4,000,000 Cassa Risparmi Verna ECD
0.000% due 01/12/1994........ 0 4,441,339 4,441,339
SPANISH PESETA
BOND -- 2.5%
(Cost $3,447,992)
ESP 0 460,000,000 460,000,000 Bonos Obligation Del Estado
13.650% due 03/15/1994....... 0 3,291,773 3,291,773
TIME DEPOSITS -- 3.9%
Salomon Brothers:
ITL 0 1,505,217,070 1,505,217,070 9.1875% due 12/03/1993........ 0 882,696 882,696
0 1,963,190,184 1,963,190,184 9.0625% due 12/03/1993........ 0 1,151,262 1,151,262
Unibank
ECU 0 2,759,159 2,759,159 7.125% due 12/03/1993......... 0 3,087,498 3,087,498
TOTAL TIME DEPOSITS
(Cost $5,169,035)............ 0 5,121,456 5,121,456
REPURCHASE
AGREEMENT -- 2.8%
US $ 0 3,764,000 3,764,000 Agreement with Union Bank of
Switzerland, 3.15% dated
11/30/93 to be repurchased at
$3,764,329 on 12/1/93,
collateralized by $3,255,000
U.S. Treasury Bond, 8.75% due
11/15/08..................... 0 3,764,000 3,764,000
TOTAL INVESTMENTS
(Cost $134,459,333*)......... 51,295,817 80,986,292 132,282,109
<FN>
- ----------------------------------
* Aggregate cost for Federal tax purposes.
</TABLE>
See Notes to Pro Forma Financial Statements
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND/WORLDWIDE PRIME ASSETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993 (UNAUDITED)
<TABLE>
<CAPTION>
SBS SBS
LIMITED WORLDWIDE PRO FORMA
MATURITY PRIME ASSETS COMBINED
TREASURY FUND FUND ADJUSTMENTS (NOTE 1)
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost
$51,939,473,
$82,519,860 and $134,459,333
respectively) (Note 2) See
accompanying schedule................ $ 51,295,817 $ 80,986,292 $132,282,109
Receivable for forward foreign
exchange
contracts to sell.................... 0 85,050,238 85,050,238
Forward foreign exchange contracts to
buy, at value (Contract cost
$39,698,058)......................... 0 39,288,101 39,288,101
Cash.................................. 296,132 2,838 298,970
Dividends and interest receivable..... 418,125 588,877 1,007,002
Receivable for investment securities
sold................................. 0 4,845,185 4,845,185
Receivable from investment adviser.... 0 0 117,048(a) 117,048
Receivable for Fund shares sold....... 396,815 27,002 423,817
Unamortized organization costs........ 37,130 79,918 (117,048)(a) 0
Total Assets...................... 52,444,019 210,868,451 0 263,312,470
LIABILITIES:
Forward foreign exchange contracts to
sell, at value (Contract cost
$85,412,776)......................... 0 83,953,710 83,953,710
Payable for forward foreign exchange
contracts to buy..................... 0 39,603,102 39,603,102
Dividend distributions payable........ 113,195 25,357 138,552
Payable for investment securities
purchased............................ 0 5,138,159 5,138,159
Payable for fund shares redeemed...... 84,266 248,547 332,803
Investment advisory fee payable....... 91,652 21,628 113,280
Administration fee payable............ 51,860 7,959 59,819
Custodian fee payable................. 4,200 60,000 64,200
Distribution fees payable............. 6,629 62,287 68,916
Transfer agent fees payable........... 3,400 8,000 11,400
Miscellaneous fees payable 62,846 101,040 163,886
Total Liabilities................. 418,038 129,229,789 0 129,647,827
NET ASSETS.............................. $ 52,025,981 $ 81,638,662 $0 $133,664,643
NET ASSET VALUE:
Net Asset Value and redemption price
per share ($52,025,981 divided by
6,388,691, $81,638,662 divided by
47,142,056, and $133,664,641 divided
by 16,418,011 shares of beneficial
interest outstanding)................ $8.14 $1.73 $8.14
Maximum offering price per share
(based on maximum sales charge of
1.25% of offering price on November
30, 1993)............................ $8.24 n/a $8.24
<FN>
- ----------------------------------
(a) Any remaining unamortized organization costs will be assumed by the
investment manager prior to merger date.
</TABLE>
See Notes to Pro Forma Financial Statements
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND/WORLDWIDE PRIME ASSETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993 (UNAUDITED)
<TABLE>
<CAPTION>
SBS SBS
LIMITED WORLDWIDE PRO FORMA
MATURITY PRIME ASSETS COMBINED
TREASURY FUND FUND ADJUSTMENTS (NOTE 1)
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
INCOME:
Interest.............................. $ 2,627,530 $ 5,849,473 $ 8,477,003
TOTAL INCOME............................ 2,627,530 5,849,473 0 8,477,003
EXPENSES:
Investment advisory fee............... 171,260 601,334 (109,333)(a) 663,261
Administration fee.................... 97,863 267,259 365,122
Transfer agent fees................... 39,550 89,690 129,240
Trustees' fees and expenses........... 6,594 22,957 (20,551)(b) 9,000
Custodian fees........................ 15,843 278,784 (235,518)(b) 59,109
Distribution fees..................... 73,397 1,202,614 (1,002,170)(a) 273,841
Audit and legal fees.................. 27,815 59,653 (37,468)(b) 50,000
Amortization of organization costs.... 12,042 37,679 (37,679)(c) 12,042
Other................................. 65,801 146,347 (137,148)(b) 75,000
Fees waived by Investment adviser and
administrator........................ (125,611) (367,482) 493,093 0
TOTAL EXPENSES.......................... 384,554 2,338,835 (1,086,774) 1,636,615
NET INVESTMENT INCOME (LOSS)............ 2,242,976 3,510,638 1,086,774 6,840,388
<FN>
- ----------------------------------
(a) Adjustment to reflect SBS Limited Maturity Treasury Fund's currently
effective fee schedule.
(b) Reductions reflect expected savings when the two funds become one.
(c) Any remaining unamortized organization costs will be assumed by the
investment manager prior to merger date.
</TABLE>
See Notes to Pro Forma Financial Statements
<PAGE>
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
The unaudited Pro Forma Combining Portfolio of Investment, the Pro Forma
Combining Statement of Assets and Liabilities and the Pro Forma Combining
Statement of Net Investment Income reflect the accounts of Smith Barney Shearson
Limited Maturity Treasury Fund ("Treasury") and Smith Barney Shearson Worldwide
Prime Assets Fund ("Worldwide") at and for the year ended November 30, 1993.
These statements have been derived from the funds' books and records utilized in
calculating daily net asset value at November 30, 1993.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of Worldwide to Treasury in exchange for shares of
Treasury under generally accepted accounting principles. The historical cost of
investment securities will be carried forward to the surviving entity and the
results of operations of Treasury for precombination periods will not be
restated. The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the Agreement and Plan of Reorganization
since these expenses will not be ongoing operating expenses of the combined Fund
and are not indicative of the results which would have been attained if the
Funds had been combined for the period shown.
The Pro Forma Combining Portfolio of Investments, the Pro Forma Combining
Statement of Assets and Liabilities and the Pro Forma Combining Statement of Net
Investment Income should be read in conjunction with the historical financial
statements of the funds included or incorporated by reference in the Statement
of Additional Information.
2. PORTFOLIO VALUATION
Securities of both Treasury and Worldwide are valued at market value, or in
the absence of a market value with respect to any portfolio securities, at fair
value as determined by or under the direction of the funds' Board of Trustees.
Portfolio securities that are primarily traded on an exchange are valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Short-term investments that mature in 60 days or
less are valued at amortized cost.
3. CAPITAL SHARES
The pro forma net asset value per share assumes the issuance of additional
shares of Treasury which would have been issued at November 30, 1993 in
connection with the proposed reorganization. The pro forma number of shares
outstanding of 16,418,011 consists of 10,029,320 additional shares assumed
issued in the reorganization plus 6,388,691 shares of Treasury outstanding at
November 30, 1993.
<PAGE>
SMITH BARNEY SHEARSON INCOME TRUST
PART C
OTHER INFORMATION
<TABLE>
<C> <S>
ITEM 15. INDEMNIFICATION
The response to this item is incorporated by reference to "Liability of
Trustees" under the caption "Information on Shareholder Rights" in Part A
of this Registration Statement.
ITEM 16. EXHIBITS -- All references are to the Registrant's Registration Statement
on Form N-1A as filed with the Securities and Exchange Commission (the
"SEC") on October 21, 1991. File Nos. 33-43446 and 811-6444
(the "Registration Statement").
(1) Registrant's Master Trust Agreement dated October 17, 1991 and Amendment
No. 1 to the Master Trust Agreement dated November 5, 1992 and Amendment
No. 2 to the Master Trust Agreement dated July 30, 1993 are incorporated by
reference to Post-Effective Amendment No. 4 filed January 27, 1994.
(2) Registrant's By-Laws are incorporated by reference to the Registration
Statement.
(3) Not Applicable.
(4) Form of Agreement and Plan of Reorganization.*
(5) Registrant's form of share certificates for shares of beneficial interest
in each of its sub-trusts are incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement.
(6)(a) Investment Advisory Agreement between the Registrant and Greenwich Street
Advisors dated July 30, 1993, is incorporated by reference to
Post-Effective Amendment No. 3 to the Registration Statement filed on
December 1, 1993 ("Post-Effective Amendment No. 3").
(7) Distribution Agreement dated July 30, 1993 between the Registrant and Smith
Barney Shearson Inc. is incorporated by reference to Post-Effective
Amendment No. 3.
(8) Not Applicable.
(9) Custodian Agreement between the Registrant and Boston Safe Deposit and
Trust Company ("Boston Safe") is incorporated by reference to Pre-Effective
Amendment No. 1.
(10) Services and Distribution Plan pursuant to Rule 12b-1 dated July 30, 1993
is incorporated by reference to Post-Effective Amendment No. 3.
(11) Opinion and Consent of Willkie Farr & Gallagher with respect to legality
(with Opinion of Francis J. McNamara III, Esq. attached thereto).**
(12) Opinion and Consent of Willkie Farr & Gallagher supporting tax matters and
consequences discussed in Prospectus/Proxy Statement**
(13)(a) Transfer Agency Agreement between the Registrant and The Shareholders
Services Group is incorporated by reference to Post-Effective Amendment No.
3.
(b) Administration Agreement dated May 21, 1993 between the Registrant and
Boston Advisors are incorporated by reference to Post-Effective Amendment
No. 3.
(c) Purchase Agreement between the Registrant and Shearson Lehman Brothers Inc.
is incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(14) Consent of Coopers & Lybrand.**
(15) Not Applicable.
(16) Powers of Attorney.***
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
(17)(a) Form of Proxy Card.**
(b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated by
reference to the Registration Statement.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a Prospectus which is a part
of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the reoffering Prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every Prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering
of the securities at that time shall be deemed to be the initial bona fide
offering of them.
<FN>
- ------------------------
* Filed herewith as Exhibit A to Registrant's Prospectus/Proxy Statement
contained in Part A of this Registration Statement.
** Filed herewith.
*** Previously filed.
</TABLE>
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the registrant, in the City of New York and State of
New York on the 2nd day of June, 1994.
<TABLE>
<S> <C>
SHEARSON LEHMAN BROTHERS
INCOME TRUST, on behalf of
SMITH BARNEY SHEARSON
LIMITED MATURITY TREASURY FUND
By: /s/HEATH B. MCLENDON
_____________________________________
HEATH B. MCLENDON
PRESIDENT
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ --------------------------------------------------------- ----------------
<C> <S> <C>
/s/HEATH B. MCLENDON
---------------------------- Chairman of the Board June 2, 1994
Heath B. McLendon
*
---------------------------- President June 2, 1994
Stephen J. Treadway
*
---------------------------- Treasurer (Chief Financial and Accounting Officer) June 2, 1994
Vincent Nave
*
---------------------------- Trustee June 2, 1994
Burt N. Dorsett
*
---------------------------- Trustee June 2, 1994
Elliot S. Jaffe
*
---------------------------- Trustee June 2, 1994
Harry W. Knight
*
---------------------------- Trustee June 2, 1994
Cornelius C. Rose
*/s/HEATH B. MCLENDON
----------------------------
Heath B. McLendon
as Attorney-in-Fact
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ------------------------------------------------------------ -----
<C> <S> <C>
(11) Opinion of Willkie Farr & Gallagher with respect to legality
(with Opinion of Francis J. McNamara III, Esq. attached
thereto).
(12) Opinion of Willkie Farr & Gallagher with respect to tax
matters.
(14) Consent of Coopers & Lybrand.
(17)(a) Form of Proxy Card.
</TABLE>
S-2
<PAGE>
1
Exhibit (11)
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
June 1, 1994
Smith Barney Shearson
Income Trust
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
We have acted as counsel for Smith Barney Shearson Income Trust (the
"Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts, in connection with the proposed acquisition by Smith Barney
Shearson Limited Maturity Treasury Fund (the "Fund"), a sub-trust of the Trust,
of substantially all of the assets and certain scheduled liabilities of Smith
Barney Shearson Worldwide Prime Assets Fund (the "Acquired Fund"), a business
trust organized under the laws of The Commonwealth of Massachusetts, in exchange
for shares of beneficial interest of the Fund (the "Shares"), pursuant to an
Agreement and Plan of Reorganization to be dated as of June 1, 1994 between
the Trust, on behalf of the Fund, and the Acquired Fund (the "Agreement").
As counsel for the Trust, we have examined its Registration
Statement on Form N-14 substantially in the form in which it is to become
effective (the "Registration Statement"), its Master Trust Agreement and By-
laws, and all amendments thereto, and the Agreement.
We have also examined and relied upon such corporate records of the
Trust and other documents and certificates with respect to factual matters as
we have deemed necessary to render the opinions expressed herein. We have
assumed without independent verification the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity
<PAGE>
2
with originals of all documents submitted to us as copies. As to matters of
Massachusetts law, we have relied solely on the opinion of Francis J.
McNamara, III, General Counsel of The Boston Company Advisors, Inc., which
serves as sub-administrator to the Fund, with respect to the matters
addressed therein, which is satisfactory to us in form and scope and a copy of
which is annexed hereto.
Based upon the foregoing, we are of the opinion that all necessary
Trust action precedent to the issuance of the Shares pursuant to the
Agreement has been duly taken. We are further of the opinion that the Shares
when issued pursuant to the Agreement will be legally and validly issued,
fully paid and nonassessable by the Trust. In rendering the opinion expressed
in the preceding sentence, we assume that the sale of the Shares will be
effected in compliance with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities. We further assume that there will be no
material changes in the facts and conditions on which we base this opinion
between the date hereof and the time of issuance of the Shares.
As indicated above, the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable for the obligations of the Trust. The Trust's Master Trust
Agreement provides, however, that if a shareholder of any sub-trust of the Trust
is charged or held personally liable solely by reason of being or having been
a shareholder, the shareholder shall be entitled out of the assets of the
sub-trust to be held harmless from and indemnified against all loss and expense
arising from such liability. Thus, the risk of a shareholder incurring
financial loss on account of shareholder's liability is limited to
circumstances in which the Trust itself would be unable to meet its
obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in the Prospectus/Proxy
Statement included as part of the Registration Statement and to the filing of
this opinion as an exhibit to any application made by or on behalf of the
Trust or any distributor or dealer in connection with the registration or
qualification of the Trust or the Shares under the securities laws of any
state or other jurisdiction.
<PAGE>
3
This opinion is furnished by us as counsel to the Trust, is solely
for the benefit of the Trust and its governing board in connection with the
above described acquisition of assets and liabilities and may not be relied
upon for any other purpose or by any other person.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
WILLKIE FARR & GALLAGHER
<PAGE>
1
[Letterhead of The Boston Company Advisors, Inc.]
June 1, 1994
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Ladies and Gentlemen:
I have acted as special Massachusetts counsel for Smith Barney Shearson Income
Trust (the "Trust"), a business trust organized under the laws of The
Commonwealth of Massachusetts, in connection with the proposed acquisition by
Smith Barney Shearson Limited Maturity Treasury Fund (the "Fund"), a sub-trust
of the Trust, of substantially all of the assets and certain scheduled
liabilities of Smith Barney Shearson Worldwide Prime Assets Fund (the "Acquired
Fund"), a business trust organized under the laws of The Commonwealth of
Massachusetts, in exchange for shares of beneficial interest of the Fund (the
"Shares") pursuant to an Agreement and Plan of Reorganization to be dated as of
June 1, 1994 between the Trust, on behalf of the Fund, and the Acquired Fund
(the "Agreement"). Capitalized terms used herein have the same meanings
ascribed to them in the Agreement unless defined otherwise herein.
As special Massachusetts counsel for the Trust, I have examined its Master Trust
Agreement and By-laws, and all amendments thereto, its Registration Statement
on Form N-14 (the "Registration Statement") and a draft of the Agreement, and
have examined and relied upon such records of the Trust and other documents and
certificates as to factual matters as I have deemed to be necessary to render
the opinion expressed herein. I have assumed without independent verification
the genuineness of all signatures, the authenticity of all documents submitted
to me as originals and the conformity with originals of all documents submitted
to me as copies.
Based upon the foregoing, I am of the opinion that all necessary Trust action
precedent to the issuance of the Shares pursuant to the Agreement has been
duly taken. I am further of the opinion that the Shares when issued pursuant
to the Agreement will be legally and validly
<PAGE>
2
Willkie Farr & Gallagher
June 1, 1994
Page 2
issued, fully paid and nonassessable by the Trust. In rendering the opinion
expressed in the preceding sentence, I assume that the sale of the Shares will
be effected in compliance with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities. I further assume that there will be no
material changes in the facts and conditions on which I base this opinion
between the date hereof and the time of issuance of the Shares.
As indicated above, the Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, a shareholder of a
business trust may, under certain circumstances, be held personally liable for
the obligations of the Trust. The Trust's Master Trust Agreement provides,
however, that if a shareholder of any sub-trust of the Trust is charged or held
personally liable solely by reason of being or having been a shareholder, the
shareholder shall be entitled out of the assets of said sub-trust to be held
harmless from and indemnified against all loss and expense arising from such
liability. Thus, the risk of a shareholder incurring financial loss on
account of shareholder's liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the filing of this opinion as an exhibit to any
application made by or on behalf of the Trust or any distributor or dealer in
connection with the registration or qualification of the Trust or the Shares
under the securities laws of any state or other jurisdiction.
This opinion is furnished by me as counsel to the Trust, is solely for your
benefit in connection with the rendering of an opinion to the Trust regarding
the above-described acquisition of assets and liabilities and may not be
relied upon for any other purpose or by any other person.
Very truly yours,
/s/ Francis J. McNamara, III
Francis J. McNamara, III
<PAGE>
1
Exhibit (12)
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
May 25, 1994
Smith Barney Shearson
Worldwide Prime Assets Fund
Two World Trade Center
New York, New York 10048
Smith Barney Shearson
Limited Maturity Treasury Fund
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
You have asked us for our opinion concerning certain federal income tax
consequences to the Smith Barney Shearson Limited Maturity Treasury Fund, a
separate investment series of Smith Barney Shearson Income Trust (the
"Acquiring Fund"), and to the Smith Barney Shearson Worldwide Prime Assets
Fund (the "Acquired Fund") and its shareholders ("Acquired Fund Shareholders")
when the Acquired Fund Shareholders receive shares (including fractional
shares) of common stock of the Acquiring Fund ("Acquiring Fund Shares") in
liquidation of their interests in the Acquired Fund pursuant to an acquisition
by the Acquiring Fund of all or substantially all of the assets of the
Acquired Fund in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund, the
liquidation of the Acquired Fund and the distribution in liquidation of
Acquiring Fund Shares to the Acquired Fund Shareholders.
We have reviewed such documents and materials as we have considered necessary
for the purpose of rendering this opinion. In rendering this opinion, we
assume that such documents as yet unexecuted will, when executed, conform in
all material respects to the proposed forms of such documents that we have
examined. In addition, we assume the genuineness of all signatures, the
capacity of each party executing a document so to execute that document, the
authenticity of all documents submitted to us as originals and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. We have made inquiry as to the underlying facts which we
considered to be relevant to the conclusions set forth in this letter. The
opinions expressed in this letter are based upon certain factual
<PAGE>
2
statements relating to the Acquiring Fund and the Acquired Fund set forth in
the Registration Statement on Form N-14 (the "Registration Statement") filed
by Smith Barney Shearson Income Trust, on behalf of its separate investment
portfolio, the Acquiring Fund, with the Securities and Exchange Commission and
representations to be made in a letter from the Acquiring Fund addressed to us
for our use in rendering this opinion. Based on information received from the
Acquiring Fund and the Acquired Fund, we have no reason to believe that we
will not be able to render this opinion as a final opinion at the Closing. We
have no reason to believe that these representations and facts will not be
valid, but we have not attempted and will not attempt to verify independently
any of these representations and facts, and this opinion is based upon the
assumption that each of them is accurate. Capitalized terms used herein and
not otherwise defined shall have the meaning given them in the Registration
Statement.
The conclusions expressed herein are based upon the Internal Revenue Code of
1986 (the "Code"), Treasury regulations issued thereunder, published rulings
and procedures of the Internal Revenue Service and judicial decisions, all as
in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund will be
a taxable event causing the Acquired Fund to realize gain or loss;
(2) the Acquired Fund will recognize gain or loss based on the
relationship of its tax basis in the assets transferred to the value of
Acquiring Fund Shares received plus the amount of liabilities assumed;
(3) the character of the Acquired Fund's realized gain or loss may be
ordinary or capital gain or loss. Gain or loss will be long-term with respect
to capital assets held for more than one year and short-term with respect to
capital assets held for one year or less. However, gain or loss relating to
"Section
<PAGE>
3
1256 Contracts" will be treated generally as 60% long-term and 40% short-term
capital gain or loss, regardless of the Acquired Fund's actual holding period
for the assets;
(4) the Acquired Fund will take into account any gain or loss it
recognizes in the Reorganization in setting the amount of its declared
ordinary and capital gain dividends and its net asset value on the Closing
Date;
(5) dividends of the Acquired Fund attributable to short-term capital
gains will be taxable to Shareholders of the Acquired Fund as ordinary income,
and dividends attributable to long-term capital gains will be taxable to the
Acquired Fund Shareholders as long-term capital gain regardless of the length
of time Acquired Fund Shareholders have held their shares in the Acquired
Fund;
(6) the Acquiring Fund will not recognize gain or loss on the receipt of
the Acquired Fund's assets in exchange for Acquiring Fund Shares;
(7) the Acquiring Fund's tax basis in the acquired assets of the
Acquired Fund will be the fair market value of such assets on the acquisition
date and the Acquiring Fund's holding period for such assets will begin on the
day after the acquisition date;
(8) the Acquired Fund will not recognize gain or loss on the
distribution of Acquiring Fund Shares to the Acquired Fund Shareholders in
liquidation of the Acquired Fund;
(9) the receipt of Acquiring Fund Shares in exchange for shares of the
Acquired Fund by the Acquired Fund Shareholders will cause the Acquired Fund
Shareholders to recognize gain or loss, which will be long-term or short-term
gain or loss depending on the Shareholder's holding period for the shares in
the Acquired Fund; and
(10) Acquired Fund Shareholders will take a tax basis in Acquiring Fund
Shares received equal to the net asset value of Acquiring Fund Shares on the
Closing Date, and the Acquired Fund Shareholders' holding period for Acquiring
Fund Shares will begin on the day following the Closing Date.
<PAGE>
4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our
firm in the Registration Statement or in the Prospectus/Proxy Statement
constituting a part thereof.
Very truly yours,
/s/WILLKIE FARR & GALLAGHER
WILLKIE FARR & GALLAGHER
<PAGE>1
Exhibit (14)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Shearson Income Trust
We hereby consent to the following with respect to the Registration
Statement on Form N-14 under the Securities Act of 1933, as amended, of Smith
Barney Shearson Income Trust:
1. The incorporation by reference of our report dated January 10, 1994,
accompanying the financial statements of the Smith Barney Shearson
Limited Maturity Treasury Fund (one series of the Smith Barney
Shearson Income Trust) as of November 30, 1993, which report is
included in Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 33-43446) of the Smith Barney
Shearson Income Trust.
2. The incorporation by reference of our report dated January 7, 1994,
accompanying the financial statements of the Smith Barney Shearson
Worldwide Prime Assets Fund as of November 30, 1993, which report is
included in Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A (File No. 33-37750) of the Smith Barney
Shearson Worldwide Prime Assets Fund.
3. The reference to our firm under the heading "Financial Statements
and Experts" in the Prospectus/Proxy Statement.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
Boston, Massachusetts
May 31, 1994
<PAGE>1
Exhibit (17)(a)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
Please indicate your vote by an "X" in the appropriate box below.
This proxy, if properly executed, will be voted in the manner directed by the
undersigned shareholder. IF NOT DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL.
Please refer to the Prospectus/Proxy Statement for a discussion of the
Proposal.
1. To approve the Agreement and Plan of Reorganization FOR / / AGAINST / /
ABSTAIN / /
dated as of June 1, 1994 providing for (i) the acquisition of substantially
all of the assets of Smith Barney Shearson Worldwide Prime Assets Fund
("Worldwide Prime Assets Fund") by Smith Barney Shearson Limited Maturity
Treasury Fund ("Limited Maturity Treasury Fund"), a separate investment series
of Smith Barney Shearson Income Trust, in exchange for shares of Limited
Maturity Treasury Fund and the assumption by Limited Maturity Treasury Fund of
certain liabilities of Worldwide Prime Assets Fund, (ii) the distribution of
such shares of Limited Maturity Treasury Fund to shareholders of Worldwide
Prime Assets Fund in liquidation of Worldwide Prime Assets Fund and (iii) the
subsequent dissolution and termination of Worldwide Prime Assets Fund.
<PAGE>2
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND PROXY SOLICITED BY THE
BOARD OF TRUSTEES
The undersigned holder of shares of Worldwide Prime Assets Fund ("Worldwide
Prime Assets Fund") hereby appoints Heath B. McLendon, Christina T. Sydor
and Lee D. Augsburger attorneys and proxies for the undersigned with full
powers of substitution and revocation, to represent the undersigned and to
vote on behalf of the undersigned all shares of the Worldwide Prime Assets
Fund that the undersigned is entitled to vote at the Special meeting of
Shareholders of Worldwide Prime Assets Fund to be held at the offices of the
Worldwide Prime Assets Fund, Two World Trade Center, New York, New York on
July 5, 1994 at 10:30 a.m., and any adjournment or adjournments thereof. The
undersigned hereby acknowledges receipt of the Notice of Special Meeting and
Prospectus/Proxy Statement dated June 2, 1994 and hereby instructs said
attorneys and proxies to vote said shares as indicated herein. In their
discretion, the proxies are authorized to vote upon such other business as may
properly come before the Special Meeting. A majority of the proxies present
and acting at the Special Meeting in person or by substitute (or, if only one
shall be so present, then that one) shall have and may exercise all of the
power and authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears
on this Proxy. If joint owners, EITHER may sign
this Proxy. When signing as attorney, executor,
administrator, trustee, guardian or corporate
officer, please give your full title.
Date: June __, 1994
Signature(s) (Title(s), if applicable)
